Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Oct. 29, 2019) (Bouchard, C.)
In this memorandum opinion, the Delaware Court of Chancery granted a unitholder’s (“Plaintiff”) motion for summary judgment, finding that certain contractual safe harbors were not satisfied in connection with the approval of a conflicted transaction involving a master limited partnership. In so ruling, the Court held that the approvals of the transaction by a conflicts committee and a majority of unaffiliated unitholders did not satisfy the safe harbors because the committee was not properly constituted and the unaffiliated stockholders relied on a proxy statement that contained inadequate disclosures. In addition, the Court denied the defendants’ motion for summary judgment, holding that the approval of the transaction was not entitled to a conclusive presumption of good faith because a genuine issue of fact existed as to whether the general partner, in approving the final terms of the transaction, actually relied on a fairness opinion.
This dispute arose from the acquisition of Regency Energy Partners LP (the “Partnership”) by Energy Transfer Partners, L.P. (“ETP”). At the time of the transaction, ETP and the Partnership’s general partner, Regency GP LP (the “General Partner”), were under common control. Given this conflict, the General Partner delegated the authority to review, negotiate, and approve the transaction to a conflicts committee, which consisted of two purportedly qualified directors. Under the Partnership’s operating agreement (“Partnership Agreement”), the conflicts committee’s approval of a conflicted transaction would constitute “special approval,” which provided a “safe harbor” for such a transaction in that it would not be deemed a breach of the Partnership Agreement. ETP and the Conflicts Committee negotiated the transaction, and, ultimately, the conflicts committee received a fairness opinion from its financial advisor as to the agreed-upon merger consideration (ETP units and cash). After approving the merger, the parties amended the consideration to replace the cash component with additional ETP units but did not receive an updated fairness opinion. The Partnership then issued a proxy statement soliciting unitholder votes in favor of the merger, and the unaffiliated unitholders subsequently approved the merger.
Following the closing of the transaction, Plaintiff commenced an action, which the Court dismissed based on the safe harbors in the Partnership Agreement. The Delaware Supreme Court reversed the Court’s dismissal, based on its finding that Plaintiff had alleged sufficient facts regarding the use of a “conflicted” conflicts committee. Plaintiff then filed an amended complaint, alleging breaches of the Partnership Agreement and the implied covenant of good faith and fair dealing, aiding and abetting a breach of the Partnership Agreement, and tortious interference of the Partnership Agreement. The Court dismissed the aiding and abetting and tortious interference claims and dismissed, in part, the implied covenant claim.
In analyzing the remaining claims, the Court first reviewed whether the General Partner had reasonably relied on the fairness opinion rendered by the conflicts committee’s financial advisor, which, under the Partnership Agreement, would have provided a conclusive presumption that the approval of the transaction was taken in “good faith.” The Court found, based on minutes of conflicts committee meetings and depositions of conflicts committee members, that it was “open for debate whether the [c]onflicts [c]ommittee relied on [the financial advisor’s] fairness opinion when it approved the January 25 terms given the evidence that the [c]onflicts [c]ommittee already had determined that the inferior January 22 terms were fair.” The Court also noted that the alleged failure to update the fairness opinion to reflect the amended consideration, which the General Partner argued was unnecessary because the overall value of the merger consideration had not changed, was a question of fact for trial. Accordingly, the Court denied General Partner’s motion for summary judgment.
The Court next analyzed Plaintiff’s claim that the conflicts committee was not validly constituted, which would have negated its “special approval” of the transaction. The Court first noted that the conditions for service on the conflicts committee under the Partnership Agreement would have been “reasonably read by unitholders to imply a condition that a [conflicts] [c]ommittee has been established whose members genuinely qualified as unaffiliated with the General Partner and independent at all relevant times.” Given that one member of the conflicts committee simultaneously served as a director of an affiliate of the General Partner for a period of at least five days and the membership requirements for service on the conflicts committee precluded such dual service, the Court determined that the conflicts committee was impermissibly organized. The Court rejected the General Partner’s contentions that the resolutions appointing the conflicted director were sent in error and that the director’s appointment to the conflicts committee did not actually occur until after he had resigned from the affiliate’s board of directors. Given this conflict, the Court found that the conflicts committee “special approval” safe harbor was not satisfied.
Finally, the Court analyzed whether Plaintiff was entitled to summary judgment on its claim that the unaffiliated unitholders’ approval of the transaction did not bring the transaction within the safe harbor provision because the proxy statement was false and misleading. Based on its finding that the conflicts committee was not properly constituted, the Court held that the proxy statement was false and misleading because it affirmatively stated that the conflicts committee was composed of qualified directors and that approval of the transaction by the conflicts committee constituted “special approval.” Given these disclosure deficiencies, the Court granted summary judgment to Plaintiff, holding that the approval by the unaffiliated unitholders did not satisfy the contractual safe harbor.