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Dieckman v. Regency GP LP

Supreme Court of Delaware

January 20, 2017

ADRIAN DIECKMAN, on behalf of himself and all others similarly situated, Plaintiff Below, Appellant,
v.
REGENCY GP LP, REGENCY GP LLC, ENERGY TRANSFER EQUITY, L.P., ENERGY TRANSFER PARTNERS, L.P., ENERGY TRANSFER PARTNERS, GP, L.P., MICHAEL J. BRADLEY, JAMES W. BRYANT, RODNEY L. GRAY, JOHN W. McREYNOLDS, MATTHEW S. RAMSEY and RICHARD BRANNON, Defendants Below, Appellees.

          Submitted: November 16, 2016

         Court Below-Court of Chancery of the State of Delaware C.A. No. 11130

         Upon appeal from the Court of Chancery: REVERSED.

          Stuart M. Grant, Esquire (argued) and James J. Sabella, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware; Mark Lebovitch, Esquire, Jeroen van Kwawegen, Esquire and Alla Zayenchik, Esquire, Bernstein Litowitz Berger & Grossman LLP, New York, New York; Mark C. Gardy, Esquire and James S. Notis, Esquire, Gardy & Notis, LLP, New York, New York, for Plaintiff, Appellant, Adrian Dieckman.

          Rolin P. Bissell, Esquire and Tammy L. Mercer, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Michael Holmes, Esquire (argued), Manuel Berrelez, Esquire and Craig Zieminski, Esquire, Vinson & Elkins LLP, Dallas, Texas for Defendants, Appellees, Regency GP LP, Regency GP LLC, Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Energy Transfer Partners, GP, L.P., Michael J. Bradley, Rodney L. Gray, John W. McReynolds and Matthew S. Ramsey.

          David J. Teklits, Esquire and D. McKinley Measley, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; M. Scott Barnard, Esquire, Michelle A. Reed, Esquire and Matthew V. Lloyd, Esquire, Akin Gump Strauss Hauer & Feld LLP, Dallas, Texas for Defendants, Appellees, James W. Bryant and Richard Brannon.

          Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en Banc.

          SEITZ, Justice

         In this appeal, we again wade into the details of a master limited partnership agreement to decide whether the complaint's allegations can overcome the general partner's use of conflict resolution safe harbors to dismiss the case. The parties are identified by a host of confusing abbreviations, but the gist of the appeal is as follows.

         The plaintiff is a limited partner/unitholder in the publicly-traded master limited partnership ("MLP"). The general partner proposed that the partnership be acquired through merger with another limited partnership in the MLP family. The seller and buyer were indirectly owned by the same entity, creating a conflict of interest. Because conflicts of interest often arise in MLP transactions, those who create and market MLPs have devised special ways to try to address them. The general partner in this case sought refuge in two of the safe harbor conflict resolution provisions of the partnership agreement-"Special Approval" of the transaction by an independent Conflicts Committee, and "Unaffiliated Unitholder Approval."

         In the MLP context, Special Approval typically means that a Conflicts Committee composed of members independent of the sponsor and its affiliates reviewed the transaction and made a recommendation to the partnership board whether to approve the transaction. Unaffiliated Unitholder Approval is typically just that-a majority of unitholders unaffiliated with the general partner and its affiliates approve the transaction. Under the partnership agreement, if either safe harbor is satisfied, the transaction is deemed not to be a breach of the agreement.

         The partnership agreement required that the Conflicts Committee be independent, meaning that its members could not be serving on affiliate boards and were independent under the audit committee independence rules of the New York Stock Exchange. The plaintiff alleged in the complaint that the general partner failed to satisfy the Special Approval safe harbor because the Conflicts Committee was itself conflicted. According to the plaintiff, one of the Committee's two members began evaluating the transaction while still a member of an affiliate's board, and then resigned from the affiliate's board four days after he began his review to then become a member of the Conflicts Committee. On the same day the transaction closed, the committee member was reappointed to the seat left vacant for him on the affiliate's board.

         The plaintiff also alleged that the general partner failed to satisfy the Unaffiliated Unitholder Approval safe harbor because the general partner made false and misleading statements in the proxy statement to secure that approval. In the 165-page proxy statement sent to the unitholders, the general partner failed to disclose the conflicts within the Conflicts Committee. Instead, the proxy statement stated that Special Approval had been obtained by an independent Conflicts Committee.

         The general partner moved to dismiss the complaint and claimed that, in the absence of express contractual obligations not to mislead investors or to unfairly manipulate the Conflicts Committee process, the general partner need only satisfy what the partnership agreement expressly required-to obtain the safe harbor approvals and follow the minimal disclosure requirements. In other words, whatever the general partner said in the proxy statement, and whomever the general partner appointed to the Conflicts Committee, was irrelevant because only the express requirements of the partnership agreement controlled and displaced any implied obligations not to undermine the protections afforded unitholders by the safe harbors.

         The Court of Chancery side-stepped the Conflicts Committee safe harbor, but accepted the general partner's argument that the Unaffiliated Unitholder Approval safe harbor required dismissal of the case. The court held that, even though the proxy statement might have contained materially misleading disclosures, fiduciary duty principles could not be used to impose disclosure obligations on the general partner beyond those in the partnership agreement, because the partnership agreement disclaimed fiduciary duties. Further, the court agreed with the defendants that the only express disclosure requirement of the agreement in the event of a merger-that the general partner simply provide either a summary of, or a copy of, the merger agreement-displaced any implied contractual duty to disclose in the proxy statement material facts about the conflicts within the Conflicts Committee.

         On appeal, the plaintiff concedes that if the general partner met the requirements of either safe harbor, his breach of contract claim would fail. The plaintiff also does not argue with the Court of Chancery's ruling that the partnership agreement's express disclosure requirements cannot be supplanted by implied or fiduciary-based disclosure obligations. Instead, he argues that the Court of Chancery erred when it concluded that the general partner satisfied the Unaffiliated Unitholder Approval safe harbor, because he alleged sufficient facts to show that the approval was obtained through false and misleading statements. The plaintiff also claims that, for pleading stage purposes, he has made a sufficient showing that the Special Approval safe harbor was not satisfied, because the Conflicts Committee was not independent.

         We view the central issue in the dispute through a different lens than the Court of Chancery. The Court of Chancery was correct that the implied covenant of good faith and fair dealing cannot be used to supplant the express disclosure requirements of the partnership agreement. But the court focused too narrowly on the partnership agreement's disclosure requirements. Instead, the center of attention should have been on the conflict resolution provision of the partnership agreement.

         The partnership agreement's conflict resolution provision is a powerful tool in the general partner's hands because it can be used to shield a conflicted transaction from judicial review. But the conflicts resolution provision also operates for the unitholders' benefit. It ensures that, before a safe harbor is reached by the general partner, unaffiliated unitholders have a vote, or the conflicted transaction is reviewed and recommended by an independent Conflicts Committee.

         The partnership agreement does not address how the general partner must conduct itself when seeking the safe harbors. But where, as here, the express terms of the partnership agreement naturally imply certain corresponding conditions, unitholders are entitled to have those terms enforced according to the reasonable expectations of the parties to the agreement. The implied covenant is well-suited to imply contractual terms that are so obvious-like a requirement that the general partner not engage in misleading or deceptive conduct to obtain safe harbor approvals-that the drafter would not have needed to include the conditions as express terms in the agreement.

         We find that the plaintiff has pled sufficient facts, which we must accept as true at this stage of the proceedings, that neither safe harbor was available to the general partner because it allegedly made false and misleading statements to secure Unaffiliated Unitholder Approval, and allegedly used a conflicted Conflicts

          Committee to obtain Special Approval. Thus, we reverse the Court of Chancery's order dismissing Counts I and II of the complaint.

         I.

         As alleged in the complaint, the plaintiff, Adrian Dieckman, is a unitholder of Regency. The business entity defendants, their relationships, and other abbreviations are as follows:

Regency Energy Partners LP ("Regency") - a publicly-traded Delaware limited partnership engaged in the gathering and processing, contract compression, treating and transportation of natural gas and the transportation, fractionation and storage of natural gas liquids.
Regency General Partner LP ("General Partner LP") - the general partner of Regency.
Regency General Partner LLC ("General Partner LLC") - a Delaware LLC and the general partner of General Partner LP.[1]
Energy Transfer Partners L.P. ("ETP") - the general partner of Sunoco LP; a 43% owner of limited partnership interests in Sunoco and a 100% owner of Sunoco's distribution rights.
Energy Transfer Partners, GP, L.P. ("EGP") - the general partner of ETP.
Energy Transfer Equity, L.P. ("ETE") - indirectly owns Regency's general partner and ETP's ...

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