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Hurwitz v. LRR Energy, L.P.

United States District Court, D. Delaware

March 13, 2017

ROBERT HURWITZ, on behalf of himself and all others similarly situated, Plaintiff,
v.
LRR ENERGY, LP., ERIC MULLINS, CHARLES W. ADCOCK, JONATHAN C. FARBER, TOWNES G. PRESSLER, JR., JOHN A. BAILEY, JONATHAN P. CARROLL, VANGUARD NATURAL RESOURCES, LLC, LIGHTHOUSE MERGER SUB, LLC, SCOTT W. SMITH, RICHARD A. ROBERT, W. RICHARD ANDERSON, BRUCE W. MCCULLOUGH, AND LOREN SINGLETARY, Defendants.

          Blake A. Bennett, Esquire of Cooch and Taylor, P.A., Wilmington, Delaware. Counsel for Plaintiff. Of Counsel: Stephen J. Oddo, Esquire, and Nichole T. Browning, Esquire of Robbins Arroyo LLP, San Diego, California.

          Rolin P. Bissell, Esquire, Tammy L. Mercer, Esquire, and Pilar G. Kraman, Esquire of Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware. Counsel for Defendants Vanguard Natural Resources, LLC, Scott W. Smith, Richard A. Robert, Richard Anderson, Bruce W. McCullough, Loren Singletary, and LRR Energy, L.P.

          Brock E. Czeschin, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware. Counsel for Eric Mullins, Charles W. Adcock, Jonathan C. Farber, Townes G. Pressler, Jr., John A. Bailey, and Jonathan P. Carroll.

          MEMORANDUM OPINION

          ROBINSON, Senior District Judge

         I. INTRODUCTION

         On April 20, 2015, Vanguard Natural Resources, LLC ("Vanguard") announced that it would acquire LRR Energy, LP. ("LRR Energy") and its general partner LRE GP, LLC in a unit-for-unit transaction with an exchange ratio of 0.55 Vanguard common units per LRR Energy common unit. To facilitate the transaction, LRR Energy issued a proxy statement (the "Proxy"), and Vanguard issued a registration statement (the "Registration Statement"). Plaintiff Robert Hurwitz ("plaintiff'), a former unitholder of LRR Energy, sued on behalf of himself and all others similarly situated, for violations of sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), and sections 14(a) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 14a-9 promulgated thereunder. (D.I. 15) Plaintiff essentially alleges that the Proxy and Registration Statement failed to disclose that existing debt servicing issues would cause Vanguard to significantly reduce distributions to unitholders after the acquisition. (D.I. 15 ¶ 6; D.I. 31 at 6)

         Currently before the court is defendants' motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6), and failure to adhere to the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"). (D.I. 29) The court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1331 (federal question jurisdiction), 15 U.S.C. § 77v (jurisdiction for violations of the Securities Act), and 15 U.S.C. § 78aa (jurisdiction for violations of the Exchange Act). For the reasons discussed below, defendants' motion to dismiss is denied.

         II. BACKGROUND

         A. The Parties

         Before the merger, LRR Energy was a publicly traded limited partnership ("MLP") formed to operate, acquire, and develop oil and natural gas properties in North America with long-lived, predictable production profiles. (D.I. 15 ¶¶ 3, 40) Vanguard is a publicly traded Delaware limited liability company focused on the acquisition and development of mature, long-lived oil and natural gas properties in the United States. (Id. at ¶ 41)

         Defendants Eric Mullins, Charles W. Adcock, Jonathan C. Farber, Townes G. Pressler, Jr., John A. Bailey, and Jonathan P. Carroll were members of LRR Energy's board of directors at the time of the transaction (collectively, the "LRR Energy Individual Defendants"). (D.I. 30 at 4) Defendants Scott W. Smith, Richard A. Robert, Richard Anderson, Bruce W. McCullough, and Loren Singletary were and still are members of Vanguard's board of directors (collectively, the "Vanguard Individual Defendants, " with Vanguard, the "Vanguard Defendants, " and with the LRR Energy Individual Defendants, the "Individual Defendants"). (Id.)

         B. Plaintiff's Claims

         Vanguard filed the Registration Statement on June 3, 2015, and it was amended several times before finally becoming effective on September 3, 2015. (D.I. 15 ¶¶ 49-50) LRR Energy issued the Proxy on September 3, 2015, which was incorporated into the Registration Statement by reference. (D.I. 30-1) On October 5, 2015, LRR Energy held a special meeting where its unitholders approved the transaction. (D.I. 15 ¶ 4)

         Before the transaction, LRR Energy historically made "increasing cash distributions [to its unitholders] despite the unfavorable market environment." (Id. at ¶ 3) The Proxy and Registration Statement both stated that "Vanguard believes [LRR Energy's] assets will provide consistent and predictable cash flow volumes that will enable Vanguard to continue to make consistent monthly cash distributions to its unitholders and, over time, improve equity valuation." (D.I. 30-1 at 129) According to plaintiff, the Proxy and Registration Statement failed to disclose that Vanguard's then-current financial projections showed that it would violate existing debt covenants in certain future periods. (D.I. 15 ¶ 6; D.I. 31 at 6) The Proxy and Registration Statement also failed to disclose the consequences that existing debt servicing issues would have on Vanguard's payment of cash distributions to unitholders. (Id.)

         C. Vanguard's Debt Covenants

         To explain why some of defendants' arguments are unpersuasive, the court provides some background regarding Vanguard's debt covenants. On September 30, 2011, Vanguard and certain financial institutions acting as lenders and administrative agent entered into a Third Amended and Restated Credit Agreement (the "Credit Agreement"). (Vanguard, Current Report (Form 8-K) (Oct. 5, 2011)) The Credit Agreement contains two debt covenants: Consolidated Leverage Ratio and Consolidated Current Ratio, but only the Consolidated Leverage Ratio appears to be at issue in this case. Vanguard's Credit Agreement was amended several times, but no changes were made to the terms of the Consolidated Leverage Ratio set forth in Section 9.01(a) until around the time Vanguard announced its transaction with LRR Energy. Section 9.01 (a) originally stated that Vanguard "will not, as of the last day of any fiscal quarter, permit the Consolidated Leverage Ratio to be greater than 4.00 to 1.00." (Id., Ex. 10-1 (Credit Agreement) at p. 91)

         The Credit Agreement defines how Consolidated Leverage Ratio is calculated. For ease of following the several definitions, each term within a definition that is further defined has been bolded. The Credit Agreement defines Consolidated Leverage Ratio as "the ratio of (a) Total Debt as of such date to (b) EBITDA for each four consecutive fiscal quarter period ending on such date of determination." (Id. at p. 7) "Total Debt" means:

[A]ll Debt of the Parent, the Borrower and the Subsidiaries on a consolidated basis, excluding (i) noncash obligations under ASC 815 and (ii) accounts payable and other accrued liabilities (for the deferred purchase price of Property or services) from time to time incurred in the ordinary course of business which are not greater than sixty (60) days past the date of invoice or delinquent or which are being contested in good faith by appropriate action and for which adequate reserves are maintained in accordance with GAAP.

(Id. at p. 27) The term "Debt" is a lengthy definition with thirteen subparts. (Id. at p. 7) It is sufficient to note that Debt "shall include all obligations ... of the character described [in the subparts] to the extent [Vanguard] remains legally liable in respect thereof notwithstanding that any such obligation is not included as a liability of such Person under GAAP." (Id.) "ASC 815" means the Accounting Standards Codification No. 815 (Derivatives and Hedging), as issued by the Financial Accounting Standards Board. (Id. at p. 4) Finally, "EBITDA, " also a lengthy definition, states in relevant part that consolidated net income must exclude "any noncash revenue or expense associated with Swap Agreements resulting from ASC 815, " and all the components of EBITDA, must be "determined ... in accordance with GAAP." (Id. at p. 27)

         Exhibit D to the Credit Agreement distills all of these definitions into a one-page form to be used to calculate the Consolidated Leverage Ratio. For the sake of clarity that will be helpful later, the court recreates the relevant part of that form here.

         I. Section 9.01(a) - Consolidated Leverage Ratio

         A. Total Debt

1. Debt, less $___
2. Non-cash obligations under ASC 815, less ($___)
3. Accounts payable and other accrued liabilities not greater than 60 days past due or which are being contested in good faith ($___)
4. Total Debt $___

         B. EBITDA

1. Consolidated net income, less $___
2. Non-cash revenue or expense associated with Swap Agreements resulting from ...

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