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Dieckman v. Regency GP LP

Court of Chancery of Delaware

February 20, 2018

ADRIAN DIECKMAN, on behalf of himself and all others similarly situated, Plaintiff,
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.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

         WHEREAS:

         A. Before April 2015, Regency Energy Partners LP ("Regency" or the "Partnership") was a publicly listed master limited partnership ("MLP") that gathered, processed, treated, and transported natural gas.[1]

         B. Regency was managed by its general partner, defendant Regency GP, LP (the "General Partner"), which in turn was managed by the board of directors (the "Regency Board") of its general partner, defendant Regency GP LLC. The Regency Board consisted of the six individual defendants: Michael J. Bradley, Richard Brannon, James W. Bryant, Rodney L. Gray, John W. McReynolds, and Matthew S. Ramsey.

         C. Regency, the General Partner, and Regency GP LLC were indirectly owned by defendant Energy Transfer Equity, L.P. ("ETE"), a MLP that sat atop of the "Energy Transfer family."[2] The Energy Transfer family also included Energy Transfer Partners, L.P. ("ETP"), Sunoco LP, and Sunoco Logistics Partners, L.P.

         D. The rights and the duties of the General Partner, Regency GP LLC, and the unitholders were governed by Regency's Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement" or "LPA"). The default standard of conduct in the LPA is that the General Partner must act in "good faith" when taking action as the General Partner.[3] "In order for a determination or other action to be in 'good faith' for purposes of [the LPA], the Person or Persons making such determination or taking or declining to take such other action must believe that the determination or other action is in the best interests of the Partnership."[4]

         E. On January 16, 2015, the boards of ETE and ETP held a joint meeting to discuss a potential merger of ETP and Regency. Later that day, the ETP board made a proposal to merge Regency into ETP for a combination of cash and stock reflecting an exchange ratio of 0.4044 ETP common units per one common unit of Regency and a $137 million cash payment

         F. Also on January 16, 2015, Brannon was appointed to the Regency Board while he was still a director of an affiliated entity (Sunoco LP) within the Energy Transfer family, and the Regency Board determined that it would delegate authority to the Conflicts Committee to review and analyze the proposed transaction.

         G. The Conflicts Committee came to have two members: Bryant and Brannon. Brannon was appointed to the Conflicts Committee on January 20, 2015, the same day he resigned from Sunoco LP's board. Before Brannon even was appointed to the Conflicts Committee, he and Bryant "met with Akin Gump (selected by Regency) to discuss general issues and strategy with regard to the proposed transaction and the draft merger agreement."[5] Brannon and Bryant retained as the Conflict Committee's financial advisor JP Morgan, which had been selected by Regency's CFO, Thomas Long, and which had a highly lucrative relationship with ETP and its affiliates in recent years, H. On January 25, 2015, the Conflicts Committee accepted ETP's merger proposal, offering an exchange ratio of 0.4066 and a cash payment of $0.32 per common unit of Regency (the "Merger"), and it recommended that the Regency Board approve the proposal as well. The Regency Board accepted ETP's offer that day, although the terms of the Merger subsequently were amended to provide additional ETP stock in lieu of the cash component. The Conflicts Committee did not solicit any other potential buyers or conduct a market check.

         I. On April 28, 2015, a majority of Regency's unitholders voted to approve the Merger, which closed on April 30. That same day, Brannon rejoined, and Bryant joined, Sunoco LP's board.

         J. On June 10, 2015, plaintiff filed this action.

         K. On March 29, 2016, the court issued a memorandum opinion and dismissed plaintiffs complaint on the ground that defendants had availed themselves of the unitholder approval safe harbor in the LPA.[6] That conclusion caused plaintiffs other claims to fail as well.[7]

          L. On January 20, 2017, the Delaware Supreme Court reversed that decision, concluding that plaintiff had "pled sufficient facts . . . 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."[8]

         M. On May 5, 2017, plaintiff filed the Verified Amended Class Action Complaint (the "Amended Complaint") asserting four claims. Count I asserts that the General Partner and Regency GP LLC breached the LPA by approving the Merger when they did not believe that it was in the best interests of the Partnership. Count II asserts that the General Partner and Regency GP LLC breached the implied covenant of good faith and fair dealing by approving the Merger. Count III asserts that all defendants, other than the General Partner and Regency GP LLC, aided and abetted a breach of the LPA. Count IV asserts that all defendants, other than the General Partner and Regency GP LLC, tortiously interfered with the LPA.

         N. On May 19, 2017, defendants moved to dismiss the Amended Complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief.

         NOW THEREFORE, the court having considered the parties' submissions, IT IS HEREBY ORDERED, this 20th day of February, 2018, as follows:

         1. The standards governing a motion to dismiss for failure to state a claim for relief are well-settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and ([iv]) dismissal is inappropriate unless the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."[9]

         2. Count I. Defendants' motion to dismiss Count I is DENIED because the Amended Complaint alleges facts from which it is reasonably conceivable that the General Partner and Regency GP LLC did not believe that the Merger was in the best interests of the Partnership and thus violated LPA § 7.9(b).

         3. Delaware courts have held that contractual language similar to Section 7.9(b) requires directors to have subjectively believed that a transaction was in the best interests of the partnership.[10] But "state of mind and knowledge may be averred generally pursuant to Rule 9(b) because 'any attempt to require specificity in pleading a condition of mind would be unworkable and undesirable."[11]

         4. As our Supreme Court has recognized, "it may be virtually impossible for a . . . plaintiff to sufficiently and adequately describe the defendant's state of mind at the pleadings stage."[12] Accordingly, "objective factors may inform an analysis of a defendant's subjective belief to the extent they bear on the defendant's credibility when asserting" he believed a transaction was in the best interests of the partnership.[13] When a court undertakes such an analysis, "[t]he directors' personal knowledge and experience will be relevant to a subjective good faith determination, which must focus on measuring the directors' approval of a transaction against their knowledge of the facts and circumstances surrounding the transaction."[14]

          5. Here, plaintiff has pleaded sufficient facts from which, when viewed collectively, [15] it is reasonably conceivable that the General Partner and Regency GP LLC did not subjectively believe that the Merger was in the best interests of the Partnership. Such factual allegations include the following:

• Regency had a bright future as a standalone entity and there was no need to complete the Merger in order to lower its cost of capital, which was the only purported benefit to Regency listed in the proxy statement.[16]
• Even though Regency objectively would have been better off as a standalone entity, its stable revenue stream and growth were deployed to shore up a struggling ETP, in a ...

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