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In re Energy Transfer Equity L.P. Unitholder Litigation

Court of Chancery of Delaware

February 28, 2019

In re Energy Transfer Equity, L.P. Unitholder Litigation,

          Date Submitted: November 19, 2018

          Michael Hanrahan, Esquire Paul A. Fioravanti, Jr., Esquire Kevin H. Davenport, Esquire Samuel L. Closic, Esquire Eric J. Juray, Esquire Prickett, Jones & Elliott, P.A.

          Rolin P. Bissell, Esquire James M. Yoch, Jr., Esquire Benjamin M. Potts, Esquire Young Conaway Stargatt & Taylor, LLP

          SAM GLASSCOCK III, VICE CHANCELLOR

         This Letter Opinion addresses the Plaintiffs' Post-Trial Petition for an Award of Attorneys' Fees, Costs, and Expenses.

         I. Background

         This litigation began on April 12, 2016. What follows is a truncated version of the facts regarding the transaction at issue; the interested reader is referred to my Memorandum Opinion of May 17, 2018[1] for a more comprehensive recitation. Energy Transfer Equity ("ETE") is a Delaware Master Limited Partnership (MLP), and is managed by the Board of Directors (the "Board" and the "Directors") of its General Partner, LE GP, LLC. The Plaintiffs[2] alleged that the General Partner of ETE breached the Limited Partnership Agreement (LPA) by issuing Series A Convertible Preferred Units (CPUs) to ETE affiliates, and that this issuance was not fair to the Partnership. They sued ETE and certain CPU recipients on behalf of the holders of Common Units (the "Unitholders"), exclusive of the Defendants and other CPU recipients. The case proceeded via vigorous litigation: with discovery, motion practice, and ultimately through trial. The suit presented complex issues of Limited Partnership law; however, I address only those facts and issues that are relevant here.

         In September 2015, ETE announced its merger with the Williams Companies, Inc. ("Williams").[3] Soon after, the energy sector experienced a decline, during which ETE's unit price fell by 65.5 percent.[4] ETE's credit rating was downgraded, and access to credit became more difficult.[5] Although these changes affected the energy industry as a whole, they were particularly detrimental to ETE's Unitholders, because as an MLP, ETE distributed all of its available cash to Unitholders every quarter.[6] Moreover, consideration for the Williams merger was a mix of equity and cash; ETE's decrease in unit price meant a correspondingly large cash component would be due to Williams at closing.

         In light of its worsening financial situation, and in contemplation of its merger with Williams, in February 2016 ETE issued a class of securities, the CPUs, in a private offering going largely to ETE insiders.[7] Originally, ETE had envisioned a similar offering that would be extended to all Unitholders; however, ETE came to believe that Williams would not consent to a public offering, as required by the merger terms.[8] As originally contemplated, the public offering provided for deferred dividends, to be paid in accrued equity, rather than in cash.[9] This would allow ETE to retain much-needed capital, with the hope that it could avoid canceling distributions to the common Unitholders.[10] Ultimately, ETE offered its insiders sweeter terms.

         Under the terms of the private offering, subscribers would receive an $0.11 cash distribution each quarter.[11] The subscribers also received a deferred equity accrual, representing units valued at the difference between the $0.11 the subscriber received and the then-current distribution rate of $0.285, regardless of whether any distribution to common Unitholders was actually made.[12] These terms were more favorable to the subscribers than those of the previously-contemplated public offering. I found it reasonable to conclude that ETE's CFO "informed insiders that a public offering to all unitholders would be unlikely, given [Williams'] lack of consent; that a Private Offering would be an alternative; that a substantial risk of distribution cuts or cancellations loomed; and that the insiders seized the opportunity to eliminate downside risk for themselves and their cronies."[13]

         On April 18, 2016, about two months after the issuance described above, ETE announced that it would cut distributions to the common Unitholders.[14] Ultimately, however, the anticipated Williams merger did not close, and the energy economy recovered.[15] As a result, ETE did not cut distributions.[16] Instead, it announced that its distributions to common Unitholders would remain unchanged, at $0.285.[17]Then, on October 26, 2017-during the pendency of this litigation-ETE announced that it would increase the quarterly distributions to $0.295 per share.[18] In February 2018, ETE raised distributions a second time, to $0.305.[19] These distributions negated any damages to the Plaintiffs as a result of the CPU issuance, even though I found that the Defendants had breached their contractual duties. In short, because the economic upturn and the merger failure fortuitously coincided, ETE was able to maintain, and ultimately increase, distributions to nonparticipating Unitholders, so that the Plaintiffs suffered no monetary harm as result of the Defendants' breach.

         In a post-trial opinion dated May 17, 2018, I found that, although the issuance of the CPUs was not impermissible under the LPA, it was nevertheless a conflicted transaction that was not fair to the Partnership.[20] Thus, in my view, the Plaintiffs prevailed in the substantive litigation, despite the lack of court-ordered relief.[21]

         Subsequently, the Plaintiffs moved for an award of attorneys' fees. Contending that fees are warranted under the corporate benefit theory, the Plaintiffs point to two corporate benefits. First, the litigation "clarified" the LPA, and it "establishes that in any future conflicted transaction, the General Partner and its Affiliates must prove fairness."[22] Second, per the Plaintiffs, the distributions that occurred during the litigation were actually a result of the litigation, which served to simultaneously negate damages and work a corporate benefit. The Plaintiffs otherwise submit that I should use my equitable powers to award attorneys' fees.[23]

         In their opposition, the Defendants argue that there is no cognizable benefit. They submit that the post-trial "guidance" that clarified the LPA is not a true corporate benefit.[24] They also contend that the distribution increases were entirely independent of the litigation, and were therefore not a benefit of the Plaintiffs' efforts.[25]

         The ultimate question is this: Did the litigation provide such benefits to the entity and the Unitholders that an award of fees is warranted under the corporate benefit doctrine?

         II. Analysis

         This is an unusual fee request. The litigation here was extensive. The Plaintiffs demonstrated that insiders crafted a transaction that benefited themselves at the expense of the Unitholders, in breach of the contractual analog of fiduciary duties by which the parties were bound. The benefit improperly conveyed was a downside hedge, which, as a mere fortuity, did not help-and, in fact, slightly disadvantaged-the Defendants. As a result, the breach resulted in no cognizable damages. In the face of these facts, the Plaintiffs seek fees for having worked a benefit on the Partnership. The Defendants agree that a cognizable benefit here would justify fee shifting; however, they contend that the litigation achieved no such benefit.

         This jurisdiction employs the American rule on fees and expenses: winners and losers bear their own. There are exceptions, the pertinent one being that where the litigation has worked a benefit on a corporation or a class, the plaintiffs, taking only a share of the fruits of their efforts, are entitled to share their costs as well. Here, the question is, in light of the lack of damages or other meaningful remedy, what is the benefit conferred by the litigation? And to the extent that a benefit was conveyed, how should I properly evaluate the resulting equitable fee shifting? I note that each side here, although they vary wildly as to the appropriate amount of fees to be shifted, agrees that an improvidently-set fee will work a perverse incentive toward wholesome levels of entity litigation.[26]

         The path that leads this Court to an appropriate fee is well-worn, if not easy to tread. I must employ the factors set out by our Supreme Court in Sugarland.[27] Of these, the most important is the benefit achieved, and I turn first to that consideration.

         A. Therapeutic Benefit

         This Court, and our Supreme Court, have repeatedly found a corporate benefit sufficient to shift fees where a substantial therapeutic benefit to corporate governance was accomplished via the litigation.[28] Here, I find that the litigation has resulted in a substantial benefit to the Unitholders and the Partnership, in defining the duties required in the event of a conflicted transaction.

         I turn first to the Defendants' contention that litigation that merely "reminds" fiduciaries of their duties under law does not thereby work a cognizable benefit sufficient to justify shifting fees.[29] The Plaintiffs submit that a benefit of this litigation is that it clarified the Partnership Agreement. Specifically, the litigation "established that under § 7.6(f), the General Partner and its Affiliates bear the burden of proving that a conflicted transaction is fair and reasonable."[30] Moreover, as a result of the litigation, "the General Partner and its directors now know that a Conflicts Committee must be properly [composed] and established by proper procedures. . . . Resolutions and minutes must accurately record board and committee action."[31] The Conflicts Committee must be fully informed; "[i]t cannot merely be a rubber stamp for whatever the General Partner desires."[32]

         In opposition, the Defendants argue that "post-trial 'guidance' is not a compensable benefit."[33]

         In general, corporate fiduciaries are bound by common-law duties and the DGCL-and are charged with knowledge of those responsibilities-so a cognizable benefit is not worked merely by reminding them of such.[34] In this case, however, the entity is a Limited Partnership. It was created by contract, and the parties had the opportunity to craft their relationship-with minimal limitations-as they wished, via the contract. That contract, the LPA, specifically eschews common-law fiduciary duties. Instead, it creates its own duties, including (pertinent here) for insider transactions. The universe of duties here is self-defining. The proper construction of those duties was hotly debated in the litigation. I credit the Defendants with having reached an initial interpretation of their duties in sincerity. Accordingly, I must assume that such interpretation-erroneous, as it turned out- would have continued to be held and applied by the Defendants going forward, absent this litigation. Unlike with the duties imposed by law, here the clarification that contractual duties apply in a way that is favorable to the entity and the Unitholders, and unfavorable to the Defendants, has value that justifies an award of fees.[35]

         Specifically, the LPA limits insider transactions to those transactions whose terms are "fair and reasonable."[36] Through the litigation, the Defendants stoutly maintained that this language imposes a burden on a challenging Unitholder to demonstrate the lack of fairness of the conflicted transaction.[37] For reasons adequately explained in my Memorandum Opinion, the LPA in fact imposes that burden on the insiders.[38] Presumably, this clarification will limit marginally-unfair conflicted transactions going forward.

         Next, the LPA provides a safe harbor for conflicted transactions where the Board creates an independent conflicts committee and defers to that committee's decision regarding the transaction.[39] The Defendants maintained that the Directors' creation of a conflicts committee, composed of a majority of conflicted members, nonetheless provided a safe harbor for the conflicted transaction if the one unconflicted member approved. This was an incorrect understanding of the LPA. The Plaintiffs advocated, and I found, that safe harbor under the LPA in this context required approval by a contractually-proper conflicts committee appointed by the Board, acting in good faith in consideration of the transaction. Again, this clarification of the Partnership's governing document is a benefit to the entity going forward. The Defendants held an erroneous view of their duties, and acted consistent with their view but against the interest of the Unitholders. Presumably, absent the litigation, they would have continued to do so. To my mind, this is a benefit that justifies shifting fees.

         B. ...


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