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Williams Field Services Group, LLC v. Caiman Energy II, LLC

Court of Chancery of Delaware

September 25, 2019

WILLIAMS FIELD SERVICES GROUP, LLC, Plaintiff,
v.
CAIMAN ENERGY II, LLC; ENCAP FLATROCK MIDSTREAM FUND II, L.P.; ENCAP ENERGY INFRASTRUCTURE FUND, L.P.; TT-EEIF CO-INVESTMENTS, LLC; UT EEIF SIDE CAR, LLC; LIC-EEIF SIDECAR, LLC;OAKTREE CAPITAL MANAGEMENT, L.P.; HIGHSTAR IV CAIMAN II HOLDINGS, LLC; FR B.R. HOLDINGS L.L.C.;JACK M. LAFIELD; RICHARD D. MONCRIEF; STEPHEN L. ARATA; WILLIAM R. LEMMONS, JR.;DENNIS F. JAGGI; STEVEN GUDOVIC; and BLUE RACER MIDSTREAM, LLC, Defendants.

          Date Submitted: July 29, 2019

          William M. Lafferty, Kevin M. Coen, Lauren Neal Bennett, Sabrina Hendershot, Lauren P. Russell, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Andrew Ditchfield, Paul S. Mishkin, Daniel J. Schwartz, Tina Hwa Joe, Alexa B. Lutchen, Connie L. Dang, DAVIS POLK & WARDWELL LLP, New York, New York; Counsel for Plaintiff Williams Field Services Group, LLC.

          Rolin P. Bissell, James M. Yoch, Jr., YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Michael C. Holmes, John C. Wander, Craig E. Zieminski, George M. Padis, Margaret D. Terwey, VINSON & ELKINS LLP, Dallas, Texas; Counsel for Defendants Caiman Energy II, LLC, Jack M. Lafield, Richard D. Moncrief, Stephen L. Arata, Steven Gudovic, and Blue Racer Midstream, LLC.

          A. Thompson Bayliss, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Alan S. Goudiss, K. Mallory Brennan, Ryan Martin-Patterson, Susan Loeb, SHEARMAN & STERLING LLP, Counsel for Defendants EnCap Flatrock Midstream Fund II, L.P., EnCap Energy Infrastructure Fund, L.P., TT EEIF Co-Investments, LLC, UT EEIF Side Car, LLC, LIC-EEIF Side Car, LLC, Dennis F. Jaggi, and William R. Lemmons.

          Raymond J. DiCamillo, Robert L. Burns, Brian S. Yu, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Paul C. Gluckow, SIMPSON THACHER & BARTLETT LLP, New York, New York; Counsel for Defendants FR B.R. Holdings, L.L.C.

          Raymond J. DiCamillo, Robert L. Burns, Brian S. Yu, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael J. Shipley, David A. Klein, KIRKLAND & ELLIS LLP, Los Angeles, California; Counsel for Defendants Oaktree Capital Management, L.P. and Highstar IV Caiman II Holdings, LLC.

          MEMORANDUM OPINION

          LASTER, V.C.

         This post-trial decision addresses the parties' competing requests for declaratory judgments that interpret the currently operative limited liability company agreement of Caiman Energy II, LLC ("Caiman II"). The parties agree that the LLC agreement gives EnCap Capital Management ("EnCap") the sole and exclusive right to cause Caiman II to approve an initial public offering that meets the definition of a "Qualified IPO." They further agree that the LLC agreement gives EnCap the sole and exclusive right to take any action that is "required or necessary to facilitate" a Qualified IPO. Their superficial agreement on these realities masks a fundamental disagreement on the scope of authority that these provisions confer.

         The defendants read the provisions as granting plenary authority to EnCap in connection with a Qualified IPO, including the power to modify the definition of a Qualified IPO and to alter steps that the LLC agreement otherwise would require in connection with a Qualified IPO. Using the expansive authority that the defendants contend it possesses, EnCap has proposed an intricate, multi-step reorganization that will culminate in what the parties describe as an "Up-C IPO." EnCap's proposed transaction, however, is far more complex than a standard Up-C IPO. Among other things, it will invert the Caiman II entity structure, transforming Caiman II from its current status as the top-tier entity into a post-IPO role as the lowest-tier subsidiary. The defendants contend that EnCap has the authority to implement its Up-C IPO.

         The plaintiff reads the same provisions narrowly as granting, at best, limited authority to EnCap to approve what the LLC agreement defines as a Qualified IPO, and then to take actions that are necessary to achieve an IPO that meets the contractual definition. As the plaintiff sees it, EnCap cannot amend the definition of a Qualified IPO or evade otherwise mandatory steps for pursuing a Qualified IPO. More broadly, the plaintiff contends that EnCap cannot take action that would conflict with veto rights that the plaintiff possesses under other sections in the LLC agreement. The plaintiff concludes that EnCap lacks the authority to implement its Up-C IPO.

         This decision interprets the plain language of the LLC agreement differently than either of the extreme positions taken by the parties. This decision concludes that EnCap has the power to implement certain steps in its proposed Up-C IPO, but lacks the power to implement others. This decision further concludes that EnCap cannot rely on a cooperation clause in the LLC agreement to compel the plaintiff to give up its contractual rights.

         I. FACTUAL BACKGROUND

         The parties reached agreement on fifty-four stipulations of fact. During two days of trial, the parties introduced 250 exhibits and lodged fourteen depositions in evidence. Seven fact witnesses testified live. What follows are the court's findings based on a preponderance of the evidence.[1]

         A. Caiman I

         In 2009, defendants Jack M. Lafield and Richard D. Moncrief formed Caiman Energy, LLC ("Caiman I"). Defendant Stephen L. Arata later joined the Caiman I management team. This decision refers to Lafield, Moncrief, and Arata as "Caiman Management."

         Between 2009 and 2012, Caiman I acquired and developed midstream assets in the Marcellus Shale in West Virginia. In March 2012, Caiman I sold its assets to The Williams Companies, Inc. for $2.5 billion (the "Caiman I Sale"). As part of that transaction, Caiman Management entered into non-competition agreements that prohibited them from competing with their former business in its area of operations for a period of two years (the "Non-Compete Agreements").

         B. Caiman II

         In June 2012, three months after the Caiman I Sale, Caiman Management formed Caiman II. Through Caiman II, they planned to pursue the same midstream business model that Caiman I had used, this time in the Utica Shale in Ohio and Pennsylvania.

         Caiman II obtained funding from many of the same investors who had backed Caiman I. EnCap committed $285 million.[2] Oaktree Capital Management ("Oaktree") committed $95 million.[3] Caiman Management committed approximately $29 million, and a smattering of other individuals invested. See JX 1, sched. I.

         During the negotiations over the Caiman I Sale, Caiman Management had expressed interest in pursuing a follow-on venture, and Williams had expressed interest in investing. As a result, when Caiman Management formed Caiman II, they sought and obtained capital from Williams.[4] Williams committed $380 million, making it the largest investor in Caiman II.

         Williams did not want Caiman Management to use Williams' capital to compete with the business that Williams had only recently purchased in the Caiman I Sale. See Armstrong Dep. 146–48; Scheel Dep. 175. Williams had protection for the first two years in the form of the Non-Compete Agreements, but once they expired, Williams could find itself in the position of having funded a competitor. To address this risk, Williams insisted on a geographic limitation that would restrict Caiman II to the Utica Shale.[5] Without the geographic limitation, Williams would not have invested in Caiman II.[6]

         The geographic limitation was memorialized in Caiman II's original limited liability company agreement, dated as of July 9, 2012 (the "Original LLC Agreement"). In the initial draft, Caiman Management proposed that Caiman II could "acquire, own, hold, maintain, develop and operate Midstream Assets in the continental United States and the state and federal waters offshore thereto." JX 13 at '217. Williams struck the reference to the continental United States and its offshore waters, substituting "Utica Shale in Ohio and northwestern Pennsylvania." Id. at '217 to '218. Caiman Management accepted this change but added the language "and such other areas as determined by the Board with the approval required for a Special Voting Item." JX 14 at '550 to '551. In the final version of the Original LLC Agreement, Section 1.3 provided as follows:

Purpose. The purposes for which [Caiman II] is organized are:
(a) to acquire, own, hold, maintain, develop and operate Midstream Assets in the Utica Shale in Ohio and northwestern Pennsylvania and such other areas as determined by the Board with the approval required for a Special Voting Item;
(b) to sell, abandon and otherwise Dispose of Midstream Assets; and
(c) to engage in or perform any and all activities that are related to or incident to the foregoing or otherwise authorized by the Board in accordance with the terms of this Agreement, and that may be lawfully conducted by a limited liability company under the Act.
In carrying out the business and purposes of [Caiman II], [Caiman II] may act directly or indirectly through one or more entities.

See JX 17, § 1.3 (formatting altered). This decision refers to this language as the "Original Purpose Clause."

         Clause (a) of the Original Purpose Clause limited Caiman II's operations to "the Utica Shale in Ohio and northwestern Pennsylvania and such other areas as determined by the Board with the approval required for a Special Voting Item." See id. (emphasis added). The concept of a "Special Voting Item" referenced an aspect of Caiman II's governance regime. Under the Original LLC Agreement, Caiman II was a manager-managed LLC with a nine-member board of managers (the "Board"). Williams received the right to designate three of the members of the Board; it designated Curt Carmichael, David Keylor, and T.J. Rinke (the "Williams Managers"). EnCap received the right to designate two of the members of the Board; it designated William R. Lemmons, Jr. and Dennis F. Jaggi (the "EnCap Managers"). Oaktree received the right to designate one member of the Board; it designated Steven Gudovic (the "Oaktree Manager"). Caiman Management held the remaining three seats. See PTO ¶ 37.

         The Original LLC Agreement provided that as a general matter, valid Board action required a number of votes equal to or exceeding a majority of the managers then entitled to be designated to the Board. See JX 17, §§ 6.1, 6.8(a). In other words, with nine managers entitled to be designated to the Board, valid Board action required five votes. But the Original LLC Agreement then identified a list of eleven additional matters, each defined as a "Special Voting Item, " for which valid Board action also required "the affirmative vote of at least one EnCap Manager and at least one [Williams] Manager." See id. § 6.8(b). If either EnCap or Williams opposed a Special Voting Item, their representatives could block it by withholding support, even if a majority of the Board otherwise approved.

         By providing that Caiman II could only operate outside of the Utica Shale "as determined by the Board with the approval required for a Special Voting Item, " Clause (a) of the Original Purpose Clause required approval from at least one EnCap Manager and at least one Williams Manager. As a result, Caiman II would not be able to operate outside the Utica Shale without both EnCap's and Williams' consent. Making this agreement doubly clear, the list of Special Voting Items included taking "any action that is inconsistent with [Caiman II's] purpose, as set forth in Section 1.3." Id. § 6.8(b)(x).

         Other pertinent Special Voting Items included:

(iii) unless such matter is a Major Special Voting Item, to merge, combine, or consolidate [Caiman II] with any other entity, convert [Caiman II] into another form of entity, or exchange interests in [Caiman II] with any other person (except as part of a Drag-Along Sale effected pursuant to Section 9.3);
* * *
(xi) to approve a Qualified IPO; or
(xii) to take any action, authorize or approve, or enter into any binding agreement with respect to or otherwise omit to any of the foregoing.

Id. § 6.8(b).

         As indicated by item (iii) in this list, the Original LLC Agreement identified an additional category of Board actions known as "Major Special Voting Items." See id. § 6.8(c). For these items, Board approval required the affirmative vote of one EnCap Manager. Id. A Major Special Voting Item could not be approved by any other means, meaning that a single EnCap Manager could determine unilaterally whether to approve a Major Special Voting Item. Id. The list of Major Special Voting Items in the Original LLC Agreement identified only one substantive item, followed by a general catchall for actions related to that item:

(i) subject to the applicable requirements of Section 9.7, to enter into or consummate any transaction that will constitute an Exit Event, including
the Disposition of all or substantially all of the assets of [Caiman II] (including by way of Disposition of all or any portion of any equity interests held by [Caiman II] or its subsidiaries),
the Disposition of all of the Membership Interests as a Drag-Along Sale effected pursuant to Section 9.3, or
a merger of [Caiman II] with and into another entity or pursuant to which [Caiman II] is not the surviving entity (any such transaction approved pursuant to this Section 6.8(c), a "Company Sale"), or
(ii) to take any action, authorize or approve, or enter into any binding agreement with respect to or otherwise commit to do any of the foregoing.

Id. (formatting altered). The possibility of effectuating an Exit Event through a "Drag-Along Sale" referred to Section 9.3 of the Original LLC Agreement, which gave EnCap the right to cause the Board to approve and Caiman II to engage in "a sale of [Caiman II] that will be an Exit Event . . . structured as a sale of the Membership Interests." Id. § 9.3(a).

         By making the effectuation of an Exit Event a Major Special Voting Item, Section 6.8(c)(i) gave EnCap the unilateral ability to cause the Board to approve and Caiman II to consummate an Exit Event. Consistent with the examples included in Section 6.8(c)(i), the Original LLC Agreement defined "Exit Event" as

the sale of [Caiman II], in one transaction or a series of related transactions, whether structured as
(i) a sale or other transfer of all or substantially all of the Equity Securities (including by way of merger, consolidation, share exchange, or similar transaction),
(ii) the sale or other transfer of all or substantially all of the assets of [Caiman II], promptly followed by a dissolution and liquidation of [Caiman II],
(iii) any other dissolution or liquidation of [Caiman II], or
(iv) a combination of any of the foregoing.

Id. § 2.1 (formatting altered).

         Although EnCap had the unilateral ability to cause the Board to approve and Caiman II to consummate an Exit Event, the exercise and implementation of that right was not unfettered. EnCap's rights under Section 6.8(c)(i) were "subject to the applicable requirements of Section 9.7." In that section, Williams had a right of first offer under which EnCap had to provide Williams with written notice of the proposed Exit Event, then negotiate in good faith with Williams

with respect to a transaction pursuant to which [Williams] would consummate an Exit Event pursuant to which [Williams] would acquire all of the Equity Interests (if a Drag-Along Sale), all of the assets of [Caiman II] (if a Company Sale) or all of the assets of [Caiman II] to be sold (if a Material Asset Sale) . . . .

Id. § 9.7(b). EnCap's right to effectuate a Drag-Along Sale under Section 9.3 was likewise subject to Williams' right of first offer in Section 9.7. Id. § 9.3(b).

         Through its right of first offer, Williams had the opportunity to consummate the Exit Sale itself. By doing so, Williams could avoid the prospect of a new owner buying Caiman II, eliminating the Original Purpose Clause, and using Caiman II to compete with the business that Williams had purchased from Caiman I.

         C. The Dominion Transaction

         In fall 2012, Caiman II identified an opportunity to partner with Dominion Energy, Inc. ("Dominion") to form a joint venture that Caiman Management would manage (the "Dominion Transaction"). In November, Caiman II and Dominion negotiated a letter of intent, and Caiman II formed a wholly owned subsidiary called Blue Racer Midstream LLC ("Blue Racer") to serve as the vehicle for the Dominion Transaction. See JX 20; JX 21; JX 34 at 1. Blue Racer became and remains Caiman II's only revenue producing asset. It is also the only entity through which Caiman II does business.

         In December 2012, Dominion effectuated the first step of the Dominion Transaction by causing its wholly owned subsidiary, Dominion Natrium Holdings, Inc., to contribute certain midstream assets to Blue Racer in exchange for cash at closing. Dominion also committed to cause Dominion Natrium to contribute additional assets over time in return for additional cash payments to be funded by Caiman II. As part of the Dominion Transaction, Dominion received equity interests reflecting a 50% ownership interest in Blue Racer, leaving Caiman II with the remaining 50% ownership interest. See generally JX 31; JX 33.

         In connection with the Dominion Transaction, Caiman II and Dominion entered into a new limited liability company agreement for Blue Racer. See JX 34 (the "Blue Racer LLC Agreement"). At around the same time, the members of Caiman II entered into an amended and restated limited liability company agreement for Caiman II. See JX 1. This agreement is still the operative agreement that governs Caiman II, so this decision refers to it as the "Caiman LLC Agreement."

         When entering into the Blue Racer LLC Agreement and the Caiman LLC Agreement, the parties addressed a variety of issues. Two are pertinent to the current dispute: (i) a modification to the geographic area in which Caiman II and Blue Racer would operate, and (ii) a restructuring of EnCap's exit rights.

         1. Geographic Scope

         Dominion contributed assets to Blue Racer that included certain assets located in West Virginia, near the assets that Williams had purchased in the Caiman I Sale. Under the Original Purpose Clause, Caiman II could not operate in West Virginia, and Caiman II would have violated the Original Purpose Clause by engaging in business in West Virginia through Blue Racer. The parties addressed this problem by including a modified geographic limitation in the Blue Racer LLC Agreement, then using that modified scope to frame a revised purpose provision in the Caiman LLC Agreement.

         The Blue Racer LLC Agreement addressed the geographic situation by defining the "Purposes of the Company" as follows:

[Blue Racer] is formed for the purposes of developing the business of wet gas, lean gas, crude and condensate gathering, processing, and fractionation and NGL transportation within the AMI Area and, to the extent necessary for owning, operating and expanding the TL-404 Gathering Line, the Natrium Facility and G-150 Pipeline, within West Virginia (collectively, the "Company Business"). Each of the Members agrees to cause [Blue Racer] to conduct, directly and through its subsidiaries, the Company Business in accordance with the provisions of this Agreement and the Act.

         JX 34, § 3.1 (the "Blue Racer Purpose Clause"). The Blue Racer LLC Agreement defined "AMI Area" as "the area of the Utica Shale formation, specifically the counties in the State of Ohio and the Commonwealth of Pennsylvania set forth in Schedule 3, as may be modified pursuant to Section 10.4."[7] The Blue Racer Purpose Clause thus limited Blue Racer to operating in this area, except that Blue Racer could operate within West Virginia "to the extent necessary for owning, operating and expanding the TL-404 Gathering Line, the Natrium Facility and G-150 Pipeline." Id. § 3.1. These were specific assets that Dominion Natrium contributed to Blue Racer as part of the Dominion Transaction.

         The Caiman LLC Agreement addressed the geographic situation with a new purpose clause. Section 1.3 of the Caiman LLC Agreement provided as follows:

Purpose. The purposes for which [Caiman II] is organized are:
(a) to acquire, own, hold, maintain, develop and operate Midstream Assets in the Utica Shale in Ohio and northwestern Pennsylvania, including all those areas covered by the AMI Area and, to the extent necessary for owning, operating and expanding the Natrium Facility, the G-150 Pipeline and the TL-404 Gathering Line, within West Virginia (provided that, except for the Replacement Natrium Processing Contracts (as such term is defined in the Blue Racer Investment Agreement), neither [Caiman II] nor its subsidiaries may enter into, or cause Blue Racer or its subsidiaries to enter into, new gathering, processing or fractionation agreements for hydrocarbons produced in West Virginia prior to April 27, 2014), and such other areas as determined by the Board with the approval required for a Special Voting Item;
(b) to sell, abandon and otherwise Dispose of Midstream Assets; and
(c) to engage in or perform any and all activities that are related to or incident to the foregoing or otherwise authorized by the Board in accordance with the terms of this Agreement, and that may be lawfully conducted by a limited liability company under the Act.
In carrying out the business and purposes of [Caiman II], [Caiman II] may act directly or indirectly through one or more entities. Notwithstanding the foregoing, prior to the Equalization Date, [Caiman II] shall not pursue any Operation and Enhancement Plans except through Blue Racer and its subsidiaries.

         JX 1, § 1.3 (formatting altered; the "Caiman Purpose Clause").

         To ensure that the Blue Racer Purpose Clause and the Caiman Purpose Clause (together, the "Purpose Clauses") tracked each other, the Caiman LLC Agreement defined the term "AMI Area" to have "the meaning set forth in the Blue Racer LLC Agreement." Id. § 2.1. Recognizing that the scope of the Caiman Purpose Clause now turned on a definition in the Blue Racer LLC Agreement, the Caiman LLC Agreement expanded the list of Special Voting Items to include any action "to amend, modify or otherwise change (including by waiver or consent . . .) in any material respect any Blue Racer Agreement, including but not limited to an amendment of the definition of 'AMI Area' or 'ROFO Development Opportunity' under the Blue Racer Agreements . . . ." JX 1, § 6.8(b)(xii).[8]

         As a result of these changes, both before and after the Dominion Transaction, Caiman II could not compete with the business that Williams had purchased in the Caiman I Sale. The Caiman Purpose Clause only permitted Caiman II to operate in West Virginia to the extent necessary to own, operate, or expand the specific assets it received in the Dominion Transaction. Otherwise, Caiman II could not operate outside of the Utica Shale. Before Caiman II could operate anywhere else, it had to receive the approval of both one EnCap Manager and one Williams Manager. Caiman II could not violate this limitation directly or indirectly, whether through Blue Racer or otherwise. Blue Racer also could not operate outside of that same designated area, and Caiman II could not authorize any change in this aspect of the Blue Racer LLC Agreement without the approvals necessary for a Special Voting Item. As a result, neither Caiman II nor Blue Racer could operate outside of their designated area without Williams' consent.

         2. Exit Rights

         A more significant set of changes to the Original LLC Agreement involved the members' exit rights. This issue arose because the Blue Racer LLC Agreement contemplated that Dominion Natrium would contribute additional assets to Blue Racer in exchange for cash, and it obligated Caiman II to provide the capital necessary for Blue Racer to finance those transactions. See JX 22. During the lead up to the Dominion Transaction, Williams submitted a proposal to Caiman Management under which Williams would fund 100% of the required capital in return for additional member interests in Caiman II, which would result in Williams holding up to a 66% ownership interest in Caiman II. JX 24. In exchange for this commitment, Williams' proposal contemplated that an Exit Event would no longer be a Major Special Voting Item that EnCap could control unilaterally. See id.; see also JX 23.

         Knowing that EnCap would be focused on its need to exit as its funds entered their harvesting stage, Caiman Management questioned whether EnCap would be willing to give up its control over an Exit Event. But Caiman Management believed a compromise was possible, because they foresaw that the most likely outcome for Caiman II was either a sale to Williams or an IPO, and Caiman Management believed an IPO would likely generate greater value for EnCap. Caiman Management therefore thought that EnCap might be willing to give up its control over an Exit Right in return for greater control over an IPO. See JX 23.

         In crafting a counteroffer that would be acceptable to both Williams and EnCap, Caiman Management proposed swapping the approvals required for an Exit Event and a Qualified IPO. Under the Caiman Management proposal, an Exit Event would become a Special Voting Item, and a Qualified IPO would become a Major Special Voting Item only requiring the approval of an EnCap Manager. JX 25. Caiman Management also proposed that in the event of a Qualified IPO that was structured through a master limited partnership ("MLP"), the other investors in Caiman II "will sell their GP interest for cash to [Williams] using a defined valuation mechanism." Id. at '146. At the time, publicly traded midstream businesses were invariably organized as MLPs, and the parties expected Caiman II to go public as an MLP. Under this proposal, Williams would have the right to purchase all of the general partner interests in the MLP and control the post-IPO entity. The Caiman Management proposal also reduced Williams' maximum capital contribution and resulting equity stake from 66% to 62.5%. See id. In addition, Caiman Management proposed that the geographic restrictions in the Caiman LLC Agreement and the Blue Racer LLC Agreement would fall away once Caiman II had satisfied all of its funding commitments to Blue Racer. See id. at '147; JX 34 at A-6.

         Caiman Management ran its proposal by EnCap. See JX 26. EnCap struck the language eliminating its right to force an Exit Event, but kept the language that would let it unilaterally approve a Qualified IPO. Caiman Management sent the amended proposal to Williams. See JX 28. Williams restored the language eliminating EnCap's right to force an Exit Event and struck the point about the geographic restrictions falling away. See JX 30.

         The parties reached an agreement in principle based on Williams' counterproposal. Looking back on the negotiations from May 2014, Arata summarized the basic deal as follows:

When [Blue Racer] was formed, [Williams] negotiated for the option to increase its interest in Caiman II to 62.5%. An additional element of this change was [Williams'] request to not be able to be dragged into a sale of Caiman II (as they would now most likely be a majority owner of Caiman II). This was agreed to on the condition of [EnCap] being allowed to drag [Williams] into an IPO of either [Blue Racer] or Caiman II. The final element of the change of control adjustments was that, in the event of an IPO of either [Blue Racer] or Caiman II, [Williams] would have the right to buy out the other Caiman II owners' interest in the GP of Caiman II for fair market value in cash at the closing of the IPO (with an agreed upon process for resolving a valuation dispute).

         JX 46 at '757 to '758.

         The lawyers implemented the business deal in the Caiman LLC Agreement. To document the agreement regarding an Exit Event, the Caiman LLC Agreement (i) struck Section 9.3 of the Original LLC Agreement in its entirety, thereby eliminating the concept of a Drag-Along Sale, and (ii) moved the approval of an Exit Event from Section 6.8(c)(i), where it was a Major Special Voting Item, to Section 6.8(b)(xi), where it became a Special Voting Item. In a related change, the parties revised Section 6.8(b)(iii), which made it a Special Voting Item "to merge, combine, or consolidate [Caiman II] with any other entity, convert [Caiman II] into another form of entity, or exchange interests in [Caiman II] with any other person." Previously, this provision included an exception that recognized EnCap's right to authorize a merger or similar transaction as a Major Special Voting Item when it was part of an Exit Event. JX 17, § 6.8(b)(iii). The Caiman LLC Agreement eliminated that exception.

         To document the agreement regarding a Qualified IPO, the Caiman LLC Agreement moved the approval of a Qualified IPO from Section 6.8(b)(xi), where it had been a Special Voting Item, to Section 6.8(c)(i), where became a Major Special Voting Item. As a result, the list of Major Special Voting Items in the Caiman LLC Agreement consisted of the following:

(i) to approve a Qualified IPO, or
(ii) to take any action, authorize or approve, or enter into any binding agreement with respect to or otherwise commit to do any of the foregoing.

Id. § 6.8(c).

         The Caiman LLC Agreement did not make any changes to the definition of a Qualified IPO. Both in the Original LLC Agreement and in the Caiman LLC Agreement, a "Qualified IPO" was defined as

any underwritten initial public offering by the IPO Issuer of equity securities pursuant to an effective registration statement under the Securities Act for which aggregate cash proceeds to be received by the IPO Issuer from such offering (without deducting underwriting discounts, expenses and commissions) are at least $75, 000, 000; provided that a Qualified IPO shall not include an offering made in connection with a business acquisition or combination pursuant to a registration statement on Form S-4 or any similar form, or an employee benefit plan pursuant to a registration statement on Form S-8 or any similar form.

Id. § 2.1(a); JX 17, § 2.1(a).

         The definition of "Qualified IPO" referred to the concept of the "IPO Issuer, " and the Caiman LLC Agreement changed that definition. It now stated:

"IPO Issuer" means (i) [Caiman II] or (ii) an Affiliate of [Caiman II] that will be the issuer in a Qualified IPO. For the avoidance of doubt, and without limiting the definition of Affiliate, Blue Racer and its subsidiaries will be considered Affiliates of [Caiman II] for purposes of this definition.

         JX 1, § 2.1(a). The qualification "[f]or the avoidance of doubt" was an addition. It made clear that Blue Racer or one of its subsidiaries could be the IPO Issuer.

         In the Original LLC Agreement, Section 9.5 governed the implementation of a Qualified IPO, and in the Caiman LLC Agreement, the parties made relatively limited changes to this set of provisions. See JX 1, § 9.5 (the "Qualified IPO Section"). To implement the agreement regarding who could control a Qualified IPO, the parties added language to Section 9.5(a) to make clear that (i) the decision to effectuate a Qualified IPO was a Major Special Voting Item and (ii) any references to approvals by the Board in Section 9.5 meant the approval necessary for a Major Special Voting Item, i.e., EnCap's sole approval. See JX 1, § 9.5(a).

         The only other significant modification to the Qualified IPO Section addressed Williams' right to acquire 100% of the general partner interest in the event of a Qualified IPO involving an MLP, which the Caiman LLC Agreement defined as an "MLP Conversion." To implement this agreement, the parties added a new Section 9.5(e) which granted Williams "the sole and exclusive right to purchase each other Investor's Equity Interests in the general partner, including any incentive distribution rights and similar incentive securities" for cash in an amount equal to "fair market value." See JX 1, § 9.5(e). The new section included a mechanism for determining fair market value, including for the appointment of an appraiser. See id.

         In January 2013, weeks after executing the Caiman LLC Agreement, Williams prepared a summary of its terms. The summary of the Qualified IPO Section stated: "Actions requiring Board approval in connection with a Qualified IPO are considered Major Special Voting Items (as defined below), which require the affirmative vote of one EnCap Manager and no other." JX 35 at '448.

         D. The Contemplated MLP Conversion In 2015

         Beginning in early 2014, Caiman Management explored the possibility of conducting a Qualified IPO, believing initially that it "would optimally be timed in early Q2 of 2015." JX 46 at '757; see PTO ¶ 38; JX 55. Publicly traded midstream companies continued to be organized as MLPs, and Caiman Management expected that a Qualified IPO would take place through an MLP Conversion.

         Caiman Management did not want the MLP to face geographic restrictions and asked their outside counsel whether the restrictions would apply. In an email sent in May 2014, counsel expressed the view that

the restrictions in the Caiman II purpose clause would naturally fall away at a Caiman II level at IPO b/c we will have a new partnership agreement, however, absent amending the Blue Racer LLC Agreement, Caiman II would still be limited by the purpose clause in Blue Racer to the extent it is pursuing activities through Blue Racer.

         JX 43 at '328. After receiving this advice, Caiman Management and EnCap discussed how to negotiate with Williams over removing the Blue Racer Purpose Clause. See JX 46 at '758. Their discussions assumed that the amendment would require Williams' consent. See id.

         When EnCap engaged with Williams about the Qualified IPO, Williams suggested the possibility of buying Caiman II. See JX 50 at '021. For a time, the discussions focused on a sale of Caiman II to Williams. See JX 59.

         In November 2014, with the discussions over a sale bogging down, Caiman Management resumed their preparations for an MLP Conversion. Caiman Management anticipated that Williams would exercise its right to acquire 100% of the general partner and asked Williams to confirm that fact. Notwithstanding the advice they had received six months earlier about the Caiman Purpose Clause "fall[ing] away, " Caiman Management asked Williams to agree that the Purpose Clauses would be removed post-IPO "as they would be unduly restrictive for marketing purposes." JX 70. Caiman Management argued this should be an easy concession for Williams because if Williams exercised its right to acquire 100% of the general partner, then Williams "will be in joint control of [Blue Racer] at that point" and could ensure that the MLP and Blue Racer did not expand into the Marcellus Shale. Id.

         In January 2015, counsel for Caiman II prepared a draft Form S-1. It disclosed as a risk factor that both the MLP's limited partnership agreement and the Blue Racer LLC Agreement would "limit[] our ability to expand [our or] Blue Racer's operations beyond the Utica Shale and certain portions of the Marcellus Shale." JX 71 at '139 (bracketed text in original). A drafting note from counsel called for confirming with Williams whether this disclosure needed to be retained, or whether Williams would agree to eliminate the geographic restrictions: "NTD: confirm [Williams] intent to leave purpose limitation in place." Id. Williams "held to the position that we did want to maintain [the business purpose limitation], and that it should be in the [S-1] disclosures." Carmichael Tr. 124.

         Caiman II subsequently filed a preliminary Form S-1 on a confidential basis with the SEC on May 13, 2015. JX 77 at '710. The as-filed Form S-1 included the same risk factor language and contained additional disclosures regarding how the business purpose provisions would limit the operations of the post-IPO entities. It stated that the "sole purpose" of Caiman II and Blue Racer was "pursuing midstream energy opportunities in the Utica Shale." Id. at '716. It later stated that "Blue Racer's assets are exclusively located in . . . the Utica Shale and certain adjacent areas in the Marcellus Shale, and the Blue Racer LLC Agreement restricts it from engaging in operations outside of this area." Id. at 749. The as-filed version added that "entry into any business other than the company's stated purposes" would require approval of members holding 100% of Blue Racer's member interests. Id. at '763 to '764. See generally PTO ¶¶ 38-43.

         E. The Contemplated MLP Conversion In 2017

         Because of adverse market conditions, Caiman II did not proceed with the MLP Conversion in 2015. Caiman Management revisited the prospect of an MLP Conversion in 2017. This time, Caiman Management did not assume that Williams would exercise its right to acquire 100% of the MLP's general partner and proceeded with the expectation that the Form S-1 would have to disclose both the possibility that Williams would exercise its option and the possibility that the general partner would have multiple members. As before, Caiman Management wanted to remove the business purpose limitations, but did not believe it could be done without Williams' consent. See Juban Dep. 111; see also JX 137 at '828. When Caiman II filed a new Form S-1 confidentially in 2017, it disclosed that the business purpose provisions would limit the ability of IPO Issuer and Blue Racer to operate and discussed the resulting implications for investors.[9]

         While Caiman Management was preparing for the 2017 MLP Conversion, Williams supported the Qualified IPO, but proceeded slowly and deliberately. Williams had a contractual obligation to support a Qualified IPO, and it took care to comply with that obligation, but it also sought to limit its support to what was contractually required. At the same time, Williams continued to dangle the possibility of a purchase of Caiman II. By February 2017, little progress had been made, and Caiman Management and EnCap had grown frustrated with Williams. See JX 112 at '132, JX 113 at '193. Those dynamics persisted through the balance of 2017. See, e.g., JX 140; JX 141; JX 142; JX 149; JX 154.

         Unfavorable market conditions in late 2017 put an end to the prospect of the MLP Conversion. In June 2018, when Caiman Management tried to re-start the IPO process. EnCap did not support the idea, believing it was ...


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