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Dieckman v. Regency GP LP

Court of Chancery of Delaware

October 29, 2019

ADRIAN DIECKMAN, on behalf of himself and all others similarly situated, Plaintiff,
v.
REGENCY GP LP and REGENCY GP LLC, Defendants.

          Date Submitted: July 19, 2019

          CHRISTINE M. MACKINTOSH, GRANT & EISENHOFER P.A., WILMINGTON, DELAWARE; GREGORY V. VARALLO, BERNSTEIN LITOWITZ BERGER & GROSSMAN LLP, WILMINGTON, DELAWARE; JEROEN VAN KWAWEGEN, EDWARD G. TIMLIN, AND TAMARA GAVRILOVA, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, NEW YORK, NEW YORK; ATTORNEYS FOR PLAINTIFF AND THE CLASS.

          ROLIN P. BISSELL, TAMMY L. MERCER, AND BENJAMIN M. POTTS, YOUNG CONAWAY STARGATT & TAYLOR, LLP, WILMINGTON, DELAWARE; MICHAEL C. HOLMES, CRAIG E. ZIEMINSKI, KIMBERLY R. MCCOY, AND JEFFREY CROUGH, VINSON & ELKINS LLP, DALLAS, TEXAS; ATTORNEYS FOR DEFENDANTS REGENCY GP LP AND REGENCY GP LLC.

          MEMORANDUM OPINION

          BOUCHARD, C.

          This action involves a master limited partnership in the energy industry that engaged in a conflicted transaction that closed in April 2015. Fact discovery has concluded and the parties have filed cross-motions for summary judgment.

         The cross-motions implicate three provisions that commonly appear in MLP agreements. Those provisions concern: (i) approval of a conflicted transaction by an independent committee, known as a "Special Approval;" (ii) approval of a conflicted transaction by a vote of the majority of units not held by the general partner and its affiliates, known as a "Unitholder Approval;" and (iii) action taken by the general partner in reasonable reliance upon the opinion of a professional or expert, such as an investment bank. The standard of review the court must apply to evaluate the transaction at issue in this case would be altered significantly if any of these provisions is triggered.

         Plaintiff is a unitholder of Regency Energy Partners LP who brought this action on behalf of a class of Regency common unitholders as of the date of its merger with an affiliate. He seeks partial summary judgment that the Special Approval and Unitholder Approval safe harbors were not satisfied. For the reasons discussed below, the court grants plaintiff's motion because the conflicts committee was not validly constituted, which negates the Special Approval provision; and because the proxy statement for the transaction was materially false and misleading in at least two respects, which negates the Unitholder Approval provision.

         Defendants consist of the general partner of Regency and the general partner's parent. They seek summary judgment that the general partner's reliance on a fairness opinion from an investment bank triggers a conclusive presumption of good faith that would be dispositive of plaintiff's claim for breach of the partnership agreement. Plaintiff's response is twofold. He contends (i) that the provision governing reliance on an expert does not apply to conflicted transactions and (ii) that a genuine issue of material fact exists concerning whether the general partner actually relied on the investment bank's fairness opinion. For the reasons discussed below, the court agrees with plaintiff on the second point and thus must deny defendants' motion. The court does so without needing to decide the first point.

         I. BACKGROUND

         Prior decisions of this court and the Delaware Supreme Court discuss the background of this action extensively.[1] This opinion recites only the facts necessary to decide the parties' cross-motions for summary judgment based on those prior decisions and the parties' submissions.

         A. The Parties

         Regency Energy Partners LP ("Regency") is a Delaware limited partnership that traded publicly until April 30, 2015. Regency is a midstream natural gas company, meaning it engages in gathering, processing, compressing, treating, and transporting natural gas. Plaintiff Adrian Dieckman was a common unitholder of Regency at all relevant times.

         Defendant Regency GP LP is a Delaware limited partnership that served as the general partner of Regency. Defendant Regency GP LLC is a Delaware LLC that served as the general partner of Regency GP LP. For simplicity, the court refers to these entities together as the "General Partner."

         Energy Transfer Partners L.P. ("ETP") is a Delaware limited partnership that owns the general partner of Sunoco LP ("Sunoco") as well as 43% of the limited partnership interests in Sunoco and 100% of Sunoco's distribution rights. Energy Transfer Partners, GP, L.P. ("EGP") is a Delaware limited partnership that serves as the general partner of ETP. ETP acquired Regency's common units on April 30, 2015 in a merger (the "Merger").

         Energy Transfer Equity, L.P. ("ETE") is a Delaware limited partnership that indirectly owns the General Partner of Regency and the general partner of ETP (EGP). ETE thus controlled Regency both before and after ETP acquired Regency in the Merger.

         The ownership relationships among the relevant entities before the Merger is depicted below, along with the status of Regency after the Merger:

         (Image Omitted)

         The following six individuals were members of the General Partner's board of directors at all relevant times: Michael Bradley, Richard Brannon, James Bryant, Rodney Gray, John McReynolds, and Matthew Ramsey (collectively, the "Regency board"). Brannon and Bryant constituted the Conflicts Committee of the Regency board when it approved the Merger.

         B. The Relevant LP Agreement Provisions

         The Limited Partnership Agreement (the "LP Agreement") governs the General Partner's relationship with Regency's limited partners. Section 7.9(b) of the LP Agreement provides that, "[w]henever the General Partner makes a determination or takes or declines to take any other action . . . in its capacity as the general partner of the Partnership . . ., then, unless another express standard is provided for in this Agreement, the General Partner . . . shall make such determination or decline to take such action in good faith."[2] This means it "must believe that the determination or other action is in the best interests of the Partnership."[3]

         Given ETE's control of both Regency (through the General Partner) and ETP (through EGP), it is undisputed that the Merger presented a potential conflict of interest between, on the one hand, the General Partner and, on the other hand, Regency's common unitholders, who had no connection to ETE. With respect to transactions involving potential conflicts of interest, Section 7.9(a) of the LP Agreement provides, in relevant part, that any course of action taken by the General Partner concerning such conflict of interest "shall not constitute a breach of this Agreement . . . or of any duty stated or implied by law or equity" if any one of four specified safe harbors is satisfied:

Unless otherwise expressly provided in this Agreement . . ., whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, any Group Member or any Partner, on the other, any resolution or course of action by the General Partner or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement . . . or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval, (ii) approved by the vote of a majority of the Common Units (excluding Common Units owned by the General Partner and its Affiliates), (iii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or (iv) fair and reasonable to the Partnership taking into account the totality of the relationships between the parties involved . . . .[4]

         Of the four safe harbors in Section 7.9(a), only two are relevant to the parties' cross-motions for summary judgment: the first, i.e., the "Special Approval;" and the second, i.e., the "Unitholder Approval." These safe harbors are discussed further in Sections III.B-C below.

         Another provision of the LP Agreement relevant to the parties' cross-motions is Section 7.10(b). It provides, in relevant part, that an action of the General Partner taken in reasonable reliance on an investment banker's opinion "shall be conclusively presumed to have been done . . . in good faith."[5] This provision, and its interplay with Section 7.9(a), is discussed in Section III.A below.

          C. The Merger

         On January 16, 2015, the boards of ETE and ETP held a joint meeting to discuss a potential merger of ETP and Regency.[6] At the meeting, the ETP board approved making a proposal to merge Regency into ETP for 0.4044 ETP common units per common unit of Regency and a $137 million cash payment or $0.36 per common unit of Regency.[7] Also on January 16, the Regency board delegated authority to the Conflicts Committee to review and consider the proposed transaction.[8]

         On January 20, 2015, the Conflicts Committee decided to retain J.P. Morgan Securities, LLC ("J.P. Morgan") as its financial advisor for the Merger, "subject to the negotiation of an acceptable engagement letter, including the related engagement fee."[9] Regency and the Conflicts Committee entered into an engagement agreement with J.P. Morgan two days later, on January 22, 2015.[10] The Conflicts Committee also retained Akin Gump Strauss Hauer & Feld LLP ("Akin Gump") as its legal advisor for the Merger.[11]

         On January 22, 2015, the Conflicts Committee reviewed ETP's proposal to acquire Regency for 0.4044 ETP units and $0.36 per common unit of Regency, and determined that those terms "were fair to the unaffiliated unitholders of the Partnership."[12] On January 23, ETP increased its offer to 0.4066 ETP units plus $0.31 per common unit of Regency.[13] The next day, on January 24, the parties agreed to modify the offer to 0.4066 ETP units plus $0.32 per common unit of Regency.[14]

         On January 25, the Conflicts Committee accepted the January 24 offer and recommended approval of the Merger to the Regency board.[15] In that meeting, J.P. Morgan gave a verbal fairness opinion to the Conflicts Committee that the proposed terms of the Merger were fair to Regency's common unitholders.[16] Later on January 25, after receiving the recommendation of the Conflicts Committee and discussing the proposed transaction with J.P. Morgan, the Regency board approved the proposed Merger.[17]

         On February 18, 2015, the parties agreed to amend the terms of the Merger to replace the cash component with additional ETP units, based on the volume- weighted average price of ETP units for the five trading days preceding the closing of the Merger.[18]

         On March 24, 2015, Regency issued a definitive proxy statement (the "Proxy") in advance of a special meeting of Regency unitholders to consider and vote on whether or not to approve the Merger.[19] On April 28, 2015, a majority of Regency's unitholders voted to approve the Merger, which closed on April 30, 2015.[20] At closing, each Regency common unit was converted into 0.4124 units of ETP.[21] No appraisal rights were available in connection with the Merger.[22]

         II. PROCEDURAL POSTURE

         On June 10, 2015, Dieckman filed his original complaint in this case, asserting four claims for relief on behalf of a class of Regency common unitholders as of the date of the Merger. On March 29, 2016, the court issued a memorandum opinion and dismissed all four claims based primarily on application of the Unitholder Approval safe harbor in the LP Agreement.[23]

         On January 20, 2017, the Delaware Supreme Court reversed this court's dismissal decision. It concluded that Dieckman had pled sufficient facts that the Unitholder Approval safe harbor was not satisfied because the General Partner "allegedly made false and misleading statements to secure" that approval, and that the Special Approval safe harbor was not satisfied because the General Partner "allegedly used a conflicted Conflicts Committee."[24]

         On May 5, 2017, Dieckman filed an amended complaint, asserting four claims. Count I asserted that the General Partner breached Section 7.9(b) of the LP Agreement by approving the Merger even though the members of the Regency board did not believe that the Merger was in the best interests of Regency. Count II asserted that the General Partner breached the implied covenant of good faith and fair dealing by approving the Merger. Count III asserted that all the other defendants aided and abetted a breach of the LP Agreement. Count IV asserted that all the other defendants had tortiously interfered with the LP Agreement.

         On May 19, 2017, defendants filed a motion to dismiss the amended complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief.[25] On February 20, 2018, the court issued an order granting in part and denying in part that motion.[26] Specifically, the court denied defendants' motion to dismiss Count I and granted the motion with respect to Count II, insofar as it pertained to Section 7.9(b), and Counts III and IV.[27]

         On May 14, 2019, the parties filed the pending cross-motions for summary judgment.[28]

         III. ANALYSIS

         Under Court of Chancery Rule 56(c), this court "shall" enter summary judgment "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."[29] Under Rule 56(e), "[w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial."[30]

         A. There is a Genuine Issue of Material Fact Concerning Whether the Conflicts Committee or the Regency Board Relied on J.P. Morgan's Fairness Opinion

         Defendants seek summary judgment in their favor on Count I of the amended complaint based on the application of Section 7.10(b) of the LP Agreement. That provision states in relevant part that an act the General Partner takes in reasonable reliance upon the opinion of an investment banker shall be conclusively presumed to have been done in good faith:

The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including an Opinion of Counsel) of such Persons as to matters that the General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.[31]

         According to defendants, because the Conflicts Committee and the Regency board relied on a fairness opinion J.P. Morgan provided in connection with the Merger, the General Partner fulfilled the requirements of Section 7.10(b) and "must be presumed to have acted in good faith in approving the Merger," thus barring Dieckman's claim for breach of the LP Agreement.[32]

         Dieckman does not dispute that the Conflicts Committee consulted with J.P. Morgan concerning the proposed Merger or that J.P. Morgan was qualified to render a fairness opinion as a general matter.[33] Dieckman's opposition focuses instead on two issues. The first raises a legal question-does Section 7.10(b) apply to a conflicted transaction like the Merger? The second is a fact question-did the General Partner (through the Conflicts Committee and, in turn, the Regency board) actually rely on J.P. Morgan's fairness opinion?

         With respect to the first issue, Dieckman argues that Section 7.10(b)-which appears in a section of the LP Agreement (Section 7.10) entitled "Other Matters Concerning the General Partner"-was not intended to apply to conflicted transactions given that the LP Agreement has another provision (Section 7.9) specifically dedicated to "Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties."[34] In support of this argument, Dieckman relies heavily on Vice Chancellor Glasscock's decision in Morris v. Spectra Energy Partners (DE) GP, LP, which analyzed two provisions similar to Sections 7.9(a) and 7.10(b) of the LP Agreement.[35]

         Like this case, Spectra involved a master limited partnership in an energy business that had engaged in a conflicted transaction. Defendants argued for dismissal of certain claims based on the conclusive presumption of good faith in Section 7.10(b) of the Spectra agreement because the conflicts committee allegedly relied on a financial advisor in approving the transaction. Applying the specific-over-the-general rule of contract interpretation, [36] the court declined to apply the conclusive presumption in Section 7.10(b) and opted instead to apply the "rebuttable good faith presumption" in Section 7.9(a) of the Spectra agreement after carefully considering the structure and plain language of the agreement and after determining there was "no binding authority" requiring it to apply the conclusive presumption.[37] In distinguishing one of the authorities on which defendants relied heavily, the court further explained "that when sophisticated parties intend to provide a conclusive presumption in a conflicts situation, they know how to draft such a provision."[38]

         Although the court finds the analysis in Spectra to be persuasive, examining the interplay of MLP provisions like Sections 7.9(a) and 7.10(b) of LP Agreement is a nuanced endeavor best done only when necessary.[39] Here, it is not necessary for the court to do so because a genuine issue of fact exists that would preclude entry of summary judgment in defendants' favor in any event based on Section 7.10(b). The court turns to that issue next.

         In support of their contention that the Conflicts Committee relied on a fairness opinion from J.P. Morgan, defendants cite to minutes of a Conflicts Committee meeting held on January 25, 2015. Those minutes reflect that the Conflicts Committee approved the proposed Merger and recommended it to the Regency board after receiving an oral opinion from J.P. Morgan that "the aggregate consideration comprised of (i) 0.4066 ETP units for each Partnership unit and (ii) $0.32 cash per Partnership unit was, from a financial point of view, fair to the unaffiliated holders of common units of the Partnership."[40] In support of their contention that the Regency board relied on the same opinion, defendants cite to minutes of a Regency board meeting held later that day reflecting that the board approved the Merger after a representative of J.P. Morgan discussed its "analysis used in connection with rendering its fairness opinion regarding the proposed merger."[41]

         In response, Dieckman has provided evidence suggesting that the Conflicts Committee determined several days before J.P. Morgan issued its oral fairness opinion on January 25, that the Merger was fair to the unitholders on terms less favorable than the terms on which J.P. Morgan provided its fairness opinion. In particular, the minutes of a January 22 meeting of the Conflicts Committee reflect that the Conflicts Committee "determined that it believed the financial terms of the Potential Transaction were fair to the unaffiliated unitholders of the Partnership."[42] At that time, the proposal on the table consisted of an exchange ratio of 0.4044 ETP common units and a cash payment of $0.36 per common unit of Regency.[43]According to a preliminary financial analysis by J.P. Morgan, the implied value of those terms as of January 22 was $26.27 per Regency unit.[44] The proposal on the table as of January 25, however, was higher than the January 22 proposal. It consisted of an exchange ratio of 0.4066 and a cash payment of $0.32 per common unit of Regency that, according to a financial analysis prepared by J.P. Morgan on January 24, had an implied value of the $26.89 per Regency unit.[45]

         Dieckman points to deposition testimony of both members of the Conflicts Committee corroborating what its January 22 meeting minutes say. Specifically, when Brannon was asked whether "the proposal ETP made as of January 22 was already acceptable," he replied: "Taking everything as a whole, yes."[46] Bryant testified similarly, affirming that "as of January 22nd, 2015, the [Conflicts Committee] had determined that it believed the financial terms of the potential transaction were fair to the . . . unaffiliated [unitholders]."[47]

         As evidence that the Regency board also did not rely on J.P. Morgan's fairness opinion, Dieckman points to the deposition of director Rodney Gray, who was not on the Conflicts Committee. Gray agreed that the Regency board did not base its conclusion to approve the Merger on any "separate board process apart from the conflict committee's process."[48]

         Based on the evidence of record just discussed, Dieckman has demonstrated in my opinion that there is a genuine issue of fact about whether defendants actually relied on J.P. Morgan's January 25 fairness opinion. To be clear, it is open for debate whether the Conflicts Committee relied on J.P. Morgan's fairness opinion when it approved the January 25 terms given the evidence that the Conflicts Committee already had determined that the inferior January 22 terms were fair. This fact dispute is material because Section 7.10(b), by its plain terms, only applies if the act in question was "taken in reliance upon" the professional opinion.[49]

         Dieckman further argues that the Conflicts Committee could not have relied on the J.P. Morgan's fairness opinion because the Merger consideration changed after J.P. Morgan provided its opinion on January 25. As discussed above, as of January 25, the Merger consideration consisted of 0.4066 ETP units and $0.32 cash per Regency unit.[50] On February 18, 2015, the cash component was replaced with additional ETP units.[51] J.P. Morgan, however, never updated its fairness opinion to reflect this change in consideration.[52] Thus, even if the Conflicts Committee did rely on the J.P. Morgan fairness opinion as of January 25, the committee nevertheless did not rely on any updated fairness opinion for the final deal terms.

         Defendants assert that the fact that J.P. Morgan did not update its fairness opinion does not matter because the change in the Merger consideration was immaterial. Whether the change in the terms from January 25 to February 18 was material, however, is a fact question appropriate for trial, especially given that the value of the proposal could fluctuate since the exchange ratio did not have a collar.[53]

         For the reasons explained above, defendants' motion for summary judgment based on the application of Section 7.10(b) of the LP Agreement is denied.

         B.There Is No Genuine Dispute That the Conflicts Committee Was Not Validly Constituted, Precluding Application ...


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