Delaware Supreme Court Reverses Dismissal Of Claims Challenging A General Partner's Compliance With Safe Harbor Provisions In A Conflicted Transaction
On January 20, 2017, the Delaware Supreme Court, in Dieckman v. Regency GP LP et al., No. 208, 2016, reversed the dismissal of a complaint challenging a conflicted transaction between two affiliated parties, Regency Energy Partners LP (“Regency”), and Energy Transfer Partners L.P. (“ETP”) (the “Transaction”). The conflicts of interest stemmed from Regency’s and ETP’s general partners being indirectly owned by Energy Transfer Equity, L.P. (“ETE”). As a result, Regency’s general partner sought protection under two safe harbor provisions, only one of which needed to be satisfied, found in Regency’s partnership agreement (the “LPA”): (1) approval by “a Conflicts Committee composed of members independent of the sponsor and its affiliates” (“Special Approval”); or (2) approval by a majority of unaffiliated unitholders (“Unaffiliated Unitholder Approval”).
In his complaint, Plaintiff alleged that Regency’s general partner failed to comply with both safe harbor provisions. Plaintiff alleged that the general partner failed to comply with the Special Approval provision because one of the Conflicts Committee members resigned from an affiliate board four days after he “began evaluating the transaction” and rejoined the affiliate board when the Transaction closed. Plaintiff also alleged that the general partner did not comply with the Unaffiliated Unitholder Approval provision “because the general partner made false and misleading statements in the proxy statement to secure that approval.” The general partner moved to dismiss the complaint because “the general partner need only satisfy what the [LPA] expressly required.” Needing only to find that the general partner complied with one of the safe harbor provisions, the trial court determined that the general partner complied with the Unaffiliated Unitholder Approval because “fiduciary duty principles could not be used to impose disclosure obligations on the general partner beyond those in the [LPA] because the [LPA] disclaimed fiduciary duties.” As a result, the court dismissed the complaint.
On appeal, the Delaware Supreme Court disagreed with the court below. The Court determined that the trial court should have focused “on the conflict resolution provision of the [LPA]” rather than narrowly focusing on “the [LPA’s] disclosure requirements.” With this in mind, the Court found that the LPA did “not address how the general partner must conduct itself when seeking the safe harbors [and] where, as here, the express terms of the [LPA] naturally imply certain corresponding conditions, unitholders are entitled to have those terms enforced according to the reasonable expectations of the agreement.” The Court explained that “[t]he implied covenant is well-suited to imply contractual terms that are so obvious—like a requirement that the general partner not engage in misleading or deceptive conduct to obtain safe harbor approvals—that the drafter would not have needed to include the conditions as express terms in the agreement.” Thus, the Court held that plaintiff had “pled sufficient facts . . . that neither safe harbor was available to the general partner.”
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About Michael Van Gorder
Michael Van Gorder is an associate in Faruqi & Faruqi’s Delaware office. Michael focuses his practice on securities litigation.