Dieckman v. Regency GP LP, Regency GP LLC

IN THE SUPREME COURT OF THE STATE OF DELAWARE
ADRIAN DIECKMAN, on behalf of §
himself and all others similarly §
situated, §
§ No. 208, 2016
Plaintiff Below, Appellant, §
§ Court Below—Court of Chancery
v. § of the State of Delaware
§
REGENCY GP LP, REGENCY GP § C.A. No. 11130
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 Below, Appellees. §
Submitted: November 16, 2016
Decided: January 20, 2017
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and
SEITZ, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery: REVERSED.
Stuart M. Grant, Esquire (argued) and James J. Sabella, Esquire, Grant &
Eisenhofer P.A., Wilmington, Delaware; Mark Lebovitch, Esquire, Jeroen van
Kwawegen, Esquire and Alla Zayenchik, Esquire, Bernstein Litowitz Berger &
Grossman LLP, New York, New York; Mark C. Gardy, Esquire and James S.
Notis, Esquire, Gardy & Notis, LLP, New York, New York, for Plaintiff,
Appellant, Adrian Dieckman.
Rolin P. Bissell, Esquire and Tammy L. Mercer, Esquire, Young Conaway
Stargatt & Taylor, LLP, Wilmington, Delaware; Michael Holmes, Esquire
(argued), Manuel Berrelez, Esquire and Craig Zieminski, Esquire, Vinson &
Elkins LLP, Dallas, Texas for Defendants, Appellees, 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, Rodney L. Gray, John W.
McReynolds and Matthew S. Ramsey.
David J. Teklits, Esquire and D. McKinley Measley, Esquire, Morris, Nichols,
Arsht & Tunnell LLP, Wilmington, Delaware; M. Scott Barnard, Esquire, Michelle
A. Reed, Esquire and Matthew V. Lloyd, Esquire, Akin Gump Strauss Hauer &
Feld LLP, Dallas, Texas for Defendants, Appellees, James W. Bryant and Richard
Brannon.
SEITZ, Justice:
In this appeal, we again wade into the details of a master limited partnership
agreement to decide whether the complaint’s allegations can overcome the general
partner’s use of conflict resolution safe harbors to dismiss the case. The parties are
identified by a host of confusing abbreviations, but the gist of the appeal is as
follows.
The plaintiff is a limited partner/unitholder in the publicly-traded master
limited partnership (“MLP”). The general partner proposed that the partnership be
acquired through merger with another limited partnership in the MLP family. The
seller and buyer were indirectly owned by the same entity, creating a conflict of
interest. Because conflicts of interest often arise in MLP transactions, those who
create and market MLPs have devised special ways to try to address them. The
general partner in this case sought refuge in two of the safe harbor conflict
resolution provisions of the partnership agreement—“Special Approval” of the
transaction by an independent Conflicts Committee, and “Unaffiliated Unitholder
Approval.”
In the MLP context, Special Approval typically means that a Conflicts
Committee composed of members independent of the sponsor and its affiliates
reviewed the transaction and made a recommendation to the partnership board
whether to approve the transaction. Unaffiliated Unitholder Approval is typically
just that—a majority of unitholders unaffiliated with the general partner and its
affiliates approve the transaction. Under the partnership agreement, if either safe
harbor is satisfied, the transaction is deemed not to be a breach of the agreement.
The partnership agreement required that the Conflicts Committee be
independent, meaning that its members could not be serving on affiliate boards and
were independent under the audit committee independence rules of the New York
Stock Exchange. The plaintiff alleged in the complaint that the general partner
failed to satisfy the Special Approval safe harbor because the Conflicts Committee
was itself conflicted. According to the plaintiff, one of the Committee’s two
members began evaluating the transaction while still a member of an affiliate’s
board, and then resigned from the affiliate’s board four days after he began his
review to then become a member of the Conflicts Committee. On the same day the
transaction closed, the committee member was reappointed to the seat left vacant
for him on the affiliate’s board.
The plaintiff also alleged that the general partner failed to satisfy the
Unaffiliated Unitholder Approval safe harbor because the general partner made
false and misleading statements in the proxy statement to secure that approval. In
the 165-page proxy statement sent to the unitholders, the general partner failed to
disclose the conflicts within the Conflicts Committee. Instead, the proxy statement
stated that Special Approval had been obtained by an independent Conflicts
Committee.
2
The general partner moved to dismiss the complaint and claimed that, in the
absence of express contractual obligations not to mislead investors or to unfairly
manipulate the Conflicts Committee process, the general partner need only satisfy
what the partnership agreement expressly required—to obtain the safe harbor
approvals and follow the minimal disclosure requirements. In other words,
whatever the general partner said in the proxy statement, and whomever the
general partner appointed to the Conflicts Committee, was irrelevant because only
the express requirements of the partnership agreement controlled and displaced any
implied obligations not to undermine the protections afforded unitholders by the
safe harbors.
The Court of Chancery side-stepped the Conflicts Committee safe harbor,
but accepted the general partner’s argument that the Unaffiliated Unitholder
Approval safe harbor required dismissal of the case. The court held that, even
though the proxy statement might have contained materially misleading
disclosures, fiduciary duty principles could not be used to impose disclosure
obligations on the general partner beyond those in the partnership agreement,
because the partnership agreement disclaimed fiduciary duties. Further, the court
agreed with the defendants that the only express disclosure requirement of the
agreement in the event of a merger—that the general partner simply provide either
a summary of, or a copy of, the merger agreement—displaced any implied
3
contractual duty to disclose in the proxy statement material facts about the
conflicts within the Conflicts Committee.
On appeal, the plaintiff concedes that if the general partner met the
requirements of either safe harbor, his breach of contract claim would fail. The
plaintiff also does not argue with the Court of Chancery’s ruling that the
partnership agreement’s express disclosure requirements cannot be supplanted by
implied or fiduciary-based disclosure obligations. Instead, he argues that the Court
of Chancery erred when it concluded that the general partner satisfied the
Unaffiliated Unitholder Approval safe harbor, because he alleged sufficient facts to
show that the approval was obtained through false and misleading statements. The
plaintiff also claims that, for pleading stage purposes, he has made a sufficient
showing that the Special Approval safe harbor was not satisfied, because the
Conflicts Committee was not independent.
We view the central issue in the dispute through a different lens than the
Court of Chancery. The Court of Chancery was correct that the implied covenant
of good faith and fair dealing cannot be used to supplant the express disclosure
requirements of the partnership agreement. But the court focused too narrowly on
the partnership agreement’s disclosure requirements. Instead, the center of
attention should have been on the conflict resolution provision of the partnership
agreement.
4
The partnership agreement’s conflict resolution provision is a powerful tool
in the general partner’s hands because it can be used to shield a conflicted
transaction from judicial review. But the conflicts resolution provision also
operates for the unitholders’ benefit. It ensures that, before a safe harbor is
reached by the general partner, unaffiliated unitholders have a vote, or the
conflicted transaction is reviewed and recommended by an independent Conflicts
Committee.
The partnership agreement does not address how the general partner must
conduct itself when seeking the safe harbors. But where, as here, the express terms
of the partnership agreement naturally imply certain corresponding conditions,
unitholders are entitled to have those terms enforced according to the reasonable
expectations of the parties to the agreement. The 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.
We find that the plaintiff has pled sufficient facts, which we must accept as
true at this stage of the proceedings, 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
5
Committee to obtain Special Approval. Thus, we reverse the Court of Chancery’s
order dismissing Counts I and II of the complaint.
I.
As alleged in the complaint, the plaintiff, Adrian Dieckman, is a unitholder
of Regency. The business entity defendants, their relationships, and other
abbreviations are as follows:
Regency Energy Partners LP (“Regency”) - a publicly-traded
Delaware limited partnership engaged in the gathering and processing,
contract compression, treating and transportation of natural gas and
the transportation, fractionation and storage of natural gas liquids.
Regency General Partner LP (“General Partner LP”) - the general
partner of Regency.
Regency General Partner LLC (“General Partner LLC”) - a Delaware
LLC and the general partner of General Partner LP.1
Energy Transfer Partners L.P. (“ETP”) - the general partner of Sunoco
LP; a 43% owner of limited partnership interests in Sunoco and a
100% owner of Sunoco’s distribution rights.
Energy Transfer Partners, GP, L.P. (“EGP”) - the general partner of
ETP.
Energy Transfer Equity, L.P. (“ETE”) - indirectly owns Regency’s
general partner and ETP’s general partner.
Conflicts Committee - the committee formed by the General Partner
under § 7.9(a) of the LP Agreement.
1
Like the Court of Chancery, for simplicity’s sake we collapse General Partner LP and General
Partner LLC into one as the “General Partner” of Regency, recognizing that there were two
layers of general partners.
6
LP Agreement - the Regency limited partnership agreement.
The following is a diagram from the Court of Chancery opinion showing the
interconnected relationships among the entities before the merger, and Regency’s
status after the merger:
The remaining defendants are the six members of General Partner LP’s
board of directors—Michael J. Bradley (also CEO of the General Partner), James
W. Bryant, Rodney L. Gray, John W. McReynolds (also CFO and president of
ETE), Matthew S. Ramsay, and Richard Brannon. Bryant and Brannon served on
7
the Conflicts Committee of the General Partner’s board. Brannon was a Sunoco
director until January 20, 2015, and was reappointed to the Sunoco board on May
5, 2015. Bryant was appointed to Sunoco’s board on May 5, 2015.
A.
According to the complaint and the proxy statement distributed to
unitholders,2 the ETP and ETE boards met to discuss a merger between ETP and
Regency. ETP eventually made a merger proposal to Regency, where Regency
would be merged into ETP for a combination of cash and stock using an exchange
ratio of 0.4044 ETP common units for one Regency common unit, and a $137
million cash payment. Because of the undisputed conflicts of interest in the
proposed merger transaction, the General Partner looked to the conflict resolution
provisions of the LP Agreement.
Under § 7.9(a) of the LP Agreement, entitled “Resolution of Conflicts of
Interest; Standards of Conduct and Modification of Duties,” unless otherwise
provided in another agreement, the General Partner can resort to several safe
harbors to immunize conflicted transactions from judicial review:
[A]ny 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
2
The proxy statement incorporated into the complaint and relied on by the parties is properly
considered on a motion to dismiss. Allen v. Encore Energy Partners, L.P., 72 A.3d 93, 96 n.2
(Del. 2013).
8
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 (including other transactions that may be
particularly favorable or advantageous to the Partnership).3
The General Partner sought the protections of the safe harbors by Special
Approval under § 7.9(a)(i) and Unaffiliated Unitholder Vote under § 7.9(a)(ii).
Special Approval is defined in the LPA as “approval by a majority of the members
of the Conflicts Committee.”4 The Conflicts Committee must be:
[A] committee of the Board of Directors of the general partner of the
General Partner5 composed entirely of two or more directors who are
not (a) security holders, officers or employees of the General Partner,
(b) officers, directors or employees of any Affiliate of the General
Partner[,] or (c) holders of any ownership interest in the Partnership
Group other than Common Units and who also meet the independence
standards required of directors who serve on an audit committee of a
board of directors established by the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission
thereunder and by the National Securities Exchange on which the
Common Units are listed or admitted to trading.6
For purposes of subsection (b), “Affiliate” is defined as any person “that
directly or indirectly through one or more intermediaries controls, is controlled by
3
App. to Opening Br. at 105 (LP Agreement § 7.9(a)).
4
Id. at 70 (LP Agreement § 1.1).
5
The general partner of the General Partner is Regency GP LLC. As noted before, for simplicity
sake, “General Partner” in this decision includes both Regency GP LP and Regency GP LLC.
6
App. to Opening Br. at 62 (LP Agreement § 1.1).
9
or is under control with, the Person in question.”7 Sunoco and the General Partner
are both controlled by ETE, and are “Affiliates,” under the LP Agreement. Thus,
Sunoco board members were not eligible to serve as members of the General
Partner’s Conflicts Committee. Nor was it clear that they would meet the audit
committee independence rules of the New York Stock Exchange.
B.
The General Partner appointed Brannon and Bryant to the Conflicts
Committee. The complaint alleges that before the proposed transaction, Brannon
was a Sunoco director. On January 16, 2015, ETE appointed Brannon to the
General Partner’s board, while still a director of Sunoco. The plaintiff claims that,
from January 16-20, while a member of both boards, Brannon consulted informally
on the proposed transaction. According to the complaint, Brannon then
temporarily resigned from the Sunoco board on January 20, and on January 22,
became an official member of the Conflicts Committee when formal resolutions
were passed creating the Committee. Brannon and Bryant then negotiated on
behalf of Regency with ETP and recommended the merger transaction to the
General Partner. On April 30, 2015, the day that the merger closed, Brannon was
reappointed to the Sunoco board, and Bryant was also appointed to Sunoco board.
7
Id. at 49 (LP Agreement § 1.1).
10
The complaint also alleges that the Conflicts Committee retained a
conflicted financial advisor, J.P. Morgan. J.P. Morgan was supposedly chosen by
Regency’s CFO, Long, and not by the Conflicts Committee. Because it was
allegedly known that Long was expected to become the CFO of ETP GP LLC, the
plaintiff claims that J.P. Morgan was beholden to Long and would favor its long-
term relationship with the Energy Transfer entities.
The plaintiff claims that the negotiations between the Conflicts Committee
and ETP were ceremonial and only lasted a few days. According to the complaint,
between January 23 and January 25, the Conflicts Committee made a perfunctory
and slightly increased counteroffer to ETP’s offer, which would have achieved a
15% premium to the closing price of common units. ETP rejected the
counteroffer, and the parties settled on ETP’s opening bid of a 13.2% premium to
the January 23 closing price. The Conflicts Committee recommended that the
General Partner pursue the transaction on the original terms proposed by ETP,
which the General Partner approved on January 25. The plaintiff alleges that the
entire process from start to finish lasted nine days.
C.
The LP Agreement only required minimal disclosure when a merger
transaction was considered by the unitholders—a summary of, or a copy of, the
11
merger agreement.8 But the General Partner went beyond the minimal
requirements in the LP Agreement. To gain Unaffiliated Unitholder Approval and
the benefit of the safe harbor, the General Partner filed a 165-page proxy statement
and disseminated it and a copy of the merger agreement to the unitholders.
The proxy statement stated that the “Conflicts Committee consists of two
independent directors: Richard D. Brannon (Chairman) and James W. Bryant.”9 It
also stated that the Conflicts Committee approved the transaction, and such
approval “constituted ‘Special Approval’ as defined in the Regency partnership
agreement.”10 The proxy statement did not inform unitholders about the
circumstances of Bryant’s alleged overlapping and shifting allegiances, including
reviewing the proposed transaction while still a member of the Sunoco board, his
nearly contemporaneous resignation from the Sunoco board and appointment to the
General Partner’s board and then the Conflicts Committee, or Brannon’s
appointment and Bryant’s reappointment to the Sunoco board the day the
transaction closed. At a special meeting of Regency’s unitholders on April 28,
2015, a majority of Regency’s unitholders, including a majority of its unaffiliated
unitholders, approved the merger.
8
Id. at 124-35 (LP Agreement § 14.3(a)).
9
Id. at 215.
10
Id.
12
D.
After plaintiff filed his complaint challenging the fairness of the merger
transaction, the defendants moved to dismiss under Court of Chancery Rule
12(b)(6), invoking the protections of Special Approval and Unaffiliated Unitholder
Approval under the LP Agreement. The Chancellor reached only the Unaffiliated
Unitholder Vote safe harbor. After finding that all fiduciary duties were displaced
by contractual terms, the court noted that the LP Agreement contained “just a
single disclosure requirement” and thus the LP Agreement terms “unambiguously
extinguish the duty of disclosure and replace it with a single disclosure
requirement.”11 According to the court, given the express disclosure obligation,
the implied covenant of good faith and fair dealing “has no work to do” because
“the express waiver of fiduciary duties and the clearly defined disclosure
requirement … prevent the implied covenant from adding any additional disclosure
obligations to the agreement.”12 Once the Unaffiliated Unitholder Vote safe harbor
applied, the court dismissed the case because “the Merger is deemed approved by
all the limited partners, including plaintiff, and is immune to challenge for
contractual breach.”13
11
Dieckman v. Regency GP LP, 2016 WL 1223348, at *9 (Del. Ch. Mar. 29, 2016).
12
Id.13
Id. at *10.
13
II.
The appeal comes to us from the Court of Chancery’s decision granting the
defendants’ motion to dismiss. Our review is de novo.14
A.
We start with the settled principles of law governing Delaware limited
partnerships. The Delaware Revised Uniform Limited Partnership Act
(“DRUPLA”) gives “maximum effect to the principle of freedom of contract.”15
One freedom often exercised in the MLP context is eliminating any fiduciary
duties a partner owes to others in the partnership structure.16 The act allows
drafters of Delaware limited partnerships to modify or eliminate fiduciary-based
principles of governance, and displace them with contractual terms.
With the contractual freedom accorded partnership agreement drafters, and
the typical lack of competitive negotiations over agreement terms, come
corresponding responsibilities on the part of investors to read carefully and
understand their investment. Investors must appreciate that “with the benefits of
investing in alternative entites often comes the limitation of looking to the contract
as the exclusive source of protective rights.”17 In other words, investors can no
14
Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 813 (Del. 2013).
15
6 Del. C. § 17-1101(c).
16
6 Del. C. § 17-1101(d).
17
The Haynes Family Trust v. Kinder Morgan G.P., Inc., 135 A.3d 76, 2016 WL 912184, at *2
(Del. Mar. 10, 2016).
14
longer hold the general partner to fiduciary standards of conduct, but instead must
rely on the express language of the partnership agreement to sort out the rights and
obligations among the general partner, the partnership, and the limited partner
investors.
Even though the express terms of the agreement govern the relationship
when fiduciary duties are waived, investors are not without some protections. For
instance, in the case of an ambiguous partnership agreement of a publicly traded
limited partnership, ambiguities are resolved as with publicly traded corporations,
to give effect to the reading that best fulfills the reasonable expectations an
investor would have had from the face of the agreement.18 The reason for this is
simple. When investors buy equity in a public entity, they necessarily rely on the
text of the public documents and public disclosures about that entity, and not on
parol evidence.19 And, of course, another protection exists. The DRUPLA
18
Bank of New York Mellon v. Commerzbank Capital Funding Trust II, 65 A.3d 539, 551-52
(Del. 2013) (construing an agreement against the drafter to give effect to the “investors’
reasonable expectation” using a species of the contra proferentem doctrine); see also Norton v.
K-Sea Transp. Partners L.P., 67 A.3d 354, 365 n. 56 (Del. 2013); SI Mgmt., L.P. v. Wininger,
707 A.2d 37, 42-43 (Del. 1998).
19
Stockman v. Heartland Industrial Partners, L.P., 2009 WL 2096213 at *5 (Del. Ch. July 14,
2009) (ambiguities are construed against drafter “to protect the reasonable expectations of people
who join a partnership or other entity after it was formed and must rely on the face of the
operating agreement to understand their rights and obligations when making the decision to
join.”).
15
provides for the implied covenant of good faith and fair dealing, which cannot be
eliminated by contract.20
The implied covenant is inherent in all contracts and is used to infer contract
terms “to handle developments or contractual gaps that the asserting party pleads
neither party anticipated.”21 It applies “when the party asserting the implied
covenant proves that the other party has acted arbitrarily or unreasonably, thereby
frustrating the fruits of the bargain that the asserting party reasonably expected.”22
The reasonable expectations of the contracting parties are assessed at the time of
contracting.23 In a situation like this, involving a publicly traded MLP, the
pleading-stage inquiry focuses on whether, based on a reading of the terms of the
partnership agreement and consideration of the relationship it creates between the
MLP’s investors and managers, the express terms of the agreement can be
reasonably read to imply certain other conditions, or leave a gap, that would
prescribe certain conduct, because it is necessary to vindicate the apparent
intentions and reasonable expectations of the parties.
B.
The Court of Chancery decided that the implied covenant could not be used
to remedy what the plaintiff alleged were faulty safe harbor approvals because the
20
See 6 Del. C. § 17-1101(d).
21
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010) (internal citations omitted).
22
Id. at 1126 (citing Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005)).
23
Id. (citing Cont’l Ins. Co. v. Rutledge & Co., 750 A.2d 1219, 1234 (Del. Ch. 2000)).
16
LP Agreement waived fiduciary-based standards of conduct and contained an
express contractual term addressing what disclosures were required in merger
transactions. According to the court, the implied covenant had “no work to do”
because the express disclosure requirement displaced the implied covenant.24
The Court of Chancery erred by focusing too narrowly on whether the
express disclosure provision displaced the implied covenant. Instead, it should
have focused on the language of the safe harbor approval process, and what its
terms reasonably mean. Although the terms of the LP Agreement did not compel
the General Partner to issue a proxy statement, it chose to undertake the
transaction, which the LP Agreement drafters would have known required a pre-
unitholder vote proxy statement. Thus, the General Partner voluntarily issued a
proxy statement to induce unaffiliated unitholders to vote in favor of the merger
transaction. The favorable vote led not only to approval of the transaction, but
allowed the General Partner to claim the protections of the safe harbor and
immunize the merger transaction from judicial review. Not surprisingly, the
express terms of the LP Agreement did not address, one way or another, whether
the General Partner could use false or misleading statements to enable it to reach
the safe harbors.
24
Dieckman, 2016 WL 1223348, at *9.
17
We find that implied in the language of the LP Agreement’s conflict
resolution provision is a requirement that the General Partner not act to undermine
the protections afforded unitholders in the safe harbor process. Partnership
agreement drafters, whether drafting on their own, or sitting across the table in a
competitive negotiation, do not include obvious and provocative conditions in an
agreement like “the General Partner will not mislead unitholders when seeking
Unaffiliated Unitholder Approval” or “the General Partner will not subvert the
Special Approval process by appointing conflicted members to the Conflicts
Committee.” But the terms are easily implied because “the parties must have
intended them and have only failed to express them because they are too obvious
to need expression.”25 Stated another way, “some aspects of the deal are so
obvious to the participants that they never think, or see no need, to address
them.”26
25
Danby v. Osteopathic Hospital Ass’n of Del., 101 A.2d 308, 313-14 (Del. Ch. 1953), aff’d, 104
A.2d 903 (Del. 1954).
26
In re El Paso Pipeline Partners, L.P. Deriv. Litig., 2014 WL 2768782, at *16 (Del. Ch. June
12, 2014), rev’d on other grounds sub nom. El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff,
__A.3d __, 2016 WL 7380418 (Del. Dec. 20, 2016) (citing Katz v. Oak Indus. Inc., 508 A.2d
873, 880 (Del. Ch. 1986)); 508 A.2d at 880 (“[P]arties occasionally have understandings or
expectations that were so fundamental that they did not need to negotiate about those
expectations.”) (quoting Corbin on Contracts (Kaufman Supp. 1984), § 570)); see also
Cincinnati SMSA Ltd. P’ship v. Cincinnati Bell Cellular Sys. Co., 1997 WL 525873, at *5 (Del.
Ch. Aug. 13, 1997), aff’d, 708 A.2d 989 (Del. 1998) (“Terms are to be implied in a contract not
because they are reasonable but because they are necessarily involved in the contractual
relationship so that the parties must have intended them and have only failed to express them
because they are too obvious to need expression.” (quoting Danby, 101 A.2d at 313-14)).
18
Our use of the implied covenant is based on the words of the contract and
not the disclaimed fiduciary duties. Under the LP Agreement, the General Partner
did not have the full range of disclosure obligations that a corporate fiduciary
would have had. Yet once it went beyond the minimal disclosure requirements of
the LP Agreement, and issued a 165-page proxy statement to induce the
unaffiliated unitholders not only to approve the merger transaction, but also to
secure the Unaffiliated Unitholder Approval safe harbor, implied in the language
of the LP Agreement’s conflict resolution provision was an obligation not to
mislead unitholders.
Further, the General Partner was required to form a Conflicts Committee
comprised of members who:
[A]re not (a) security holders, officers or employees of the General
Partner, (b) officers, directors or employees of any Affiliate of the
General Partner or (c) holders of any ownership interest in the
Partnership Group other than Common Units and who also meet the
independence standards required of directors who serve on an audit
committee of a board of directors established by the Securities
Exchange Act of 1934, as amended, and the rules and regulations of
the Commission thereunder and by the National Securities Exchange
on which the Common units are listed or admitted to trading.27
As with the contract language regarding Unaffiliated Unitholder Approval,
this language is reasonably read by unitholders to imply a condition that a
Committee has been established whose members genuinely qualified as
27
App. to Opening Br. at 62 (LP Agreement § 1.1).
19
unaffiliated with the General Partner and independent at all relevant times.
Implicit in the express terms is that the Special Committee membership be
genuinely comprised of qualified members and that deceptive conduct not be used
to create the false appearance of an unaffiliated, independent Special Committee.
C.
The plaintiff has agreed that the LP Agreement’s safe harbor provisions, if
satisfied, would preclude judicial review of the transaction. But we find that the
plaintiff has pled sufficient facts to support his claims that those safe harbors were
unavailable to the General Partner. Instead of staffing the Conflicts Committee
with independent members, the plaintiff alleges that the chair of the two-person
Committee started reviewing the transaction while still a member of an Affiliate
board. Just a few days before the General Partner created the Conflicts Committee,
the same director resigned from the Affiliate board and became a member of the
General Partner’s board, and then a Conflicts Committee member.
Further, after conducting the negotiations with ETE over the merger terms
and recommending the merger transaction to the General Partner, the two members
of the Conflicts Committee joined an Affiliate’s board the day the transaction
closed. The plaintiff also alleges that the Conflicts Committee members failed to
satisfy the audit committee independence rules of the New York Stock Exchange,
as required by the LP Agreement. In the proxy statement used to solicit
20
Unaffiliated Unitholder Approval of the merger transaction, the plaintiff alleges
that the General Partner materially misled the unitholders about the independence
of the Conflicts Committee members. In deciding to approve the merger, a
reasonable unitholder would have assumed based on the disclosures that the
transaction was negotiated and approved by a Conflicts Committee composed of
persons who were not “affiliates” of the general partner and who had the
independent status dictated by the LP Agreement. This assurance was one a
reasonable investor may have considered a material fact weighing in favor of the
transaction’s fairness.
The plaintiff has therefore pled facts raising sufficient doubt about the
General Partner’s ability to use the safe harbors to shield the merger transaction
from judicial review. Thus, we reverse the judgment of the Court of Chancery
dismissing Counts I and II of the complaint.
21