Adrian Dieckman v. Regency GP LP

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ADRIAN DIECKMAN, on behalf of
himself and all others similarly situated,
Plaintiff,
V.
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, JAMES W.
BRYANT, RODNEY L. GRAY, JOHN
W. McREYNOLDS, MATTHEW S.
RAMSEY and RICHARD BRANNON,
Defendants.
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C.A. No. lll30-CB
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS’ MOTION TO DISMISS
WHEREAS:
A. Before April 2015, Regency Energy Partners LP (“Regency” or the
“Partnership”) was a publicly listed master limited partnership (“MLP”) that
gathered, processed, treated, and transported natural gas.'
l The facts recited herein are taken from the Verified Amended Class Action Complaint
filed on May 5, 2017 (Dkt. 65).
B. Regency was managed by its general partner, defendant Regency GP,
LP (the “General Partner”), which in turn was managed by the board of directors
(the “Regency Board”) of its general partner, defendant Regency GP LLC. The
Regency Board consisted of the six individual defendants: Michael J. Bradley,
Richard Brannon, James W. Bryant, Rodney L. Gray, John W. McReynolds, and
Matthew S. Ramsey.
C. Regency, the General Partner, and Regency GP LLC were indirectly
owned by defendant Energy Transfer Equity, L.P. (“ETE”), a MLP that sat atop of
the “Energy Transfer family.”2 The Energy Transfer family also included Energy
Transfer Partners, L.P. (“ETP”), Sunoco LP, and Sunoco Logistics Partners, L.P.
D. The rights and the duties of the General Partner, Regency GP LLC, and
the unitholders were governed by Regency’s Amended and Restated Agreement of
Limited Partnership (the “Partnership Agreement” or “LPA”). The default standard
of conduct in the LPA is that the General Partner must act in “good faith” when
taking action as the General Partner.3 “In order for a determination or other action
to be in ‘good faith’ for purposes of [the LPA], the Person or Persons making such
2 A chart depicting the relationship among the entities making up the Energy Transfer
famin is included in the court’s prior decision in this action. See Dz'eckman v. Regency GP
LP, 2016 WL 1223348, at *2 (Del. Ch. Mar. 29, 2016), rev ’d, 155 A.3d 358 (“Regency 1”).
3 Transmittal Aff. of James M. Yoch, Jr. (Yoch Aff.) Ex. 1 (LPA) § 7.09(b).
2
determination or taking or declining to take such other action must believe that the
determination or other action is in the best interests of the Partnership.”4
E. On January 16, 2015, the boards of ETE and ETP held a joint meeting
to discuss a potential merger of ETP and Regency. Later that day, the ETP board
made a proposal to merge Regency into ETP for a combination of cash and stock
reflecting an exchange ratio of 0.4044 ETP common units per one common unit of
Regency and a $137 million cash payment.
F. Also on January 16, 2015, Brannon was appointed to the Regency
Board while he was still a director of an affiliated entity (Sunoco LP) within the
Energy Transfer family, and the Regency Board determined that it would delegate
authority to the Conflicts Committee to review and analyze the proposed transaction.
G. The Conflicts Committee came to have two members: Bryant and
Brannon. Brannon was appointed to the Conflicts Committee on January 20, 2015,
the same day he resigned from Sunoco LP’s board. Before Brannon even was
appointed to the Conflicts Committee, he and Bryant “met with Akin Gump
(selected by Regency) to discuss general issues and strategy with regard to the
proposed transaction and the draft merger agreement.”5 Brannon and Bryant
retained as the Conflict Committee’s financial advisor JP Morgan, which had been
4 Id.
5 Am. Compl.1] 5.
selected by Regency’s CFO, Thomas Long, and which had a highly lucrative
relationship with ETP and its affiliates in recent years.
H. On January 25, 2015, the Conflicts Committee accepted ETP’s merger
proposal, offering an exchange ratio of 0.4066 and a cash payment of $0.32 per
common unit of Regency (the “Merger”), and it recommended that the Regency
Board approve the proposal as well. The Regency Board accepted ETP’s offer that
day, although the terms of the Merger subsequently were amended to provide
additional ETP stock in lieu of the cash component The Conflicts Committee did
not solicit any other potential buyers or conduct a market check.
I. On April 28, 2015, a majority of Regency’s unitholders voted to
approve the Merger, which closed on April 30. That same day, Brannon rejoined,
and Bryant joined, Sunoco LP’s board.
J. On June 10, 2015, plaintiff filed this action.
K. On March 29, 2016, the court issued a memorandum opinion and
dismissed plaintiff’ s complaint on the ground that defendants had availed themselves
of the unitholder approval safe harbor in the LPA.6 That conclusion caused
plaintiff’ s other claims to fail as well.7
6 Regency I, 2016 WL 1223348, at ”‘10.
7 Id. 31*11-13.
L. On January 20, 2017, the Delaware Supreme Court reversed that
decision, concluding that plaintiff had “pled sufficient facts . . . 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 Committee to obtain Special Approval.”8
M. On May 5, 2017, plaintiff filed the Verified Amended Class Action
Complaint (the “Amended Complaint”) asserting four claims. Count I asserts that
the General Partner and Regency GP LLC breached the LPA by approving the
Merger when they did not believe that it was in the best interests of the Partnership.
Count II asserts that the General Partner and Regency GP LLC breached the implied
covenant of good faith and fair dealing by approving the Merger. Count III asserts
that all defendants, other than the General Partner and Regency GP LLC, aided and
abetted a breach of the LPA. Count IV asserts that all defendants, other than the
General Partner and Regency GP LLC, tortiously interfered with the LPA.
N. On May 19, 2017, defendants moved to dismiss the Amended
Complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state
a claim for relief.
8 Dieckman v. Regency GP LP, 155 A.3d 358, 361-62 (De|. 2017) (“Regency II”).
5
NOW THEREFORE, the court having considered the parties’ submissions,
IT IS HEREBY ORDERED, this 20th day of February, 2018, as follows:
l. The standards governing a motion to dismiss for failure to state a claim
for relief are well-settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if`` they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.”9
2. Count I. Defendants’ motion to dismiss Count l is DENIED because
the Amended Complaint alleges facts from which it is reasonably conceivable that
the General Partner and Regency GP LLC did not believe that the Merger was in the
best interests of the Partnership and thus violated LPA § 7.9(b).
3. Delaware courts have held that contractual language similar to Section
7.9(b) requires directors to have subjectively believed that a transaction was in the
best interests of the partnership10 But “state of mind and knowledge may be averred
9 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (intemal citations omitted).
10 See, e.g., Allen v. Encore Energy Partners, L.P., 72 A.3d 93, 104 (Del. 2013) (holding
that the use of the unmodified verb “believes” in a limited partnership agreement imposes
a subjective standard).
6
generally pursuant to Rule 9(b) because ‘any attempt to require specificity in
pleading a condition of mind would be unworkable and undesirable.”"l
4. As our Supreme Court has recognized, “it may be virtually impossible
for a . . . plaintiff to sufficiently and adequately describe the defendant’s state of
mind at the pleadings stage.”'2 Accordingly, “objective factors may inform an
analysis of a defendant’s subjective belief to the extent they bear on the defendant’s
credibility when asserting” he believed a transaction was in the best interests of the
partnership.'3 When a court undertakes such an analysis, “[t]he directors’ personal
knowledge and experience will be relevant to a subjective good faith determination,
which must focus on measuring the directors’ approval of a transaction against their
knowledge of the facts and circumstances surrounding the transaction.”'4
" Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006)
(citation omitted); see also Desert Equiti``es, Inc. v. Morgan Stanley Leveragea’ Equiiy Fund,
II, L.P., 624 A.2d 1199, 1208 (Del. 1993) (“[A] fairly pleaded claim of good faith/bad faith
raises essentially a question of fact which generally cannot be resolved on the pleadings or
without first granting an adequate opportunity for discovery.”) (citation omitted).
‘2 Desert Equz'ties, 624 A.2d at 1208; see also Encore Energy, 72 A.3d at 106 (noting that
even after trial, “[d]espite their expertise, the members of the Court of Chancery cannot
peer into the ‘hearts and souls of directors’ to determine their subjective intent with
certainty.”) (citation omitted).
'3 Encore Energy, 72 A.3d at 107.
'4 ld.
5. Here, plaintiff has pleaded sufficient facts from which, when viewed
collectively,‘$ it is reasonably conceivable that the General Partner and Regency GP
LLC did not subjectively believe that the Merger was in the best interests of the
Partnership. Such factual allegations include the following:
0 Regency had a bright future as a standalone entity and there was no need to
complete the Merger in order to lower its cost of capital, which was the only
purported benefit to Regency listed in the proxy statement16
0 Even though Regency objectively would have been better off as a standalone
entity, its stable revenue stream and growth were deployed to shore up a
struggling ETP, in a transaction that was accretive to ETP.17
0 The substantive Merger negotiations spanned less than one week and were
conducted in a “halfhearted and perfunctory” manner.18
0 The Conflicts Committee was composed in a “musical chairs” fashion, Where
directors fluidly rotated around the boards of entities in the Energy Transfer
family, casting doubt on the Committee’s independence.19
'5 See Gelfman v. Weeden Inv 'rs, L.P., 792 A.2d 977, 990 (Del. Ch. 2001) (listing objective
factors, when taken together, that support an inference of bad faith).
'6 Am. Compl. 1111 2-3, 122-27.
'7 Am. Compl.1]1l45, 113.
18 Am.Compl.1|134.
'9 Am. Compl. 1111 69, 71-73.
o The Conflicts Committee used a financial advisor (JP Morgan) pre-selected
by Regency’s CFO that had provided a wide range of services to ETP and its
affiliates in recent years.20
0 Members of the Regency Board were highly experienced in the industry yet
still approved a deal that benefited ETP but did not benefit the Partnership.z'
0 The proxy statement seeking unitholder approval for the Merger was false and
misleading because it led unitholders to believe that Brannon and Bryant were
independent from ETE and ETP.22 As the Supreme Court explained:
The proxy statement did not inform unitholders about the
circumstances of [Brannon’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
[Bryant’s] appointment and [Brannon’s] reappointment to the
Sunoco board the day the transaction closed.23
6. Count II. Defendants’ motion to dismiss Count II is GRANTED
because it impermissibly repackages Count I, plaintiffs breach of contract claim.
“The implied covenant of good faith and fair dealing is the doctrine by which
Delaware law cautiously supplies terms to fill gaps in the express provisions of a
20 Am. Compl. 1111 88-89.
2' Am. Compl. 1111 21-26; 121-28.
22 Am. Compl. 1111 77-82.
23 Regency II, 155 A.3d at 365.
specific agreement.”24 lf “the language of the contract expressly covers a particular
issue,” then “the implied covenant will not apply.”25
7. Plaintiff argues that “the LPA does not address whether [the General
Partner] could ever be said to act in good faith if it agrees to a merger designed and
timed solely for the benefit of ETP and ETE and that is highly unfair to the limited
partners.”26 Section 7.9(b) of the LPA, however, is sufficiently broad to cover such
a scenario. It provides that, for the General Partner and Regency GP LLC to have
acted in good faith, they had to have believed the transaction was “in the best
interests of the Partnership.” A transaction that is in the best interests of the
Partnership logically should not be “highly unfair to the limited partners.”27 Thus,
the LPA “sets a contractual standard by which to evaluate” the actions of the General
Partner and Regency GP LLC so that “[t]here is no gap in the [LPA] to fill in this
regard.”28
24 Allen v. El PaSO Pl'pe/l``ne GP CO., L.L.C., 113 A.3d 167, 182(1)€1. Ch. 2014).
25 Id. at 183.
26 Pl.’s Answering Br. 43.
27 See El Paso Pi'peli``ne, 113 A.3d at 181 (“When considering [the best interests of the
partnership], the Conflicts Committee has discretion to consider the full range of entity
constituencies, including but not limited to employees, creditors, suppliers, customers, the
general partner, . . . and of course the limited partners.”) (emphasis added).
28 Fortz``s Aa’visors LLC v. Dialog Seml``conductor PLC, 2015 WL 401371, at *5 (Del. Ch.
Jan. 30, 2015).
10
8. Count III. Defendants’ motion to dismiss Count III is GRANTED
because there can be no liability for aiding and abetting a breach of a contractual
duty created by the LPA under Delaware law. “Delaware law does not recognize a
claim for aiding and abetting a breach of contract.”29 An exception to this rule arises
where a contract creates fiduciary duties, but that exception does not apply here.30
9. The LPA did not create fiduciary duties contractually.3' The
Partnership Agreement eliminated all fiduciary duties32 and replaced them with a
contractual obligation requiring the General Partner to subjectively believe that its
actions were in the best interests of the Partnership.33 Thus, because the LPA
29 Gerber v. EPE Holdings, LLC, 2013 WL 209658, at *11 (Del. Ch. Jan. 18, 2013) (citing
Zi``mmerman v. Crothall, 2012 WL 707238, at * 19 (Del. Ch. Mar. 12, 2012)).
30 Gotham Partners, L.P. v. Hallwooa' Realzy Partners, L.P., 817 A.2d 160, 172-73 (Del.
2002).
31 See Gotham Partners, 817 A.2d at 173 (“[T]he General Partner had a fiduciary
relationship with the Partnership and its limited partners as defined by the Partnership
Agreement . . . which impose[d] the fiduciary duties of entire fairness.”); El Paso Pipeli'ne,
113 A.3d at 193 (“Because the alternative entity Statutes permit the entity’s governing
agreement to modify, alter, or expand fiduciary duties, there are situations involving
alternative entities where a party could owe fiduciary duties, the scope of the fiduciary duty
would be established by contract, and a third party could aid and abet a breach of the
contractually measured fiduciary duty.”).
32 See Yoch Aff. Ex. 1 § 7.9(e) (“Except as expressly set forth in this Agreement, neither
the General Partner nor any other Indemnitee shall have any duties or liabilities, including
fiduciary duties, to the Partnership or any Limited Partner and the provisions of this
Agreement, to the extent that they restrict, eliminate or otherwise modify the duties and
liabilities, including fiduciary duties, of the General Partner or any other Indemnitee
otherwise existing at law or in equity, are agreed by the Partners to replace such other duties
and liabilities of the General Partner or such other Indemnitee.”).
33 Yoch Aff. Ex. 1 § 7.9(b).
1 l
established a “purely contractual relationship, a theory of aiding and abetting a
breach of contract is unavailable in this case.”3“
10. Count IV. Defendants’ motion to dismiss Count IV is GRANTED. “In
order to state a claim for tortious interference with contractual ri ghts, a plaintiff must
allege the existence of ‘(1) a contract; (2) about which Defendant knew and (3) an
intentional act that is a significant factor in causing the breach of such contract (4)
without justification (5) which causes injury.”’35
11. Directors tortuously interfere with their company’s agreements “if and
only if [they] exceed the scope of [their] agency in so doing.”36 Simply alleging that
an officer or director caused his company to breach its contract, as plaintiff does
here,37 without more, is insufficient for a tortious interference claim.38 This analysis
does not change merely because a pass-through entity (z'.e., the General Partner) sits
34 El Paso Pipeline, 113 A.3d at 194.
35 Goldman v. Pogo.com, Inc., 2002 WL 1358760, at *8 (Del. Ch. June 14, 2002) (citation
omitted).
36 Id. (alterations in original and citations omitted).
37 See Am. Compl.11 185.
30 MCG Capz'tal Corp. v. Maginn, 2010 WL 1782271, at * 12 (Del. Ch. May 5, 2010); see
Wallace v. Wood, 752 A.2d 1175, 1183 (Del. Ch. 1999) (“Merely stating that the Officers
controlled the General Partner fails to support a claim of tortious interference.”); see also
Tenneco Auto., Inc. v. El Paso Corp., 2007 WL 92621, at *5 (Del. Ch. Jan. 8, 2007) (“After
all, ‘[a] defendant cannot interfere with its own contract.”’) (alteration in original and
citation omitted).
1 2
between the members of the Regency Board and the company they control (i.e.,
Regency).39
12. Plaintiff argues that “[t]ortious interference claims are also properly
asserted against ETE, ETP, and [Energy Transfer Partners, GP, L.P.], which are the
ultimate parents and affiliates, respectively, of [the General Partner].”40 This
assertion of the possibility of liability may be correct under Delaware law,41 but
whether an entity can be sued is distinct from actually stating a claim against that
entity, The Amended Complaint fails to allege facts from which it reasonably can
be inferred that ETE, ETP, or Energy Transfer Partners, GP, L.P. had the requisite
39 See, e.g., Norton v. K-Sea Transp. Partners, L.P., 67 A.3d 354, 367-68 (Del. 2013) (en
banc) (holding that a “pass-through” entity was entitled to a good-faith presumption under
a limited partnership agreement when the board of its parent entity met the requirements
for that presumption); Kuroa’a v. SPJS Holdings, L.L.C., 971 A.2d 872, 884 (Del. Ch. 2009)
(controllers of entities that in turn controlled defendant could not be liable for tortious
interference with defendant’s contract as long as the controllers were acting within the
scope of their authority); Tenneco, 2007 WL 92621, at *5 (“Imposition of liability for
tortious interference with contractual relationship requires that the defendant be a stranger
to both the contract and the business relationship giving rise to and underpinning the
contract.”) (citation and internal quotation marks omitted).
40 Pl.’s Answering Br. 52-53.
4' See NAMA Hola'ings, LLC v. Related WMC LLC, 2014 WL 6436647, at *26 (Del. Ch.
Nov. 17, 2014) (“Delaware’s respect for corporate separateness also means that Delaware
maintains a role for tortious interference with contract even in the parent-subsidiary
context.”).
1 3
mental state or committed any “intentional act” necessary to state a tortious
interference claim.
ancellor
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