IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ENERGY TRANSFER EQUITY ) Cons. C.A. No. 12197-VCG
L.P. UNITHOLDER LITIGATION )
MEMORANDUM OPINION
Date Submitted: November 9, 2016
Date Decided: February 28, 2017
Michael Hanrahan, Paul A. Fioravanti, Jr., Samuel L. Closic, Eric J. Juray, of
PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL:
Lee D. Rudy, Michael C. Wagner, Leah Heifetz, of KESSLER TOPAZ MELTZER
& CHECK, LLP, Radnor, Pennsylvania, Attorneys for Plaintiffs.
Rolin P. Bissell, Elena C. Norman, Tammy L. Mercer, Benjamin M. Potts, of
YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF
COUNSEL: Michael C. Holmes, John C. Wander, Andrew E. Jackson, Craig E.
Zieminski, of VINSON & ELKINS LLP, Dallas, Texas, Attorneys for Defendants
Energy Transfer Equity, L.P., LE GP, LLC, Kelcy L. Warren, John W. McReynolds,
Marshall S. McCrea III, Matthew S. Ramsey, Ted Collins, Jr., K. Rick Turner, Ray
Davis and Richard D. Brannon.
David E. Ross, John A. Eakins, of ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; OF COUNSEL: M. Scott Barnard, Michelle Reed, Lauren
E. York, of AKIN GUMP STRAUSS HAUER & FELD LLP, Dallas, Texas,
Attorneys for Defendant William P. Williams.
GLASSCOCK, Vice Chancellor
This unsatisfying Memorandum Opinion addresses cross-motions for partial
summary judgment in the context of the issuance of partnership units of a limited
partnership, Energy Transfer Equity, L.P. (“ETE” or the “Partnership”). The
Memorandum Opinion is unsatisfying because the utility of motions for partial
summary judgment lies in clearing away the brush in a litigation, to make traversing
the remaining issues straightforward; this decision, however, leaves the thicket
largely intact.
The matter involves an issuance of convertible units to some, but not all,
unitholders in ETE, in return for which the unitholders gave up their common units
(the “Issuance”). The opportunity to participate in the Issuance (the “Offering”) was
provided to less than all unitholders, and less than all the unitholders to whom the
opportunity was extended chose to participate. Ownership of an ETE common unit
entails the right to quarterly distributions from the Partnership under certain
conditions; holders of convertible units received distributions on a different
schedule. The Plaintiffs characterize the difference in distribution schedules as
entirely favorable to the convertible unitholders, and the Issuance as a distribution
of wealth from ETE to the insiders who received the convertible units. The
Defendants, for their part, describe the Offering and Issuance as a tool to defer ETE’s
obligation to make distributions, enhancing its ability to finance a merger with The
Williams Companies, Inc. (“Williams”). They point out that ETE initially
1
considered extending a right to participate in a similar unit exchange to all ETE
unitholders, but that provisions of the merger agreement with Williams, and
Williams’ unwillingness to consent, scuttled that idea, resulting—according to the
Defendants—in the revised issuance of convertible units that actually occurred. The
merger itself foundered; the flotsam that is the Issuance remains.
Rights of limited partners are largely defined by the governing partnership
agreement. The most significant issue on these cross-motions involves whether the
extension of the right to participate in the Issuance of the convertible units, or the
Issuance itself, is a contractual “distribution.” If so, the Defendants have breached
the partnership agreement, which requires that “distributions” be provided pro-rata
to all unitholders. The Plaintiffs argue that the Issuance was a distribution of value
to the favored unitholders who were extended the right to participate, and thus
amounts to an improper distribution of ETE’s assets to some, but not all, unitholders.
The Defendants characterize the Issuance as an exchange for value, in
connection with which the Partnership issued units. They point out that an issuance
of units, even if conflicted, is permitted under the partnership agreement, so long as
its “fair and reasonable” to ETE. They point to ETE’s use of a Conflicts Committee
approval process as evincing fairness under a safe harbor provision of the partnership
agreement. The parties disagree whether the Issuance was a contractual
2
“distribution” and, if not, whether it is entitled to the contractual safe harbor on
which the Defendants rely.
The resulting inquiry presents mixed questions of law and fact. Before
characterizing the Issuance as a “distribution”—itself an undefined term in the
partnership agreement—I find it appropriate to have a full factual record, and
therefore I defer that characterization until after trial. Likewise, although the
Plaintiffs have raised significant doubt about the propriety of the process by which
the Conflicts Committee undertook its review of the Issuance, whether the Issuance
qualifies as contractually “fair and reasonable” involves factual questions
appropriately addressed upon a full record. The cross-motions for partial summary
judgment are, accordingly, denied. My reasoning is below.
I. BACKGROUND1
The following rather wearying stroll through the facts is necessary to a proper
understanding of my resolution of the issues here.2
A. The Parties and Relevant Non-parties
The lead Plaintiffs, Lee Levine and Chester County Employee’s Retirement
Fund, have at all relevant times been common unitholders of ETE. 3 The Plaintiffs
1
Unless otherwise noted, the information in this section is undisputed and taken from the verified
pleadings, affidavits, and other evidence submitted to the Court.
2
Anyone who has grown out an avocado seed on a windowsill will recognize how the seed of
these facts dwarfs any useful analysis growing therefrom.
3
Amended and Supplemented Verified Class Action Complaint (the “Complaint” or. “Compl.”) ¶
14.
3
are suing both individually and as a class on behalf of the non-participating common
unitholders of ETE for claims arising out of a March 8, 2016 transaction.4
Defendant ETE is a master limited partnership (“MLP”) organized under
Delaware law, with its principal office in Dallas, Texas. 5 ETE is in the business of
energy pipelines.6 ETE is managed by its General Partner, LE GP, LLC (“LE GP”)
and its board of directors (the “Board”). 7 During the time frame relevant to liability
the Board consisted of Defendants Kelcy L. Warren, John W. McReynolds, Marshall
S. McCrea, Matthew S. Ramsey, K. Rick Turner, Ted Collins, Jr., and William P.
Williams (the “Director Defendants”). 8 Defendants Ray Davis and Richard D.
Brannon (collectively with the Director Defendants, the “Unitholder Defendants”)
are unitholders of ETE, but neither was a director or officer of ETE during the period
relevant to liability.9
Defendant LE GP is a Delaware limited liability company and the General
Partner of ETE.10 LE GP is a party to the Limited Partnership Agreement (the
“LPA”) in its capacity as General Partner. 11
4
Id. at Introduction.
5
Id. at ¶ 15.
6
Id.
7
See id.
8
Id. at ¶¶ 17–23, 26.
9
Id. at Introduction, ¶¶ 24–25.
10
Id. at ¶ 16.
11
Transmittal Affidavit of Benjamin M. Potts, Esquire (“Potts Aff”) Ex. 1 at 1 (Third Amended
and Restated LPA, the “LPA”).
4
Non-party Williams is an energy infrastructure company incorporated in
Delaware, with its principal offices in Tulsa, Oklahoma. 12 Williams’ holdings
include pipelines and other energy service related assets. 13 Williams was the
counterparty to a merger which was abandoned in June, 2016.
Non-party Energy Transfer Corporation LP (“ETC”) is a Delaware limited
partnership. 14 ETC was a party to the Williams merger, as discussed below.
Non-party Energy Transfer Partners, L.P. (“ETP”) is a Delaware MLP with
its principal offices in Dallas, Texas.15
B. The Offering
1. The Williams Merger
On September 28, 2015, Williams, ETE, LE GP and select other ETE affiliates
executed an Agreement and Plan of Merger (the “Merger Agreement”).16 Pursuant
to the Merger Agreement Williams was to merge with and into ETC. 17 The Merger
Agreement required a series of transactions (the “Merger”). The intricacies of the
deal structure are not necessary to this opinion, as the litigation here involves the
Partnership’s obligations to its own unitholders in engaging in transactions with
select unitholders. Interested readers are referred to this Court’s Memorandum
12
Compl. ¶ 27.
13
Id.
14
Id. at ¶ 28.
15
Id. at ¶ 29.
16
Transmittal Affidavit of Eric J. Juray, Esquire (“Juray Aff.”) Ex. 3 (the “Merger Agreement”).
17
See Merger Agreement.
5
Opinion in Williams Companies, Inc. v. Energy Transfer Equity, L.P.,18 for further
detail regarding the Merger Agreement. It is sufficient for the purposes of this
opinion to state that the Merger would have required ETE to pay approximately
$6.05 billion in cash, along with ETC common shares, to Williams. 19 ETE expected
to incur $6.05 billion in debt to finance the cash component of the Merger, and to
assume additional debt from Williams of upwards of $4 billion. 20
2. Commodity Prices Drop
After the Merger Agreement was signed, but before the Merger closed,
commodity prices declined.21 ETE’s SEC filings characterized the drop as a recent
development, and indicated that the crude oil price decline was “significant” from
an average of $60.00 per barrel in June 2015 to an average closing price of $30.62
in February 2016. 22 Natural gas prices suffered a similar decline.23 Such declines
drove down the equity values of energy related companies and the cost of capital for
companies in the energy sector increased as investors and financiers became more
cautious.24
18
2016 WL 3576682 (Del. Ch. June 24, 2016).
19
See Merger Agreement §§ 2.01(b), 2.04; Williams Companies, 2016 WL 3576682, at *1.
20
Potts Aff. Ex. 3 at 20.
21
See, e.g., Juray Aff. Ex. 52 at 18.
22
Id.
23
See id.
24
See id. at 18–19.
6
“As of December 31, 2015, ETE had approximately $7 billion of debt on a
stand-alone basis and approximately $36.97 billion of consolidated debt, excluding
the debt of its joint ventures.”25 ETE would incur additional debt of $6.05 billion to
finance the cash portion of the Merger, and would also assume $4.2 billion of
Williams’ debt.26
By January 2016, the market prices of ETE units and Williams stock had
dropped precipitously from where such securities were trading at the time of the
announcement of the Merger. Similarly, the synergies which ETE and Williams
expected from the Merger proved to be significantly over-estimated—rather than the
$2 billion per year expected at execution, joint integration planning between the
companies reached a number “materially less” of $170 million per year.27 The
reduction in expected synergies was attributed, in part, to the decline in commodity
prices.28
The parties dispute whether such decline in the market generally and the
attractiveness of the Merger would have forced ETE to reduce or eliminate its cash
distributions to holders of common units (the “Common Units”).29 The Defendants
point to record evidence of Kelcy Warren’s statements on a February 25, 2016
25
Id. at 19–20.
26
Id. at 20.
27
Id. at 19.
28
See id.
29
See Pls’ Opening Br. 9; Defs’ Opening Br. 9.
7
earnings call that indicated ETE was actively trying to avoid, and did not expect,
distribution cuts.30 The Plaintiffs assert that it was “increasingly probable that ETE
would have to reduce or eliminate its cash distributions to holders of Common
Units.”31 Such a reduction, the Plaintiffs argue, would impact Kelcy Warren
particularly, as they allege such distributions were his primary source of cash flow.32
The Defendants assert that ETE was facing credit risks as a result of the
deterioration in market conditions, combined with the debt that the Merger required.
The Defendants argue that the financing of the cash component of the Merger via
the “Bridge Loan” threatened ETE’s ability to secure credit in the future at favorable
rates.33 That is, absent efforts to reduce its debt load and debt ratios, ETE faced the
threat of a credit downgrade due to the debt arising from the Merger and worsening
market conditions.34 To ETE this was particularly unappetizing as the terms of the
Bridge Loan provided that ETE would have to repay or refinance the $6.05 billion
credit facility within two years of the Merger.35 The adverse effects of a credit
downgrade were explained in an April 2016 SEC filing. 36 Further, that filing
30
Defs’ Opening Br. 9 (quoting Potts Aff. Ex. 8 at PLAINTIFFS-001885).
31
Pls’ Opening Br. 9 (citing, for example, Juray Aff. Ex. 33 at 41, ETE’s December 31, 2015 10-
K, which indicates that to manage its debt levels the company may need to “reduce the cash
distributions we pay to our unitholders”).
32
Pls’ Opening Br. 9.
33
Defs’ Opening Br. 7.
34
Id. (citing Potts Aff. Ex. 3).
35
Potts Aff. Ex. 3 at 9, 40–41.
36
See Potts Aff. Ex. 3.
8
disclosed that if certain outstanding notes of a Williams entity—which would
become an ETE subsidiary post-closing—were downgraded, an obligation to
repurchase the notes costing upwards of $2.9 billion could be triggered. 37 It is in
this context that the unit offering at issue here was conceived.
3. The Offering
The transaction underlying this litigation was initially planned as a public
offering; however, ETE was not able to secure certain required approvals from
Williams to facilitate the planned transaction. ETE’s stated motivation for the
Issuance was to finance the Merger while alleviating “the mounting pressure from
the ratings agencies.”38 The Plaintiffs assert this debt rationale was “bogus.”39
a. The Public Plan
The initial plan was to issue $1 billion in Convertible Preferred Units
(“Convertible Units”) as a part of a public offering to all unitholders.40 Pursuant to
the initial plan, ETE public unitholders were to be offered the opportunity to
participate in the “Plan,” through which they would make a one-time election to
forgo their quarterly distributions for eight quarters taking instead a preferred
distribution capped at $0.11 a unit, and agreeing not to transfer the units during the
37
Id. at 63.
38
Defs’ Opening Br. 10.
39
See Pls’ Answering Br. 4.
40
See Potts Aff. Ex. 9 at ETEe-LEVINE-00000019–20.
9
Plan period.41 Participating unitholders would receive one Convertible Unit for each
Common Unit that the holder elected to surrender. At the time of the proposed
public plan, ETE Common Units had most recently paid distributions of $0.285 per
quarter,42 and did not contain a restriction of transferability. 43 At the end of the Plan
period, the Convertible Units would convert into additional Common Units based
on a specified “Conversion Value” calculation. 44 Part of the Conversion Value
formula provided that electing unitholders would accrue value of $0.285 a unit per
quarter, redeemable, ultimately, as Common Units.45 By decreasing distributions to
current unitholders ETE sought to free up cash flow to manage the Bridge Loan and
other debt obligations.46 It appears this issuance was set at $1 billion because the
Merger Agreement provided a $1 billion cap on equity issuances by ETE.47
By early February 2016, the Public Plan was presented to the boards of LE
GP and ETP.48 Williams’ consent was required in order for the public offering to
move forward, but Williams withheld its consent. 49 Specifically, ETE needed to
41
Id.
42
Id.
43
Juray Aff. Ex. 55 at 40:1–42:2 (Welch) (explaining concerns he raised as the former CFO of
ETE about the restriction on transferability’s effect on institutional investors ability to participate).
44
Potts Aff. Ex. 9 at ETEe-LEVINE-00000019–20.
45
Id. at ETEe-LEVINE-00000020.
46
See Defs’ Opening Br. 11.
47
See id. at 12 (quoting Potts Aff. Ex. 10 §4.01(b)(v)(1) (“[ETE] may make issuances of equity
securities with a value of up to $1.0 billion in the aggregate.”)).
48
See Juray Aff. Exs. 12, 13.
49
Compl. ¶ 67.
10
register the securities planned to be issued via the Public Plan with the SEC, however
Williams refused to consent and provide certain information needed to facilitate the
requisite SEC filings.50 Williams recognized that the “planned action [was] intended
to strengthen the credit profile of ETE,”51 nonetheless, on February 18, 2016,
Williams informed ETE of its decision to withhold the necessary consents. 52
b. The Private Plan
On February 22, 2016, following Williams’ refusal to consent to a public
offering, LE GP held a board meeting where Kelcy Warren presented a proposal
from “management . . . to conduct a private placement of the Convertible Units . . .
subject to conflicts committee approval.”53 Such a placement, theoretically, avoided
SEC filings, and thus did not require Williams’ cooperation. By the next day, the
draft SEC filing required for the proposed public offering was revised into a draft of
the Private Placement Memorandum (the “PPM”).54 Similarly, the draft of an
amendment to the LPA (“Amendment 5”) was revised to reflect that “certain”
accredited investors, rather than “all” common unitholders were to be given the right
50
Potts Aff. Ex. 12.
51
Id.
52
Id.
53
Juray Aff. Ex. 18.
54
Juray Aff. Ex. 19.
11
to participate in the Private Plan.55 The substantive terms of the Private Plan do not
appear to have materially changed from the terms of the thwarted Public Plan.56
4. The Conflicts Committee
The LE GP Board voted at the February 22, 2016 meeting to establish a
conflicts committee to determine whether to approve the proposed private
issuance.57 At the same meeting the Board unanimously approved establishing a
conflicts committee (the “Conflicts Committee”) consisting of Ted Collins, Richard
Turner, and William P. Williams. 58 The LPA provides that “‘Conflicts Committee’
means a committee of the Board of Directors of the General Partner composed
entirely of one or more directors” who meet certain qualifications. 59 Among other
qualifications, a director is not permitted to serve on the Conflicts Committee if they
are “officers, directors or employees of any Affiliate of the General Partner.” 60
Neither Turner nor Collins could comply with this provision. Turner was a director
of Sunoco LP, which was an affiliate.61 Collins was a director of ETP which was
also an affiliate.62 A February 28, 2016 resolution of the LE GP Board indicates that
55
Juray Aff. Ex. 21 at ETEe-LEVINE-00031239.
56
Compare Potts Aff. Ex. 9 at ETEe-LEVINE-00000019–20 with Potts Aff. Ex. 14 at ETEe-
WMB-00047553–54.
57
See Juray Aff. Ex. 18 (“Mr. Warren then explained that ETE would need to establish a conflicts
committee to determine the fairness of the private placement transaction.”).
58
Id.
59
LPA § 1.1.
60
Id.
61
See Potts Aff. Ex. 16 at 114, 116–17.
62
Id. at 114, 117.
12
the Conflicts Committee consisted of only William P. Williams.63 The record,
however, is devoid of any resolution or resignation that demonstrates that Collins
and Turner had been removed from the Conflicts Committee by this time.
It is not entirely clear, at this stage, the events that occurred between February
22, and February 28, 2016 concerning the composition of the Conflicts Committee.
The parties dispute the propriety of the Conflicts Committee process and whether
Special Approval, as defined by the LPA, was received. The following summary of
events is non-exhaustive and is simply meant to orient the reader to the general
timeline of events; it does not constitute my findings as to the actions of the Conflicts
Committee or the validity of the Special Approval sought, issues resolution of which
awaits a developed record.64
On February 26, 2016, Kelcy Warren sought to schedule a Board meeting of
ETE for February 28, 2016 to have the work of the Conflicts Committee approved
by the Board.65 At this point, however, the Conflicts Committee had yet to hold a
meeting. As of 10:21 a.m. on February 26, 2016, ETE insider John McReynolds
still characterized Collins as the “Chair” of the Conflicts Committee.66
63
Potts Aff. Ex. 17 at ETEe-LEVINE-00000388–89.
64
I note the Plaintiffs have challenged the timing and propriety of certain Board minutes. It
appears certain minutes were drafted on April 7, 2016. See Juray Aff. Ex. 67.
65
Juray Aff. Ex. 22.
66
Id. (“[T]he Conflicts Committee, which is being chaired this time by Ted Collins, will be in a
position to report to the Board as to their findings . . . .”).
13
The Conflicts Committee met for the first time by phone at 5:30 p.m. on
February 26, 2016, for a twenty-minute meeting. 67 The minutes indicate that “the
sole member of the Committee,” William P. Williams, was in attendance. 68 The
stated purpose of the meeting was to discuss the engagement of Akin Gump Strauss
Hauer & Feld LLP (“Akin Gump”) as legal counsel for the Committee, and discuss
the engagement of a financial advisor. 69 The Committee engaged Akin Gump as its
legal advisor after disclosures of potential conflicts.70 Further, the Committee
directed Akin Gump to set up a meeting with FTI Consulting, Inc. (“FTI”), a
potential financial advisor for the following day to discuss the proposed
transaction.71 The minutes indicate that the attorney participating from Akin Gump
advised Mr. Williams that “the Committee and the Audit and Conflicts Committee
of the General Partner could participate in discussions together” but that Mr.
Williams would still “need to independently deliberate and reach his own
conclusions.”72 Also on February 26, 2016, Ted Collins signed an engagement letter
with FTI on behalf of the “Conflicts Committee of the Board of Directors of Energy
67
Juray Aff. Ex. 23.
68
Id. at ETEe-LEVINE-00000394.
69
Id.
70
Id. at ETEe-LEVINE-00000395.
71
Id. at ETEe-LEVINE-00000396.
72
Id. at ETEe-LEVINE-00000395.
14
Transfer Equity, L.P.” for FTI to provide advisory services related to the “private
placement offering of convertible preferred units.” 73
From February 27 to February 28, 2016, the Conflicts Committee held three
additional meetings.74 The three meetings of the Conflicts Committee were held as
joint meetings of the Conflicts Committee and the Audit and Conflicts Committee
(the “Audit Committee”) of the Board of Directors of LE GP.75 The minutes indicate
each of these meetings was attended by Mr. Williams as the “sole member” of the
Conflicts Committee, tasked with reviewing the transaction pursuant to the terms of
the LPA.76 Additionally, the minutes indicate each of these three meetings was
attended by Mr. Collins who, along with Mr. Williams, constituted the Audit
Committee of the Board of Directors of LE GP, which was required to review the
proposed transaction pursuant to LE GP’s LLC Agreement. 77 FTI presented
financial information regarding the effect the Convertible Units would have on
ETE’s debt load and leverage ratios.78 The projections indicated that ETE would be
able to lower its leverage ratio closer to what ratings agencies expect in order to
provide a “a neutral rating.” 79
73
Juray Aff. Ex. 66.
74
Juray Aff. Exs. 24–26.
75
See id.
76
Id.
77
Id.
78
See, e.g., Potts Aff. Ex. 17 at ETEe-LEVINE-00000371–85.
79
Id. at ETEe-LEVINE-00000385.
15
Minutes of a February 28, 2016 joint meeting of the Audit Committee and the
Conflicts Committee provide that Mr. Williams and Mr. Collins approved the
Convertible Units transaction, the Plan and Amendment 5 on behalf of the Audit
Committee.80 Mr. Collins then left the meeting and Mr. Williams, acting as the sole
member of the Conflicts Committee, approved the transaction and voted to grant
“Special Approval.”81 The Conflicts Committee resolved that the transaction and
related agreements were “in the best interest of [ETE].” 82 Later that day the full
Board of LE GP, acting on the Conflicts Committee’s determination, approved the
Convertible Unit transaction, the Plan, and Amendment 5. 83
The Plaintiffs argue strenuously that the Special Approval process by the
Conflicts Committee failed to comply with the contractual requirements of the LPA.
They point to the lack of contemporaneous documentation demonstrating that the
two ineligible members had been removed.84 Further, the Plaintiffs point to
allegedly inconsistent language used in the February 28, 2016 LE GP board minutes,
including the characterization that a “special committee” of Collins, Turner, and
Williams was formed.85 Similarly, the Plaintiffs point to the apparent discrepancy
between the original February 22, 2016 minutes appointing three people to the
80
Juray Aff. Ex. 26 at 5.
81
Id.; Potts Aff. Ex. 23.
82
Potts Aff. Ex. 23.
83
Juray Aff. Ex. 29; Potts Aff. Ex. 24.
84
See Pls’ Opening Br. 20–21.
85
See Juray Aff. Ex. 29; Pls’ Opening Br. 20–21.
16
Conflicts Committee and later Conflicts Committee minutes stating the Committee
consisted of just Mr. Williams. 86 Thus, Plaintiffs’ position is that one of three
members, less than the required majority, gave Special Approval—therefore no valid
Special Approval was given. 87
5. The Convertible Unit Transactions
The February 28, 2016 resolution of the LE GP Board indicates that the
Partnership would “offer to certain of its common unitholders who are ‘accredited
investors’ . . . the opportunity to participate in the plan.”88 The Partnership was to
provide Plan offerees with a PPM and an election form.89 While the Offering was
limited to accredited investors as defined by SEC regulations, not all accredited
investors holding ETE units were invited to participate in the Plan.90 The invitation
to participate was rather limited.91
86
Pls’ Opening Br. 20–21.
87
Id. at 22.
88
Juray Aff. Ex. 27 at ETEe_LEVINE-000003888.
89
Id.
90
See Potts. Aff. Exs. 26, 27. It appears about twenty-five people or entities participated in the
Issuance. The Defendants argue that not all people invited to participate actually participated.
Defs’ Opening Br. 16.
91
See Potts Aff. Exs. 26, 27 (listing potential participants and actual participants); Juray Aff. Ex.
42 at ETEe-LEVINE-00003490 (indicating the Plan was “offered to certain long-term unitholders
including management and Kelcy Warren, as well as several large institutional investors who are
long-term holders with meaningful ownership positions and who we believed could act quickly
and be capable of agreeing to the nine quarter transfer restrictions”).
17
a. The Private Placement Memorandum
On February 29, 2016, ETE sent the PPM to those selected to receive the
opportunity to participate in the Plan. 92 The PPM provided that unitholders had the
opportunity to “make a one-time election” to exchange one Convertible Unit for each
Common Unit they held.93 Each recipient of the Offering had until the close of
business on March 3, 2016 to return their election decision and a questionnaire
evincing their status as an accredited investor. 94 However, the deadline was
extended to March 4, 2016 to allow certain “potential offerees the ability to
participate.”95 I note that the PPM provided that “[p]rior to the Closing Date, we
may modify or terminate this offering or the Plan . . . at any time . . . ,” and thus no
enforceable rights accrued based on the PPM. 96 The record reflects that some
common unitholders requested to participate, but were not permitted.97 The
Plaintiffs argue that this dissemination of the PPM was a “Rights Distribution.” 98
92
See Juray Aff. Ex. 32.
93
Id. at ETEe-WMB-00047553.
94
Id.
95
Juray Aff. Ex. 37.
96
Juray Aff. Ex. 32 at ETEe-WMB-00047570.
97
See, e.g., Juray Aff. Exs. 51 at 2; 57 at 76–77.
98
See, e.g., Pls’ Opening Br. 49–50 (arguing “[t]he rights were distributed to limited partners in
their capacity as limited partners through dissemination of the February 29, 2016 Private
Placement Memorandum and were exercisable from February 29, 2016 through March 4, 2016”).
18
b. The Convertible Units
On March 8, 2016, ETE issued 329,399,267 Convertible Units to the electing
unitholders.99 This represented participation of approximately 31.5% of ETE’s total
Common Units.100 Of the Convertible Units issued, the majority, 187,313,942, went
to ETE’s Chairman, Kelcy Warren.101 Other Defendants acquired a substantial
number of units, and together the Unitholder Defendants own approximately 85%
of the Convertible Units issued.102 Record evidence indicates that as of March 11,
2016, Fitch Ratings considered ETE’s Convertible Units “a proactive step in
enhancing its liquidity and managing acquisition leverage in a credit neutral manner”
but that the “issuance ha[d] no immediate impact to ETE’s rating.” 103
c. Amendment 5
Amendment 5 was also entered on March 8, 2016,104 by LE GP as the General
Partner of the Partnership “on behalf of itself and the Limited Partners of the
Partnership.”105 Amendment 5 established the “designations, preferences and
relative participating, optional or other special rights, powers and duties of holders
of the Convertible Units.”106 That is, Amendment 5 amended the LPA to
99
Potts Aff. Ex. 25 at 2.
100
Id.
101
Id.
102
See Juray Aff. Ex. 82 at 15.
103
Potts Aff. Ex. 28.
104
Juray Aff. Ex. 41; Potts Aff. Ex. 25 at 3.
105
Juray Aff. Ex. 41 at 1.
106
Potts Aff. Ex. 25 at 3.
19
accommodate the new units.107 This amendment was done via Section 13.1 of the
LPA, which provides that the General Partner may amend the LPA in certain
circumstances, including amendments “necessary or appropriate” to the issuance of
securities “without the approval of any Partner.” 108
Section 1(a) of Amendment 5 added numerous definitions to the LPA related
to the new Convertible Units.109 Section 1(c) of Amendment 5 set out the terms of
the Convertible Units by adding Section 5.15 to the LPA. 110 Further, Section 1(f) of
Amendment 5 restated Section 6.3 of the LPA. Section 1(f) deleted the phrase “in
accordance with their respective Partnership Interests” from Section 6.3(a) of the
LPA which governs the terms for quarterly cash distributions to partners.111 This
appears to be an attempt to accommodate the functioning of the Convertible Units.
Amendment 5 left Section 6.3(a) of the LPA otherwise unchanged. 112 Additionally,
Section 1(f) of Amendment 5 added new Sections 6.3(e), 6.3(f) and 6.3(g) to the
LPA.113 New Sections 6.3(e) and 6.3(f) relate to the Convertible Units’ distribution
107
See Defs’ Opening Br. 2 (indicating the Amendment “effectuated the Issuance by adding the
new securities to ETE’s equity structure”).
108
LPA § 13.1(g). See Juray Aff. Ex. 41 at 1 (citing Sections 5.8, 13.1(g) and 13.1(d)(i) as the
basis of authority for the Amendment).
109
Juray Aff. Ex. 41 § 1(a). The Plaintiffs indicate that “[m]any of these additional definitions
relate to the newly created Convertible Units.” Pls’ Opening Br. 26.
110
Juray Aff. Ex. 41 § 1(c).
111
Compare LPA § 6.3(a) with Juray Aff. Ex. 41 § 1(f).
112
Id.
113
Juray Aff. Ex. 41 § 1(f).
20
preference. 114 New Section 6.3(g) provides that, notwithstanding the other
limitations and provisions on distributions, an “Extraordinary Distribution shall be
distributed” to Common and Convertible Units “in accordance with their respective
Percentage Interests, and on an As-Converted Basis.”115
6. ETE Terminated the Merger but the Units Remain
In early April 2016 ETE recognized that the transaction with Williams’ would
be even more unpalatable than previously expected.116 By April 18, 2016, ETE
notified the public that if the Merger with Williams closed, that is, if ETE continued
on the present path, there would be no distributions to common unitholders from the
second quarter of 2016 through the fourth quarter of 2017. 117
The Merger failed to close following an opinion of this Court on June 24,
2016, and ETE’s subsequent notice of termination on June 29, 2016. 118 The
Convertible Units remain even after ETE’s termination of the Merger, and their
validity and the propriety of their creation form the basis of the present litigation.
Since the termination of the Merger, ETE is no longer projecting distribution cuts,
and the second quarter of 2016 distribution for ETE Common Units remained at
114
See id.
115
Id.
116
See Juray Aff. Ex. 57 at 70; Potts Aff. Exs. 31, 32.
117
See Potts Aff. Ex. 3 at 24–25.
118
See Juray Aff. Ex. 59 at 1 (indicating ETE “terminated” the Merger on June 29, 2016).
21
$0.285.119 The provisions of the LPA and other texts necessary to the Court’s
analysis are described below in the relevant analysis section.
C. Procedural History
Plaintiff Lee Levine initiated this action on April 12, 2016, and the matter was
expedited shortly thereafter. This action was consolidated with a similar action on
May 3, 2016.
Following discovery, an Amended and Supplemented Verified Class Action
Complaint (the “Complaint”) was filed on August 29, 2016. The Compliant pleads
four counts. Count I alleges a breach of Section 6.3 of the LPA against ETE, LE GP
and the Unitholder Defendants.120 Count I asserts that the “Rights Distribution” and
the “Convertible Units Distribution” were an extraordinary non-cash distribution
made in violation of Section 6.3’s requirements that such a distribution be made in
accordance with unitholders’ respective percentage interests.121 Count II alleges a
breach of Section 7.6(f) of the LPA against ETE, LE GP, and the Unitholder
Defendants.122 Count II asserts that ETE, LE GP, and the Unitholder Defendants
breached 7.6(f)’s requirement that conflicted transactions be “fair and reasonable to
the Partnership” because none of the enumerated safe harbors were met and the terms
119
Potts Aff. Ex. 33.
120
Compl. ¶¶ 162–169.
121
See id.
122
Id. at ¶¶ 170–177.
22
of the Issuance of Convertible Units were not fair and reasonable.123 Count III
asserts a claim for breach of the contractual “good faith” obligations in making
determinations and approvals under Sections 5.8, 7.9(a), 7.9(b), 13.1(d)(i) and
13.1(g) of the LPA against ETE, LE GP and the Director Defendants. 124 The
Plaintiffs assert nine different theories for this Count.125 Count IV asserts that
Amendment 5 was not permitted by Section 7.9(a) of the LPA and thus ETE, LE GP
and the Unitholder Defendants breached the LPA.126 The theory of Count IV is that
the Amendment was a conflict situation and that by not securing any of the
exceptions under Section 7.9, “the Amendment is not permitted and the entry into
and implementation of the Amendment were in breach of the Partnership
Agreement.”127
The Defendants and the Plaintiffs have both moved for partial summary
judgment. Each partial summary judgment request is described briefly below.
The Plaintiffs seek summary judgment on two primary points. First, the
Plaintiffs seek summary judgment that the “Rights Distribution and Convertible
Units Distribution are invalid because they were non-Pro Rata distributions of
securities to some limited partners in their capacity as Partners that were not in
123
See id.
124
Id. at ¶¶ 178–195.
125
Id. at ¶¶ 187–195.
126
Id. at ¶¶ 196–202.
127
See id. at ¶¶ 199–202.
23
accordance with their percentage interests in the Partnership.” 128 The Plaintiffs
argue such “distributions” were not authorized and violated the LPA. Second, the
Plaintiffs seek summary judgment that the “Defendants breached the Partnership
Agreement because, in its haste, the LE GP Board of Directors . . . failed to establish
a duly constituted Conflicts Committee composed of directors who were not also
directors of an affiliate of the General Partner.”129 The Plaintiffs argue that the flaws
in this process result in a failure to establish Special Approval as defined by the LPA,
and that they are entitled to summary judgment that Special Approval was not given.
The Defendants seek partial summary judgment on a number of points. First,
the Defendants argue that the “Plaintiffs’ claims against the Individual Defendants
and ETE fail as a matter of law because Plaintiffs’ breach-of-the-LPA claims can
only be brought against the General Partner.”130 Second, the Defendants assert that
“Count III fails as a matter of law to the extent it relates to a breach by the General
Partner for approving the Amendment because Section 13.1(g) forecloses any such
claim.”131 Third, the Defendants argue that “Count IV fails as a matter of law
because Section 7.9(a) does not provide a claim for breach as to the Amendment.” 132
The Defendants argue Section 7.9(a) “is an optional safe harbor provision that
128
Pls’ Opening Br. 2.
129
Id. at 3.
130
Defs’ Opening Br. 32.
131
Id.
132
Id.
24
cannot be breached as a matter of law.” 133 Finally, the Defendants assert that “Count
I fails as a matter of law because the Issuance is an issuance of equity securities, not
a distribution subject to Section 6.3 of the LPA.”134 The Defendants’ final summary
judgment request, regarding Section 6.3, overlaps directly with Plaintiffs’ first
summary judgment request. It appears the Defendants are not seeking summary
judgment regarding Count II as pled against the General Partner, and Count III
regarding the claims under Sections 5.8 and 7.9 as pled against the General
Partner. 135
Oral Argument was held in this matter on November 9, 2016. This
Memorandum Opinion addresses the parties’ Motions for Partial Summary
Judgment.
II. STANDARD OF REVIEW
The parties have cross-moved for partial summary judgment pursuant to Court
of Chancery Rule 56. The standard is well settled that “[w]hen opposing parties
make cross motions for summary judgment, neither party's motion will be granted
unless no genuine issue of material fact exists and one of the parties is entitled to
judgment as a matter of law.”136 That is, each party must show in support of its own
133
Id. at 25.
134
Id. at 32.
135
See id. at 4–5.
136
Shuba v. United Servs. Auto. Ass'n, 77 A.3d 945, 947 (Del. 2013).
25
motion that there is no genuine issue as to any material fact, and that it is entitled to
judgment as a matter of law. The facts are viewed in the light most favorable to the
nonmoving party on each motion.
There is no “right” to summary judgment and “the court may, in its discretion,
deny summary judgment if it decides upon a preliminary examination of the facts
presented that it is desirable to inquire into and develop the facts more thoroughly at
trial in order to clarify the law or its application.” 137 When reviewing a Rule 56
motion I am not to weigh evidence, rather I am to “determine whether or not there
is any evidence supporting a favorable conclusion to the nonmoving party.” 138 Any
request for summary judgment “must be denied if there is any reasonable hypothesis
by which the opposing party may recover, or if there is a dispute as to a material fact
or the inferences to be drawn therefrom.” 139
III. ANALYSIS
The partial summary judgment motions here each require interpretation of the
LPA, in light of the facts involved with the Issuance. The LPA is a contract that
supplies the obligations the Plaintiffs seek to enforce. In construing the LPA, I am
guided by our case law concerning such agreements. However, each specific
137
In re El Paso Pipeline Partners, L.P. Derivative Litig., 2014 WL 2768782, at *9 (Del. Ch. June
12, 2014) (citations omitted).
138
Id. at *8 (quoting Cont'l Oil Co. v. Pauley Petroleum, Inc., 251 A.2d 824, 826 (Del. 1969)).
139
Id. (quoting Vanaman v. Milford Mem'l Hosp., Inc., 272 A.2d 718, 720 (Del. 1970)).
26
agreement must be interpreted in accordance with its own terms, thus a review of
prior cases in our Courts tends not to be helpful.140 Nonetheless, a review of the
teachings in prior cases of first principles in limited partnership agreement
interpretation provides guidance on the issues present here.
Our Supreme Court recognizes that “[l]imited partnership agreements are a
type of contract,” and are to be construed “in accordance with their terms to give
effect to the parties' intent.” 141 Similarly, “[t]he Delaware Revised Uniform Limited
Partnership Act (DRULPA) gives ‘maximum effect to the principle of freedom of
contract and to the enforceability of partnership agreements.’” 142 Basic contract
principles are applicable including that words are to be given their “plain meaning
unless it appears that the parties intended a special meaning” and that the agreement
is to be construed as a whole giving “effect to every provision if it is reasonably
possible.”143 Further, “[a] meaning inferred from a particular provision cannot
control the agreement if that inference conflicts with the agreement's overall
scheme.”144 Finally, when interpreting the contractual language of a limited
partnership agreement, if, but only if, the contractual terms are ambiguous and the
140
See Allen v. Encore Energy Partners, L.P., 72 A.3d 93, 100 (Del. 2013) (noting that while a
series of master limited partnerships cases have come before the Supreme Court, the “precise
language” of each agreement needs to be analyzed because “facial similarities can conceal
significant differences between the limited partnership agreements”).
141
Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 360 (Del. 2013) (citation omitted).
142
Id. (quoting 6 Del. C. § 17–1101(c)).
143
Id. (citations omitted).
144
Id. (citations omitted).
27
limited partners did not negotiate for such terms, I may invoke the principle of contra
proferentem and construe the ambiguous terms against the drafter. 145 The rule of
contra proferentem is of particular importance to the just adjudication of limited
partnership agreements, since often the unitholders had no hand in the negotiation
or drafting of the agreement from which their rights derive.
With these principles in mind, I turn to the task of evaluating this particular
agreement. Neither the Defendants’ nor the Plaintiffs’ motions are potentially
dispositive of this matter—regardless of my findings in this opinion issues will
remain for trial. I note the primary dispute on these motions is twofold. First,
whether the Issuance (and the corresponding Conflicts Committee process) failed
the contractual safe harbor of Special Approval provided by the LPA; and second,
whether the Issuance (and the precedent Offering via receipt of the PPM) constituted
a contractual “distribution.” With respect to the latter, if the Offering and the
Issuance were “distributions,” they violate the LPA, which requires distributions to
be pro-rata. In light of the factual questions that remain, I find that both questions
are better answered on a post-trial factual record.
145
See id. (“If the contractual language at issue is ambiguous and if the limited partners did not
negotiate for the agreement’s terms, we apply the contra proferentem principle and construe the
ambiguous terms against the drafter.”) (citation omitted); In re Kinder Morgan, Inc. Corp.
Reorganization Litig., 2014 WL 5667334, at *3 (Del. Ch. Nov. 5, 2014) (“Where a limited
partnership agreement was drafted exclusively by the general partner, the court will interpret
ambiguities against the drafter, rather than examine extrinsic evidence.”) (citations omitted).
28
A. Partial Summary Judgment Requests
1. Special Approval
In conducting the Issuance, the Defendants rely on the general and broad
authority to issue securities provided by Section 5.8 of the LPA. Section 5.8(a) states
that:
[t]he Partnership may issue additional Partnership Securities and
options, rights, warrants and appreciation rights relating to the
Partnership Securities for any Partnership purpose at any time and from
time to time to such Persons for such consideration and on such terms
and conditions as the General Partner shall determine, all without the
approval of any Limited Partners. 146
The authority to issue securities is not unlimited. Rather, it is subject to review under
the appropriate contractual standard. The LPA provides an over-arching “good
faith” requirement whereby the Board, or the party acting, must “believe that the
determination or other action is in the best interests of the Partnership.”147 Issuances
that arise out of conflicts situations, however, are subject to a higher level of
scrutiny.148
The Parties agree that certain aspects of the Issuance and the enabling
amendments to the LPA were conflicted transactions. Conflicted transactions are
subject to review under Section 7.9(a) of the LPA. 149 Section 7.9(a) provides four
146
LPA § 5.8(a).
147
See id. §§ 7.6(f), 7.9(b).
148
Id. § 7.9(a).
149
See id. § 7.9(a).
29
ways for the General Partner or its affiliates to resolve the conflict: (1) by Special
Approval, (2) by majority approval of Common Unitholders, (3) by ensuring the
terms are “no less favorable to the Partnership than those generally being provided
to or available from unrelated third parties,” or (4) by providing terms that are “fair
and reasonable to the Partnership, taking into account the totality of the relationships
between the parties involved. . . . ”150 Section 7.6(f) addresses transfers of property
between the General Partner or its affiliates, and ETE, and provides a similar list of
safe harbors, including Special Approval.151
The Plaintiffs seek partial summary judgment that the Defendants did not
comply with the Special Approval procedure set out in the LPA and thus this Court
should enter judgment declaring that Special Approval was not received. The
Defendants seek a declaration that Special Approval was an optional safe harbor,
and failure to receive it, alone, is not an independent breach, an issue that I do not
address further.152 Under the LPA, Special Approval “means approval by the sole
member or by a majority of the members of the Conflicts Committee, as
150
LPA § 7.9(a).
151
LPA § 7.6(f).
152
See Defs’ Opening Br. 25–27. Under the terms of the LPA, Special Approval was an optional
safe-harbor to meet contractual duties in a conflicts situation—failure to receive Special Approval
is not, of itself, a breach. See LPA §§ 7.6(f), 7.9(a) (indicating that Special Approval is one of
several ways to meet the contractual standard); See also El Paso Pipeline GP Co., L.L.C. v.
Brinckerhoff, 2016 WL 7380418, at *8 n.41 (Del. Dec. 20, 2016) (collecting cases which have
read similar provisions as optional safe-harbors). It is not clear to me that the Plaintiffs contend
otherwise, and I therefore need not address the matter further.
30
applicable.”153 Thus, the LPA permits a single-member Conflicts Committee, but
requires that any Conflicts Committee approve conflicted transactions by majority
vote.
There are a number of uncertainties concerning the Special Approval process
at issue here, but it is sufficient to the denial of Plaintiffs’ motion to address only
one: did the Conflicts Committee consist of one member or three at the time it
rendered its finding, and was that finding by a majority of the members of the
Committee? The events that transpired between February 22, and February 28,
2016, are less than clear in the present record. The record indicates that the directors
initially created a three-person Conflicts Committee. Importantly from the point of
view of protection of the unitholders, the LPA provides that all members of the
Conflicts Committee, among other qualifications, shall be unaffiliated with the
General Partner.154 However, two members, Collins and Turner, were affiliates of
the General Partner and thus not eligible to serve. In other words, the Committee
initially established by the Director Defendants was not composed of contractually
qualified members.
The Committee thereafter is referred to in the record—consistently, but not
exclusively—as a one-man Committee, consisting solely of Mr. Williams. I assume
153
LPA § 1.1.
154
See id.
31
Mr. Williams to be unaffiliated, and that, to the extent the Directors appointed a
Committee consisting solely of Mr. Williams who thereafter rendered a
contractually-sufficient approval, the Defendants would have arrived thereby at a
safe harbor with respect to the Issuance. Reaching safe harbors, metaphorical or
actual, typically requires staying within the channel as marked. There remains a gap
in the record, warranting further development, to determine whether the strictures of
the Special Approval process were met here. That is, who was actually on the
Committee, when, and was majority approval received? The Plaintiffs have raised
serious questions about the constitution and actions of the Conflicts Committee, and
I have doubts whether the Defendants will be able to rely on the Special Approval
process here; nonetheless, this issue will benefit from further factual development,
and the Plaintiffs’ motion on this issue is denied.155
2. Distribution vs. Issuance
Regardless of whether the Defendants have complied with the safe harbor
provisions of the LPA in connection with the Issuance viewed as a contractually
conflicted issuance of units, the Plaintiffs argue that the transactions at issue were
also a contractual distribution of ETE assets to some, but not all, partners, and were
155
At oral argument, I expressed skepticism as to whether a contractually-sufficient Special
Approval process could be found on the current record, as well as skepticism as to whether the
record developed at trial would shed more light on the issue than the current record. I remain
skeptical as to the former point, but on review, and in light of our summary judgment standard, I
find further factual development desirable.
32
therefore in breach of the LPA. As described above, with respect to the issuance of
units, the LPA provides broad discretion and authority regarding ETE’s ability to
issue securities (although a conflicted issuance must be “fair and reasonable” to
ETE). A “distribution,” by contrast, is subject to different strictures. I note that the
term distribution is not defined in the LPA.
The LPA generally requires distributions made to partners qua partners to be
pro rata.156 Prior to Amendment 5, the LPA provided three provisions for
distributions: pro rata cash distributions pursuant to Section 6.3, pro rata
distributions of Partnership Securities pursuant to Section 5.10(a) titled “Splits and
Combinations,” and liquidation distributions pursuant to Section 12.4. 157 All
distributions, prior to Amendment 5 to the LPA, were required to be pro-rata. It is
the Plaintiffs contention that the Issuance is a distribution pursuant to Section 6.3,
and is thus impermissible; they also argue that the Issuance violates new Section
6.3(g), added by Amendment 5 contemporaneously with the Issuance. The Plaintiffs
seek a judgment confirming this assertion; Defendants seek a judgment to the
contrary. The parties’ arguments are set forth in more detail, below.
156
See LPA §§ 5.10, 6.3.
157
See id. §§ 5.10, 6.3, 12.4.
33
a. The Parties’ Contentions
The Plaintiffs seek a judgment that the Offering and the Issuance breached the
LPA because they were non-pro-rata distributions, made to some, but not all, limited
partners in their capacity as partners. Principally, the Plaintiffs point to Section
5.10(a) to buttress their argument that the present transactions were unauthorized
distributions. Section 5.10(a) titled “Splits and Combinations”158 provides the
following:
[s]ubject to Section 5.8(d), the Partnership may make a Pro Rata
distribution of Partnership Securities to all Record Holders or may
effect a subdivision or combination of Partnership Securities so long as,
after any such event, each Partner shall have the same Percentage
Interest in the Partnership as before such event, and any amounts
calculated on a per Unit basis or stated as a number of Units are
proportionately adjusted.159
Section 5.8(d), referenced above in Section 5.10(a), is under the portion of the LPA
titled “Issuances of Additional Partnership Securities” and provides that:
[n]o fractional Partnership Securities shall be issued by the Partnership.
If a distribution, subdivision or combination of Units pursuant to
Section 5.8 would result in the issuance of fractional Units, each
fractional Unit shall be rounded to the nearest whole Unit (and a 0.5
Unit shall be rounded to the next higher Unit). 160
Reading these two provisions together, the Plaintiffs make the unremarkable
observation that they “demonstrate conclusively that an issuance of equity securities
158
I note the LPA provides that headings are “for reference purposes only.” See LPA § 1.2.
159
Id. § 5.10(a) (emphasis added).
160
Id. § 5.8(d) (emphasis added).
34
can be a distribution.” 161 Further, they assert that this “issuance of Convertible Units
was a distribution of Partnership Securities to select limited partners in their capacity
as Partners” and thus did not comply with Section 5.10(a)’s pro rata requirement.162
They note that the default under DRUPLA is that distributions are pro rata, unless
the operative partnership agreement provides otherwise. 163
Additionally, the Plaintiffs argue that Section 6.3(g), which was added by
Amendment 5—the purpose of which, presumably, was to permit the Issuance—was
breached. 164 Section 6.3 is titled “Requirement and Characterization of
Distributions; Distributions to Record Holders.”165 Amendment 5 modified Section
6.3(a) by removing a prior provision there that required cash distributions to be pro
rata; the Issuance creates two classes of units which receive cash distributions
differently, and would run afoul of the original provision.166 The amended Section
6 provides at 6.3(g) that “any distribution constituting an Extraordinary Distribution
shall be distributed to the General Partner and the holders of the Common Units and
Series A Convertible Units, in accordance with their respective Percentage Interests
. . . .”167 Extraordinary Distribution is a defined contractual term and includes “any
161
Pls’ Answering Br. 30.
162
Id. at 26.
163
See 6 Del. C. § 17–504.
164
See Pls’ Opening Br. 41.
165
LPA § 6.3.
166
See Juray Aff. Ex. 41§ 1(f).
167
Id. (emphasis added).
35
non-cash distribution.” 168 The Plaintiffs’ argue that the Convertible Units
transaction was itself an extraordinary distribution not in accordance with a
unitholder’s percentage interest in violation of the LPA. 169
The Defendants have moved on this issue as well, arguing for judgment in
their favor on Count I of the Complaint, which asserts that the Issuance is an
impermissible distribution. The Defendants ask that I find that the transactions
regarding the Issuance were permitted issuances of equity securities governed by
Section 5.8 of the LPA, and were not “distributions,” as a matter of law. 170
The Defendants rely principally on Section 5.8(a) of the LPA, set out in full
above. That section gives the Director Defendants and the General Partner broad
authority to issue securities. The Defendants also point to Section 7.6(f), which
provides that in the context of conflicted transactions, when assets are contributed
“in exchange for Partnership Securities, the Conflicts Committee, in determining
whether the appropriate number of Partnership Securities are being issued, may take
into account . . .” various factors. 171 This specific provision, according to the
Defendants, cannot be harmonized with the broad definition of “distribution”
proposed by the Plaintiffs.
168
Juray Aff. Ex. 41 § 1(a).
169
See Pls’ Opening Br. 57–58.
170
See Defs’ Opening Br. 27–28.
171
LPA § 7.6(f) (emphasis added).
36
None of the provisions in the LPA defines issuance or distribution.
b. Defaults
DRULPA supplies certain default rules for distributions. Section 17-504
titled “Allocation of distributions” provides the following:
[d]istributions of cash or other assets of a limited partnership shall be
allocated among the partners, and among classes or groups of partners,
in the manner provided in the partnership agreement. If the partnership
agreement does not so provide, distributions shall be made on the basis
of the agreed value (as stated in the records of the limited partnership)
of the contributions made by each partner to the extent they have been
received by the limited partnership and have not been returned. 172
This provision provides that the LPA governs how distributions are to be allocated,
and provides for pro rata distributions where an LPA is silent. DRULPA, however,
does not define the term “distribution.”
c. This LPA
The primary question here is what constitutes an “issuance” and what
constitutes a “distribution” under the terms of the LPA. Granting the parties’ cross-
motions would require me to determine the meaning of these terms under this
particular LPA to the extent necessary to characterize the actions of the Defendants
as either a “distribution” or an “issuance,” or, more precisely, to determine whether
the transaction here was an “issuance” that was also a “distribution,” as a matter of
law.
172
6 Del. C. § 17–504 (emphasis added).
37
The Defendants put forward the following definition: “a ‘distribution’ is a
disbursement of the partnership’s assets to the partners by virtue of their status as
equity holders.”173 The Defendants assert that a distribution is “akin to a corporate
dividend” and “occurs when a partnership, without receiving anything in return,
gives its assets or earnings to its partners by virtue of their status as equity
holders.”174 Thus, Defendants argue Section 6.3 and the term distribution under the
LPA are triggered only where a transfer is made to a partner, which transfer “also
(a) lacks consideration, and (b) disburses the wealth of the partnership to its
partners.”175 The Defendants point out that a 2015 “stock split” “was indisputably a
‘distribution’” as it was given to all common unitholders for no consideration. 176
According to the Defendants, the issuance of securities to certain partners in return
for surrender of other securities at issue here was a transfer for value, and thus not a
distribution.
The Plaintiffs define distribution as any transfer “to partners in their capacity
as partners,” and assert there is no requirement that “the transfer must be for no
173
Defs’ Opening Br. 27. See Defs’ Answering Br. 2 (“[A] distribution is the MLP equivalent of
a dividend: it is the disbursement of wealth from ETE to its partners. Where, as here, ETE is
offering securities to its partners in exchange for consideration, the transaction is an issuance
subject to Section 5.8, not a distribution subject to Section 6.3.”).
174
Defs’ Answering Br. 5 (emphasis added). See id. at 12 (arguing “a distribution occurs when a
partnership ‘gives’ its wealth to its partners, not when it offers to exchange new partnership
securities for consideration”).
175
Defs’ Answering Br. 16.
176
Defs’ Answering Br. 17–18.
38
consideration.”177 That is, a distribution “occurs when cash, Partnership Securities
or other property of the Partnership is allocated among the Partners.” 178 Therefore,
the Plaintiffs argue, the present transactions, which allocated valuable rights to some
(but not all) partners, constitute an issuance that was also a distribution. 179
Additionally, the Plaintiffs argue that to the extent there is any ambiguity in the LPA
it should be construed against the Defendants.180
Because the LPA does not define “distribution,” I must look to the use of the
term in context in the LPA, and to everyday usage, to supply a meaning. 181 Starting
with usage, Black’s Law Dictionary defines partnership distribution as “[a]
partnership's payment of cash or property to a partner out of earnings or as an
advance against future earnings, or a payment of the partners' capital in partial or
complete liquidation of the partner's interest.” 182 The text of the LPA itself,
177
Pls’ Opening Br. 43 (emphasis in original). The Plaintiffs state that, for example, the issuance
of incentive rights to an employee who is also limited partner “would not be a distribution because
the issuance was not in his capacity as a limited partner.” Id. at n.144.
178
Pls’ Opening Br. 42.
179
See Pls’ Opening Br. 45 (“When securities are issued as a distribution, such an issuance is
subject to the Partnership Agreement’s terms limiting permissible distributions.”); Pls’ Answering
Br. 29 (“The Convertible Units Distribution (and the Rights Distribution) involved a transfer of
securities from the Partnership to Partners in their capacity as Partners. That type of securities
issuance is a distribution.”).
180
See Nov. 9, 2016 Oral Arg. Tr. 20:15–21:6.
181
See Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del. 2006) (“Under
well-settled case law, Delaware courts look to dictionaries for assistance in determining the plain
meaning of terms which are not defined in a contract.”).
182
PARTNERSHIP DISTRIBUTION, Black's Law Dictionary (10th ed. 2014) (Westlaw); See
Interactive Corp. V. Vivendi Universal, S.A., 2004 WL 1572932, at *3 (Del. Ch. June 30, 2004)
(using the same definition of “partnership distribution”).
39
including specifically its usage of the terms “issuance” and “distribution,” appears
consistent with the Black’s definition. The parties indulge in close textual analysis
of the various provisions of the LPA to bolster their arguments that partial summary
judgment is appropriate on the issue.
I decline, however, to find as a matter of law on the record now before me
what “distribution” means in the context of the issuance of convertible units in return
for common units. The record is incomplete, or in dispute, on issues helpful to my
analysis, including whether the Issuance was a true exchange for value, or simply a
way to provide favored unitholders a device to avoid the implication of a Merger
which would make cash distributions in the intermediate future unlikely. I note that
such issues overlap with consideration of the role of the Conflicts Committee, and
whether the Issuance, seen through the lens of a conflicted transaction, was fair and
reasonable to ETE. A trial to vindicate the protections extended unitholders under
the LPA will provide a record on which to evaluate the process undertaken and
decisions made by the Defendants in connection with these transactions. I find it
appropriate to defer this necessarily context-driven analysis of the Issuance as a
contractual “distribution” pending such record.
3. The Defendants’ Motion Regarding Count III
Pursuant to Section 13.1(g) of the LPA, the General Partner is permitted to
amend the LPA without the approval of other Partners where it is “an amendment
40
that the General Partner determines to be necessary or appropriate in connection with
the authorization of issuance of any class or series of Partnership Securities pursuant
to Section 5.8.”183 The Defendants seek a judgment that “Count III fails as a matter
of law to the extent it relates to a breach by the General Partner for approving the
Amendment because Section 13.1(g) forecloses any such claim.” 184
The Defendants conceded at oral argument that an amendment made under
Section 13.1(g) is subject to review under Section 7.9(b) of the LPA. 185 That Section
requires that subject actions be taken in “good faith,” and requires that the person
taking the action “must believe that the determination or other action is in the best
interests of the Partnership.”186 I am unable to determine on this record that the
General Partner’s imposition of Amendment 5 meets this standard. 187 Therefore, I
cannot find that Section 13.1(g) was satisfied as a matter of law, thus this portion of
Defendants’ motion is denied.
4. Other Issues
The parties briefed a number of other issues that may be mooted or informed
by my analysis here, or may, alternatively, be ripe for partial summary judgment.
183
LPA § 13.1(g).
184
Defs’ Opening Br. 32.
185
Nov. 9, 2016 Oral Arg. Tr. 88:13–89:4.
186
LPA § 7.9(b).
187
I make no determination whether this amendment would also be subject to the conflicts
provisions of Section 7.9(a) of the LPA.
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The Parties should confer and inform me of any issues they believe remain to be
determined before trial.
IV. CONCLUSION
The Cross Motions for Summary Judgment are DENIED as provided in the
discussion above. Counsel should confer about what issues remain outstanding, and
provide a form of order consistent with this Memorandum Opinion.
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In re Energy Transfer Equity L.P. Unitholder Litigation
Combined Opinion