In re Energy Transfer Equity, L.P. Unitholder Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE ENERGY TRANSFER EQUITY, )
L.P. UNITHOLDER LITIGATION ) C.A. No. 12197-VCG

MEMORANDUM OPINION

Date Submitted: April 16, 2018
Date Decided: May 17, 2018

Michael Hanrahan, Paul A. Fioravanti, Jr., Kevin H. Davenport, Samuel L. Closic,
and Eric J. Juray, of PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware;
OF COUNSEL: Marc A. Topaz, Lee D. Rudy, Eric L. Zagar, Michael C. Wagner,
and Grant D. Goodhart, III, of KESSLER TOPAZ MELTZER & CHECK, LLP,
Radnor, Pennsylvania, Attorneys for Plaintiffs.

Rolin P. Bissell, James M. Yoch, Jr., and Benjamin M. Potts, of YOUNG
CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF
COUNSEL: Michael C. Holmes, John C. Wander, Craig E. Zieminski, and Andrew
E. Jackson, 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 and Benjamin Z. Grossberg, of ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; OF COUNSEL: M. Scott Barnard, Michelle Reed, and
Lauren E. York, of AKIN GUMP STRAUSS HAUER & FELD LLP, Dallas, Texas,
Attorneys for Defendant William P. Williams.

GLASSCOCK, Vice Chancellor
 Now-Chief Justice Strine once colorfully described the results of precipitous

or imprudent action thus: it is easier to throw pizza at a wall than to clean it up.1 The

pie of the ill-fated merger of ETE and Williams hit the wall of the downturn in the

energy industry in early summer of 2016. The cleanup has, from a legal point of

view, been arduous, and is ongoing. This matter involves but one slice of that pie.

Certain ETE unitholders, purportedly on behalf of a class, challenge the

issuance of securities by ETE in a private offering going largely, but not exclusively,

to insiders. ETE made the issuance in contemplation of the merger with Williams.

According to the Defendants, ETE was, as a result of the cash required to

consummate the merger in light of the economic downturn, between the Scylla of a

downgraded credit rating—devastating for an MLP like ETE—and the Charybdis of

halting cash distributions to unitholders—a proposition also disastrous to an MLP.

In the Defendants’ telling, the private offering was a device to assuage concerns of

the credit rating agencies without cutting distributions; to the Plaintiffs, it was a

hedge meant to protect insiders from the anticipated bad effects of the coming

merger. I find it was both.

The private offering is described in detail in this Memorandum Opinion, but

in abbreviated form subscribers agreed to accumulate credit redeemable as common

1
Auriga Capital Corp. v. Gatz Props., 40 A.3d 839, 882 n.184 (Del. Ch. 2012), aff’d sub nom.
Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012). Clearly, the Chief Justice
does not own dogs like mine, who would make short work of such cleanup sans complaint.
2
units in ETE after nine quarters, in return for forgoing some distributions over that

period, and were guaranteed to accrue some quantum of such credit even if

distributions were reduced or cancelled. The benefit to ETE was that the forgone

distributions would allow the company to avoid some borrowing, lowering the debt-

to-earnings ratio, the metric that most concerned the rating agencies. The private

offering was not contingent on the merger closing.

In the event, ETE was able to avoid the merger. The energy market has

boomed, and the value of ETE units has soared. The Plaintiffs brought this action,

alleging that the private offering is prohibited under the terms of the LPA, and that

the contemplated redemption would result in a windfall for subscribers at the

expense of the Partnership and its non-subscribing unitholders. ETE strenuously

disagrees. The matter was tried over three days, and post-trial briefing and argument

ensued. The Plaintiffs seek cancellation of the private offering. The nine-quarter

life of the offering ends on May 18, 2018, at which point the accumulated credit will

be redeemed for common ETE units; therefore, equitable relief, according to the

Plaintiffs, to be meaningful must issue before that time. Accordingly, my

consideration of the matter has been abbreviated; this rough-and-ready

Memorandum Opinion is the result.

Upon consideration of the evidence, I find that the private offering does not

represent an impermissible distribution prohibited by the LPA. The offering is a

3
conflicted transaction, however, which under that contract must be fair and

reasonable to the Partnership. The Defendants failed to effectively take advantage

of safe harbor provisions that would have demonstrated, conclusively, compliance

with the “fair and reasonable” standard. The issue, then, is one of fact, with the

burden on the Defendants to demonstrate the fairness of the transaction. I find that

the Defendants have failed to demonstrate that the private offering was fair to the

Partnership. Thus, in issuing the securities, the General Partner breached the LPA.

The Plaintiffs have represented that damages are unavailable. They seek

equitable relief, the cancellation of the securities. I find that they have failed to

establish that equity should so act here, however.

My reasoning follows.

I. BACKGROUND

Trial took place over three days, during which ten witnesses gave live

testimony. The parties submitted over 900 exhibits, and sixteen depositions were

lodged. I give the evidence the weight and credibility I find that it deserves.

A. The Parties

Defendant Energy Transfer Equity, L.P. (“ETE”) is a Delaware master limited

partnership (“MLP”) headquartered in Dallas, Texas.2 ETE’s family of companies

2
PTO ¶ 16.
4
owns over 71,000 miles of oil and gas pipelines.3 ETE’s common units trade on the

New York Stock Exchange under the symbol “ETE.”4

Defendant LE GP, LLC is a Delaware limited liability company.5 LE GP,

LLC (the “General Partner”) directs all of ETE’s activities, and ETE is managed by

the General Partner’s board of directors (the “Board”).6 In accordance with this role,

the Board appoints ETE’s executive officers.7

Defendant Kelcy L. Warren has served as the Chairman of the Board since

August 15, 2007, and as of February 12, 2016, he held 187,739,220 ETE common

units, representing about 18% of ETE’s outstanding common units.8 Since August

15, 2007, Warren has also served as the CEO and Chairman of the board of Energy

Transfer Partners, GP, L.P. (“ETP GP”).9 ETP GP is the general partner of Energy

Transfer Partners, L.P. (“ETP”), a member of the ETE family of companies.10

Defendant John W. McReynolds has served as ETE’s President since March

2005, and he has been a General Partner director since August 2005.11 As of

February 12, 2016, McReynolds owned 25,084,555 ETE common units.12

3
Id.
4
Id.
5
Id. ¶ 22.
6
Id. ¶¶ 18–19.
7
Id. ¶ 25.
8
Id. ¶¶ 29, 33.
9
Id. ¶ 35.
10
Id. ¶¶ 26, 84.
11
Id. ¶ 38.
12
Id. ¶ 37.
5
 Defendant Ted Collins, Jr. served on the Board from November 2015 to

October 31, 2016, and he served as an ETP GP director from August 2014 until he

passed away on January 28, 2018.13 As of February 12, 2016, Collins held 351,639

ETE common units.14

Defendant K. Rick Turner has served on the Board since October 2002, and

he has also served as a director of Sunoco L.P., a member of the ETE family of

companies.15 As of February 12, 2016, Turner owned 362,095 ETE common units.16

Defendant William P. Williams began working in the oil and gas industry in

1967, and he served as ETP’s Vice President of Engineering and Operations and

Vice President of Measurement before his retirement in 2011.17 Williams was

appointed to the Board in March 2012.18 As of February 12, 2016, Williams owned

5,399,835 ETE common units.19

Defendant Marshall S. McCrea III began serving as a General Partner director

in December 2009, and he has been an ETP GP director since 2009.20 Since

November 2015, McCrea has served as the ETE family’s Group Chief Operating

13
Id. ¶¶ 42–44. The parties have agreed to dismiss Collins from this action with prejudice.
14
Id. ¶ 40.
15
Id. ¶¶ 26, 47.
16
Id. ¶ 45.
17
Id. ¶ 50; Trial Tr. 188:21–22.
18
PTO ¶ 51.
19
Id. ¶ 48.
20
Id. ¶ 53.
6
Officer and Chief Commercial Officer.21 As of February 12, 2016, McCrea held

2,347,200 ETE common units.22

Defendant Matthew S. Ramsey has served on the Board since July 17, 2012.23

Since November 2015, Ramsey has been the President and COO of ETP GP, on

whose board he also serves.24 As of February 12, 2016, Ramsey held 52,317 ETE

common units.25

Defendant Ray Davis held 67,216,204 ETE common units as of February 12,

2016.26 Effective August 15, 2007, Davis retired from his positions as co-CEO and

co-Chairman of ETP, and co-Chairman of ETE.27 Davis resigned from the Board

on February 13, 2013, and he resigned from the ETP board on June 30, 2011.28

Defendant Richard D. Brannon began serving on the Board on March 16,

2016.29 He was not on the Board when it approved the issuance challenged by the

Plaintiffs in this action.30

21
Id. ¶ 54.
22
Id. ¶ 52.
23
Id. ¶ 55.
24
Id. ¶¶ 56–57.
25
Id. ¶ 55.
26
Id. ¶ 58.
27
Id. ¶ 59.
28
Id. ¶¶ 60–61.
29
Id. ¶ 64.
30
Id.
7
 Plaintiff Lee Levine is a New Jersey lawyer who has held ETE common units

at all relevant times.31 Plaintiff Chester County Employees’ Retirement Fund has

likewise held ETE common units at all relevant times.32

B. Factual Background

1. ETE Agrees to Merge with Williams, and Industry Conditions
Decline

On September 28, 2015, ETE and several of its affiliates entered into an

agreement to merge with the Williams Companies, Inc. (“Williams Co.”),33 an

energy infrastructure company.34 Under the merger agreement, Williams Co. would

receive, among other things, $6.05 billion in cash, which ETE would finance with

new debt.35 ETE would also assume approximately $4.2 billion of Williams Co.’s

outstanding debt.36 Moreover, ETE expected to become the parent of Williams

Partners, L.P. (“WPZ”), which had $19.1 billion in outstanding debt.37 As a result,

ETE predicted that its consolidated debt would increase by over $30 billion if the

merger closed.38

31
Id. ¶¶ 11–12.
32
Id. ¶ 14.
33
I refer to The Williams Companies as “Williams Co.” to differentiate references to William P.
Williams, member of the Board, who I denominate as “Mr. Williams” or “Williams.”
34
Id. ¶¶ 80, 87. Interested readers may find a more complete description of the merger in Williams
Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch. June 24, 2016), aff’d, 159
A.3d 264 (Del. 2017).
35
JX 405.0078.
36
Id.
37
Id. at .0046.
38
Id.
8
 Soon after the merger was announced, the energy sector entered a precipitous

decline.39 From September 2015 to the end of February 2016, the price of crude oil

fell by 26.3%, and the price of natural gas dropped 39.1%.40 During this period,

ETE’s unit price fell by 65.5%.41 As a result of the downturn, the credit market for

energy companies experienced significant stress.42 Access to credit was reduced,

and energy companies were at increased risk of a credit rating downgrade from the

major rating agencies (Moody’s Investors Services, Standard & Poor’s, and Fitch

Group).43 Indeed, between December 2015 and March 2016, Moody’s issued fifty-

two credit rating downgrades in the energy sector alone.44 One group of analysts

covering the MLP sector noted that “the rating agencies have raised the bar for

what’s acceptable in terms of debt/EBITDA levels.”45

These developments spelled trouble for ETE. As an MLP, ETE distributed

all of its available cash to unitholders every quarter.46 Thus, ETE depended on

access to capital markets to fund its growth.47 Because credit ratings determine

access to credit and the cost of debt, it was particularly important for the ETE family

39
Trial Tr. 460:13–17; JX 138.0003.
40
JX 678.0020–21.
41
Id. at .0021.
42
Id. at .0022.
43
Id. at .0010, .0022.
44
Id. at .0022.
45
JX 242.0002.
46
JX 678.0009; Trial Tr. 229:3–17.
47
JX 678.0010; Trial Tr. 60:12–14.
9
of companies to maintain its ratings.48 But that was becoming increasingly difficult

by late 2015, when the rating agencies began to express concern about ETE’s credit

outlook.49 Notably, from September 2015 to February 2016, ETE’s and Williams

Co.’s EBITDA projections for 2016 to 2018 declined by between 14% and 22%,

which increased ETE’s forecasted debt-to-EBITDA ratio (“D/E”).50

In January 2016, the rating agencies downgraded Williams Co. and WPZ and

lowered ETE’s credit outlook from “positive” to “stable.”51 Tom Long, ETE’s CFO,

described the latter step as “shooting a little missile across the bow,” by which he

meant that the rating agencies were signaling the importance of taking action to

improve ETE’s credit outlook.52 The rating agencies focused in particular on ETE’s

D/E, which they expected to be kept at 4.0x or lower; Long told the agencies that if

the ratio went above 4.0x, an equity issuance would be on the table.53 For its part,

Perella Weinberg Partners (“Perella”), ETE’s financial advisor, predicted that ETE’s

D/E would reach 4.7x if the merger with Williams Co. closed.54 ETE therefore

needed to take swift action to assuage the rating agencies, because if it did nothing,

it faced the prospect of a credit rating downgrade.55 But deleveraging need not come

48
JX 678.0010; Trial Tr. 60:15–24.
49
Trial Tr. 227:24–229:24.
50
JX 556.0018–19; JX 900.0004.
51
JX 52; JX 56.0002; JX 63; Trial Tr. 233:17–20.
52
Trial Tr. 233:3–20.
53
Id. at 230:19–231:19; JX 49.0002; JX 53.0001.
54
JX 175.0004.
55
Trial Tr. 233:21–234:6, 409:1–4, 609:17–20; Beach Dep. 144:1–6.
10
“in one fell swoop;” instead, the rating agencies look for “an actionable plan to

achiev[e] a longer term leveraging target.”56

As the Plaintiffs’ expert testified, a rating downgrade would have put ETE in

“a very bad situation.”57 For one thing, ETE’s and its subsidiaries’ credit ratings are

linked, so a downgrade at ETE could have led to downgrades at other companies in

the ETE family.58 And because ETE’s subsidiaries were only one step above a high-

yield rating, a downgrade at those subsidiaries would have had several negative

consequences, including a substantial increase in the cost of debt and a reduction in

access to capital markets.59 Moreover, a downgrade at ETE would have made it

much more costly to finance or refinance its debt.60 To illustrate this, one of the

Defendants’ experts showed that a one-step downgrade would have increased ETE’s

interest expense by approximately $607 million between 2016 and 2018.61 Finally,

a downgrade would have harmed ETE’s competitiveness and commercial

reputation.62

56
Trial Tr. 470:18–23.
57
Id. at 63:6–7.
58
Id. at 504:18–21; McCrea Dep. 48:6–13, 56:2–57:2.
59
Trial Tr. 238:1–15, 504:18–505:14; see also JX 242.0005 (“For midstream companies with
investment grade ratings, defending that rating remains of utmost importance.”).
60
JX 678.0033; Beach Dep. 256:16–21.
61
Trial Tr. 606:7–8; JX 678.0034.
62
McCrea Dep. 54:4–19.
11
 2. ETE Explores Deleveraging Options

ETE began considering deleveraging options in early 2016.63 ETE’s first step

was to decide to keep distributions flat at $0.285 per quarter for several quarters.64

That was a departure from past practice: from the first quarter of 2014 to the third

quarter of 2015, ETE’s distributions had steadily increased.65 ETE also retained

Perella to, among other things, help it devise a plan to assuage the rating agencies.66

Perella presented ETE with several options, including issuing equity, renegotiating

the terms of the Williams Co. merger so that ETE would pay with equity rather than

cash, selling assets, and cutting distributions.67 Several of these options were

infeasible in early 2016.68 For example, given industry conditions at the time, asset

sales were not an attractive option.69 What is more, ETE tried (and failed) to

persuade Williams Co. to accept equity rather than cash as merger consideration.70

ETE was further stymied by the merger agreement, which contained several

conduct-of-business restrictions that constrained its deleveraging options.71

63
Trial Tr. 232:5–17.
64
Id. at 246:5–15; JX 124.0003; JX 181.0006.
65
PTO ¶ 21.
66
Trial Tr. 448:6–8; JX 76.0001; JX 136.0004.
67
JX 136.0006, .0014; JX 175.0005, .0007.
68
E.g., Beach Dep. 259:12–21; Trial Tr. 251:1–252:8.
69
Trial Tr. 138:20–139:4.
70
DX7, at 190:21–193:15.
71
JX 35, § 4.01(b); Trial Tr. 251:6–8.
12
 As just noted, Perella’s analyses included distribution cuts as one means of

reducing leverage.72 For example, in its February 8, 2016 presentation to the General

Partner and ETP boards, Perella explained that ETE had three “holistic” options for

reducing its leverage: issuing equity, adjusting the merger consideration, and cutting

distributions.73 Perella noted that a partial or complete distribution cut following the

merger would pose “[n]o execution risk,” in addition to satisfying the rating agencies

and not requiring Williams Co.’s approval.74

Perella was not the only entity that analyzed distribution cuts for ETE. In

January 2016, Goldman, Sachs & Co. performed such an analysis.75 Indeed, in mid-

February, ETE President John McReynolds told Goldman that ETE was open to the

possibility of a distribution cut.76 And starting in early February 2016, ETE itself

began analyzing scenarios in which distributions were cut, though neither ETE’s

management projections nor its presentations to the rating agencies included any

cuts.77

Moreover, around this time, some market participants expressed the view that

ETE would eventually cut distributions. For example, on January 15, 2016, Wells

72
E.g., JX 81.0002; JX 82.0005; JX 86.0005; JX 94.0006, .0008, .0010, .0022–23; JX 136.0009.
73
JX 175.0005.
74
Id.
75
JX 75.0001–4; JX 93.0001, .0037–39.
76
JX 191.
77
JX 155.0002; JX 157.0002–03; JX 170.0001; JX 199.0001; JX 205.0001–02; JX 253.0003–04;
Trial Tr. 271:15–272:8.
13
Fargo described ETE as a “[p]otential [c]andidate” for a distribution cut owing to its

“[h]igh leverage [and] limited ability to access capital markets.”78 And on February

10, financial services provider Raymond James sent the following email to a General

Partner director: “The latest report of Feb 9, it seems like these are coming

daily….obviously the ETE group is trading as if a distributions cut is coming….good

luck.”79 During a February 25 earnings call, Warren himself stated that while there

were no “contemplated distribution cuts at ETP whatsoever,” they were nevertheless

an “option” and “certainly possible.”80

Nevertheless, Perella and ETE aver they were not seriously considering a

distribution cut at this time.81 Long explained at trial that, in the MLP sector,

distribution cuts are “the option of last resort, kind of the nuclear option.”82 Warren,

for his part, testified that maintaining distributions was critical to ETE, and that

cutting distributions would cause the market to “lose[] its trust” in the company,

thereby “affect[ing] [its] equity price for [the] long term.”83 And Andrew Bednar, a

Perella partner who advised ETE on deleveraging options, noted that distribution

cuts are “the last thing on the list.”84 Bednar elaborated: “[I]n the MLP universe,

78
JX 66.0008.
79
JX 184.0001.
80
JX 280.0013.
81
Trial Tr. 253:1–10, 441:3–8, 456:14–22.
82
Id. at 247:4–6.
83
Id. at 391:24–392:13.
84
Id. at 456:8.
14
distributions are viewed as sacrosanct, and they drive a lot of the valuation of the

underlying unit. And so if you look at history, ‘what’s past is prologue,’ you would

have to expect a pretty severe reaction to any distribution cut.”85 Bednar’s take on

distribution cuts finds some support in market evidence: between July 2015 and

March 2016, MLPs that engaged in distribution cuts underperformed the S&P by

45.4% in the year after the cuts.86

3. ETE Decides on a Public Offering, Which Then Becomes a Private
Offering

On February 8, 2016, the Board evaluated a term sheet for a public offering

of securities with a guaranteed $0.11 of cash or accrual per quarter.87 The discussion

included a presentation by Perella on various deleveraging options.88 Four days

later, Long sent Don Chappel, Williams Co.’s CFO, a draft Form S-3 for the public

offering that guaranteed only $0.11 in cash or accrual if common unit distributions

were less than $0.11 (the “Initial Terms”).89 If the common unit distributions were

above $0.11, however, the participating unitholders would receive $0.11 in cash and

an accrual, redeemable for common units, for the amount in excess of $0.11.90

85
Id. at 456:24–457:5.
86
JX 688.010.
87
JX 175.0001, .0012–13.
88
Id. at .0001–03.
89
JX 200.0001, .0021.
90
Id. at .0022; Trial Tr. 318:19–319:1.
15
 On February 13, 2016, Chappel informed Long that Williams Co. believed

the public offering required Williams Co.’s consent and that he (Chappel) would not

allow Williams Co.’s auditors to release the financials necessary to file the S-3.91

That was essential to the public offering, because to issue the securities, ETE was

required to file an S-3 with the Securities and Exchange Commission.92 The same

day Long and Chappel had this conversation, attorneys representing Williams Co.

and ETE exchanged emails about the disputed consent requirement.93 The next day,

Chappel sent Long an email stating that the consent “matter will not be resolved in

the next several days,” and ignoring a request from Long to designate a person to

work on obtaining consents for the proposed S-3.94 Within a few minutes, Thomas

Mason, ETE’s general counsel, and McReynolds, ETE’s president, exchanged

emails that included Chappel’s response.95

On the morning of February 15, Latham & Watkins LLP, which represented

ETE, sent an updated S-3 and LPA Amendment in regard to the proposed offering,

with redlines, to ETE’s leadership and its financial and legal advisors.96 Those

attachments are fully redacted.97 Nevertheless, a comparison of redlines to

91
JX 200.0001; JX 215.0002; Trial Tr. 315:12–316:11.
92
17 C.F.R. § 210.3–05.
93
JX 206.0001–03.
94
JX 209.0001.
95
Id.
96
JX 233.0001–02.
97
Id. at .0003–10.
16
Amendment No. 5 from Latham’s drafts of February 12 and February 2598 reveals

an increase in unit quarterly accrual from $0.11 to $0.285.99 That is, the updated S-

3, for the first time, contained a massive accrual increase, which would be a lucrative

hedge for subscribers in the event of distribution cuts.

That afternoon, the Board met via telephone.100 The meeting minutes are

redacted; what is disclosed does not include any discussion about a change in the

unit accrual rate from $0.11 to $0.285.101 In the Board resolutions, the Board

purported to approve the public issuance of units on “substantially the terms set forth

in the term sheet previously provided to the Board.”102 Yet a redline comparison of

the February 8 term sheet previously provided to the Board and the term sheet

actually approved by the Board on February 15 reveals a substantial change, from

the $0.11 guaranteed accrual to a $0.285 guaranteed accrual.103 Moreover, on the

same day as the February 15 board meeting, a Perella employee outlined the

differences between the “Old Plan” and the “New Plan.”104 The “Old Plan” allowed

98
An email from Latham on February 25, 2016 stated that the attached February 25, 2016 redline
was “marked to the last version distributed in the [February 15, 2016 at 9:56 am] email below.”
JX285.0001.
99
Compare JX 202.0004–6, with JX 285.0024.
100
JX 213.0001.
101
Id. at .0001–02.
102
JX 220.0001.
103
JX 219.0019–20.
104
JX 216.0001; JX 219.0001.
17
for an $0.11 distribution per quarter, while the “New Plan” guaranteed $0.285 in

quarterly accruals105 (the “Revised Terms”).

Long testified that, at the February 15 meeting, he gave a report on his

February 13 conversation with Chappel—the one in which, according to Long,

Chappel stated that “he was not going to allow [Williams Co.’s] auditors to provide

the consent” necessary to consummate the public offering.106 Thus, the evidence

supports the conclusion that the Board knew on February 15 that Williams Co. would

likely refuse to take the steps required for ETE to complete the public offering. The

record is silent as to whether ETE bothered to communicate the Revised Terms to

Williams Co.

On February 18, Long emailed Chappel “to follow up concerning ETE’s

proposed offering of convertible preferred units that we discussed last Friday. I

know that our respective legal counsels have spoken and I understand that Williams

has taken the view that its consent to the offering is required under the merger

agreement.”107 Chappel responded that “[t]he Williams Board unanimously

concluded not to consent to the proposed offering. Accordingly, we have advised

Williams’ external auditors not to work on their consent, as ETE is not entitled to

105
JX 216.0001; Trial Tr. 321:7–322:2.
106
Trial Tr. 315:12–316:11.
107
JX 244.0002 (emphasis added).
18
proceed with this offering without the consent of Williams’ Board.”108 Thus, ETE

would not be able to consummate the public offering. Long testified that he was

“floored” by Williams Co.’s refusal, and his colleagues at ETE similarly claimed to

be “very disappointed.”109 But, as noted above, this testimony is not credible,

because Long himself admitted that on February 13, Chappel had already told him

that he (Chappel) would not allow Williams Co.’s auditors to provide the

consents.110 And Long admitted that he shared this conversation with the Board on

February 15—three days before the February 18 email exchange with Chappel.111

At the February 15 meeting, the Board approved the public offering of

convertible preferred units.112 The plan involved offering securities to all

unitholders. A participating unitholder would receive one security for each common

unit she elected to participate (the “Participating Units”).113 In return, she would

forgo quarterly distributions payable on common units above $0.11 per unit for eight

quarters.114 During the plan period, the securities and Participating Units could not

be transferred.115 After the plan period, each security would convert into a fraction

of a common unit based on the security’s “Conversion Value” divided by the

108
Id.
109
Trial Tr. 260:19, 261:9–12.
110
Id. at 315:12–316:11.
111
Id.
112
JX 213.0002; JX 220; Trial Tr. 254:3–255:6.
113
JX 219.0003.
114
Id.
115
Id. at .0004.
19
“Conversion Price.”116 The Conversion Value would increase each quarter by

$0.285 minus the distribution paid to the unitholder.117 The Conversion Price would

be 95% of the five-day volume-weighted average closing price of ETE’s common

units at the time of the offering. This five-percent discount was purportedly designed

to encourage participation by common unitholders.118 It was lower than the discount

(10-15%) suggested for that purpose by Perella.119

Several features of the public offering as approved by the Board on February

15 bear emphasis. First, if ETE cut common distributions to zero during the plan

period, each security would still receive a quarterly accrual of $0.285.120 Thus, as

Perella put it, “accretion is realized all the [way] up to 29c even with no distribution,”

so there was “limited downside to no distribution.”121 Put differently, even if the

common unitholders received nothing in a given quarter, the securities would be

entitled to receive $0.285 in deferred value.122 Second, if ETE kept common

distributions flat at $0.285 per quarter, each security would receive a $0.11 cash

distribution per quarter plus a $0.175 quarterly accrual.123 On the other hand, if ETE

raised common distributions to, say, $0.40 per quarter, each security would be

116
Id.
117
Id.
118
JX 103.0004; Trial Tr. 257:3–7, 472:21–475:15.
119
Id.
120
JX 216.0001.
121
JX 225.0001.
122
JX 216.0001.
123
Id.
20
entitled only to a $0.11 quarterly cash distribution plus a $0.175 accrual.124 If,

however, $0.40 per quarter was declared, at the discretion of the General Partner, to

be an “Extraordinary Distribution,” securities would be entitled to receive that

amount as a quarterly cash distribution.125 “Extraordinary Distribution” was defined

to include any non-cash distribution or “any cash distribution that is materially and

substantially greater, on a per unit basis, than the Partnership’s most recent regular

quarterly distribution, as determined by [the] general partner.”126

According to ETE, the purpose of the proposed public offering was to help

the company reduce its leverage.127 ETE expected to issue the entire $1 billion of

equity allowed under the merger agreement it had entered into with Williams Co.,

and it expected to save the same amount via the public offering.128 In making these

predictions, ETE assumed (i) a 68% participation rate among common unitholders,

and (ii) cash savings of $0.175 per unit per quarter during the plan period.129

Nevertheless, a member of the Perella team commented at the time that, “[i]f cash

distributions on common units are cut to zero, the preferred . . . distributions don’t

124
Id.
125
JX 219.0007.
126
Id.
127
JX 213.0001.
128
Trial Tr. 257:8–17, 405:9–17, 480:19–24; Long Dep. 45:20–47:17; JX 214.0006–07.
129
Trial Tr. 284:3–19; JX 212.0059; Long Dep. 46:1–7.
21
conserve cash in and of themselves – rather, they represent a wealth transfer from

non-participating to participating units.”130

Long had met with the rating agencies before the February 15 meeting to

discuss the terms of the proposed public offering.131 After the Board approved the

issuance, Long attended additional meetings with the agencies in which he explained

how the public offering would help ETE “get[] ahead of the big downturn in the

commodity markets that we were seeing.”132 The rating agencies were “very

positive” about the plan.133 Moreover, they told Long that the securities would be

treated as equity rather than debt, a decision that was important to him.134 Notably,

Plaintiff Lee Levine testified that he would not have suffered any harm if ETE had

consummated the public offering.135 Similarly, Murray Beach, the Plaintiffs’ expert,

conceded that a public offering of securities would be inherently fair and

reasonable.136 Beach also testified that he would not object to a situation in which

ETE engaged in a public offering, but the only participants were those that in fact

participated in the private offering (the “Private Offering,” as described below).137

130
JX 217.0002.
131
E.g., JX 193.0001.
132
Trial Tr. 259:5–15.
133
Id. at 259:16–17; see also id. at 397:11–398:2; JX 450.0002.
134
Trial Tr. 257:18–258:8.
135
Id. at 15:7–14; see also JX 644.0009 (“Plaintiff does not allege that he would have suffered
harm had ETE offered the Convertible Units to all ETE common unitholders through the planned
public offering.”); JX 645.0008 (same).
136
Trial Tr. 58:4–7.
137
Id. at 58:8–16.
22
 As just noted, Williams Co.’s refusal to obtain the necessary consents meant

that ETE could not consummate the public offering. Thus, on February 22, 2016,

the Board decided to change course and pursue the Private Offering of securities.138

Notably, a private placement would not require Williams Co.’s consent.139 Long

testified at trial about the thinking behind pursuing a private placement:

We’ve done all the work on this. We’ve done all the analysis on it. It’s
a great instrument. The rating agencies have been very pleased with it.
What do we do? We decided at that point that we would go into what
we call a . . . private placement, which, you know, we’ve done private
placements before . . . on the equity side. It’s not something that’s new
to us. It’s something we’re actually pretty experienced at. And we
decided to go that path.140

The terms of the Private Offering were largely the same as those of the public

offering embodying the Revised Terms approved on February 15.141 To repeat, those

terms were amended substantially from the Initial Terms the Board had been

considering, before February 15, with Perella’s guidance. Significantly, at the

February 15 meeting, the Board was informed of for the first time, and approved,

the guaranteed accrual term the Perella had described as a “wealth transfer” to

subscribers in case distribution were cancelled.142 In addition, in ultimately

approving the Private Offering on February 28, the Board approved two additional

138
Id. at 261:21–262:9, 407:8–17; JX 258.0001.
139
JX 258.0001.
140
Trial Tr. 261:23–262:9.
141
Compare JX 219.0003–04, with JX 410.0001–02.
142
JX 219.0019–20.
23
changes. First, the plan period was extended from eight to nine quarters.143 Second,

electing unitholders would be allowed to transfer their securities and Participating

Units during the plan period if they received permission from the General Partner.144

The discretion of the General Partner to waive the transfer restrictions was uncabined

by the terms of the Private Offering.145

The plans and their changes may be summarized as follows:

Term February 12 Initial February 15 February 28
Terms Revised Terms Private Issuance
Minimum $0.11 $0.285 $0.285
Quarterly Accrual
or Cash
General Partner No No Yes
Waiver for
Transfers
General Partner Yes Yes Yes
Waiver for
Extraordinary
Distributions
Timeframe 8 quarters 8 quarters 9 quarters

4. The Conflicts and Audit Committees Approve the Issuance

At the February 22 meeting where it agreed to pursue the Private Offering,

the Board also decided to establish “a conflicts committee made up of Messrs.

Collins, Williams and Turner” to evaluate the proposed transaction.146 Collins and

143
JX 410.0002.
144
Id.
145
Id.
146
JX 258.0002.
24
Bill Williams were both long-time friends of Kelcy Warren, who had asked them to

join the Board.147 Before his appointment to the Board, Williams had never served

as a director, and prior to the events of this case, he had never been on a conflicts

committee.148 Williams’ background is in engineering; before his retirement in

2011, he had served as ETP’s Vice President of Engineering and Operations and

Vice President of Measurement.149 As of February 12, 2016, Williams owned

5,399,835 ETE common units, and he did not participate in the issuance of

securities.150 For his part, Collins held 351,639 ETE common units as of February

12, 2016, and he also did not participate in the issuance.151

As it turned out, neither Collins nor Turner was eligible to serve on the

Conflicts Committee. Under ETE’s limited partnership agreement (the “LPA”), the

Conflicts Committee could not include directors who were “officers, directors or

employees of any affiliate of the General Partner.”152 Turner served on the Sunoco

board, and Collins was an ETP director;153 both of those entities were “affiliate[s] of

the General Partner.”154 Thus, Bill Williams was the only member of the Conflicts

147
Trial Tr. 190:13–20; Aug. 24, 2016 Williams Dep. 13:9–16, 16:8–12; Collins Dep. 13:19–15:2.
148
Aug. 24, 2016 Williams Dep. 13:6–8, 76:7–11.
149
PTO ¶ 50; Trial Tr. 188:21–22.
150
PTO ¶ 48.
151
Id. ¶ 40.
152
JX 1.0008.
153
JX 315.0001.
154
Id.
25
Committee—as established by the Board on February 22—who was actually eligible

to serve.

At some point after the February 22 meeting, Turner told General Partner

director Matthew Ramsey that he was ill and would not be able to serve on the

Conflicts Committee.155 Ramsey, in turn, shared the news with Thomas Mason,

ETE’s general counsel.156 Later, on February 24, Mason informed investment bank

Moelis & Company that “[t]he two members of the Conflicts Committee are Ted

Collins and Bill Williams” and that “the Conflicts Committee needs to make the

decision to hire Moelis.”157 Yet the Board never designated a two-man Conflicts

Committee, and Moelis was never engaged to advise the Conflicts Committee,

apparently because it had a conflict.158 In any event, Mason told Williams that the

Conflicts Committee should hire FTI Consulting, Inc. and Akin, Gump, Strauss,

Hauer and Feld, LLP as financial and legal advisors, respectively.159 Williams

testified that if FTI and Akin Gump were good enough for Mason, they were good

enough for him.160 Williams also testified that Mason was responsible for selecting

Collins to chair the Conflicts Committee.161

155
Trial Tr. 506:12–21.
156
Id. at 506:21–507:3.
157
JX 272.0001.
158
Conly Dep. 35:22–36:12.
159
Aug. 24, 2016 Williams Dep. 74:7–75:7.
160
Trial Tr. 152:8–10.
161
Aug. 24, 2016 Williams Dep. 86:17–20.
26
 Meanwhile, ETE’s lawyers at Latham realized that Collins and Turner were

ineligible to serve on the Conflicts Committee.162 Latham made this discovery on

the morning of February 26—the day the Committee held its first meeting.163

Latham also realized that the LE GP LLC agreement required that a separate

committee—the Audit and Conflicts Committee (the “A&C Committee”)—approve

the issuance as well.164 The A&C Committee was a standing Board committee; at

the time, it consisted of Williams, Collins, and Turner.165

Having made these belated discoveries, Latham and Akin Gump decided on

February 26 to create “revised resolutions” for the February 22 meeting.166 The

“revised resolutions” purportedly reflected the Board’s decision to have (i) Williams

serve as the sole member of the Conflicts Committee, and (ii) Williams and Collins

serve as members of the A&C Committee.167 Specifically, Latham’s “revised

resolutions” stated that the Board “appoints Messr. Williams to serve as the sole

member of the Conflicts Committee,” and that “Ted Collins, Jr. and Messr. Williams

comprise a majority of the members of the ‘Audit and Conflicts Committee.’”168

The minutes of the February 22 meeting do not match these purported resolutions:

162
JX 315.0001
163
Id.
164
Id.
165
JX 405.0119.
166
JX 318.0001
167
Id. at .0007–10.
168
Id.
27
the Board appointed “Messrs. Collins, Williams and Turner” to the Conflicts

Committee, and there is no mention in the minutes of the A&C Committee.169

Moreover, as discussed below, there is no evidence in the record that the Board ever

adopted Latham’s “revised resolutions.”

Also on February 26, Latham learned from Mason that Turner was in fact

unable to serve on the A&C Committee.170 Latham then informed Akin Gump that

Mason did not “have any issues with our single member Conflicts Committee and

allowing the Conflicts Committee to review and evaluate the transaction with the

Audit and Conflicts Committee.”171 In other words, Bill Williams would serve as

the sole member of the Conflicts Committee, which would evaluate the issuance

alongside the A&C Committee, of which he formed half the membership.

The Board never held a meeting to reconstitute the Conflicts Committee.172

Within a few days of the February 22 meeting, however, the directors individually

learned that Williams would be the Committee’s sole member.173 Several directors

testified that they did not see any problem with Williams serving as a one-man

Conflicts Committee.174 Warren thought Williams would “do his duty” because

169
JX 258.0001–02.
170
JX 813.0001.
171
Id.
172
Trial Tr. 515:4–6; Aug. 24, 2016 Williams Dep. 157:23–158:15.
173
Trial Tr. 410:9–411:1, 512:18–20; JX 330.0001.
174
Trial Tr. 411:2–4, 507:22–508:1; McCrea Dep. 67:8–11.
28
“he’s a very capable, very knowledgeable guy, plus he had financial advisors and

legal advisors as well.”175 Ramsey, a General Partner director, felt the same way:

I’ve known Bill Williams for probably 25 years. There couldn’t be a
more honest person in the world than Bill Williams. He’s also a large
unitholder at ETE. So he had every reason in the world to look out for
the best interest of the partnership. He’s smart, he’s a very, very good
engineer and worked for the company for a number of years, and I was
completely comfortable with him doing the analysis and . . . making a
recommendation to the full board.176

McCrea, another General Partner director, similarly explained that he was

comfortable with Williams serving as a one-man Conflicts Committee because “he

is an independent director, has been in the industry and knowledgeable of this

business for . . . 60 years probably.”177

The Conflicts Committee purportedly held its first meeting on the afternoon

of February 26, 2016.178 The meeting was a telephone conversation between

Williams and Christine LaFollette of Akin Gump, and the minutes reflect that it

lasted twenty minutes.179 The minutes also reflect that Williams approved engaging

Akin Gump to provide legal advice to the Conflicts Committee, and that Williams

and LaFollette discussed the Committee’s duties and the possible engagement of FTI

as the Committee’s financial advisor.180 LaFollette apparently explained to Williams

175
Trial Tr. 411:6–9.
176
Id. at 508:4–13.
177
McCrea Dep. 68:13–16.
178
JX 324.
179
Id. at .0001–03.
180
Id. at .0002–03.
29
that he would serve a “dual role” “as the sole member of the Committee and, along

with . . . Collins, as a member of the Audit and Conflicts Committee.”181 Williams

then supposedly told LaFollette that he was familiar with the terms and purpose of

the scuttled public offering, since he had been serving on the Board when it was

considering that transaction.182 Finally, Williams purportedly told LaFollette to set

up a meeting with FTI for the morning and afternoon of February 27 to discuss the

issuance.183

Again, the minutes say the February 26 meeting lasted twenty minutes.184

And Williams testified that the meeting lasted somewhere between fifteen and thirty

minutes.185 But the phone records Williams produced in this litigation reflect only

a twenty-seven-second phone call from LaFollette on February 26.186 Williams’

counsel represented that those phone records were “the relevant phone records

covering the meetings of the Conflicts Committee.”187 The weight of the evidence,

then, suggests that the February 26 meeting did not take place as described in the

minutes. It also bears mentioning that on the morning of this purported meeting,

Collins had signed an engagement letter with FTI, supposedly in his capacity as

181
Id. at .0002.
182
Id. at .0003.
183
Id.
184
Id.
185
Aug. 24, 2016 Williams Dep. 97:6–8; Trial Tr. 156:22–23.
186
JX 702; Trial Tr. 159:11–163:7.
187
JX 814.0001; see also JX 815.
30
“Chairman” of the Conflicts Committee.188 Indeed, Collins apparently did not learn

he would not serve on the Conflicts Committee until February 27, one day after the

purported February 26 meeting.189 There is no record that he attended the February

26 meeting, however.

In any event, the Conflicts Committee and the A&C Committee held a joint

telephonic meeting on the morning of February 27.190 Williams, Collins, Akin

Gump, and FTI attended the meeting.191 FTI began by discussing its experience in

MLP transactions.192 It then described the purpose and terms of the proposed

issuance, explaining “its goal of aiding in the reduction of the Partnership’s

outstanding debt to a ratio of less than 4.0x EBITDA, by conserving cash for debt

reduction by allowing certain common unitholders to . . . forgo a significant portion

of the distributions on their common units.”193 FTI ended by describing the report it

would provide the Conflicts Committee regarding the proposed issuance, and

Williams requested that FTI include in this report “an analysis of the pro forma

results to the Partnership of the Proposed Transaction in the alternative events where

188
JX 306.0001, .0011.
189
JX 819.0002.
190
JX 333.
191
Id. at .0001.
192
Id. at .0002.
193
Id.
31
the Partnership’s pending merger with The Williams Companies, Inc. is or is not

consummated.”194

The Conflicts Committee and the A&C Committee met again that

afternoon.195 FTI provided its analysis of the proposed issuance.196 It explained that

it had obtained Perella’s financial model, which it modified “to reflect (i) the

extension of the proposed Plan Period from 8 quarters to 9 quarters and (ii) certain

assumptions made regarding synergies resulting from the Partnership’s planned

merger with The Williams Companies, Inc.”197 FTI stated that the proposed issuance

would be “a valuable mechanism to aid in the reduction of the Partnership’s

outstanding debt to a ratio of less than 4.0x EBITDA.”198 Williams purportedly

asked a question about a chart in a Perella presentation he had reviewed about three

weeks before in connection with a meeting of the General Partner and ETP boards.199

But Williams admitted he did not have a copy of the Perella presentation at the time

of the February 27 meeting, and indeed FTI sent it to him a mere two minutes before

that meeting ended.200

194
Id.
195
JX 347.
196
Id. at .0002.
197
Id.
198
Id.
199
Id.; Trial Tr. 174:5–11.
200
Trial Tr. 174:12–14; JX 348; JX 360.
32
 The Conflicts Committee and the A&C Committee met one last time on the

morning of February 28.201 The meeting started with Williams “ratify[ing] and

adopt[ing] the FTI engagement letter,” which Collins had signed two days earlier.202

Long and Mason then explained to the Committees the purpose of the proposed

issuance, which (to repeat) was to “reduc[e] the ratio of the Partnership’s outstanding

debt to EBITDA to less than 4.0x.”203 Long explained at trial that he “reinforced

once again how important [the issuance] was from a rating standpoint.”204 Later in

the meeting, Williams asked FTI to present its final report to the Committees;205

Williams testified that he could not recall whether he had read the report before the

meeting.206 FTI made its presentation, explaining the terms of the issuance and

setting out its projections of the impact of the issuance in various scenarios.207

Specifically, FTI projected that if the issuance took place at a participation rate of

61%, ETE’s leverage ratio would be 4.2x by the first quarter of 2018.208 If, however,

ETE did not go through with the issuance, the leverage ratio would reach 4.5x by

that time.209 If ETE went ahead with the issuance and was able to renegotiate certain

201
JX 391.
202
Id. at .0002.
203
Id.
204
Trial Tr. 265:20–21.
205
JX 391.0004.
206
Trial Tr. 217:2–4.
207
JX 391.0004.
208
Id.; Trial Tr. 551:1–7.
209
JX 391.0004.
33
Williams Co. contracts, the ratio would be 3.9x by the first quarter of 2018.210 On

the other hand, if the merger with Williams Co. did not close, the ratio would decline

to 2.8x by that time even without the issuance.211 FTI ultimately concluded that,

even if ETE could not achieve the projected 61% participation rate, there was still

value in doing the issuance.212 Nothing in the record indicates that FTI described

the specific accrual or conversion terms as desirable as compared to other potential

terms, and there is no indication either Committee considered the fairness of those

terms to ETE.

After FTI gave its presentation, the A&C Committee voted to approve the

proposed issuance.213 Collins then left the meeting, and Williams, acting as the sole

member of the Conflicts Committee, approved the issuance as well.214 Williams

testified at trial that he voted in favor of the transaction because “it appeared to me

that this is exactly what we needed,” namely, “generat[ing] cash to reduce the

debt.”215 Notably, a “WHEREAS” clause in the resolution formalizing the Conflicts

Committee’s approval stated that “the Board resolved on February 22, 2016 to

210
Id.
211
Id.
212
Trial Tr. 551:11–16; see also JX 391.22 (“[T]he Company expects to employ additional
measures to reduce its leverage ratio from approximately 5.0x in Q1 2016 to 4.2x by the end of
Q1 2018 . . . .”).
213
JX 391.0005.
214
Id.
215
Trial Tr. 187:20–21, 212:5–6.
34
establish a Conflicts Committee . . . consisting solely of Mr. William P. Williams.”216

That was untrue: the Board had resolved on February 22 to create “a Conflicts

Committee made up of Messrs. Collins, Williams and Turner.”217

While FTI’s representative testified that Williams was “engaged” during the

February 27 afternoon meeting,218 and the Conflicts Committee’s minutes reflect

that he asked questions during the meetings,219 Williams’ own testimony makes clear

that he did not understand several important aspects of the transaction he

approved.220 For example, Williams did not understand how the quarterly

distributions worked, and he did not know how the $0.11 preferred payment term

had been determined.221 Williams apparently believed that the securities had no cost

to ETE; when asked to provide a basis for that belief, he explained that he “just felt

like it didn’t cost ETE anything to do this.”222 Notably, Williams never considered

how the securities would affect ETE if the company cut its common distributions.223

216
JX 391.0025.
217
JX 258.0002.
218
Trial Tr. 539:9–13.
219
E.g., JX 347.0002.
220
Trial Tr. 178:5–179:21.
221
Id. at 180:12–15; Aug. 24, 2016 Williams Dep. 51:25–52:4.
222
Aug. 24, 2016 Williams Dep. 166:7–12.
223
Trial Tr. 183:4–9.
35
 5. The Board Approves the Issuance, and the Securities Are Issued

The Board met on the afternoon of February 28 to discuss the proposed Private

Offering.224 Warren had scheduled this meeting on February 26 on the assumption

that, by February 28, the Conflicts Committee would be finished with its work.225

At the February 28 meeting, the Board heard presentations from Mason, FTI, Akin

Gump, and Williams.226 According to the minutes, LaFollette, the Akin Gump

attorney, told the Board that Collins, Turner, and Williams “had acted as a ‘special

committee’ of the Board.”227 In fact, there is no evidence that ETE ever formed such

a “special committee,” or that those three individuals served together in any capacity

related to the issuance. In any event, the Board unanimously approved the issuance,

an amendment to the LPA (“Amendment 5”), a private placement memorandum,

and related transactions.228 The resolutions memorializing these decisions contained

a “WHEREAS” clause stating that “the Board previously authorized the formation

of a Conflicts Committee . . . consisting of William P. Williams.”229 Again,

224
JX 382.
225
JX 295.0001.
226
JX 382.0001–02.
227
Id.
228
Id. at .0002; JX 394.0147–49; Trial Tr. 408:8–9. The Plaintiffs point out that after the Board
approved Amendment 5 and the private placement memorandum, Latham made several changes
to the documents that were not formally approved by the Board. JX 395.0001. For example,
Amendment 5’s tax allocation provisions were changed to “use book gain or book loss as opposed
to taxable income or deduction to true up at the end of the conversion period.” JX 388.0001; see
also JX 395.0247. And the private placement memorandum was altered to, among other things,
calculate $6.56 as the Conversion Price. JX 395.0118.
229
JX 384.0005.
36
however, that was untrue; the Board had actually authorized the formation of a

Conflicts Committee consisting of Williams, Turner, and Collins. Another

“WHEREAS” clause stated that “the Board has reaffirmed its delegation of authority

to the Conflicts Committee and the A&C Committee with respect to the Proposed

Transaction and the Related Arrangements.”230 Importantly, setting aside the

“WHEREAS” clauses just mentioned, the February 28 resolutions do not contain

any provision resolving to ratify the decision to use a one-man Conflicts

Committee.231

Warren testified that he voted in favor of the issuance because “[t]he rating

agencies were calling our chief financial officer, saying, When are you going to

announce this? And the rug had been pulled out from under us by Williams. So we

felt the need to move quickly and demonstrate to the rating agencies that we were

doing this.”232 McCrea, for his part, explained that “[w]e had to do something. This

was the lowest risk, quickest thing we could do to start addressing our leverage

concerns.”233 Ramsey similarly thought that the issuance “was the absolute best path

on the private and also subsequently on the public offering to start the delevering

process and satisfy the rating agencies.”234 Notably, when ETE approved the

230
Id. at .0006.
231
JX 384.0007–10.
232
Trial Tr. 408:21–409:3.
233
McCrea Dep. 65:24–66:2.
234
Trial Tr. 512:6–9.
37
issuance, the General Partner directors and their advisors believed that the merger

with Williams Co. would close.235

After the issuance was approved, ETE offered securities to several individuals

and entities,236 including Warren, McReynolds, McCrea, Ramsey, Ray Davis, and

Richard Brannon.237 McReynolds decided to participate with approximately 85% of

his common units, while McCrea elected to participate with only half of his units.238

A member of the Perella team noted at the time that “[o]nly 3 institutions, Kayne

[Anderson], Tortoise and Neuberger [Berman]” were invited to participate, and that

there were “some aunts & uncles” on the list of individual invitees.239 Notably, ETE

had over 400 institutional investors at the time of the issuance.240

About half of the invitees listed in a document titled “LIST FOR PPM” were

“unrelated parties,” meaning “people who are not officers or directors at Energy

Transfer, are not 5 percent owners and are not family members of any of those two

categories.”241 On the other hand, several of these “unrelated” invitees were former

employees of the ETE family or relatives of insiders.242 In total, at least 70% of the

individuals on the “LIST FOR PPM” were either affiliated with ETE in some

235
Id. at 253:11–13, 413:7–17, 458:13–17.
236
E.g., id. at 513:6–9.
237
PTO ¶¶ 30, 37, 52, 55, 58, 63.
238
Compare id. ¶¶ 37, 52, with JX 436.0008.
239
JX 398.0002.
240
Trial Tr. 123:21–22, 310:18–5.
241
Id. at 513:1–514:3; JX 407.
242
Trial Tr. 514:9–16; McReynolds Dep. 140–21–147:5; JX 407.
38
capacity or related to individuals with such an affiliation.243 Moreover, contrary to

FTI’s assumption that ETE would achieve a 61% participation rate, only about

31.5% of ETE’s outstanding common units ended up participating in the issuance.244

Kayne and Tortoise, both of which are sophisticated institutional investors,

chose not to participate in the issuance.245 Kevin McCarthy, one of Kayne’s co-

managing partners, explained that Kayne “didn’t think the security was attractive

enough to participate. We thought that the liquidity constraints given the time in the

marketplace and the uncertainty with the Williams merger was not being offset by

attractive enough economics.”246 McCarthy further explained that Kayne chose not

to participate for purely business reasons.247 Specifically, Kayne calculated that the

securities would offer a return that was only 3.8% higher than that offered by ETE’s

common units.248 Tortoise also declined to participate, apparently because the

discount offered by the securities was insufficient to justify the lack of liquidity.249

Neuberger participated, but with only one-sixth of its common units.250

243
This list does not include Kelcy Warren or his wife, both of whom participated in the issuance.
JX 407; PTO ¶ 103.
244
PTO ¶ 101.
245
McCarthy Dep. 95:19–96:18, 97:7–98:4; Trial Tr. 269:2–3.
246
McCarthy Dep. 97:22–98:4.
247
Id. at 98:11–13.
248
JX 416.0003.
249
Trial Tr. 270:18–271:1.
250
JX 281; JX 638.
39
 6. The Rating Agencies React to the Issuance, and ETE Announces
Distribution Cuts

Fitch, one of the three major rating agencies, described the issuance as “a

proactive step in enhancing [ETE’s] liquidity and managing acquisition leverage in

a credit-neutral manner.”251 Fitch also noted that the issuance had “no immediate

impact to ETE’s ratings,” and that it considered the securities to be equity.252 Long

testified at trial that based on his meetings and phone calls with the agencies, he

believed that they saw the issuance as “very much a positive step.”253 Long also

suggested that issuing the securities prevented negative credit-rating actions.254

Notably, ETE’s unit price did not experience a statistically significant decline in the

wake of the issuance.255

On April 18, 2016, about two months after the Board approved the Private

Offering, ETE filed an updated Form S-4 announcing that it did “not expect to make

any cash distributions with respect to its common units prior to the distribution

payable with respect to the quarter ending March 31, 2018.256 According to Long,

this announcement meant that ETE was certain to cut distributions if the merger with

Williams Co. closed.257 Long testified that ETE decided to cut distributions after it

251
JX 504.0001.
252
Id.
253
Trial Tr. 224:9–13.
254
Id. at 225:5–8.
255
E.g., id. at 596:17–20.
256
JX 550.0046.
257
Trial Tr. 278:10–14.
40
received updated projections from Williams Co. on April 7.258 Those projections,

Long explained, showed that expected EBITDA and distributable cash flow had

dropped significantly compared to earlier projections.259 Moreover, while Williams

Co. initially described these updated projections as “the Downside Case,”260

Williams Co. later claimed on April 15 that “additional adjustments” were not

necessary to make them the most realistic set of projections.261

7. The Merger Does Not Close, and ETE Decides Not to Cut
Distributions

When the issuance took place, ETE and its advisors expected that the merger

with Williams Co. would close.262 For reasons that are irrelevant to the analysis

here, ETE ultimately terminated the merger agreement on June 29, 2016.263 ETE

ended up not cutting distributions: About a month after the merger was terminated,

ETE announced that its distributions to common unitholders would stay flat at

$0.285 per unit.264 On October 26, 2017, ETE announced that it would increase its

quarterly distributions to $0.295 per common unit.265 And, in February 2018, ETE

raised distributions again, this time to $0.305 per common unit.266 The plan period

258
Id. at 274:2–10; JX 534; see also McCrea Dep. 73:20–74:25.
259
Trial Tr. 274:16–275:4.
260
JX 534.0001.
261
JX 546.0001.
262
Trial Tr. 253:11–13, 413:7–17, 458:13–17.
263
Williams Cos., Inc., 2016 WL 3576682, at *2; PTO ¶ 105.
264
PTO ¶ 106.
265
Id. ¶ 107.
266
JX 701.0001.
41
for the securities is set to end on May 18, 2018, at which point the securities will

convert into common units based on the formula described above.267

C. This Litigation

Plaintiff Lee Levine commenced this action on April 12, 2016, and I granted

his request for expedition on April 22, 2016. The action was consolidated with a

similar matter on May 3, 2016. Discovery commenced, and an amended complaint

was filed on August 29, 2016. The Complaint contains four counts, and they boil

down to the assertion that the issuance (and related transactions) breached various

provisions of the LPA.268 The parties cross-moved for summary judgment on

September 28, 2016; I denied those motions on February 28, 2017, and July 31,

2017.269

The case proceeded to trial, from February 19, 2018, to February 21, 2018. In

post-trial briefing, the Plaintiffs advanced two primary theories of liability. First,

the Plaintiffs argue that the issuance was a non-pro-rata distribution of Partnership

Securities in violation of Section 5.10(a) of the LPA. Second, the Plaintiffs argue

that the issuance violated Sections 7.6(f) and 7.9 of the LPA, which address conflict

transactions. According to the Plaintiffs, these breaches of the LPA render the

267
PTO ¶ 104.
268
Compl. ¶¶ 162–202.
269
In re Energy Transfer Equity L.P. Unitholder Litig., 2017 WL 782495, at *2 (Del. Ch. Feb. 28,
2017); In re Energy Transfer Equity L.P. Unitholder Litig., 2017 WL 3500224, at *1 (Del. Ch.
July 31, 2017).
42
securities “void and a nullity.”270 The Plaintiffs therefore seek cancellation of the

securities and a permanent injunction preventing the conversion or transfer of the

units. Also pending is the Plaintiffs’ request for class certification under Court of

Chancery Rule 23.271

II. ANALYSIS

A. I Find No Violation of LPA Section 5.10(a)

The Plaintiffs argue that the private issuance is a “distribution,” and as such,

was required to be pro rata. Because it was not, per the Plaintiffs, the issuance is

void. The Plaintiffs rely on Section 5.10(a), which states:

Subject 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.272

The term “distribution” is not defined in the LPA.273 The Defendants counter

that a distribution is a transfer to partners of value, not an offer to sell securities as

took place here. They point to the common English meaning of distribution and,

270
Pls.’ Opening Post-Trial Br. 62.
271
Because of my decision here, I do not address class certification, which is opposed by ETE.
The parties should inform me, in light of this Memorandum Opinion, whether I need to address
the issue of class certification.
272
JX 1.0024 (emphasis added). A “Record Holder” is the registered owner of a Common Unit.
Id. at .0011.
273
JX 1.0005-13; JX 2; JX 4; JX 6; JX 15; JX 451.0003–05.
43
among other sources, Black’s Law Dictionary.274 Black’s defines a “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.”275 All parties

agree that “distribution” in the context of the LPA is unambiguous; they simply

disagree as to the meaning. I find the term unambiguous, and that it does not include

an issuance of a security for value, as here.

I first note that the LPA provides the General Partner discretion to issue

securities on terms it finds appropriate. Section 5.8(a) allows the Partnership to issue

additional Partnership Securities “for any Partnership purpose” and “for such

consideration and on such terms and conditions as the General Partner shall

determine, all without the approval of any Limited Partners.”276 Next, while the LPA

does not define “distribution,” it refers to distributions in several locations. Section

1.1 defines a “Record Date” as the date established by the General Partner to

identify, among other things, the “identity of Record Holders entitled to receive any

report or distribution or to participate in any offer.”277 Section 5.8(b) states that each

274
The Plaintiffs argue that the Defendants’ use of extrinsic evidence does not pertain to “the
meaning of distribution in the specific context of the specific provisions of this specific Partnership
Agreement” and should be ignored. Pls.’ Opening Post-Trial Br. 38.
275
Interactive Corp. v. Vivendi Universal, S.A., 2004 WL 1572932, at *3 (Del. Ch. June 30, 2004)
(citing Black’s Law Dictionary 488 (7th ed. 1999)).
276
JX 1.0023.
277
Id. at .0011.
44
Partnership Security may be authorized with rights determined by the General

Partner, including “the right to share in Partnership distributions.”278 Finally,

Section 5.8(d) states that:

(d) No 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).279

The Plaintiffs point to Sections 5.8(a), 5.8(d) and 5.10(a) to argue that the

LPA uses the term distribution as a type of issuance that may be with or without

consideration or conditions.280 Consequently, the “Plaintiffs’ principal claim is that

the issuance was a non-Pro Rata distribution of Partnership Securities in violation of

§5.10(a).”281

In the alternative, the Plaintiffs argue that, if I find “distribution” in the context

of the LPA to be ambiguous, contra proferentem will apply and I must construe the

meaning of distribution in Section 5.10(a) against the Defendants.282

278
Id. at .0023 (emphasis added).
279
Id. (emphasis added).
280
Pls.’ Opening Post-Trial Br. 3.
281
Id. at 37.
282
Id. at 2–3 (citing SI Mgmt., L.P. v. Wininger, 707 A.2d 37, 43-44 (Del. 1988) (applying contra
proferentem in an insurance contract); 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.” (internal quotation marks omitted))).
45
 The Defendants, in turn, argue that “a distribution is a one-way transfer”

without consideration.283 Because, in the Defendants’ view, the issuance was a “two-

way, value-for-value exchange, it was not a distribution.”284 The Defendants point

out that the subscribers exchanged, among other things of value, $518 million in

foregone cash distributions over nine quarters285 in return for the security, providing

value—needed cash flow relief—for ETE. Because the Private Offering was not a

distribution, Section 5.10(a) does not apply.286

1. The Term Distribution Is Not Ambiguous

“Limited partnership agreements are a type of contract,” and must be

construed “in accordance with their terms to give effect to the parties’ intent.”287 To

determine the parties’ intent,

[w]e give words their plain meaning unless it appears that the parties
intended a special meaning. When interpreting contracts, we construe
them as a whole and give effect to every provision if it is reasonably
possible. A meaning inferred from a particular provision cannot
control the agreement if that inference conflicts with the agreement’s
overall scheme. We consider extrinsic evidence only if the contract is
ambiguous. A contract is not ambiguous simply because the parties do
not agree upon its proper construction, but only if it is susceptible to
two or more reasonable interpretations.288

283
Defs.’ Opening Post-Trial Br. 51, 56–58.
284
Id. at 51.
285
Trial Tr. 34:13–16.
286
Defs.’ Opening Post-Trial Br. 58–59.
287
Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 360 (Del. 2013).
288
Id. at 360 (internal citations and quotation marks omitted).
46
When determining the plain meaning of a particular term in a contract, I may refer

to the “ordinary dictionary meaning.”289 However, “more than one dictionary

definition” does not itself make a term ambiguous because “if merely applying a

definition in the dictionary suffices to create ambiguity, no term would be

unambiguous.”290

The threshold question is whether the term distribution is ambiguous under

the LPA. I find that it is not. The use of the term “distribution” in the LPA, read as

a whole, refers to something transferred to the unitholders, as, for instance, a

payment; rather than something that is offered to the unitholders for sale, which they

may accept or reject. I note that this accords with the definition of partnership

distribution in Black’s Law Dictionary: “[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.”291

Not only does this definition comport with the common definition of the term,

it is consonant with the LPA as a whole.292 Section 5.8(a) allows the Partnership to

issue Partnership Securities. The General Partner is given discretion to determine

289
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 740 (Del. 2006).
290
Id. (internal quotation marks omitted).
291
Interactive Corp., 2004 WL 1572932, at *3 (citing Black’s Law Dictionary 488 (7th ed. 1999)).
292
See Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926 (Del.
2017).

47
the terms and other conditions of an issuance, including the right to share in

distributions, in Sections 5.8(a) and (b). The Plaintiffs’ interpretation would make

nonsense of this provision. It would provide that an issuance of securities would be

constrained as a pro rata distribution under Section 5.10(a); a condition that such an

issuance, practically, could never meet. The failure of a single partner to subscribe

would result in a “distribution” which did not result in “each Partner [having] the

same percentage interest in the Partnership as before such event.”293 Under the

Plaintiffs’ view, such an issuance of securities would thus be ultra vires, and void.

I cannot read the LPA thus without doing damage to its meaning.

The Plaintiffs’ attempt to circumvent this problem, I confess, eludes me. As

I understand it, the Plaintiffs contend that a sale and issuance of Partnership

Securities may constitute a valid distribution under Section 5.10(a), and the pro rata

requirement be satisfied, so long as the offer is pro rata, even if certain partners reject

the securities.294 The Plaintiffs do not conflate the offer itself with a distribution,

however. They maintained stoutly at oral argument that the securities are in some

sense distributed to the partners at the time of the offer, as they metaphorically are

laid before the partners, waiting to be picked up. If a partner spurns the transaction,

no matter; there has been a pro rata distribution in the placing of the securities within

293
JX 1.0024.
294
Apr. 16, 2018 Oral Arg. Tr. 36:1–37:23 (DRAFT).
48
her grasp. In addition to being entirely too metaphysical for my poor abilities, the

Plaintiffs’ formulation does not comport with the plain language of Section 5.10(a).

Section 5.10(a) requires that “after any such [distribution], each Partner shall have

the same Percentage Interest in the Partnership as before such [distribution].”295 In

the Plaintiffs’ scenario, assuming at least one partner declines to purchase, this

condition would be violated.

Section 5.8(a) allows the Partnership to issue Partnership Securities. The

General Partner is given discretion to determine the terms and conditions of an

issuance in Sections 5.8(a) and (b). Section 5.10, on the other hand, prevents the

Partnership from giving—distributing—something to certain unitholders and not to

others.

Viewed together, the provisions in the LPA mean that the Partnership cannot

give out value, including securities, to some partners qua partners, without giving it

pro rata to the others. This reading comports with the definition of partnership

distribution in Black’s Law Dictionary. The securities at issue were not a

distribution. They were offered for sale, as the general partner is empowered to do

under the LPA. I find the term “distribution,” in the context of the LPA,

unambiguous. Put another way, a reasonable investor, on reading the LPA, would

conclude that he would receive distributions, in cash or kind, from time to time, and

295
JX 1.0024.
49
that those would be pro rata and would not dilute his interest. He would not conclude

that the sale and issuance of equities as provided for in the LPA would result in a

pro rata “distribution” of those equites, as the Plaintiffs contend. I find the LPA

clear in this regard.

To the extent the Plaintiffs argue that the consideration given by subscribers

was illusory, and thus that the issuance was a one-way distribution rather than an

exchange, I disagree. The $518 million in forgone distributions was useful to ETE

in this situation and represented an opportunity cost and risk of some amount to the

participating unitholders. I find that this transaction was an exchange for value. I

note that not all the securities offered were subscribed, even by the insiders.

Because I find that the LPA is not ambiguous, and that this was an issuance

for value and not a distribution, I need not address the parties’ arguments regarding

contra proferentem or extrinsic evidence. I find that the issuance was not prohibited

under Section 5.10(a).

B. Fair and Reasonable

Having found that the issuance was not a prohibited distribution under the

LPA, I next determine whether the issuance was “fair and reasonable” to ETE under

Section 7.6(f) of the LPA.296 Section 7.6(f) provides in relevant part that “[n]either

296
Id. at .0031. Both parties agree that, as the more specific provision, Section 7.6(f)—not Section
7.9—controls here. Pls.’ Opening Post-Trial Br. 48; Defs.’ Opening Post-Trial Br. 31.
50
the General Partner nor any of its Affiliates shall sell, transfer or convey any property

to, or purchase any property from, the Partnership, directly or indirectly, except

pursuant to transactions that are fair and reasonable to the Partnership.”297 “The fair

and reasonable standard is something similar, if not equivalent to, entire fairness

review.”298

The LPA allows the General Partner to establish, conclusively, that the

transaction under review is fair and reasonable to the Partnership by complying with

one of several safe harbor provisions. The parties dispute vigorously whether the

Defendants have reached safe harbor, a matter I address later in this Memorandum

Opinion. I first turn to a predicate issue; burden of proof.

When entire fairness applies in the corporate context, the defendant fiduciaries

bear the burden of showing that the challenged decision was entirely fair to the

corporation and its stockholders.299 According to the Defendants, because the LPA

eliminates default fiduciary duties and replaces them with purely contractual

obligations, the Plaintiffs bear the burden of showing that the issuance was not fair

and reasonable to ETE.300 I disagree. In my view, Section 7.6(f) itself places the

297
JX 1.0031.
298
Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 256–57 (Del. 2017) (internal
quotation marks and citation omitted).
299
E.g., Frederick Hsu Living Trust v. ODN Holding Corp., 2017 WL 1437308, at *34 (Del. Ch.
Apr. 14, 2017).
300
Defs.’ Answering Post-Trial Br. 14 n.19; see also JX 1.0034 § 7.9(e) (“Except as expressly set
forth in this Agreement, none of the General Partner, the Board of Directors, any committee of the
51
burden on the Defendants to show that the issuance satisfied the fair-and-reasonable

standard.

This Court confronted a similar issue in Auriga Capital.301 There, then-

Chancellor Strine was tasked with interpreting an LLC agreement that provided, in

relevant part:

Neither the Manager nor any other Member shall be entitled to cause
the Company to enter . . . into any additional agreements with affiliates
on terms and conditions which are less favorable to the Company than
the terms and conditions of similar agreements which could be entered
into with arms-length third parties, without the consent of a majority of
the non-affiliated Members.302

The Court held that this language imposed something “akin to entire fairness review”

with respect to conflicted transactions.303 Specifically, the Court read the LLC

agreement to allow conflicted transactions without approval from a majority of the

minority members, “subject to a proviso that places the burden on the Manager . . .

to show that the price . . . was the equivalent of one in an agreement negotiated at

arms-length.”304 The Supreme Court affirmed, holding that, because the conflicted

transaction at issue did not receive the approval of a majority of the minority, “the

burden of establishing the fairness of the transaction fell upon [the manager].”305

Board of Directors nor any other Indemnitee shall have any duties or liabilities, including fiduciary
duties, to the Partnership or any Limited Partner or Assignee.”).
301
40 A.3d 839.
302
Id. at 857.
303
Id. at 856.
304
Id.
305
Gatz Props., LLC, 59 A.3d at 1213.
52
 Like the LLC agreement in Auriga, the LPA here prohibits “sell[ing],

transfer[ring] or convey[ing] any property to, or purchas[ing] any property from, the

Partnership,” subject to (i) an exception for transactions that are “fair and reasonable

to” ETE, and (ii) a set of safe harbors.306 Thus, once the plaintiff shows that a

transaction was conflicted in the manner contemplated by Section 7.6(f), the burden

falls to the defendant to prove that the transaction was fair and reasonable to the

partnership.307 Because there is no dispute that the issuance was a conflicted

transaction per Section 7.6(f), the Defendants bear the burden of proving that it was

fair and reasonable to ETE. I turn next to this analysis.

1. The “Safe Harbors”

Under the terms of Section 7.6(f), the Defendants can conclusively show that

the transaction was fair and reasonable to ETE by showing they have achieved one

306
JX 1.0034.
307
The Defendants cite Zimmerman v. Crothall, 62 A.3d 676 (Del. Ch. 2013), for the proposition
that the Plaintiffs bear the burden of proving that the issuance violated the LPA’s fair-and-
reasonable standard. Zimmerman, however, is distinguishable. In that case, the relevant provision
of the LLC agreement provided that “Members, Directors, and officers . . . shall have the right to
contract . . . with the Company . . . as the Board of Directors shall determine, provided that such
payments or fees are comparable to the payments or fees that would be paid to unrelated third
parties providing the same property, goods, or services to the Company.” Id. at 702. The Court
held that this language effectively required review under an entire fairness standard, with the
plaintiff bearing the burden of proving that a conflicted transaction was not entirely fair. Id. at
703–04. The Court recognized the tension between this holding and Auriga, but it found Auriga
distinguishable: “The Auriga provision provides that a manager or member cannot cause the
company to enter an agreement with an affiliate on terms less favorable than an arm’s length
transaction without the required consents. By contrast, [the provision here] gives members,
directors, or officers the affirmative right to engage in transactions with the Company, provided
that such transaction is comparable to a third-party transaction.” Id. at 706. In my view, Section
7.6(f) is closer to the Auriga provision than to the Zimmerman provision.
53
of four safe harbors. The Defendants rely principally on the use of a Conflicts

Committee to approve the transaction. Indeed, the Board indicated it would approve

the Private Offering only if approved by a Conflicts Committee.308 Section 7.6(f)

provides that the contractual standard is “deemed satisfied . . . as to . . . any

transaction approved by Special Approval,” defined as approval by the Conflicts

Committee.309 That Committee is defined as a one or more member committee of

the Board composed of directors who are unconflicted and independent: the

definition specifically excludes employees and directors of affiliates of the General

Partner.310

At its February 22 meeting, recognizing the conflicted nature of the proposed

Private Offering, the Board created a Conflicts Committee “made up of Messrs.

Collins, Williams and Turner” to consider the transaction.311 That Conflicts

Committee was fatally flawed, however. A majority of its members, Collins and

Turner, were employee and director, respectively, of affiliates of the General

Partner, and thus unfit to serve under the LPA.312 Only Williams, a retired ETE

308
JX 258. According to the Plaintiffs, this makes the Private Offering void, should I find that no
valid Conflicts Committee recommendation exists. I reject this argument; the General Partner is
prohibited from conflicted transactions unless “fair and reasonable”; nothing in the LPA requires
it to use a particular safe harbor, and the Board’s stated intention to rely on one safe harbor does
not mean that it breached a contractual duty if the transaction is nonetheless fair and reasonable,
despite failure to achieve that particular safe harbor.
309
JX 1.0032.
310
Id. at 6.
311
JX 258.0002.
312
JX 315.0001.
54
employee and long-time friend of Warren, was eligible to serve on a Conflicts

Committee.

In any event, Turner declined to serve due to health reasons. He so informed

a single director, but did not formally resign from the Committee.313 On February

24, ETE’s general counsel, Mason, informed a proposed financial advisor that the

hiring decision would have to be made by the “two member[]” Committee,

composed of Collins and Williams.314 Mason was calling the shots for the

Committee; he chose its financial and legal advisors, and “appointed” Collins as

committee chair.315

By Febraury 26, however, ETE’s outside counsel realized that Collins was

ineligible to serve.316 This counsel and the Committee’s outside counsel attempted

to address this problem by creating “revised resolutions” for the February 22

meeting, which falsely indicated that Williams was appointed sole member of the

Conflicts Committee.317 This was untrue; at no time prior to when Williams,

purporting to act for the Conflicts Committee on February 28, recommended the

transaction as fair, did the Board appoint Williams the sole member of the Conflicts

Committee.318 The Board met that same day. The minutes reflect that the

313
Trial Tr. 506:12–21.
314
JX 272.0001.
315
Aug. 24, 2016 Williams Dep. 74:7–75:7, 86:17–20.
316
JX 315.0001
317
JX 318.0001, .0007–10.
318
Trial Tr. 515:4–6; Aug. 24, 2016 Williams Dep. 157:23–158:15.
55
Committee’s counsel, Akin Gump, informed the Board that Collins, Turner, and

Williams had acted as a “special committee”;319 this was untrue and misleading—

the Board had appointed those gentlemen as the Conflicts Committee, but only

Williams had ever done any substantive work on the committee, and the other two

were ineligible to serve.

As a result, there was no Conflicts Committee created by the Board and in

satisfaction of the safe-harbor provision of Section 7.6(f). In order to shelter in the

safe harbor of the conclusive presumption, the Board had to create a Conflicts

Committee whose members met certain qualifications, and rely on their approval of

the transaction. The Defendants point out that the directors, in self-serving

testimony, averred that they were individually aware of and in approval of Williams’

sole service on the Conflicts Committee; Defendants add that Williams could have

acted as a sole member, under the explicit language of the LPA, if he had been so

appointed. This is to no avail. The LPA gives the Partnership protection against

conflicted transactions with the General Partner and its affiliate, prohibiting them

unless they are objectively fair and reasonable. They allow the Board to avoid

demonstration by objective proof in four limited ways. One is creating a Conflicts

Committee, composed of unconflicted members with defined qualities. Here, the

Board failed to do so, and it cannot therefore avoid an objective evaluation of

319
JX 382.0001–02.
56
whether the transaction is fair and reasonable. The safe harbor is optional; falling

short of reaching harbor does not prevent the Defendants from navigating the straits

of fairness. But having failed to perfect a Conflicts Committee in contractual

compliance, they are not entitled to its benefit.

I will not here recite again the various actions of then-counsel for the Conflicts

and A&C Committees or ETE in creating a record which is at best misleading as to

the actions of the Board in creating the Conflicts Committee; those are laid out

adequately in the facts. Suffice it to say that these actions are not helpful to the

Defendants, at all.

The Conflicts Committee was bound to act in good faith.320 Since I do not

find Williams to have constituted the Conflicts Committee, I need not examine his

actions in that regard. For completeness’ sake, however, I note that Williams is a

retired engineer.321 He testified at trial and by deposition. I found him truthful and

sincere. Nonetheless, for the reasons laid out in the facts, I found his actions short

of the kind of deliberations that should be undertaken in consideration of a conflicted

transaction. It is clear that Williams did not understand his role, which was to ensure

fairness to the Partnership, nor did he understand the terms of the transaction on

which he was opining.322 Williams relied on the Board’s previous consideration of

320
JX 1.0034.
321
PTO ¶ 50; Trial Tr. 188:21–22.
322
Trial Tr. 178:5–179:21, 180:12–15; Aug. 24, 2016 Williams Dep. 51:25–52:4.
57
the public offering, but the terms are not the same, and in any event, the Board’s

consideration of the accrual term of that transaction is problematic, as explained

below. Certainly, Williams never explored whether securities with different terms

would be better for the Partnership: he treated the issuance as a binary choice; do it,

or not.

Having found that the safe harbor of reliance on a Conflicts Committee is not

available to the Defendants, I turn to their second, and last, attempt to find such

refuge. Section 7.6(f) provides that the contractual standards of a conflicted

transaction shall be deemed satisfied so long as its “terms . . . are no less favorable

to the Partnership than those generally being provided to . . . unrelated third

parties.”323 Unrelated third parties is a term not explicitly defined in the LPA, and

the parties dispute its meaning. The Defendants point out that the Private Offering

was not just offered to affiliates of the General Partner, family, and friends; it was

offered to three (out of four hundred) institutional investors, as well.324 Therefore,

per the Defendants, it is conclusively fair and reasonable. This strikes me as too cute

by half.

323
JX 1.0032.
324
ETE also argues that eighteen unrelated third parties participated in the issuance, which ETE
argues qualify as unrelated third parties under Section 7.6(f)(iii) or as outside the scope of “related
persons” under SEC regulations. Defs.’ Opening Post-Trial Br. 32–33.
58
 Again, the LPA protects the Partnership from conflicted transactions with the

General Partner and affiliates, by prohibiting such transactions unless objectively

fair and reasonable. Unsurprisingly, the LPA provides that where a market sets the

terms of the transaction, that market price provides conclusive proof of objective

fairness. If ETE rents warehouse space from an affiliate at market price—that is, at

terms no less favorable than those generally provided to third parties—it makes no

sense to have a court examine the objective fairness of the transaction. But this

analysis does not translate well to issuances of unique securities.

ETE cites Brinckerhoff for the proposition that the “generally being provided

to unrelated third parties” language “allows MLPs to invoke this safe harbor by

comparing the challenged transaction to similar—but not identical—arms-length

transactions.”325 I agree. Brinckerhoff involved the sale of interests in an energy

pipeline MLP.326 The plaintiff there alleged that the defendant “paid $200 million

more to repurchase the same assets it sold in 2009, despite declining EBITDA,

slumping oil prices, and the absence of the expansion rights sold in 2009.”327 In

other words, the facts in Brinckerhoff allowed the Court to look at price for a similar

asset, albeit at a different time, to gauge if the terms were “no less favorable to the

325
Id. at 8 (citing Brinckerhoff., 159 A.3d at 256).
326
Brinckerhoff, 159 A.3d at 248.
327
Id. at 257.
59
Partnership than those generally provided to or available from unrelated third

parties.”328 The Court, in fact, found they were not.329

Here, by contrast, the Defendants have created a unique and complex security.

It is a single transaction offered simultaneously to selected parties. There are no

“generally” similar transactions to which to compare it. The terms of the Private

Offering were not lifted from some market. It is true that ETE extended the Private

Offering to a few outsiders, but that looks at the matter the wrong way ‘round: the

cost to ETE was not set by a market; ETE decided the terms, and then extended them

to a few outsiders. This in no way insures that the costs to ETE were the same as

those in arms-length transactions for similar securities; there are none.

ETE points out that the third-party institutional investors largely rejected the

Private Offering, and thus proposes that the terms of the offering must be at—or

below—market. I note that, for reasons poorly described in the record, but allegedly

related to business interests of ETE, the security in the Private Offering is

unregistered and not transferrable. These qualities make it less desirable to outsiders

than to insiders. Moreover, the lack of liquidity is waivable at the discretion of the

General Partner, cabined only by good faith. This is a boon to insiders, but cold

comfort to independent parties considering the security. In fact, the testimony of

328
JX 1.0032.
329
Brinckerhoff, 159 A.3d at 257.
60
Kevin McCarthy, of Kayne Anderson, showed that Kayne declined to subscribe to

the securities because they were not sufficiently valuable given the lack of

liquidity.330

In this light, I find that ETE has not reached safe harbor, based on importing

market terms to the conflicted transaction.

2. The Private Issuance Was Not Fair and Reasonable to ETE

Having found that the Defendants have not reached safe harbor, I must now

turn to the factual question of whether the Defendants have met the burden placed

on them to justify a conflicted transaction: that the transaction is objectively fair and

reasonable to the Partnership. The contractual standard here—that insider

transactions are prohibited unless “fair and reasonable”—invokes an analysis akin

to the “entire fairness” review of corporate law;331 my analysis must consider both

fair process and fair price, unifying those considerations to reach a single result.332

Based on the evidence at trial, I find that the Defendants have failed to show that the

330
McCarthy Dep. 97:22–98:4.
331
Brinckerhoff, 159 A.3d at 256–57 (“The fair and reasonable standard is something similar, if
not equivalent to entire fairness review.” (internal quotation marks and citation omitted)).
332
See, e.g., Oliver v. Boston Univ., 2006 WL 1064169, at *18 (Del. Ch. Apr. 14, 2006) (“The
entire fairness inquiry has two basic aspects: (1) fair dealing or fair process and (2) fair price. . . .
Although evaluation of two components is necessary to determine entire fairness, ‘the test for
fairness is not a bifurcated one as between fair dealing and price; [instead, all] aspects of the issue
must be examined as a whole since the question is one of entire fairness.’” (second alteration in
original) (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983))).
61
Private Offering was entirely fair to the Partnership. I make the following findings

of fact:

1) As of February 2016, ETE faced a delevering crisis. It had been warned,

effectively, by the rating agencies that it must reduce its D/E or face a

rating downgrade, which would have had catastrophic consequences for

ETE.333 The impending cash acquisition of Williams Co. made delevering

imperative.334

2) The state of the energy industry, and provisions of the merger agreement

with Williams Co., limited opportunities to delever via sale of assets or

issuance of equity.335

3) ETE made quarterly distributions to unitholders. It could reduce its D/E

by cancelling distributions and retaining cash.336 Because distributions of

earnings were the reason for being of the MLP, ETE was reluctant to cut

distributions, and viewed such cuts as detrimental to the Partnership, and

a last resort.337

4) ETE devised the public offering as a creative alternative to cancelling or

cutting distributions. In effect, the public offering served as a kind of

333
Trial Tr. 230:19–231:19, 233:3–20; JX 49.0002; JX 53.0001.
334
JX 175.0004.
335
E.g., Beach Dep. 259:12–21; Trial Tr. 138:20–139:4, 251:1–252:8; JX 35, § 4.01(b).
336
JX 136.0006, .0014; JX 175.0005, .0007.
337
Trial Tr. 247:4–6, 391:24–392:13, 456:24–457:5.
62
 voluntary distribution cut, or deferral, by subscribers. In the Initial Terms

considered by the directors, subscribers would agree to forgo all but

$0.11/unit of any distributions for the term, eight quarters.338 ETE was

then paying a distribution of $0.285.339 If common units received no

distribution, the subscribers would accrue an in-kind credit of $0.11, to be

converted to units at the end of the term.340 If ETE made a distribution of

$0.11, subscribers received that cash as well.341 If ETE made a distribution

of greater than $0.11, subscribers would receive $0.11 cash and the balance

in credits, which would convert to common units at the end of the term.342

The conversion would be based on a 5% discount to market price for units,

as it was at the beginning of the term.343

5) The $0.11 (cash or in kind) minimum distribution had two functions. First,

it was an incentive to subscribe, because it formed a hedge against the

possibility that distributions would be cancelled. I find that as of February

2017, cancellation of distributions was a possibility, but not a certainty,

and that ETE hoped to avoid cancellation even if the Williams Co. merger

338
JX 175.0012–13.
339
PTO at 7.
340
JX 175.0012–13.
341
Id.
342
Id.
343
JX 219.0004.
63
 went through.344 The $0.11 minimum also allowed accruals, at the then-

customary rate, to be cash-neutral to subscribers.345

6) The 5% discount to market conversion price served as an incentive to

subscribe.346 It offered some upside if the market for units remained stable,

and would become more valuable if that market improved. 5% was

significantly less than the 10-15% discount recommended by ETE’s

financial advisor, Perella.347

7) The Initial Terms of the public offering would have provided significant

benefits to ETE, even though, in light of the Williams Co. merger, it would

not reduce D/E below 4.0, the goal set by the rating agencies.348 It had

value in that it gave ETE time to achieve that ratio without cancellation of

distributions, by taking other measures, including sale of assets, post

merger.349 Perella, ETE’s financial advisor, recommended these terms to

344
E.g., JX 280.0013.
345
Trial Tr. 255:19–256:15, 411:7–413:2.
346
It is worth pointing out, perhaps, the obvious: that the accrual rate and the conversion rate could
have value to subscribers, under either the Public or Private Offerings, only if the subscription was
not universal. If all unit holders in ETE fully subscribed, accrued and converted credits would
result in a pro rata increase in equity, effectively a wash. Both public and Private Offerings,
therefore, were designed to have less than full subscription, and the upcoming conversion will
dilute to some extent the equity of non-subscribers to the benefit of subscribers. The choice for
potential subscribers was whether receiving a full cash distribution during the term of the
Securities would offset this benefit to subscribers.
347
Trial Tr. 257:3–7.
348
Id. at 73:15–18.
349
E.g., id. at 415:6–12.
64
 the Board.350 The Initial Terms of the public offering were fair to ETE,

and it would have been objectively fair and reasonable to offer such

securities to insiders, as required by Section 7.6(f) of the LPA.

8) Before the Board meeting of February 15, at which the public offering was

to be considered, Long, ETE’s CFO, had learned from his counterpart at

Williams Co. that Williams Co.’s consent to the public offering was

unlikely.351 Such consent was required, because ETE would not be able to

file a Form S-3 without it, and the public offering could not be completed

unless that form was filed.352 McReynolds, ETE’s president, and Mason,

ETE’s general counsel, received emails on February 14 indicating that

Williams Co.’s outside counsel believed Williams Co.’s consent was

required to complete the public offering.353 Long informed the directors at

the February 15 meeting, before the vote, of Williams Co.’s position.354

9) The public offering as approved by the Board on February 15 had

additional terms not included in the Initial Terms. Under the Initial Terms,

a subscriber would agree to forgo any distribution above $0.11, with the

difference accruing as credit toward common units, convertible at the end

350
JX 175.0003, .0008.
351
Trial Tr. 315:12–316:11.
352
17 C.F.R. § 210.3–05.
353
JX 209.0001
354
Trial Tr. 315:12–316:11.
65
 of the term. The Revised Terms set an accrual as the difference between

the $0.11 the subscriber received and the then-current distribution rate of

$0.285, regardless of whether any distribution to common unitholders was

actually made.355 This eliminated downside risk: If distributions were

eliminated, subscribers would receive a quarterly accrual of $0.285.356

This term was eventually embodied in the Private Offering.357

10) The Defendants, who bear the burden of proof, were unable to explain

how this additional downside hedge originated or came to be placed before

the Board.358 A reasonable supposition, which I adopt, was that Long

informed insiders that a public offering to all unitholders would be

unlikely, given Williams Co.’s lack of consent; that a Private Offering

would be an alternative; that a substantial risk of distribution cuts or

cancellations loomed; and that the insiders seized the opportunity to

eliminate downside risk for themselves and their cronies.

11) The Board was presented with the new $0.285 accrual term for the first

time at the February 15 meeting.359 Perella personnel attended the

meeting,360 but the record is silent as to how, if at all, the financial advisor

355
JX 219.0004.
356
JX 216.0001.
357
Compare JX 219.0003–04, with JX 410.0001–02.
358
E.g., Trial Tr. 322:12–18.
359
JX 219.0019–20
360
JX 213.0001.
66
 explained this change to the Board. Subsequently, internal emails indicate

that Perrella recognized that in case of a suspension of distributions, the

new accrual term would represent a substantial transfer of wealth to

subscribers.361 Nothing in the record indicates that the directors found the

new accrual term fair and reasonable, or (despite the internal Perella email)

considered its consequences should distributions be cut. Nothing indicates

that they determined that the term was necessary to the success of the

public offering. In other words, the imposition of the new accrual term

was not fair in terms of process, and nothing in the Board’s actions

indicates that it was fair as to price.

12) For reasons I have already explained in reference to the Conflicts

Committee safe harbor, nothing in the examination of the Private Offering

improves the process with respect to the $0.285 accrual term. Nothing in

the testimony of Williams or the other directors, and nothing in the

documentation concerning the Conflicts Committee or the February 28

board meeting adopting the Private Offering, demonstrates that the

Defendants made a determination as to the reasonableness of the accrual

term, and the process in that regard was not fair.

361
JX 217.0002.
67
 13) Fairness of price, in this context, requires examination of the exigencies

faced by ETE that made the security, with its waiver of distributions in

return for deferred issuance of equity, attractive; together with the risk that

suspension of distributions to common unitholders would nonetheless be

required, and the effect that would have on the price ultimately paid in

units. I have determined, and the Plaintiffs do not seriously contest,362 that

the Initial Terms for the public offering were fair. Those terms were $0.11

guaranteed accrual if distributions were not made, deferral of all

distributions above $0.11, in return for $0.11 in cash and accrual of the

difference in credits against conversion for eight quarters, and 5% discount

to current market price upon conversion. The Private Offering, by

contrast, included the $0.285 accrual term, which would be substantially

more valuable than the initial term to subscribers in case distributions were

cancelled, and would in that case be substantially more expensive to the

Partnership. Some upside was still preserved; the distributions to

participating unitholders were capped at $0.285, unless the General Partner

362
Unsurprisingly, the Plaintiffs do argue that the public offering, even at its Initial Terms, was
unfair in light of what they argue Defendants knew was an “inevitable” distribution cut. I have
already rejected that proposition, which is unsupported by the trial record. In any event, the
Plaintiffs’ own expert opined that the Public Placement would have been inherently fair and
reasonable. Trial Tr. 58:4–7. I note also that the Board considered the opinion of its financial
advisor, Perella, which opined that under the Initial Terms of the public offering, ETE would save
“almost $1.0 billion of cash for debt reduction, if a high percentage of holders participate in the
plan.” JX 175.0003.
68
 declared them “Extraordinary,” in the General Partner’s discretion.363 The

record simply does not exist to support the $0.285 accrual term as fair.

Given those facts, I cannot find that the Private Offering was fair. The burden

is on the Defendants to demonstrate that the price of the securities to ETE, under the

facts as then were known, was fair. The Defendants have failed to meet this burden;

therefore, I conclude that the conflicted transaction was not fair and reasonable to

the Partnership. The securities, to the extent they were transferred to the General

Partner or its affiliates, breached the LPA, and I find that the Defendant Directors

caused the General Partner to breach the LPA by issuing these securities.

C. Remedy

As a remedy for breach of the MLP, the Plaintiffs seek only equitable relief;

cancellation of the securities. I find that relief not warranted, for reasons that follow.

Let me recapitulate what I have found above. As of February 2016, ETE,

because of its business model and the downturn in the energy market, and in light of

a pending merger agreement with Williams Co., had an urgent need to delever. It

was constrained, by the Williams Co. merger agreement and the market, from selling

assets or issuing substantial amounts of equity to ease debt. It was paying quarterly

distributions, consistent with its business model, of $0.285/quarter/unit. Cutting or

363
JX 219.0007.
69
suspending distributions was an obvious way to delever, but one that was

particularly unattractive for an MLP.

As an alternative, the Board considered offering a security to all unitholders,

in return for which they agreed to forgo some distributions. Instead, they would

accrue credit redeemable for ETE units in the future. This alternative was, I find,

acceptable, as an interim measure, to the rating agencies whose indirect threat to cut

ETE’s credit rating precipitated the crisis. Williams Co., pursuant to the merger

agreement, had the power to veto this proposed public offering, and did so. The

Board then considered, and approved, the Private Offering, which did not require

approval by Williams Co. That transaction was, in part, extended to affiliates of the

General Partner, and as such was required to be fair and reasonable to the

Partnership.

The Initial Terms of the public offering involved a conversion rate at a 5%

discount to market, and an $0.11 guaranteed minimum accrual. The accrual served

as both an amount to compensate subscribers for taxes, assuming distributions

continued, and an incentive to invest as a hedge, in the event they did not.

Subscribers, in any case, would have borne risks akin to non-subscribers, in that they

were better off if the company did well and distributions continued or increased, and

worse off if ETE did poorly and was forced to cut distributions. The benefit to ETE

was clear; deferred payment of distributions to subscribers, paid with equity, allowed

70
ETE to conserve cash at a crucial time. As the plan was evaluated by Perella, it was

fair to ETE, and even below market. Perella, for instance, advocated a conversion

rate that was a discount to market of 10-15%.364 If the draft Initial Terms of the

public offering had been repeated in the Private Offering, I would find that the

Defendants had met their burden to show that the transaction was fair and reasonable

to ETE.

Contemporaneously with ETE learning that Williams Co. might withhold

approval for the public offering, a new term was presented to the General Partner’s

board. I use the passive voice in the preceding sentence advisedly; the record does

not demonstrate who first suggested the guaranteed $0.285 accrual. It is equally

opaque as to why, if at all, such an accrual term was better from ETE’s perspective

than the original terms. Nothing indicates that the Board considered the new term’s

effects. Nothing indicates why the Board adopted it. The Defendants have failed to

show fair process with respect to the guaranteed accrual.

The Defendants must also demonstrate fair price, as of the time of the

offering. Price is a complex matter here; it involved the probability that the Williams

Co. merger would (or would not) go through, the probability that distributions would

(or would not) be cut, and the cost in securities to ETE two years hence, in light of

an unknown future market price for units. Nonetheless, the cost to ETE of switching

364
JX 219.0004; Trial Tr. 257:3–7.
71
from an $0.11 to a $0.285 accrual, in case distributions were cut, was massive.

Again, the benefit of the switch to ETE, if any, is undocumented in the record.

The burden of showing fair price is on the Defendants. Based on the record,

they cannot satisfy that burden. The $0.285 accrual guarantee looks like a gift to the

insiders who subscribed to the securities, a massive hedge against distribution cuts.

I have found that the Private Offering was a conflicted transaction that was

not fair and reasonable, and that by extending it to affiliates, the Defendants breached

the LPA; what then is the remedy? Initially, the Plaintiffs asked for a declaration

that the securities were void, but that assertion was based on the contention that they

represented a prohibited non-pro-rata distribution, a contention I have rejected.365 I

have found that the General Partner and its directors, exercising their power to issue

securities in ETE, breached the LPA by engaging in an unfair transaction with

affiliates. The Plaintiffs argue that the remedy for such a breach should be

cancellation of the securities. Of course, the usual remedy for contract breach is

damages.366

365
The Plaintiffs also argue that because the Directors intended approval of the Private Offering
to be contingent on the recommendation of a properly constituted Conflicts Committee, the failure
to achieve that recommendation resulted in the transaction being void; and that ministerial changes
to the establishing documents after board approval rendered them void. I have rejected these
contentions separately, above. To the extent that the Plaintiffs argue that any breach regarding an
issuance of securities necessarily renders such securities void, I reject that as unsupported by the
LPA.
366
See, e.g., Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001) (“[T]he standard remedy
for breach of contract is based upon the reasonable expectations of the parties ex ante.”)
72
 The Plaintiffs argue that damages here are unavailable. They point to the

exculpation from damages in the LPA, which restricts damages to acts in bad faith,

which they have not alleged. Moreover, they concede that damages to the

Partnership are not demonstrable here. The breach, in that event, can justify only

nominal damages.367

The Plaintiffs’ own expert, by contrast, purported to show damages by

pointing to an impending transfer of wealth from the Partnership and non-

subscribers to the subscribers in the redemption of the credits.368 He based his

damage calculations on the difference between the current market value of common

units subscribers will receive at conversion, less the cost to them of the forgone

distributions.369 The subscribers will indeed do well. That result, however, is

unrelated to the term in the Private Offering that I have found unfair. That is, it does

not arise from the $0.285 accrual hedge that the Defendants have failed to

demonstrate was fair. That term had value to subscribers only in case of a (never

made) distribution cut.

Instead, the conversion price arose in the Initial Terms; it is an artifact of the

original term sheet from the aborted public offering, which I have found fair. It was

367
See Ravenswood Inv. Co. L.P. v. Estate of Winmill, 2018 WL 1989469, at *3 (Del. Ch. Apr. 27,
2018) (discussing nominal damages).
368
JX 676.0046–48; see also supra note 346.
369
Id.
73
in the interests of ETE that the subscription rate be sufficient to permit substantial

delevering. Subscribing to the security entailed risk and costs, however. For a

subscriber to agree to forgo potential distributions required a sufficient return on the

accrued credit. The Board was entitled to rely on its financial advisor to set a

discount rate that would be sufficiently attractive to ensure participation. Perella

recommended 10-15% under then-market conditions; nonetheless, the Board

determined to offer only a 5% discount in the Public, and ultimately the Private,

Offerings.370 This discount was modest if ETE’s unit price remained static for the

term. If the price went up, the conversion rate was better for subscribers; if it fell,

worse.

As it has turned out, the energy market has boomed, the Williams Co. merger

failed, and ETE’s unit price has more than doubled—common unitholders have

benefited, and when they convert their credit into units at 5% below the February

2016 unit price,371 subscribers will do extraordinarily well.372 The Plaintiffs argue

that the insiders must have known that, in early 2016, ETE’s unit price was

depressed, and was sure to bounce back. But they point to no knowledge held by

the Defendants unavailable to the market, and smart market players such as Kayne,

370
JX 219.0004; Trial Tr. 257:3–7.
371
The Conversion Price is 95% of the five-day volume-weighted average closing price of ETE’s
common units at the time of the offering, or $6.56. JX 676.0047 n.96.
372
The closing price for ETE’s Common Units on October 31, 2017 was $17.65 per unit. Id.
74
Neuberger, and Tortoise declined to subscribe, or fully subscribe, despite what the

Plaintiffs describe in hindsight as ETE’s depressed price.373 Again, Perella

recommended a substantially higher discount to market to the Board. The return on

investment, based on the fair Initial Terms of the public offering carried forward into

the Private Offering, cannot be the measure of damages resulting from the unfair

$0.285 accrual term, because the return on investment is unrelated to that accrual

term. The Plaintiffs have not contended otherwise in post-trial briefing.

Instead, the Plaintiffs ask me to employ equity to remedy the Defendants’

breach by cancelling the securities and their redeemable credits. They ask me to

place the subscribers into the position they would have been absent subscription. In

other words, they ask me to cancel the accrued credit, and pay the subscribers the

forgone distributions, with interest, instead. This would save the Partnership from

issuing equity, but would cost ETE something on the order of $500 million in cash.374

The road to injunctive relief is well worn. I must find that a plaintiff has

prevailed on the merits, legal relief is inadequate, and the equities balance in favor

of relief.375 Here, the Initial Terms of the public offering were fair. From ETE’s

373
McCarthy, for instance, testified that Kayne decided not to subscribe the Securities, because
their low value compared to common units alone did not compensate investors for the lack of
liquidity. McCarthy Dep. 97:22–98:4.
374
E.g., Trial Tr. 728:16–19.
375
See, e.g., Sierra Club v. DNREC, 2006 WL 1716913, at *3 (Del. Ch. June 19, 2006) (“The
elements for permanent injunctive relief are: (1) actual success on the merits; (2) irreparable harm
will be suffered if injunctive relief is not granted; and (3) the harm that will result from a failure
75
point of view, the Initial Terms offered a way to delever if distributions continued,

at a modest price to the Partnership if eliminating distributions nonetheless proved

necessary. The Defendants, however, were unable to justify the inclusion of the

additional term guaranteeing an accrual rate. By adding the $0.285 accrual term, the

General Partner guaranteed a large transfer from ETE to subscribers if distributions

were cut. The term was a large downside hedge for subscribers, without an apparent

benefit to ETE, except in the unlikely event that distributions went up.376

The unlikely event came to pass. As it turned out, under the fixed accrual at

$0.285, the subscribers did worse than they would have under the unlimited accrual

of the Initial Terms. Under those terms, subscribers would have accrued credit based

on the difference between the subscribers’ maximum $0.11 cash distribution and the

amount of actual cash distributions. Instead, the Private Offering fixed accrual as the

difference between $0.11 cash paid and $0.285. The distribution rate on common

units, post-transaction, has been at or above $0.285 each quarter. Adding the unfair

term has caused the Partnership no damages, therefore; it has actually mildly reduced

the cost to ETE.377 The other changes between the Initial Terms of the public

offering and those in the Private Offering were either beneficial at the time (increase

to enjoin the actions that threaten plaintiff outweighs the harm that will befall the defendant if an
injunction is granted.”).
376
I note that, even if distributions went up, the General Partner could waive the cap on
distributions to the participating unitholders based on the General Partner’s determination of an
“Extraordinary Distribution.” Some upside could still be captured.
377
JX 219.0004; Trial Tr. 257:3–7.
76
of the term from eight to nine quarters), or neutral to the Partnership (the waiver

provision.)

Rescinding the issuance, therefore, is not required in equity. It would not be

proportional to any loss occasioned by the breach—there is none. Moreover,

employing equity to cancel the securities would cause equitable problems of its own.

Some subscribers were outsiders, and some were friends and relatives who had no

hand in the addition of the problematic accrual term. These individuals are not

parties. They participated in the Private Offering and accepted the associated risk.

They have forgone distributions for nine quarters. Rescission would deny them the

benefit of their bargain. It is worth noting that while I have found that the Defendants

have failed to meet their burden to show the fairness of the transaction, it was not so

one-sided that all securities were subscribed; many were not.

To repeat, the unfair term added to the initial, fair terms was the $0.285

accrual term, which was unfair as a downside hedge. If ETE had failed to make

distributions of at least $0.285/unit/quarter, I would not hesitate to employ equity to

compel the Defendants, at least, to disgorge the benefits they received through their

breach of contractual responsibilities. Moreover, the General Partner retained the

discretion to declare dividends above $0.285 “Extraordinary,” in which case

subscribers would accrue additional credits. If the General Partner had done so,

again, equitable action might be appropriate. I do not condone the way in which the

77
final terms of the Private Placement were arrived at, or the rather clumsy and

misleading attempts to justify it through vindication of the Conflicts Committee

process. If the problematic hedge had, in fact, worked a benefit on the Defendants,

equity would act.

Here, however, there was no such benefit. The Plaintiffs have established a

breach, but not shown that the breach caused damage to ETE. The equities,

therefore, do not require pre-distribution injunctive relief here. The Plaintiffs seek

only cancellation of the securities in toto, and associated injunctive relief, which I

have rejected.378

III. CONCLUSION

For the foregoing reasons, the Plaintiffs’ request for rescission and associated

injunctive relief is denied. The parties should confer and advise me what further

issues, including class certification, nominal damages, and remaining requests for

equitable relief, if any, remain. Once that happens, an appropriate order will issue.

378
Given my consideration of the record, the various evidentiary motions outstanding are moot.
78