In Dieckman v. Regency GP LP, et al, C.A. No. 11130-CB (Del. Ch. March 29, 2016), the Delaware Court of Chancery dismissed a complaint contending that a merger violated the applicable limited partnership agreement.
The case involved the acquisition of Regency Energy Partners LP by an affiliated entity for approximately $11 billion in a unit-for-unit merger that closed in April 2015. Plaintiff, a former unitholder of Regency, claimed that Regency’s general partner favored the interests of its affiliate to the detriment of unaffiliated unitholders in agreeing to an unfair merger price.
Key to the decision was the fact that, as permitted under Delaware law, the limited partnership agreement eliminated all fiduciary duties and replaced them with a contractual governance scheme. The agreement included a series of safe harbors addressing conflicted transactions, and provided that a potentially conflicted transaction would be deemed to have been approved by all of the limited partners, and to not constitute a breach of the agreement or any duty, if the transaction was approved by a majority of the unafilliated common units.
The merger agreement in this case was approved by a majority of the unaffiliated common units, but plaintiff argued that the safe harbor was not effectively complied with because the conflicts were not adequately disclosed to the unitholders, and thus the unitholder approval was the result of an uninformed vote. Relying on common law principles of ratification applicable to corporations governed by the Delaware General Corporation Law, the plaintiff argued that stockholder ratifications have to be fully informed in order for the ratification to have legal effect. The Court did not find these arguments to be persuasive in the context of the limited partnership agreement, instead concluding that the doctrine of stockholder ratification is closely related to the fiduciary duty of disclosure under Delaware corporate law, and that such fiduciary duty was effectively eliminated by the limited partnership agreement.
As stated by the Court (citations omitted), “In the limited partnership context, absent contractual modification, a general partner owes fiduciary duties that include a duty of full disclosure. But, in stark contrast to the corporate context, in which fiduciary duties cannot be waived, a limited partnership may eliminate all fiduciary duties, including the duty of disclosure. Here, the LP Agreement did precisely that… As a result, although the duty of disclosure may be taken for granted in the corporate context and applies by default in the limited partnership context if not contractually modified, the LP Agreement extinguished the duty of disclosure and replaced it with the obligations explicitly stated in the LP Agreement. For this reason, it would be inappropriate to reinsert the duty of disclosure or any other common law disclosure requirements into the Unitholder Approval safe harbor. Instead, I must look to the terms of the contract, including the implied covenant of good faith and fair dealing, in deciding whether there were any disclosure failures in this case that could nullify application of the Unitholder Approval safe harbor.” The Court went on to conclude that there were no such disclosure failures, and that the implied covenant of good faith and fair dealing could not be used to create an additional disclosure obligation in the case at hand.
“In reaching this conclusion, I recognize it may seem harsh to shield a conflicted transaction from judicial review under Delaware law based on a vote of unitholders without requiring the disclosure of all material information. When considering the rights of persons who choose to invest in alternative entity structures, however, it always must be kept in mind that the express policy of this State is to give maximum effect to the principle of freedom of contract.” The Court noted that Federal securities laws would still apply.