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Chancery Blocks Natural Gas IPO

Posted In LLC Agreements

Williams Field Services Group, LLC v. Caiman Energy, C.A. No. 2019-0350-JTL (Del. Ch. Sept. 25, 2019).

This case again illustrates the contractual nature of Delaware alternative entities and the important interpretive role the courts perform construing alternative entity agreements when internal governance disputes arise. The case arose out of the parties’ competing requests for declaratory judgment regarding Caiman Energy II, LLC’s (“Caiman”) limited liability agreement (“LLC Agreement”). The Defendants, including Caiman and EnCap Capital Management (“EnCap”), argued that the provisions of the LLC Agreement grant EnCap plenary power with respect to a Qualified IPO, including the ability to change the definition of a Qualified IPO and to modify the procedures the contracting parties would otherwise have to take relating to a Qualified IPO. EnCap asserted that it could implement an Up-C IPO using its authority to effect a Qualified IPO. An Up-C IPO refers to a transaction whereby a limited liability company (“LLC”), which is taxed as a pass-through entity, performs an IPO through a holding company that has an interest in the LLC. Plaintiff Williams Field Services Group, LLC (“Williams”) contended that the Encap proposed Up-C IPO was inconsistent with the terms of the LLC Agreement. 

In a post-trial opinion, the Court of Chancery interpreted several provisions in the LLC Agreement applying well-accepted principles of contract interpretation. The Court of Chancery found that the LLC Agreement only granted EnCap the authority to approve a Qualified IPO as defined in the agreement and then to take steps necessary to facilitate the defined IPO; it did not authorize expansive authority to  take any conceivable  action with respect to a Qualified IPO. In addition, the Court of Chancery found that EnCap failed to show that the Up-C was a Qualified IPO. Therefore, the Court of Chancery held that EnCap did not have the authority to implement the Up-C IPO as it currently proposed.

Of particular interest is the Court of Chancery’s interpretation of the Cooperation clause in the LLC Agreement. The LLC Agreement required that Williams use “commercially reasonable efforts” to consummate certain transactions. The Court of Chancery held that “[t]o the extent Williams has rights under the [ ] LLC Agreement, such as a right to refuse to consent to amendments that are adverse to its interests . . . EnCap cannot rely on the [ ] Cooperation Clause to force Williams to waive or compromise its right.” Instead, Williams must only take “all reasonable steps to solve problems and consummate the transaction on the terms set forth in the governing agreement.”  That is, such a clause did not “require a party to sacrifice its own contractual rights for the benefit of its counterparty.”  The Court accordingly held that EnCap could not proceed with the Up-C IPO as currently structured.