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Chancery Finds After Trial That $10 Billion Unit-for-Unit Merger Was “Fair and Reasonable” Under Partnership Agreement

Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Feb. 15, 2021)

This matter concerned limited partners’ challenge under the governing limited partnership agreement to an acquisition of the partnership by another entity controlled by the partnership’s ultimate owner. A member of a conflicts committee, which had approved the $10 billion unit-for-unit controlling unitholder merger, also served the board of another company ultimately controlled by the same owner, contrary to the terms of the partnership agreement. After considering this issue, the Court of Chancery nevertheless held after a five-day trial that the merger was “fair and reasonable to the Partnership” under a contractual safe harbor, and that the plaintiffs failed to prove damages.

On remand from the Delaware Supreme Court, the Court of Chancery found that the general partner had breached the implied covenant of good faith and fair dealing by seeking to rely on a contractual safe harbor to permit a conflicted member to serve on the conflicts committee and by including two materially misleading disclosures in the proxy when seeking an alternative safe harbor via unitholder approval. Turning to whether the general partner had committed an express breach of the agreement, the Court concluded that the applicable standard of review governing the transaction was not the agreement’s general subjective good faith standard, but rather whether the transaction was “fair and reasonable, taking into account the totality of the relationships” among the parties, under a provision specifically addressing standards for conflict of interest transactions. The Court reasoned that the “fair and reasonable” standard under the partnership agreement was similar to entire fairness review in the corporate context.

The Court held that defendants had met their burden to show that the transaction was fair and reasonable under the partnership agreement. As to process, the Court reasoned that the partnership had faced precarious conditions due to falling oil prices; its units and the acquirer’s units had traded in an efficient market; the controlling unitholder had not abused his position of control over the merging related entities; post-merger employment opportunities of partnership executives did not appear to affect their judgment; the conflict committee members’ unit holdings in the acquirer were immaterial; the negotiations were thorough, even if swift; and the committee members were knowledgeable and well-advised. As to price, the terms of the merger implied a premium to public trading prices; financial advisors opined as to the fairness of the transaction; market reaction was positive; public analysts and proxy advisory services touted the benefits of the transaction to partnership unitholders; the fact it benefitted the acquirer did not inherently mean there was no benefit to the partnership; and the partnership’s performance continued to deteriorate between signing and closing. Separately, the Court also concluded that plaintiff’s damages analysis did not contain an apples-to-apples comparison of valuation methodologies of the partnership’s and the acquirer’s units (forming the merger consideration). Thus, plaintiff had failed to show that the plaintiff or class of unitholders had suffered damages.

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