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Court Of Chancery Stresses Proper Procedure When Relying On A Contractual Safe Harbor In The MLP Context

Posted In LP Agreements

In Re Energy Transfer Equity, L.P. Unitholder Litigation, C.A. No. 12197-VCG (Del. Ch. May 17, 2018)

Conflicted transactions are commonplace in the master limited partnership (MLP) context.  The entity’s operating agreement usually authorizes conflicted transactions that are “fair and reasonable” to the entity, or some similar phrase.  The same agreements often provide one or more safe harbors capable of creating a presumption of fairness and reasonableness, such as using a conflicts committee process. This decision teaches, among other things, that if managers want to take advantage of such a safe harbor, proper process matters.  If, for example, a conflicts committee is not properly formed, its approval will not insulate the transaction from judicial review nor avoid potential liability for the conflicted managers.  Technicalities matter and it is best to start all over again if a flaw is identified rather than trying to rewrite history.