CURRENT MONTH (March 2021)

Corporate Law

Contractual Standard of Review Satisfied 

By Michael Maxwell  

In Dieckman v. Regency GP LP et al., 2021 WL 537325 (Del. Ch. Feb. 15, 2021), the Delaware Court of Chancery resolved a longstanding dispute involving Regency Energy Partners LP (the “Partnership”) and its general partner (the General Partner”) with certain of the Partnership’s unitholders (“Plaintiffs”) for claims of breaches of the Partnership's limited partnership agreement (the “LPA”) in connection with a merger pursuant to which Energy Transfer Partners L.P. (“ETP”) acquired the Partnership (the “Merger”). At the time of the Merger, ETP and the General Partner, were under common control. In prior decisions it was found that the approvals of the Merger by a conflicts committee and a majority of unaffiliated unitholders did not satisfy the safe harbors under the conflict provision of the LPA because the conflicts committee was not properly constituted and the unaffiliated unitholders relied on a proxy statement that contained inadequate disclosures.  Although the safe harbors approval mechanisms of the LPA did not apply, the conflict provision also contained “standards of review that provided that, among other things, a conflict of interest would not be a breach of the LPA or of any duty if such conflict of interest was fair and reasonable to the Partnership.  

In the current opinion, the Court determined that the contractual fair and reasonable standard was the appropriate standard of review, similar to the “entire fairness” standard, and that notwithstanding certain deficiencies that existed in connection with the approval process for the Merger, defendants demonstrated that the Merger was fair and reasonable to the Partnership and its unitholders.  It also found that although the deficiencies in the special approval and unitholder approval processes resulted in breaches of the implied covenant of good faith and fair dealing, the Plaintiffs failed to prove that the General Partner acted in bad faith or engaged in willful misconduct or fraud and therefore the General Partner was exculpated from monetary damages under the LPA The Court entered judgement in favor of the defendants.  

Limited Liability Companies

Chancery Deems Deadlock-Based Dissolution Valid

By Ryan J. Maerz, Esq.

In Mehra et al. v. Teller et al., C.A. No. 2019-0812-KSJM, 2021 WL 300352, (Del. Ch. Jan. 29, 2021), the Delaware Court of Chancery upheld the dissolution of a Delaware limited liability company (the “LLC”) effected by a provision in the LLC’s operating agreement whereby a deadlock in the LLC’s two-person board triggered an automatic dissolution of the LLC. Plaintiff minority member and manager, and defendant majority member and manager, operated the LLC under a control-sharing provision that required unanimity for board action. Upon a deadlock-based dissolution, however, the LLC’s primary asset – its interest in a subsidiary – would be distributed to the LLC’s members (plaintiff and defendant) pro rata based on their disproportionate equity interests in the LLC. While the operating agreement afforded the members equal distribution rights with respect to the subsidiary post-deadlock, it did not require the control-sharing provision to carry through.

Mismanagement – attributed to plaintiff – caused business to flounder and distributions to cease. Plaintiff, however, could not be removed from the board (the member vote threshold could not be surpassed without him), so defendant created a board deadlock to trigger the automatic dissolution of the LLC, exit the control-sharing agreement, and carry on at the helm of the subsidiary without plaintiff on-board. It worked.

Plaintiff sued and argued that defendant breached the operating agreement and his fiduciary duties in effecting the dissolution by way of the manufactured deadlock. The Court held that the deadlock, despite being contrived, was genuine due to defendant’s subjective pre-contrivance belief that plaintiff should no longer manage the subsidiary, resulting in an irreconcilable disagreement. Under the same rationale, the Court held that defendant did not violate the operating agreement’s requirement that he act in good faith. The Court further held that defendant’s scheme did not constitute a violation of his duty of loyalty, as the evidence was at odds with plaintiff’s contention that defendant was motivated solely by his personal desire for control over the LLC’s cash flows.

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