McBride Law Blog

Make Sure To Read the Limited Partnership Agreement Before You Sign: Limited Partnership and Fiduciary Duties Under Delaware Law (Part II)

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Dieckman v. Regency GP LP[1] involved the acquisition of Regency Energy Partners LP (“Regency”) by an affiliated entity in a merger.  Dieckman was a former unitholder of Regency.  Dieckman claimed that Regency’s general partner (“GP”) favored the interests of its affiliates in agreeing to an unfair merger price and, by doing so, breached the limited partnership agreement (“LP agreement”).  Specifically, the LP agreement, which governs GP’s relationship with Regency’s limited partners, provided that whenever GP takes action in its capacity as GP, it must do so in good faith, meaning it “must believe that the determination or other action is in the best interests of the Partnership.”  Interestingly, the LP agreement also contained several “safe harbors” designed to shield GP from claims based on a breach of the LP agreement “or of any duty stated or implied by law or equity” due to conflicts of interest in the following situations:

(i) approval by a majority of the members of the conflicts committee; or

(ii) approval by the vote of a majority of the common units (excluding common units owned by GP and its affiliates).

The conflicts committee, in turn, was to be composed of two or more directors, none of whom are officers, directors, employees, or security holders of GP or any of its affiliates at the same time they are serving on the conflicts committee.

In 2015, GP’s board approved making a proposal to purchase Regency.  A conflicts committee was formed and approved the transaction.  Subsequently, Regency’s unitholders voted in favor of the merger as well, by 99.57 percent of units present at the meeting and 68.76 percent of total units outstanding, and at least 99.37 percent of the unaffiliated units present at the meeting and at least 59.63 percent of the total unaffiliated units outstanding. In other words, there was no question that a majority of unaffiliated unitholders approved the merger.  Nevertheless, Dieckman filed a lawsuit to prevent the merger from happening, claiming that GP breached the LP agreement by not acting in good faith because the merger was not in the best interests of the partnership and it instead favored the interests of GP’s affiliates.  GP argued that the merger was shielded from judicial review because two of the safe harbors under the LP agreement were satisfied through the conflicts committee and unitholder approvals.  Dieckman, in turn, argued that GP could not invoke the safe harbors because the unitholders were not fully informed about the transaction and because one of the members of the conflicts committee was formerly on the board of a GP affiliate, which, according to Dieckman, created a conflict of interest.

This post was the second part of a multi-part series on limited partnership and fiduciary duties. You can find the other posts by searching our blogs at www.mcbrideattorneys.com.  In our next post, we will discuss what the court had to say.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers, and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Firm, PLLC. She concentrates her practice on business law. So-Eun can be contacted at soeun.lee@mcbrideattorneys.com.  Her profile is available on www.mcbrideattorneys.com.

[1] Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ct. Chan. Mar. 29, 2016).  Unless otherwise specified, all references to the case are from this citation.

Posted In: Delaware Law Update, Partnerships, Uncategorized

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