Delaware Court Of Chancery Finds Certain Safe Harbor Protections Inapplicable To Approval Of Merger With General Partner’s Affiliate
On October 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted partial summary judgment to a common unitholder of Regency Energy Partners LP (“Regency”) challenging a merger with an affiliate of Regency’s general partner. Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Oct. 29, 2019). Plaintiff alleged that defendants (Regency’s general partner and its affiliates) breached the limited partnership agreement by approving the merger even though they “did not believe that the [m]erger was in the best interests of Regency.” Defendants argued that their approval was protected under three “safe harbors” in the agreement: (i) reasonable reliance upon the opinion of an investment banker; (ii) “special approval” by an independent conflicts committee; and (iii) a majority vote of the common unitholders unaffiliated with the general partner. Finding a genuine issue of fact as to whether the general partner’s board actually relied on the opinion of the investment banker, the Court denied defendants’ motion for summary judgment. The Court, however, determined plaintiff demonstrated that one of the members of the conflicts committee was not independent. Accordingly, the Court found the “special approval” safe harbor unavailable and granted partial summary judgment to plaintiff on that point. Because the proxy provided to common unitholders stated that the conflicts committee was independent, the Court found it misleading and granted partial summary judgment to plaintiff on the unavailability of the unitholder vote safe harbor.
Defendants argued that a fairness opinion issued by their investment banker entitled them to a conclusive presumption of good faith under a provision applying to an act “taken in reliance on the opinion” of a professional or expert, including an investment banker. But the Court found that “there is a genuine issue of fact about whether defendants actually relied” on the fairness opinion. The Court highlighted evidence that—a few days before the fairness opinion was issued—the conflicts committee itself had determined that the merger was fair on terms “less favorable” than improved terms on which the investment banker later issued its fairness opinion. The Court also pointed to evidence that the investment banker did not update its fairness opinion after the terms of the merger—including non-cash consideration—changed again after issuance.
By contrast, finding no genuine issue of fact, the Court granted partial summary judgment to plaintiff on the absence of the “special approval” safe harbor. The Court explained that defendants did not offer “evidence”—as opposed to an unsupported assertion—that one of the two conflicts committee members was still on the board of an affiliate of the general partner when the conflicts committee was established and began considering the merger. Moreover, even though the member resigned from the affiliate’s board within five days after the general partner appointed him to the committee and the general partner’s board approved another resolution regarding his appointment thereafter, the Court found it dispositive that the conflicts committee “was not validly constituted from its inception.”
For the same reason, the Court found that statements in the proxy that the conflicts committee was independent and that the merger was approved by “special approval” were misleading. Further, the Court held that the unitholder vote safe harbor entailed an implied obligation not to mislead the unitholders in connection with the vote. The Court, therefore, granted partial summary judgment to plaintiff on this issue as well.