August 01, 2018

MONTH-IN-BRIEF: Corporations, LLCs & Partnerships

Lawrence A. Goldman, Tarik Haskins

Corporate Law

Court of Chancery Finds that MLP Breached Partnership Agreement by Unfairly Issuing Securities

By Tarik J. Haskins, Morris, Nichols, Arsht & Tunnell LLP

In In re Energy Transfer Equity L.P. Unitholder Litigation, the Court of Chancery of the State of Delaware concluded that a private offering of securities by Energy Transfer Equity, L.P. (ETE) breached its limited partnership agreement (LPA). The court considered, among other issues, the meaning of the term “distribution” in the LPA and considered which party would bear the burden of proving that a conflicted transaction was fair or unfair if the alternative entity governing document imports an “entire fairness” equivalent for review of conflicted transactions. Under the LPA, all distributions were required to be pro rata. The plaintiffs, unitholders of ETE, challenged an issuance of securities by ETE, alleging that the offering of securities to some but not all unitholders of ETE violated the LPA. The plaintiffs argued that the issuance of securities was a non–pro rata distribution, that the transaction was a conflicted transaction that was not authorized in accordance with the terms of the LPA, and that as a non–pro rata distribution it should be void. The court found that the term “distribution,” which was not defined, did not include an issuance of a security for value. Consequently, the court concluded that the issuance was not a non–pro rata distribution that violated the LPA. The court also considered whether the transaction violated a provision in the LPA that prohibited ETE from entering into a conflicted transaction unless the transaction was fair and reasonable to ETE. After concluding that the contractual language of the LPA mandated that the burden was on the defendants to prove that the issuance was fair and reasonable, the court found that the defendants did not satisfy their burden to show that the price paid for the securities by the general partner of ETE and its affiliates was fair. The court, however, rejected plaintiffs’ request for rescission, which the court concluded was not warranted in this case.

Tarik Haskins

Partner; Morris, Nichols, Arsht & Tunnell LLP

Tarik is a partner in the Commercial Law Counseling Group. His practice covers a range of commercial transactions including mergers and acquisitions, secured financings, joint ventures, and business counseling.

Lawrence A. Goldman

Counsel, Gibbons P.C.

Larry, a member of the Corporate Department of Gibbons P.C., counsels middle market and smaller public company clients on a broad array of corporate and transactional matters, focusing on mergers and acquisitions (domestic and cross-border); capital formation and finance; governance; private placements and securities law compliance; distressed business restructuring and the corporate aspects of bankruptcy reorganization; and the organization and governance of joint ventures. He has substantial experience representing audit committees and other special board committees in corporate governance and internal investigation matters. He is a frequent speaker nationally on corporate matters, with a particular emphasis on the organization and operation of businesses as limited liability companies or other alternative entities. He is the author of The New Jersey Limited Liability Company Forms and Practice Manual and has been engaged as an expert witness on alternative entity governance and other corporate issues in litigation arising from transactional matters. Larry is a graduate of Colgate University, Boston University School of Law, and New York University School of Law (LL.M Taxation).