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.