November 15, 2017
On November 14, 2017, the Delaware Court of Chancery issued an important order concerning master limited partnerships (“MLPs”) and other alternative entities in the context of conflict-of-interest transactions. In Brinckerhoff v. Kinder Morgan, Inc., et al., C.A. No. 2017-0313-JTL (Del. Ch. Nov. 14, 2017) (Order), Vice Chancellor Laster dismissed a challenge to a merger between an MLP and an affiliate of its general partner, alleging that the general partner failed to obtain any value for pending derivative litigation. The court held that the general partner successfully satisfied a contractual safe harbor which foreclosed the plaintiff’s claims because a majority of partnership units held by holders unaffiliated with the defendants voted in favor of the merger. Weil represents the defendants in the lawsuit.
Importantly, the ruling reinforces that a general partner has the option of satisfying any of a number of contractual safe harbor provisions, and a failure to satisfy one would not preclude satisfaction of another. Additionally, the court held that to successfully challenge disclosures made by an alternative entity not subject to fiduciary duties, the complaint must allege “fraud and conduct resembling fraud.” In one of the first applications of a recent Delaware Supreme Court decision on disclosure in the alternative-entity context, Dieckman v. Regency GP LP, 155 A.3d 358 (Del. 2017), this order underscores the high bar that investors in alternative entities must meet to overcome a safe-harbor defense based on unaffiliated-unitholder approval.
The Brinckerhoff decision provides helpful guidance to transaction planners in structuring potential conflict transactions to satisfy the governing contract’s requirements. It also reminds investors in alternative entities which have disclaimed fiduciary duties that investors’ rights are limited by the contractual framework and that investors cannot resort to the implied covenant as a backdoor to impose fiduciary-like duties.