In re Energy Transfer Equity, L.P. Unitholder Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ENERGY TRANSFER EQUITY, ) L.P. UNITHOLDER LITIGATION ) C.A. No. 12197-VCG
MEMORANDUM OPINION
Date Submitted: April 16, 2018 Date Decided: May 17, 2018
Michael Hanrahan, Paul A. Fioravanti, Jr., Kevin H. Davenport, Samuel L. Closic, and Eric J. Juray, of PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL: Marc A. Topaz, Lee D. Rudy, Eric L. Zagar, Michael C. Wagner, and Grant D. Goodhart, III, of KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania, Attorneys for Plaintiffs.
Rolin P. Bissell, James M. Yoch, Jr., and Benjamin M. Potts, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Michael C. Holmes, John C. Wander, Craig E. Zieminski, and Andrew E. Jackson, of VINSON & ELKINS LLP, Dallas, Texas, Attorneys for Defendants Energy Transfer Equity, L.P., LE GP, LLC, Kelcy L. Warren, John W. McReynolds, Marshall S. McCrea III, Matthew S. Ramsey, Ted Collins, Jr., K. Rick Turner, Ray Davis, and Richard D. Brannon.
David E. Ross and Benjamin Z. Grossberg, of ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; OF COUNSEL: M. Scott Barnard, Michelle Reed, and Lauren E. York, of AKIN GUMP STRAUSS HAUER & FELD LLP, Dallas, Texas, Attorneys for Defendant William P. Williams.
GLASSCOCK, Vice Chancellor Now-Chief Justice Strine once colorfully described the results of precipitous
or imprudent action thus: it is easier to throw pizza at a wall than to clean it up.1 The
pie of the ill-fated merger of ETE and Williams hit the wall of the downturn in the
energy industry in early summer of 2016. The cleanup has, from a legal point of
view, been arduous, and is ongoing. This matter involves but one slice of that pie.
Certain ETE unitholders, purportedly on behalf of a class, challenge the
issuance of securities by ETE in a private offering going largely, but not exclusively,
to insiders. ETE made the issuance in contemplation of the merger with Williams.
According to the Defendants, ETE was, as a result of the cash required to
consummate the merger in light of the economic downturn, between the Scylla of a
downgraded credit rating—devastating for an MLP like ETE—and the Charybdis of
halting cash distributions to unitholders—a proposition also disastrous to an MLP.
In the Defendants’ telling, the private offering was a device to assuage concerns of
the credit rating agencies without cutting distributions; to the Plaintiffs, it was a
hedge meant to protect insiders from the anticipated bad effects of the coming
merger. I find it was both.
The private offering is described in detail in this Memorandum Opinion, but
in abbreviated form subscribers agreed to accumulate credit redeemable as common
1 Auriga Capital Corp. v. Gatz Props., 40 A.3d 839, 882 n.184 (Del. Ch. 2012), aff’d sub nom. Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012). Clearly, the Chief Justice does not own dogs like mine, who would make short work of such cleanup sans complaint. 2 units in ETE after nine quarters, in return for forgoing some distributions over that
period, and were guaranteed to accrue some quantum of such credit even if
distributions were reduced or cancelled. The benefit to ETE was that the forgone
distributions would allow the company to avoid some borrowing, lowering the debt-
to-earnings ratio, the metric that most concerned the rating agencies. The private
offering was not contingent on the merger closing.
In the event, ETE was able to avoid the merger. The energy market has
boomed, and the value of ETE units has soared. The Plaintiffs brought this action,
alleging that the private offering is prohibited under the terms of the LPA, and that
the contemplated redemption would result in a windfall for subscribers at the
expense of the Partnership and its non-subscribing unitholders. ETE strenuously
disagrees. The matter was tried over three days, and post-trial briefing and argument
ensued. The Plaintiffs seek cancellation of the private offering. The nine-quarter
life of the offering ends on May 18, 2018, at which point the accumulated credit will
be redeemed for common ETE units; therefore, equitable relief, according to the
Plaintiffs, to be meaningful must issue before that time. Accordingly, my
consideration of the matter has been abbreviated; this rough-and-ready
Memorandum Opinion is the result.
Upon consideration of the evidence, I find that the private offering does not
represent an impermissible distribution prohibited by the LPA. The offering is a
3 conflicted transaction, however, which under that contract must be fair and
reasonable to the Partnership. The Defendants failed to effectively take advantage
of safe harbor provisions that would have demonstrated, conclusively, compliance
with the “fair and reasonable” standard. The issue, then, is one of fact, with the
burden on the Defendants to demonstrate the fairness of the transaction. I find that
the Defendants have failed to demonstrate that the private offering was fair to the
Partnership. Thus, in issuing the securities, the General Partner breached the LPA.
The Plaintiffs have represented that damages are unavailable. They seek
equitable relief, the cancellation of the securities. I find that they have failed to
establish that equity should so act here, however.
My reasoning follows.
I. BACKGROUND
Trial took place over three days, during which ten witnesses gave live
testimony. The parties submitted over 900 exhibits, and sixteen depositions were
lodged. I give the evidence the weight and credibility I find that it deserves.
A. The Parties
Defendant Energy Transfer Equity, L.P. (“ETE”) is a Delaware master limited
partnership (“MLP”) headquartered in Dallas, Texas.2 ETE’s family of companies
2 PTO ¶ 16. 4 owns over 71,000 miles of oil and gas pipelines.3 ETE’s common units trade on the
New York Stock Exchange under the symbol “ETE.”4
Defendant LE GP, LLC is a Delaware limited liability company.5 LE GP,
LLC (the “General Partner”) directs all of ETE’s activities, and ETE is managed by
the General Partner’s board of directors (the “Board”).6 In accordance with this role,
the Board appoints ETE’s executive officers.7
Defendant Kelcy L. Warren has served as the Chairman of the Board since
August 15, 2007, and as of February 12, 2016, he held 187,739,220 ETE common
units, representing about 18% of ETE’s outstanding common units.8 Since August
15, 2007, Warren has also served as the CEO and Chairman of the board of Energy
Transfer Partners, GP, L.P. (“ETP GP”).9 ETP GP is the general partner of Energy
Transfer Partners, L.P. (“ETP”), a member of the ETE family of companies.10
Defendant John W. McReynolds has served as ETE’s President since March
2005, and he has been a General Partner director since August 2005.11 As of
February 12, 2016, McReynolds owned 25,084,555 ETE common units.12
3 Id. 4 Id. 5 Id. ¶ 22. 6 Id. ¶¶ 18–19. 7 Id. ¶ 25. 8 Id. ¶¶ 29, 33. 9 Id. ¶ 35. 10 Id. ¶¶ 26, 84. 11 Id. ¶ 38. 12 Id. ¶ 37. 5 Defendant Ted Collins, Jr. served on the Board from November 2015 to
October 31, 2016, and he served as an ETP GP director from August 2014 until he
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ENERGY TRANSFER EQUITY, ) L.P. UNITHOLDER LITIGATION ) C.A. No. 12197-VCG
MEMORANDUM OPINION
Date Submitted: April 16, 2018 Date Decided: May 17, 2018
Michael Hanrahan, Paul A. Fioravanti, Jr., Kevin H. Davenport, Samuel L. Closic, and Eric J. Juray, of PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL: Marc A. Topaz, Lee D. Rudy, Eric L. Zagar, Michael C. Wagner, and Grant D. Goodhart, III, of KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania, Attorneys for Plaintiffs.
Rolin P. Bissell, James M. Yoch, Jr., and Benjamin M. Potts, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Michael C. Holmes, John C. Wander, Craig E. Zieminski, and Andrew E. Jackson, of VINSON & ELKINS LLP, Dallas, Texas, Attorneys for Defendants Energy Transfer Equity, L.P., LE GP, LLC, Kelcy L. Warren, John W. McReynolds, Marshall S. McCrea III, Matthew S. Ramsey, Ted Collins, Jr., K. Rick Turner, Ray Davis, and Richard D. Brannon.
David E. Ross and Benjamin Z. Grossberg, of ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; OF COUNSEL: M. Scott Barnard, Michelle Reed, and Lauren E. York, of AKIN GUMP STRAUSS HAUER & FELD LLP, Dallas, Texas, Attorneys for Defendant William P. Williams.
GLASSCOCK, Vice Chancellor Now-Chief Justice Strine once colorfully described the results of precipitous
or imprudent action thus: it is easier to throw pizza at a wall than to clean it up.1 The
pie of the ill-fated merger of ETE and Williams hit the wall of the downturn in the
energy industry in early summer of 2016. The cleanup has, from a legal point of
view, been arduous, and is ongoing. This matter involves but one slice of that pie.
Certain ETE unitholders, purportedly on behalf of a class, challenge the
issuance of securities by ETE in a private offering going largely, but not exclusively,
to insiders. ETE made the issuance in contemplation of the merger with Williams.
According to the Defendants, ETE was, as a result of the cash required to
consummate the merger in light of the economic downturn, between the Scylla of a
downgraded credit rating—devastating for an MLP like ETE—and the Charybdis of
halting cash distributions to unitholders—a proposition also disastrous to an MLP.
In the Defendants’ telling, the private offering was a device to assuage concerns of
the credit rating agencies without cutting distributions; to the Plaintiffs, it was a
hedge meant to protect insiders from the anticipated bad effects of the coming
merger. I find it was both.
The private offering is described in detail in this Memorandum Opinion, but
in abbreviated form subscribers agreed to accumulate credit redeemable as common
1 Auriga Capital Corp. v. Gatz Props., 40 A.3d 839, 882 n.184 (Del. Ch. 2012), aff’d sub nom. Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012). Clearly, the Chief Justice does not own dogs like mine, who would make short work of such cleanup sans complaint. 2 units in ETE after nine quarters, in return for forgoing some distributions over that
period, and were guaranteed to accrue some quantum of such credit even if
distributions were reduced or cancelled. The benefit to ETE was that the forgone
distributions would allow the company to avoid some borrowing, lowering the debt-
to-earnings ratio, the metric that most concerned the rating agencies. The private
offering was not contingent on the merger closing.
In the event, ETE was able to avoid the merger. The energy market has
boomed, and the value of ETE units has soared. The Plaintiffs brought this action,
alleging that the private offering is prohibited under the terms of the LPA, and that
the contemplated redemption would result in a windfall for subscribers at the
expense of the Partnership and its non-subscribing unitholders. ETE strenuously
disagrees. The matter was tried over three days, and post-trial briefing and argument
ensued. The Plaintiffs seek cancellation of the private offering. The nine-quarter
life of the offering ends on May 18, 2018, at which point the accumulated credit will
be redeemed for common ETE units; therefore, equitable relief, according to the
Plaintiffs, to be meaningful must issue before that time. Accordingly, my
consideration of the matter has been abbreviated; this rough-and-ready
Memorandum Opinion is the result.
Upon consideration of the evidence, I find that the private offering does not
represent an impermissible distribution prohibited by the LPA. The offering is a
3 conflicted transaction, however, which under that contract must be fair and
reasonable to the Partnership. The Defendants failed to effectively take advantage
of safe harbor provisions that would have demonstrated, conclusively, compliance
with the “fair and reasonable” standard. The issue, then, is one of fact, with the
burden on the Defendants to demonstrate the fairness of the transaction. I find that
the Defendants have failed to demonstrate that the private offering was fair to the
Partnership. Thus, in issuing the securities, the General Partner breached the LPA.
The Plaintiffs have represented that damages are unavailable. They seek
equitable relief, the cancellation of the securities. I find that they have failed to
establish that equity should so act here, however.
My reasoning follows.
I. BACKGROUND
Trial took place over three days, during which ten witnesses gave live
testimony. The parties submitted over 900 exhibits, and sixteen depositions were
lodged. I give the evidence the weight and credibility I find that it deserves.
A. The Parties
Defendant Energy Transfer Equity, L.P. (“ETE”) is a Delaware master limited
partnership (“MLP”) headquartered in Dallas, Texas.2 ETE’s family of companies
2 PTO ¶ 16. 4 owns over 71,000 miles of oil and gas pipelines.3 ETE’s common units trade on the
New York Stock Exchange under the symbol “ETE.”4
Defendant LE GP, LLC is a Delaware limited liability company.5 LE GP,
LLC (the “General Partner”) directs all of ETE’s activities, and ETE is managed by
the General Partner’s board of directors (the “Board”).6 In accordance with this role,
the Board appoints ETE’s executive officers.7
Defendant Kelcy L. Warren has served as the Chairman of the Board since
August 15, 2007, and as of February 12, 2016, he held 187,739,220 ETE common
units, representing about 18% of ETE’s outstanding common units.8 Since August
15, 2007, Warren has also served as the CEO and Chairman of the board of Energy
Transfer Partners, GP, L.P. (“ETP GP”).9 ETP GP is the general partner of Energy
Transfer Partners, L.P. (“ETP”), a member of the ETE family of companies.10
Defendant John W. McReynolds has served as ETE’s President since March
2005, and he has been a General Partner director since August 2005.11 As of
February 12, 2016, McReynolds owned 25,084,555 ETE common units.12
3 Id. 4 Id. 5 Id. ¶ 22. 6 Id. ¶¶ 18–19. 7 Id. ¶ 25. 8 Id. ¶¶ 29, 33. 9 Id. ¶ 35. 10 Id. ¶¶ 26, 84. 11 Id. ¶ 38. 12 Id. ¶ 37. 5 Defendant Ted Collins, Jr. served on the Board from November 2015 to
October 31, 2016, and he served as an ETP GP director from August 2014 until he
passed away on January 28, 2018.13 As of February 12, 2016, Collins held 351,639
ETE common units.14
Defendant K. Rick Turner has served on the Board since October 2002, and
he has also served as a director of Sunoco L.P., a member of the ETE family of
companies.15 As of February 12, 2016, Turner owned 362,095 ETE common units.16
Defendant William P. Williams began working in the oil and gas industry in
1967, and he served as ETP’s Vice President of Engineering and Operations and
Vice President of Measurement before his retirement in 2011.17 Williams was
appointed to the Board in March 2012.18 As of February 12, 2016, Williams owned
5,399,835 ETE common units.19
Defendant Marshall S. McCrea III began serving as a General Partner director
in December 2009, and he has been an ETP GP director since 2009.20 Since
November 2015, McCrea has served as the ETE family’s Group Chief Operating
13 Id. ¶¶ 42–44. The parties have agreed to dismiss Collins from this action with prejudice. 14 Id. ¶ 40. 15 Id. ¶¶ 26, 47. 16 Id. ¶ 45. 17 Id. ¶ 50; Trial Tr. 188:21–22. 18 PTO ¶ 51. 19 Id. ¶ 48. 20 Id. ¶ 53. 6 Officer and Chief Commercial Officer.21 As of February 12, 2016, McCrea held
2,347,200 ETE common units.22
Defendant Matthew S. Ramsey has served on the Board since July 17, 2012.23
Since November 2015, Ramsey has been the President and COO of ETP GP, on
whose board he also serves.24 As of February 12, 2016, Ramsey held 52,317 ETE
common units.25
Defendant Ray Davis held 67,216,204 ETE common units as of February 12,
2016.26 Effective August 15, 2007, Davis retired from his positions as co-CEO and
co-Chairman of ETP, and co-Chairman of ETE.27 Davis resigned from the Board
on February 13, 2013, and he resigned from the ETP board on June 30, 2011.28
Defendant Richard D. Brannon began serving on the Board on March 16,
2016.29 He was not on the Board when it approved the issuance challenged by the
Plaintiffs in this action.30
21 Id. ¶ 54. 22 Id. ¶ 52. 23 Id. ¶ 55. 24 Id. ¶¶ 56–57. 25 Id. ¶ 55. 26 Id. ¶ 58. 27 Id. ¶ 59. 28 Id. ¶¶ 60–61. 29 Id. ¶ 64. 30 Id. 7 Plaintiff Lee Levine is a New Jersey lawyer who has held ETE common units
at all relevant times.31 Plaintiff Chester County Employees’ Retirement Fund has
likewise held ETE common units at all relevant times.32
B. Factual Background
1. ETE Agrees to Merge with Williams, and Industry Conditions Decline
On September 28, 2015, ETE and several of its affiliates entered into an
agreement to merge with the Williams Companies, Inc. (“Williams Co.”),33 an
energy infrastructure company.34 Under the merger agreement, Williams Co. would
receive, among other things, $6.05 billion in cash, which ETE would finance with
new debt.35 ETE would also assume approximately $4.2 billion of Williams Co.’s
outstanding debt.36 Moreover, ETE expected to become the parent of Williams
Partners, L.P. (“WPZ”), which had $19.1 billion in outstanding debt.37 As a result,
ETE predicted that its consolidated debt would increase by over $30 billion if the
merger closed.38
31 Id. ¶¶ 11–12. 32 Id. ¶ 14. 33 I refer to The Williams Companies as “Williams Co.” to differentiate references to William P. Williams, member of the Board, who I denominate as “Mr. Williams” or “Williams.” 34 Id. ¶¶ 80, 87. Interested readers may find a more complete description of the merger in Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017). 35 JX 405.0078. 36 Id. 37 Id. at .0046. 38 Id. 8 Soon after the merger was announced, the energy sector entered a precipitous
decline.39 From September 2015 to the end of February 2016, the price of crude oil
fell by 26.3%, and the price of natural gas dropped 39.1%.40 During this period,
ETE’s unit price fell by 65.5%.41 As a result of the downturn, the credit market for
energy companies experienced significant stress.42 Access to credit was reduced,
and energy companies were at increased risk of a credit rating downgrade from the
major rating agencies (Moody’s Investors Services, Standard & Poor’s, and Fitch
Group).43 Indeed, between December 2015 and March 2016, Moody’s issued fifty-
two credit rating downgrades in the energy sector alone.44 One group of analysts
covering the MLP sector noted that “the rating agencies have raised the bar for
what’s acceptable in terms of debt/EBITDA levels.”45
These developments spelled trouble for ETE. As an MLP, ETE distributed
all of its available cash to unitholders every quarter.46 Thus, ETE depended on
access to capital markets to fund its growth.47 Because credit ratings determine
access to credit and the cost of debt, it was particularly important for the ETE family
39 Trial Tr. 460:13–17; JX 138.0003. 40 JX 678.0020–21. 41 Id. at .0021. 42 Id. at .0022. 43 Id. at .0010, .0022. 44 Id. at .0022. 45 JX 242.0002. 46 JX 678.0009; Trial Tr. 229:3–17. 47 JX 678.0010; Trial Tr. 60:12–14. 9 of companies to maintain its ratings.48 But that was becoming increasingly difficult
by late 2015, when the rating agencies began to express concern about ETE’s credit
outlook.49 Notably, from September 2015 to February 2016, ETE’s and Williams
Co.’s EBITDA projections for 2016 to 2018 declined by between 14% and 22%,
which increased ETE’s forecasted debt-to-EBITDA ratio (“D/E”).50
In January 2016, the rating agencies downgraded Williams Co. and WPZ and
lowered ETE’s credit outlook from “positive” to “stable.”51 Tom Long, ETE’s CFO,
described the latter step as “shooting a little missile across the bow,” by which he
meant that the rating agencies were signaling the importance of taking action to
improve ETE’s credit outlook.52 The rating agencies focused in particular on ETE’s
D/E, which they expected to be kept at 4.0x or lower; Long told the agencies that if
the ratio went above 4.0x, an equity issuance would be on the table.53 For its part,
Perella Weinberg Partners (“Perella”), ETE’s financial advisor, predicted that ETE’s
D/E would reach 4.7x if the merger with Williams Co. closed.54 ETE therefore
needed to take swift action to assuage the rating agencies, because if it did nothing,
it faced the prospect of a credit rating downgrade.55 But deleveraging need not come
48 JX 678.0010; Trial Tr. 60:15–24. 49 Trial Tr. 227:24–229:24. 50 JX 556.0018–19; JX 900.0004. 51 JX 52; JX 56.0002; JX 63; Trial Tr. 233:17–20. 52 Trial Tr. 233:3–20. 53 Id. at 230:19–231:19; JX 49.0002; JX 53.0001. 54 JX 175.0004. 55 Trial Tr. 233:21–234:6, 409:1–4, 609:17–20; Beach Dep. 144:1–6. 10 “in one fell swoop;” instead, the rating agencies look for “an actionable plan to
achiev[e] a longer term leveraging target.”56
As the Plaintiffs’ expert testified, a rating downgrade would have put ETE in
“a very bad situation.”57 For one thing, ETE’s and its subsidiaries’ credit ratings are
linked, so a downgrade at ETE could have led to downgrades at other companies in
the ETE family.58 And because ETE’s subsidiaries were only one step above a high-
yield rating, a downgrade at those subsidiaries would have had several negative
consequences, including a substantial increase in the cost of debt and a reduction in
access to capital markets.59 Moreover, a downgrade at ETE would have made it
much more costly to finance or refinance its debt.60 To illustrate this, one of the
Defendants’ experts showed that a one-step downgrade would have increased ETE’s
interest expense by approximately $607 million between 2016 and 2018.61 Finally,
a downgrade would have harmed ETE’s competitiveness and commercial
reputation.62
56 Trial Tr. 470:18–23. 57 Id. at 63:6–7. 58 Id. at 504:18–21; McCrea Dep. 48:6–13, 56:2–57:2. 59 Trial Tr. 238:1–15, 504:18–505:14; see also JX 242.0005 (“For midstream companies with investment grade ratings, defending that rating remains of utmost importance.”). 60 JX 678.0033; Beach Dep. 256:16–21. 61 Trial Tr. 606:7–8; JX 678.0034. 62 McCrea Dep. 54:4–19. 11 2. ETE Explores Deleveraging Options
ETE began considering deleveraging options in early 2016.63 ETE’s first step
was to decide to keep distributions flat at $0.285 per quarter for several quarters.64
That was a departure from past practice: from the first quarter of 2014 to the third
quarter of 2015, ETE’s distributions had steadily increased.65 ETE also retained
Perella to, among other things, help it devise a plan to assuage the rating agencies.66
Perella presented ETE with several options, including issuing equity, renegotiating
the terms of the Williams Co. merger so that ETE would pay with equity rather than
cash, selling assets, and cutting distributions.67 Several of these options were
infeasible in early 2016.68 For example, given industry conditions at the time, asset
sales were not an attractive option.69 What is more, ETE tried (and failed) to
persuade Williams Co. to accept equity rather than cash as merger consideration.70
ETE was further stymied by the merger agreement, which contained several
conduct-of-business restrictions that constrained its deleveraging options.71
63 Trial Tr. 232:5–17. 64 Id. at 246:5–15; JX 124.0003; JX 181.0006. 65 PTO ¶ 21. 66 Trial Tr. 448:6–8; JX 76.0001; JX 136.0004. 67 JX 136.0006, .0014; JX 175.0005, .0007. 68 E.g., Beach Dep. 259:12–21; Trial Tr. 251:1–252:8. 69 Trial Tr. 138:20–139:4. 70 DX7, at 190:21–193:15. 71 JX 35, § 4.01(b); Trial Tr. 251:6–8. 12 As just noted, Perella’s analyses included distribution cuts as one means of
reducing leverage.72 For example, in its February 8, 2016 presentation to the General
Partner and ETP boards, Perella explained that ETE had three “holistic” options for
reducing its leverage: issuing equity, adjusting the merger consideration, and cutting
distributions.73 Perella noted that a partial or complete distribution cut following the
merger would pose “[n]o execution risk,” in addition to satisfying the rating agencies
and not requiring Williams Co.’s approval.74
Perella was not the only entity that analyzed distribution cuts for ETE. In
January 2016, Goldman, Sachs & Co. performed such an analysis.75 Indeed, in mid-
February, ETE President John McReynolds told Goldman that ETE was open to the
possibility of a distribution cut.76 And starting in early February 2016, ETE itself
began analyzing scenarios in which distributions were cut, though neither ETE’s
management projections nor its presentations to the rating agencies included any
cuts.77
Moreover, around this time, some market participants expressed the view that
ETE would eventually cut distributions. For example, on January 15, 2016, Wells
72 E.g., JX 81.0002; JX 82.0005; JX 86.0005; JX 94.0006, .0008, .0010, .0022–23; JX 136.0009. 73 JX 175.0005. 74 Id. 75 JX 75.0001–4; JX 93.0001, .0037–39. 76 JX 191. 77 JX 155.0002; JX 157.0002–03; JX 170.0001; JX 199.0001; JX 205.0001–02; JX 253.0003–04; Trial Tr. 271:15–272:8. 13 Fargo described ETE as a “[p]otential [c]andidate” for a distribution cut owing to its
“[h]igh leverage [and] limited ability to access capital markets.”78 And on February
10, financial services provider Raymond James sent the following email to a General
Partner director: “The latest report of Feb 9, it seems like these are coming
daily….obviously the ETE group is trading as if a distributions cut is coming….good
luck.”79 During a February 25 earnings call, Warren himself stated that while there
were no “contemplated distribution cuts at ETP whatsoever,” they were nevertheless
an “option” and “certainly possible.”80
Nevertheless, Perella and ETE aver they were not seriously considering a
distribution cut at this time.81 Long explained at trial that, in the MLP sector,
distribution cuts are “the option of last resort, kind of the nuclear option.”82 Warren,
for his part, testified that maintaining distributions was critical to ETE, and that
cutting distributions would cause the market to “lose[] its trust” in the company,
thereby “affect[ing] [its] equity price for [the] long term.”83 And Andrew Bednar, a
Perella partner who advised ETE on deleveraging options, noted that distribution
cuts are “the last thing on the list.”84 Bednar elaborated: “[I]n the MLP universe,
78 JX 66.0008. 79 JX 184.0001. 80 JX 280.0013. 81 Trial Tr. 253:1–10, 441:3–8, 456:14–22. 82 Id. at 247:4–6. 83 Id. at 391:24–392:13. 84 Id. at 456:8. 14 distributions are viewed as sacrosanct, and they drive a lot of the valuation of the
underlying unit. And so if you look at history, ‘what’s past is prologue,’ you would
have to expect a pretty severe reaction to any distribution cut.”85 Bednar’s take on
distribution cuts finds some support in market evidence: between July 2015 and
March 2016, MLPs that engaged in distribution cuts underperformed the S&P by
45.4% in the year after the cuts.86
3. ETE Decides on a Public Offering, Which Then Becomes a Private Offering
On February 8, 2016, the Board evaluated a term sheet for a public offering
of securities with a guaranteed $0.11 of cash or accrual per quarter.87 The discussion
included a presentation by Perella on various deleveraging options.88 Four days
later, Long sent Don Chappel, Williams Co.’s CFO, a draft Form S-3 for the public
offering that guaranteed only $0.11 in cash or accrual if common unit distributions
were less than $0.11 (the “Initial Terms”).89 If the common unit distributions were
above $0.11, however, the participating unitholders would receive $0.11 in cash and
an accrual, redeemable for common units, for the amount in excess of $0.11.90
85 Id. at 456:24–457:5. 86 JX 688.010. 87 JX 175.0001, .0012–13. 88 Id. at .0001–03. 89 JX 200.0001, .0021. 90 Id. at .0022; Trial Tr. 318:19–319:1. 15 On February 13, 2016, Chappel informed Long that Williams Co. believed
the public offering required Williams Co.’s consent and that he (Chappel) would not
allow Williams Co.’s auditors to release the financials necessary to file the S-3.91
That was essential to the public offering, because to issue the securities, ETE was
required to file an S-3 with the Securities and Exchange Commission.92 The same
day Long and Chappel had this conversation, attorneys representing Williams Co.
and ETE exchanged emails about the disputed consent requirement.93 The next day,
Chappel sent Long an email stating that the consent “matter will not be resolved in
the next several days,” and ignoring a request from Long to designate a person to
work on obtaining consents for the proposed S-3.94 Within a few minutes, Thomas
Mason, ETE’s general counsel, and McReynolds, ETE’s president, exchanged
emails that included Chappel’s response.95
On the morning of February 15, Latham & Watkins LLP, which represented
ETE, sent an updated S-3 and LPA Amendment in regard to the proposed offering,
with redlines, to ETE’s leadership and its financial and legal advisors.96 Those
attachments are fully redacted.97 Nevertheless, a comparison of redlines to
91 JX 200.0001; JX 215.0002; Trial Tr. 315:12–316:11. 92 17 C.F.R. § 210.3–05. 93 JX 206.0001–03. 94 JX 209.0001. 95 Id. 96 JX 233.0001–02. 97 Id. at .0003–10. 16 Amendment No. 5 from Latham’s drafts of February 12 and February 2598 reveals
an increase in unit quarterly accrual from $0.11 to $0.285.99 That is, the updated S-
3, for the first time, contained a massive accrual increase, which would be a lucrative
hedge for subscribers in the event of distribution cuts.
That afternoon, the Board met via telephone.100 The meeting minutes are
redacted; what is disclosed does not include any discussion about a change in the
unit accrual rate from $0.11 to $0.285.101 In the Board resolutions, the Board
purported to approve the public issuance of units on “substantially the terms set forth
in the term sheet previously provided to the Board.”102 Yet a redline comparison of
the February 8 term sheet previously provided to the Board and the term sheet
actually approved by the Board on February 15 reveals a substantial change, from
the $0.11 guaranteed accrual to a $0.285 guaranteed accrual.103 Moreover, on the
same day as the February 15 board meeting, a Perella employee outlined the
differences between the “Old Plan” and the “New Plan.”104 The “Old Plan” allowed
98 An email from Latham on February 25, 2016 stated that the attached February 25, 2016 redline was “marked to the last version distributed in the [February 15, 2016 at 9:56 am] email below.” JX285.0001. 99 Compare JX 202.0004–6, with JX 285.0024. 100 JX 213.0001. 101 Id. at .0001–02. 102 JX 220.0001. 103 JX 219.0019–20. 104 JX 216.0001; JX 219.0001. 17 for an $0.11 distribution per quarter, while the “New Plan” guaranteed $0.285 in
quarterly accruals105 (the “Revised Terms”).
Long testified that, at the February 15 meeting, he gave a report on his
February 13 conversation with Chappel—the one in which, according to Long,
Chappel stated that “he was not going to allow [Williams Co.’s] auditors to provide
the consent” necessary to consummate the public offering.106 Thus, the evidence
supports the conclusion that the Board knew on February 15 that Williams Co. would
likely refuse to take the steps required for ETE to complete the public offering. The
record is silent as to whether ETE bothered to communicate the Revised Terms to
Williams Co.
On February 18, Long emailed Chappel “to follow up concerning ETE’s
proposed offering of convertible preferred units that we discussed last Friday. I
know that our respective legal counsels have spoken and I understand that Williams
has taken the view that its consent to the offering is required under the merger
agreement.”107 Chappel responded that “[t]he Williams Board unanimously
concluded not to consent to the proposed offering. Accordingly, we have advised
Williams’ external auditors not to work on their consent, as ETE is not entitled to
105 JX 216.0001; Trial Tr. 321:7–322:2. 106 Trial Tr. 315:12–316:11. 107 JX 244.0002 (emphasis added). 18 proceed with this offering without the consent of Williams’ Board.”108 Thus, ETE
would not be able to consummate the public offering. Long testified that he was
“floored” by Williams Co.’s refusal, and his colleagues at ETE similarly claimed to
be “very disappointed.”109 But, as noted above, this testimony is not credible,
because Long himself admitted that on February 13, Chappel had already told him
that he (Chappel) would not allow Williams Co.’s auditors to provide the
consents.110 And Long admitted that he shared this conversation with the Board on
February 15—three days before the February 18 email exchange with Chappel.111
At the February 15 meeting, the Board approved the public offering of
convertible preferred units.112 The plan involved offering securities to all
unitholders. A participating unitholder would receive one security for each common
unit she elected to participate (the “Participating Units”).113 In return, she would
forgo quarterly distributions payable on common units above $0.11 per unit for eight
quarters.114 During the plan period, the securities and Participating Units could not
be transferred.115 After the plan period, each security would convert into a fraction
of a common unit based on the security’s “Conversion Value” divided by the
108 Id. 109 Trial Tr. 260:19, 261:9–12. 110 Id. at 315:12–316:11. 111 Id. 112 JX 213.0002; JX 220; Trial Tr. 254:3–255:6. 113 JX 219.0003. 114 Id. 115 Id. at .0004. 19 “Conversion Price.”116 The Conversion Value would increase each quarter by
$0.285 minus the distribution paid to the unitholder.117 The Conversion Price would
be 95% of the five-day volume-weighted average closing price of ETE’s common
units at the time of the offering. This five-percent discount was purportedly designed
to encourage participation by common unitholders.118 It was lower than the discount
(10-15%) suggested for that purpose by Perella.119
Several features of the public offering as approved by the Board on February
15 bear emphasis. First, if ETE cut common distributions to zero during the plan
period, each security would still receive a quarterly accrual of $0.285.120 Thus, as
Perella put it, “accretion is realized all the [way] up to 29c even with no distribution,”
so there was “limited downside to no distribution.”121 Put differently, even if the
common unitholders received nothing in a given quarter, the securities would be
entitled to receive $0.285 in deferred value.122 Second, if ETE kept common
distributions flat at $0.285 per quarter, each security would receive a $0.11 cash
distribution per quarter plus a $0.175 quarterly accrual.123 On the other hand, if ETE
raised common distributions to, say, $0.40 per quarter, each security would be
116 Id. 117 Id. 118 JX 103.0004; Trial Tr. 257:3–7, 472:21–475:15. 119 Id. 120 JX 216.0001. 121 JX 225.0001. 122 JX 216.0001. 123 Id. 20 entitled only to a $0.11 quarterly cash distribution plus a $0.175 accrual.124 If,
however, $0.40 per quarter was declared, at the discretion of the General Partner, to
be an “Extraordinary Distribution,” securities would be entitled to receive that
amount as a quarterly cash distribution.125 “Extraordinary Distribution” was defined
to include any non-cash distribution or “any cash distribution that is materially and
substantially greater, on a per unit basis, than the Partnership’s most recent regular
quarterly distribution, as determined by [the] general partner.”126
According to ETE, the purpose of the proposed public offering was to help
the company reduce its leverage.127 ETE expected to issue the entire $1 billion of
equity allowed under the merger agreement it had entered into with Williams Co.,
and it expected to save the same amount via the public offering.128 In making these
predictions, ETE assumed (i) a 68% participation rate among common unitholders,
and (ii) cash savings of $0.175 per unit per quarter during the plan period.129
Nevertheless, a member of the Perella team commented at the time that, “[i]f cash
distributions on common units are cut to zero, the preferred . . . distributions don’t
124 Id. 125 JX 219.0007. 126 Id. 127 JX 213.0001. 128 Trial Tr. 257:8–17, 405:9–17, 480:19–24; Long Dep. 45:20–47:17; JX 214.0006–07. 129 Trial Tr. 284:3–19; JX 212.0059; Long Dep. 46:1–7. 21 conserve cash in and of themselves – rather, they represent a wealth transfer from
non-participating to participating units.”130
Long had met with the rating agencies before the February 15 meeting to
discuss the terms of the proposed public offering.131 After the Board approved the
issuance, Long attended additional meetings with the agencies in which he explained
how the public offering would help ETE “get[] ahead of the big downturn in the
commodity markets that we were seeing.”132 The rating agencies were “very
positive” about the plan.133 Moreover, they told Long that the securities would be
treated as equity rather than debt, a decision that was important to him.134 Notably,
Plaintiff Lee Levine testified that he would not have suffered any harm if ETE had
consummated the public offering.135 Similarly, Murray Beach, the Plaintiffs’ expert,
conceded that a public offering of securities would be inherently fair and
reasonable.136 Beach also testified that he would not object to a situation in which
ETE engaged in a public offering, but the only participants were those that in fact
participated in the private offering (the “Private Offering,” as described below).137
130 JX 217.0002. 131 E.g., JX 193.0001. 132 Trial Tr. 259:5–15. 133 Id. at 259:16–17; see also id. at 397:11–398:2; JX 450.0002. 134 Trial Tr. 257:18–258:8. 135 Id. at 15:7–14; see also JX 644.0009 (“Plaintiff does not allege that he would have suffered harm had ETE offered the Convertible Units to all ETE common unitholders through the planned public offering.”); JX 645.0008 (same). 136 Trial Tr. 58:4–7. 137 Id. at 58:8–16. 22 As just noted, Williams Co.’s refusal to obtain the necessary consents meant
that ETE could not consummate the public offering. Thus, on February 22, 2016,
the Board decided to change course and pursue the Private Offering of securities.138
Notably, a private placement would not require Williams Co.’s consent.139 Long
testified at trial about the thinking behind pursuing a private placement:
We’ve done all the work on this. We’ve done all the analysis on it. It’s a great instrument. The rating agencies have been very pleased with it. What do we do? We decided at that point that we would go into what we call a . . . private placement, which, you know, we’ve done private placements before . . . on the equity side. It’s not something that’s new to us. It’s something we’re actually pretty experienced at. And we decided to go that path.140
The terms of the Private Offering were largely the same as those of the public
offering embodying the Revised Terms approved on February 15.141 To repeat, those
terms were amended substantially from the Initial Terms the Board had been
considering, before February 15, with Perella’s guidance. Significantly, at the
February 15 meeting, the Board was informed of for the first time, and approved,
the guaranteed accrual term the Perella had described as a “wealth transfer” to
subscribers in case distribution were cancelled.142 In addition, in ultimately
approving the Private Offering on February 28, the Board approved two additional
138 Id. at 261:21–262:9, 407:8–17; JX 258.0001. 139 JX 258.0001. 140 Trial Tr. 261:23–262:9. 141 Compare JX 219.0003–04, with JX 410.0001–02. 142 JX 219.0019–20. 23 changes. First, the plan period was extended from eight to nine quarters.143 Second,
electing unitholders would be allowed to transfer their securities and Participating
Units during the plan period if they received permission from the General Partner.144
The discretion of the General Partner to waive the transfer restrictions was uncabined
by the terms of the Private Offering.145
The plans and their changes may be summarized as follows:
Term February 12 Initial February 15 February 28 Terms Revised Terms Private Issuance Minimum $0.11 $0.285 $0.285 Quarterly Accrual or Cash General Partner No No Yes Waiver for Transfers General Partner Yes Yes Yes Waiver for Extraordinary Distributions Timeframe 8 quarters 8 quarters 9 quarters
4. The Conflicts and Audit Committees Approve the Issuance
At the February 22 meeting where it agreed to pursue the Private Offering,
the Board also decided to establish “a conflicts committee made up of Messrs.
Collins, Williams and Turner” to evaluate the proposed transaction.146 Collins and
143 JX 410.0002. 144 Id. 145 Id. 146 JX 258.0002. 24 Bill Williams were both long-time friends of Kelcy Warren, who had asked them to
join the Board.147 Before his appointment to the Board, Williams had never served
as a director, and prior to the events of this case, he had never been on a conflicts
committee.148 Williams’ background is in engineering; before his retirement in
2011, he had served as ETP’s Vice President of Engineering and Operations and
Vice President of Measurement.149 As of February 12, 2016, Williams owned
5,399,835 ETE common units, and he did not participate in the issuance of
securities.150 For his part, Collins held 351,639 ETE common units as of February
12, 2016, and he also did not participate in the issuance.151
As it turned out, neither Collins nor Turner was eligible to serve on the
Conflicts Committee. Under ETE’s limited partnership agreement (the “LPA”), the
Conflicts Committee could not include directors who were “officers, directors or
employees of any affiliate of the General Partner.”152 Turner served on the Sunoco
board, and Collins was an ETP director;153 both of those entities were “affiliate[s] of
the General Partner.”154 Thus, Bill Williams was the only member of the Conflicts
147 Trial Tr. 190:13–20; Aug. 24, 2016 Williams Dep. 13:9–16, 16:8–12; Collins Dep. 13:19–15:2. 148 Aug. 24, 2016 Williams Dep. 13:6–8, 76:7–11. 149 PTO ¶ 50; Trial Tr. 188:21–22. 150 PTO ¶ 48. 151 Id. ¶ 40. 152 JX 1.0008. 153 JX 315.0001. 154 Id. 25 Committee—as established by the Board on February 22—who was actually eligible
to serve.
At some point after the February 22 meeting, Turner told General Partner
director Matthew Ramsey that he was ill and would not be able to serve on the
Conflicts Committee.155 Ramsey, in turn, shared the news with Thomas Mason,
ETE’s general counsel.156 Later, on February 24, Mason informed investment bank
Moelis & Company that “[t]he two members of the Conflicts Committee are Ted
Collins and Bill Williams” and that “the Conflicts Committee needs to make the
decision to hire Moelis.”157 Yet the Board never designated a two-man Conflicts
Committee, and Moelis was never engaged to advise the Conflicts Committee,
apparently because it had a conflict.158 In any event, Mason told Williams that the
Conflicts Committee should hire FTI Consulting, Inc. and Akin, Gump, Strauss,
Hauer and Feld, LLP as financial and legal advisors, respectively.159 Williams
testified that if FTI and Akin Gump were good enough for Mason, they were good
enough for him.160 Williams also testified that Mason was responsible for selecting
Collins to chair the Conflicts Committee.161
155 Trial Tr. 506:12–21. 156 Id. at 506:21–507:3. 157 JX 272.0001. 158 Conly Dep. 35:22–36:12. 159 Aug. 24, 2016 Williams Dep. 74:7–75:7. 160 Trial Tr. 152:8–10. 161 Aug. 24, 2016 Williams Dep. 86:17–20. 26 Meanwhile, ETE’s lawyers at Latham realized that Collins and Turner were
ineligible to serve on the Conflicts Committee.162 Latham made this discovery on
the morning of February 26—the day the Committee held its first meeting.163
Latham also realized that the LE GP LLC agreement required that a separate
committee—the Audit and Conflicts Committee (the “A&C Committee”)—approve
the issuance as well.164 The A&C Committee was a standing Board committee; at
the time, it consisted of Williams, Collins, and Turner.165
Having made these belated discoveries, Latham and Akin Gump decided on
February 26 to create “revised resolutions” for the February 22 meeting.166 The
“revised resolutions” purportedly reflected the Board’s decision to have (i) Williams
serve as the sole member of the Conflicts Committee, and (ii) Williams and Collins
serve as members of the A&C Committee.167 Specifically, Latham’s “revised
resolutions” stated that the Board “appoints Messr. Williams to serve as the sole
member of the Conflicts Committee,” and that “Ted Collins, Jr. and Messr. Williams
comprise a majority of the members of the ‘Audit and Conflicts Committee.’”168
The minutes of the February 22 meeting do not match these purported resolutions:
162 JX 315.0001 163 Id. 164 Id. 165 JX 405.0119. 166 JX 318.0001 167 Id. at .0007–10. 168 Id. 27 the Board appointed “Messrs. Collins, Williams and Turner” to the Conflicts
Committee, and there is no mention in the minutes of the A&C Committee.169
Moreover, as discussed below, there is no evidence in the record that the Board ever
adopted Latham’s “revised resolutions.”
Also on February 26, Latham learned from Mason that Turner was in fact
unable to serve on the A&C Committee.170 Latham then informed Akin Gump that
Mason did not “have any issues with our single member Conflicts Committee and
allowing the Conflicts Committee to review and evaluate the transaction with the
Audit and Conflicts Committee.”171 In other words, Bill Williams would serve as
the sole member of the Conflicts Committee, which would evaluate the issuance
alongside the A&C Committee, of which he formed half the membership.
The Board never held a meeting to reconstitute the Conflicts Committee.172
Within a few days of the February 22 meeting, however, the directors individually
learned that Williams would be the Committee’s sole member.173 Several directors
testified that they did not see any problem with Williams serving as a one-man
Conflicts Committee.174 Warren thought Williams would “do his duty” because
169 JX 258.0001–02. 170 JX 813.0001. 171 Id. 172 Trial Tr. 515:4–6; Aug. 24, 2016 Williams Dep. 157:23–158:15. 173 Trial Tr. 410:9–411:1, 512:18–20; JX 330.0001. 174 Trial Tr. 411:2–4, 507:22–508:1; McCrea Dep. 67:8–11. 28 “he’s a very capable, very knowledgeable guy, plus he had financial advisors and
legal advisors as well.”175 Ramsey, a General Partner director, felt the same way:
I’ve known Bill Williams for probably 25 years. There couldn’t be a more honest person in the world than Bill Williams. He’s also a large unitholder at ETE. So he had every reason in the world to look out for the best interest of the partnership. He’s smart, he’s a very, very good engineer and worked for the company for a number of years, and I was completely comfortable with him doing the analysis and . . . making a recommendation to the full board.176
McCrea, another General Partner director, similarly explained that he was
comfortable with Williams serving as a one-man Conflicts Committee because “he
is an independent director, has been in the industry and knowledgeable of this
business for . . . 60 years probably.”177
The Conflicts Committee purportedly held its first meeting on the afternoon
of February 26, 2016.178 The meeting was a telephone conversation between
Williams and Christine LaFollette of Akin Gump, and the minutes reflect that it
lasted twenty minutes.179 The minutes also reflect that Williams approved engaging
Akin Gump to provide legal advice to the Conflicts Committee, and that Williams
and LaFollette discussed the Committee’s duties and the possible engagement of FTI
as the Committee’s financial advisor.180 LaFollette apparently explained to Williams
175 Trial Tr. 411:6–9. 176 Id. at 508:4–13. 177 McCrea Dep. 68:13–16. 178 JX 324. 179 Id. at .0001–03. 180 Id. at .0002–03. 29 that he would serve a “dual role” “as the sole member of the Committee and, along
with . . . Collins, as a member of the Audit and Conflicts Committee.”181 Williams
then supposedly told LaFollette that he was familiar with the terms and purpose of
the scuttled public offering, since he had been serving on the Board when it was
considering that transaction.182 Finally, Williams purportedly told LaFollette to set
up a meeting with FTI for the morning and afternoon of February 27 to discuss the
issuance.183
Again, the minutes say the February 26 meeting lasted twenty minutes.184
And Williams testified that the meeting lasted somewhere between fifteen and thirty
minutes.185 But the phone records Williams produced in this litigation reflect only
a twenty-seven-second phone call from LaFollette on February 26.186 Williams’
counsel represented that those phone records were “the relevant phone records
covering the meetings of the Conflicts Committee.”187 The weight of the evidence,
then, suggests that the February 26 meeting did not take place as described in the
minutes. It also bears mentioning that on the morning of this purported meeting,
Collins had signed an engagement letter with FTI, supposedly in his capacity as
181 Id. at .0002. 182 Id. at .0003. 183 Id. 184 Id. 185 Aug. 24, 2016 Williams Dep. 97:6–8; Trial Tr. 156:22–23. 186 JX 702; Trial Tr. 159:11–163:7. 187 JX 814.0001; see also JX 815. 30 “Chairman” of the Conflicts Committee.188 Indeed, Collins apparently did not learn
he would not serve on the Conflicts Committee until February 27, one day after the
purported February 26 meeting.189 There is no record that he attended the February
26 meeting, however.
In any event, the Conflicts Committee and the A&C Committee held a joint
telephonic meeting on the morning of February 27.190 Williams, Collins, Akin
Gump, and FTI attended the meeting.191 FTI began by discussing its experience in
MLP transactions.192 It then described the purpose and terms of the proposed
issuance, explaining “its goal of aiding in the reduction of the Partnership’s
outstanding debt to a ratio of less than 4.0x EBITDA, by conserving cash for debt
reduction by allowing certain common unitholders to . . . forgo a significant portion
of the distributions on their common units.”193 FTI ended by describing the report it
would provide the Conflicts Committee regarding the proposed issuance, and
Williams requested that FTI include in this report “an analysis of the pro forma
results to the Partnership of the Proposed Transaction in the alternative events where
188 JX 306.0001, .0011. 189 JX 819.0002. 190 JX 333. 191 Id. at .0001. 192 Id. at .0002. 193 Id. 31 the Partnership’s pending merger with The Williams Companies, Inc. is or is not
consummated.”194
The Conflicts Committee and the A&C Committee met again that
afternoon.195 FTI provided its analysis of the proposed issuance.196 It explained that
it had obtained Perella’s financial model, which it modified “to reflect (i) the
extension of the proposed Plan Period from 8 quarters to 9 quarters and (ii) certain
assumptions made regarding synergies resulting from the Partnership’s planned
merger with The Williams Companies, Inc.”197 FTI stated that the proposed issuance
would be “a valuable mechanism to aid in the reduction of the Partnership’s
outstanding debt to a ratio of less than 4.0x EBITDA.”198 Williams purportedly
asked a question about a chart in a Perella presentation he had reviewed about three
weeks before in connection with a meeting of the General Partner and ETP boards.199
But Williams admitted he did not have a copy of the Perella presentation at the time
of the February 27 meeting, and indeed FTI sent it to him a mere two minutes before
that meeting ended.200
194 Id. 195 JX 347. 196 Id. at .0002. 197 Id. 198 Id. 199 Id.; Trial Tr. 174:5–11. 200 Trial Tr. 174:12–14; JX 348; JX 360. 32 The Conflicts Committee and the A&C Committee met one last time on the
morning of February 28.201 The meeting started with Williams “ratify[ing] and
adopt[ing] the FTI engagement letter,” which Collins had signed two days earlier.202
Long and Mason then explained to the Committees the purpose of the proposed
issuance, which (to repeat) was to “reduc[e] the ratio of the Partnership’s outstanding
debt to EBITDA to less than 4.0x.”203 Long explained at trial that he “reinforced
once again how important [the issuance] was from a rating standpoint.”204 Later in
the meeting, Williams asked FTI to present its final report to the Committees;205
Williams testified that he could not recall whether he had read the report before the
meeting.206 FTI made its presentation, explaining the terms of the issuance and
setting out its projections of the impact of the issuance in various scenarios.207
Specifically, FTI projected that if the issuance took place at a participation rate of
61%, ETE’s leverage ratio would be 4.2x by the first quarter of 2018.208 If, however,
ETE did not go through with the issuance, the leverage ratio would reach 4.5x by
that time.209 If ETE went ahead with the issuance and was able to renegotiate certain
201 JX 391. 202 Id. at .0002. 203 Id. 204 Trial Tr. 265:20–21. 205 JX 391.0004. 206 Trial Tr. 217:2–4. 207 JX 391.0004. 208 Id.; Trial Tr. 551:1–7. 209 JX 391.0004. 33 Williams Co. contracts, the ratio would be 3.9x by the first quarter of 2018.210 On
the other hand, if the merger with Williams Co. did not close, the ratio would decline
to 2.8x by that time even without the issuance.211 FTI ultimately concluded that,
even if ETE could not achieve the projected 61% participation rate, there was still
value in doing the issuance.212 Nothing in the record indicates that FTI described
the specific accrual or conversion terms as desirable as compared to other potential
terms, and there is no indication either Committee considered the fairness of those
terms to ETE.
After FTI gave its presentation, the A&C Committee voted to approve the
proposed issuance.213 Collins then left the meeting, and Williams, acting as the sole
member of the Conflicts Committee, approved the issuance as well.214 Williams
testified at trial that he voted in favor of the transaction because “it appeared to me
that this is exactly what we needed,” namely, “generat[ing] cash to reduce the
debt.”215 Notably, a “WHEREAS” clause in the resolution formalizing the Conflicts
Committee’s approval stated that “the Board resolved on February 22, 2016 to
210 Id. 211 Id. 212 Trial Tr. 551:11–16; see also JX 391.22 (“[T]he Company expects to employ additional measures to reduce its leverage ratio from approximately 5.0x in Q1 2016 to 4.2x by the end of Q1 2018 . . . .”). 213 JX 391.0005. 214 Id. 215 Trial Tr. 187:20–21, 212:5–6. 34 establish a Conflicts Committee . . . consisting solely of Mr. William P. Williams.”216
That was untrue: the Board had resolved on February 22 to create “a Conflicts
Committee made up of Messrs. Collins, Williams and Turner.”217
While FTI’s representative testified that Williams was “engaged” during the
February 27 afternoon meeting,218 and the Conflicts Committee’s minutes reflect
that he asked questions during the meetings,219 Williams’ own testimony makes clear
that he did not understand several important aspects of the transaction he
approved.220 For example, Williams did not understand how the quarterly
distributions worked, and he did not know how the $0.11 preferred payment term
had been determined.221 Williams apparently believed that the securities had no cost
to ETE; when asked to provide a basis for that belief, he explained that he “just felt
like it didn’t cost ETE anything to do this.”222 Notably, Williams never considered
how the securities would affect ETE if the company cut its common distributions.223
216 JX 391.0025. 217 JX 258.0002. 218 Trial Tr. 539:9–13. 219 E.g., JX 347.0002. 220 Trial Tr. 178:5–179:21. 221 Id. at 180:12–15; Aug. 24, 2016 Williams Dep. 51:25–52:4. 222 Aug. 24, 2016 Williams Dep. 166:7–12. 223 Trial Tr. 183:4–9. 35 5. The Board Approves the Issuance, and the Securities Are Issued
The Board met on the afternoon of February 28 to discuss the proposed Private
Offering.224 Warren had scheduled this meeting on February 26 on the assumption
that, by February 28, the Conflicts Committee would be finished with its work.225
At the February 28 meeting, the Board heard presentations from Mason, FTI, Akin
Gump, and Williams.226 According to the minutes, LaFollette, the Akin Gump
attorney, told the Board that Collins, Turner, and Williams “had acted as a ‘special
committee’ of the Board.”227 In fact, there is no evidence that ETE ever formed such
a “special committee,” or that those three individuals served together in any capacity
related to the issuance. In any event, the Board unanimously approved the issuance,
an amendment to the LPA (“Amendment 5”), a private placement memorandum,
and related transactions.228 The resolutions memorializing these decisions contained
a “WHEREAS” clause stating that “the Board previously authorized the formation
of a Conflicts Committee . . . consisting of William P. Williams.”229 Again,
224 JX 382. 225 JX 295.0001. 226 JX 382.0001–02. 227 Id. 228 Id. at .0002; JX 394.0147–49; Trial Tr. 408:8–9. The Plaintiffs point out that after the Board approved Amendment 5 and the private placement memorandum, Latham made several changes to the documents that were not formally approved by the Board. JX 395.0001. For example, Amendment 5’s tax allocation provisions were changed to “use book gain or book loss as opposed to taxable income or deduction to true up at the end of the conversion period.” JX 388.0001; see also JX 395.0247. And the private placement memorandum was altered to, among other things, calculate $6.56 as the Conversion Price. JX 395.0118. 229 JX 384.0005. 36 however, that was untrue; the Board had actually authorized the formation of a
Conflicts Committee consisting of Williams, Turner, and Collins. Another
“WHEREAS” clause stated that “the Board has reaffirmed its delegation of authority
to the Conflicts Committee and the A&C Committee with respect to the Proposed
Transaction and the Related Arrangements.”230 Importantly, setting aside the
“WHEREAS” clauses just mentioned, the February 28 resolutions do not contain
any provision resolving to ratify the decision to use a one-man Conflicts
Committee.231
Warren testified that he voted in favor of the issuance because “[t]he rating
agencies were calling our chief financial officer, saying, When are you going to
announce this? And the rug had been pulled out from under us by Williams. So we
felt the need to move quickly and demonstrate to the rating agencies that we were
doing this.”232 McCrea, for his part, explained that “[w]e had to do something. This
was the lowest risk, quickest thing we could do to start addressing our leverage
concerns.”233 Ramsey similarly thought that the issuance “was the absolute best path
on the private and also subsequently on the public offering to start the delevering
process and satisfy the rating agencies.”234 Notably, when ETE approved the
230 Id. at .0006. 231 JX 384.0007–10. 232 Trial Tr. 408:21–409:3. 233 McCrea Dep. 65:24–66:2. 234 Trial Tr. 512:6–9. 37 issuance, the General Partner directors and their advisors believed that the merger
with Williams Co. would close.235
After the issuance was approved, ETE offered securities to several individuals
and entities,236 including Warren, McReynolds, McCrea, Ramsey, Ray Davis, and
Richard Brannon.237 McReynolds decided to participate with approximately 85% of
his common units, while McCrea elected to participate with only half of his units.238
A member of the Perella team noted at the time that “[o]nly 3 institutions, Kayne
[Anderson], Tortoise and Neuberger [Berman]” were invited to participate, and that
there were “some aunts & uncles” on the list of individual invitees.239 Notably, ETE
had over 400 institutional investors at the time of the issuance.240
About half of the invitees listed in a document titled “LIST FOR PPM” were
“unrelated parties,” meaning “people who are not officers or directors at Energy
Transfer, are not 5 percent owners and are not family members of any of those two
categories.”241 On the other hand, several of these “unrelated” invitees were former
employees of the ETE family or relatives of insiders.242 In total, at least 70% of the
individuals on the “LIST FOR PPM” were either affiliated with ETE in some
235 Id. at 253:11–13, 413:7–17, 458:13–17. 236 E.g., id. at 513:6–9. 237 PTO ¶¶ 30, 37, 52, 55, 58, 63. 238 Compare id. ¶¶ 37, 52, with JX 436.0008. 239 JX 398.0002. 240 Trial Tr. 123:21–22, 310:18–5. 241 Id. at 513:1–514:3; JX 407. 242 Trial Tr. 514:9–16; McReynolds Dep. 140–21–147:5; JX 407. 38 capacity or related to individuals with such an affiliation.243 Moreover, contrary to
FTI’s assumption that ETE would achieve a 61% participation rate, only about
31.5% of ETE’s outstanding common units ended up participating in the issuance.244
Kayne and Tortoise, both of which are sophisticated institutional investors,
chose not to participate in the issuance.245 Kevin McCarthy, one of Kayne’s co-
managing partners, explained that Kayne “didn’t think the security was attractive
enough to participate. We thought that the liquidity constraints given the time in the
marketplace and the uncertainty with the Williams merger was not being offset by
attractive enough economics.”246 McCarthy further explained that Kayne chose not
to participate for purely business reasons.247 Specifically, Kayne calculated that the
securities would offer a return that was only 3.8% higher than that offered by ETE’s
common units.248 Tortoise also declined to participate, apparently because the
discount offered by the securities was insufficient to justify the lack of liquidity.249
Neuberger participated, but with only one-sixth of its common units.250
243 This list does not include Kelcy Warren or his wife, both of whom participated in the issuance. JX 407; PTO ¶ 103. 244 PTO ¶ 101. 245 McCarthy Dep. 95:19–96:18, 97:7–98:4; Trial Tr. 269:2–3. 246 McCarthy Dep. 97:22–98:4. 247 Id. at 98:11–13. 248 JX 416.0003. 249 Trial Tr. 270:18–271:1. 250 JX 281; JX 638. 39 6. The Rating Agencies React to the Issuance, and ETE Announces Distribution Cuts
Fitch, one of the three major rating agencies, described the issuance as “a
proactive step in enhancing [ETE’s] liquidity and managing acquisition leverage in
a credit-neutral manner.”251 Fitch also noted that the issuance had “no immediate
impact to ETE’s ratings,” and that it considered the securities to be equity.252 Long
testified at trial that based on his meetings and phone calls with the agencies, he
believed that they saw the issuance as “very much a positive step.”253 Long also
suggested that issuing the securities prevented negative credit-rating actions.254
Notably, ETE’s unit price did not experience a statistically significant decline in the
wake of the issuance.255
On April 18, 2016, about two months after the Board approved the Private
Offering, ETE filed an updated Form S-4 announcing that it did “not expect to make
any cash distributions with respect to its common units prior to the distribution
payable with respect to the quarter ending March 31, 2018.256 According to Long,
this announcement meant that ETE was certain to cut distributions if the merger with
Williams Co. closed.257 Long testified that ETE decided to cut distributions after it
251 JX 504.0001. 252 Id. 253 Trial Tr. 224:9–13. 254 Id. at 225:5–8. 255 E.g., id. at 596:17–20. 256 JX 550.0046. 257 Trial Tr. 278:10–14. 40 received updated projections from Williams Co. on April 7.258 Those projections,
Long explained, showed that expected EBITDA and distributable cash flow had
dropped significantly compared to earlier projections.259 Moreover, while Williams
Co. initially described these updated projections as “the Downside Case,”260
Williams Co. later claimed on April 15 that “additional adjustments” were not
necessary to make them the most realistic set of projections.261
7. The Merger Does Not Close, and ETE Decides Not to Cut Distributions
When the issuance took place, ETE and its advisors expected that the merger
with Williams Co. would close.262 For reasons that are irrelevant to the analysis
here, ETE ultimately terminated the merger agreement on June 29, 2016.263 ETE
ended up not cutting distributions: About a month after the merger was terminated,
ETE announced that its distributions to common unitholders would stay flat at
$0.285 per unit.264 On October 26, 2017, ETE announced that it would increase its
quarterly distributions to $0.295 per common unit.265 And, in February 2018, ETE
raised distributions again, this time to $0.305 per common unit.266 The plan period
258 Id. at 274:2–10; JX 534; see also McCrea Dep. 73:20–74:25. 259 Trial Tr. 274:16–275:4. 260 JX 534.0001. 261 JX 546.0001. 262 Trial Tr. 253:11–13, 413:7–17, 458:13–17. 263 Williams Cos., Inc., 2016 WL 3576682, at *2; PTO ¶ 105. 264 PTO ¶ 106. 265 Id. ¶ 107. 266 JX 701.0001. 41 for the securities is set to end on May 18, 2018, at which point the securities will
convert into common units based on the formula described above.267
C. This Litigation
Plaintiff Lee Levine commenced this action on April 12, 2016, and I granted
his request for expedition on April 22, 2016. The action was consolidated with a
similar matter on May 3, 2016. Discovery commenced, and an amended complaint
was filed on August 29, 2016. The Complaint contains four counts, and they boil
down to the assertion that the issuance (and related transactions) breached various
provisions of the LPA.268 The parties cross-moved for summary judgment on
September 28, 2016; I denied those motions on February 28, 2017, and July 31,
2017.269
The case proceeded to trial, from February 19, 2018, to February 21, 2018. In
post-trial briefing, the Plaintiffs advanced two primary theories of liability. First,
the Plaintiffs argue that the issuance was a non-pro-rata distribution of Partnership
Securities in violation of Section 5.10(a) of the LPA. Second, the Plaintiffs argue
that the issuance violated Sections 7.6(f) and 7.9 of the LPA, which address conflict
transactions. According to the Plaintiffs, these breaches of the LPA render the
267 PTO ¶ 104. 268 Compl. ¶¶ 162–202. 269 In re Energy Transfer Equity L.P. Unitholder Litig., 2017 WL 782495, at *2 (Del. Ch. Feb. 28, 2017); In re Energy Transfer Equity L.P. Unitholder Litig., 2017 WL 3500224, at *1 (Del. Ch. July 31, 2017). 42 securities “void and a nullity.”270 The Plaintiffs therefore seek cancellation of the
securities and a permanent injunction preventing the conversion or transfer of the
units. Also pending is the Plaintiffs’ request for class certification under Court of
Chancery Rule 23.271
II. ANALYSIS
A. I Find No Violation of LPA Section 5.10(a)
The Plaintiffs argue that the private issuance is a “distribution,” and as such,
was required to be pro rata. Because it was not, per the Plaintiffs, the issuance is
void. The Plaintiffs rely on Section 5.10(a), which states:
Subject to Section 5.8(d), the Partnership may make a Pro Rata distribution of Partnership Securities to all Record Holders or may effect a subdivision or combination of Partnership Securities so long as, after any such event, each Partner shall have the same Percentage Interest in the Partnership as before such event, and any amounts calculated on a per Unit basis or stated as a number of Units are proportionately adjusted.272
The term “distribution” is not defined in the LPA.273 The Defendants counter
that a distribution is a transfer to partners of value, not an offer to sell securities as
took place here. They point to the common English meaning of distribution and,
270 Pls.’ Opening Post-Trial Br. 62. 271 Because of my decision here, I do not address class certification, which is opposed by ETE. The parties should inform me, in light of this Memorandum Opinion, whether I need to address the issue of class certification. 272 JX 1.0024 (emphasis added). A “Record Holder” is the registered owner of a Common Unit. Id. at .0011. 273 JX 1.0005-13; JX 2; JX 4; JX 6; JX 15; JX 451.0003–05. 43 among other sources, Black’s Law Dictionary.274 Black’s defines a “partnership
distribution” as “[a] partnership’s payment of cash or property to a partner out of
earnings or as an advance against future earnings, or a payment of the partners'
capital in partial or complete liquidation of the partner's interest.”275 All parties
agree that “distribution” in the context of the LPA is unambiguous; they simply
disagree as to the meaning. I find the term unambiguous, and that it does not include
an issuance of a security for value, as here.
I first note that the LPA provides the General Partner discretion to issue
securities on terms it finds appropriate. Section 5.8(a) allows the Partnership to issue
additional Partnership Securities “for any Partnership purpose” and “for such
consideration and on such terms and conditions as the General Partner shall
determine, all without the approval of any Limited Partners.”276 Next, while the LPA
does not define “distribution,” it refers to distributions in several locations. Section
1.1 defines a “Record Date” as the date established by the General Partner to
identify, among other things, the “identity of Record Holders entitled to receive any
report or distribution or to participate in any offer.”277 Section 5.8(b) states that each
274 The Plaintiffs argue that the Defendants’ use of extrinsic evidence does not pertain to “the meaning of distribution in the specific context of the specific provisions of this specific Partnership Agreement” and should be ignored. Pls.’ Opening Post-Trial Br. 38. 275 Interactive Corp. v. Vivendi Universal, S.A., 2004 WL 1572932, at *3 (Del. Ch. June 30, 2004) (citing Black’s Law Dictionary 488 (7th ed. 1999)). 276 JX 1.0023. 277 Id. at .0011. 44 Partnership Security may be authorized with rights determined by the General
Partner, including “the right to share in Partnership distributions.”278 Finally,
Section 5.8(d) states that:
(d) No fractional Partnership Securities shall be issued by the Partnership. If a distribution, subdivision or combination of Units pursuant to Section 5.8 would result in the issuance of fractional Units, each fractional Unit shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher Unit).279
The Plaintiffs point to Sections 5.8(a), 5.8(d) and 5.10(a) to argue that the
LPA uses the term distribution as a type of issuance that may be with or without
consideration or conditions.280 Consequently, the “Plaintiffs’ principal claim is that
the issuance was a non-Pro Rata distribution of Partnership Securities in violation of
§5.10(a).”281
In the alternative, the Plaintiffs argue that, if I find “distribution” in the context
of the LPA to be ambiguous, contra proferentem will apply and I must construe the
meaning of distribution in Section 5.10(a) against the Defendants.282
278 Id. at .0023 (emphasis added). 279 Id. (emphasis added). 280 Pls.’ Opening Post-Trial Br. 3. 281 Id. at 37. 282 Id. at 2–3 (citing SI Mgmt., L.P. v. Wininger, 707 A.2d 37, 43-44 (Del. 1988) (applying contra proferentem in an insurance contract); In re Kinder Morgan, Inc. Corp. Reorganization Litig., 2014 WL 5667334, at *3 (Del. Ch. Nov. 5, 2014) (“Where a limited partnership agreement was drafted exclusively by the general partner, the court will interpret ambiguities against the drafter, rather than examine extrinsic evidence.” (internal quotation marks omitted))). 45 The Defendants, in turn, argue that “a distribution is a one-way transfer”
without consideration.283 Because, in the Defendants’ view, the issuance was a “two-
way, value-for-value exchange, it was not a distribution.”284 The Defendants point
out that the subscribers exchanged, among other things of value, $518 million in
foregone cash distributions over nine quarters285 in return for the security, providing
value—needed cash flow relief—for ETE. Because the Private Offering was not a
distribution, Section 5.10(a) does not apply.286
1. The Term Distribution Is Not Ambiguous
“Limited partnership agreements are a type of contract,” and must be
construed “in accordance with their terms to give effect to the parties’ intent.”287 To
determine the parties’ intent,
[w]e give words their plain meaning unless it appears that the parties intended a special meaning. When interpreting contracts, we construe them as a whole and give effect to every provision if it is reasonably possible. A meaning inferred from a particular provision cannot control the agreement if that inference conflicts with the agreement’s overall scheme. We consider extrinsic evidence only if the contract is ambiguous. A contract is not ambiguous simply because the parties do not agree upon its proper construction, but only if it is susceptible to two or more reasonable interpretations.288
283 Defs.’ Opening Post-Trial Br. 51, 56–58. 284 Id. at 51. 285 Trial Tr. 34:13–16. 286 Defs.’ Opening Post-Trial Br. 58–59. 287 Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 360 (Del. 2013). 288 Id. at 360 (internal citations and quotation marks omitted). 46 When determining the plain meaning of a particular term in a contract, I may refer
to the “ordinary dictionary meaning.”289 However, “more than one dictionary
definition” does not itself make a term ambiguous because “if merely applying a
definition in the dictionary suffices to create ambiguity, no term would be
unambiguous.”290
The threshold question is whether the term distribution is ambiguous under
the LPA. I find that it is not. The use of the term “distribution” in the LPA, read as
a whole, refers to something transferred to the unitholders, as, for instance, a
payment; rather than something that is offered to the unitholders for sale, which they
may accept or reject. I note that this accords with the definition of partnership
distribution in Black’s Law Dictionary: “[a] partnership’s payment of cash or
property to a partner out of earnings or as an advance against future earnings, or a
payment of the partners' capital in partial or complete liquidation of the partner's
interest.”291
Not only does this definition comport with the common definition of the term,
it is consonant with the LPA as a whole.292 Section 5.8(a) allows the Partnership to
issue Partnership Securities. The General Partner is given discretion to determine
289 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 740 (Del. 2006). 290 Id. (internal quotation marks omitted). 291 Interactive Corp., 2004 WL 1572932, at *3 (citing Black’s Law Dictionary 488 (7th ed. 1999)). 292 See Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926 (Del. 2017).
47 the terms and other conditions of an issuance, including the right to share in
distributions, in Sections 5.8(a) and (b). The Plaintiffs’ interpretation would make
nonsense of this provision. It would provide that an issuance of securities would be
constrained as a pro rata distribution under Section 5.10(a); a condition that such an
issuance, practically, could never meet. The failure of a single partner to subscribe
would result in a “distribution” which did not result in “each Partner [having] the
same percentage interest in the Partnership as before such event.”293 Under the
Plaintiffs’ view, such an issuance of securities would thus be ultra vires, and void.
I cannot read the LPA thus without doing damage to its meaning.
The Plaintiffs’ attempt to circumvent this problem, I confess, eludes me. As
I understand it, the Plaintiffs contend that a sale and issuance of Partnership
Securities may constitute a valid distribution under Section 5.10(a), and the pro rata
requirement be satisfied, so long as the offer is pro rata, even if certain partners reject
the securities.294 The Plaintiffs do not conflate the offer itself with a distribution,
however. They maintained stoutly at oral argument that the securities are in some
sense distributed to the partners at the time of the offer, as they metaphorically are
laid before the partners, waiting to be picked up. If a partner spurns the transaction,
no matter; there has been a pro rata distribution in the placing of the securities within
293 JX 1.0024. 294 Apr. 16, 2018 Oral Arg. Tr. 36:1–37:23 (DRAFT). 48 her grasp. In addition to being entirely too metaphysical for my poor abilities, the
Plaintiffs’ formulation does not comport with the plain language of Section 5.10(a).
Section 5.10(a) requires that “after any such [distribution], each Partner shall have
the same Percentage Interest in the Partnership as before such [distribution].”295 In
the Plaintiffs’ scenario, assuming at least one partner declines to purchase, this
condition would be violated.
Section 5.8(a) allows the Partnership to issue Partnership Securities. The
General Partner is given discretion to determine the terms and conditions of an
issuance in Sections 5.8(a) and (b). Section 5.10, on the other hand, prevents the
Partnership from giving—distributing—something to certain unitholders and not to
others.
Viewed together, the provisions in the LPA mean that the Partnership cannot
give out value, including securities, to some partners qua partners, without giving it
pro rata to the others. This reading comports with the definition of partnership
distribution in Black’s Law Dictionary. The securities at issue were not a
distribution. They were offered for sale, as the general partner is empowered to do
under the LPA. I find the term “distribution,” in the context of the LPA,
unambiguous. Put another way, a reasonable investor, on reading the LPA, would
conclude that he would receive distributions, in cash or kind, from time to time, and
295 JX 1.0024. 49 that those would be pro rata and would not dilute his interest. He would not conclude
that the sale and issuance of equities as provided for in the LPA would result in a
pro rata “distribution” of those equites, as the Plaintiffs contend. I find the LPA
clear in this regard.
To the extent the Plaintiffs argue that the consideration given by subscribers
was illusory, and thus that the issuance was a one-way distribution rather than an
exchange, I disagree. The $518 million in forgone distributions was useful to ETE
in this situation and represented an opportunity cost and risk of some amount to the
participating unitholders. I find that this transaction was an exchange for value. I
note that not all the securities offered were subscribed, even by the insiders.
Because I find that the LPA is not ambiguous, and that this was an issuance
for value and not a distribution, I need not address the parties’ arguments regarding
contra proferentem or extrinsic evidence. I find that the issuance was not prohibited
under Section 5.10(a).
B. Fair and Reasonable
Having found that the issuance was not a prohibited distribution under the
LPA, I next determine whether the issuance was “fair and reasonable” to ETE under
Section 7.6(f) of the LPA.296 Section 7.6(f) provides in relevant part that “[n]either
296 Id. at .0031. Both parties agree that, as the more specific provision, Section 7.6(f)—not Section 7.9—controls here. Pls.’ Opening Post-Trial Br. 48; Defs.’ Opening Post-Trial Br. 31. 50 the General Partner nor any of its Affiliates shall sell, transfer or convey any property
to, or purchase any property from, the Partnership, directly or indirectly, except
pursuant to transactions that are fair and reasonable to the Partnership.”297 “The fair
and reasonable standard is something similar, if not equivalent to, entire fairness
review.”298
The LPA allows the General Partner to establish, conclusively, that the
transaction under review is fair and reasonable to the Partnership by complying with
one of several safe harbor provisions. The parties dispute vigorously whether the
Defendants have reached safe harbor, a matter I address later in this Memorandum
Opinion. I first turn to a predicate issue; burden of proof.
When entire fairness applies in the corporate context, the defendant fiduciaries
bear the burden of showing that the challenged decision was entirely fair to the
corporation and its stockholders.299 According to the Defendants, because the LPA
eliminates default fiduciary duties and replaces them with purely contractual
obligations, the Plaintiffs bear the burden of showing that the issuance was not fair
and reasonable to ETE.300 I disagree. In my view, Section 7.6(f) itself places the
297 JX 1.0031. 298 Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 256–57 (Del. 2017) (internal quotation marks and citation omitted). 299 E.g., Frederick Hsu Living Trust v. ODN Holding Corp., 2017 WL 1437308, at *34 (Del. Ch. Apr. 14, 2017). 300 Defs.’ Answering Post-Trial Br. 14 n.19; see also JX 1.0034 § 7.9(e) (“Except as expressly set forth in this Agreement, none of the General Partner, the Board of Directors, any committee of the 51 burden on the Defendants to show that the issuance satisfied the fair-and-reasonable
standard.
This Court confronted a similar issue in Auriga Capital.301 There, then-
Chancellor Strine was tasked with interpreting an LLC agreement that provided, in
relevant part:
Neither the Manager nor any other Member shall be entitled to cause the Company to enter . . . into any additional agreements with affiliates on terms and conditions which are less favorable to the Company than the terms and conditions of similar agreements which could be entered into with arms-length third parties, without the consent of a majority of the non-affiliated Members.302
The Court held that this language imposed something “akin to entire fairness review”
with respect to conflicted transactions.303 Specifically, the Court read the LLC
agreement to allow conflicted transactions without approval from a majority of the
minority members, “subject to a proviso that places the burden on the Manager . . .
to show that the price . . . was the equivalent of one in an agreement negotiated at
arms-length.”304 The Supreme Court affirmed, holding that, because the conflicted
transaction at issue did not receive the approval of a majority of the minority, “the
burden of establishing the fairness of the transaction fell upon [the manager].”305
Board of Directors nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner or Assignee.”). 301 40 A.3d 839. 302 Id. at 857. 303 Id. at 856. 304 Id. 305 Gatz Props., LLC, 59 A.3d at 1213. 52 Like the LLC agreement in Auriga, the LPA here prohibits “sell[ing],
transfer[ring] or convey[ing] any property to, or purchas[ing] any property from, the
Partnership,” subject to (i) an exception for transactions that are “fair and reasonable
to” ETE, and (ii) a set of safe harbors.306 Thus, once the plaintiff shows that a
transaction was conflicted in the manner contemplated by Section 7.6(f), the burden
falls to the defendant to prove that the transaction was fair and reasonable to the
partnership.307 Because there is no dispute that the issuance was a conflicted
transaction per Section 7.6(f), the Defendants bear the burden of proving that it was
fair and reasonable to ETE. I turn next to this analysis.
1. The “Safe Harbors”
Under the terms of Section 7.6(f), the Defendants can conclusively show that
the transaction was fair and reasonable to ETE by showing they have achieved one
306 JX 1.0034. 307 The Defendants cite Zimmerman v. Crothall, 62 A.3d 676 (Del. Ch. 2013), for the proposition that the Plaintiffs bear the burden of proving that the issuance violated the LPA’s fair-and- reasonable standard. Zimmerman, however, is distinguishable. In that case, the relevant provision of the LLC agreement provided that “Members, Directors, and officers . . . shall have the right to contract . . . with the Company . . . as the Board of Directors shall determine, provided that such payments or fees are comparable to the payments or fees that would be paid to unrelated third parties providing the same property, goods, or services to the Company.” Id. at 702. The Court held that this language effectively required review under an entire fairness standard, with the plaintiff bearing the burden of proving that a conflicted transaction was not entirely fair. Id. at 703–04. The Court recognized the tension between this holding and Auriga, but it found Auriga distinguishable: “The Auriga provision provides that a manager or member cannot cause the company to enter an agreement with an affiliate on terms less favorable than an arm’s length transaction without the required consents. By contrast, [the provision here] gives members, directors, or officers the affirmative right to engage in transactions with the Company, provided that such transaction is comparable to a third-party transaction.” Id. at 706. In my view, Section 7.6(f) is closer to the Auriga provision than to the Zimmerman provision. 53 of four safe harbors. The Defendants rely principally on the use of a Conflicts
Committee to approve the transaction. Indeed, the Board indicated it would approve
the Private Offering only if approved by a Conflicts Committee.308 Section 7.6(f)
provides that the contractual standard is “deemed satisfied . . . as to . . . any
transaction approved by Special Approval,” defined as approval by the Conflicts
Committee.309 That Committee is defined as a one or more member committee of
the Board composed of directors who are unconflicted and independent: the
definition specifically excludes employees and directors of affiliates of the General
Partner.310
At its February 22 meeting, recognizing the conflicted nature of the proposed
Private Offering, the Board created a Conflicts Committee “made up of Messrs.
Collins, Williams and Turner” to consider the transaction.311 That Conflicts
Committee was fatally flawed, however. A majority of its members, Collins and
Turner, were employee and director, respectively, of affiliates of the General
Partner, and thus unfit to serve under the LPA.312 Only Williams, a retired ETE
308 JX 258. According to the Plaintiffs, this makes the Private Offering void, should I find that no valid Conflicts Committee recommendation exists. I reject this argument; the General Partner is prohibited from conflicted transactions unless “fair and reasonable”; nothing in the LPA requires it to use a particular safe harbor, and the Board’s stated intention to rely on one safe harbor does not mean that it breached a contractual duty if the transaction is nonetheless fair and reasonable, despite failure to achieve that particular safe harbor. 309 JX 1.0032. 310 Id. at 6. 311 JX 258.0002. 312 JX 315.0001. 54 employee and long-time friend of Warren, was eligible to serve on a Conflicts
Committee.
In any event, Turner declined to serve due to health reasons. He so informed
a single director, but did not formally resign from the Committee.313 On February
24, ETE’s general counsel, Mason, informed a proposed financial advisor that the
hiring decision would have to be made by the “two member[]” Committee,
composed of Collins and Williams.314 Mason was calling the shots for the
Committee; he chose its financial and legal advisors, and “appointed” Collins as
committee chair.315
By Febraury 26, however, ETE’s outside counsel realized that Collins was
ineligible to serve.316 This counsel and the Committee’s outside counsel attempted
to address this problem by creating “revised resolutions” for the February 22
meeting, which falsely indicated that Williams was appointed sole member of the
Conflicts Committee.317 This was untrue; at no time prior to when Williams,
purporting to act for the Conflicts Committee on February 28, recommended the
transaction as fair, did the Board appoint Williams the sole member of the Conflicts
Committee.318 The Board met that same day. The minutes reflect that the
313 Trial Tr. 506:12–21. 314 JX 272.0001. 315 Aug. 24, 2016 Williams Dep. 74:7–75:7, 86:17–20. 316 JX 315.0001 317 JX 318.0001, .0007–10. 318 Trial Tr. 515:4–6; Aug. 24, 2016 Williams Dep. 157:23–158:15. 55 Committee’s counsel, Akin Gump, informed the Board that Collins, Turner, and
Williams had acted as a “special committee”;319 this was untrue and misleading—
the Board had appointed those gentlemen as the Conflicts Committee, but only
Williams had ever done any substantive work on the committee, and the other two
were ineligible to serve.
As a result, there was no Conflicts Committee created by the Board and in
satisfaction of the safe-harbor provision of Section 7.6(f). In order to shelter in the
safe harbor of the conclusive presumption, the Board had to create a Conflicts
Committee whose members met certain qualifications, and rely on their approval of
the transaction. The Defendants point out that the directors, in self-serving
testimony, averred that they were individually aware of and in approval of Williams’
sole service on the Conflicts Committee; Defendants add that Williams could have
acted as a sole member, under the explicit language of the LPA, if he had been so
appointed. This is to no avail. The LPA gives the Partnership protection against
conflicted transactions with the General Partner and its affiliate, prohibiting them
unless they are objectively fair and reasonable. They allow the Board to avoid
demonstration by objective proof in four limited ways. One is creating a Conflicts
Committee, composed of unconflicted members with defined qualities. Here, the
Board failed to do so, and it cannot therefore avoid an objective evaluation of
319 JX 382.0001–02. 56 whether the transaction is fair and reasonable. The safe harbor is optional; falling
short of reaching harbor does not prevent the Defendants from navigating the straits
of fairness. But having failed to perfect a Conflicts Committee in contractual
compliance, they are not entitled to its benefit.
I will not here recite again the various actions of then-counsel for the Conflicts
and A&C Committees or ETE in creating a record which is at best misleading as to
the actions of the Board in creating the Conflicts Committee; those are laid out
adequately in the facts. Suffice it to say that these actions are not helpful to the
Defendants, at all.
The Conflicts Committee was bound to act in good faith.320 Since I do not
find Williams to have constituted the Conflicts Committee, I need not examine his
actions in that regard. For completeness’ sake, however, I note that Williams is a
retired engineer.321 He testified at trial and by deposition. I found him truthful and
sincere. Nonetheless, for the reasons laid out in the facts, I found his actions short
of the kind of deliberations that should be undertaken in consideration of a conflicted
transaction. It is clear that Williams did not understand his role, which was to ensure
fairness to the Partnership, nor did he understand the terms of the transaction on
which he was opining.322 Williams relied on the Board’s previous consideration of
320 JX 1.0034. 321 PTO ¶ 50; Trial Tr. 188:21–22. 322 Trial Tr. 178:5–179:21, 180:12–15; Aug. 24, 2016 Williams Dep. 51:25–52:4. 57 the public offering, but the terms are not the same, and in any event, the Board’s
consideration of the accrual term of that transaction is problematic, as explained
below. Certainly, Williams never explored whether securities with different terms
would be better for the Partnership: he treated the issuance as a binary choice; do it,
or not.
Having found that the safe harbor of reliance on a Conflicts Committee is not
available to the Defendants, I turn to their second, and last, attempt to find such
refuge. Section 7.6(f) provides that the contractual standards of a conflicted
transaction shall be deemed satisfied so long as its “terms . . . are no less favorable
to the Partnership than those generally being provided to . . . unrelated third
parties.”323 Unrelated third parties is a term not explicitly defined in the LPA, and
the parties dispute its meaning. The Defendants point out that the Private Offering
was not just offered to affiliates of the General Partner, family, and friends; it was
offered to three (out of four hundred) institutional investors, as well.324 Therefore,
per the Defendants, it is conclusively fair and reasonable. This strikes me as too cute
by half.
323 JX 1.0032. 324 ETE also argues that eighteen unrelated third parties participated in the issuance, which ETE argues qualify as unrelated third parties under Section 7.6(f)(iii) or as outside the scope of “related persons” under SEC regulations. Defs.’ Opening Post-Trial Br. 32–33. 58 Again, the LPA protects the Partnership from conflicted transactions with the
General Partner and affiliates, by prohibiting such transactions unless objectively
fair and reasonable. Unsurprisingly, the LPA provides that where a market sets the
terms of the transaction, that market price provides conclusive proof of objective
fairness. If ETE rents warehouse space from an affiliate at market price—that is, at
terms no less favorable than those generally provided to third parties—it makes no
sense to have a court examine the objective fairness of the transaction. But this
analysis does not translate well to issuances of unique securities.
ETE cites Brinckerhoff for the proposition that the “generally being provided
to unrelated third parties” language “allows MLPs to invoke this safe harbor by
comparing the challenged transaction to similar—but not identical—arms-length
transactions.”325 I agree. Brinckerhoff involved the sale of interests in an energy
pipeline MLP.326 The plaintiff there alleged that the defendant “paid $200 million
more to repurchase the same assets it sold in 2009, despite declining EBITDA,
slumping oil prices, and the absence of the expansion rights sold in 2009.”327 In
other words, the facts in Brinckerhoff allowed the Court to look at price for a similar
asset, albeit at a different time, to gauge if the terms were “no less favorable to the
325 Id. at 8 (citing Brinckerhoff., 159 A.3d at 256). 326 Brinckerhoff, 159 A.3d at 248. 327 Id. at 257. 59 Partnership than those generally provided to or available from unrelated third
parties.”328 The Court, in fact, found they were not.329
Here, by contrast, the Defendants have created a unique and complex security.
It is a single transaction offered simultaneously to selected parties. There are no
“generally” similar transactions to which to compare it. The terms of the Private
Offering were not lifted from some market. It is true that ETE extended the Private
Offering to a few outsiders, but that looks at the matter the wrong way ‘round: the
cost to ETE was not set by a market; ETE decided the terms, and then extended them
to a few outsiders. This in no way insures that the costs to ETE were the same as
those in arms-length transactions for similar securities; there are none.
ETE points out that the third-party institutional investors largely rejected the
Private Offering, and thus proposes that the terms of the offering must be at—or
below—market. I note that, for reasons poorly described in the record, but allegedly
related to business interests of ETE, the security in the Private Offering is
unregistered and not transferrable. These qualities make it less desirable to outsiders
than to insiders. Moreover, the lack of liquidity is waivable at the discretion of the
General Partner, cabined only by good faith. This is a boon to insiders, but cold
comfort to independent parties considering the security. In fact, the testimony of
328 JX 1.0032. 329 Brinckerhoff, 159 A.3d at 257. 60 Kevin McCarthy, of Kayne Anderson, showed that Kayne declined to subscribe to
the securities because they were not sufficiently valuable given the lack of
liquidity.330
In this light, I find that ETE has not reached safe harbor, based on importing
market terms to the conflicted transaction.
2. The Private Issuance Was Not Fair and Reasonable to ETE
Having found that the Defendants have not reached safe harbor, I must now
turn to the factual question of whether the Defendants have met the burden placed
on them to justify a conflicted transaction: that the transaction is objectively fair and
reasonable to the Partnership. The contractual standard here—that insider
transactions are prohibited unless “fair and reasonable”—invokes an analysis akin
to the “entire fairness” review of corporate law;331 my analysis must consider both
fair process and fair price, unifying those considerations to reach a single result.332
Based on the evidence at trial, I find that the Defendants have failed to show that the
330 McCarthy Dep. 97:22–98:4. 331 Brinckerhoff, 159 A.3d at 256–57 (“The fair and reasonable standard is something similar, if not equivalent to entire fairness review.” (internal quotation marks and citation omitted)). 332 See, e.g., Oliver v. Boston Univ., 2006 WL 1064169, at *18 (Del. Ch. Apr. 14, 2006) (“The entire fairness inquiry has two basic aspects: (1) fair dealing or fair process and (2) fair price. . . . Although evaluation of two components is necessary to determine entire fairness, ‘the test for fairness is not a bifurcated one as between fair dealing and price; [instead, all] aspects of the issue must be examined as a whole since the question is one of entire fairness.’” (second alteration in original) (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983))). 61 Private Offering was entirely fair to the Partnership. I make the following findings
of fact:
1) As of February 2016, ETE faced a delevering crisis. It had been warned,
effectively, by the rating agencies that it must reduce its D/E or face a
rating downgrade, which would have had catastrophic consequences for
ETE.333 The impending cash acquisition of Williams Co. made delevering
imperative.334
2) The state of the energy industry, and provisions of the merger agreement
with Williams Co., limited opportunities to delever via sale of assets or
issuance of equity.335
3) ETE made quarterly distributions to unitholders. It could reduce its D/E
by cancelling distributions and retaining cash.336 Because distributions of
earnings were the reason for being of the MLP, ETE was reluctant to cut
distributions, and viewed such cuts as detrimental to the Partnership, and
a last resort.337
4) ETE devised the public offering as a creative alternative to cancelling or
cutting distributions. In effect, the public offering served as a kind of
333 Trial Tr. 230:19–231:19, 233:3–20; JX 49.0002; JX 53.0001. 334 JX 175.0004. 335 E.g., Beach Dep. 259:12–21; Trial Tr. 138:20–139:4, 251:1–252:8; JX 35, § 4.01(b). 336 JX 136.0006, .0014; JX 175.0005, .0007. 337 Trial Tr. 247:4–6, 391:24–392:13, 456:24–457:5. 62 voluntary distribution cut, or deferral, by subscribers. In the Initial Terms
considered by the directors, subscribers would agree to forgo all but
$0.11/unit of any distributions for the term, eight quarters.338 ETE was
then paying a distribution of $0.285.339 If common units received no
distribution, the subscribers would accrue an in-kind credit of $0.11, to be
converted to units at the end of the term.340 If ETE made a distribution of
$0.11, subscribers received that cash as well.341 If ETE made a distribution
of greater than $0.11, subscribers would receive $0.11 cash and the balance
in credits, which would convert to common units at the end of the term.342
The conversion would be based on a 5% discount to market price for units,
as it was at the beginning of the term.343
5) The $0.11 (cash or in kind) minimum distribution had two functions. First,
it was an incentive to subscribe, because it formed a hedge against the
possibility that distributions would be cancelled. I find that as of February
2017, cancellation of distributions was a possibility, but not a certainty,
and that ETE hoped to avoid cancellation even if the Williams Co. merger
338 JX 175.0012–13. 339 PTO at 7. 340 JX 175.0012–13. 341 Id. 342 Id. 343 JX 219.0004. 63 went through.344 The $0.11 minimum also allowed accruals, at the then-
customary rate, to be cash-neutral to subscribers.345
6) The 5% discount to market conversion price served as an incentive to
subscribe.346 It offered some upside if the market for units remained stable,
and would become more valuable if that market improved. 5% was
significantly less than the 10-15% discount recommended by ETE’s
financial advisor, Perella.347
7) The Initial Terms of the public offering would have provided significant
benefits to ETE, even though, in light of the Williams Co. merger, it would
not reduce D/E below 4.0, the goal set by the rating agencies.348 It had
value in that it gave ETE time to achieve that ratio without cancellation of
distributions, by taking other measures, including sale of assets, post
merger.349 Perella, ETE’s financial advisor, recommended these terms to
344 E.g., JX 280.0013. 345 Trial Tr. 255:19–256:15, 411:7–413:2. 346 It is worth pointing out, perhaps, the obvious: that the accrual rate and the conversion rate could have value to subscribers, under either the Public or Private Offerings, only if the subscription was not universal. If all unit holders in ETE fully subscribed, accrued and converted credits would result in a pro rata increase in equity, effectively a wash. Both public and Private Offerings, therefore, were designed to have less than full subscription, and the upcoming conversion will dilute to some extent the equity of non-subscribers to the benefit of subscribers. The choice for potential subscribers was whether receiving a full cash distribution during the term of the Securities would offset this benefit to subscribers. 347 Trial Tr. 257:3–7. 348 Id. at 73:15–18. 349 E.g., id. at 415:6–12. 64 the Board.350 The Initial Terms of the public offering were fair to ETE,
and it would have been objectively fair and reasonable to offer such
securities to insiders, as required by Section 7.6(f) of the LPA.
8) Before the Board meeting of February 15, at which the public offering was
to be considered, Long, ETE’s CFO, had learned from his counterpart at
Williams Co. that Williams Co.’s consent to the public offering was
unlikely.351 Such consent was required, because ETE would not be able to
file a Form S-3 without it, and the public offering could not be completed
unless that form was filed.352 McReynolds, ETE’s president, and Mason,
ETE’s general counsel, received emails on February 14 indicating that
Williams Co.’s outside counsel believed Williams Co.’s consent was
required to complete the public offering.353 Long informed the directors at
the February 15 meeting, before the vote, of Williams Co.’s position.354
9) The public offering as approved by the Board on February 15 had
additional terms not included in the Initial Terms. Under the Initial Terms,
a subscriber would agree to forgo any distribution above $0.11, with the
difference accruing as credit toward common units, convertible at the end
350 JX 175.0003, .0008. 351 Trial Tr. 315:12–316:11. 352 17 C.F.R. § 210.3–05. 353 JX 209.0001 354 Trial Tr. 315:12–316:11. 65 of the term. The Revised Terms set an accrual as the difference between
the $0.11 the subscriber received and the then-current distribution rate of
$0.285, regardless of whether any distribution to common unitholders was
actually made.355 This eliminated downside risk: If distributions were
eliminated, subscribers would receive a quarterly accrual of $0.285.356
This term was eventually embodied in the Private Offering.357
10) The Defendants, who bear the burden of proof, were unable to explain
how this additional downside hedge originated or came to be placed before
the Board.358 A reasonable supposition, which I adopt, was that Long
informed insiders that a public offering to all unitholders would be
unlikely, given Williams Co.’s lack of consent; that a Private Offering
would be an alternative; that a substantial risk of distribution cuts or
cancellations loomed; and that the insiders seized the opportunity to
eliminate downside risk for themselves and their cronies.
11) The Board was presented with the new $0.285 accrual term for the first
time at the February 15 meeting.359 Perella personnel attended the
meeting,360 but the record is silent as to how, if at all, the financial advisor
355 JX 219.0004. 356 JX 216.0001. 357 Compare JX 219.0003–04, with JX 410.0001–02. 358 E.g., Trial Tr. 322:12–18. 359 JX 219.0019–20 360 JX 213.0001. 66 explained this change to the Board. Subsequently, internal emails indicate
that Perrella recognized that in case of a suspension of distributions, the
new accrual term would represent a substantial transfer of wealth to
subscribers.361 Nothing in the record indicates that the directors found the
new accrual term fair and reasonable, or (despite the internal Perella email)
considered its consequences should distributions be cut. Nothing indicates
that they determined that the term was necessary to the success of the
public offering. In other words, the imposition of the new accrual term
was not fair in terms of process, and nothing in the Board’s actions
indicates that it was fair as to price.
12) For reasons I have already explained in reference to the Conflicts
Committee safe harbor, nothing in the examination of the Private Offering
improves the process with respect to the $0.285 accrual term. Nothing in
the testimony of Williams or the other directors, and nothing in the
documentation concerning the Conflicts Committee or the February 28
board meeting adopting the Private Offering, demonstrates that the
Defendants made a determination as to the reasonableness of the accrual
term, and the process in that regard was not fair.
361 JX 217.0002. 67 13) Fairness of price, in this context, requires examination of the exigencies
faced by ETE that made the security, with its waiver of distributions in
return for deferred issuance of equity, attractive; together with the risk that
suspension of distributions to common unitholders would nonetheless be
required, and the effect that would have on the price ultimately paid in
units. I have determined, and the Plaintiffs do not seriously contest,362 that
the Initial Terms for the public offering were fair. Those terms were $0.11
guaranteed accrual if distributions were not made, deferral of all
distributions above $0.11, in return for $0.11 in cash and accrual of the
difference in credits against conversion for eight quarters, and 5% discount
to current market price upon conversion. The Private Offering, by
contrast, included the $0.285 accrual term, which would be substantially
more valuable than the initial term to subscribers in case distributions were
cancelled, and would in that case be substantially more expensive to the
Partnership. Some upside was still preserved; the distributions to
participating unitholders were capped at $0.285, unless the General Partner
362 Unsurprisingly, the Plaintiffs do argue that the public offering, even at its Initial Terms, was unfair in light of what they argue Defendants knew was an “inevitable” distribution cut. I have already rejected that proposition, which is unsupported by the trial record. In any event, the Plaintiffs’ own expert opined that the Public Placement would have been inherently fair and reasonable. Trial Tr. 58:4–7. I note also that the Board considered the opinion of its financial advisor, Perella, which opined that under the Initial Terms of the public offering, ETE would save “almost $1.0 billion of cash for debt reduction, if a high percentage of holders participate in the plan.” JX 175.0003. 68 declared them “Extraordinary,” in the General Partner’s discretion.363 The
record simply does not exist to support the $0.285 accrual term as fair.
Given those facts, I cannot find that the Private Offering was fair. The burden
is on the Defendants to demonstrate that the price of the securities to ETE, under the
facts as then were known, was fair. The Defendants have failed to meet this burden;
therefore, I conclude that the conflicted transaction was not fair and reasonable to
the Partnership. The securities, to the extent they were transferred to the General
Partner or its affiliates, breached the LPA, and I find that the Defendant Directors
caused the General Partner to breach the LPA by issuing these securities.
C. Remedy
As a remedy for breach of the MLP, the Plaintiffs seek only equitable relief;
cancellation of the securities. I find that relief not warranted, for reasons that follow.
Let me recapitulate what I have found above. As of February 2016, ETE,
because of its business model and the downturn in the energy market, and in light of
a pending merger agreement with Williams Co., had an urgent need to delever. It
was constrained, by the Williams Co. merger agreement and the market, from selling
assets or issuing substantial amounts of equity to ease debt. It was paying quarterly
distributions, consistent with its business model, of $0.285/quarter/unit. Cutting or
363 JX 219.0007. 69 suspending distributions was an obvious way to delever, but one that was
particularly unattractive for an MLP.
As an alternative, the Board considered offering a security to all unitholders,
in return for which they agreed to forgo some distributions. Instead, they would
accrue credit redeemable for ETE units in the future. This alternative was, I find,
acceptable, as an interim measure, to the rating agencies whose indirect threat to cut
ETE’s credit rating precipitated the crisis. Williams Co., pursuant to the merger
agreement, had the power to veto this proposed public offering, and did so. The
Board then considered, and approved, the Private Offering, which did not require
approval by Williams Co. That transaction was, in part, extended to affiliates of the
General Partner, and as such was required to be fair and reasonable to the
Partnership.
The Initial Terms of the public offering involved a conversion rate at a 5%
discount to market, and an $0.11 guaranteed minimum accrual. The accrual served
as both an amount to compensate subscribers for taxes, assuming distributions
continued, and an incentive to invest as a hedge, in the event they did not.
Subscribers, in any case, would have borne risks akin to non-subscribers, in that they
were better off if the company did well and distributions continued or increased, and
worse off if ETE did poorly and was forced to cut distributions. The benefit to ETE
was clear; deferred payment of distributions to subscribers, paid with equity, allowed
70 ETE to conserve cash at a crucial time. As the plan was evaluated by Perella, it was
fair to ETE, and even below market. Perella, for instance, advocated a conversion
rate that was a discount to market of 10-15%.364 If the draft Initial Terms of the
public offering had been repeated in the Private Offering, I would find that the
Defendants had met their burden to show that the transaction was fair and reasonable
to ETE.
Contemporaneously with ETE learning that Williams Co. might withhold
approval for the public offering, a new term was presented to the General Partner’s
board. I use the passive voice in the preceding sentence advisedly; the record does
not demonstrate who first suggested the guaranteed $0.285 accrual. It is equally
opaque as to why, if at all, such an accrual term was better from ETE’s perspective
than the original terms. Nothing indicates that the Board considered the new term’s
effects. Nothing indicates why the Board adopted it. The Defendants have failed to
show fair process with respect to the guaranteed accrual.
The Defendants must also demonstrate fair price, as of the time of the
offering. Price is a complex matter here; it involved the probability that the Williams
Co. merger would (or would not) go through, the probability that distributions would
(or would not) be cut, and the cost in securities to ETE two years hence, in light of
an unknown future market price for units. Nonetheless, the cost to ETE of switching
364 JX 219.0004; Trial Tr. 257:3–7. 71 from an $0.11 to a $0.285 accrual, in case distributions were cut, was massive.
Again, the benefit of the switch to ETE, if any, is undocumented in the record.
The burden of showing fair price is on the Defendants. Based on the record,
they cannot satisfy that burden. The $0.285 accrual guarantee looks like a gift to the
insiders who subscribed to the securities, a massive hedge against distribution cuts.
I have found that the Private Offering was a conflicted transaction that was
not fair and reasonable, and that by extending it to affiliates, the Defendants breached
the LPA; what then is the remedy? Initially, the Plaintiffs asked for a declaration
that the securities were void, but that assertion was based on the contention that they
represented a prohibited non-pro-rata distribution, a contention I have rejected.365 I
have found that the General Partner and its directors, exercising their power to issue
securities in ETE, breached the LPA by engaging in an unfair transaction with
affiliates. The Plaintiffs argue that the remedy for such a breach should be
cancellation of the securities. Of course, the usual remedy for contract breach is
damages.366
365 The Plaintiffs also argue that because the Directors intended approval of the Private Offering to be contingent on the recommendation of a properly constituted Conflicts Committee, the failure to achieve that recommendation resulted in the transaction being void; and that ministerial changes to the establishing documents after board approval rendered them void. I have rejected these contentions separately, above. To the extent that the Plaintiffs argue that any breach regarding an issuance of securities necessarily renders such securities void, I reject that as unsupported by the LPA. 366 See, e.g., Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001) (“[T]he standard remedy for breach of contract is based upon the reasonable expectations of the parties ex ante.”) 72 The Plaintiffs argue that damages here are unavailable. They point to the
exculpation from damages in the LPA, which restricts damages to acts in bad faith,
which they have not alleged. Moreover, they concede that damages to the
Partnership are not demonstrable here. The breach, in that event, can justify only
nominal damages.367
The Plaintiffs’ own expert, by contrast, purported to show damages by
pointing to an impending transfer of wealth from the Partnership and non-
subscribers to the subscribers in the redemption of the credits.368 He based his
damage calculations on the difference between the current market value of common
units subscribers will receive at conversion, less the cost to them of the forgone
distributions.369 The subscribers will indeed do well. That result, however, is
unrelated to the term in the Private Offering that I have found unfair. That is, it does
not arise from the $0.285 accrual hedge that the Defendants have failed to
demonstrate was fair. That term had value to subscribers only in case of a (never
made) distribution cut.
Instead, the conversion price arose in the Initial Terms; it is an artifact of the
original term sheet from the aborted public offering, which I have found fair. It was
367 See Ravenswood Inv. Co. L.P. v. Estate of Winmill, 2018 WL 1989469, at *3 (Del. Ch. Apr. 27, 2018) (discussing nominal damages). 368 JX 676.0046–48; see also supra note 346. 369 Id. 73 in the interests of ETE that the subscription rate be sufficient to permit substantial
delevering. Subscribing to the security entailed risk and costs, however. For a
subscriber to agree to forgo potential distributions required a sufficient return on the
accrued credit. The Board was entitled to rely on its financial advisor to set a
discount rate that would be sufficiently attractive to ensure participation. Perella
recommended 10-15% under then-market conditions; nonetheless, the Board
determined to offer only a 5% discount in the Public, and ultimately the Private,
Offerings.370 This discount was modest if ETE’s unit price remained static for the
term. If the price went up, the conversion rate was better for subscribers; if it fell,
worse.
As it has turned out, the energy market has boomed, the Williams Co. merger
failed, and ETE’s unit price has more than doubled—common unitholders have
benefited, and when they convert their credit into units at 5% below the February
2016 unit price,371 subscribers will do extraordinarily well.372 The Plaintiffs argue
that the insiders must have known that, in early 2016, ETE’s unit price was
depressed, and was sure to bounce back. But they point to no knowledge held by
the Defendants unavailable to the market, and smart market players such as Kayne,
370 JX 219.0004; Trial Tr. 257:3–7. 371 The Conversion Price is 95% of the five-day volume-weighted average closing price of ETE’s common units at the time of the offering, or $6.56. JX 676.0047 n.96. 372 The closing price for ETE’s Common Units on October 31, 2017 was $17.65 per unit. Id. 74 Neuberger, and Tortoise declined to subscribe, or fully subscribe, despite what the
Plaintiffs describe in hindsight as ETE’s depressed price.373 Again, Perella
recommended a substantially higher discount to market to the Board. The return on
investment, based on the fair Initial Terms of the public offering carried forward into
the Private Offering, cannot be the measure of damages resulting from the unfair
$0.285 accrual term, because the return on investment is unrelated to that accrual
term. The Plaintiffs have not contended otherwise in post-trial briefing.
Instead, the Plaintiffs ask me to employ equity to remedy the Defendants’
breach by cancelling the securities and their redeemable credits. They ask me to
place the subscribers into the position they would have been absent subscription. In
other words, they ask me to cancel the accrued credit, and pay the subscribers the
forgone distributions, with interest, instead. This would save the Partnership from
issuing equity, but would cost ETE something on the order of $500 million in cash.374
The road to injunctive relief is well worn. I must find that a plaintiff has
prevailed on the merits, legal relief is inadequate, and the equities balance in favor
of relief.375 Here, the Initial Terms of the public offering were fair. From ETE’s
373 McCarthy, for instance, testified that Kayne decided not to subscribe the Securities, because their low value compared to common units alone did not compensate investors for the lack of liquidity. McCarthy Dep. 97:22–98:4. 374 E.g., Trial Tr. 728:16–19. 375 See, e.g., Sierra Club v. DNREC, 2006 WL 1716913, at *3 (Del. Ch. June 19, 2006) (“The elements for permanent injunctive relief are: (1) actual success on the merits; (2) irreparable harm will be suffered if injunctive relief is not granted; and (3) the harm that will result from a failure 75 point of view, the Initial Terms offered a way to delever if distributions continued,
at a modest price to the Partnership if eliminating distributions nonetheless proved
necessary. The Defendants, however, were unable to justify the inclusion of the
additional term guaranteeing an accrual rate. By adding the $0.285 accrual term, the
General Partner guaranteed a large transfer from ETE to subscribers if distributions
were cut. The term was a large downside hedge for subscribers, without an apparent
benefit to ETE, except in the unlikely event that distributions went up.376
The unlikely event came to pass. As it turned out, under the fixed accrual at
$0.285, the subscribers did worse than they would have under the unlimited accrual
of the Initial Terms. Under those terms, subscribers would have accrued credit based
on the difference between the subscribers’ maximum $0.11 cash distribution and the
amount of actual cash distributions. Instead, the Private Offering fixed accrual as the
difference between $0.11 cash paid and $0.285. The distribution rate on common
units, post-transaction, has been at or above $0.285 each quarter. Adding the unfair
term has caused the Partnership no damages, therefore; it has actually mildly reduced
the cost to ETE.377 The other changes between the Initial Terms of the public
offering and those in the Private Offering were either beneficial at the time (increase
to enjoin the actions that threaten plaintiff outweighs the harm that will befall the defendant if an injunction is granted.”). 376 I note that, even if distributions went up, the General Partner could waive the cap on distributions to the participating unitholders based on the General Partner’s determination of an “Extraordinary Distribution.” Some upside could still be captured. 377 JX 219.0004; Trial Tr. 257:3–7. 76 of the term from eight to nine quarters), or neutral to the Partnership (the waiver
provision.)
Rescinding the issuance, therefore, is not required in equity. It would not be
proportional to any loss occasioned by the breach—there is none. Moreover,
employing equity to cancel the securities would cause equitable problems of its own.
Some subscribers were outsiders, and some were friends and relatives who had no
hand in the addition of the problematic accrual term. These individuals are not
parties. They participated in the Private Offering and accepted the associated risk.
They have forgone distributions for nine quarters. Rescission would deny them the
benefit of their bargain. It is worth noting that while I have found that the Defendants
have failed to meet their burden to show the fairness of the transaction, it was not so
one-sided that all securities were subscribed; many were not.
To repeat, the unfair term added to the initial, fair terms was the $0.285
accrual term, which was unfair as a downside hedge. If ETE had failed to make
distributions of at least $0.285/unit/quarter, I would not hesitate to employ equity to
compel the Defendants, at least, to disgorge the benefits they received through their
breach of contractual responsibilities. Moreover, the General Partner retained the
discretion to declare dividends above $0.285 “Extraordinary,” in which case
subscribers would accrue additional credits. If the General Partner had done so,
again, equitable action might be appropriate. I do not condone the way in which the
77 final terms of the Private Placement were arrived at, or the rather clumsy and
misleading attempts to justify it through vindication of the Conflicts Committee
process. If the problematic hedge had, in fact, worked a benefit on the Defendants,
equity would act.
Here, however, there was no such benefit. The Plaintiffs have established a
breach, but not shown that the breach caused damage to ETE. The equities,
therefore, do not require pre-distribution injunctive relief here. The Plaintiffs seek
only cancellation of the securities in toto, and associated injunctive relief, which I
have rejected.378
III. CONCLUSION
For the foregoing reasons, the Plaintiffs’ request for rescission and associated
injunctive relief is denied. The parties should confer and advise me what further
issues, including class certification, nominal damages, and remaining requests for
equitable relief, if any, remain. Once that happens, an appropriate order will issue.
378 Given my consideration of the record, the various evidentiary motions outstanding are moot. 78
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