Dieckman v. Regency GP LP, Regency GP LLC
155 A.3d 358, 2017 Del. LEXIS 27 (2017)
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Rule of Law:
The implied covenant of good faith and fair dealing prohibits a general partner from undermining contractual safe harbors through deceptive conduct, such as making misleading disclosures to obtain unitholder approval or appointing conflicted members to a conflicts committee, even when fiduciary duties have been explicitly disclaimed in the partnership agreement.
Facts:
- Regency Energy Partners LP ('Regency'), a master limited partnership, was controlled by a General Partner which, in turn, was indirectly owned by Energy Transfer Equity ('ETE').
- Another ETE-controlled entity, Energy Transfer Partners L.P. ('ETP'), proposed to merge with and acquire Regency, creating a conflict of interest for the General Partner.
- The partnership agreement allowed for conflicted transactions if approved via 'safe harbors,' including approval by an independent Conflicts Committee ('Special Approval') or by a majority of unaffiliated unitholders.
- The General Partner appointed Richard Brannon to the Conflicts Committee to evaluate the merger.
- Brannon was a director of Sunoco, an affiliate of the General Partner, and allegedly reviewed the transaction while on the Sunoco board. He then temporarily resigned from the Sunoco board, joined the Conflicts Committee to approve the deal, and was reappointed to the Sunoco board on the day the merger closed.
- To obtain unitholder approval, the General Partner issued a 165-page proxy statement.
- The proxy statement described the Conflicts Committee as 'independent' but did not disclose the details of Brannon’s temporary resignation from and subsequent reappointment to the affiliate's board.
- A majority of Regency’s unaffiliated unitholders voted to approve the merger based on the information provided.
Procedural Posture:
- Adrian Dieckman, a unitholder, filed a complaint against Regency GP LP and its directors in the Delaware Court of Chancery (trial court), challenging the fairness of a merger.
- The defendants filed a motion to dismiss under Court of Chancery Rule 12(b)(6), arguing the transaction was protected by the partnership agreement's safe harbors.
- The Court of Chancery granted the motion to dismiss, holding that the Unaffiliated Unitholder Approval safe harbor was satisfied and insulated the transaction from review because the agreement's express disclosure term displaced any further duties.
- Dieckman (appellant) appealed the dismissal to the Delaware Supreme Court (highest court).
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Issue:
Does the implied covenant of good faith and fair dealing prevent a general partner from claiming the protection of contractual safe harbors, such as 'Special Approval' and 'Unaffiliated Unitholder Approval,' when a plaintiff alleges that those approvals were obtained through misleading disclosures and the use of a conflicted committee?
Opinions:
Majority - Seitz, Justice
Yes. The implied covenant of good faith and fair dealing prevents a general partner from using deceptive or misleading conduct to obtain the protection of contractual safe harbors. Although the partnership agreement waived fiduciary duties and had minimal express disclosure requirements, the implied covenant inheres in the contract to enforce the parties' reasonable expectations. The purpose of the safe harbor provisions—to ensure fair dealing in conflicted transactions—would be frustrated if the General Partner could secure those protections by misleading unitholders or by subverting the independence of the Conflicts Committee. The court reasoned that the obligation not to act deceptively to secure a safe harbor is so obvious that the parties would not have felt the need to express it. Therefore, the plaintiff has pled sufficient facts to allege that neither safe harbor was legitimately obtained, and the case should not have been dismissed.
Analysis:
This decision significantly clarifies the role of the implied covenant of good faith and fair dealing in limited partnership agreements where fiduciary duties are waived. It establishes that general partners cannot use the letter of the contract to subvert its spirit, particularly regarding conflict resolution mechanisms designed to protect limited partners. The ruling prevents general partners from using misleading disclosures or sham committees to immunize conflicted transactions, ensuring that contractual safe harbors must be obtained in a manner consistent with the reasonable expectations of investors. This precedent reinforces that even in a contract-centric environment, a baseline level of honest conduct is required to give effect to the bargain struck by the parties.
