Delaware Court Of Chancery Issues Guidance On Step Transaction Doctrine, Good Faith And Fair Dealing

Delaware Court Of Chancery Issues Guidance On Step Transaction Doctrine, Good Faith And Fair Dealing

 

In a December 30 decision, the Delaware Court of Appeals issued useful guidance with respect to both the step transaction doctrine and the application of the implied covenant of good faith and fair dealing. Ellis v. OTLP GP, LLC, C.A. No. 10495-VCN, 2015 WL 535866 (Del. Ch. January 30, 2015).

 

Marquard & Bahls AG (“M & P”) owned all of OTLP GP, LLC (“GP”). GP was in turn the sole general partner in Oiltanking Partners, L. P. (“Oiltanking”). In addition to controlling the general partner, M & B owned 65% of the limited partnership interests in Oiltanking. The balance of the limited partnership interests were held by other parties.

 

Enterprise Products Partners LP (“Enterprise”) inquired of M&B about acquiring the entirety of Oiltanking, including the interest held by the unaffiliated limited partners. M&B  responded to Enterprise that it was willing to discuss selling its interest to Enterprise, but it was not interested in any deal contingent upon the participation of those unaffiliated parties.

 

The Oiltanking limited partnership agreement provided, through November, 2014, that a merger would require the approval of a majority of the unaffiliated partnership interests. After that date, a merger could be approved by a majority of the limited partner units, they all voting as a single class. Essentially, after November 2014, the 65% limited partnership interest held by M&B in Oiltanking could approve a merger.

 

As of October 1, 2014, before the expiration of the period during which the unaffiliated limited partners could block a merger by a class vote, Enterprise acquired both GP and M&B’s limited partnership units in Oiltanking. Prior to the closing, Enterprise gave notice of its intention to acquire all of Oiltanking by means of a merger. Its proposed merger price was referred to a conflicts committee, which was able to negotiate an increase in the tender price. The price remained, however, less than the price that Enterprise was paying M&B for its limited partnership units.

 

In opposition, the unaffected limited partners asserted that they continue to be entitled to a class vote on the basis that Enterprise and M&B “design[ed] the transaction in a conscious effort to defeat their entitlement a class vote.” Slip op. at 6. They theorized that, as the merger was announced during the period when they had rights to a class vote, that right must govern the subsequent vote as to the merger irrespective that the class voting period had otherwise expired. In that the subject limited partnership agreement did not expressly address this point, it was asserted that there was a violation of the implied covenant of good faith and fair dealing in determining that no class vote is required, and that the transaction was structured in such a way that, viewed as a whole, that right should be retained.

 

As to the suggestion that the right to class voting accrued at the time of the announcement of the transaction, rather than being determined as of the time of the vote, that assertion was rejected by the Court of Chancery.  Rather:

 

If the drafters of the LP Agreement had wanted to subject announcement of the merger, as contrasted with a vote on a merger, to certain requirements, presumably they could have done so. They did not do so.  Slip op. at 9.

 

With respect to the step transaction doctrine, the Chancery Court would hold that it is inapplicable.  Reciting the three alternatives under Delaware law for the application of the doctrine (see footnote 9 at slip op. 12), the Court determined that none of them were applicable. Essentially, Enterprise acquired all of the interest of M&B in Oiltanking and then proposed to acquire all of the interest held by the unaffiliated limited partners; the former was not contingent upon the latter.  Furthermore, M&B did not engineer the two step transactions; Enterprise did.

 

With respect to the obligation of good faith and fair dealing, citing In re El Paso Pipeline Partners, L.P. Derivative Litigation, 2014 WL 2768782,*16 (Del. Ch. June 12, 2014), it was reiterated that:

 

The implied covenant is not a free-floating duty that requires good faith conduct in subjectively appropriate ends... [But] rather, the doctrine by which Delaware law cautiously supplies the implied terms to fill gaps in the express provisions of an agreement. Slip op. at 9 (balance of citation omitted).