Friday, January 27, 2017

Delaware Supreme Court Emphasizes the Gap-Filling Role of the Implied Covenant of Good Faith and Fair Dealing

Delaware Supreme Court Emphasizes the Gap-Filling Role of the Implied Covenant of Good Faith and Fair Dealing
      In a decision rendered last week, the Delaware Supreme Court reviewed the gap-filling role of the implied covenant of good faith and fair dealing, emphasizing that it addresses lacuna between negotiated terms in order to give full effect to the agreement. In this instance, notwithstanding asserted compliance with the express terms of the agreement, the plaintiff's case could go forward because the defendant’s actions, even if the in strict compliance with the agreement’s express terms, did not satisfy the obligation of good faith and fair dealing.  Dieckman v. Regency GP LP, No. 208, 2016, 2017 WL 243361 (Del. Jan. 20, 2017.
      The underlying transaction involved a merger between two limited partnerships, both within the same family of a master limited partnership. In that transactions of this nature are anticipated, the partnership agreement contained a pair of mechanisms for addressing the conflict. First, the proposed transaction could be negotiated and approved by an independent committee. In the alternative, the transaction could proceed if it received the approval of a majority of the unaffiliated limited partners. In this instance, a belt and suspenders approach was (purportedly) employed. First, a two-person independent conflicts committee was charged to oversee the transaction. Thereafter, a comprehensive proxy statement (not required by the partnership agreement) was distributed to the limited partners soliciting their consent to the transaction based, in part, upon the independent review of the conflicts committee.
      When a limited partner challenged the transaction, it was defended on the basis that it had received the approval of both the independent conflicts committee and a majority of the unaffiliated limited partners, and on that basis the transaction was not subject to further scrutiny. While the Chancery Court accepted that argument, it was rejected by the Delaware Supreme Court. With respect to the independent conflicts committee, the Supreme Court found that it was not, at least for the standards employed in connection with a motion to dismiss, independent. Rather, of the two members, one of them had begun review of the transaction while still affiliated with the general partner. In fact, the persons comprising the committee had to effect certain resignations in order that they could become “independent”, and immediately after approving the transaction they were rehired to positions that would have created a conflict. Also, the standard for independence included that for members of an audit committee of a company listed on the New York Stock Exchange, but those standards were never satisfied.

As with the contract language regarding Unaffiliated Unit Holder Approval, this language is reasonably read by Unit Holders to imply a condition that a Committee has been established whose members genuinely qualified as unaffiliated with the General Partner and independent at all relevant times. Implicit in the express terms is that the Special Committee membership be genuinely comprised of qualified members and that deceptive conduct not be used to create the false appearance of an unaffiliated, independent Special Committee.
The plaintiff has agreed that the LP Agreement’s safe harbor provisions, if satisfied, would preclude judicial review of the transaction. But we find that the plaintiff has pled sufficient facts to support his claims that those safe harbors were unavailable to the General Partner. Instead of staffing the Conflicts Committee with independent members, the plaintiff alleges that the chair of the two-person Committee started reviewing the transaction while still a member of an Affiliate board. Just a few days before the General Partner created the Conflicts Committee, the same director resigned from the Affiliate board and became a member of the General Partner’s board, and then a Conflicts Committee member.
Further, after conducting the negotiations with ETE over the merger terms and recommending the merger transaction to the General Partner, the two members of the Conflicts Committee joined an Affiliate’s board the day the transaction closed. The plaintiff also alleges that the Conflicts Committee members failed to satisfy the audit committee independence rules of the New Your Stock Exchange, as required by the LP Agreement. In the proxy statement used to solicit Unaffiliated Unit Holder Approval of the merger transaction, the plaintiff alleges that the General Partner materially misled Unit Holders about the independence of the Conflicts Committee members. In deciding to approve the merger, reasonable unit holder would have assumed based on the disclosures that the transaction was negotiated and approved by a Conflicts Committee composed of persons who were not “affiliates” of the general partner and who had the independent status dictated by the LP Agreement. This assurance was one a reasonable investor may have considered a material fact weighing in favor of the transaction’s fairness.


No comments:

Post a Comment