Importance of Careful Compliance by General Partner with MLP Requirements—<em>ETE</em>

Importance of Careful Compliance by General Partner with MLP Requirements—ETE

By: Abigail Pickering Bomba, Warren S. de Wied, Steven Epstein, Arthur Fleischer, Jr., David J. Greenwald, Scott B. Luftglass, Philip Richter, Robert C. Schwenkel, Peter L. Simmons, Gail Weinstein

In Energy Transfer Equity L.P. Unitholder Litigation (Mar. 1, 2017), the Court of Chancery denied the parties' cross-motions for summary judgment, and ruled that the plaintiffs' challenge to the General Partner's issuance of convertible units to certain (but not all) unitholders, in exchange for their common units, required development of a full factual record at trial. The principal issues to be determined, according to the court, were: (i) whether the Conflicts Committee approval of the issuance was effective and (ii) whether, in any event, the issuance was a “distribution” under the partnership agreement (in which case it would have been prohibited, as the agreement required that all “distributions” be made pro rata to all the unitholders). The decision underscores that, although MLP agreements typically provide broad rights to the General Partner that permit the elimination of fiduciary duties to the unitholders and establish “safe harbor” procedures for barring claims against even self-dealing transactions, it is critical that a General Partner carefully complies with the agreement provisions—including “staying within the channel” of a safe harbor provision for Conflicts Committee approval of conflicted transactions. Specifically, a Conflicts Committee should be comprised only of members who meet the requirements set forth in the safe harbor provision; and, if non-complying members are inadvertently included, they should be promptly removed or resign as members of the Committee and their removal or resignation should be carefully documented. In the attached Briefing, we discuss the case and offer related practice points.

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