Dieckman v. Regency GP LP, et al. came before the Delaware Court of Chancery as a dispute over a merger between Energy Transfer Partners, L.P. (“ETP”) and Regency Energy Partners LP (“Regency”) for an exchange ratio of 0.4066 and a cash payment of $0.32 per common unit of Regency (the “Merger”).

At the time of ETP’s merger proposal, Regency was managed by its general partner, defendant Regency GP, LP (the “General Partner”), which in turn was managed by the board of directors (the “Regency Board”) of its general partner, defendant Regency GP, LLC. The Regency Board consisted of the six individual defendants, two of whom made up the Conflicts Committee appointed by the Regency Board to review and analyze the proposed transaction. Regency, the General Partner, and Regency GP LLC were indirectly owned by defendant Energy Transfer Equity, L.P. (“ETE”), which sat atop of the same “Energy transfer family” to which ETP, Sunoco LP, and Sunoco Logistics Partners, L.P. also belonged.

The rights and duties of the General Partner, Regency GP, LLC, and the unitholders were governed by Regency’s Amended and Restated Agreement of Limited Partnership (the “LPA”), which stated that the General Partner must act in good faith when taking action in such capacity. Under the LPA, the General Partner acts in “good faith” so long as in “making [a] determination or taking or declining to take such other action . . . [it] believe[s] that the determination or other action is in the best interests of the Partnership.”

The Court denied Defendants’ motion to dismiss Plaintiff’s claim that the General Partner and Regency GP LLC breached the LPA by approving the Merger when they did not believe that it was in the best interest of the Partnership. Emphasizing that a lesser degree of specificity is required in pleading a condition of the mind, the Court looked to objective factors informing Defendants’ states of mind in order to measure approval of the Merger against Defendants’ knowledge of the surrounding facts and circumstances. Despite Regency’s objectively brighter future as a standalone entity, Merger negotiations lasted less than a week, and the Conflicts Committee’s independence was called into question by the two members’ revolving door memberships on boards of entities in the Energy transfer family. These factors were even more egregious in light of the Regency Board’s longstanding industry experience.

The Court granted Defendants’ motion to dismiss Plaintiff’s claim that the General Partner and Regency GP LLC breached the implied covenant of good faith and fair dealing by approving the Merger. The implied covenant of good faith and fair dealing may be used to fill the gaps of a particular provision; however, the same will not apply in the instance an agreement expressly addresses a particular issue. Plaintiff argued that the LPA did not specifically address whether the General Partner could reasonably have acted in good faith by approving a merger which was “designed and timed solely for the benefit of ETP and ETE and [was] highly unfair to the limited partners.” The Court found there to be no gap to fill in the LPA given that relevant section of the LPA provides that the General Partner and Regency GP LLC must believe the Merger to be “in the best interest of the Partnership”, thereby setting a measurable standard for the actions of the General Partner and Regency GP LLC.

The Court also granted Defendants’ motion to dismiss Plaintiff’s claims that all Defendants, other than the General Partner and Regency GP LLC, tortiously interfered with and aided and abetted a breach of the LPA. Plaintiff’s claim that Defendants breached the LPA, without more, was insufficient to establish tortious interference. The Court determined that the exception to Delaware’s general rule that a party may not aid and abet a breach of contract, except where such contract creates fiduciary duties, did not apply wherein the LPA eliminated Defendants’ fiduciary duties in favor of the “contractual obligation requiring the General Partner to subjectively believe that its actions were in the best interest of the Partnership.”

Diekman v. Regency GP LP et al.