The Delaware Court of Chancery has rejected unit holder claims to unwind a March 2016 issuance of convertible preferred units by Energy Transfer Equity, L.P.

ETE completed the convertible preferred issuance to select unit holders in March 2016. The issuance was designed to prevent a downgrade in ETE’s credit rating and address ETE’s liquidity needs. Unfavorable market conditions, restrictions in ETE’s merger agreement and other factors, limited ETE’s options. Participants in the convertible preferred offering agreed to exchange their common units for convertible preferred units that paid a substantially smaller quarterly distribution over a nine quarter period with a conversion feature at the end of that period that would result in participants receiving a certain number of common units based on the amount of the expected foregone distribution.

Shortly after The Williams Companies filed lawsuits challenging the issuance as a breach of the parties’ merger agreement, ETE unit holders filed lawsuits seeking to enjoin the issuance, alleging that the issuance was an impermissible non pro rata distribution and was unfair to ETE investors who had been excluded from the offering.

After a three-day trial in February 2016, the Delaware Court of Chancery issued a 78-page opinion upholding the issuance and allowing the conversion to go forward on May 18, 2018, per the terms of the units. The court found that the issuance was not a distribution under ETE’s partnership agreement and further found that ETE and its unitholders suffered no harm from the issuance of convertible securities.