Five Significant Delaware Corporate Governance Opinions In 2011

2011 was an active year for the Delaware Court of Chancery (the "Court"). The Court issued several significant corporate law decisions that issuers, investment bankers, and their counsel should be aware of. In addition to the highly publicized $1.263 billion damage award in In re Southern Peru Copper Corp. Shareholder Derivative Litigation, there were also other notable opinions in other areas, including master limited partnerships (MLPs), conflicts involving investment banks, poison pills, and general M&A-related litigation. This article highlights five significant decisions by topic.

1. MLPs can eliminate fiduciary duties and provide safe harbors for transactions involving potential conflicts of interest.

   In In re K-Sea Transportation Partners L.P. Unitholders Litigation, C.A. No. 6301–VCP, 2011 WL 2520209 (Del. Ch. June 10, 2011), Vice Chancellor Donald Parsons denied the plaintiffs' motion for expedited discovery in a case involving a merger between a Delaware MLP (K-Sea) and an unrelated party (Kirby Corporation). Under the terms of the merger, Kirby would purchase K-Sea for $329 million with $18 million of that specifically allocated to buyout the units and incentive distribution rights (IDRs) held by the ultimate owner of K-Sea's general partner (K-Sea GP). Because this term created a potential conflict between K-Sea GP and K-Sea, K-Sea's board asked a committee of directors independent of K-Sea's GP (known in the MLP context as a conflicts committee) to consider the transaction. The conflicts committee ultimately concluded that the transaction was fair.

   After the merger was announced, litigation ensued. The plaintiff unitholders sought to enjoin the transaction (and moved for expedited treatment) for three reasons: (i) the conflicts committee should have separately considered the buyout of K-Sea GP's units and IDRs, rather than consider the transaction in full, (ii) K-Sea's proxy statement was materially misleading, and (iii) the members of the conflicts committee were not sufficiently independent.

   Vice Chancellor Parsons found that the first two arguments failed to set forth colorable claims. With respect to the first argument, the Court found that K-Sea's limited partnership agreement (LPA) authorized the conflicts committee to evaluate the fairness of the entire transaction and did not require it to analyze a term that created a potential conflict of interest in isolation. This ruling is significant to the extent an MLP is considering a transaction in which only a piece of it involves a potential conflict of interest, and underscores the importance of reading and following the terms of the applicable LPA in determining how to structure a transaction process.

   With respect to the second argument, the Court, relying on Lonergan v. EPE Holdings L.L.C., 5 A.3d 1008 (Del. Ch. 2010), held that the LPA eliminated all fiduciary duties and only obligated K-Sea to provide unitholders a copy of the merger agreement and a summary of it, which K-Sea had done.

   With respect to the third argument, the Court found that the pre-transaction granting of a significant amount of phantom units to the conflicts committee members that would vest if the transaction were approved met the low bar for articulating a colorable claim that the members were not sufficiently independent. However, the Court denied expedition finding that any harm could be compensated through monetary damages.

   Similarly, in Brinckerhoff v. Enbridge Energy Co., C.A. No. 5526-VCN, 2011 WL 4599654 (Del Ch. Sept. 30, 2011), the Court dismissed claims challenging the fairness of a joint venture transaction between Enbridge Energy Partners, L.P. (EEP), a Delaware MLP, and Enbridge, Inc. (Enbridge), which owned EEP's GP. Of interest, the Brinckerhoff court did not rely directly on EEP's use of a conflicts committee to dismiss the claims, but instead relied on the provision in EEP's LPA that eliminated any liability for monetary damages absent a showing of bad faith. Because EEP had voluntarily utilized its conflicts committee, and its conflicts committee had voluntarily retained legal...