WILMINGTON, Del. (Legal Newsline) - A “conflicts committee” that was supposed to be conflict-free but wasn’t tainted did not invalidate the $10 billion merger between two pipeline companies, a Delaware court ruled in a decision dismissing a lawsuit seeking more than $2 billion in damages.
Energy Transfer Partners bought Regency Energy Partners in a share-for-share transaction in 2015, part of a consolidation wave that swept the pipeline industry after tax-law changes and a plunge in oil prices hurt the outlook for many companies. Energy Transfer Partners and Regency were both controlled by Energy Transfer Equity through a complicated partnership structure in which the general partner directed operations at the pipeline units.
To avoid a court challenge to the transaction, ET negotiated the merger with a Regency conflicts committee that was supposed to be entirely independent and exclude officers, employees or shareholders who owned anything other than common partnership units. Despite this requirement, ET appointed Richard Brannon to the committee while he was still a director of Sunoco, another ET-controlled pipeline partnership.
The plan was for Brannon to resign from the Sunoco board before joining Regency’s conflicts committee “but implementation of the plan was badly mishandled,” Chancery Judge Andre Bouchard wrote in a lengthy opinion issued Feb. 15.
After a series of offers and counter-offers between ETE and the conflicts committee, the two sides announced a merger in January 2015 at a 0.4066 share-for-share exchange ratio plus 32 cents a share in cash, which was later amended to all stock. Regency shares rose 5% on the news and ET shares fell. The merger passed in April 2015 with a 60% vote of unaffiliated shareholders.
A Regency investor sued over the merger in June 2015. Energy Transfer sought to dismiss the case, citing “safe harbor” provisions shielding the transaction from court scrutiny if the merger was approved by the conflicts committee and a majority of unaffiliated shares.
A lower court dismissed the case in March 2016 but an appeals court reversed in January 2017, saying Brannon’s presence on the conflicts committee invalidated both safe harbors because Regency shareholders could plausibly claim they were misled into voting for the merger.
The case went to trial in December 2019, where an expert for the shareholders, James L. Canessa, said ET underpaid by $1.7 billion and investors were owed $2.2 billion with interest.
In his final decision, Judge Bouchard ruled it was improper for Brannon to sit on the conflicts committee but neither Brannon nor the other committee members approved the merger in bad faith. The judge also rejected the opinion of the plaintiffs’ expert because he improperly used a dividend-discount model to value Regency but actual market value for Energy Transfer.
Dividend-discount models are based on the estimated flow of future dividends, discounted back to the present at an appropriate interest rate. The market value is simply the price investors place on the company’s securities. Canessa didn’t “provide any authority from finance literature to support his methodology,” the judge found.
A defense expert found that using the same valuation method for both companies produced results that supported the merger terms, and the only way Canessa could generate a different result was by using two different methods. Canessa justified his methods by saying ET used its control over Regency to depress its market value below what the dividend-discount model would predict. The judge said that while possible, the scenario wasn’t likely in this case.