A Delaware court revived an investor lawsuit against Energy Transfer Partners (ETP.N) over its $11 billion acquisition of Regency Energy Partners in a case focused on protections for investors in master limited partnerships.
The Delaware Supreme Court ruled on Friday that pipeline operators Energy Transfer Partners and its indirect parent, Energy Transfer Equity (ETE.N), must face allegations that Regency investors were not properly informed when they approved the merger in 2015.
Energy Transfer Equity was also the indirect parent of Regency. Adrian Dieckman, an investor in Regency, filed a class action in June 2015 and alleged the deal was structured to undervalue Regency.
The ruling sends the case back to the Delaware Court of Chancery, which dismissed the lawsuit in March at an early stage without considering the merits of the allegations.
A spokeswoman for Energy Transfer Partners and ETE said the companies do not comment on pending litigation.
Stuart Grant, the attorney who represented Dieckman, did not immediately respond to a request for comment.
Like many energy pipeline operators, Regency is organized as an MLP, or master limited partnership. MLPs have tax advantages but lack the fiduciary duties that protect investors in corporations.
Instead, Regency protected investors from potentially conflicted deals by establishing an independent committee to negotiate with Energy Transfer Partners, and put the deal to a vote of its investors.
Chancellor Andre Bouchard dismissed the case after finding that Regency provided the basic protections, and had met its minimal disclosure requirements.
However, the Delaware Supreme Court ruled that Regency investors would reasonably expect members of the conflicts committee to be independent directors, without ties to the board of the buyer, Energy Transfer Partners.
One of the two members of the conflicts committee, Richard Brannon, resigned from the board of Sunoco LP (SUN.N), which had a general partner interest in Energy Transfer Partners, to negotiate the deal.
Once the deal closed, Brannon and the other member of the conflicts committee, James Bryant, both joined the Sunoco LP board.
Neither of those potential conflicts were disclosed to Regency investors prior to the vote on the deal.
Larry Hamermesh, a professor at Delaware Law School in Wilmington, Delaware, said the case would have set a troubling precedent for MLP investors if it had been affirmed.
“What would have been the incentive to tell the truth?” asked Hamermesh. “Non-disclosure of material factors might not have been a problem. Now it may be.”
