Delaware Chancery Declines to Hold Up Merger, Finding Two-Step Process OK

Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...

By Michael Greene

Feb. 3 — The Delaware Chancery Court Jan. 30 declined to postpone a challenged merger on the grounds that the two steps to accomplish the transaction should be viewed as a single integrated transaction.

In denying the plaintiffs' motion to expedite, Vice Chancellor John W. Noble ruled that the plaintiffs did not bring forth a colorable claim.

Subordination Period

The plaintiffs brought an action seeking to challenge the acquisition of Oiltanking Partners LP by defendant Enterprise Products Partners LP.

Oiltanking's LP agreement provided that during a subordination period, any merger depended on a class vote of unitholders that were unaffiliated with Oiltanking's general partner OTLP GP, LLC.

Prior to the expiration of the subordination period, Enterprise acquired approximately two-thirds of Oiltanking's LP interest by purchasing Oiltanking's general partner and announced its intentions to acquire all of Oiltanking by merger.

The plaintiff contended that because the acquisition was announced during the subordination period, the voting prerequisite would control even if the merger vote would occur several months after the subordination period ended.

Implied Covenant

The court, however, found that the defendants were not obligated to seek a class vote.

That the limited partnership agreement did not expressly address what voting standard would apply if the merger was announced before the end of the subordination period does not by itself implicate the implied covenant of good faith and fair dealing, Vice Chancellor Noble reasoned.

Instead, he found the text of the limited partnership to be clear and that the subordination period was “well-defined and it expiration was readily predicted.”

“If the drafters of the LP Agreement had wanted to subject announcements of merger, as contrasted with a vote on a merger, to certain requirements, presumably they could have done so,” he concluded.

Two-Step Transaction

The plaintiffs also argued that the defendants improperly divided the transaction into subparts in a conscious effort to defeat the plaintiffs' right to a class vote.

Vice Chancellor Noble, however, rejected this premise as well. Instead he found that Oiltanking's general partner did not structure the merger and Enterprise was under no obligation to pursue a merger after it acquired the general partner.

“Enterprise simply took advantage of the road map drawn by the LP Agreement,” Vice Chancellor Noble opined.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The opinion is available at http://www2.bloomberglaw.com/public/desktop/document/Ellis_v_OTLP_GP_LLC_No_10495VCN_Del_Ch_Jan_30_2015_Court_Opinion.