Court Examines Application of Implied Covenant, Step-Transaction Doctrines

While the decision by Delaware Court of Chancery Vice Chancellor John W. Noble in Ellis v. OTLP GP LLC, C.A. No. 10495-VCN (Let. Op. Jan. 30, 2015), takes as its form a letter opinion addressing the merits of a motion to expedite, the court’s discussion of the merits of the dispute (in applying the “colorable claim” aspect of the test for expedition) is worth noting for its coverage of two topics. First, does the implied covenant of good faith and fair dealing preclude structuring a transaction (in a manner specifically permitted by the governance documents) to avoid having to submit the matter to a vote of unaffiliated unitholders? Second, should a transaction’s two phases be deemed a unitary transaction under the “step-transaction doctrine” such that a vote of unaffiliated unitholders was required to approve it? The court answered both questions in the negative and refused to expedite the proceedings seeking to enjoin the vote on the proposed transaction.

The Transactions

The plaintiffs are limited partners of Oiltanking Partners L.P. Oiltanking’s general partner was OTLP GP LLC (the GP). The GP was wholly owned by defendant Marquard & Bahls AG (M&B), which also owned 65 percent of the limited partner units in Oiltanking. In June 2014, defendant Enterprise Products Partners L.P. approached M&B regarding a purchase of Oiltanking, which would include a purchase of both M&B’s 65 percent interest as well as the 35 percent owned by unaffiliated limited partners. M&B was willing to entertain a transaction with Enterprise, but was only willing to do so if it could be structured to avoid a vote that would depend on the support of the unaffiliated limited partners. Pursuant to Oiltanking’s LP agreement, any merger would require the affirmative vote of a “unit majority.” Given the definition of unit majority in the LP agreement, the affirmative vote required to approve a merger would depend on when that vote was taken. If taken during the “subordination period,” the vote required for approval would be at least a majority of the limited partner units not affiliated with the GP—which acted as the functional equivalent of a “majority of the minority” condition to approval. If the vote was taken after the subordination period, then approval by a majority of all limited partner unitholders was required. The subordination period was based on the period pursuant to which the unitholders were to receive certain cash distributions and was expected to end in mid-November 2014.