Gerber v. EPE Holdings, LLC

JOEL A. GERBER, Plaintiff,

v. EPE HOLDINGS, LLC, n/k/a ENTERPRISE PRODUCTS HOLDINGS, LLC; ENTERPRISEPRODUCTS COMPANY f/k/a EPCO, INC.; DUNCAN FAMILY INTERESTS, INC.;DFI GP HOLDINGS, LP; RANDA DUNCAN WILLIAMS; O.S. ("DUB") ANDRAS;CHARLES E. MCMAHEN; EDWIN E. SMITH THURMONANDRESS; RICHARD H.BACKMANN; RALPH H. CUNNINGHAM; W. RANDALL FOWLER; AND RANDADUNCAN WILLIAMS, RICHARD H. BACHMANN, AND RALPH H.CUNNINGHAM, IN THEIR CAPACITY AS EXECUTORS OF THE ESTATE OF DAN L.DUNCAN, DECEASED, Defendants, and ENTERPRISE PRODUCTS PARTNERS, LPand ENTERPRISE ETE LLC, Successor by Mergerto ENTERPRISE GP HOLDINGS, LP, Nominal Defendants.

C.A. No. 3543-VCN

COURT OF CHANCERY OF THE STATE OF DELAWARE

Date Decided: January 18, 2013

Date Submitted: September 19, 2012

MEMORANDUM OPINION

Jessica Zeldin, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware; Jeffrey H. Squire, Esquire and Lawrence P. Eagel, Esquire of Bragar Wexler Eagel & Squire, PC, New York, New York; and Daniel L. Carroll, Esquire of Ingram Yuzek Gainen Carroll & Bertolotti, LLP, New York, New York, Attorneys for Plaintiff.

Richard D. Heins, Esquire, Richard L. Renck, Esquire, and Stacy L. Newman, Esquire of Ashby & Geddes, Wilmington, Delaware, Attorneys for Defendants Enterprise Products Company, Duncan Family Interests, Inc., DFI GP Holdings LP, Randa Duncan Williams, and Randa Duncan Williams, Richard H. Bachmann, and Ralph S. Cunningham, in their capacities as Executors of the Estate of Dan L. Duncan.

A. Gilchrist Sparks, III, Esquire, William M. Lafferty, Esquire, Thomas W. Briggs, Jr., Esquire, D. McKinley Measley, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Attorneys for Defendants Enterprise Products Holdings, LLC, Enterprise Products Partners L.P., Michael A. Creel, Richard H. Bachmann, W. Randall Fowler, O.S. ("Dub") Andras, Charles E. McMahen, Edwin E. Smith, Thurmon Andress, and Ralph H. Cunningham.

Patricia R. Uhlenbrock, Esquire and Seton Mangine, Esquire of Pinckney, Harris & Weidinger, LLP, Wilmington, Delaware, Attorneys for Nominal Defendant Enterprise ETE LLC.

NOBLE, Vice Chancellor

This is yet another action involving a master limited partnership agreement that established a "Special Approval" process which purports to allow the general partner to engage in an otherwise self-interested transaction without breaching any duty owed to the partnership or the limited partners.¹

Plaintiff Joel A. Gerber ("Gerber") brought claims on behalf of Enterprise GP Holdings, L.P. ("EPE" or the "Partnership") to challenge EPE's May 7, 2007 purchase of Texas Eastern Products Partners, LLC ("Teppco GP") from affiliates of EPE's controller, Dan L. Duncan ("Duncan"). While Gerber's challenge was pending, EPE was merged into Enterprise ETE LLC ("MergerCo"), a wholly owned subsidiary of Enterprise Products Partners, L.P. ("Enterprise Products") (the "Merger"). EPE no longer exists. In light of the Merger, Gerber now brings this action directly as a class action on behalf of certain former unitholders of EPE.² In the alternative, Gerber brings this action derivatively on behalf of MergerCo and double derivatively on behalf of Nominal Defendant Enterprise Products.³ The Court now considers the Defendants' Motion to Dismiss the Second Amended Supplemental Verified Complaint.

I. BACKGROUND⁴

A. The Parties

Gerber owned EPE limited partner units continuously from October 24, 2006 until the Merger.⁵ He now holds Enterprise Products limited partner units.⁶ EPE was a Delaware limited partnership in the oil and gas business.⁷ EPE's general partner was EPE Holdings, LLC ("EPE Holdings" or the "General Partner"), a privately held Delaware limited liability company.⁸ EPE Holdings was indirectly owned by Duncan at the time of the Merger.⁹ Since the Merger, EPE Holdings has been renamed Enterprise Products Holdings LLC ("Enterprise Products GP"). Enterprise Products GP is now the general partner of Enterprise Products.

EPCO, Inc. is a privately-owned Texas corporation. Duncan and his family were owners of all, or virtually all, of EPCO's stock. EPCO's principal business is to provide employees, management, and administrative services to all of Duncan's companies including Enterprise Products GP, Teppco GP, and, until the Merger, EPE. Duncan Family Interests, Inc. ("DFI"), a Delaware corporation, and DFI GPHoldings LP ("DFI GP"), a Delaware limited partnership, were, until the Merger, affiliates of EPE Holdings. Now, they are affiliates of Enterprise Products GP.¹⁰ Randa Duncan Williams, O.S. ("Dub") Andras, Charles E. McMahen, Edwin E. Smith, Thurmon Andress, Richard H. Bachmann and Ralph H. Cunningham and W. Randall Fowler (collectively, the "Board") were all directors of EPE Holdings during the relevant time.¹¹

B. The Teppco GP Transaction

In February 2005, Duncan caused DFI GP to purchase Teppco GP for $1.1 billion. Teppco GP, as general partner of Teppco Partners, LP ("Teppco"), was entitled to receive certain distribution rights from Teppco. In December 2006, Teppco GP relinquished certain distribution rights in exchange for 14.1 million Teppco limited partnership units. On May 7, 2007, EPE announced that it had purchased Teppco GP from Duncan's affiliates for approximately $1.1 billion in EPE limited partnership units (the "Transaction"). The Teppco GP that EPE purchased, however, only came with 4.4 million of the Teppco LP units that Teppco GP had received in the December 2006 exchange. Duncan retained ownership of the other 9.7 million units. The Transaction was not presented to the unitholders for approval, but it received a "Special Approval" under EPE's LimitedPartnership Agreement (the "LPA").¹² EPE Holdings chose not to seek and did not obtain any expert opinion on the Transaction.¹³

Gerber complains that the Transaction was not fair to EPE and points to Section 7.6(e) of the LPA, which provides that transactions involving the sale or purchase of partnership property must be "fair and reasonable to [EPE]."¹⁴ The $1.1 billion paid to Duncan (or his affiliates) as part of the Transaction equaled what Duncan (or his affiliates) had paid originally for Teppco GP. Duncan (or his affiliates), however, retained Teppco GP units worth in excess of $500 million. Thus, EPE bought for approximately half of what Duncan (or his affiliates) had acquired some twenty-seven months before, roughly for the same $1.1 billion figure. The Defendants observe that changes in the economic conditions might explain the valuation differences, even over a relatively short period of time.

C. EPE's Limited Partnership Agreement

Section 7.9(a) of the LPA provides a number of mechanisms by which the General Partner may conduct transactions involving a conflict of interest and stillcomply with its contractually defined duties to the Partnership.¹⁵ One such mechanism is Special Approval, or approval by a majority of EPE's Audit and Conflicts Committee (the "Conflicts Committee").¹⁶ The Conflicts Committee is defined by the LPA as "a committee of the Board of Directors of the General Partner composed entirely of three or more directors who meet the independence, qualification and experience requirements established by the Securities Exchange Act and the rules and regulations of the Commission thereunder and by the New York Stock Exchange."¹⁷ McMahen, Smith and Andress comprised the Conflicts Committee during the relevant period.¹⁸

The LPA purports to eliminate common law fiduciary duties and to leave the relationship among the General Partner, its affiliates, the limited partners, and the limited partnership to be governed by contractually agreed-upon standards. As Section 7.9(e) of the LPA provides:

Except as expressly set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner and provisions of this Agreement, to the extent that they restrict or otherwise modify the duties and liabilities, including fiduciary duties, of the General Partner or any other Indemnitee otherwise existing at law or in equity, are agreed by the Partners toreplace such other duties and liabilities of the General Partner or such other Indemnitee.¹⁹

Section 7.9(a) of the LPA addresses potential conflicts of interest and how to deal with them. It provides options for resolving or excusing conflicts. A conflict of interest between the General Partner and the limited partners "shall be permitted and deemed approved by all Partners, and shall not constitute a breach of [the LPA] . . . , or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval."

The LPA, at Section 7.9(b), also establishes that actions taken by the General Partner or its affiliates will be deemed taken in good faith if the persons taking the action "believe that the determination or other action is in the best interest of the Partnership."

D. Procedural History

On February 14, 2008, Gerber commenced this action and, on September 15, 2008, he filed his amended complaint. On September 29, 2008, the Defendants moved to dismiss Gerber's claims, and, on April 7, 2009, they submitted a brief in support of their motion. Oral argument on the Defendants' motion was scheduled for October 21, 2010, but on September 7, 2010, EPE and Enterprise Products announced a definitive agreement that would result in the Merger. Oral argumentwas postponed to await the Merger. The Merger was completed on November 22, 2010.

On February 8, 2011, Gerber moved for leave to amend and supplement his amended complaint. This Court granted Gerber leave to supplement in three ways: (1) to describe the Merger and the entities that emerged out of it; (2) to plead a double derivative claim on behalf of Enterprise Products; and (3) to plead direct claims on behalf of those who held limited partnership units of EPE immediately...