Energy Transfer Equity LP's $1 billion private offering of preferred units in 2016 was not entirely fair to the partnership's common unit holders, a Delaware Chancery Court judge ruled, but ETE does not have to revoke the transaction.
Chancellor Sam Glasscock said there was no reason to provide relief to aggrieved common unit holders because the offering turned out to be a bad deal for the insider buyers.
The dispute over ETE's private offering was a remnant of ETE's aborted attempt to merge with fellow pipeline giant Williams Cos. Inc. in spring 2016.
"It is easier to throw pizza at a wall than to clean it up," Glasscock wrote to lead off his opinion that ultimately found in favor of ETE. "The cleanup has, from a legal point of view, been arduous, and is ongoing. This matter involves but one slice of that pie."
ETE planned to use the cash from the preferred offering to help close on a merger with fellow midstream giant Williams without affecting its debt ratios, which were worrying credit rating agencies.
The select buyers of the preferred units would not be able to trade them and would forgo any cash distributions between 11.5 cents per unit and 28.5 cents per unit for nine quarters in exchange for a lump sum payout of cash or stock May 18, the end of the period. If ETE cut distributions, the preferred buyers were protected with a future payout, while common unit holders had no protection, Glasscock noted in his May 17 opinion.
Common unitholders led by the Chester County (Pa.) Employees' Retirement Fund sued ETE, charging that private placement gave unit holders on a select subscription list an unfair advantage over common unit holders. Glasscock said he would have agreed the deal was unfair if ETE had cut its distributions.
ETE got out of the merger agreement with Williams and never cut its then 28.5 cent dividend. ETE raised its distributions twice in 2017 to their current 30.5 cents. Subscribers that locked up their money for nine quarters did worse than common unit holders at the end of the nine-quarter period, Glasscock said.
"ETE was, as a result of the cash required to consummate the merger in light of the economic downturn, between the Scylla of a downgraded credit rating — devastating for an MLP like ETE — and the Charybdis of halting cash distributions to unitholders — a proposition also disastrous to an MLP," Glasscock said in his opinion. "In the defendants' telling, the private offering was a device to assuage concerns of the credit rating agencies without cutting distributions; to the plaintiffs, it was a hedge meant to protect insiders from the anticipated bad effects of the coming merger. I find it was both."
Because the preferred shareholders had no idea the distributions would go up, not down, the deal was fair, Glasscock ruled. If ETE had gone the other way and cut distributions, presumably to finance the ill-fated Williams merger, Glasscock said he would have found it unfair to common unit holders. "If the problematic hedge had, in fact, worked a benefit on the [preferred unit holders]," Glasscock said he could find an equitable solution. "Here, however, there was no such benefit."
"I do not condone the way in which the final terms of the private placement were arrived at, or the rather clumsy and misleading attempts to justify it," Glasscock said.
ETE announced the dismissal of the case May 17 and said the preferred convertible units would convert to common units May 21.
