Background
American Midstream Partners, LP was a publicly traded Delaware master limited partnership whose general partner was indirectly owned by sponsor ArcLight Capital Partners, LLC. After deteriorating energy markets, failed asset sales and an acquisition collapse, operational setbacks, rising leverage, and distribution cuts weakened the partnership, an ArcLight subsidiary proposed acquiring the publicly held units that ArcLight did not already own.
Because the merger was conflicted, the general partner formed a three-member independent conflicts committee to consider and negotiate the proposal under the limited partnership agreement’s Special Approval procedure. Assisted by independent legal and financial advisers, the committee held twenty-eight formal meetings, reviewed updated projections and investor submissions, and negotiated the sponsor’s revised offer from $4.50 to $5.25 per unit. After Evercore opined that $5.25 was fair from a financial perspective, the committee unanimously approved the merger as being in the partnership’s and unaffiliated unitholders’ best interests.
Former unitholder Craig W. Thomas brought a class action alleging that the general partner breached the limited partnership agreement. Following dismissal of his other claims, the remaining claim proceeded to a bifurcated trial on whether the conflicts committee validly granted Special Approval in good faith.
The Court’s Holding
The Court held that Thomas failed to rebut the contractual presumption that the conflicts committee acted in good faith. Under the limited partnership agreement, good faith required each committee member to subjectively believe that approving the merger was in, or not opposed to, the partnership’s best interests. Thomas therefore had to prove by a preponderance of the evidence that the members lacked that belief or consciously disregarded their obligation to form it.
The trial evidence showed the opposite. Each member credibly testified that he believed the merger was better for the partnership than remaining independent, and the record supported those beliefs through the committee’s extensive deliberations, reliance on qualified advisers, consideration of updated information, and repeated negotiations with the sponsor. Although the sponsor acted opportunistically and negotiated aggressively, it did not cause many of the partnership’s underlying financial problems, and its conduct did not establish that the independent committee lacked subjective good faith.
Because valid Special Approval supplied the general partner with the agreement’s safe harbor for the conflicted merger, the Court resolved the sole issue presented at the bifurcated trial against Thomas. It directed the parties to apply that conclusion under the agreement and submit a stipulated order and final judgment on the remaining count.
Key Takeaways
- A plaintiff challenging Special Approval under this limited partnership agreement had to overcome an express presumption that the conflicts committee acted in subjective good faith.
- An imperfect transaction or aggressive conduct by the sponsor does not establish bad faith when independent committee members reach a rational decision for credible, comprehensible reasons.
- The committee’s extensive meetings, independent advisers, updated analyses, consideration of investor concerns, and successful price increases supported the members’ testimony that they believed the merger served the partnership’s best interests.
Why It Matters
The decision illustrates the substantial protection that a properly constituted and genuinely engaged conflicts committee can provide under a Delaware limited partnership agreement that replaces fiduciary duties with contractual standards. Once the agreement presumes Special Approval was granted in good faith, a challenger must prove the committee members’ lack of the required subjective belief, not merely identify process criticisms or argue that a better result was possible.
The opinion also distinguishes sponsor opportunism from committee bad faith. Even when a sponsor benefits from adverse circumstances and uses its negotiating leverage, the contractual safe harbor may remain effective if independent committee members credibly evaluate the partnership’s alternatives and sincerely conclude that the transaction is in its best interests.