Delaware Chancellor Rejects “Apples-to-Oranges” Damages Analysis

Dieckman v. Regency GP LP et al.

This article discusses Dieckman v. Regency GP, LP, a recent Delaware Chancery Court decision. It is a reminder for valuation professionals providing damages testimony to be wary when mixing the use of the market approach and income approach when estimating damages in situations where multiple entities are involved. For example, using the income approach in valuing the allegedly harmed subject company and then using a market approach for a similarly situated company that allegedly harmed the subject company (and vice versa).

On February 15, 2021, Chancellor Andre Bouchard of the Delaware Court of Chancery issued a post-trail opinion rejecting the “apples-to-oranges” damages analysis proffered by the plaintiff’s expert in the matter of Dieckman v. Regency GP LP, et al. C.A. No. 11130-CB.[1] Chancellor Bouchard took issue with an expert that used the dividend discount model (DDM) to value one entity while simultaneously using the market price to value another entity in determining damages even though equity securities of both entities were publicly traded.

The key takeaway for valuation professionals is to be wary when mixing the use of the market and income approaches to estimate damages in situations where multiple entities are involved. For example, specifically, avoid using the income approach when valuing the allegedly harmed subject company and then using a market approach for a similarly situated company that allegedly harmed the subject company (and vice versa).

Background on the Merger

On January 25, 2015, Energy Transfer Partners, LP (ETP) signed a definitive agreement to acquire Regency Partners L.P. (Regency) for an implied value of $11.3 billion in a transaction that closed on April 30, 2015 (the Merger).[2] Under the terms of the Merger, each common unit of Regency received 0.4066 common units of ETP and a cash consideration of $0.32.[3] The deal was unanimously approved by boards of directors and conflicts committees of both ETP and Regency. Following the acquisition, Regency operated as a wholly owned subsidiary of ETP and stopped trading on the market.

According to the decision issued by Chancellor Bouchard, at the time of the Merger, Energy Transfer Equity L.P. (ETE) held controlling interests in both Regency and ETP.[4]

Regency was a Delaware master limited partnership (MLP) that provided midstream oil and gas services in the United States.[5] It owned and operated pipelines that engaged in the gathering, processing, and transportation of natural gas and natural gas liquids (NGLs).[6] These products were ultimately delivered to downstream pipelines and markets. Prior to being acquired, units in Regency were traded on the New York Stock Exchange under the ticker RGP.

At the time of the transaction, ETP was a Delaware MLP operating in the transportation and storage segments of the oil and gas industry.[7] The company primarily transported crude oil, natural gas, and NGLs. At the time of the merger, units in ETP were traded on the New York Stock Exchange under the ticker ETP.

Overview of Asserted Damages

In a nutshell, plaintiff asserted damages related to the value received by Regency unitholders in the transaction described above was deficient (i.e., the value of the ETP units received did not fairly compensate the Regency unitholders or the “give” was worth more than the “get”). In asserting damages of approximately $1.6 billion owed to plaintiff and those similarly situated, the plaintiff’s expert valued Regency’s partnership units using the DDM method (i.e., the give) and valued the merger consideration using the market price of the ETP units received by Regency unitholders (i.e., along with the cash consideration, the get).[8] Chancellor Bouchard relied, at least in part, on the defendant’s expert rebuttal analysis showing that using the market price for both Regency and ETP resulted in no indication of damages using the financial models of the plaintiff’s expert. Further, the defendant’s expert analysis illustrated that using a DDM method for both Regency and ETP resulted in no indication of damages. In the end, the court awarded no damages in its published opinion.

Plaintiff’s expert noted that the public price of Regency suffered a “valuation overhang” related to distribution splits under the partnership agreements, but the court was not persuaded by the argument and thus reverted to the logic of “apples-to-apples” analyses proffered by the defendants’ expert that eliminated any indication of damages.[9]   

Conclusion

While there may be legitimate valuation reasons to mix the use of valuation approaches/methods when analyzing similarly situated companies, valuation professionals should take great care knowing the risk of having their opinions rejected on the basis of the “apples-to-oranges” argument.

[1] In re Dieckman v. Regency GP LP, et al. C.A. No. 11130-CB (Del. Ch., Feb. 2, 2021) at p. 2. Decision available at: https://courts.delaware.gov/Opinions/Download.aspx?id=316760.

[2] S&P CapitalIQ database.

[3] Ibid.

[4] In re Dieckman v. Regency GP LP, et al. C.A. No. 11130-CB (Del. Ch., Feb. 2, 2021) at p. 1.

[5] S&P CapitalIQ database.

[6] Ibid.

[7] Ibid.

[8] In re Dieckman v. Regency GP LP, et al. C.A. No. 11130-CB (Del. Ch., Feb. 2, 2021) at p. 2.

[9] In re Dieckman v. Regency GP LP, et al. C.A. No. 11130-CB (Del. Ch., Feb. 2, 2021) at p. 119.

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Joseph Thompson, CFA, ASA, is a Principal at the Griffing Group, a Chicago-based valuation consulting firm. Mr. Thompson has provided expert witness testimony in numerous jurisdictions including the Delaware Court of Chancery. In addition to his position at the Griffing Group, he is an adjunct professor at DePaul University and a former options trader on the floor of the Chicago Board of Options Exchange (CBOE).

Mr. Thompson can be contacted at (708) 383-9050 or by e-mail to jthompson@thegriffinggroup.com.

Paul Skluzak is an Associate at the Griffing Group. He provides valuation and damages analyses for purposes of commercial litigation and estate and gift taxation. Mr. Skluzak’s experience covers a wide range of industries, including information technology, civil engineering and construction, professional sports, multinational retail, agricultural equipment, real estate, and others.

Mr. Skluzak can be contacted at (708) 383-9050 or by e-mail to pskluzak@thegriffinggroup.com.