Reaffirming the Limits of Interlocutory Review in Conflicted Transactions: A New Framework for Applying Section 7.10(b) in Merger Disputes

Reaffirming the Limits of Interlocutory Review in Conflicted Transactions: A New Framework for Applying Section 7.10(b) in Merger Disputes

Introduction

The recent decision in American Midstream GP, LLC n/k/a Third Coast Midstream Holdings, LLC v. Craig W. Thomas issued by the Delaware Supreme Court on February 25, 2025 presents a significant development in the review of interlocutory appeals in merger disputes involving conflicted transactions. The case arose out of a complex corporate reorganization where American Midstream GP ("GP"), acting as the general partner via its ownership by ArcLight Capital Partners’ affiliates, opposed a class action initiated by former minority Partnership unitholder Craig Thomas and similarly situated investors.

At the core of the dispute is the procedural maneuver concerning the motion for a summary judgment under Section 7.10(b) of the Partnership’s Limited Partnership Agreement (LPA), which lays out a conclusive presumption of good faith in reliance on professional advice. The Court of Chancery, however, denied the summary judgment motion on three grounds, primarily focusing on the inapplicability of Section 7.10(b) to conflicted transactions as well as questions regarding the reliance and authority of the Conflicts Committee and related fairness opinion provided by Evercore Group LLC.

Summary of the Judgment

The Delaware Supreme Court reviewed GP’s interlocutory appeal of the Court of Chancery’s order denying its motion for summary judgment. The Court’s analysis confirmed the lower court’s interpretation of the LPA:

  • Section 7.10(b)’s conclusive presumption of good faith does not extend to conflicted transactions.
  • GP could not benefit from the presumption due to failure to demonstrate reliance on the fairness opinion rendered by Evercore, nor could it claim that the Conflicts Committee acted as its agent.
  • The Conflicts Committee, which was tasked with its own independent negotiation contrary to GP’s interests, was similarly precluded from invoking the presumption.

In addition, the Court affirmed the discretion of the Court of Chancery regarding interlocutory review certification under Rule 42, rejecting factors proposed by GP, such as claims of significant issues of material importance and the termination of litigation via early appellate review.

Ultimately, the Supreme Court declined to certify the interlocutory appeal, underscoring that the Opinion merely interpreted the contractual provisions in a manner consistent with established Delaware case law.

Analysis

Precedents Cited

In reaching its decision, the Court extensively referred to both the Court of Chancery’s opinion in Thomas v. Am. Midstream GP, LLC (2024 WL 5135828) and the well-established Delaware precedence regarding interlocutory appeals. The Court cited:

  • Thomas v. Am. Midstream GP, LLC (2024 WL 5135828): This case provided the factual and procedural matrix in which Section 7.10(b) was analyzed, particularly regarding the implications of a conflicted transaction where the fairness opinion and the role of the Conflicts Committee were under scrutiny.
  • Delaware Supreme Court Rules (Rule 42): The decision elaborates on the stringent thresholds that must be met for interlocutory review, specifically emphasizing that a decision must resolve a substantial issue of material importance before a final judgment is rendered.

These precedents established the legal framework by which the Court measured GP’s arguments. The reliance on these prior decisions reinforced a consistent judicial interpretation that good faith presumptions outlined in Section 7.10(b) cannot shield a transaction where inherent conflicts exist.

Legal Reasoning

The Court’s legal reasoning was multifaceted. Firstly, it recognized that conflicts of interest inherently compromise the applicability of rules designed to protect good faith reliance on professional advice. The Court clarified that:

  • Applicability of Section 7.10(b): By explicitly stating that this section does not cover conflicted transactions, the Court refined its scope and the limits of relying on the validity of a fairness opinion.
  • Role of the Conflicts Committee: The Committee’s independent position—despite its initial mandate to seek Special Approval—meant it operated with a mandate distinct from GP’s interests. This distinction was crucial in rejecting the notion that either party could claim the benefit of the conclusive presumption.
  • Interlocutory Review Threshold: The Court applied a rigorous analysis of the interlocutory appeal rules under Rule 42, determining that the issues raised did not meet the threshold of resolving a “substantial issue of material importance” prior to final judgment.

Collectively, the decision underscores an important principle: procedural shortcuts that otherwise shield corporate actions from judicial review must be carefully balanced against potential conflicts and the overarching need for fairness in corporate governance.

Impact on Future Cases

The implications of this Judgment are wide-ranging:

  • Refinement of Good Faith Presumptions: Future litigants will need to re-examine the boundaries of Section 7.10(b) and its role in shielding contested decisions, particularly in cases involving conflicted transactions.
  • Guidance for Appointment and Role of Conflicts Committees: The decision reaffirms that committees created to manage conflicts must maintain a clear separation from the interests they are meant to mitigate, thereby reducing the dual role risks.
  • Limited Use of Interlocutory Appeals: By reinforcing the strict criteria for interlocutory review, the Judgment sets a precedent that discourages premature appellate intervention unless the issues raised are indeed complex and fundamental.

These factors suggest that the decision will likely inform both corporate restructuring practices and the scheduling of judicial reviews in future disputes.

Complex Concepts Simplified

Certain legal concepts in the Decision may appear intricate but can be simplified as follows:

  • Interlocutory Review: This is a mechanism through which courts can review a lower court's decision before the entire case is resolved. However, this is only granted under strict and significant circumstances.
  • Conclusive Presumption of Good Faith (Section 7.10(b)): Typically, this legal tool is designed to favor a corporate decision if it was made with the counsel of independent professionals. However, when a conflict is present, as in this case, that presumption no longer applies.
  • Conflicted Transactions: These involve situations where the decision-making entity might have competing interests, thus requiring extra scrutiny to ensure fairness and due process.

Conclusion

In conclusion, the Delaware Supreme Court’s decision in American Midstream GP, LLC n/k/a Third Coast Midstream Holdings, LLC v. Craig W. Thomas delivers several key takeaways:

  • The statutory shield provided by Section 7.10(b) clearly does not extend to transactions involving inherent conflicts of interest.
  • The established judicial standard for interlocutory review remains firmly in place, ensuring that only truly substantial legal issues warrant early appellate intervention.
  • The delineation of roles—specifically that of the Conflicts Committee versus GP—reinforces the need for transparent and unbiased decision-making in corporate restructurings.

This Judgment thus reinforces the importance of stringent procedural safeguards and clarifies the limits of reliance on external professional advice in conflicted transactions. Its influence will undoubtedly guide future cases, prompting a re-evaluation of corporate governance practices and judicial review standards in Delaware and beyond.

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