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Avoiding the “Partner Trap”:g pHow to Prevent being Bound by a Non-Binding Letter of Intent

James L. Rice IIIJulie GremillionMary Isensee

Letters of Intent in Oil & Gas Transactions

• Common practice in the oil and gas industry to frame negotiations for asset sales, mergers, joint ventures and other transactions

• Typically include provisions that neither party will be legally obligated to consummate the transaction until definitive documents are negotiated and executed

• Inclusion of such provisions allow both parties to conduct diligence and explore the economics before entering into enforceable transaction documents

Dating Letter of Intentg

Marriage Transaction

Letters of Intent in Oil & Gas Transactions

• However, in the context of a proposed joint venture or partnership, the parties must be aware of the “Partner Trap”

• Despite provisions that the letter of intent is non-binding and despite a lack of more detailed definitive documents, the parties may find themselves bound in a partnership or joint venture under Texas law…

JUST LIKE A COMMON LAW MARRIAGE

The Story of a Love Triangle

EnterpriseEnterprise

EnbridgeEnergy Transfer

Partners “ETP”

Market Need for OK-TX Pipeline

• Crude oil is transported from Canada and the U.S. to Cushing, OK storage hub

• By Spring 2011, Cushing had developed an oversupply of crudeoversupply of crude due to the lack of take-away capacity.

• Glut caused• Glut caused significant price differentials with the Gulf Coast.

Boy Meets Girl

• Enterprise approaches ETP about building a pipeline to connect Cushing to the Gulf gCoast

• ETP owns the Old Ocean Pipeline, which can be converted to an oil pipeline faster than new build

“I like youI like you…But I’m not ready to beBut I m not ready to be

serious yet.”y

Initial Non-Binding Agreements

• March 10, 2011 – Confidentiality Agreement• April 21, 2011 – Letter Agreement and JV Term Sheet• April 27, 2011 – Reimbursement Agreement

E h f th d tEach of these documents was signed and contained expresscontained express,non-binding language.

March 10, 2011 – Confidentiality Agreement

“The Parties agree that unless and until a definitive agreement between the Parties with respect to the PotentialParties with respect to the Potential Transaction has been executed and delivered, and then only to the extent of the specific terms of such definitive agreement no Party hereto will beagreement, no Party hereto will be under any legal obligation of any kind whatsoever with respect to any transaction by virtue of this Agreement or any written or oralAgreement or any written or oral expression with respect to such a transaction by any Party or their respective Representatives, except in the case of this Agreement for the mattersthe case of this Agreement, for the matters specifically agreed to herein. [A]ny Party may depart from negotiations at any time for any reason or no reason without liability to any Party hereto ”without liability to any Party hereto.

April 11, 2011 – Letter Agreement and JV Term Sheet

“Neither this letter nor the JV Term Sheet create any binding or enforceable obligations between the Parties and, except for the Confidentiality Agreement… no binding or enforceable obligations shall exist between the Parties with respect to the Transaction unless and until the Parties have received their

ti b d l d d fi itirespective board approvals and definitive agreements memorializing the terms and conditions of the Transaction have been negotiated, executed and delivered by both of the PartiesParties.

“Unless and until such definitive agreements are executed and delivered by both of the Parties, either [Enterprise] or Terms in JV Term Sheet Terms in JV Term Sheet , [ p ]ETP, for any reason, may depart from or terminate the negotiations with respect to the Transaction at any time without any liability or obligation to the other, whether arising in

includedincluded::

•• Assets and $ to come from each partyAssets and $ to come from each party•• 50/50 ownership of JV50/50 ownership of JV•• Customary governance rights andCustomary governance rights and

contract, tort, strict liability or otherwise.”Customary governance rights and Customary governance rights and

transfer restrictionstransfer restrictions•• Establishment of “Integrated Project Establishment of “Integrated Project Team” to develop engineering designTeam” to develop engineering design

April 27, 2011 – Reimbursement Agreement

“Each Party expressly agrees to indemnify and hold the yother Party harmless from liability if it binds or attempts to bind the other Party to anyto bind the other Party to any other agreement without such prior written consent. Nothing herein shall beNothing herein shall be deemed to create or constitute a joint venture, a partnership aa partnership, a corporation or any entity taxable as a corporation, partnership or otherwise ”partnership or otherwise.

“Okay, I’ll update my y yFacebook status.”

April 26, 2011 Joint Press Release

Enterprise and ETP issue jointETP issue joint press release announcing agreement toagreement to form joint venture for a 400,000 BPD400,000 BPD crude oil pipeline from Cushing to the Gulf Coast.

Joint Marketing Materials

Open Commitment Period Materials• Project named the “Double E Crude Pipeline, LLC”

• May 2011 FERC Open Commitment materials include:– Joint Notice from “Double E Pipeline Company, LLC”– Draft Transportation Service Agreement (TSA) between

shipper and “Double E Crude Pipeline, LLC”– Pro forma FERC Tariff in the name of “Double E Crude– Pro forma FERC Tariff in the name of Double E Crude

Pipeline LLC”

• All documents include non-binding language and provision that TSAs are subject to board approval by Enterprise and ETP (not Double E)p ( )

Draft Transportation Services Agreement “The terms proposed in this draft are conditional upon approval by the senior management and board of directors of Enterprise Products P t L P d f E T fPartners L.P. and of Energy Transfer Partners, L.P. This is not a binding contract.”

“Unless and until a mutuallyUnless and until a mutually acceptable definitive written agreement has been formally approved and duly executed by the parties, none of the p ,provisions contained in this preliminary draft or any discussions in connection therewith shall be binding upon

f blor in any way enforceable against either party.”

Double E Crude Pipeline LLCDouble E Crude Pipeline, LLC

“But, maybe I’m not quite yready to commit.”

Negotiations ContinueETP t i b t l tt i f f• ETP proposes a new cost reimbursement letter in favor of ETP for up to $2.5 million – ETP expresses hesitance to spend big $ working on conversion of Old

Ocean Pipeline without agreement from Enterprise to reimburse itsOcean Pipeline without agreement from Enterprise to reimburse its share of costs

• Draft definitive agreements are exchanged multiple times during June and July 2011during June and July 2011– LLC Agreement, Contribution Agreement, Pipeline Operating

Agreement, Construction Management Agreement

Draft LLC Agreement includes provisions that Double E Pipeline is not a state law partnership and that no fiduciary duties are owed

• “The Members intend that: The Company may not be a common law partnership or joint venture.”partnership or joint venture.•“[T]his Agreement [does] not create any agency or other relationship creating fiduciary or quasi-fiduciary duties owed by any Member to the Company or to any other Member or Committee Member, and . . . this Agreement may not be construed to suggest otherwise, except for g y gg , pthe implied covenant of good faith and fair dealing.”

“I’m not sure this is ki tworking out…

…but I don’t have…but I don t have anything better yet.”y g y

Project Overhaul – June 30th

• Senior executives from Enterprise and ETP meet to discuss project development

• Enterprise no longer thinks conversion of Old Ocean Pipeline is feasible and proposes 100% new build –making the economics “skinnier” and extending the project timeline– Enterprise and ETP reaffirm decision to keep pursuing

project, even if 100% new build

• Parties extend the open commitment period twice in July to give shippers more time to commit to the y g ppproject

“Playing the field ”Playing the field.

Enterprise Meets Enbridge

DATES ACTIONSAugust 3rd Enterprise approaches Enbridge about pursuing a bigger pipeline

project that would replace the Double E Pipeline project

Internal communications indicate Enbridge provided a much needed g plink to the Canadian crude shippers

August 9th Enterprise floats the idea of using the Seaway corridor for a joint pipeline, then jointly owned by Enterprise and ConocoPhillips

thAugust 10th Enterprise sends Enbridge a term sheet for a competing pipeline from Cushing-Houston

Enterprise represents it has secured volumes that could be used in a h b dJV with Enbridge

Remember, Double E open commitment period didn’t expire until August 12th

“Breaking up is hard to do ”Breaking up is hard to do.

Straddling the Line

DATES ACTIONSEarly Enterprise and ETP continue negotiating with interested shippers,EarlyAugust

Enterprise and ETP continue negotiating with interested shippers, including Chesapeake, a potential anchor shipper

August 11th Enterprise allegedly communicates to Enbridge that if the open commitment period for Double E Pipeline produces enough shipper support Enterprise will stick with ETPsupport, Enterprise will stick with ETP

August 12th Chesapeake submits draft TSA to Double E Pipeline for 100,000 BPD with a 10-year term

August 12th Double E Pipeline open commitment period ends without any anchorAugust 12 Double E Pipeline open commitment period ends without any anchor shipper commitments other than Chesapeake

Commitments totaling another 100,000 BPD are received for shorter time periods from a variety of smaller market playerstime periods from a variety of smaller market players

“Never mind It’s over ”Never mind. It s over.

It’s not me. It’s you.• August 15th: ETP sends letter to Enterprise stating parties

had verbally agreed the project was not commercially viable due to lack of long term commitments and that the gparties would not move forward due to lack of economic justification

• August 16th: Enterprise and Enbridge begin negotiating• August 16 : Enterprise and Enbridge begin negotiating exclusivity agreement for new pipeline project

• August 18th: Enterprise sends ETP a draft press release i th b d t f th D bl E Pi liannouncing the abandonment of the Double E Pipeline

project due to insufficient interest from shippers

Enterprise changes its Facebook status

Enterprise issues a unilateral pressunilateral press release on August 19th, without ETP’s approval asapproval as contemplated by the relevant language in the ConfidentialityConfidentiality Agreement.

“I found someone else ”I found someone else.

Enterprise and Enbridge move forward together

• August 23rd: Enterprise and Enbridge meet to continue pursuing new pipeline project– Enterprise identifies 225,000 BPD of commitments that can be

transitioned to new partnership

• Enterprise sends Enbridge copies of the draft open commitment materials used for the Double E Pipeline, including the TSA negotiated with Chesapeake– Internal Enterprise communications discuss whether to send

Double E work product, including engineering studies, to Enbridge

• September 29th: Enterprise and Enbridge issue a joint press release announcing their proposed joint venture to develop a pipeline from Cushing OK to Houston TX calleddevelop a pipeline from Cushing, OK to Houston, TX called “Wrangler”

“Too bad you’re already y ymarried.”

ETP alleges an existing partnership with Enterprise

On October 1, 2011, ETP files suit against Enterprise and Enbridge alleging a number of claims.

• Claims against Enterprise:– Breach of joint ventureBreach of joint venture – Breach of partnership– Breach of joint enterprise– Unfair competition– Breach of fiduciary duties by taking pipeline project to Enbridge– Breach of Confidentiality Agreement by unilaterally releasing a press release

• Claims against Enbridge– Tortious interference with existing contract– Tortious interference with prospective business relations– Conspiracy or aiding and abetting Enterprise’s breach of fiduciary duties

“How could I have been so wrong?”

Texas Partnership LawpStatutory Test as to Partnership Formation found inTexas Business and Organizations Code , Section 152.052

• Case law holds that statutory test applies to both partnership formation

Sec. 152.052. RULES FOR DETERMINING IF PARTNERSHIP IS CREATED.(a) Factors indicating that persons have

t d t hi i l d th and formation of a joint venture

created a partnership include the persons':

(1) receipt or right to receive a share of profits of the business;

(2) expression of an intent to be partners in the business;

(3) participation or right to participate in control of the business;

(4) agreement to share or sharing:(A) losses of the business; or(B) liability for claims by third parties against the business; and

(5) agreement to contribute or contributing money or property to the business.

Texas Partnership LawThe Supreme Court of Texas provided guidance on the application of the multi-factor statutory test in Ingram v Deere 288 S W 3d 886 (Tex 2009)

p

v. Deere, 288 S.W.3d 886 (Tex. 2009).

– All five factors are to be considered in determining whether a partnership exists However proof of allwhether a partnership exists. However, proof of all factors is not required, and no one factor is determinative.

– Evidence of the five factors is considered under a totality-of-the circumstances test.• A partnership will be proved (or disproved) as a matter of

law by conclusive evidence proving (or disproving) every single factor.

• Intent to form a partnership is not determinative, and a partnership may be formed regardless of the parties’ intent to form (or not form) a partnership.

ETP’s Perspective:“W d fi it l i d!”

ETP’s assertionsin support of partnership formation

From a deposition of ETP’s corporate representative:

“We were definitely married!”

pp p p

• JV Term Sheet provided for 50/50 ownership

Q: “Have you ever seen a partnership agreement between ETP and Enterprise involving the subject matter of this lawsuit?”

A “I’ li d i t hi ith th

• Representations to third parties that a JV was formed = intent to be partners

A: “I’ve lived in a partnership with these guys regarding this asset.”

Q: “Have you ever seen a partnership agreement?”

A: “Well, seeing it and living it to me are the same

• Joint representation on Integrated Project Team and joint marketing presentations were participation in control of the business

, g gthing.”

• Parties agreed to contribute money and property to the business by executing the Reimbursement Agreements and sharingg gcosts of development

Enterprise’s Perspective:“No we were just dating!”No, we were just dating!

Draft definitive agreements l di l i d th ti

Enterprise’s assertionsagainst partnership formation

expressly disclaimed the parties were entering into a partnership or joint venture

g p p

• Letter agreement included two conditions precedent to partnership formation, neither of which were ever met or waived F E t i ’ lmet or waived

• Approval by parties’ respective boards• Negotiation, execution and delivery of definitive agreements for the transaction

From Enterprise’s counsel:

“Energy Transfer Partners is trying to get in the courthouse what it could not achieve in the marketplace ”

• Express non-binding language in the preliminary agreements precludes partnership formation

marketplace.

“The parties made crystal clear that they had not yet agreed to undertake the proposed joint venture.”

• Parties only acted the way they did because they had promised not to be bound, thus subsequent conduct could

“Both parties wanted no exclusivity. They’re trying to create a partnership through ambush.”

not have altered parties’ express intent

“Wait, don’t we each have to say ‘I do’ first?”

• Enterprise’s primary contention is that formation of a partnership was, at a minimum, subject to 2 conditions precedent in the letter agreement:precedent in the letter agreement:– Board approval from both ETP and Enterprise– Execution of definitive agreements

• Texas courts have consistently held that failure of a condition precedent can preclude formation of a partnership or performance of an obligation.

Just one catch…•The conditions precedent were set forth in a non-binding letter agreement that had no carve outs for specific provisions that would be bindinghad no carve-outs for specific provisions that would be binding.

•ETP’s contention is that if the letter agreement is non-binding, then so are the conditions in it!

“But we promised we wouldn’t get married.”

• Enterprise’s second contention is that action subsequent to execution of a non-binding agreement cannot override the parties’ intent not to be boundparties intent not to be bound.

• Texas courts have held that conduct consistent with the performance of the non-binding letter of intent does not prove the parties disregarded the initial non-binding language.

There’s always a catchThere s always a catch…• In this case, the parties made public statements that they had actually

formed a joint venture, which could have been interpreted as disregarding or eclipsing the original letter agreement.

• Likely a question of fact whether the parties’ partial performance was consistent with the letter agreement or in furtherance of a full-blown partnership.

“S if it t t“So if it turns out we were marriedwe were married,

what does that mean?”what does that mean?

Duties in Partnerships• Texas Business Organizations Code 152.204: Partners owe the

following duties:– Duty of Care: act as would an ordinarily prudent person, e.g. on anDuty of Care: act as would an ordinarily prudent person, e.g. on an

informed basis– Duty of Loyalty: cannot compete with partnership or deal with

partnership in a manner adverse to the partnership– Partners shall discharge duties and exercise rights in good faith and in

a manner reasonably believed to be in the best interest of the partnership

• These duties cannot be waived in their entirety in Texas.– Can identify specific types of activities that are excluded from duty of

loyalty (e.g. corporate opportunities)– Can predetermine standard by which performance is to be measured

for duty of care and obligation of good faith (TBOC 152.002(b))

Duties in Partnerships

• “A partner. . . is not a trustee and is not held to the standards of a trustee ” TBOC 152 204(d)a trustee. TBOC 152.204(d)

• Official Comments state that the adoption of specific duties and the language eliminating trustee status were meant to reign in the loose use of fiduciary concepts being applied by the courts.

• Even so courts have continued to impose fiduciary duties in

y p g pp y

• Even so, courts have continued to impose fiduciary duties in cases where a partner acts as managing partner or exerts substantial control over the partnership:– A partner is not per se a fiduciary vis-à-vis other partners, similar toA partner is not per se a fiduciary vis à vis other partners, similar to

how shareholders do not owe other similarly situated shareholders fiduciary duties

– Control is the determining factor– A general partner may have fiduciary duties to limited partners

Fiduciary Duties in Potential Partnerships

• Fiduciary duties may be owed even in a prospective or potential joint venture or partnership (a claim by ETP)j p p ( y )– Texas courts have held that a fiduciary relationship can exist when

one party trusts and relies upon another and has a “confidential or special relationship” even without a formal oral or written agreement

Generally refuted by the Texas Supreme Court and the TBOC• Texas Supreme Court limited this quasi-partnership theory to moral,

social domestic or purely personal relationships in which a confidential orsocial, domestic or purely personal relationships in which a confidential or trust relationship existed prior to the business relationship

• Adoption of 5-factor test in TBOC eliminated need for courts to find “confidential relationships” because it is less difficult to find a statutory partnership existedpartnership existed

“H d I id“How do I avoid accidentally gettingaccidentally getting

married?”married?

Best Practices

• Continue to include conditions precedent, such as execution of definitive agreements, in non-binding letter agreements– While conditions precedent won’t preclude later formation of a partnership,

their existence (if binding) will weigh in favor of no partnership

• If the proposed JV project requires third party support to be• If the proposed JV project requires third party support to be viable (as in the Double E case), add language that parties intend to jointly market project, and that they agree that no such statements or marketing efforts will cause a state law partnership to be formed– Monitor client communications, marketing materials, press releases and

public filings for misleading language

• Consider adding exclusivity provision– Provides parties with a clear starting and end point for the relationship

F th th t th t ti l i t d d t b b d f– Furthers the argument that parties only intended to be bound for a pre-defined period, after which no duties were owed

Best Practices

• Include waiver of fiduciary or other duties to the extent permitted by law

• Include waiver of claims based on the establishment of partnership or other enforceable obligations arising from course of dealing or course of conduct prior to definitivecourse of dealing or course of conduct prior to definitive agreements being executed– Parties agree in advance they won’t bring a claim that subsequent conduct

caused a partnership to form or other enforceable obligations to arise

• Include a statement that the parties have expressly relied on the disclaimers, waivers or non-binding nature of the letter agreement:agreement:– “But for the waivers and statements made in this section, including the

disclaimer of fiduciary duties, the waiver of claims relating to course of conduct and the non-binding nature of the attached proposal, the parties would not be willing to execute this letter agreement or jointly pursue the proposed transaction.”

Best Practices

• Adopt or avoid certain key terms in non-binding letter agreements:– Be very clear which provisions are binding and which aren’t– Avoid language that states some commercial terms have been agreed,

even if subject to further documentation Avoid language about the parties’ mutual intent to pursue a transaction or– Avoid language about the parties’ mutual intent to pursue a transaction or come to an agreement

Terms to adopt Terms to avoid Risky Terms“Non-binding” “Agreement” or “Contract” “Term sheet”“Proposal” “Firm commitment” “Status letter”Proposal Firm commitment Status letter“No obligation” “Shall perform”

Questions?