## Facts

- Atlas Energy Resources, LLC (Energy) was a publicly traded Delaware LLC formed to hold certain oil and gas assets and pursue Marcellus Shale development.
- Atlas America, Inc. (America), through itself and a subsidiary, held roughly 48% of Energy’s voting power and functioned as Energy’s controlling unitholder.
- America proposed a merger in which Energy would survive and become a wholly owned subsidiary of America; Energy’s public unitholders would receive 1.16 shares of America per Energy unit.
- Minority unitholders alleged the consideration was below Energy’s market trading price and failed to reflect (i) the value of Marcellus Shale assets and (ii) the effect of eliminating Energy’s cash distributions.
- Because of controller conflicts, Energy’s board formed a special committee of independent directors to evaluate the transaction and alternatives, using legal and financial advisors.
- Plaintiffs alleged America and conflicted insiders effectively set deal terms, omitted a majority-of-the-minority condition, constrained the special committee’s information, and pushed the transaction through a controlled process.
- Energy’s LLC agreement eliminated traditional fiduciary duties of directors and officers and replaced them with a contractually defined duty of good faith, and it included provisions addressing certain affiliate conflict transactions.

## Issues

1. Whether a merger between a publicly traded LLC and its controlling unitholder is reviewed for entire fairness when the LLC agreement contains conflict-of-interest provisions.
2. Whether the LLC agreement’s conflict mechanism insulated the controlling unitholder from claims based on a controller–minority unitholder conflict.
3. Whether directors and officers, whose fiduciary duties were contractually eliminated, could still be liable under the agreement’s subjective good-faith standard on the pleaded facts.
4. Whether the implied covenant of good faith and fair dealing could supply liability where fiduciary duties were disclaimed and the agreement addressed related topics.

## Decision

- The court denied the controlling unitholder’s motion to dismiss.
- The court held the controller transaction was subject to entire fairness review because the LLC agreement did not clearly address or alter review of controller–minority conflicts in a squeeze-out type merger.
- The court granted the directors’ and officers’ motion to dismiss.
- The court enforced the LLC agreement’s elimination of traditional fiduciary duties and required well-pleaded facts showing a lack of subjective good faith, which the complaint did not provide.
- The court interpreted the agreement’s conflict provisions as addressing conflicts between the LLC and affiliates, not the controller’s conflict with minority unitholders, and thus not as a bar to entire-fairness scrutiny of the controller.

## Legal Principles

- A controller-led merger affecting minority owners in a Delaware entity is generally subject to entire fairness review (fair dealing and fair price) absent effective contractual modification.
- In a Delaware LLC, parties may eliminate or modify traditional fiduciary duties by contract; courts will enforce clear provisions substituting a contractual standard.
- A contractual “good faith” standard may be defined subjectively; liability requires facts supporting an inference that fiduciaries did not actually believe they were acting in the entity’s and investors’ best interests.
- Conflict-of-interest provisions are construed according to their text; a clause addressing affiliate–company conflicts may not reach controller–minority investor conflicts unless stated.
- The implied covenant of good faith and fair dealing is a gap-filler and cannot be used to recreate fiduciary duties expressly disclaimed by contract.

## Conclusion

The Court of Chancery allowed claims against the controlling unitholder to proceed under entire fairness because the LLC agreement did not displace controller–minority conflict review, while dismissing claims against directors and officers by enforcing the agreement’s replacement of fiduciary duties with a narrow, subjective good-faith obligation not adequately pleaded as breached.


In re Atlas Energy Res. LLC Unitholder Litig., C.A. No. 4589-VCN (Del. Ch. Oct. 28, 2010)