The plaintiffs proved the breach. The court found that the general partner violated the implied covenant of good faith and fair dealing in a $10 billion affiliated merger. And then Chancellor Bouchard awarded zero damages. Not reduced damages. Not nominal damages. Zero.
In Dieckman v. Regency GP LP, C.A. No. 11130-CB, 2019 WL 5576886 (Del. Ch. Oct. 29, 2019), the plaintiffs’ expert used a dividend discount model to value what the class gave up and market price to value what they received. Both methods are individually defensible. Using them on opposite sides of the same equation is not. And in a 129-page post-trial opinion, Chancellor Bouchard methodically explained why that inconsistency — and nothing else — destroyed a $1.7 billion damages claim that might otherwise have succeeded.
If you’re retaining or cross-examining a valuation expert in a stock-for-stock merger dispute, this is the case to know.
The Transaction and the Breach
Energy Transfer Equity (ETE) controlled two publicly traded Delaware master limited partnerships: Regency Energy Partners and Energy Transfer Partners (ETP). In January 2015, Regency’s board approved a merger with ETP in which each Regency unit would be exchanged for 0.4066 ETP units plus $0.32 in cash. The deal closed in April 2015 at an implied value of roughly $11 billion.
The problem was the conflicts committee. The Regency partnership agreement required that any affiliated merger receive “Special Approval” from an independent conflicts committee or approval by a majority of unaffiliated unitholders. One of the conflicts committee members had ties to Sunoco, another ETE-controlled entity — he was reviewing the merger’s fairness while simultaneously serving on the board of an affiliate that stood to benefit from it. The Delaware Supreme Court reversed the initial dismissal in 2017, finding the plaintiff had adequately pled that neither safe harbor was satisfied.
At trial, Chancellor Bouchard found that the general partner breached the implied covenant of good faith and fair dealing. The breach was established. The only remaining question was damages.
The $1.7 Billion Mistake
The plaintiffs’ damages theory was a “give-get” analysis: compare the value of what the Regency unitholders gave up (their Regency units) to the value of what they received (ETP units). The difference is the damage.
The expert valued the “give” — one Regency unit — at $29.06 using a dividend discount model, which projects the future stream of distributions and discounts them to present value. He valued the “get” — 0.4066 ETP units — at $23.49, based on ETP’s market closing price of $57.78. The difference: $5.57 per unit, or roughly $1.7 billion in aggregate class damages.
The court rejected the entire analysis. Not because the DDM was wrong. Not because ETP’s market price was wrong. Because the expert used a different valuation methodology for each side of the same exchange ratio. Regency and ETP were both publicly traded partnerships operating in the same sector, controlled by the same parent. If the expert believed Regency’s market price didn’t reflect fair value (because of a “valuation overhang” caused by ETE’s control), then the same concern applied to ETP — which was also controlled by ETE. You can’t apply a DDM to one and a market price to the other without explaining why the two entities deserve different valuation approaches.
The court was direct: the plaintiffs’ expert “did not provide any authority from finance literature to support his methodology of comparing a DDM-derived value to a market value.” The analysis “illogically attempts to equate two different standards of value.” It was given zero weight.
What the Defendants’ Expert Did Differently
The defendants’ expert presented three methodologies, all of them apples-to-apples: one market-to-market comparison (using both entities’ trading prices) and two variations of a DDM-to-DDM comparison (applying the same income-approach methodology to both sides). Every apples-to-apples comparison showed zero damages.
This is the part that matters for practitioners. The defendants didn’t need a novel methodology or a brilliant insight. They needed consistency. By applying the same valuation approach to both sides of the exchange ratio, they showed that the merger consideration was fair when measured on a like-for-like basis. The plaintiffs’ $1.7 billion damages figure existed only because of the methodological asymmetry. Remove the asymmetry and the damages disappeared.
The Late Alternative That Also Failed
Sensing the weakness in their primary theory, the plaintiffs introduced a “Dilution Analysis” for the first time in post-trial briefing. This theory quantified the amount of Regency’s cash flows that were allegedly diverted through the merger to ETE, discounted to present value, yielding damages of roughly $338–340 million.
The court rejected this too, for two independent reasons. First, the Dilution Analysis didn’t account for the fact that the historic decline in energy prices hit Regency and ETP differently because of their different business mixes and commodity sensitivities. The defendants’ DDM-to-DDM comparison showed that once you accounted for this differential exposure, the dilution disappeared. Second, the analysis ignored the merger premium: the exchange ratio was set at a premium to Regency’s unaffected unit price as of the announcement date, and that premium substantially exceeded the alleged dilution damages.
Beyond its substance, the timing killed it. Introducing a new damages theory in post-trial briefing — after the defendants have lost the opportunity to rebut it with testimony — is the kind of procedural error that courts treat harshly. The Dilution Analysis was not “fairly raised” and the court declined to consider it on that basis alone.
The Consistency Rule for Merger Disputes
Dieckman doesn’t create new law. It applies a principle that Delaware courts have enforced for decades: in a stock-for-stock merger, you cannot use one standard of value for the “give” and a different standard for the “get.” Chancellor Bouchard cited Citron v. E.I. Du Pont (1990, comparing adjusted book value to market price) and Emerald Partners v. Berlin (2003, comparing undiscounted going-concern value to discounted going-concern value) for the same proposition. The rule isn’t new. But the scale of the consequences in Dieckman — $1.7 billion in damages zeroed out entirely — makes the point unforgettable.
For litigation counsel, the practical checklist is straightforward:
Does the expert use the same methodology for both sides of the exchange? If not, the expert must provide a specific, evidence-based justification for the asymmetry. “Professional judgment” is not enough. The court wants authority from finance literature and a factual basis in the record.
If the expert believes market price is unreliable for one entity, does that logic apply to the other? In Dieckman, the plaintiffs’ expert argued Regency’s market price suffered from a “valuation overhang” caused by ETE’s control. But ETP was controlled by the same parent. If the overhang theory applied to one, it applied to both — and the expert never explained why it didn’t.
Does the analysis account for external factors that affected both entities? The energy price collapse hit Regency and ETP differently. Any damages analysis that doesn’t control for that kind of exogenous shock is measuring the wrong thing.
Is the damages theory raised at the right time? Post-trial briefing is too late. If you have a backup damages theory, present it at trial, where the opposing side can test it.
When You Don’t Need an Expert
If both entities in a stock-for-stock merger are publicly traded with reasonable liquidity, a market-to-market comparison of the exchange ratio may be all you need to evaluate whether the class suffered damages. Pull the unaffected trading prices, apply the exchange ratio, and see whether the class received less than what their units were worth on a like-for-like basis. If the market-to-market comparison shows no damages, a plaintiff retaining a DDM expert to value one side differently will face the same problem the Dieckman plaintiffs faced: they’ll need to explain why the market is right for one entity and wrong for the other, and that explanation will be held to a high evidentiary standard.
You need a valuation expert when there’s a genuine reason to believe market prices don’t reflect intrinsic value for one or both entities — thin trading, information asymmetry, or a demonstrable market inefficiency. But even then, the expert must apply whatever methodology they choose consistently across both sides. The income approach for both, the market approach for both, or a well-explained reason for the difference. Dieckman makes clear that “both approaches are individually valid” is not the same as “using both approaches on opposite sides of the same comparison is valid.”
The Takeaway
The plaintiffs in Dieckman proved the breach. They had a $1.7 billion damages claim. And they lost it entirely because their expert mixed methodologies across the exchange ratio without adequate justification. The defendants’ expert didn’t need a better number — just a consistent one. Every apples-to-apples comparison showed zero damages. For litigation counsel, the lesson is visceral: methodological consistency isn’t a technical nicety. It’s the difference between a $1.7 billion recovery and nothing.
If you’re evaluating a damages theory in a stock-for-stock merger dispute and want a second set of eyes on the methodology before it goes to trial, happy to review it. The consistency issues that sank the Dieckman plaintiffs are easy to spot early and expensive to discover at trial.
