aster imited artnerships and merger review nique...

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MASTER LIMITED PARTNERSHIPS AND MERGER REVIEW:

A UNIQUE FORM MERITING CAREFUL ANALYSIS

BY JEFFREY OLIVER*

I. INTRODUCTION ..................................................................................... 357 II. MASTER LIMITED PARTNERSHIPS: AN OVERVIEW ............................... 358

A. Incentive Distribution Rights, a Unique MLP Asset .................... 360 III. THE HSR ACT’S INEFFICIENT TREATMENT OF MLPS .......................... 361

A. The EPCO/TEPPCO Transaction ................................................. 363 B. Continuing Uncertainty ................................................................ 365 C. Potential Solutions ........................................................................ 366

IV. MLPS AND PARTIAL ACQUISITIONS ..................................................... 367 A. Relevant Guidelines and Case Law .............................................. 367 B. Relevant MLP Transactions ......................................................... 370 C. Potential Improvements ................................................................ 374

V. A UNIQUE MLP INCENTIVE .................................................................. 375 A. A Disincentive for Anti-Competitive Behavior ............................ 375 B. Likely FTC Arguments ................................................................. 377 C. The Importance of Clarity ............................................................ 378

VI. CONCLUSION ......................................................................................... 378

I. INTRODUCTION

Master limited partnerships (MLPs)—publicly traded limited partnerships largely concentrated in the energy industry—appear to be somewhere near the middle of a remarkable growth spurt. Over the last decade, the number of MLPs has jumped from about 15 to over 100.1 During the same period, total MLP market capitalization has leapt from about $25 billion to more than $400 billion.2 This remarkable growth and proliferation will likely continue as MLPs

* Jeffrey Oliver is an antitrust associate at Baker Botts L.L.P. From 2010 to 2013, he was a staff

attorney in Mergers III of the Federal Trade Commission. Mr. Oliver obtained his J.D. from the University of Chicago Law School.

1. NAT’L ASS’N OF PUBLICLY TRADED P’SHIPS, MASTER LIMITED PARTNERSHIP 101; UNDERSTANDING MLPS 25 (2013), available at http://www.naptp.org/documentlinks/Investor_ Relations/MLP_101.pdf [hereinafter MLP 101]; ERNST & YOUNG, MASTER LIMITED PARTNERSHIP ACCOUNTING AND REPORTING GUIDE 5 (Nov. 2011), available at http://www.ey.com/publication/vwluassetsdld/master_limited_partnership_accounting_and_reporting_guide/$file/mlp_bb1889_3november2011.pdf?OpenElement.

2. MLP 101, supra note 1, at 31; ERNST & YOUNG, supra note 1, at 1.

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358 TEXAS JOURNAL OF OIL, GAS, AND ENERGY LAW [Vol. 9

exploit the boom in domestic natural gas and oil production. Estimates indicate that U.S. energy infrastructure will require massive capital expenditures in the coming decades, with some estimates as high as $10 billion per year for the next 25 years.3 That infrastructure will largely be built by MLPs.

MLPs differ from traditional partnerships and corporations in ways that raise important questions relevant to antitrust review. The questions are increasingly pressing as MLP acquisitions proliferate. In addition, the importance of the MLP form will increase if Congress passes the Master Limited Partnership Parity Act, which will extend the form to the renewable energy industry.4 While the number of MLP transactions that have received substantive antitrust review remains small, the record is now substantial enough to describe areas of relative clarity and obscurity and also to identify a number of important antitrust issues relevant to many MLP transactions.

This Article details three problems currently facing antitrust review of MLP acquisitions: 1) current application of the Hart-Scott-Rodino Antitrust Improvements Act (HSR) tends toward inefficient review of many MLP acquisitions; 2) many MLP acquisitions are partial in nature, which is a problem given that the relevant antitrust agencies lack a systematic method for reviewing partial acquisitions; and 3) Federal Trade Commission (FTC) enforcement actions thus far indicate that the FTC does not understand or fully appreciate the pro-competitive incentives inherent in the MLP form. After a short overview of the MLP structure, this Article provides a brief explanation of each problem and offers potential solutions.

II. MASTER LIMITED PARTNERSHIPS: AN OVERVIEW

MLPs are publicly traded limited partnerships that effectively combine the pass-through tax treatment of partnerships with the liquidity of ownership interests associated with corporations.5 Under the current tax code, MLPs must obtain 90% of their revenue from “qualifying” sources, most of which are in the energy sector.6 Thriving MLPs include EQT Energy Partners, L.P., Blueknight Energy Partners, L.P., Enterprise Products Partners, L.P., and Magellan Midstream Partners, L.P. The following is a diagram of a typical MLP structure:

3. See, e.g., ICF INT’L, THE INGAA FOUND., NATURAL GAS PIPELINE AND STORAGE

INFRASTRUCTURE PROJECTS THROUGH 2030, at 88 (2009), available at http://www.ingaa.org/ Foundation/Foundation-Reports/Studies/7828/9115.aspx.

4. The Master Limited Partnerships Parity Act, S. 795, 113th Cong. (2013); H.R. 1696, 113th Cong. (2013).

5. John Goodgame, Master Limited Partnership Governance, 60 BUS. LAW. 471, 472, 499 (2005). 6. 26 U.S.C. § 7704(d) (2012).

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No. 2] MASTER LIMITED PARTNERSHIPS AND MERGER REVIEW 359

While the MLP form has seen increasing variation over the last few years,

the above diagram offers a picture of most MLP structures today.7 MLPs generally have a single general partner endowed with total day-to-day control of the MLP.8 A typical MLP partnership agreement states: “The General Partner shall conduct, direct and exercise full control over all activities of the Partnership.”9 The general partner is a subsidiary of a larger entity known as the MLP “sponsor.”10 The sponsor controls the general partner and, in turn, the MLP.

The MLP’s publicly traded limited partner interests are called “common units” and are sold on most stock exchanges.11 Compared to corporate stocks, common units endow very few rights or privileges. Under most MLP partnership agreements, common unitholders do not vote for the MLP’s board of directors, nor can they easily remove a general partner.12 Moreover, as permitted by Delaware law, the general partner and the sponsor limit their

7. For a discussion of the latest evolutions in the MLP form, see generally John Goodgame, New

Developments in Master Limited Partnership Governance, 68 BUS. LAW 81 (2012). 8. Goodgame, supra note 5, at 473; Diana M. Liebmann et al., Recent Developments in Texas and

United States Energy Law, 4 TEX. J. OIL, GAS & ENERGY L. 363, 400 (2009); Richard Lehmann, Pipelines to Profit, FORBES (Oct. 5 2009), http://www.forbes.com/forbes/2009/1005/ finance-pipelines-to-profit-fixed-income-watch.html.

9. E.g., ENBRIDGE ENERGY PARTNERS, L.P., FOURTH AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF ENBRIDGE ENERGY PARTNERS, L.P. § 6.1, in Enbridge Energy Partners, L.P., Current Report (Form 8-K), Exhibit 3.1 (Aug. 16, 2006).

10. Goodgame, supra note 5, at 474. 11. Id. at 471. 12. Liebmann et al., supra note 8, at 401 (“The most obvious difference between the unitholder of

an MLP and the stockholder of a corporation is that unitholders have relatively little influence over the MLP or its operations.”); JEFFREY BRENNER, MOODY’S INVESTOR’S SERV., CORPORATE GOVERNANCE STRUCTURE OF MASTER LIMITED PARTNERSHIPS CARRIES CREDIT RISK 2 (2007), available at https://www.moodys.com/sites/products/AboutMoodys RatingsAttachments/2006600000441511.pdf (“Voting rights of MLP common unitholders are very limited. . . . Under a typical [partnership agreement], common unitholders can remove the [general partner] if two-thirds approve. However, typically any single entity (other than the [general partner]) owning 20% or more of common units cannot vote, which makes removal of the [general partner] nearly impossible in practice.”).

MLP

MLP GP

Sponsor Limited Partners (Public Investors)

Common Units

2% GP interest 100% Incentive Distribution Rights

100%

Common Units

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fiduciary duties to the MLP and the unitholders,13 and MLP partnership agreements typically waive fiduciary duties.14 Therefore, an MLP’s common unitholders do not enjoy the protections of a fiduciary duty.

Under MLP partnership agreements, the MLP is required to distribute all “Available Cash” to its partners.15 Available Cash is generally defined as all cash on hand at the end of the quarter, plus working capital borrowings at the end of the quarter, less reserves established by the general partner.16 The right to these distributions is the primary privilege of common unit ownership,17 but that right is highly contingent. While most MLP agreements come with a targeted “minimum quarterly distribution” (MQD), the MQD is not legally binding.18 If an MLP has no revenue during a quarter, it has no duty to distribute.19 As discussed below, however, the MLP structure incentivizes the general partner to meet and exceed the MQD as quickly and frequently as possible.

At its IPO, the MLP sells common units to the public.20 The sponsor usually retains some common units, and the percentage retained by the sponsor varies depending on the size of the MLP and the size of the offering. Over time, the percentage held by the sponsor typically declines as the MLP issues additional units to the public to finance growth and, in some cases, as the sponsor sells down its position. The sponsor retains control of the MLP through its ownership of the general partner.

A. Incentive Distribution Rights, a Unique MLP Asset

This divergence of ownership and control—whereby the majority owners (the public) are, for the most part, simply passive investors—is a common quality of most mature MLPs. This would seem to make mature MLPs a risky investment for prospective common unitholders. MLPs mitigate this risk through a unique instrument that serves to align the interests of the MLP managers and majority owners: incentive distribution rights (IDRs).

IDRs provide the holder with a quarterly distribution that increases as distributions to common unitholders increase.21 The MLP general partner usually holds the IDRs, which pay distributions according to a sliding scale of four tiers or “splits.”22 Each new split is triggered when the quarterly

13. Goodgame, supra note 7, at 85. 14. Goodgame, supra note 5, at 494 (“Because DRULPA permits a partnership agreement to restrict

or eliminate fiduciary duties, MLP partnership agreements contain explicit provisions defining the duties of the general partners and its affiliates to the MLP and the limited partners.”).

15. Id. at 475. 16. Id. 17. Id. 18. Liebmann et al., supra note 8, at 402. 19. Id.; Goodgame, supra note 5, at 474. 20. Liebmann et al., supra note 8, at 401. 21. Id. at 402; see also Goodgame, supra note 5, at 474. 22. Liebmann et al., supra note 8, at 404.

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distributions to the common unitholders surpass a specified amount.23 Most splits are set such that holders of the IDRs receive nothing until the MLP meets the “Second Target Distribution,” which is set higher than the MQD.24 At that point, the general partner typically gets 15% of every additional dollar of “Available Cash.”25 Upon meeting the “Third Target Distribution,” the general partner takes 25% of every additional dollar.26 At the highest target distribution—commonly called the “high split”—the general partner takes 50% of every additional dollar.27

Under the influence of IDRs, general partners desire a steady and dependable increase in quarterly distributions to common unitholders. Such an increase is the “goal of any transaction proposed by an MLP.”28 This imperative to increase quarterly distributions leaves MLPs highly dependent on their ability to raise capital through both debt and equity, which allows the MLP to grow while maintaining or increasing its distribution rate (assuming the growth produces enough revenue to exceed the cost of the acquired capital).29

In short, MLPs exhibit defining characteristics of both corporations (freely tradable interests) and partnerships (pass-through tax treatment). MLP common unitholders, which often include other MLP sponsors, appear to be increasingly confident in the long-term viability of the form. The Alerian MLP Index—tracking the 50 largest U.S. MLPs—is reaching new highs.30 An increasing number of exchange-traded, mutual, and closed-end funds traffic in MLP common units. Meanwhile, the financial press trumpets MLP investment opportunities with headlines like: “Master Limited Partnerships worth a look for high-yield seekers.”31

III. THE HSR ACT’S INEFFICIENT TREATMENT OF MLPS

The Hart-Scott-Rodino Antitrust Improvements Act’s pre-merger

23. E.g., FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF EL PASO

PIPELINE PARTNERS, L.P. art. VI, in El Paso Pipeline Partners, L.P., Current Report (Form 8-K), Exhibit 3.1 (Nov. 28, 2007).

24. Id. art. V § 5.11(e). 25. Id. 26. Id. 27. Id. 28. Goodgame, supra note 5, at 474; see also UBS Arburg, MLP Bible, Apr. 2003, at 27 (“MLPs are

guided by one simple principal in making acquisitions—it must be ‘accretive’ to available cash flow.”). 29. Goodgame, supra note 5, at 502 (“Because an MLP must convince investors that it is a good

investment, and must do so repeatedly in order to expand, MLPs have a significant incentive to maintain a governance model that is viewed by the market as ‘good governance’; after all, if investors believe that an MLP will favor its sponsor to the detriment of the MLP, it is less likely that investors will be willing to provide capital for that MLP (or, at least, a cost acceptable for use by that MLP).”).

30. Demitri Defotis, MLPs: An Industry Veteran’s View, BARRON’S (Apr. 2, 2012), http://online.barrons.com/article/SB50001424052748704882404578388634022540690.html?mod=BOL_da_qa#articleTabs_article%3D1.

31. John Wasik, Master Limited Partnerships Worth a Look for High-Yield Seekers, REUTERS (Oct. 12, 2012), http://www.reuters.com/article/2012/10/12/column-wasik-idUSL1E8 LBG4320121012.

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notification requirements apply only to acquisitions of “assets” and “voting securities.”32 Until 2005, the FTC treated individual partnership interests as neither assets nor voting securities.33 Therefore, an acquisition of anything less than 100% of a partnership’s financial interests faced no pre-merger notification requirements.34 This approach tended toward inefficient regulation. A new investor purchasing a 99% partnership interest faced no pre-merger review, while a 99% owner purchasing the last 1% partnership interest faced the full range of pre-merger filing requirements.

This changed in 2005 when the FTC amended the Premerger Notification Rules (the Rules) under the HSR Act.35 The amendments sought to trigger unincorporated pre-merger filing obligations “at the point at which control of an unincorporated entity changes.”36 To this end, the FTC defined “control” of an unincorporated entity as the right to 50% or more of the profits, or having the right, in the event of dissolution, to 50% or more of the assets.37 Acquiring such “control” triggers HSR filing requirements, assuming the transaction exhibits all the other requisite characteristics.

The amendment made sense for traditional partnerships, where controlling parties are almost invariably the majority owners. As discussed above, however, majority ownership often does not belong to the general partner or its sponsor in an MLP, even though the general partner makes all decisions regarding the MLP’s assets.38 Even when an MLP reaches the “high splits,” meaning that each additional MLP dollar is split 50/50 between the general partner and the unitholders,39 the general partner is frequently receiving less than 50% of the MLP’s distributable cash, given that the general partner only takes 50% of the payout that is actually above the high split threshold. Therefore, when a new sponsor acquires the general partner of such an MLP, the acquiring entity seldom acquires “control” of the MLP under the HSR Act. As a result, the current application of the HSR Act to MLPs can lead to severely inefficient regulation, triggering filing requirements for innocuous transactions while leaving the antitrust agencies to review and potentially rollback consummated transactions that never faced filing requirements.

32. 15 U.S.C. § 18a (2012) (“[N]o person shall acquire, directly or indirectly, any voting securities

or assets of any other person . . . .”). The HSR Act amended the antitrust laws of the United States, including the 1914 Clayton Act. 15 U.S.C. §§ 12–27.

33. Premerger Notification; Reporting and Waiting Period Requirements, 70 Fed. Reg. 11,502 (Mar. 8, 2005).

34. Id. 35. Id; see 16 C.F.R. § 801.1(b) (2013). 36. Premerger Notification; Reporting and Waiting Period Requirements, 70 Fed. Reg. 11,502 (Mar.

8, 2005). 37. 16 C.F.R. § 801.1(b) (“The term control (as used in the terms control(s), controlling, controlled

by and under common control with) means: . . . (ii) In the case of an unincorporated entity, having the right to 50 percent or more of the profits of the entity, or having the right in the event of dissolution to 50 percent or more of the assets of the entity. . . .”).

38. See supra Part II.A. 39. See Goodgame, supra note 5, at 479.

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A. The EPCO/TEPPCO Transaction This inefficiency has already played itself out more than once before the

FTC, offering a taste of future events as the number of MLP transactions increase. One example came in a series of transactions involving TEPPCO Partners L.P. (TEPPCO) and Enterprise Products Partner L.P. (Enterprise), two successful MLPs with assets spread across the United States.40 In February 2005, EPCO, Inc. (EPCO), Enterprise’s privately held holding company, purchased the general partner of TEPPCO along with a small percentage of TEPPCO’s common units.41 The TEPPCO acquisition was not HSR reportable because EPCO had not gained a right to 50% of TEPPCO’s profits, even though EPCO had gained actual control of TEPPCO.42 The pre- and post-acquisition structures are diagramed below:

Pre-Acquisition

Post-Acquisition

40. See TEPPCO Partners, L.P. General Partner Acquired by EPCO, Inc., PR NEWSWIRE (Feb. 24,

2005), http://www.prnewswire.com/news-releases/teppco-partners-lp-general-partner-acquired-by-epco-inc-54136382.html [hereinafter PR NEWSWIRE].

41. Id. 42. 16 C.F.R. § 801.1(b) (2013).

TEPPCO LP

TEPPCO GP

Duke Public

Unitholders

2% GP interest 100% IDR

100%

94%

4%

EPCO

100%

4%

Public Unitholders

Enterprise LP

Enterprise GP

2% GP interest 100% IDR

94%

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The FTC eventually challenged the consummated merger, claiming that

EPCO (through Enterprise) and TEPPCO together controlled some 70% of the salt dome storage capacity in Mont Belvieu, Texas, a key hub for the storage, transportation, and sale of natural gas liquids.43 In its investigation, the FTC concluded that the “practical result” of the EPCO/TEPPCO acquisition was that EPCO “ultimately owns and controls both” TEPPCO and Enterprise.44 Nevertheless, this conclusion was not entirely accurate; the transaction failed to trigger HSR filing requirements because EPCO had acquired only partial ownership of TEPPCO, even though it had indeed acquired total managerial control.45

On August 18, 2006, more than a year after consummation, the FTC and EPCO entered into a settlement agreement requiring EPCO to divest TEPPCO’s salt dome storage.46 EPCO did so in February 2007, a full two years after consummating the acquisition.47 The FTC’s actions made headlines, partly because the events seemed a return to pre-HSR days when the agency focused much of its time unwinding consummated mergers.48 One commentator wrote: “Notably, the FTC did not claim that the parties were required to provide the FTC with pre-merger notification under the Hart-Scott-Rodino Antitrust Improvements Act.”49

Ironically, three years after the settlement agreement, in 2009, EPCO faced its first HSR filing requirement when it acquired all of TEPPCO’s outstanding common units.50 The acquisition achieved what the FTC claimed the first acquisition accomplished, namely the consolidation of ownership and control of TEPPCO under EPCO.51 However, the acquisition changed nothing about who actually controlled TEPPCO and was, therefore, a far less ideal candidate for HSR filing requirements than the initial acquisition, which was, and remains, precisely exempt.

43. Dan L. Duncan, No. 051-0108, 2006 WL 2522712 (F.T.C. Aug. 18, 2006). 44. Id. at 60. 45. 16 C.F.R. § 801.1(b). 46. Duncan, 2006 WL 2522712. 47. Dan L. Duncan, No. 051-0108, Letter from Donald S. Clark, Fed. Trade Comm’n Sec’y,

Approving November 17, 2006 Application of Texas Eastern Products Pipeline Company LLC (TEPPCO) to Divest the TEPPCO NGL Storage Assets to Louis Dreyfus Energy Services (Feb. 23, 2007), available at http://www.ftc.gov/sites/default/files/documents/cases/2007/02/070223 dlduncanepcoltrapprvdivest.pdf.

48. See SHULTE ROTH & ZABEL, LLP., FTC REQUIRES DIVESTITURE IN CONSUMMATED TRANSACTION 1 n.2 (2006), available at http://www.srz.com/files/News/86815f38-52c7-4b6d-b06b-666b07008f7c/Presentation/NewsAttachment/017c859b-5454-4590-aad6-2b912edb5bb9/files filesClientAlert083006.pdf.

49. Id. 50. See Enterprise and TEPPCO Agree to Merge Forming Largest Publicly Traded Energy

Partnership, REUTERS (Jun. 29, 2009) http://www.reuters.com/article/2009/06/29/idUS90296+29-Jun-2009+BW20090629; Enterprise Products to Buy Teppco for $3.3 Billion, BLOOMBERG (Jun. 29, 2009), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ard4juLLQVU0.

51. Supra note 50.

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B. Continuing Uncertainty The uncertainty surrounding the application of the HSR Act to the

EPCO/TEPPCO transaction has not been lessened by subsequent enforcement actions. Indeed, the events are more or less set to repeat themselves with a number of MLPs. For example, in 2010, Energy Transfer Equity, L.P. (ETE) purchased the general partner of Regency Energy Partners, L.P. (Regency) from General Electric, Inc.52 ETE also acquired some 19% of Regency’s common units.53 ETE already owned the general partner of Energy Transfer Partners L.P. (ETP), another midstream MLP, along with some 26% of ETP’s common units.54 ETE’s acquisition of Regency’s general partner and common units was not HSR reportable because ETE did not have “control” of Regency post-acquisition—ETE did not have a right to 50% or more of Regency’s profits.55 In reality, however, ETE gained total control of Regency, a fact made plain in Regency’s 2010 10-K: “ETE owns our General Partner and as a result controls us.”56 Though the acquisition surely lacked competitive effect, the 10-K went on to offer a potential justification for antitrust review, stating, “ETE also owns the general partner of Energy Transfer Partners, L.P., or ETP, a publicly-traded partnership with which we compete in the natural gas gathering, processing, and transportation business.”57 Should ETE increase its ownership above the 50% threshold in either ETP or Regency, the company will face HSR filing requirements as well as the possibility that the FTC could review the already consummated transaction by which ETE gained actual control of Regency.58

In short, acquisitions involving MLP general partners can face the threat of post-closing investigations and follow-on filing requirements for competitively insignificant transactions. Thus, the current approach to MLPs under the HSR Act tends toward precisely the sort of inefficient HSR enforcement that the 2005 amendments aimed to cure. The resulting uncertainty undermines the purpose of the HSR Act, which is to assist “the business community in planning and predictability, by making it more likely that Clayton Act [antitrust] cases will be resolved in a timely and effective fashion.”59

Ironically, the HSR Act owes its existence, at least partially, to a natural gas pipeline merger similar to that of TEPPCO and EPCO.60 In 1957, El Paso

52. See Claire Poole, Energy Dealmaking Remains Hot, DEAL PIPELINE (Jun. 24 2011),

http://www.thedeal.com/content/energy/energy-dealmaking-remains-hot.php. 53. See Energy Transfer Equity, LP, Annual Report (Form 10-K), at 2 (Feb. 28, 2011) [hereinafter

Energy Transfer Equity 10-K]; Regency Energy Partners, LP, Annual Report, at 84 (Form 10-K) (Feb. 18, 2011) [hereinafter Regency Energy Partners 10-K].

54. See Energy Transfer Equity 10-K, supra note 53. 55. See 16 C.F.R. § 801.1 (2013) (defining control); see also supra note 37. 56. Regency Energy Partners 10-K, supra note 53, at 34. 57. Id. 58. See Section III. 59. H.R. REP. NO. 94-1373, at 11 (1976), reprinted in 1976 U.S.C.C.A.N. 2637, 2643. 60. See Scott A. Sher, Gone But Not Forgotten: Government Review of Consummated Mergers

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acquired Pacific Northwest Pipeline Corp. (PNW).61 At the time, El Paso was the sole supplier of natural gas to California,62 and PNW owned a natural gas pipeline running from New Mexico to the Pacific Northwest.63 PNW was looking to use its pipeline to sell excess natural gas supply to customers in California, thereby becoming a direct competitor to El Paso.64 El Paso finalized its acquisition of PNW in a “midnight merger.”65 Seven years later, the Supreme Court concluded that the merger was anti-competitive and required El Paso to divest the PNW assets.66 The Department of Justice (DOJ) and El Paso battled for another ten years before finalizing the divesture, thereby completing a 17-year process.67 That battle became the poster-child in the legislative debates over the HSR Act in 1976.68

C. Potential Solutions

Under the HSR Act, the FTC, “with the concurrence of the Assistant Attorney General,” may define the terms of the HSR Act and may also “prescribe such other rules as may be necessary and appropriate to carry out the purposes of this section.”69 The FTC employed this authority in 2005 when it defined “control” with respect to unincorporated entities as “the right to 50 percent or more of the profits of the entity, or having the right in the event of dissolution to 50 percent or more of the assets of the entity . . . .”70 In justifying those changes, the FTC stated, “[t]he central thrust of these rules is that meaningful antitrust review should occur at the point at which control of an unincorporated entity changes.”71

With regard to MLPs, the FTC is far from achieving this stated goal. As evidenced in the EPCO/TEPPCO transactions, the current application of the HSR Act to MLPs often misses the moment of transferred control, but triggers filing requirements when no such transfer occurs.72 While there appears to be no simple solution, the following are two ideas that may well prove productive. Each would require the FTC to use its authority under the HSR Act to amend the current rules.

Under Section 7 of the Clayton Act, 45 SANTA CLARA L. REV. 41, 53 n.78 (2005).

61. United States v. El Paso Natural Gas Co., 376 U.S. 651, 655 (1964). 62. Id. at 652. 63. Id. at 653. 64. Id. at 653–54. 65. Id. at 655; see William J. Baer, Reflections on 20 Years of Merger Enforcement Under the Hart-

Scott-Rodino Act, Speech Before the Conference Board, FED. TRADE COMM’N (Oct. 31, 1996), http://www.ftc.gov/public-statements/1996/10/reflections-20-years-merger-enforcement -under-hart-scott-rodino-act.

66. El Paso, 376 U.S. at 662. 67. Id. 68. See Sher, supra note 60, at 53 n.78. 69. Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a (2012). 70. See 16 C.F.R. § 801.1(b) (2013) (defining control); see also supra note 37. 71. Premerger Notification; Reporting and Waiting Period Requirements, 78 Fed. Reg. 41294 (Jul.

10, 2013). 72. Section 7A of the Clayton Act, 15 U.S.C. § 18a (2012).

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One potential amendment would be to tie filing requirements to the acquisition of IDRs. As discussed above, it is almost universally the case that whoever owns the IDRs controls the MLP.73 Indeed, the purpose of IDRs is to align the interests of the controlling party with the interests of the majority owners—the common unit holders.74 When an acquiring party acquires the MLP general partner, they acquire the MLP’s IDRs.75 While this solution holds promise, it may be complicated by the fact that there is no control right inherent in the IDRs, which are also freely transferrable. It is therefore possible, though rare, that a non-controlling entity would gain ownership of the IDRs. Still, IDR ownership appears to be a better indicator of MLP control than a 50% or higher profit share.

A second solution might be found in attaching filing requirements to MLP general partner ownership. MLP general partners almost invariably control the MLP, regardless of whether the general partner holds the IDRs.76 Again, however, there are exceptions. In some highly unique cases, MLPs either do away with the general partner or allow the common unitholders to elect the board of directors.77 Still, by tying filing requirements to general partnership ownership, the FTC would better meet its goal of triggering HSR filing requirements “at the point at which control of an unincorporated entity changes.”78

IV. MLPS AND PARTIAL ACQUISITIONS

MLP acquisitions are often partial in nature, fracturing or mixing control and ownership in myriad ways that seldom produce a complete overlap of the two. For example, in the EPCO/TEPPCO acquisition outlined above, there was a transfer of complete control coupled with a transfer of partial ownership.79 Other likely outcomes include a transfer of partial ownership absent control, or a transfer of partial ownership with partial control. As MLPs continue to multiply and thrive, the variety and pace of these acquisitions will likely increase. Such transactions will almost surely pose a challenge to the current merger review regime, given the numerous uncertainties surrounding the antitrust analysis of partial acquisitions.

A. Relevant Guidelines and Case Law Prior to publication of the 2010 Merger Guidelines, neither the FTC nor the

DOJ had ever officially addressed the question of how to analyze partial

73. See Goodgame, supra note 5, at 478 n.42. 74. Goodgame, supra note 7, at 87. 75. Goodgame, supra note 5, at 499. 76. See Goodgame, supra note 7, at 87–88. 77. See id. 78. Premerger Notification; Reporting and Waiting Period Requirements, 70 Fed. Reg. 11,502 (Mar.

8, 2005). 79. See PR NEWSWIRE, supra note 40.

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acquisitions.80 Historically, partial acquisitions have been relatively rare, and merger analysis has somewhat safely assumed that any acquiring firm will control the acquired entity.81 This has changed significantly over the last decade with the surge of private-equity financing, whereby an increasing number of private equity funds have acquired partial interests in companies that compete with each other.82

Section 13 of the new guidelines, titled “Partial Acquisitions,” acknowledges the upward trend while recognizing the infrequency of such acquisitions relative to complete acquisitions.83 The section, which is the last, begins: “In most horizontal mergers, two competitors come under common ownership and control, completely and permanently eliminating competition between them. . . . However, the statutory provisions referenced in Section 1 also apply to one firm’s partial acquisition of a competitor.”84 Despite the obvious hedging, the section is noteworthy in that it marks the first time the U.S. antitrust agencies have officially acknowledged that some partial acquisitions—with their unique fracturing of control and ownership—may require distinct antitrust analysis from complete acquisitions.

The section identifies three areas of concern regarding partial acquisitions: 1) transactions that “lessen competition by giving the acquiring firm the ability to influence the competitive conduct of the target firm”;85 2) transactions that can “lessen competition by reducing the incentive of the acquiring firm to compete,” namely, “[a]cquiring a minority position in a rival”;86 and 3) transactions that give “the acquiring firm access to non-public, competitively sensitive information from the target firm.”87 The section, in other words, identifies the important questions discussed above without offering specific answers. The section concludes by stating: “Partial acquisitions, like mergers, vary greatly in their potential for anticompetitive effects. Accordingly, the specific facts of each case must be examined to assess the likelihood of harm to competition.”88 In short, there is not yet a systematic approach to the antitrust analysis of partial acquisitions.

80. Daniel P. O’Brien & Steven C. Salop, Competitive Effects of Partial Ownership: Financial

Interest and Corporate Control, 67 ANTITRUST L.J. 559, 559–560 (2000) (“The competitive analysis of horizontal mergers in the United States follows a well-established and widely accepted economic framework. A merger allows previously independent competitors to coordinate their price and output decision to maximize joint profits. . . . The competitive analysis of partial ownership interests is less well established.”).

81. Id. at 562. 82. Laura A. Wilkinson & Jeff L. White, Private Equity: Antitrust Concerns with Partial

Acquisitions, 21 ANTITRUST, No. 2, Spring 2007, at 28, 28. 83. See U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER GUIDELINES 33–34

(2010), available at http://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf. 84. Id. at 33. 85. Id. 86. Id. at 34. 87. Id. 88. Id.

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The relevant case law does not provide additional clarity or specificity. While the Supreme Court has long settled the question of whether Section 7 of the Clayton Act reaches partial acquisitions,89 no court or government agency has identified a consistent standard by which to distinguish benign and anticompetitive partial acquisitions.90 If anything, recent cases have significantly muddied the waters. For example, in United States v. Dairy Farmers of America, the Sixth Circuit blocked a partial acquisition consisting entirely of overlapping passive ownership interests.91 The decision departs from prior rulings on partial acquisitions, which had consistently focused on the extent of the overlapping control in determining the likelihood of anticompetitive effect.92 This prior consensus was harmonious with Section 7’s “solely for investment” exemption.93

In Dairy Farmers of America, however, the Sixth Circuit explicitly rejected the argument that “lack of control or influence precludes a Section 7 violation.”94 The decision seemed to renew the possibility that any transaction “might be struck down if a plaintiff can show the transaction may vaguely align the interests or incentives of two competitors.”95 In short, Dairy Farmers of America complicates the already uncertain approach to antitrust review of partial acquisitions in the United States. While the 2010 Merger Guidelines clarify that the U.S. antitrust regime lacks a systematic approach to reviewing partial acquisitions, Dairy Farmers of America demonstrates that any partial acquisition is a candidate for antitrust enforcement.96

89. See Brown Shoe Co. v. United States, 370 U.S. 294, 316–23 (1962) (discussing the broad

Congressional intent behind the reworking of Clayton Act § 7); United States v. Von’s Grocery Co., 384 U.S. 270, 273–74 (using evidence of many other partial mergers to hold against a supermarket merger in Los Angeles).

90. Compare Denver & Rio Grande W. R.R. Co. v. United States, 387 U.S. 485, 501 (1967) (“A company need not acquire control of another company in order to violate the Clayton Act.”), and United States v. E.I. duPont de Nemours Co., 353 U.S. 586, 592 (1957) (“[A]ny acquisition by one corporation of all or any part of the stock of another corporation . . . is within reach of [section 7] . . . .”).

91. United States v. Dairy Farmers of Am., Inc., 426 F.3d 850, 860–61 (6th Cir. 2005). 92. See, e.g., United States v. Tracinda Inv. Corp., 477 F. Supp. 1093, 1100–01 (C.D. Cal. 1979)

(finding that a partial acquisition was not anti-competitive because the transferred interest was passive); United States v. Int’l Harvester Co., 564 F.2d 769, 777 (7th Cir. 1977) (holding that an investor’s competitive position was not affected by provisions requiring partial sale of stock); Anaconda Co. v. Crane Co., 411 F. Supp. 1210, 1218–19 (S.D.N.Y. 1975) (holding that the Clayton Act’s “solely for investment” exemption sheltered a passive acquisition by a competitor).

93. Section 7 of the Clayton Act prohibits acquisitions of the whole or any part of the stock or other share capital . . . of one or more persons engaged in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition, of such stock or assets, or of the use of such stock by the voting or granting of proxies or otherwise, may be substantially to lessen competition, or to tend to create a monopoly.

15 U.S.C. § 18 (2012). However, the Act also states that “[t]his section shall not apply to persons purchasing such stock solely for investment and not using the same by voting or otherwise to bring about, or in attempting to bring about, the substantial lessening of competition.” Id.

94. Dairy Farmers of Am., 426 F.3d at 859. 95. Brendan J. Reed, Private Equity Partial Acquisitions: Towards a New Antitrust Paradigm, 5

VA. L. & BUS. REV. 303, 323 (2010). 96. Dairy Farmers of Am., 426 F.3d at 860–61.

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B. Relevant MLP Transactions The FTC’s treatment of MLP transactions thus far indicates that, in the

absence of a systematic approach to partial acquisitions, the agency tends to treat partial acquisitions as complete acquisitions. As noted above, the FTC stated that the “practical result” of the EPCO/TEPPCO transaction was to combine both control and ownership of Enterprise and TEPPCO under EPCO.97 In other words, the FTC appears to have viewed the partial EPCO/TEPPCO transaction as if it were a complete merger. This is unfortunate given that partial acquisitions, as noted in the 2010 Merger Guidelines, present unique incentives requiring tailored antitrust analysis.98

An example of the complicated analysis required by many MLP transactions came in 2004 when Magellan Midstream Partners acquired, among other assets, a refined petroleum products terminal in Oklahoma City from Shell, Inc.99 Magellan already controlled a competing terminal in the same market.100 When the FTC challenged the acquisition as anticompetitive, Magellan proposed divesting the terminal to SemGroup, L.P.101 One problem with the proposal was that Carlyle Riverstone, a joint venture of private equity firms Carlyle Group L.P. and Riverstone Holdings, held partial interests in both Magellan and SemGroup.102 The interests included (1) a 50% share of Magellan’s general partner along with a small portion of Magellan’s common units;103 and (2) a 30% interest in SemGroup’s general partner along with a small portion of SemGroup’s limited partnership interests.104 In short, Carlyle Riverstone had partial control and partial ownership of both Magellan and SemGroup.

It is easy to see why the proposed divestiture raised eyebrows at the FTC. The transaction would have placed previously independent competing assets under common—if highly partial—control and ownership. It is harder, however, to pinpoint the proper nature and extent of the concern. Though Carlyle Riverstone had the right to designate two Magellan board members and the right to veto

97. Dan L. Duncan, No. 051-0108, Analysis of Proposed Agreement Containing Consent Orders to

Aid Public Comment, at 2 (F.T.C. Aug. 2008), available at http://www.ftc.gov/ sites/default/files/documents/cases/2006/08/analysis.pdf.

98. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, supra note 83, at 33–34. 99. See Magellan Midstream Partners, L.P., No. 0410164, Analysis of Proposed Agreement

Containing Consent Order to Aid Public Comment, at 1 (F.T.C. Sept. 29, 2004), available at http://www.ftc.gov/sites/default/files/documents/cases/2004/09/040929anal0410164.pdf.

100. Id. 101. See Magellan Midstream Partners, L.P., No. 041-0164, Petition of Magellan Midstream

Partners, L.P. Withdrawing Petition for Approval of Proposed Divestiture, (F.T.C. Mar. 15, 2005), available at http://www.ftc.gov/sites/default/files/documents/cases/2005/03/050322with drawalpet0410164.pdf.

102. See id. at 2. 103. See Williams Energy Partners Announces Buyer of General Partner Interest, MAGELLAN LP

(Apr. 21, 2003), http://www.magellanlp.com/WilliamsNews.aspx?id=186. 104. See SemGroup Signs Letter of Intent for $75 Million Equity Transaction with

Carlyle/Riverstone, SEMGROUP (Dec. 15, 2004), http://www.semgroupcorp.com/NewsAndMedia /PressReleases/PressReleaseDetail.aspx?id=%7B5D2EEA9D-E1C0-4BB3-9069-B0D7320 875A7%7D.

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certain actions taken by the board, its control of Magellan was significantly less than total. Its interest in SemGroup was even more limited. The resulting questions remain difficult to answer: How much overlapping control is necessary to trigger anticompetitive concerns? Is any amount of overlapping control too much? Is the level of allowable control related in some way to the size of the ownership interest?

Though these questions are not specific to MLP transactions, many MLP transactions will inevitably raise them. The fact that the questions remain largely unanswered gives rise to significant uncertainty among prospective MLP transactions and may have the effect of stifling beneficial transactions. This seems even more likely given that the most recent and relevant enforcement action, which centered on the same Carlyle Riverstone interests described above, seems to have entirely ignored certain MLP characteristics that are highly relevant to gauging the potential effects of such acquisitions.105

In the face of FTC skepticism, Magellan eventually withdrew its proposal to divest the offending terminal to SemGroup.106 Two years later, in 2006, the FTC moved to block the proposed $22 billion management-led buyout of Kinder Morgan, Inc. (KMI).107 Once again, Carlyle Riverstone’s partial interest in Magellan was the motivating concern. Carlyle Riverstone joined other investors in the buyout, including KMI management, Goldman Sachs Capital Partners (Goldman Sachs), and American International Group (AIG).108 KMI competes with Magellan in gasoline terminaling in the Southeastern United States.109 The transaction would have left Carlyle Riverstone with a 22.6% ownership interest in KMI and the right to appoint two representatives to KMI’s board of directors.110 The FTC sued to block the merger, perhaps marking the first official enforcement action motivated by the overlap of partial ownership interests by private-equity firms.111

While the resulting FTC complaint and related documents acknowledge the partial nature of the overlapping interests, they indicate that the agency treated the acquisition as a full merger.112 The complaint stated: “The Acquisition may substantially lessen competition in the following ways, among others . . . by eliminating competition between KMI and Magellan” and “by increasing the likelihood that Magellan or KMI, or the combination of Magellan and KMI,

105. See id. 106. Supra note 101. 107. Laura A. Wilkinson & Jeff L. White, FTC Challenges Participation of Private-Equity

Investors in Kinder Morgan Buyout, ANTITRUST UPDATE, Spring 2007, at 13, available at http://www.weil.com/wgm/cwgmhomep.nsf/Files/AUSpring07/$file/AUSpring07.pdf.

108. Id. 109. TC Group, L.L.C., No. 0610197, Complaint, (F.T.C. Jan. 25, 2007), available at

http://www.ftc.gov/sites/default/files/documents/cases/2007/01/complaint.pdf. 110. Id. at 4. 111. Id. at 1. 112. Id.

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will unilaterally exercise market power.”113 The FTC subsequently stated:

113. Id. at 6.

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The combination would make the exercise of unilateral market power more likely because many customers view KMI’s and Magellan’s terminals as their first and second choices . . . . Although the proposed transaction will not directly merge KMI and Magellan, it will have the effect of combining the two companies through partial common ownership.114

Those claims—particularly the last one—beg numerous questions highly relevant to any antitrust review of a partial acquisition. For example: 1) What econometric tools did the FTC use to gauge the anticompetitive effects, given that the acquisition and relevant ownership interests were partial and therefore outside the predictive reach of typical market-share and HHI thresholds?115 2) How did Carlyle Riverstone’s minority ownership interests in Magellan and KMI “have the effect of combining” two companies that were majority-owned and controlled by numerous other shareholders, none of whom shared Carlyle Riverstone’s precise post-acquisition incentives? 3) In the context of such fractured ownership and control, is a unilateral effects theory116 even coherent, given that any exercise of market power requires coordinated action among numerous controlling parties with varying incentives?

Ultimately, the FTC ordered Carlyle Riverstone to convert its interest in Magellan to a passive investment. Carlyle Riverstone had to

(1) remove all of [its] representatives from the Magellan Board of Managers and its boards of directors, (2) cede control of Magellan to its other principal investor, Madison Dearborn Partners, and (3) not influence or attempt to influence the management or operation of Magellan.117

These actions provide some limited guidance going forward. Clearly, the

114. TC Group, L.L.C, No. 0610197, Analysis of Proposed Agreement Containing Consent Orders

to Aid Public Comment, at 4 (F.T.C. Jan. 25, 2007), available at http://www.ftc.gov/sites/ default/files/documents/cases/2007/01/analysis.pdf.

115. For a discussion on this dilemma, see O’Brien & Salop, supra note 80; Dr. Leonardo Mautin, Share and Share Alike? Unilateral Effects Analysis in Minority Shareholdings, OXERA AGENDA, Apr. 2012, available at http://www.oxera.com/Oxera/media/Oxera/downloads/Agenda/ Minority-shareholdings.pdf?ext=.pdf. For a description of the HHI, see infra Section IV.C.

116. The unilateral effects theory is a theory of competitive harm from mergers. Herbert Hovenkamp, Post-Chicago Antitrust: A Review and Critique, 2001 COLUM. BUS. L. REV. 257, 332 (2001). The theory

predict[s] that in product differentiated markets, firms that make relatively similar variations of the product may be able to increase their price following a merger, even though the rest of the firms in the market are unable to do so, or are able to manage only a much smaller increase. The amount of this price increase is larger as the output of the two merging firms is more similar, and as their output is more dissimilar from the output of other firms in the market.

Id. 117. FTC Challenges Acquisition of Interests in Kinder Morgan, Inc. by the Carlyle Group and

Riverstone Holdings, FED. TRADE COMM’N (Jan. 25, 2007), http://www.ftc.gov/news-events/press-releases/2007/01/ftc-challenges-acquisition-interests-kinder-morgan-inc-carlyle; see also TC Group, L.L.C., No. 0610197, Decision and Order, (F.T.C. Mar. 16, 2006), available at http://www.ftc.gov/os/caselist/0610197/decisionorder.pdf.

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FTC is more concerned about overlapping control than overlapping ownership, given that it allowed Carlyle Riverstone to keep a passive partial ownership interest in Magellan. Still, the action raised more questions than it answered. Is less than 50% control of either entity still too much? What if a party has 50% control of one but only 25% control of the other? What if the actual influence is limited so as to not include a veto right? If there is a level of allowable control, is it related in some way to the size of the ownership interest? With regard to passive ownership interests, at what point do such interests raise antitrust concerns?

C. Potential Improvement

As noted earlier, these questions are of significant interest to MLP investors given that many, if not most, MLP transactions raise one or all of these questions. No doubt, the idea that the FTC or DOJ can predict with certainty what level of control or ownership leads to competitive harm is optimistic at best and perhaps simply naïve. Still, there are some tools available to help make the analysis more predictable and systematic. One such tool, seemingly ready for implementation, is the Modified HHI Index (MHHI), first proposed by Timothy Bresnahan and Stephen Salop in 1986.118 Like the HHI Index, the MHHI provides “a rough gauge” of a transaction’s effect on competitive incentives.119 However, unlike the HHI, the MHHI is capable of gauging the effects of varying degrees of ownership and control, ranging from “silent financial interest” to “total control.” 120

Implementation of the MHHI will certainly not resolve all of the enforcement ambiguities currently surrounding partial acquisitions. Moreover, the MHHI, like the HHI, is severely limited in that it assumes that there is no substitution outside the relevant market and does not take into account any other competitive factors or efficiencies.121 Still, the MHHI would prove helpful in adding some measure of predictability and structure to the review of partial acquisitions generally and MLP transactions specifically.

118. Timothy F. Bresnahan & Stephen C. Salop, Quantifying the Competitive Effects of Production

Joint Ventures, 4 INT’L J. INDUS. ORG. 155 (June 1986). 119. O’Brien & Salop, supra note 80, at 595. 120. Bresnahan & Salop, supra note 118, at 158–173. 121. Id. at 156.

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V. A UNIQUE MLP INCENTIVE

As noted above, the MLP form is calibrated to align the general partner’s financial interests with those of the limited partners.122 The alignment is accomplished primarily by the IDRs, which render the general partner’s income contingent upon the limited partner’s income.123 In short, the IDRs force the general partner to want what the limited partners want—a steady and dependable increase in quarterly distributions.124 In pursuit of that goal, general partners turn to debt and equity offerings to raise capital for growth projects.125 Doing so allows the general partner to avoid tapping “available cash.”126 This consistent need to access fresh capital through debt or equity, or growth imperative, provides a powerful incentive for general partners to forgo some unilateral uses of market power.127 This Section briefly explains this incentive and then analyzes evidence that the FTC has failed to recognize or appreciate its importance.

A. A Disincentive for Anti-Competitive Behavior The growth imperative inherent in the MLP form limits the MLP sponsor

and general partner’s incentive to behave anti-competitively in situations where a sponsor controls multiple MLPs. This is because an MLP sponsor or general partner that favors itself over MLP common unitholders may have difficulty attracting new investors.128 One commentator explains it this way:

Because an MLP must convince investors that it is a good investment, and must do so repeatedly in order to expand, MLPs have a significant incentive to maintain a governance model that is viewed by the market as “good governance;” after all if investors believe that an MLP will favor its sponsor to the detriment of the MLP, it is less likely that investors will be willing to provide capital for that MLP (or at least a cost acceptable for use by that MLP).129

In short, the MLP form disfavors unilaterally beneficial action by a single sponsor of competing MLPs. This is not to say that a sponsor of multiple MLPs does not have any economic incentive to favor one MLP over another. Given that a sponsor’s economic interests in various MLPs will almost surely diverge, some incentive to favor one over the other is almost inevitable. Still, the incentive is significantly if not altogether mitigated by the consequences of such favoring.

122. Liebmann et al., supra note 8, at 403–06. 123. Id. 124. Id. 125. Goodgame, supra note 5, at 501–04. 126. Id. at 474–80. 127. Id. at 502. 128. Id. 129. Id.

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The proposed 2004 Magellan/SemGroup terminal divestiture described above provides a real-world example of the importance of the incentive. As described, Magellan proposed divesting a terminal to SemGroup to correct a previous acquisition.130 Magellan eventually abandoned the proposal after the FTC expressed concern over Carlyle Riverstone’s partial control and partial ownership interests in both Magellan and SemGroup, the former of which already owned a terminal that competed with the divestiture terminal.131 The most likely unilateral theory would hold that Carlyle Riverstone, as a result of the acquisition, had an incentive to raise the price of services at one of the two relevant terminals132 with the other recapturing some of the diverted sales.133

Assuming Carlyle Riverstone could actually use its minority interest in SemGroup to successfully raise prices, the event would ultimately produce a decline in SemGroup’s available cash (otherwise, Carlyle Riverstone would have raised prices prior to the transaction).134 The decline would, in turn, decrease quarterly distributions to SemGroup’s common unitholders, who would thus not benefit from the recaptured sales at Magellan. Rather, the anticompetitive price increase at SemGroup would effectively require SemGroup common unitholders to subsidize increased quarterly distributions to Magellan’s common unitholders and to Carlyle Riverstone as co-owner of Magellan’s general partner. Carlyle Riverstone’s manifest willingness to favor itself over SemGroup common unitholders would raise the risk of investing in Carlyle Riverstone-controlled MLPs, in turn increasing the cost of capital for such MLPs. For Carlyle Riverstone, the losses stemming from increased cost of capital could easily swamp the marginal gains achieved through anticompetitive behavior.

This MLP-specific check on anticompetitive behavior appears to have exercised no influence on FTC analysis of MLP transactions. As noted, the FTC appears to have viewed both the EPCO/TEPPCO and the Carlyle Riverstone/KMI transactions as essentially full mergers.135 This incomplete

130. See supra Section IV.B. 131. Jeffrey Oliver, Dissecting the MLP Antitrust Issue, MIDSTREAM BUS. at 3 (June 13, 2013),

available at http://www.bakerbotts.com/file_upload/documents/ArticleMSBAntitrust JOliverJune2013.pdf.

132. Section 6.1 of the 2010 Merger Guidelines states that the chances of unilateral effects “are greater, the more the buyers of products sold by one merging firm consider products sold by the other merging firm to the their next choice.” U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, supra note 83, § 6.1 (2010).

133. The theory assumes that the FTC viewed the combined terminals as differentiated products. This seems likely given that most terminals enjoy varying pipeline inputs and outflow, making them varyingly attractive to potential customers, depending on where the customer’s product is coming from and where the product is going to.

134. As Carlyle Riverstone’s interest in SemGroup was only 30%, this seems unlikely, given that the other owners and operators did not enjoy the same post-transaction incentives and, therefore, would have been unlikely to agree to a transaction-related price increase. The fact that Carlyle Riverstone would have had to collude with co-owners to achieve such a price increase begs the question of whether a unilateral theory is actually coherent in the context of such fractured ownership and control.

135. Dan L. Duncan, No. 051-0108, Analysis of Proposed Agreement Containing Consent Order to

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view of the transactions leaves little room for contemplating that the noted pro-competitive incentive is precisely a product of the partial nature of MLP ownership. If the MLP general partner were not dependent upon the investments of prospective co-owners (prospective common unitholders), these incentives would not exist.

B. Likely FTC Arguments

Here, the government agencies would likely argue that common unitholders cannot easily distinguish good sponsors from bad. In other words, the market is unlikely to punish self-serving sponsors. This is inaccurate for a number of reasons. First, MLP common unitholders are generally highly sophisticated investors.136 Second, MLPs must disclose any conflicting sponsor incentives.137 For example, ETE sponsors ETP and Regency, two competing MLPs, and Regency’s 10-K makes the conflicting interests plain:

ETE owns our General Partner and as a result controls us. . . . ETE also owns the general partner of Energy Transfer Partners, L.P., or ETP, a publicly-traded partnership with which we compete in the natural gas gathering, processing, and transportation business. . . . As a result of these conflicts of interest, our General Partner may favor its own interest or those of ETE, ETP . . . or their owners or affiliates over the interest of our unitholders.138

Finally, credit rating agencies have also put potential investors on notice. For example, in 2007, Moody’s offered the following advisory titled “Corporate Governance Structure of [MLPs] Carries Credit Risk”:

This special comment outlines why the separation of ownership and control inherent to the master limited partnership (MLP) corporate governance structure leads Moody’s to suppress the credit ratings of MLPs relative to public corporations with comparable financial metrics. . . . The central governance risk is that the general partner (GP) could use its control to extract value from the MLP to the detriment of common unitholders and bondholders.139

In short, a self-serving MLP sponsor or general partner risks a credit downgrade, incentivizing potential investors to simply shop elsewhere, thereby limiting or ending the relevant sponsor’s ability to benefit from its MLP investments.140

Aid Public Comment, (F.T.C. Aug. 18, 2006), available at http://www.ftc.gov/os/caselist/ 0510108/analysis.pdf.

136. Goodgame, supra note 8, at 474. 137. Id. 138. Regency Energy Partners 10-K, supra note 53 (emphasis added). 139. BRENNER, supra note 12, at 2 (emphasis added). 140. The highly circumscribed rights of MLP common unitholders further incentivize close scrutiny

and careful investment. Voting with their wallets is the only voting opportunity typically available to

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The FTC might also argue that such a constraint is merely reputational, similar to a fiduciary duty, and therefore discountable as too weak to mitigate antitrust concerns. This argument ignores the immediate loss in quantifiable earning potential MLP sponsors or general partners will likely face if they favor themselves over common unitholders. Unlike the fiduciary duty, which constrains behavior only through litigation risk, the MLP’s ability or inability to attract new investors carries significant, quantifiable, market-oriented consequences to the near-term bottom line.

C. The Importance of Clarity

By indicating no consideration or even awareness of the pro-competitive incentive inherent in the MLP structure, the FTC seems to be saying that the incentive is irrelevant to antitrust analysis of MLP acquisitions. The FTC has offered no insight as to why that would be the case. This paucity of relevant information creates uncertainty among MLP sponsors and general partners at a time when MLP transactions continue to increase. Given the various novelties of the MLP form and the growing importance of MLPs in the overall economy, clear regulatory guidance is increasingly important. In future actions, the FTC should seek to elucidate its analysis of the incentive described above and its role in unilateral theories of competitive harm. Given the precedent-setting nature of the KMI settlement, the FTC might consider providing some statement as to whether this incentive played any role in the FTC’s analysis and, if so, what that role was. Such statements should accompany any future actions involving relevant MLP transactions.

VI. CONCLUSION

The MLP form presents certain challenges to the present merger review process. As MLP transactions proliferate, it will become increasingly important to provide predictable, efficient antitrust review. Doing so will likely require a slight change to current application of the HSR Act so as to trigger filing requirements at the moment control of an MLP changes hands. Current application of the HSR Act to MLP transactions fails to do this.

Moreover, the FTC appears to have ignored an important pro-competitive incentive inherent in the MLP form. This incentive makes it extremely unlikely that an MLP sponsor will use market power to raise prices, even when controlling competition assets. It is unclear whether the FTC simply ignored this incentive or otherwise discounted it. The FTC should provide some indication of its analysis regarding these incentives. Doing so will provide regulatory clarity at a time when it is increasingly valuable.

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