2011 was a record-setting year for mergers and acquisitions (M&A) in the midstream space, with more than $65 billion of transactions announced, including several transactions involving publicly traded master limited partnerships (MLPs). Given that record, MLP boards of directors and senior management should be aware of certain structural differences between MLPs and C-corporations.

MLPs and C-corporations are similar in several ways, including having a legal existence separate and apart from their owners, management by a board of directors and executive officers, and limited liability for their investors. MLPs and C-corporations are, however, very different when it comes to the technical aspects of public company M&A.

The power to elect directors and the right to vote on material events, or not, are only two of the major differences between MLPs and C-corporations. The differences in investors' rights (or lack thereof) are fairly well known throughout the MLP space and are discussed with some frequency. Despite this knowledge, it is the disproportionate impact that these and other provisions can have on public company M&A in the MLP space, as well as the broader midstream space, which is often overlooked.

Election of directors

The power to elect the board of directors, and thus control the company, through a proxy contest or some other form of direct action is one of the critical components of public company M&A. In a C-corporation, the board of directors is at the corporation itself and except in limited circumstances the common stockholders have the right to elect directors. As such, stockholders in a C-corporation have the ability to influence the direction of the company.

In a contest for corporate control, an acquirer can take its case directly to the stockholders of the target by putting a competing board up for election. Similarly, management can take its arguments straight to its stockholders and ask them to defeat the potential acquirer at the next stockholder vote. There are ways to defeat direct action, such as staggered terms for individual directors and poison pills, but use of such anti-takeover devices can create additional issues for the existing board of directors and senior management if not implemented properly.

However, the board of directors is actually the board of directors of the MLP's general partner (GP), not the MLP itself. For the majority of the MLPs in existence today, it is the owner of the GP, or the sponsor, not the holders of the common units, that elects the board of directors. The sponsor is subject to the requirements of the federal securities laws and stock exchange regulations with respect to board composition and director independence, but otherwise it has complete control over the election of directors and thus complete control over the MLP.

While there are exceptions (Copano Energy LLC, Eagle Rock Energy Partners LP and Magellan Midstream Partners LP each granted their respective unit holders the right to elect directors) it is extremely difficult to force the sponsor to do so against its will. As such, it is virtually impossible to acquire an MLP except in a friendly, negotiated transaction.

Automatic loss of voting rights

The rules related to Section 13(d) of the Securities Exchange Act of 1934 require investors in public companies to make certain informational filings with the Securities and Exchange Commission if the investor acquires more than 5% of the outstanding common stock of a particular company.

The rule does not, however, prevent the investor from voting its shares. Rather, it prevents acquirers from gaining unfair advantage in a contest for corporate control by forcing the investor to disclose its position well before it would be able to influence the outcome of a stockholder vote in any material fashion.

Investors in MLPs are subject to the same rules and must file the same sort of information if they breach the 5% threshold. In addition, if an investor acquires more than a certain percentage of the common units of an MLP, usually 20% of the then-outstanding limited partner interests, that investor will automatically lose its right to vote its units unless that investor purchased the units from the partnership or the board of directors approves the sale. This provision was created many years ago to provide additional protection to MLPs when the MLP industry was in its infancy.

The provision is not part of the federal securities laws. Rather, it is an anti-takeover provision found in the partnership agreements of the majority of MLPs and provides an almost unbreakable shield from investors mounting unsolicited, and likely unfriendly, acquisitions.

Robert A. Pacha and Raymond B. Strong are senior managing directors and Christopher C. Juban is a managing director for Evercore Partners, an independent investment banking advisory firm that provides strategic advisory services for mergers, acquisitions, divestitures and capital markets transactions. Evercore Partners is currently advising Plains All American, L.P. on its unsolicited bid for SemGroup Corporation, Southern Union Company on its announced transaction with Energy Transfer Equity, L.P. and Kinder Morgan, Inc., on its announced transaction with El Paso Corporation.