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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Kevin White: Hello all, and welcome to our latest Ropes & Gray podcast. I am Kevin White, a counsel in our asset management group based in San Francisco. My practice focuses on sponsor-side representations in GP-led continuation vehicle transactions and similar “liquidity transactions.” Joining me today is Adam Dobson, a partner in our alternative asset opportunities group based in Boston, who focuses on GP-leds and other liquidity transactions, albeit from the perspective of buyers. We also are joined by Bil Davison, a partner in our securities litigation practice in Boston, who focuses primarily on representing clients in the financial services industry, including investment advisors.
Recently, Energy & Minerals Group, or EMG, ran a single asset continuation vehicle process on one of its underlying positions in a portfolio company, Ascent. The EMG funds at issue that currently hold Ascent are late in their term and otherwise would have been required to liquidate their position soon. In lieu of a disposition to a third party, EMG determined to sell the asset to a continuation vehicle. As is customary in these transactions, the continuation vehicle also is managed by EMG and would be financed with capital from new investors. An investor in the selling EMG funds would have the opportunity, but not the obligation, to maintain its indirect exposure to Ascent by “rolling” its investment into the continuation vehicle. The alternative for this investor would be liquidation of its exposure to Ascent by opting—or being deemed to opt—to sell its investment in this transaction. All of these steps are typical for a continuation vehicle transaction.
Continuation vehicle transactions are fraught with conflicts of interest, as we will speak to in a moment, and therefore, it is necessary for a fund manager to obtain consent to aspects of a continuation vehicle transaction as required under the fund’s limited partnership agreement. In some instances, that would be consent of the limited partner base at large. In many instances, including for EMG, the necessary consent was that of the LPAC. Per a complaint filed with the Delaware Chancery Court, EMG first approached members of its LPAC about this transaction on October 23, 2025. On October 30, 2025, EMG sought a vote to approve going forward with the transaction. Per the allegations of the plaintiff in the filing—an investor and member of the LPAC—LPAC members were given incomplete information and insufficient time to review information. The LPAC vote failed, and EMG moved on to one-off conversations with LPAC members in pursuit of requisite consent. EMG also declined to hold any follow-up meetings with the full LPAC despite requests from members. The plaintiff also alleges that buyers received different information than existing LPs received regarding valuation of potential exit opportunities. Existing LPs were provided a very pessimistic view of the portfolio company at issue, while marketing decks to buyers [allegedly] painted a very optimistic view. Moreover, this investor also alleges that EMG understated the carry that they would receive in the transaction.
In mid-November, EMG sent out election materials to participants that were promptly met with a lawsuit by the plaintiff alleging breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing. The parties will be arbitrating the dispute, as required under the fund’s LPAs. The plaintiff filed for relief before the Delaware Chancery Court, seeking to enjoin the closing of the transaction pending the arbitration.
And with that, I would like to turn it to Bil for some thoughts on this from the perspective of a litigator. Bil, would you like to speak to this?
Bil Davison: So, this is an interesting case, because it is exceedingly rare that you actually see this type of issue litigated in public. That’s because most LPAs require arbitration for dispute resolution. And while this LPA has an arbitration provision, the plaintiff here filed in Delaware Chancery Court in order to put the transaction on hold while the arbitration proceeded. What is so interesting about the claims here is that they really tie back to the process and the information that was provided to the LPAC and the selling LPs in general. Generally, with a continuation vehicle, the conflict is moderated by both a fairness opinion from a third party and a vote of the LPAC. Here, while we had a vote of the LPAC in favor of the transaction, the claim by plaintiff is that the actual vote itself was fundamentally flawed because of a flawed process and a lack of complete and accurate information.
With respect to the process, the complaint really focuses on two issues:
• First, it alleges that the process was so rushed that the LPAC could not conduct a meaningful analysis of the information provided and give informed consent. Essentially, plaintiff alleges that the LPAC was first made aware of the transaction on October 23, with a vote then scheduled for October 30, seven days later. The LPAC did not receive any advisory board presentation and fairness opinion until October 27, and then received limited information relating to frequently asked questions on October 29. The plaintiff alleges that that timing is insufficient to allow for an informed vote that would actually ameliorate the conflict of interest with this continuation vehicle. The vote failed at the October 30 meeting, but EMG kept the LPAC vote open and stated that it received the required consents of the LPAC by November 11, and then launched the full LP election process on November 20.
• Second, the complaint alleges that EMG prevented LPAC members from conversing with each other regarding the fairness of the transaction and attempted to utilize a divide and conquer approach to getting the necessary approval. The plaintiff claims that it attempted to have in-camera meetings with the LPAC without the manager there, but that EMG refused and pushed back against LPAC members discussing the process with each other.
With respect to the information provided to the LPAC, the plaintiff claims that it was so flawed as to nullify the LPAC’s reported approval of the transaction. In particular, the plaintiff alleges that the information provided to the LPAC materially understated the value of the single portfolio company at issue, ignored the potential for alternative transactions, such as an IPO, and understated the fees and returns that EMG, the manager, expected to receive from the transaction. In support of these claims, plaintiff makes much of the fact that information in the data room for the buying LPs was much more rosy than the information provided to the existing LPs. In short, plaintiff claims that while there was an LPAC vote to approve the transaction, that vote was based on fundamentally flawed information and therefore cannot be relied upon to ameliorate the conflict of interest that is here.
The parties have since agreed to stay the transaction while the arbitration takes place. So, at this point, there’s nothing going on in the Delaware litigation itself, and it’s more of a waiting game for us to see what happens in the arbitration and whether the transaction continues. As it is now in arbitration, that information will likely be kept confidential, and so, it’s more of a waiting game to see if the transaction itself moves forward or changes over time.
Having spoken to the litigation at issue, let’s step back and take a broader look at what this litigation means for asset managers generally. Adam, would you mind speaking to LPAC considerations?
Adam Dobson: Sure. Thanks, Bil. I think one of the primary takeaways we have from this is that early and full transparency with the LPAC is very important—we need clear consents. In normal times, fund managers navigate many conflicts of interest with respect to the funds that they advise.
In the context of continuation funds, the risk is heightened even more, hence, the LPAC sits there as an objective check on the fund manager in light of all of those conflicts. The sponsor has a fiduciary duty to sellers, but at the same time, is economically aligned with buyers because it’s rolling its investment in much—if not all—of its carried interest. The fund manager may also be motivated to negotiate harder on aspects of a transaction from which it derives a direct benefit, while having less motivation to negotiate on behalf of aspects from which its benefit is more attenuated. For instance, go-forward management fees that the new investors will pay are very often heavily negotiated because the manager has a direct interest in the quantum of those fees, while the manager derives no direct benefit from negotiating heavily the indemnity or contingent liabilities of the sellers in a transaction agreement. And because of the nature of that conflict of interest, it’s important that they involve the LPAC early, not only to cleanse it from the perspective of the lead investors you have in any potential regulatory investigation, but because the LPAC potentially can help shape the transaction to one that would be beneficial for the selling and remaining LPs—otherwise, they don’t have a voice in the negotiation in the same way that the other parties do.
Moreover, the Advisers Act and SEC guidance are clear on the GP’s obligations to its LPs. When the GP goes to seek the consent, it should give a full and fair picture of the transaction and the conflicts it perceives to be involved. Some conflicts are consistent with all of these transactions, including alignment of the fund manager with the buyers while negotiating on behalf of sellers. Some conflicts will be fact-specific and bespoke, for example, if the sponsor requires a stapled commitment in connection with a continuation fund transaction or if the sponsor has a pre-existing relationship between the fund manager and the lead investor.
Not only should the sponsor be concerned about early and frequent communications with the LPAC, but so should the lead investors. Our clients would rather have a clean process than have to assert a defense against any claims that might arise in connection with the transaction. Kevin, how does this apply to the EMG situation?
Kevin White: In the EMG case, the plaintiff cited the ability to receive carry under different terms under the CV agreement versus the original fund agreements, and also, to Adam’s point, the fund manager’s position as a “net buyer.” These two factors are likely to be present in most continuation vehicle transactions, but as we’ve been discussing here, the conflicts can be much more involved than that, and for those listening, it’s important to step back and think more broadly about the nuances of your continuation vehicle transaction, because no two of these are fully alike—they all have their nuances. And so, a fund manager needs to take a step back, take a holistic view on the transaction it’s leading, identify the places where its interests may not fully align with that of its investor base, and bring those conflicts to the investors for their consent.
In addition to this, and as part of a separate consent most likely, it’s helpful for the fund manager to seek consent of the LPAC to treat any broken deal expenses as fund expenses rather than a manager’s expense. Even if the fund LPA states that a broken deal can be borne by the fund, the conflicted nature of these transactions justifies the different treatment and therefore the need for LPAC consent.
Adam, what other lessons could a fund manager take from the recent litigation?
Adam Dobson: A second takeaway from this litigation is the equity of information among the parties. The plaintiff here cited a difference in information provided to the buyers, on the one hand, and the information provided to the current LPs, on the other hand. Per the filing, the buyers purportedly received different information on existing LPs regarding valuation and potential exit opportunities. Existing LPs were provided a very pessimistic view on the portfolio company at issue, while marketing decks to buyers painted a very optimistic view.
Disparity of information is a topic that frequently comes up in these transactions. Fund managers must be alert to this. It is natural for those crafting the message to prospective buyers to speak to the great prospects for the portfolio company while those crafting the message to fund investors are going to be inclined to minimize those prospects to the fund investors while instead speaking to the opportunity for liquidity.
Parity of information is critical and is a principle of the Williams Act, the statutory regime on tender offers. Although a continuation vehicle transaction is not a tender offer, the principles that investors will look to in these transactions generally sync with the principles stated in the Williams Act. In order to ensure parity of information, the fund manager should ensure that all material documents that were provided to buyers are included in the data room for current limited partners to see—that includes the deck that was provided to prospective buyers.
Kevin, how should a fund manager think about this in the context of its communication with the broader LP base?
Kevin White: Another major takeaway from this litigation is the importance of being responsive to your investor considerations. Generally speaking, there are three categories of primary stakeholders in these CV transactions: there’s the fund manager, there are the new buyers, and there are existing investors. Only two of them have a direct seat at the table: the fund manager and the new buyers. The fund manager, in practice, is acting like a proxy for the existing investors, despite its not being fully aligned with existing investors, as Adam noted earlier. No matter how serious the fund manager takes its role in negotiating on behalf of its existing investors, the fund manager is inherently conflicted. As a net buyer, it has less incentive to maximize the purchase price. It also will not be as concerned about indemnification terms (both in terms of scope and survival), covenants, or representations and warranties.
The same applies to the process for the transaction. A major detail in the plaintiff’s complaint is the lack of advanced notice and lack of information, as Bil spoke to. Investors were notified of the potential transaction, and seven days later, were asked to provide consent to it. It was clear that EMG knew about the transaction well before then, as the date on the deck provided to prospective buyers was in the spring of 2025. EMG likely could have mitigated its friction with its LPAC by apprising them of the potential transaction throughout 2025. In my experience in these deals, an LPAC that is well informed on a CV transaction may raise concerns about it, but so long as they’re fully aware and their concerns are taken seriously, they are less likely to withhold consent.
In addition to discussions at LPAC meetings, fund managers should welcome one-on-one discussions with existing LPs to address any specific concerns those LPs have.
Adam, you frequently represent lead buyers in these transactions, and you’ve spoken briefly to some considerations lead buyers should have. What else should a lead buyer be thinking about in light of this litigation?
Adam Dobson: Well, I think there are two broad areas. One is, what do we do in the documents to protect the continuation vehicle investors and the lead investors in the event these issues do arise in the transaction? I’ll touch on those in a moment. But the other item to think about is, what does the process look like? And how do we encourage the sponsor to follow a good process? A couple of those are simple—we typically require fairness opinions and LPAC approvals as a closing deliverable. Buyers also want to more broadly confirm with the sponsor the scope of consents that are required for the transaction. It’s a little bit tricky, because a buyer doesn’t want to insert itself in the sponsor’s process—it’s not our process and it’s not our responsibility—but it would behoove us to at least read the election materials to understand how the sponsor’s describing the transaction and make sure it aligns with the information that our clients have been provided. And so, I think it’s just a general sense of: Is this a good process? Has the LPAC been involved?
We can ask those questions at a high level and then rely on the transaction agreements to protect the interests of the continuation vehicle and its investors, and there are a few places we would do that. One is, we would want a robust excluded obligations provision with an attendant indemnity. We would make sure—and it’s quite typical in these transactions—that failures in process of the sponsor are not the liabilities of the continuation fund, and so, we never assume those obligations. We may also want to strengthen our closing conditions around the consents and ongoing disclosure about the election process, which is largely in the purview of the sponsor. I think the terms will evolve, depending on the resolution of this case and as the intelligence percolates through the market, but under current formulations, I think the documents are well equipped to protect the buyers against these circumstances. This is because, while this is the first publicly litigated case around process, disclosure issues have been an issue in some GP-led transactions from the early days of this kind of transaction, and so, buyers have developed robust contractual protections over the years.
Kevin White: Adam, Bil, and I very much appreciate your taking time to listen to us today. We hope you have found this helpful as you navigate the continuation vehicles market. You can subscribe to this and other Ropes & Gray podcasts wherever you typically listen to podcasts, including on Apple and Spotify. Thanks again for listening.