DealLawyers.com Blog

With the uptick in continuation fund transactions in the past few years, this recent development in Chancery Court isn’t terribly surprising, but it does highlight the importance of process and documentation in these transactions (and may be worth sharing with clients). Here’s a summary of the litigation from this Davis Polk alert:

On December 3, 2025, the Abu Dhabi Investment Council . . . initiated litigation in the Delaware Court of Chancery against affiliates of the Energy & Minerals Group (EMG) arising from EMG’s proposed sale of a 30% stake in Ascent Resources to a continuation fund. The complaint . . . sought injunctive relief in aid of arbitration and alleges that EMG engineered a conflicted, below-market sale that would disadvantage existing investors at the current time. According to ADIC, the transaction, structured as a sale from one EMG-managed fund to another, would harm limited partners, confer substantial benefits on EMG insiders, and allow the manager to reset performance-fee economics on an asset that would be unlikely to generate carried interest if sold in a conventional exit or public offering at the current time.

Like many continuation fund transactions, EMG engaged a financial advisor to run a competitive process, sought approval of the limited partner advisory committee (LPAC) of the existing EMG fund for the transaction, obtained a fairness opinion with respect to the purchase price, and offered existing investors a “rollover” option and a “cash-out” option.

Nevertheless, the complaint emphasizes a number of procedural concerns with the transaction, in particular alleging (i) a lack of adequate notice and information provided to LPAC members before they were asked to vote on the transaction, (ii) a failure to address requests from certain LPAC members to delay the vote and hold an in-camera session (i.e., without EMG present), (iii) information asymmetry between the LPAC members relative to prospective investors in the continuation fund, resulting in the LPAC not being fully informed of all relevant facts, and (iv) a failure to conduct a process for alternative transactions such as a public offering or a merger despite having recently engaged in discussions about such transactions . . .

Although the governing fund documents require arbitration of disputes, ADIC sought, and EMG ultimately consented to, a temporary halt in Chancery Court.  On December 4, the parties submitted, and the Court approved, a stipulation delaying the transaction until at least late February 2026 to allow review by an independent commercial arbiter.  The matter now proceeds in a dual-track posture, with urgent equitable oversight by the Court occurring concurrently with the arbitration framework contemplated by the EMG funds’ partnership agreements.

The alert says, since these transactions involve inherent conflicts of interest (with the sponsor on both sides), they “present heightened sensitivity around valuation, timing, governance, and performance fee incentives.” It suggests:

– Sponsors should engage the LPAC early in the process, and maintain regular communication as the transaction progresses, so that any feedback received from the LPAC can be taken into account in determining the deal’s structure and terms.

– Further, sponsors should seek to avoid any misalignment of information provided to limited partners of their existing funds relative to prospective buyers in the continuation fund by providing both sets of investors with access to the same information about the underlying assets, including with respect to the sponsor’s future exit plans.

– As continuation fund transactions become more prevalent in the market, sponsors should anticipate increased scrutiny by existing investors of their conflict-management practices, valuation methodologies, and the sponsor’s economics and fee arrangements.

For background on continuation fund transactions, see this Skadden alert.

– Meredith Ervine