EMG Case Shines a Light on Sponsor Conflicts in Continuation Fund Transactions
Try acting as both buyer and seller in the same transaction and see where that gets you. Short answer: Into a world of trouble. For a case in point in the continuation fund context, see the recent, unusually (for such transactions, at least so far) public airing of a dispute arising out of a GP-led sale of a minority stake in a portfolio company to the sponsor’s continuation fund set forth in a complaint filed in the Delaware Court of Chancery (the “Court”) on December 3, 2025 by Abu Dhabi Investment Council (“ADIC”) against affiliates of Energy & Minerals Group (“EMG”). [1]ADIC, an investor in the existing fund and member of the fund’s limited partner advisory committee (“LPAC”), objected to the sale of a 30% stake in Ascent Resources (“Ascent”), a portfolio company of EMG, to the continuation fund and alleges in support of its request for injunctive relief that the proposed sale would harm the fund’s limited partners, disproportionately benefit EMG insiders, and enable the fund manager to reset its performance-based share of the profits or “carry” on a fund asset that is unlikely to generate any carried interest if sold in an arm’s length transaction or public offering to the benefit of the sponsor and not the investors.
According to the complaint, the sponsor committed several serious procedural foot faults prior to conducting the sale: (i) it failed to give adequate notice and information to members of the LPAC sufficiently in advance of when they were asked to vote, and adopted a “divide and conquer” strategy of having one-off conversations and sharing different information with individual LPAC members to try to convince them to support the transaction; (ii) it failed to address requests from LPAC members to delay the vote and hold a meeting among just the LPAC members without EMG present; (iii) it provided material information about the transaction and the valuation of the Ascent stake to prospective investors in the continuation fund that it did not provide to the LPAC; and (iv) it failed adequately to explore possible alternative exit transactions, such as an IPO or sale to a third party. The complaint goes on to allege that the fairness opinion obtained by EMG with respect to the continuation fund’s proposed purchase price was based on inaccurate assumptions provided by EMG, which led to an undervaluation of its stake in Ascent.
Although the fund documents require disputes to be arbitrated, the plaintiff sought and received interim emergency relief from the Court in aid of arbitration that included approval of a stipulation delaying the transaction until at least late February of 2026 to enable an independent arbiter to review the dispute.
As a backdrop to the dispute, to meet the demand from limited partners in recent years for higher ratios of distributions to paid-in capital, there has been a pronounced trend by sponsors to resort to sales of fund assets to continuation funds to generate returns to limited partners and extend holding periods for fund assets for which there is no ready path to liquidity through a public offering or sale to a third party. Such transactions, as in the EMG matter, can involve inherent conflicts of interest since the GP acts in effect as both seller and buyer of fund assets in such sales. For example, one of the allegations made by ADIC is that EMG told the LPAC that Ascent has no prospects for an IPO or M&A exit, while at the same time it allegedly told prospective investors in the continuation vehicle that an IPO for the company can be expected and an “upside case” involves a possible merger exit for Ascent.
Takeaways for Sponsors:
While no two continuation vehicles are exactly alike, there are certain prophylactic steps that may be derived from the EMG case to help safeguard sponsors from potential disputes over possible conflicts of interest potentially leading to sponsor liability for breach of fiduciary duties and the implied covenant of good faith and fair dealing in the sale of fund assets to the continuation vehicle:
Identify all issues where the fund manager’s interests may not fully align with that of its investor base and bring those conflicts to the investors for their consent.
Share all material information regarding the proposed continuation fund transaction with the LPAC early in the process and communicate regularly with the LPAC as the transaction progresses to enable its full input into the structure and terms of the proposed sale.
Avoid asymmetries of information between the investors in the existing fund and prospective buyers in the continuation fund regarding valuation of, and other material facts regarding, the underlying assets and the sponsor’s future exit plans for the assets.
Seek consent of the LPAC to treat any broken deal expenses as fund expenses rather than the manager’s expense.
Going forward, sponsors should expect increased scrutiny by the SEC and existing investors of the sponsor’s carried interest reset, fees, valuation methodology for the assets to be sold to the continuation vehicle, and the existing fund’s conflict management policies.
If you have questions or are interested in additional details or guidance, please reach out to James Rosenbluth (james.rosenbluth@pierferd.com) or your regular PierFerd contact for assistance.
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[1] Abu Dhabi Inv. Council Co. et al. v. Energy & Minerals Grp LP et al., No. 2025-1389-NAC (Del. Ch. Dec. 3, 2025 (verified complaint for preliminary injunction in aid of arbitration).
