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Williams Cos., Inc. v. Energy Transfer Equity, L.P., C.A. Nos. 12168 & 12337 (Del. Mar. 23, 2017) (Vaughn, J.)

March 23, 2017

In this en banc majority opinion, the Supreme Court of the State of Delaware, while finding that the Delaware Court of Chancery erred in its analysis of whether Energy Transfer Equity, L.P. (“ETE”) breached its covenants under the Agreement and Plan of Merger (the “Merger Agreement”), affirmed the Court of Chancery’s holding that ETE was permitted to terminate the Merger Agreement pursuant to its terms.

ETE and The Williams Companies, Inc. (“Williams”) entered into the Merger Agreement on September 28, 2015, pursuant to which ETE would acquire Williams for a mixture of cash and stock.  The merger was condition upon the issuance of an opinion (the “721 Opinion”) by ETE’s tax counsel, Latham & Watkins LLP (“Latham”), that the merger “should” qualify as a tax-free exchange under Section 721(a) of the Internal Revenue Code (the “Code”), among other things.  The Merger Agreement provided that the parties were required to use “commercially reasonable efforts” to obtain the 721 Opinion and to use “reasonable best efforts” to consummate the merger.  After a downturn in the energy market that rendered the acquisition undesirable to ETE, Latham determined that it was unable to issue the 721 Opinion.  Williams, through its counsel, Cravath, Swaine & Moore LLP (“Cravath”), contacted Latham regarding two proposals that may allow Latham to issue the 721 Opinion.  When Latham determined that neither proposal would permit Latham to issue the 721 Opinion, Cravath contacted Gibson, Dunn & Cruther, LLP (“Gibson Dunn”), Williams’ other deal counsel, to determine whether Gibson Dunn could issue the 721 Opinion.  Gibson Dunn determined that it could issue a “weak-should” opinion, but that such a conclusion would be difficult to reach.

The Court of Chancery first determined that Latham’s inability to issue the 721 Opinion permitted ETE to terminate the Merger Agreement.  The Court of Chancery then found that Latham acted independently and in good faith in determining that it could not issue the 721 Opinion. The Court of Chancery also held that ETE did not materially breach its duty to use commercially reasonable efforts to secure the 721 Opinion from Latham, noting that the record did not reflect any affirmative acts taken by ETE to mislead Latham and prevent the issuance of the 721 Opinion.

On appeal, the Delaware Supreme Court found that the Court of Chancery did not properly analyze whether or not ETE breached its covenants in the Merger Agreement.  The Court reasoned that the provisions in the Merger Agreement requiring ETE to use its commercially reasonable efforts to obtain the 721 Opinion and its reasonable best efforts to consummate the merger placed an affirmative obligation on ETE to take all reasonable steps to obtain the 721 Opinion and complete the transaction, and the Court of Chancery erred in focusing on the absence of evidence establishing that ETE caused Latham to withhold the 721 Opinion.  The Court then rejected Williams’ contention that the Court of Chancery improperly placed the burden of proof on Williams to show that ETE’s alleged breach of covenant did not materially contribute to Latham’s unwillingness to issue the 721 Opinion, noting that the Court of Chancery, after finding that ETE did not breach its covenant, declined to analyze whether such a breach would have been material to Latham’s inability to issue the 721 Opinion.  However, the Court of Chancery considered, in a footnote, whether ETE would have otherwise met its burden to show that such a breach did not materially contribute to Latham’s refusal to issue the 721 Opinion and determined that ETE would have met its burden by showing that the record lacked any indication that any action or inaction by ETE materially contributed to Latham’s inability to issue the 721 Opinion.  The Court found that the foregoing determination by the Court of Chancery was based on findings of fact that were not clearly erroneous, and, therefore, Williams’ argument that the Court of Chancery improperly placed the burden of proof on Williams must fail.

Finally, Williams argued that ETE should be estopped from terminating the Merger Agreement because ETE failed to comply with the representations and warranties of the Merger Agreement at the time it was entered into because ETE did not disclose any fact known to it that “would reasonably be expected to prevent [the transaction] from qualifying as an exchange to which Section 721 of the Code applies.”  The Delaware Supreme Court rejected Williams’ contention, explaining that Latham’s refusal to issue the 721 Opinion was not due to ETE’s failure to disclose any known facts at the time the Merger Agreement was entered into, but rather Latham’s change in its theory of tax liability after the Merger Agreement was executed.  

Despite the Court of Chancery’s err in analyzing whether ETE breached its covenants in the Merger Agreement, the Delaware Supreme Court ultimately affirmed the Court of Chancery’s final determination because ETE’s actions did not materially contribute to Latham’s unwillingness to issue the 721 Opinion. 

Chief Justice Strine dissented from the majority opinion and concluded that the case should be remanded and retried, in which trial ETE should be required to prove that its breach of covenant did not materially contribute to Latham’s failure to issue the 721 Opinion. While agreeing with the majority’s determination that the Court of Chancery did not analyze why Latham refused to issue the 721 Opinion properly, Chief Justice Strine disagreed with the majority’s conclusion that such an error did not alter the outcome of the case.  The dissent criticized the majority’s reliance on a footnote to determine that if the proper burden of proof was applied, ETE would have met its burden of proof to show that it did not materially contribute to the inability of Latham to issue the 721 Opinion, stating that a footnote was not a substitute for a proper analysis.  Chief Justice Strine also points to several facts that suggested ETE’s actions may have materially contributed to Latham’s determination that it could not issue the 721 opinion, including that: (i) ETE discouraged Latham from collaborating with ETE’s deal counsel to discuss a path by which Latham could issue the 721 Opinion; (ii) ETE did not permit its additional tax counsel, who was hired to consult on this issue, to discuss the issue with Latham; (iii) ETE did not inform Williams that Latham would not be able to issue the 721 Opinion promptly; (iv) ETE, shortly after informing Williams of Latham’s inability to issue the 721 Opinion, publicly announced that Latham would not be in a position to deliver the 721 Opinion; and (v) Latham refused to consider whether either of Cravath’s proposals would have permitted Latham to issue the 721 Opinion. As a result, Chief Justice Strine concluded that the case should be remanded and retried using the appropriate burden of proof to determine whether ETE’s actions materially contributed to Latham’s inability to issue the 721 Opinion.

The full opinion is available here