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In Merger Dispute, Plaintiff’s Request to Enjoin Defendants from Terminating Merger Agreement is Denied

Williams Co., Inc. v. Energy Transfer Equity, L.P.., C.A.
No. 12168-VCG (Del. Ch. June 24, 2016) Court of Chancery of the State of Delaware

by Matthew S. Sarna, Summer Associate
Semmes, Bowen & Semmes (

Available at:

In Williams Co., Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG (Del. Ch. June 24, 2016), the Delaware Chancery Court denied Plaintiff, The Williams Companies, Inc.’s (“Williams”), request to enjoin Energy Transfer Equity, L.P. (“ETE”) from terminating or otherwise avoiding its obligations under the parties’ Merger Agreement on the basis that Latham & Watkins LLP (“Latham”), ETE’s tax attorneys, failed to deliver a Section 721(a) tax opinion pursuant to a condition precedent to close.

On September 28, 2015, Williams and ETE finalized the terms for a heavily negotiated Merger Agreement. Under the agreement, ETE would create Energy Transfer Corp. L.P. (“ETC”), a shell corporation into which Williams would merge. ETC would then transfer the former Williams assets and 19% of ETC stock to ETE in return for ETE partnership units equal in value to ETC stock on a one-to-one basis, with $6 billion in cash then to be distributed to Williams’ former stockholders. As a condition precedent to the consummation of the Merger Agreement, Latham would issue an opinion that the specific transaction between ETC and ETE “should” be treated as a tax-free exchange under I.R.C. § 721(a) (“721 Opinion”). Without this condition precedent, either party would have the option to terminate the Merger Agreement.

Shortly after the Merger Agreement was entered, the energy market dipped heavily, resulting in a decline in the value of ETE partnership units. Shortly after, Latham asserted that it would not be able to provide the 721 Opinion necessary to avoid potential termination of the deal. It is upon this action that Williams brought suit to enjoin ETE from terminating the Merger Agreement on the ground that the 721 Opinion condition precedent had not been met. Williams claimed that ETE had materially breached its contractual obligations by failing to use commercially reasonable efforts to secure the required 721 Opinion. In relief, Williams requested that the Court declare that ETE had materially breached the Merger Agreement, permanently enjoin ETE from terminating or otherwise avoiding their obligations on the basis that Latham had failed to provide a 721 Opinion, and permanently enjoin ETE terminating the same on the basis that they have failed to close by the prescribed date. Additionally, Williams claimed that ETE breached the Merger Agreement’s interim operating covenants by creating a special stock issuance in the midst of this dispute.

The Court separated the issue of whether ETE materially breached the Merger Agreement for failure to secure the 721 Opinion into two questions: did Latham act in bad faith, and did ETE fail to use commercially reasonable efforts under the terms of the agreement.

For the deal to make economic sense, the exchange of Williams’ assets between ETC and ETE had to be considered a tax-free exchange. The potential tax liability, if not so, rose close to $1 billion. As such, Latham had originally stated that it would issue the 721 Opinion, stating that the transaction “should” be tax-free.

The Court explained that a “should” decision is a term of art in the tax-law field. Standards of opinions range from “more likely than not” to “should” to “will” opinions. “Should,” meaning that it is quite likely that the tax opinion rendered will be upheld, led the Court to determine that it was Latham’s subjective good-faith determination as to whether it could issue the condition precedent opinion that drove this dispute. Accordingly, Vice Chancellor Glasscock opined that it was not his Honor’s role to substitute his own opinion for Latham’s independent legal expertise.

The Court observed that the timing of Latham’s flip-flop could have been determinative of bad-faith or merely a coincidence, as the energy market had severely dipped shortly before the rendering of its decision. Taking this into consideration, the Court next weighed Latham’s underlying interests in reversing itself as to the 721 Opinion. The Court noted that as a firm of national and international repute, Latham’s interests are larger than those of this particular representation; “While this deal is, certainly, a lunker, Latham has even bigger fish to fry.” It was against Latham’s reputational interest to backtrack and conclude that it could not issue the 721 Opinion.

Keeping Latham’s reputational considerations in mind, the Court next examined the testimony of the head of ETE’s tax department, who had originally been the one to see the flaw in both ETE’s and Latham’s reasoning. Simply put, the two entities did not consider that a significant fluctuation in the market could render the transaction a “perfect hedge.” With the value of ETE partnership units declining, the IRS might view this transaction as an overpayment for a hidden sale of assets for cash, triggering tax liability. Without direction to change its original viewpoint, Latham, according to the record, ultimately invested over 1,000 hours of attorney time to this issue, eventually coming to the conclusion that it could not appropriately render the 721 Opinion. Additional tax lawyers hired by ETE also came to the same conclusion.

Arguing to the contrary, Williams purported that the refusal to issue the 721 Opinion solely reflected the interests of ETE, to avoid a worsening deal, rather than the accurate legal advice of counsel. Williams’ expert opined that “no reasonable tax attorney could opine otherwise, and that therefore Latham must be acting in bad faith, suppressing its true opinion.” While the Court took this assertion seriously, the Court ultimately was unconvinced. Circling back around, the Court outlined that Williams’ conclusion relied on two purported factual allegations and an improper deduction. First, ETE wanted out of the proposed transaction; this was true. Second, no reasonable tax attorney could reach Latham’s conclusion; this was not. Accordingly, Williams deduced that Latham must have acted in bad faith. Finding a lack of evidence in the record to support this conclusion, the Court determined that Latham had not, in fact, acted in bad faith for failing to render the 721 Opinion.

Moving on, the Court next examined the second issue; did ETE materially breach its contractual obligations by failing to use commercially reasonable efforts to secure the 721 Opinion from Latham.

“Commercially reasonable efforts” was not an explicitly defined term in the Merger Agreement. So, the Court looked to Hexion Specialty Chems., Inc. v. Huntsman Corp. for guidance. 965 A.2d 715 (Del. 2008). Hexion equated “reasonable best efforts” with good faith in the context of contractual obligations. Finding that this language was sufficiently similar, the Court explained that ETE bound itself to an objective standard in terms of producing the desired 721 Opinion. The Court relied heavily on its previous discussion concerning Latham’s good faith actions, and this, coupled with a lack of evidence pointing to any manipulation of information provided to Latham, or evidence that ETE instructed Latham, directly or indirectly, to fail to satisfy the condition precedent, led the Court to conclude that ETE had not materially breached its general contractual obligations under the Merger Agreement. Further, the Court determined that ETE neither breached its specific representations and warranties to disclose of any fact that would reasonably be expected to prevent the 721 Opinion from issuing.

Finally, the Court briefly looked at Williams’ claim that ETE’s special stock issuance constituted a breach of the Merger Agreement’s mandate that ETE carry on its business in the normal course. Seeking to unwind this issuance, Williams asserted that the issuance of convertible units to certain stockholders and not others was to the detriment of ETE and its common holders. However, the Court determined that there was no risk of irreparable harm, a requirement for rescinding this type of transaction under Draper Coomc’ns, Inc. v. Del. Valley Broads. L.P., 550 A.2d 1283, 1288 (Del. Ch. 1985), because, in light of the Court’s decision as to the 721 Opinion, ETE’s right to terminate the Merger Agreement was preserved.

In conclusion, the Court denied Williams’ request to enjoin ETE from terminating the Merger Agreement based on a failure to secure the 721 Opinion, and granted ETE’s request for a declaration of that finding.