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The Williams Companies, Inc. v. Energy Transfer Equity, L.P.

Court of Chancery of Delaware

December 1, 2017

THE WILLIAMS COMPANIES, INC., Plaintiff and Counterclaim Defendant,
v.
ENERGY TRANSFER EQUITY, L.P. and LE GP, LLC, Defendants and Counterclaim Plaintiffs. THE WILLIAMS COMPANIES, INC., Plaintiff and Counterclaim Defendant,
v.
ENERGY TRANSFER EQUITY, L.P., ENERGY TRANSFER CORP LP, ETE CORP GP, LLC, LE GP, LLC, and ENERGY TRANSFER EQUITY GP, LLC, Defendants and Counterclaim Plaintiffs.

          Submitted: August 29, 2017

          Kenneth J. Nachbar and Zi-Xiang Shen, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, DE; OF COUNSEL: Sandra C. Goldstein, Antony L. Ryan, and Kevin J. Orsini, of CRAVATH, SWAINE & MOORE LLP, New York, NY, Attorneys for the Plaintiff and Counterclaim Defendant.

          Rolin P. Bissell, Tammy L. Mercer, and James M. Yoch, Jr., of YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, DE; OF COUNSEL: Michael C. Holmes, John C. Wander, Michael L. Charlson, and Craig E. Zieminski, of VINSON & ELKINS LLP, Dallas, TX, Attorneys for the Defendants and Counterclaim Plaintiffs.

          MEMORANDUM OPINION

          GLASSCOCK, Vice Chancellor

          What, Langston Hughes asked, becomes of a dream deferred?[1] When the dream is a multi-billion-dollar merger that changing market conditions no longer favor, it seems, it becomes a carcass that, like those of millions of turkeys featured in the holiday feasts just past, is diligently picked over. The carcass here is the remnant of the dreamed-of merger of The Williams Companies, Inc. ("Williams") and Energy Transfer Equity, L.P. ("ETE" or the "Partnership"). The matter came before me just before its demise, as Williams unsuccessfully fought for injunctive relief to force consummation, a result vigorously opposed by ETE. Thereafter, the parties pursued actions against one another for contractual damages under the merger agreement. Before me now is Williams' Motion to Dismiss ETE's counterclaims. ETE, having successfully resisted Williams' attempt to force consummation of the merger, is in the unlikely position of arguing that it is also entitled to a billion-dollar breakup fee under the merger agreement. ETE, however, was able to walk away from the merger based on the failure of a condition precedent: the inability of its counsel to opine that the merger "should" trigger favorable tax treatment. Since none of the allegations of breach supporting ETE's entitlement to the breakup fee caused, or even relate to, ETE's exercise of its right to avoid the merger, and, fundamentally, because the contract language it relies on is not supportive, I find ETE's counterclaim seeking the breakup fee not viable. My analysis of ETE's remaining counterclaims is mixed. My reasoning follows.

         I. BACKGROUND

         This Memorandum Opinion assumes familiarity with the facts outlined in the previous Opinions of both this Court and the Supreme Court. "The reader is forewarned that this case involves a maze of corporate entities and an alphabet soup of corporate names."[2] This Opinion includes only those facts necessary to my analysis.

         A. The Merger Agreement and Failure of a Condition

         The parties are significant players in the energy pipeline business.[3]Counterclaim Plaintiffs ETE and its affiliate Energy Transfer Corp LP ("ETC") are Delaware limited liability partnerships.[4] Counterclaim Defendant Williams is a Delaware corporation.[5]

         Williams and ETE negotiated a merger as set out in an Agreement and Plan of Merger dated September 28, 2015 (the "Merger Agreement" or "Agreement").[6]Under the Merger Agreement, Williams would merge into ETC (the "Merger") in exchange for ETC stock, $6.05 billion in cash, and certain other rights.[7] Post-Merger ownership of ETC would be split, with 19% held by the Partnership and 81% by former Williams stockholders.[8]

         After ETE and Williams signed the Merger Agreement, the energy industry―and particularly the outlook for ETE and Williams―declined substantially.[9] In reaction to this decline-although its precise motives are in dispute-ETE issued new units to certain large ETE equity holders after signing the Merger Agreement (the "Special Issuance").[10] Ultimately, ETE's tax counsel, Latham & Watkins LLP ("Latham"), decided that it could not issue a tax-related opinion with the required confidence level to satisfy a condition precedent for the Merger to close.[11] Relying on the failure of this condition precedent, ETE exercised its right to terminate the Agreement on June 29, 2016.[12]

          B. Procedural History

         The parties quickly became entangled in litigation. Williams challenged the Special Issuance and filed its first Verified Complaint against the Partnership and LE GP on April 6, 2016 (the "First Action"), arguing that equitable relief was necessary to preserve the Merger Agreement.[13] Williams filed a Verified Amended Complaint on April 19, 2016 (the "Second Action") against the Defendants to specifically enforce the Agreement and compel ETE to comply.[14] I found that ETE was entitled to terminate the Agreement because Latham's inability to issue the tax opinion was a failure of a condition precedent under that Agreement.[15] Williams appealed to the Supreme Court, which affirmed, in pertinent part, the Opinion below.[16] Williams also filed suit against ETE CEO and Chairman Kelcy Warren in Texas state court for tortious interference with contract, but the suit was dismissed as incompatible with the forum selection clause in the Merger Agreement.[17]

         Williams seeks contract damages in the current litigation. ETE brought counterclaims and alleges that Williams breached provisions of the Agreement pertaining to (i) the board recommendation requirement, (ii) the forum selection clause, and (iii) the reasonable best efforts, disclosure, and financing cooperation requirements. ETE contends that, as a result of these breaches, Williams owes ETE $1.48 billion (the "Termination Fee") and other damages.[18] Currently before me is Williams' Motion to Dismiss those counterclaims. Because these alleged breaches largely rely on my interpretation of the Merger Agreement, I include significant portions of that Agreement below.

         C. The Board Recommendation Claim

         ETE alleges that Williams breached the board recommendation and reasonable best efforts provisions of the Agreement by making negative comments about Warren in press releases, public filings, pleadings in a lawsuit against Warren in Texas state court, and by "failing to reconsider the recommendation" of the Merger in light of changes "described in [Williams'] Form S-4" that "gutted the foundations for the original recommendation."[19] The required "Company Board Recommendation" (or the "Recommendation") was defined in Section 3.01(d) of the Merger Agreement:

The Board of Directors of the Company duly and validly adopted resolutions (A) approving and declaring advisable this Agreement, the Merger and the other Transactions, (B) declaring that it is in the best interests of the stockholders of the Company that the Company enter into this Agreement and consummate the Merger and the other Transactions on the terms and subject to the conditions set forth herein, (C) directing that the adoption of this Agreement be submitted to a vote at a meeting of the stockholders of the Company and (D) recommending that the stockholders of the Company adopt this Agreement ((A), (B), (C) and (D) being referred to herein as the "Company Board Recommendation"), which resolutions, as of the date of this Agreement, have not been rescinded, modified or withdrawn in any way.[20]

         ETE's contention relies on interpreting the Agreement to mean that the public statements made by Williams, or Williams' Board of Directors (the "Directors" or the "Board"), constitute a withdrawal of the Company Board Recommendation or designation as a "Company Adverse Recommendation Change" under Section 4.02.[21] Williams argues that a proper construction of Section 4.02 allows for a "Company Adverse Recommendation Change" only in the context of a formal board resolution and that no such board resolution was enacted.[22] Section 4.02 reads in relevant part:

(d) Neither the Board of Directors of the Company nor any committee thereof shall (i)(A) withdraw (or modify or qualify in a manner adverse to [ETE]), or publicly propose to withdraw (or modify or qualify in a manner adverse to [ETE]), the Company Board Recommendation or (B) recommend the approval or adoption of, or approve or adopt, declare advisable or publicly propose to recommend, approve, adopt or declare advisable, any Company Takeover Proposal (any action described in this clause (i) being referred to as a "Company Adverse Recommendation Change") or (ii) approve or recommend, or publicly propose to approve or recommend, or cause or permit the Company or any of its Subsidiaries to execute or enter into any Company Acquisition Agreement.
(f) Nothing contained in this Section 4.02 or elsewhere in this Agreement shall prohibit the Company or any of its Subsidiaries from (i) taking and disclosing to its stockholders a position contemplated by Rule 14d-9, Rule 14e-2(a) or Item 1012(a) of Regulation M-A promulgated under the Exchange Act or (ii) making any disclosure to its stockholders if the Board of Directors of the Company or any of its Subsidiaries determines in good faith (after consultation with and receiving advice of its outside legal counsel) that the failure to do so would reasonably be likely to constitute a breach of its fiduciary duties to its stockholders under applicable Law; provided, however, that any such action or statement or disclosure made pursuant to clause (i) or clause (ii) shall be deemed to be a Company Adverse Recommendation Change unless the Board of Directors of the Company reaffirms its recommendation in favor of the Merger in such statement or disclosure or in connection with such action.[23]

         ETE contends that violations of the Company Adverse Recommendation provision in Section 4.02(d), which fall outside of the safe harbor in Section 4.02(f), are necessarily a violation of the reasonable best efforts provision in Section 5.03, and that Williams―by breaching Section 4.02(d)―is also in breach of Section 5.03.[24]ETE also contends that violations of portions of Section 5.03 are "untethered to consummation of the Merger" and that such claims should remain even if the Merger failed.[25] As a result of these and other breaches, ETE seeks unspecified damages.[26]

          ETE also argues that Williams' breach of the Company Adverse Recommendation provision in Section 4.02(d) allowed ETE to terminate the Agreement under Section 7.01(e), which permits termination by ETE "in the event that a Company Adverse Recommendation Change shall have occurred."[27]Therefore, Williams became immediately liable for a $1.48 billion fee (the "Company Termination Fee") under Section 5.06(d)(iii).[28] Section 5.06(d)(iii) states that if the "Agreement is terminated by [ETE] pursuant to Section 7.01(e) [a Company Adverse Recommendation change], then . . . [Williams] shall pay [ETE] . . . an aggregate fee equal to $1.48 billion."[29] Thus, according to ETE, Williams' breach of the Company Adverse Recommendation Change provision in Section 4.02(b) allowed ETE to terminate the Agreement under the permissible termination provision in Section 7.01(e), but then required Williams to pay a $1.48 billion Company Termination Fee under Section 5.06(d)(iii).[30]

          According to Williams, ETE could receive the $1.48 billion Termination Fee only if ETE "validly terminated the Agreement under Section 7.01(e) because the Williams Board effected a Company Adverse Recommendation Change."[31] Thus, Williams contends, to the extent that ETE maintains that violations of the reasonable best efforts clause in Section 5.01-or any other violations besides those under Section 7.01(e) and Section 5.06(d)(iii)-could lead to Williams paying the Company Termination Fee, those contentions are based on an inaccurate reading of the Merger Agreement.[32] Sections 5.06(b) and (c) specify the fees and expenses owed to the parties when the Agreement is terminated under other circumstances.[33]Williams argues that it does not owe ETE the $1.48 billion Termination Fee because it did not effect a Company Adverse Recommendation Change under the Agreement, [34] which is, according to Williams, the only way for Williams to owe ETE the $1.48 billion Termination Fee.

         D. The Forum Selection Clause

         ETE alleges that Williams' lawsuit against Warren in Texas for tortious interference with the Agreement (the "Texas Merger Action") violates the forum selection clause in Section 8.10(b) of the Merger Agreement.[35] Section 8.10(b) states that:

Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the Court of Chancery of the State of Delaware for the purposes of any suit, action or other proceeding arising out of or relating to this Agreement and the rights and obligations hereunder or the Transactions or for the recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations arising hereunder or the Transactions.[36]

         Williams contends that it did not breach the clause because it sued Warren in his personal capacity and Warren is not a party to the Merger Agreement.[37] Regardless, argues Williams, any such breach was immaterial and therefore not subject to liability because Section 7.02 limits post-termination liability for everything except "willful and material breach[es] of any of its representations, warranties, covenants or agreements."[38] Even if a breach were material, according to Williams, ETE suffered no cognizable damages.[39] Alternatively, if there were damages, then Williams argues that recovery would be prohibited because Section 5.02(a) of the Agreement states that "all fees and expenses incurred in connection with this Agreement and the Transactions shall be paid by the party incurring such fees or expenses, whether or not the Transactions are consummated."[40]

          E. The Additional Breach of Contract Claims

         ETE argues that Williams breached Section 5.01 of the Agreement by failing to disclose: (i) information about an internal proxy contest that may have influenced Williams' vote in approving the Agreement and for failing to promptly notify ETE of the same, [41] (ii) "the self-interests of the Williams Board and/or beliefs concerning those self-interests, "[42] and (iii) the "material fact that members of [Williams'] [B]oard considered the possibility of a board-member-led proxy contest when voting in favor of the [Merger]" in the Form S-4.[43] Williams argues that it disclosed the relevant facts and that, in any case, ETE "has pleaded (and can plead) no injury" from any disclosure violations.[44]

         Section 5.01 pertains to the preparation of the Form S-4 and the proxy statement and states in pertinent part:

(a) If at any time prior to receipt of the Company Stockholder Approval any information relating to [ETE] or the Company, or any of their respective Affiliates, directors or officers, should be discovered by [ETE] or the Company which is required to be set forth in an amendment or supplement to either the Form S-4 or the Proxy Statement, so that either such document would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, the party that discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by Law, disseminated to the stockholders of the Company.[45]

         The success of ETE's allegations rest on whether I find that these omissions are material and, if material, resulted in compensable damages.

         ETE further alleges that Williams breached Sections 4.01(b) (carrying on business in the ordinary course), 5.03 (reasonable best efforts), and 5.14 (reasonable cooperation in financing arrangements) of the Agreement by refusing to provide the information required―including certain financial information and a consent from Williams' auditor to include its audit reports related to that financial information―for ETE to file a Form S-3 and complete a public equity offering.[46] ETE's contention is that Williams' obligation to not unreasonably withhold consent for ETE to "carry on its business in the ordinary course" under Section 4.01(b), combined with the Letter Agreement's allowance for "issuances of equity securities with a value of up to $1.0 billion in the aggregate, "[47] should be read together to mean that a proposed issuance, by which ETE intended to finance the Merger in part, was allowable. Williams' consent was improperly withheld, placing Williams in breach of Section 4.01(b).[48] ETE alleges that this violation also breaches the reasonable best efforts provision in Section 5.03 and a provision requiring cooperation in financing arrangements in Section 5.14.[49] Williams argues that Section 5.14 was not triggered because its consent was not unreasonably withheld.[50] Section 5.14 states in relevant part:

Prior to the Effective Time, the Company shall, and shall cause its Subsidiaries and their respective Representatives to, provide cooperation reasonably requested by [ETE] that is necessary or reasonably required in connection with the Financing or any other financing that may be arranged by [ETE].[51]

         The viability of these contentions depends on my finding that Williams' consent was withheld improperly and that any such withholding of consent caused injury to ETE.

         In addition, Williams argues that alleged violations of Section 5.01(b)―which pertains to preparing the Form S-4 and the proxy statement―did not result in damages to ETE. Section 5.06 states in pertinent part:

(b) If this Agreement is terminated (i) by either the Company or [ETE] pursuant to Section 7.01(b)(iii) or (ii) by [ETE] pursuant to Section 7.01(c), then in each case of clauses (i) and (ii) the Company shall promptly upon written demand by [ETE] (and in any event no later than two business days after such written demand is delivered to the Company) reimburse [ETE], by wire transfer of same day federal funds to the account specified by [ETE], for all out-of-pocket fees and expenses incurred or paid by or on behalf of [ETE] or their respective Subsidiaries and Affiliates in connection with the Merger or related to the preparation, negotiation, execution and performance of this Agreement, the Commitment Letter, the Fee Letter and related transaction documents, including all fees and expenses of counsel, financial advisors, accountants, experts and consultants retained by [ETE] or their respective Subsidiaries and Affiliates, such amount not to exceed $50.0 million in the case of clause (i) and $100.0 million in the case of clause (ii).
(c) If this Agreement is terminated by the Company pursuant to Section 7.01(d), then [ETE] shall promptly upon written demand by the Company (and in any event no later than two business days after such written demand is delivered to [ETE]) reimburse the Company, by wire transfer of same day federal funds to the account specified by the Company, for all out-of-pocket fees and expenses incurred or paid by or on behalf of the Company or its Subsidiaries and Affiliates in connection with the Merger or related to the preparation, negotiation, execution and performance of this Agreement and related transaction documents, including all fees and expenses of counsel, ...

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