The Williams Companies, Inc. v. Energy Transfer Equity, L.P. ( 2017 )


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  •    IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
    THE WILLIAMS COMPANIES, INC.,            )
    )
    Plaintiff and              )
    Counterclaim Defendant,    )
    )
    v.                                 ) C.A. No. 12168-VCG
    )
    ENERGY TRANSFER EQUITY, L.P.             )
    and LE GP, LLC,                          )
    )
    Defendants and             )
    Counterclaim Plaintiffs.   )
    )
    )
    THE WILLIAMS COMPANIES, INC.,            )
    )
    Plaintiff and              )
    Counterclaim Defendant,    )
    )
    v.                                 ) C.A. No. 12337-VCG
    )
    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.   )
    MEMORANDUM OPINION
    Date Submitted: August 29, 2017
    Date Decided: December 1, 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.
    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
    1
    Harlem, Langston Hughes, Collected Poems (1994).
    1
    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
    2
    Chester Cty. Emps.' Ret. Fund v. New Residential Inv. Corp., 
    2017 WL 4461131
    , at *1 (Del.
    Ch. Oct. 6, 2017) (quoting Veloric v. J.G. Wentworth, Inc., 
    2014 WL 4639217
    , at *2 (Del. Ch.
    Sept. 18, 2014)).
    3
    Williams Cos., Inc. v. Energy Transfer Equity, L.P. (Williams’ Second Action), 
    2016 WL 3576682
    , at *1 (Del. Ch. June 24, 2016).
    4
    In addition, Counterclaim Plaintiffs LE GP, LLC (“LE GP”), ETE Corp GP, LLC (“ETE Corp”),
    and Energy Transfer Equity GP, LLC (“ETE GP”) are Delaware limited liability companies.
    Defs.’ and Countercl. Pls.’ Second Am. & Supplemental Affirm. Defenses & Verified Countercl.
    (the “Countercl.” or the “Counterclaim Complaint”) ¶¶ 41–45.
    5
    Id. ¶ 46.
    2
    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
    6
    Id. ¶ 48 (including a Letter Agreement dated May 24, 2016 and noting that the Merger Agreement
    was amended on May 1, 2016); Williams’ Second Action, 
    2016 WL 3576682
     at *1.
    7
    Countercl. ¶ 48; Williams’ Second Action, 
    2016 WL 3576682
     at *3.
    8
    Williams’ Second Action, 
    2016 WL 3576682
     at *3, 6.
    9
    Countercl. ¶ 3.
    10
    
    Id.
     ¶¶ 143–46, 149–50, 158–59; Williams’ Second Action, 
    2016 WL 3576682
     at *4.
    11
    Countercl. ¶¶ 171–77; Merger Agreement § 6.01(h).
    12
    Countercl. ¶ 7; Williams Cos., Inc. v. Energy Transfer Equity, L.P., 
    159 A.3d 264
    , 275 (Del.
    2017) (denying Williams’ request to enjoin ETE from terminating the Merger Agreement).
    3
    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
    13
    Williams Cos., Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG (Del. Ch. Apr. 6,
    2016); a separate challenge to ETE’s issuance is also proceeding before me. In re Energy Transfer
    Equity L.P. Unitholder Litig. (ETE Unitholder Litig.), 
    2017 WL 782495
    , at *1 (Del. Ch. Feb. 28,
    2017).
    14
    The actions are now combined in the present matter. Williams Cos., Inc. v. Energy Transfer
    Equity, L.P., C.A. No. 12337-VCG (Del. Ch. Nov. 30, 2016).
    15
    Williams’ Second Action, 
    2016 WL 3576682
     at *21.
    16
    Williams Cos., 
    159 A.3d at 275
    .
    17
    Countercl. ¶¶ 72, 168–69.
    4
    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
    18
    Countercl. ¶ 8.
    19
    Id. ¶ 23.
    5
    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
    20
    Merger Agreement § 3.01(d) (emphases added).
    21
    For ease of reference, any citation to a “section” refers to a section in the Merger Agreement,
    unless otherwise noted.
    22
    Pl.’s Br. in Supp. of Its Mot. to Dismiss & to Strike Defs. & Countercl. Pls.’ Second Am. &
    Supplemental Affirmative Defenses & Verified Countercl. (“Pl. Op. Br.”) at 23–30; Nov. 30,
    2016 Oral Arg. Tr. at 8:14–9:14.
    6
    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
    23
    Merger Agreement § 4.02(f) (emphases added).
    24
    Countercl. ¶¶ 9, 32.
    7
    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
    25
    Defs. & Countercl. Pls.’ Br. in Opp’n to Pl. and Countercl. Def.’s Mot. to Dismiss & to Strike
    Defs. and Countercl. Pls.’ Second Amended & Supplemental Affirmative Defenses & Verified
    Countercl. (“Defs. Ans. Br.”) 47–48.
    26
    The damages sought other than the $1.48 billion Company Termination Fee are left unclear in
    the Counterclaim Complaint. See Countercl. ¶¶ 32 (“By taking these actions, Williams breached
    Sections 4.01(b), 5.03, and 5.14 of the Merger Agreement, is not entitled to any post-termination
    relief, and is liable for damages.”), 86 (“Williams has, therefore, violated Sections 4.02 and 5.03
    of the Merger Agreement, owes ETE $1.48 billion, and is not entitled to any relief.”).
    27
    Merger Agreement § 7.01(e).
    28
    Id. § 5.06(d)(iii).
    29
    Id. § 5.06(d)(iii).
    30
    Countercl. ¶ 51.
    8
    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)
    31
    Pl.’s Reply Br. in Further Supp. of Its Mot. to Dismiss & to Strike Defs. and Countercl. Pls.’
    Second Am. & Supplemental Affirmative Defenses & Verified Countercl. at 6.
    32
    Nov. 30, 2016 Oral Arg. 16:22–17:5.
    33
    Merger Agreement §§ 5.06(b)–(c).
    34
    Nov. 30, 2016 Oral Arg. Tr. 15:9–17:5.
    35
    Countercl. ¶ 33.
    9
    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
    36
    Merger Agreement § 8.10(b) (emphasis added).
    37
    Pl. Op. Br. at 52–53.
    38
    Merger Agreement § 7.02 (emphases added).
    39
    Pl. Op. Br. at 52.
    40
    Merger Agreement § 5.06(a).
    10
    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
    41
    Countercl. ¶ 29.
    42
    Id. ¶ 130.
    43
    Id. ¶ 112.
    44
    Pl. Op. Br. at 42–48.
    11
    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
    45
    Merger Agreement § 5.01(a) (emphasis added).
    46
    Countercl. ¶¶ 31–32.
    47
    Id. ¶ 154.
    48
    Id. ¶¶ 148–56.
    12
    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,
    49
    Id. ¶¶ 32, 136; Merger Agreement §§ 4.01(b), 5.03, 5.14.
    50
    Pl. Op. Br. at 48–52.
    51
    Merger Agreement § 5.14 (emphases added).
    13
    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, financial
    advisors, accountants, experts and consultants retained by the Company
    or its Subsidiaries and Affiliates, such amount not to exceed $100.0
    million.52
    II. ANALYSIS
    The Counterclaim Defendants have moved to dismiss the counterclaims under
    Court of Chancery Rule 12(b)(6). When reviewing such a motion,
    (i) all well-pleaded factual allegations are accepted as true; (ii) even
    vague allegations are well-pleaded if they give the opposing party
    notice of the claim; (iii) the Court must draw all reasonable inferences
    in favor of the non-moving party; and (iv) dismissal is inappropriate
    unless the plaintiff would not be entitled to recover under any
    reasonably conceivable set of circumstances susceptible of proof.53
    I need not, however, “accept conclusory allegations unsupported by specific facts or
    . . . draw unreasonable inferences in favor of the non-moving party.”54 In addition,
    52
    Merger Agreement §§ 5.06(b)–(c).
    53
    Savor, Inc. v. FMR Corp., 
    812 A.2d 894
    , 896–97 (Del. 2002) (footnotes and internal quotation
    marks omitted).
    54
    Price v. E.I. DuPont de Nemours & Co., 
    26 A.3d 162
    , 166 (Del. 2011).
    14
    I refer to certain documents and public filings that are incorporated by reference in
    the Counterclaim Complaint.55
    A. The Board Recommendation Claim
    The most serious contention in the ETE counterclaims―from a damages
    perspective, at least―is that Williams violated its contractual obligations regarding
    the Board Recommendation in favor of the Merger, after which ETE terminated the
    Agreement, triggering an obligation on Williams’ part to pay ETE a $1.48 billion
    Termination Fee. ETE seeks specific performance of this provision.
    The syllogism under which ETE seeks the Termination Fee is rather
    complicated. First, ETE points out that under Section 3.01(d)(1), the Williams’
    Board of Directors is required to cause the Company to adopt resolutions (a)
    approving the Merger; (b) declaring that the Merger is in the best interest of its
    stockholders; (c) directing a stockholder vote; and (d) recommending that the
    stockholders adopt the Merger Agreement in that vote. Resolutions comprising (a),
    (b), (c) and (d) are defined as the “Company Board Recommendation.”56 All parties
    agree that the Williams’s Board initially complied with the Merger Agreement by
    making this required Company Board Recommendation. Second, ETE points out
    that Section 4.02(d)(i)(A) provides that neither Williams’ Board, “nor any
    55
    See Amalgamated Bank v. Yahoo! Inc., 
    132 A.3d 752
    , 797 (Del. Ch. 2016).
    56
    Merger Agreement § 3.01(d).
    15
    committee thereof,” shall “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
    [Williams], the Company Board Recommendation.”57 ETE argues that, even though
    the Williams Directors did not formally withdraw the Company Board
    Recommendation, the Directors informally decided (in light of ETE’s perceived
    disinclination to merge) that it was more lucrative to Williams to pursue negotiation
    of a walk-away payment from ETE than to consummate the Merger. Third, ETE
    contends that, in pursuit of the strategy just described, the Company took the
    following actions during the pendency of the Merger: it (1) issued press releases
    that signaled Williams’ pessimism about the Merger to the market; (2) sued ETE
    CEO Kelcy Warren in Texas state court and used the pleadings to damage investor
    confidence in Warren; (3) used the media to portray ETE in a negative light; and (4)
    released a Form S-4 that undermined the financial projections used to initially
    recommend the Merger to Williams’ stockholders. The actions described above,
    according to ETE, amount to a de facto “withdrawal” of the Company Board
    Recommendation sufficient to qualify as a breach of Section 4.02(d). Fourth, after
    that breach, ETE exercised its right to terminate the Merger. Fifth, and finally, under
    the remedies described in Section 5.06 of the Merger Agreement, termination in this
    scenario entitles ETE to the Termination Fee.
    57
    Id. § 4.02(d)(i)(A).
    16
    ETE presses this argument despite the following undisputed facts: 1) Williams
    sued ETE to specifically enforce consummation of the Merger, which ETE
    strenuously (and successfully) opposed; 2) notwithstanding the supposed de facto
    withdrawal of the Company Board Recommendation in favor of the Merger,
    Williams’ Directors never acted formally to withdraw the resolutions; 3) the Board
    affirmed the Company Board Recommendation several times during the pendency
    of the Merger; 4) an overwhelming majority of Williams’ stock was voted in favor
    of the Merger, after which ETE—not Williams—terminated the Merger upon failure
    of a condition precedent.
    Williams notes that ETE did not purport to terminate the Merger based on
    breach of the Company Board Recommendation provision; instead, it relied on the
    failure of the tax opinion to avoid the deal. Williams then makes the common-sense
    observation that it would be passing strange for two parties to a merger agreement
    to structure the agreement so that a party which desired to exit the agreement could
    do so, over the other party’s objections, and at the same time receive the windfall of
    a substantial termination fee. ETE does not suggest that it is not seeking a windfall
    in the form of the Termination Fee; it simply notes that Delaware is a contractarian
    state that leaves parties to the benefits of their bargains, good, bad, and indifferent.
    ETE argues that Williams breached its duty not to modify the Company Board
    Recommendation, after which breach ETE terminated the Merger, thereby
    17
    qualifying for the $1.48 billion Termination Fee. Accordingly, ETE asserts that if it
    is entitled to the Termination Fee under the negotiated terms of the Agreement, our
    Courts will enforce the contract, windfall or no. ETE is correct in noting that this is
    a contractarian jurisdiction;58 however, I find the contract language, as written, fatal
    to ETE’s contention here.
    That is because the Agreement itself carefully defines the Company Board
    Recommendation as a series of four recommendations to be made, via board
    resolution, by the Williams’ Directors. It is undisputed that the Williams Board
    created,     via    resolutions,      a    contractually       compliant       Company        Board
    Recommendation. There are no allegations in the Counterclaim Complaint that the
    Directors, or any subcommittee thereof, ever formally modified (or expressed the
    intent to so modify) the Recommendation. In fact, the Recommendation remained
    in place through the vote on the Merger, which was overwhelmingly approved by
    Williams’ stockholders. ETE, therefore, received what it bargained for. ETE has
    not alleged facts which make it reasonably conceivable that the Board withdrew the
    Recommendation.
    ETE’s argument is really that the Board adopted a strategy under which the
    58
    Martin Marietta Materials, Inc. v. Vulcan Materials Co., 
    56 A.3d 1072
    , 1075 (Del.
    Ch.), aff'd, 
    68 A.3d 1208
     (Del. 2012), as corrected (July 12, 2012) (“I conclude that . . . consistent
    with Delaware's pro-contractarian public policy, the parties' agreement . . . should be entitled to
    specific performance and injunctive relief should be respected.”).
    18
    Company took a number of actions which ETE deems inimical to consummation of
    the merger.    As will be discussed below, those efforts may be contractually
    meaningful in terms of the “best efforts” requirement that the Merger Agreement
    imposed on Williams.       However, the Agreement was careful to cabin ETE’s
    entitlement to the Termination Fee to those situations in which Board (or
    subcommittee) action modified (or proposed to modify) the required Company
    Board Recommendation, after which ETE terminated the Merger.
    Because I find the Merger Agreement sections discussed to be clear on their
    face, I will not discuss further the parties’ various attempts to construe those
    provisions in light of other provisions in the Agreement. Suffice it to say that ETE’s
    reference to other contract provisions, attempting to demonstrate that the plain
    reading of the sections I have described above is incompatible with the balance of
    the Merger Agreement, I find unconvincing.
    B. The Forum Selection Clause
    During the pendency of the Merger, Williams brought an action against Kelcy
    Warren, ETE’s principal, in Texas. The parties dispute the motive behind the
    litigation, which involved ETE’s issuance of equity in ETE to insiders. The purpose
    for that issuance is itself disputed. Williams characterizes the Texas litigation as in
    aid of consummation of the Merger; ETE characterizes it as posturing in favor of
    Williams’ negotiating a payment from ETE in return for Williams’ consent to
    19
    terminate the merger. In any event, ETE argues that the Texas litigation violated
    Section 8.10(b), which provides that no party shall bring “actions relating to this
    Agreement or the Transactions in any court other than the [Court of Chancery]” and
    that each such party “irrevocably submits with regard to any such action or
    proceeding . . . generally and unconditionally, to the personal jurisdiction of the
    aforesaid courts.”59 According to ETE, the Texas court dismissed the suit for
    violating the forum selection clause in Section 8.01(b) of the Merger Agreement.60
    ETE seeks damages here, which it describes as the fees and costs of the Texas action,
    arising from breach of the forum selection clause.
    The parties argue forcefully about whether Warren was a party to the Merger
    Agreement, and thus whether Section 8.01(b) applied to the Texas action, and
    whether this Court had jurisdiction over Warren under the terms of the Merger
    Agreement. Even if I assume that ETE has the best of that argument, and that ETE
    is the proper party to seek as damages fees and costs incurred in a suit against Warren
    in his personal capacity, ETE cannot recover those fees and costs here, because
    Section 5.06(a) of the Agreement is, in that case, dispositive. That Section provides
    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
    59
    Merger Agreement § 8.10(b).
    60
    Defs. Ans. Br. 16.
    20
    not the Transactions are consummated.”61 In adopting that language, the parties
    waived any right to receive fees and expenses for a breach of the Agreement—if a
    breach it was—of the type ETE describes here.
    I note that in addition to fees and costs, ETE argues that it suffered other
    damages in connection with the representations made by Williams in the Texas
    litigation, violating Merger Agreement provisions independent of the forum
    selection clause. Those damages claims are incorporated in the discussion below.
    C. The Additional Breach of Contract Claims
    Aside from its arguments concerning the Termination Fee and breach of the
    forum selection clause, ETE alleges other supposed breaches of the Agreement by
    Williams.
    ETE argues that, as market conditions changed, the Williams’ Board failed to
    obtain an updated fairness opinion from its financial advisors and failed to make
    disclosures to its stockholders concerning changes in market conditions. In addition,
    ETE contends that Williams’ disclosures were materially incomplete concerning its
    reasons for agreeing to the Merger in the first instance. According to ETE, those
    include the threat of a proxy fight or consent solicitation―which caused some
    Williams Directors to change their vote to favor the Merger―that was inadequately
    disclosed. ETE next alleges that Williams failed to disclose various self-interests of
    61
    Merger Agreement § 5.06(a).
    21
    Williams’ Directors. Also, ETE alleges that Williams failed to update its Form S-4
    to reflect that at least one of the potential proxy contests could have been led by at a
    sitting Williams’ Board member, which according to ETE, influenced the other
    Directors’ votes in the Merger. These disclosures, according to ETE, would have
    been material to stockholders in making an informed vote concerning the Merger.
    The disclosures—in addition to being required under common law—were required
    under Section 5.01 of the Agreement.
    Whether Williams’ Board breached duties to its stockholders either under
    common law or the Agreement is a question of fact. Here, however, ETE seeks its
    own damages under the Agreement. While failure of material disclosures may have
    posed a threat of damages to the combined entity if the Merger had been
    consummated, the Merger was in fact terminated by ETE. Damages are an element
    of a breach of contract action.62 It is simply not reasonably conceivable that any
    breach of the Williams Directors’ responsibility to obtain an updated fairness
    opinion63 or make required disclosures to Williams stockholders could lead to
    damages to ETE, in light of the failure of the Merger. Therefore, the Motion to
    Dismiss must be granted with respect to this issue.
    62
    H-M Wexford LLC v. Encorp, Inc., 
    832 A.2d 129
    , 140 (Del. Ch. 2003) (“Under Delaware law,
    the elements of a breach of contract claim are: 1) a contractual obligation; 2) a breach of that
    obligation by the defendant; and 3) a resulting damage to the plaintiff.”).
    63
    I make no finding here that Williams was under a common law obligation to obtain an updated
    fairness opinion, as a duty to its stockholders.
    22
    Next, ETE notes that Williams failed to consent to a nearly $1 billion public
    offering, by which ETE intended to finance, in part, the Merger. ETE argues that
    Williams had a responsibility to cooperate with this equity financing, which required
    Williams to submit certain financial information and a consent from Williams’
    auditor to include certain audit reports related to that financial information.
    According to Williams, the public offering was discriminatory to Williams’
    stockholders, and it had a proper business purpose for withholding its consent. As
    noted above, I have another action pending64 concerning this Special Issuance and
    its effect on other non-participating stockholders.        The contractual language
    regarding Williams’ obligation in this situation is not clear to me, and my analysis
    would benefit from extrinsic evidence regarding that obligation. A more serious
    question is whether damages can flow from any breach, given that ETE terminated
    the Agreement for failure of the unrelated condition precedent regarding tax
    consequences.        ETE also argues that Williams failed to use best efforts to
    consummate the Merger as required by the Merger Agreement. To the extent that
    ETE can prove such, again, damages are problematic. However, we are at the
    motion to dismiss phase of this litigation. ETE argues that its willingness to exercise
    its option to terminate the Merger Agreement, based on the failure of the condition
    precedent, was informed by the results of Williams’ breach of the obligation to
    64
    See ETE Unitholder Litig., 
    2017 WL 782495
    , at *1.
    23
    approve the equity offering and failure of best efforts. It seeks, at a minimum, to
    offset Williams’ own damages claims accordingly. While I am dubious that ETE
    will ultimately prevail in demonstrating that Williams breached the Agreement in
    this regard, and that damages flowed as a result, such an outcome is reasonably
    conceivable. Therefore, resolution of these issues awaits a developed record and the
    Motion to Dismiss this claim is denied.
    III. CONCLUSION
    For the foregoing reasons, the Plaintiff’s Motion to Dismiss the counterclaims
    is granted in part and denied in part. I note that Williams has a motion outstanding
    to strike ETE’s affirmative defenses, which rest on the same allegations as do the
    counterclaims. The parties should consult and inform me whether any portion of
    that Motion to Strike needs further judicial resolution. The parties should also
    provide a Form of Order consistent with this Memorandum Opinion.
    24
    

Document Info

Docket Number: C.A. Nos. 12168-VCG & 12337-VCG

Judges: Glasscock, V.C.

Filed Date: 12/1/2017

Precedential Status: Precedential

Modified Date: 12/1/2017