The Williams Companies, Inc. v. Energy Transfer LP ( 2021 )

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 LP, formerly )
known as 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 LP, formerly )
known as 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: September 23, 2021
Date Decided: December 29, 2021
Kenneth J. Nachbar, Susan W. Waesco, and Matthew R. Clark, of MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL:
Antony L. Ryan, Kevin J. Orsini, Michael P. Addis, and David H. Korn, of
CRAVATH, SWAINE & MOORE LLP, New York, New York, Attorneys for
Plaintiff and Counterclaim Defendant The Williams Companies, Inc.
Rolin P. Bissel, James M. Yoch, Jr., and Alberto E. Chávez, of YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Michael C.
Holmes, John C. Wander, Craig E. Zieminski, and Andy E. Jackson, of VINSON &
ELKINS LLP, Dallas, Texas, Attorneys for Defendants and Counterclaim Plaintiffs
Energy Transfer LP, formerly Energy Transfer Equity, L.P.; Energy Transfer Corp
LP; ETE Corp GP, LLC; LE GP, LLC; and Energy Transfer Equity GP, LLC.
GLASSCOCK, Vice Chancellor
This matter first came before me on Plaintiff The Williams Companies, Inc.’s
(“Plaintiff” or “Williams”) motion to specifically enforce a merger agreement (the
“Merger”) with Defendant Energy Transfer LP (“ETE”). Between signing and
closing, market conditions changed, making the Merger less favorable to ETE, to
the point that ETE’s CEO and board chairman, Kelcy Warren, foresaw a credit-
ratings downgrade and regretted agreeing to the Merger. The same market
conditions caused the failure of a condition precedent: that Latham & Watkins be
able to certify that the Merger was structured in such a way that it should be a tax-
free exchange of partnership units (the “721 Opinion”).
In 2016, Williams sued to prevent ETE from terminating the merger
agreement due to the failure of this condition. Despite recognizing that ETE wanted
out of the merger agreement, I determined that the failure of the condition precedent
independently gave ETE an exit right. Left in the case was Williams’ pursuit of a
contractual breakup fee. 1 In denying specific performance, I noted ETE’s strong
desire not to close, but also that “even a desperate man can be an honest winner of
the lottery,” analogizing such luck to the tax-representation-out that had presented
itself. In this action for liquidated damages, however, I also note that even this lucky
winner must face the tax man. Having called a dirge for the Merger, ETE must pay
1
As detailed below, Williams and ETE negotiated a $410 million reimbursement that ETE was
required to pay Williams in the event that the Merger failed and certain conditions were met.
the piper. For the reasons given below, I find that ETE is contractually obligated to
pay the breakup fee.
I. BACKGROUND 2
The facts recited in this post-trial Opinion are the Court’s findings based on
the record presented at trial. The following facts were either uncontested or proven
by a preponderance of the evidence. “The reader is forewarned that this case
involves a maze of corporate entities and an alphabet soup of corporate names.”3
This Opinion includes only those facts necessary to my analysis.
A. The Parties
Plaintiff and Counterclaim Defendant Williams is a Delaware corporation
with its principal executive offices located in Tulsa, Oklahoma.4 Williams is a North
American energy company focused on providing infrastructure to deliver natural gas
products to market.5 Williams owns and operates interstate natural gas pipelines and
gathering and processing operations throughout the country. 6 Williams stock is
traded on the New York Stock Exchange (the “NYSE”) under the symbol “WMB.”7
2
Where the facts are drawn from exhibits jointly submitted at trial, they are referred to according
to the numbers provided on the parties’ joint exhibit list and with page numbers derived from the
stamp on each JTX page (“JTX-__.__”).
3
Williams Cos., Inc. v. Energy Transfer Equity, 2017 WL 5953513 (Del. Ch. Dec. 1, 2017)
(quoting Chester Cnty. Emps.’ Ret. Fund v. New Residential Inv. Corp., 2017 WL 4461131, at *1
(Del. Ch. Oct. 6, 2017)).
4
Pre-Trial Stipulation and Order, Dkt. No. 577 ¶ 10 [hereinafter “Stip.”].
5
Id.6
Id.7
Id.2
Williams is a party to the Agreement and Plan of Merger entered on September 28,
2015 (the “Merger Agreement”).8
Defendant and Counterclaim Plaintiff Energy Transfer LP, formerly known
as Energy Transfer Equity, L.P., 9 is a Delaware limited partnership with its principal
executive offices located in Dallas, Texas. 10 ETE’s family of companies owns and
operates approximately 71,000 miles of natural gas, natural gas liquids, refined
products and crude oil pipelines.11 ETE’s common units are traded on the NYSE
under the symbol “ET.”12
Defendant and Counterclaim Plaintiff Energy Transfer Corp LP (“ETC”) is a
Delaware limited partnership taxable as a corporation.13 Pursuant to the Merger,
Williams would have merged with and into ETC.14 ETC is a party to the Merger
Agreement and would have been the managing member of the general partner of
ETE following the consummation of the Merger.15
8
Id.9
On October 19, 2018, Energy Transfer, L.P. changed its name to “Energy Transfer LP.” Id. ¶ 12.
The parties agree that Energy Transfer Equity, L.P. is the same entity as Energy Transfer LP for
the purposes of this litigation. Id.
10
Id. ¶ 11.
11
Id.
12
Id.
13
Id. ¶ 13.
14
Id.
15
Id.
3
Defendant and Counterclaim Plaintiff ETE Corp GP, LLC is a Delaware
limited liability company, the general partner of ETC, and a party to the Merger
Agreement. 16
Defendant and Counterclaim Plaintiff LE GP, LLC (“LE GP”) is a Delaware
limited liability company, the general partner of ETE, and a party to the Merger
Agreement. 17
Defendant and Counterclaim Plaintiff Energy Transfer Equity GP, LLC
(“ETE GP”) is a Delaware limited liability company and a party to the Merger
Agreement. 18 Pursuant to the Merger, ETE GP would have merged with LE GP
such that ETE GP would have been the surviving company and general partner of
ETE.19
Unless otherwise specified, I refer to these Defendants and Counterclaim
Plaintiffs collectively as “ETE.”
B. Factual Background
1. Williams Agrees to the WPZ Roll-Up
Before ETE submitted an offer to purchase Williams, Williams entered into
an agreement to undertake a separate roll-up transaction with its master limited
16
Id. ¶ 14.
17
Id. ¶ 15.
18
Id. ¶ 16.
19
Id.
4
partnership, Williams Partners, L.P. (“WPZ”).20 The Williams Board approved the
WPZ transaction on May 12, 2015.21 Williams and WPZ executed the transaction
documents that day, and the next day, May 13, 2015, they issued a joint press release
announcing the execution of the agreement. 22 The WPZ agreement required
Williams to pay WPZ a termination fee of $410 million if it later terminated the
WPZ transaction. 23
At the time the WPZ transaction was announced, ETE had not made a formal
offer to purchase Williams, though it had expressed interest in doing so.
Specifically, on May 6, 2015, a week before the WPZ transaction was announced,
ETE’s Chief Executive Officer (“CEO”), Kelcy Warren, hosted a dinner at his home
with Williams’ CEO, Alan Armstrong, Williams’ Chief Financial Officer (“CFO”)
Don Chappel, and ETE’s then-CFO, Jamie Welch for the purpose of asking whether
Williams would be interested in a merger with ETE.24 Warren did not make a formal
offer to purchase Williams at this dinner,25 nor had he decided whether he wanted to
make an offer. 26 Warren did not propose a price term for a potential offer,27 but
20
JTX-1218.0130.
21
Id.
22
Id.
23
Id.
24
Trial Tr. at 137:21–138:3(Chappel); id. at 313:23–314:3(Warren).
25
Id. at 138:4–6(Chappel).
26
Id. at 312:15–314:19(Warren).
27
Id. at 138:7–9(Chappel).
5
Welch did outline a potential transaction structure. 28 Armstrong did not brief the
Williams board of directors (the “Williams Board”) about the dinner. 29
2. The Parties Negotiate the Merger Agreement
On May 19, 2015, ETE submitted a bid to purchase Williams in an all-equity
deal. 30 As a condition to its offer, ETE required Williams to terminate the roll-up
transaction with WPZ, which, as detailed above, would require Williams to pay
WPZ a $410 million termination fee.31 Negotiations proceeded through the summer
of 2015.32 Williams was represented by Cravath, Swaine & Moore (“Cravath”), and
ETE was represented by Wachtell, Lipton, Rosen & Katz (“Wachtell”). The
Williams Board formed a Strategic Review Administration Committee to evaluate
and oversee a potential sale.33
a. Economic Equivalence Was “Paramount” to Williams
The Merger contemplated an “Up-C” structure, in which Williams
stockholders would receive shares in a new entity, ETC, instead of receiving ETE
common units directly. 34 The Williams Board was therefore concerned that ETC
shares could trade at a discount to ETE common units.35 The Williams Board was
28
Id. at 601:24–602:6(Armstrong).
29
Id. at 603:1–3(Armstrong).
30
Stip. ¶ 17.
31
JTX-0202.0004.
32
Stip. ¶ 17.
33
JTX-1218.0134.
34
JTX-0026.0004.
35
E.g., Trial Tr. at 18:10–15(Chappel); id. at 316:24–317:9(Warren).
6
likewise concerned that, because Warren personally owned a significant number of
ETE units and would control both ETE and ETC after the Merger, he might take
actions that benefitted ETE at ETC’s expense.36
As a result, achieving economic equivalence between the ETE common units
and the ETC shares was a key point of negotiation. Warren wrote to the Williams
Board in a June 18, 2015 letter that Williams “stockholders would receive common
shares in [ETC] that would mirror the economic attributes of ETE common units.”37
Chappel testified at trial that “economic equivalence was paramount” and that there
was “engineering that was done to ensure that” ETE common units and ETC shares
“traded as closely as we possibly could.”38 Warren admitted at trial that “equality
of distributions between ETC shares and ETE units was a key aspect of the
merger.” 39 Al Garner, a financial advisor to Williams from Lazard, testified that
bargaining for economic equivalence was “the subject of most of the negotiations
on the transaction” and “the most important and time-consuming part of the[]
negotiations.” 40 Garner further testified that in the final months leading up to the
execution of the merger agreement, economic equivalence took up the “lion’s share
of the negotiation.”41
36
Trial Tr. at 482:9–483:2(McReynolds); id. at 605:7–22(Armstrong); JTX-1218.0161.
37
JTX-0026.0004.
38
Trial Tr. at 18:24–19:3(Chappel).
39
Id. at 316:24–318:17(Warren).
40
Id. at 146:11–147:6(Garner).
41
Id. at 147:24–148:3(Garner).
7
As a result, the Merger Agreement featured various terms that were designed
to achieve economic equivalence. For instance, the parties agreed that ETC would
pay dividends on ETC shares that were equal to distributions paid on ETE common
units through 2018.42 In addition, ETE agreed to provide ETC stockholders with an
equalizing payment at the end of two years if ETC shares traded at a discount to ETE
common units.43 Finally, the parties agreed to replace a portion of the all-equity
consideration with a $6.05 billion cash payment that would be used by ETE to
purchase shares in ETC, known as “hook stock,” which ensured that ETE’s and
ETC’s interests were aligned.44 ETC would distribute this consideration to its
stockholders, formerly Williams stockholders.45
3. The Merger Agreement
The parties executed the Merger Agreement on September 28, 2015.46
Following the consummation of the Merger, ETC would own Class E Units
representing approximately 57% of the limited partner interest of ETE, and the
existing limited partners of ETE would own the remaining approximately 43%
limited partner interest.47 ETE would own the Williams assets, as well as
42
JTX-0189.0006–.0007 (§5.15(b)(iii)); Trial Tr. at 19:5–20:16(Chappel); id. at 146:11–
147:14(Garner); id. at 317:24–318:5(Warren).
43
Trial Tr. at 19:5–20:16(Chappel).
44
Id. at 20:17–21:7(Chappel); id. at 147:7–14(Garner); id. at 418:19–422:1(Welch); id. at 988:16–
989:3(Needham); id. at 1230:23–12:31:1(Whitehurst).
45
Stip. ¶ 18.
46
Id. ¶ 17. See also JTX-0209.
47
Stip. ¶ 18.
8
approximately 19% of the outstanding ETC shares. 48 The former Williams
stockholders would own the remaining approximately 81% of the ETC shares and
would receive approximately $6.05 billion in cash consideration.49 Williams and
ETE eventually agreed to a Closing Date of June 28, 2016 at 9:00 AM.50
The Merger Agreement featured several provisions that are at issue in this
litigation, including a Capital Structure Representation, an Ordinary Course
Covenant, and three Interim Operating Covenants.
a. The Capital Structure Representation
Under the Merger Agreement, ETE represented at signing that its capital
structure was composed of three classes of equity securities—common units and
Class D Units representing limited partnership interests in ETE, and a general
partner interest in ETE—as well as the number of outstanding units in each class and
the percentage of the general partner interest (the “Capital Structure
Representation”):
Capital Structure. (i) The authorized equity interests of
Parent consist of common units representing limited
partner interests in Parent (“Parent Common Units”),
Class D Units representing limited partner interests in
Parent (“Parent Class D Units”) and a general partner
interest in Parent (“Parent General Partner Interest”). At
the close of business on September 25, 2015 (the “Parent
Capitalization Date”), (i) 1,044,764,836 Parent Common
48
Id.
49
Id.
50
Id. ¶ 34.
9
Units were issued and outstanding, of which 5,776,462
consisted of Parent Restricted Units, (ii) 2,156,000 Parent
Class D Units were issued and outstanding and (iii) there
was an approximate 0.2576% Parent General Partner
Interest. Except as set forth above, at the close of business
on the Parent Capitalization Date, no equity securities or
other voting securities of Parent were issued or
outstanding. 51
The parties agreed that the representation regarding the three existing classes
of equity—but not the representation regarding the number of outstanding units—
would be brought down to closing, “except for any immaterial inaccuracies”:
The representations and warranties of the Company set
forth in Sections 3.01(c)(i) [] (Capital Structure) shall be
true and correct as of the Closing Date as though made on
such date (except to the extent any of such representations
and warranties speak as of an earlier date, in which case
such representations and warranties shall be true and
correct as of such earlier date), except for any immaterial
inaccuracies. 52
Therefore, if ETE issued more units within its existing classes between
signing and closing, the representation would remain true. If, however, ETE created
a new class of equity interests, the representation would no longer be true at closing.
The Capital Structure Representation was a “key element . . . in addressing the
[Williams] [B]oard’s concerns about economic equivalence” because it ensured that
ETE could not “issue a new security with rights that shifted value from what was
51
JTX-0209.0030 (§3.02(c)(i)). The Merger defines “Parent” to mean ETE, and “TopCo” to mean
ETC. JTX-0209.0004.
52
Id. at .0063 (§6.03(a)(i)).
10
expected and what was modeled,” which could result in “a deal that was quite a bit
different than the deal that was bargained for.”53
b. The Ordinary Course and Interim Operating Covenants
ETE agreed to several covenants in the Merger Agreement regarding its
conduct between signing and closing, four of which are at issue here. Each of these
covenants are subject to exceptions, discussed below, identified in the Parent
Disclosure Letter for Agreement and Plan of Merger (the “Parent Disclosure
Letter”).
First, ETE agreed to operate its business “in the ordinary course” (the
“Ordinary Course Covenant”):
Except as set forth in Section 4.01(b) of the Parent
Disclosure Letter, expressly permitted by this Agreement,
required by applicable Law or consented to in writing by
the Company (such consent not to be unreasonably
withheld, conditioned or delayed), during the period from
the date of this Agreement to the Effective Time, Parent
shall, and shall cause each of its Subsidiaries to, carry on
its business in the ordinary course and shall use
commercially reasonable efforts to preserve substantially
intact its current business organizations, maintain its
rights, franchises and Parent Permits and to preserve its
relationships with significant customers and suppliers.54
The “ordinary course” obligation in turn entailed several specific restrictions
on ETE between signing and closing (the “Interim Operating Covenants”). As with
53
Trial Tr. at 204:19–205:3(Van Ngo); id. at 28:3–11(Chappel).
54
JTX-0209.0045 (§4.01(b)) (emphasis added).
11
the general Ordinary Course Covenant, the Interim Operating Covenants were
subject to exceptions provided in the Parent Disclosure Letter:
Without limiting the generality of the foregoing, except as
set forth in Section 4.01(b) of the Parent Disclosure Letter,
expressly permitted by this Agreement, required by
applicable Law or consented to in writing by the Company
(such consent not to be unreasonably withheld,
conditioned or delayed), during the period from the date
of this Agreement to the Effective Time, Parent shall not,
and shall not permit any of its Subsidiaries to . . . . 55
Three of the Interim Operating Covenants are at issue here. First, ETE agreed
that it would not take any actions resulting in new restrictions on distributions and
payments of dividends:
[Parent shall not, and shall not permit any of its
Subsidiaries to] take any action that would result in Parent
or any of its Subsidiaries becoming subject to any
restriction not in existence on the date hereof with respect
to the payment of distributions or dividends[.] 56
Second, ETE agreed to refrain from certain actions regarding its equity
securities:
[Parent shall not, and shall not permit any of its
Subsidiaries to] split, combine or reclassify any of its
equity securities or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution
for equity securities, other than transactions by a wholly
owned Subsidiary of Parent which remains a wholly
owned Subsidiary after consummation of such
transaction[.]57
55
Id. (emphasis added).
56
Id. at .0045 (§4.01(b)(ii)).
57
Id. at .0045 (§4.01(b)(iii)).
12
Third, ETE agreed not to amend certain organizational documents:
[Parent shall not, and shall not permit any of its
Subsidiaries to] amend (A) the organizational documents
of TopCo, (B) the Parent Certificate of Partnership or the
Parent Partnership Agreement (other than the Parent
Partnership Agreement Amendment) or (C) the
comparable organizational documents of any Subsidiary
of Parent in any material respect[.]58
Section 6.03(b) of the Merger Agreement required ETE to have “performed
or complied” with each of the Ordinary Course Covenant and the Interim Operating
Covenants “by the time of the Closing” “in all material respects”:
Performance of Obligations of TopCo and Parent. Each
of TopCo and Parent shall have, in all material respects,
performed or complied with all obligations required by the
time of the Closing to be performed or complied with by
it under this Agreement, and the Company shall have
received a certificate signed on behalf of Parent by the
chief executive officer or the chief financial officer of
Parent to such effect.59
These covenants were designed to ensure that, between signing and closing,
“the deal that was struck [wa]s preserved through the closing date” and were “part
of the package of protections that the [Williams B]oard requested to address their
concerns around economic equivalence.”60
58
Id. at .0046 (§4.01(b)(vi)).
59
Id. at .0063 (§6.03(b)).
60
Trial Tr. at 21:8–23(Chappel); id. at 203:8–23(Van Ngo).
13
c. The Parties Negotiate the $1 Billion Equity Issuance
Exception
As I noted above, the Ordinary Course Covenant and each of the Interim
Operating Covenants were subject to exceptions “set forth in Section 4.01(b) of the
Parent Disclosure Letter.”61 Section 4.01(b) of the Parent Disclosure Letter, in turn,
identifies these exceptions. 62 The exceptions are organized under headers that
correspond to specific sections within Section 4.01(b) of the Merger Agreement.63
Under the header “Section 4.01(b)(v),” the Parent Disclosure Letter states, “Parent
may make issuances of equity securities with a value of up to $1.0 billion in the
aggregate” (the “$1 Billion Equity Issuance Exception”).64
The parties dispute whether the $1 Billion Equity Issuance Exception applies
to all of the Ordinary Course and Interim Operating Covenants, or just the Interim
Operating Covenant located within Section 4.01(b)(v) of the Merger Agreement,
which prohibits ETE from issuing equity between signing and closing. The
transaction documents include two provisions that are relevant to this interpretive
question. First, the Parent Disclosure Letter states that “[t]he headings contained in
this Parent Disclosure Letter are for reference only and shall not affect in any way
61
JTX-0209.0045 (§4.01(b)).
62
JTX-0194.0017–.0019.
63
Id. Specifically, there are headers titled, “Section 4.01(b)(i),” “Section 4.01(b)(ii),” “Section
4.01(b)(v),” “Section 4.01(b)(vii),” “Section 4.01(b)(ix),” “Section 4.01(b)(x),” “Section
4.01(b)(xi),” “Section 4.01(b)(xii),” and “Section 4.01(b)(xiii).” Id.
64
Id. at .0018.
14
the meaning or interpretation of this Parent Disclosure Letter.” 65 Second, the Merger
Agreement includes a savings clause stating that the disclosures in any section of
the Parent Disclosure Letter apply to the corresponding section of the Merger
Agreement, as well as to any other section of the Merger Agreement so long as the
“relevan[ce]” to the other section “is reasonably apparent on its face”:
[A]ny information set forth in one Section or subsection of
the Parent Disclosure Letter shall be deemed to apply to
and qualify the Section or subsection of this Agreement to
which it corresponds in number and each other Section or
subsection of this Agreement to the extent that it is
reasonably apparent on its face in light of the context and
content of the disclosure that such information is relevant
to such other Section or subsection[.]66
The parties also introduced extrinsic evidence at trial regarding their intent
with respect to these exceptions. Since the initial drafts, the Merger Agreement had
included a prohibition on issuing equity between signing and closing.67 ETE then
proposed adding the $1 Billion Equity Issuance Exception directly into this
prohibition, rather than adding it into the Parent Disclosure Letter. 68 The $1 Billion
Equity Issuance Exception was negotiated by Chappel and Welch, the CFOs for both
parties.69 As the parties exchanged subsequent drafts, the $1 Billion Equity Issuance
Exception remained directly within the equity issuance covenant of the Merger
65
Id. at .0002.
66
JTX-0209.0030 (§3.02).
67
JTX-0056.0064 (§5.2(b)(xi)); JTX-0058.0047 (§4.01(b)(iv)).
68
JTX-0064.0170–.0171 (§4.01(b)(iv)(A)); Trial Tr. at 408:19–409:1(Welch).
69
Trial Tr. at 22:8–15(Chappel); id. at 404:15–405:1(Welch).
15
Agreement, instead of the Parent Disclosure Letter.70 Chappel and Welch both
testified that they both understood the $1 Billion Equity Issuance Exception to apply
only to the Interim Operating Covenant prohibiting equity issuances in Section
4.01(b)(v). 71
The day before signing, on September 27, 2015, Williams and ETE each
moved several exceptions that had been drafted into individual covenants in the
Merger Agreement to their respective disclosure letters.72 When the parties did so,
they tied each exception to the corresponding Interim Operating Covenant from
which it had been moved through the use of headers identifying those individual
covenants by section.73 The $1 Billion Equity Issuance Exception was one of the
exceptions that ETE moved into its Parent Disclosure Letter. 74 ETE removed the
$1 Billion Equity Issuance Exception from Section 4.01(b)(v) of the Merger
Agreement and placed it under a header in Section 4.01(b) of the Parent Disclosure
Letter titled, “Section 4.01(b)(v).” 75
70
E.g., JTX-0146.0003; Tr.211:17–212:19(Van Ngo).
71
Trial Tr. at 24:2–25:7(Chappel); id. at 409:2–413:5(Welch).
72
Compare JTX-0139.0055–.0061, with JTX-0160.0029–.0032 (moving exceptions from Merger
Agreement §4.01(a) to Company Disclosure Letter); compare JTX-0162.0175–.0179, with JTX-
0167.0019–.0021 (moving exceptions from Merger Agreement §4.01(b) to Parent Disclosure
Letter).
73
See JTX-0160.0029–.0032 (Company Disclosure Letter); JTX-0162.0175–.0179 (Parent
Disclosure Letter).
74
JTX-0194.0018.
75
Compare JTX-0162.0176 (Merger Agreement §4.01(b)(v)), with JTX-0167.0020 (Parent
Disclosure Letter).
16
The evidence presented at trial established that the parties moved the
exceptions into the disclosure letters to maintain their confidentiality, and that they
did not intend the moves to be substantive. Chappel testified at trial that the
exceptions were moved to the disclosure letters “to maintain confidentiality” with
respect to “sensitive issues,” and that they intended “no change in rights.” 76 Welch
agreed that the exceptions were moved for confidentiality reasons. 77 Likewise, Minh
Van Ngo, the Cravath attorney advising Williams on the Merger, testified that
Cravath told Wachtell at that time “that we were fine with th[e] movement, with the
understanding that it was nonsubstantive,” meaning, “just like it operate[d] if it were
in the body of the merger agreement, . . . the exceptions in the disclosure schedule
would apply only to the corresponding section of the merger agreement.”78 Van Ngo
also testified that he told Wachtell that he understood the disclosure letters to be
“section-specific.”79
76
Trial Tr. at 25:12–26:6(Chappel).
77
Id. at 415:19–416:5(Welch).
78
Id. at 213:13–21(Van Ngo).
79
Id. at 215:3–8 (Van Ngo). Although David Katz, one of ETE’s deal counsel at Wachtell, testified
in a deposition that he believed the $1 Billion Equity Issuance Exception applied to each of the
covenants within Section 4.01(b) of the Merger Agreement, he admitted that he was not involved
in drafting the Parent Disclosure Letter and that he did not know how his team determined the
structure of the exceptions in the letter. Katz Dep. at 88:21–91:25. Rather, his interpretation was
based solely on his reading of the Merger Agreement and Parent Disclosure Letter on the day of
the deposition. Id. Accordingly, I find this testimony to be unpersuasive regarding the parties’
intent.
17
Van Ngo also testified that he told Wachtell he preferred the “‘reasonably
apparent on its face’ formulation for the savings clause” and Wachtell responded,
“[t]hat’s fine.” 80 Van Ngo testified that he understood the “reasonably apparent on
its face” formulation was meant “to address obvious drafting errors and[/]or manifest
errors on the parties” because “when you move sections . . . to a disclosure schedule,”
“there’s a heightened risk that you have misalignment of the sections or that . . . you
miss . . . certain cross references.” 81
In addition, the parties’ conduct after signing the Merger Agreement further
demonstrates that they intended the exceptions that were moved into the disclosure
letters to apply only to the specific covenants from which they were moved. After
signing, Williams planned its own equity issuance.82 Like ETE, Williams was also
subject to a restriction on the issuance of equity,83 and its Company Disclosure Letter
included an exception permitting Williams to issue up to $1 billion in equity
securities.84 And like the Parent Disclosure Letter, the Company Disclosure Letter
was structured so that each exception fell under a header that corresponded to a
specific covenant in the Merger Agreement. 85
80
Trial Tr. at 215:3–8(Van Ngo).
81
Id. at 215:3–23 (Van Ngo).
82
Id. at 29:13–32:10(Chappel); id. at 416:6–417:18(Welch); JTX-0246.0001–.0002.
83
JTX-0209.0042 (§4.01(a)(v)).
84
JTX-0196.0025.
85
Id. at .0025–.0029.
18
Although Williams was therefore permitted to issue equity under this
Company Disclosure Letter exception, the particular issuance that Williams planned
involved the waiver of incentive distribution rights (“IDRs”),86 which was prohibited
by a separate interim operating covenant. 87 Accordingly, before going forward with
the planned issuance, Williams requested ETE’s consent to the waiver of IDRs.88
ETE refused to consent, and Williams did not proceed with the issuance. 89 If the
parties had intended the $1 billion equity issuance exception in the Company
Disclosure Letter to apply to all of Williams’ interim operating covenants, rather
than just the equity issuance covenant, ETE’s consent would not have been required.
d. The Merger Agreement Was Conditioned on a Tax Opinion
The Merger Agreement was conditioned on ETE’s tax counsel, Latham &
Watkins LLP (“Latham”), rendering the 721 Opinion—that the contribution by ETC
of the Williams assets to ETE in exchange for the issuance of Class E units “should”
be treated as tax free under Section 721 of the Internal Revenue Code. 90
The Merger Agreement also included certain representations and covenants
related to the Section 721 tax treatment. First, ETE represented that it did not
“know[] of the existence of any fact that would reasonably be expected to prevent”
86
Trial Tr. at 29:13–33:13(Chappel); id. at 416:6–417:23(Welch); JTX-0246.0001–.0002.
87
JTX-0209.0043 (§4.01(a)(x)).
88
Trial Tr. at 32:11–33:13(Chappel); id. at 417:2–18(Welch); JTX-0246.0001–.0002.
89
Trial Tr. at 33:14–20(Chappel); id. at 417:19–23(Welch).
90
JTX-0209.0062 (§6.01(h)).
19
the Merger “from qualifying as an exchange to which Section 721(a) of the Code
applies.” 91 This representation was brought down to closing, subject to the “Parent
Material Adverse Effect” materiality standard.92 Williams also made a reciprocal
representation, which was also brought down to closing, subject to a “Company
Material Adverse Effect” materiality standard. 93 Second, the Merger Agreement
included covenants that required ETE and Williams to use reasonable best efforts to
consummate the Merger and commercially reasonable efforts to cause the
contribution to qualify as tax-free under Section 721(a).94
4. The Williams Board Approves the Merger
Following negotiations, the Williams Board met on September 24 and 25,
2015 to discuss the Merger.95 At the September 24, 2021 meeting, the Board took a
“straw poll” and preliminarily rejected the Merger by a 6-to-7 vote.96 The next day,
two Williams directors—Janice Stoney and Joe Cleveland—changed their votes, and
the Board voted to approve the Merger 8-to-5.97
ETE contends that threats of a consent solicitation from two activist directors
on the Williams Board, Keith Meister and Eric Mandelblatt, were a significant factor
91
Id. at .0038 (§3.02(n)(i)).
92
Id. at .0063 (§6.03(a)(iv)).
93
Id. at .0026 (§3.01(n)(i)), .0062 (§6.02(a)(iv)).
94
Id. at .0053 (§5.03), .0060 (§5.07).
95
JTX-0137.
96
Id. at .0005.
97
Id. at .0006.
20
in the Williams Board’s decision to approve the Merger.98 The evidence presented
at trial, however, established that Meister and Mandelblatt did not make any such
threats. Both Meister and Mandelblatt testified that they did not threaten a consent
solicitation. 99 This is consistent with testimony from other Williams directors, who
generally testified that they did not perceive or recall perceiving threats from Meister
and Mandelblatt. 100 Although one director, Kathleen Cooper, testified equivocally
during a 2016 deposition that she thought she recalled Meister stating that he and
Mandelblatt would initiate a consent solicitation if a deal was not reached, 101 her
uncertain testimony is outweighed by the testimony of the other Williams directors.
In any event, she acknowledged that to the extent there was such a threat, it did not
“affect[] [her] feelings about the deal.”102
The other evidence presented by ETE does not support their argument that
purported threats from Meister and Mandelblatt were a significant factor in the
Williams’ Board’s decision to approve the Merger. Cooper’s October 22, 2015
email to Stoney lamenting that “we succumbed to the threats just at the wrong time
rather than fighting for long-term shareholder value at [Williams]” referred to threats
98
Defs.’ and Countercl. Pl.’s Post-Trial Br., Dkt. No. 637 at 9–11 [hereinafter “ETE OB”].
99
Meister Dep. at 402:25–403:13; Mandelblatt Dep. at 377:19–25.
100
Trial Tr. at 856:18–21(Stoney); id. at 859:17–860:12(Stoney); Hinshaw Dep. at 276:9–14; Sugg
Dep. at 314:11–18 (2018); Nance Dep. at 62:19–63:10; Izzo Dep. at 107:18–24; Smith Dep. at
167:9–169:15 (2018). ETE did not depose Cleveland, whose deposition was cancelled for medical
reasons in 2019. ETE OB at 10 n.20.
101
Cooper Dep. at 31:11–33:25 (2016).
102
Id. at 32:21–23.
21
from when Meister and Mandelblatt joined the Board in early 2014, not threats in
connection with the Merger. 103 Likewise, Armstrong’s notes to himself regarding
“[t]hreatening Proxy contests” and “[t]hreatening personal liability in case of proxy
fight”104 referred to these perceived 2014 threats and his general thoughts about the
presence of activists in the Williams boardroom.105 Finally, while the September
24-25, 2015 Williams Board meeting minutes do discuss “appreciation of the
practical consequences of a rejection of the” Merger, including “the likelihood of a
consent solicitation to replace all or certain Directors” and the “expected response
of Messrs. Mandelblatt and Meister,”106 the minutes make no mention of “threats”
from Mandelblatt and Meister. This is consistent with Stoney’s testimony, during
which she stated that the Board discussed the likelihood of a consent solicitation
being launched and the likelihood of the outcome, but that no one had threatened a
consent solicitation.107 Williams disclosed to stockholders in the Form S-4
registration statement (the “S-4”) filed with the Securities Exchange Commission
(the “SEC”) that the Williams Board discussed a potential consent solicitation when
evaluating the Merger. 108
103
JTX-0235.0001; JTX-0012.
104
JTX-0223.0003.
105
Trial Tr. at 713:24–714:21(Armstrong); id. at 706:9–707:4(Armstrong).
106
JTX-0137.0004.
107
Trial Tr. at 854:7–856:21(Stoney).
108
JTX-1218.0148.
22
On September 28, 2015, the Williams Board approved and declared advisable
the Merger. 109 As a result, Williams terminated the WPZ agreement and paid the
$410 million termination fee to WPZ. 110 Under the Merger Agreement, if the Merger
failed and certain conditions were met, ETE was required to reimburse Williams for
the $410 million termination fee (the “WPZ Termination Fee Reimbursement”).111
5. The Energy Market Deteriorates
In late 2015, commodity prices declined sharply, leading to a deterioration of
the energy market.112 As a result, both Williams and ETE reassessed the Merger in
light of their changing financial positions.
ETE was concerned about its ability to finance the Merger. Warren was
concerned that the $6.05 billion cash component of the Merger consideration was a
“problem” 113 because the debt required to finance it could lead to a “potential ratings
downgrade” to “junk status.”114 The ETE senior management team was likewise
concerned about the cash component of the Merger consideration. 115
In light of these concerns about financing the cash consideration, by January
2016, Warren no longer wanted to close the Merger as it was structured.116 On
109
Stip. ¶ 33.
110
Trial Tr. at 13:15–14:12(Chappel); JTX-0202.0004.
111
JTX-0209.0059 (§5.06(f)).
112
Trial Tr. at 33:21–34:3(Chappel).
113
Id. at 308:16–22(Warren).
114
Id. at 325:14–21(Warren).
115
Id. at 330:20–331:1(Warren).
116
Id. at 296:3–18(Warren).
23
January 7, 2016, Warren called a meeting of ETE executives and lawyers to discuss
ETE’s “rights and obligations under the merger agreement” because, “as structured,”
Warren believed the Merger “was not in ETE’s best interests.” 117 At the meeting,
Warren expressed that he believed that the Merger, as structured with a cash
consideration component, “would create a ratings downgrade” that would lead to an
“implosion.”118 Warren indicated that he was “very much opposed to the” Merger
and would “walk away” “[i]f he could, under the merger agreement.” 119
Four days later, on January 11, 2016, Warren spoke over the phone with Frank
MacInnis, the Williams Chairman.120 On the call, Warren proposed a meeting to
discuss a “restructuring” or “changes” to the Merger Agreement. 121 Warren stated
that ETE also would not be able to restructure the deal to be “all-equity.” 122 The
Williams Board minutes describing MacInnis’s summary of the call state that
Warren “discussed the possibility of terminating the transaction and had mentioned
the possibility of cutting distributions.” 123 At trial, Warren acknowledged it was
possible that he told MacInnis that ETE might have to cut distributions if the Merger
closed as structured.124 The following day, on January 12, 2016, Armstrong and
117
JTX-0331; Trial Tr. at 422:2–13(Welch).
118
Trial Tr. at 422:21–423:5(Welch).
119
Id. at 423:23–424:14(Welch).
120
JTX-0357.0005.
121
Id.
122
JTX-0378.0002; Trial Tr. at 334:13–17(Warren).
123
JTX-0378.0002; Trial Tr. at 333:18–334:17(Warren); id. at 207:7–14(Van Ngo).
124
Trial Tr. at 333:18–334:7(Warren).
24
Chappel met with Tom Long, the then-CFO of an ETE subsidiary, who proposed
changes to the terms of the deal. 125
Two days later, on January 14, 2016, Chappel and Williams’ financial advisor
from Lazard, Al Garner, met with Warren and Welch.126 At this meeting, Warren
and Welch expressed that the Merger was now “a problem.”127 In a
contemporaneous email describing the discussion, a Lazard employee wrote that
Warren and Welch stated that “ETE may be forced to cut distribution[s] to zero for
2 years.”128 Likewise, both Chappel and Garner testified at trial that at this meeting,
Warren and Welch stated “that they would have to cut distributions to zero for two
years.”129 Although Warren and Welch indicated that they “plan[ned] to ‘honor [the]
agreement,’” they stated that if Williams were to “walk, ETE would not require [a]
breakup fee” and they “also offered to ‘help’ purchase WPZ assets if [the] deal [is]
called off.”130 Welch also stated that he believed the S-4 needed to disclose that
Williams would be worth more as a standalone company than with “ETE with no
distr[ibutions].”131
125
Id. at 34:15–35:23(Chappel).
126
Id. at 35:24–36:8(Chappel); id. at 150:4–7(Garner); JTX-0374.0001.
127
JTX-0374.0001.
128
Id.
129
Trial Tr. at 36:9–23(Chappel); id. at 150:8–24(Garner); JTX-0327.0001.
130
JTX-0374.0001.
131
Id.
25
For its part, the Williams Board and management also had some internal
dissent with respect to the merits of the Merger. As I discussed above, the Williams
Board had approved the Merger in an 8-to-5 vote.132 This internal dissent continued
during the market collapse. In December 2015, the Williams Board called a meeting
to discuss the “dire” “state of the markets.” 133 Armstrong wanted to terminate the
Merger, and he was a “strong voice” in that discussion.134
Armstrong encouraged Williams’ CFO, Chappel, to “accept forecast
assumptions for Williams” and “pessimistic forecast assumptions for ETE,” though
Chappel, who supported the Merger, had “strong support from the [B]oard to ensure
that the forecasts were thoughtfully prepared, well-vetted, and balanced between
optimism and pessimism and provided transparency to the [B]oard.”135 Armstrong
did, however, present optimistic projections of Williams as a standalone company
to the Board in February 2016 without vetting them with Chappel.136 Armstrong
and other dissenting directors also included Stoney and Cleveland on emails
expressing their disagreement regarding the merits of the Merger, including their
132
JTX-0137.0006.
133
JTX-0308.0001–.0002.
134
Trial Tr. at 120:7–23(Chappel).
135
Id. at 121:13–22(Chappel).
136
Id. at 124:10–125:2(Chappel).
26
criticism of Williams’ banker’s financial analysis.137 Stoney testified that she
nonetheless never felt pressure to reconsider her position. 138
Despite the internal dissent at Williams, the Williams Board determined at a
January 15, 2016 meeting that the Merger Agreement was a “valuable asset” and
resolved to issue a press release expressing its unanimous support for the Merger.139
The Williams Board issued that press release the same day, stating that it was
“unanimously committed to completing the transaction.”140 Williams also asked its
financial advisors, Lazard and Barclays, to assess the value of the Merger to
Williams stockholders in light of the changing market conditions, 141 and to assess to
value of a potential breakup fee from ETE. 142 Both concluded that the Merger still
provided Williams stockholders with billions of dollars in value. 143
In response to ETE’s concerns about financing the cash component of the
consideration, Williams proposed restructuring the Merger by swapping the cash
component for equity at the then-current market value of ETE units. 144 ETE refused
137
See JTX-0437; JTX-0439; JTX-0755; JTX-1019; Tr.127:8–16(Chappel); JTX-0727;
JTX-0743.
138
Trial Tr. at 865:5–866:7(Stoney). As I noted above, Cleveland did not testify at trial or
deposition, after his deposition was cancelled for medical reasons in 2019. ETE OB at 10 n.20.
139
JTX-0378.0002.
140
JTX-0379.0001.
141
JTX-0441; JTX-0449; Trial Tr. at 38:3–39:18(Chappel); id. at 157:6–158:2(Garner).
142
JTX-0742; JTX-0741; Trial Tr. at 888:3–889:6(Stoney).
143
JTX-0441.0006, .0025; JTX-0449.0085; Trial Tr. at 38:3–39:18(Chappel); id. at 159:1–
160:16(Garner).
144
JTX-0382.
27
and countered with an offer to replace the cash consideration with ETE units at a
valuation from before the energy market decline.145
a. ETE Crafts a Public Offering with a Distribution Preference
To solve its leverage issues, ETE structured two equity issuances—a public
offering, which Williams rejected (the “Proposed Public Offering”); and a private
offering, which ETE completed without Williams’ consent (the “Preferred
Offering”). The Preferred Offering ultimately became the subject of an action
brought by ETE unitholders, in which I found that ETE breached its partnership
agreement in connection with the offering (the “Unitholder action”). 146
Shortly after ETE raised the possibility of distribution cuts to Williams in
January 2016, ETE retained Perella Weinberg Partners (“Perella”) to advise ETE on
solutions to its potential leverage issues.147 One of the solutions Perella presented
was the Proposed Public Offering.148 Perella and ETE explored other options too,
such as selling assets and issuing common units, but concluded that those were not
viable. 149 Perella and ETE also raised the possibility of cutting distributions,150
145
JTX-0382; Trial Tr. at 310:24–312:1(Warren).
146
In re Energy Transfer Equity, L.P. Unitholder Litig., 2018 WL 2254706, at *22–25 (Del. Ch.
May 17, 2018), aff’d sub nom. Levine v. Energy Transfer L.P., 223 A.3d 97 (Del. 2019).
147
Trial Tr. at 152:8–153:16(Garner); JTX-0382.0001; Trial Tr. at 435:13–19(McReynolds); id.at 458:4–459:19(McReynolds).
148
JTX-0330.0033; JTX-0426.0034; Trial Tr. at 340:9–343:2(Warren).
149
Trial Tr. at 436:19–437:14(McReynolds); id. at 438:19–439:13(McReynolds); id. at 1654:21–
1656:18(Bednar); Long Dep. at 96:9–19 (2019); Trial Tr. at 384:12–385:10(Warren).
150
Trial Tr. at 339:1–340:3(Warren); id. at 1662:18–21(Bednar); JTX-0400.0001.
28
though they deemed that “an option of last resort” due to the potential negative
“longer-term implications” of cutting distributions, including on ETE’s credit
rating. 151 However, ETE received positive responses from its credit rating agencies
when it previewed to them the Proposed Public Offering.152 As originally conceived,
participants would forgo distributions on their common units for a set period.153 In
exchange for forgoing such distributions, participants would receive preferred units
that paid discretionary distributions of up to 40% of the distributions paid on
common units.154 At the end of the period, the distributions on participants’ common
units would become unrestricted, and the participants’ preferred units would convert
into additional common units, calculated based on the amount of distributions that
participants forwent. 155
Perella first presented the Proposed Public Offering to ETE at a meeting with
Warren on January 27, 2016.156 As originally proposed, the offering did not feature
any distribution preference for participants. 157 Warren testified at trial that, at the
time, ETE had considered the possibility of a two-year distribution cut, even though
151
Trial Tr. at 1648:22–1652:8(Bednar); id. at 438:3–18(McReynolds); id. at 1565:3–
17(Bramhall); id. at 301:14–23(Warren); McGovern Dep. at 32:24–34:9 (2018); JTX-0598.0016;
Long Dep. at 65:23–67:3 (2016); JTX-0399.0006.
152
JTX-0679.0002.
153
JTX-0330.0033.
154
Id.155
Id.156
Id.; JTX-0426.0034; Trial Tr. at 340:9–343:2(Warren).
157
JTX-0330.0033; JTX-0426.0034; Trial Tr. at 340:9–343:2(Warren).
29
distribution cuts are “the last bucket you go to.”158 As the holder of over 190 million
ETE units, however, Warren would lose over $200 million per year in personal cash
flow if ETE eliminated distributions. 159 Warren therefore proposed that Perella add
a distribution preference for participants in the offering. 160 In response, ETE’s
advisors revised the offering to feature an 11 cent per quarter distribution
preference, 161 a reduction from ETE’s historic distribution of 28½ cents per
quarter. 162
Despite Warren’s support for a distribution preference, ETE’s CFO, Welch,
expressed reservations. 163 Welch expressed to Warren and other ETE executives
that he believed there was no justification for a distribution preference, and that a
distribution preference would create “a superpriority class of holders versus all other
common holders.”164 Welch believed that Warren was “looking to . . . ensure that
there was a certain amount of cash, annual cash flow, that he would receive with
certainty to, basically, support his living” if ETE cut distributions. 165 Warren
insisted, however, that “there needed to be a minimum level of certainty on cash
158
Trial Tr. at 339:1–340:8(Warren); id. at 347:9–348:4(Warren); see also id. at 426:4–
429:19(Welch).
159
Trial Tr. at 334:18–335:24(Warren); id. at 388:6–389:24(Welch).
160
JTX-0434.0001; Trial Tr. at 464:24–466:6(McReynolds); id. at 399:3–401:24(Welch).
161
JTX-0434.0001; JTX-0457.0008; Trial Tr. at 464:24–466:6(McReynolds); id. at 1668:4–
1671:5(Bednar).
162
JTX-0430.0001.
163
Trial Tr. at 399:3–401:24(Welch).
164
Id. at 390:22–393:3(Welch); id. at 398:21–400:10(Welch); id. at 401:4–24(Welch).
165
Id. at 402:1–14(Welch); id. at 428:14–429:19(Welch).
30
flow on a going-forward basis, if he was to support” an offering. 166 Warren asserted
that “the preferred payment was a necessary core part of [the] program . . . which
was needed for him to support it.” 167
On February 8, 2016, Perella presented a revised proposal to the ETE
Board. 168 This time, the proposal featured the 11-cent cash distribution preference,
which would be paid regardless of whether ETE cut distributions on common
units.169 One ETE director, John McReynolds, questioned whether the offering
would “really save up to $1B[illion] if distributions actually later get cut.”170 At
trial, he acknowledged that if distributions were cut to zero, the offering would not
save ETE any money during that period. 171
In its February 8 presentation, Perella also posed distribution cuts as a
potential alternative that would have “[n]o execution risk” and would “[s]atisf[y]
rating agencies.”172 ETE sought additional advice from a second financial advisor,
Goldman Sachs & Co. (“Goldman Sachs”), who gave a February 12, 2016
presentation suggesting a “[s]ubstantial distribution / dividend cut” if the Merger
closed, among other alternatives.173 Goldman Sachs advised that a distribution cut
166
Id. at 389:5–24(Welch).
167
Id. at 390:22–391:12(Welch).
168
JTX-0482.0002–.0016; Trial Tr. at 343:3–10(Warren).
169
JTX-0482.0008, .0012; Trial Tr. at 343:3–345:10(Warren).
170
JTX-0465.0003.
171
Id.; Trial Tr. at 468:13–17(McReynolds).
172
JTX-0486.0004–.0005.
173
JTX-0506.0003.
31
was “likely to be well received by [the] market given current trading levels and
investor concerns.”174 In February 2016, ETE also ran models evaluating
distribution cuts. 175
ETE sent the terms of the Proposed Public Offering to Williams on
February 12, 2016. 176 ETE was not able to complete the offering unless Williams
instructed its independent registered accounting firm to provide consent to the
incorporation by reference of the firm’s report on Williams’ audited financial
statements.177 ETE therefore requested Williams’ auditor’s consent to file with the
SEC.178 The next day, on February 13, 2016, Williams responded that it believed
the Proposed Public Offering would violate the Merger Agreement and that the
Board was required to assess it. 179 Chappel also noted that Williams “reviewed
potential additional actions that we could take to strengthen the WPZ and [Williams]
credit profile.”180
In the meantime, the ETE Board met again on February 15, 2016, and
discussed the Proposed Public Offering. 181 At this meeting, the ETE Board revised
174
Id.175
JTX-0461.0002; JTX-0475.0002; JTX-0579; JTX-0500.0001; Trial Tr. at 1579:7–
1583:15(Bramhall).
176
JTX-0507; Trial Tr. at 52:6–13(Chappel).
177
Stip. ¶ 25.
178
Trial Tr. at 52:14–20(Chappel).
179
JTX-0517.0001; Trial Tr. at 208:11–20(Van Ngo); id. at 53:10–22(Chappel); JTX-0537.0002.
180
JTX-0517.0001.
181
JTX-0535; JTX-0536.0001–.0002.
32
the distribution preference to include an additional 17½ cents of accrual credits,
toward new units, per quarter, in addition to the 11-cent cash distribution. 182 This
had the effect of preserving ETE’s historic distribution of 28½ cents for Proposed
Public Offering participants, and therefore eliminated the risk of a distribution cut
for those participants. Although ETE asserts that it added the accrual credits to
ensure that the Proposed Public Offering would be marketable,183 the elimination of
downside risk was an advantage to ETE insiders, including Warren and ETE senior
management, who had pledged to “commit their units to th[e] program.” 184
ETE made this change itself before consulting Perella. 185 After ETE informed
Perella of the change, a Perella analyst remarked that “[i]f cash distributions on
common units are cut to zero, the preferred [payment in kind (“PIK”)] distributions
don’t conserve cash in and of themselves—rather, they represent a wealth transfer
from non-participating to participating units.” 186
b. Williams Declines to Consent to the Proposed Public
Offering
The Williams Board asked its financial advisors, Lazard and Barclays, to
assess the Proposed Public Offering. 187 On February 17, 2016, both advisors
182
JTX-0535.0019; JTX-0538.0002; Trial Tr. at 351:1–352:10(Warren).
183
ETE OB at 26–27; Trial Tr. at 1656:19–1658:3(Bednar); id. at 441:17–442:11(McReynolds);
id. at 450:3–21(McReynolds).
184
JTX-0518.0001; JTX-0512.0001.
185
Trial Tr. at 1677:2–19(Bednar); JTX-0532.0001.
186
JTX-0537.0001.
187
Trial Tr. at 53:10–55:1(Chappel).
33
recommended that the Williams Board decline to consent.188 Although Williams
believed that the Proposed Public Offering would have a positive impact on ETE’s
leverage issues, 189 the advisors determined that because the Proposed Public
Offering would allow participants to benefit disproportionately over
nonparticipating unitholders (including future ETC stockholders) in the event of a
distribution cut, it “would have an extraordinary detrimental impact on Williams
shareholders.”190 Chappel agreed with this analysis.191 The Williams Board
therefore declined to provide consent.192
On February 18, 2016, Williams informed ETE that it would not provide
consent. 193 Although ETE contends that it was surprised by this news,194 ETE’s
CFO admitted in the Unitholder action that Chappel had already informed him on
February 13, 2016 that “he was not going to allow [Williams Co.’s] auditors to
provide the consent.”195 The next day, Chappel and Williams’ general counsel met
with Welch and ETE’s general counsel, and Chappel stated that Williams was open
to other solutions, “including an offering that Williams shareholders could
participate in on an equivalent basis to ETE shareholders, one that would treat
188
Id. at 54:5–22(Chappel).
189
Id. at 113:5–16(Chappel).
190
Id. at 54:9–22(Chappel); id. at 162:22–168:23(Garner); JTX-0551.0008, .0010.
191
Trial Tr. at 54:23–55:1(Chappel).
192
Stip. ¶ 25. JTX-0549.0003.
193
Trial Tr. at 54:5–55:16(Chappel); JTX-0561.0002.
194
ETE OB at 27.
195
Energy Transfer, 2018 WL 2254706, at *6.
34
Williams shareholders fairly and so they would be in the same class as ETE
shareholders.”196
ETE refused this proposal.197 Instead, ETE devised the private Preferred
Offering, featuring a similar distribution preference, which I found in the Unitholder
action was “a hedge meant to protect insiders from the anticipated bad effects of the
coming merger.” 198
c. ETE Makes the Private Preferred Offering
Unlike the Proposed Public Offering, the private Preferred Offering did not
require the consent of Williams’ auditors. 199 On February 25, 2016, a few days
before the ETE Board approved the Preferred Offering, Warren was asked on
earnings call about potential distribution cuts at ETE and an ETE affiliate, ETP.200
Warren stated that there were “no contemplated distribution cuts at ETP
whatsoever.” 201 With respect to ETE, however, Warren stated that although “ETE
is very healthy” and “distribution cuts are not required,” “everybody knows
obviously that that’s an option.”202 Warren added that “[i]t would be one of the last
[buckets] that we would reach to, but it’s certainly possible.”203
196
JTX-0561; Trial Tr. at 56:1–57:7(Chappel).
197
Trial Tr. at 57:8–14(Chappel).
198
Energy Transfer, 2018 WL 2254706, at *1.
199
Id. at *8.
200
JTX-0595.0013; Trial Tr. at 355:9–357:8(Warren).
201
JTX-0595.0013.
202
Id.
203
Id.
35
The next day, on February 26, 2016, Warren called an ETE Board meeting to
discuss the Preferred Offering.204 The ETE Board met on February 28, 2016 and
approved the Preferred Offering, 205 in a process which I found in the Unitholder
action breached ETE’s limited partnership agreement because it involved, among
other things, a “fatally flawed” conflicts committee and “untrue” board
resolutions.206 ETE instructed its counsel not to inform Williams of the Preferred
Offering until after it closed.207
ETE closed the Preferred Offering on March 8, 2016.208 The Preferred
Offering created a new class of equity—Series A Convertible Preferred Units 209—
which featured an increased distribution preference of 28½ cents.210 17½ cents of
this was to be an accrual credit toward PIK distributions, saving ETE cash if common
unit cash distributions continued without diminution.211 Unlike the Proposed Public
Offering, the Preferred Offering was made available only to ETE insiders.212
Warren, McReynolds, and Ray Davis, ETE’s co-founder, received over 85% of the
204
JTX-0606.
205
Id. at .0002; JTX-0638; Trial Tr. at 357:9–360:2(Warren).
206
Energy Transfer, 2018 WL 2254706, at *12, 20, 24–25.
207
Trial Tr. at 209:2–15(Van Ngo); Katz Dep. at 64:4–65:10; McReynolds Dep. at 191:11–192:17
(2019).
208
Stip. ¶ 26.
209
Id.210
JTX-0713.0008; Trial Tr. at 169:9–172:3(Garner); id. at 490:13–492:11(Ruback).
211
JTX-1218.0045–.0046.
212
Trial Tr. at 169:9–170:10(Garner); JTX-0713.0008.
36
total preferred units. 213 Those to whom the Preferred Offering was extended were
invited to participate pro rata based on their holdings of existing units.214 Warren
and McReynolds participated in the Preferred Offering with respect to substantially
all of their units.215
The market’s reaction to the Preferred Offering was mixed. One ETE investor
suggested that the Preferred Offering could be a “sub-rosa plan to give management
the ability to preserve payments to itself while shutting off distributions to common
unit-holders entirely,” which “would not be consistent with [ETE’s] well-earned
reputation.”216 An analyst wrote to McReynolds that “it looks to me (and the market,
apparently) that [Warren] has insulated himself from a distribution cut, but ETE
common holders are still on the hook for a potential distribution cut should one be
required.”217
Williams and its stockholders were also concerned. One Williams
stockholder admonished that “[t]he insiders at ETE are enriching themselves at the
expense of the rest of the ETE shareholders” and decried the Preferred Offering as
“something similar” to a “fraudulent conveyance.” 218 Garner testified that he
213
Trial Tr. at 1648:16–1750:18(Atkins).
214
JTX-1218.0045.
215
Trial Tr. at 1748:16–19(Atkins); id. at 449:2–450:10(McReynolds); JTX-1218.0046.
216
JTX-0702.0001.
217
JTX-0705.0001. Trial Tr. at 474:9–24(McReynolds).
218
JTX-0711.0001–.0002; Trial Tr. at 475:1–17(McReynolds).
37
believed the Preferred Offering was “more outrageous than the prior one,” 219 and
Chappel testified that he believed it “was a complete game changer with respect to
what was bargained for in the merger agreement.”220 Likewise, Stoney described
the Preferred Offering “as a sweetheart deal” for “the CEO of ETE and some small
selected group of people.” 221
Meanwhile, ETE’s credit ratings agencies responded positively to the
Preferred Offering. 222 Indeed, Fitch, one of the three major rating agencies,
described the Preferred Offering as “a proactive step in enhancing [ETE’s] liquidity
and managing acquisition leverage in a credit neutral manner.” 223
d. ETE Announces Plans to Cut Distributions
In February and April 2016, Williams provided ETE with financial
projections. 224 The February 10, 2016 projections, which were ratings agency
updates, included both base-case and downside case forecasts. 225 Dylan Bramhall,
ETE’s Vice President of Financial Planning and Analysis, 226 testified at trial that
these forecasts indicated to ETE that Williams had “bottomed out” from late 2015
declines, “the numbers had stepped back up a little bit,” and ETE “felt that business
219
Trial Tr. at 169:16–18(Garner).
220
Id. at 58:21–59:10(Chappel).
221
Id. at 866:17–867:5(Stoney).
222
JTX-0716.
223
Id. at .0001; Energy Transfer, 2018 WL 2254706, at *14.
224
JTX-0495.
225
Id. at .0010, .0022.
226
Trial Tr. at 1564:17–20(Bramhall).
38
was performing well enough to cover current distribution levels.”227 Bramhall
testified that ETE understood the base-case projections to reflect Williams’ view “as
[to] what was most expected.”228
In late March and early April 2016, ETE asked Williams to provide updated
projections to incorporate in an amendment to the S-4. 229 Williams sent updated
projections to ETE on April 7, 2016.230 Williams’ April 7 projections were bleaker
than its projections from February 10. Compared to the February 10 base-case
forecast, Williams’ April 7 forecast projected lower distributable cash flows for
WPZ—by 15.8% in 2016 and 21.7% in 2017.231 But when compared against the
February 10 downside forecast, the April 7 projections for WPZ’s distributable cash
flows were lower by just 5.9% in 2016 and 11.3% in 2017.232
When Chappel sent the projections to ETE, he presented them as “based on
the Downside Case that we presented . . . in February.”233 However, Long asked
Chappel on April 15, 2016 whether the updated projections “represent [Williams’]
most realistic projections,” or whether there were additional “adjustments that
should be made to the projections to reflect [Williams’] most realistic
227
Id. at 1571:6–1572:5(Bramhall).
228
Id. at 1632:16–1633:3(Bramhall).
229
Id. at 1572:6–20; JTX-0807.
230
JTX-0846.
231
Plaintiff’s Demonstrative Ex. 5 at 3.
232
Id. at 4.
233
JTX-0846.0001.
39
projections.” 234 Chappel replied that Williams viewed the April 7 projections “as
appropriately capturing a discount for customer credit risk, a realistic risk in this
environment,” and that he “d[id] not believe that additional adjustments [were]
necessary.” 235 Bramhall testified that the projections in the April 7 update were a
“surprise” that “caught everyone off guard” and demonstrated to ETE that “it was
going to be difficult for WPZ to maintain [its] current distribution levels and keep
leverage below five times.” 236 But he also acknowledged that by this point, ETE
had already been “looking at what would happen on the [Williams] downside case
as well.”237
In addition to Williams’ declining projections, ETE also revised its synergies
estimates downward between February and April 2016. On February 23, 2016, ETE
estimated Merger synergies between $195–$879 million annually.238 ETE increased
its synergies estimate to between $403–889 million on March 9, 2016, 239 but on
April 15, 2016, it reduced its base-case estimate to $126 million. 240
On April 18, 2016, six weeks after closing the Preferred Offering, ETE
announced publicly in an amendment to the S-4 that if the Merger closed, it expected
234
JTX-0963.0001.
235
Id.
236
Trial Tr. at 1572:6–1575:6(Bramhall).
237
Id.
238
JTX-0581.0003.
239
JTX-0686.0004.
240
JTX-0957.0002.
40
to eliminate common unit distributions for two years.241 ETE restated this
expectation in the amended S-4 filed on May 24, 2016.242
The parties dispute what precipitated this announcement. Williams contends
that ETE had anticipated a potential distribution cut since January 2016, shortly after
the energy market began to crater.243 In contrast, ETE asserts that it only decided to
cut distributions in April 2016, after a confluence of the bleaker financial projections
from Williams on April 7, 2016 and the decreased synergies estimates in April
2016. 244
The evidence presented at trial demonstrated that ETE anticipated the
potential distribution cuts as early as January 2016. As I noted above, Warren and
Welch both raised the possibility of distribution cuts in January 2016, including
specifically a two-year distribution cut mirrored by the anticipated cut that ETE
ultimately announced. 245 Warren also testified that when Perella first presented the
Proposed Public Offering in late January 2016, ETE had been considering the
possibility of a two-year distribution cut.246 In February 2016, both of ETE’s
advisors, Goldman Sachs and Perella, suggested distribution cuts as possible
241
JTX-0992.0046; Trial Tr. at 362:17–364:1(Warren).
242
JTX-1218.0046; Trial Tr. at 483:3–11(McReynolds).
243
Pl.’s and Countercl. Def.’s Posttrial Br., Dkt. No. 630 at 37–43 [hereinafter “Williams OB”].
244
ETE OB § II.D.4.
245
See supra notes 123–24, 128–29 and accompanying text.
246
See supra note 158 and accompanying text.
41
alternatives,247 and ETE ran models involving distribution cuts.248 On the
February 25, 2016 earnings call, Warren definitively ruled out a distribution cut at
ETP, but equivocated regarding an ETE distribution cut.249
ETE’s evidence that it only began to expect post-closing distribution cuts in
April 2016 is unconvincing. When Long testified at the Unitholder trial that ETE
only expected a distribution cut after it received Williams’ April 7 projections, he
asserted that the new projections showed a “huge” “50 percent” drop in distributable
cash flow.250 That was incorrect: As discussed above, even when compared to the
more positive February 10 base-case projections instead of the downside case
projections, the drop was actually 15.8% in 2016 and 21.7% in 2017.251 When
deposed in this matter, Long acknowledged that the drop “wasn’t nearly as large” as
what he had previously testified.252 Bramhall also admitted at trial that what Long
characterized “as a 50 percent decrease . . . was, in fact, a 21 percent decrease.”253
Moreover, although Bramhall testified on direct examination that ETE did not
begin to expect distribution cuts until early April 2016 and that before then,
“executives at Energy Transfer were very opposed to distribution cuts,” 254 he
247
See supra notes 172–74 and accompanying text.
248
See supra note 175 and accompanying text.
249
See supra notes 200–03 and accompanying text.
250
JTX-1387.0274:16–.0275:4 (Long Unitholder testimony).
251
See supra note 231 and accompanying text.
252
Long Dep. at 164:23–165:12 (2019).
253
Id. at 1594:6–20(Bramhall).
254
Id. at 1565:3–12(Bramhall); id. at 1567:5–12(Bramhall).
42
admitted on cross-examination that distribution cuts were “above [his] pay grade”
and he “did not know what the executive team was discussing.” 255 Bramhall also
conceded at trial that, even before receiving Williams’ April 7 projections, ETE had
already incorporated Williams’ February 10 downside projections—which more
closely approximated the April 7 projections—into its S-4 projections.256
As of the Closing Date, ETE continued to state that it expected to cut
distributions on common units, including common units held by former Williams
stockholders, to zero until March 31, 2018.257 Meanwhile, ETE expected that
participants in the Preferred Offering would receive 28½ cents in value per quarter
during the same period—including up to 11 cents in cash, 258 which would amount
to over $150 million in cash flow for Warren personally. 259
6. Williams Defends Stockholder Actions
Between signing and closing, Williams faced multiple stockholder actions
challenging the Merger. Williams managed to prevent each of them from blocking
the Merger by obtaining either a dismissal or settlement.260
255
Id. at 1576:4–1578:19(Bramhall).
256
Id. at 1572:6–20(Bramhall).
257
See JTX-1218.0046.
258
Id. at .0045–.0046, .0054.
259
Trial Tr. at 371:20–373:1(Warren); JTX-1218.0046.
260
In re The Williams Cos., Inc. Merger Litig., No. 11844-VCG (Del. Ch. dismissed July 19,
2017); In re The Williams Cos., Inc. Stockholder Litig., No. 11236-VCG (De. Ch. dismissed Mar.
31, 2016); City of Birmingham Retirement & Relief Sys. v. Armstrong, No. 16-17-RGA, Dkt. No.
59, (D. Del. dismissed Mar. 7, 2016); Bumgarner v. Williams Cos., Inc., 2016 WL 1717206 (N.D.
Okla. Apr. 28, 2016).
43
One of those lawsuits, brought by Williams stockholder and former executive
John Bumgarner,261 was at issue in this litigation. ETE contends that Armstrong,
who was “tasked with executing the Board’s directive to close the transaction,”262
flouted this directive by working covertly with Bumgarner to support his lawsuit and
put a stop to the Merger.263 But the evidence presented at trial demonstrated that,
although Armstrong did regularly communicate with Bumgarner, he did so in an
attempt to allay Bumgarner’s opposition to the Merger, not in connection with a
clandestine plot to thwart it. 264
Bumgarner had worked at Williams for approximately 25 years, retiring
around 2001.265 At one time, Bumgarner was in charge of mergers and acquisitions
at Williams and he was an advisor to the then-CEO. 266 After the Merger was
announced, Bumgarner approached Armstrong and threatened litigation regarding
the synergies estimates contained in joint press release announcing the Merger.267
In particular, Bumgarner took issue with a $2 billion estimate made by ETE that was
261
See generally Bumgarner, 2016 WL 1717206.
262
Trial Tr. at 657:2–7(Armstrong).
263
ETE OB § II.B.1.
264
This is not to say that Armstrong’s tactics in attempting to assuage Bumgarner’s concerns
represented a model of corporate governance best practices.
265
Trial Tr. at 903:6–904:11(Bumgarner); id. at 620:6–23(Armstrong).
266
Id. at 903:11–904:11(Bumgarner); id. at 620:6–23(Armstrong).
267
Id. at 625:3–626:19(Armstrong); id. at 699:6–700:3(Armstrong); id. at 719:22–
720:3(Armstrong).
44
referenced in the press release. 268 As former colleagues, Armstrong and Bumgarner
were friends.269 Armstrong testified that, leveraging this relationship, he tried to
explain to Bumgarner that the $2 billion estimate came from ETE, and that the
Williams Board relied on its own synergies estimate of $200 million, which would
be disclosed in the S-4. 270
Armstrong did not notify Williams’ counsel of Bumgarner’s threats, though
he did inform the Chairman of Williams’ Board, Frank MacInnis. 271 At trial,
Armstrong testified that he did not notify Williams’ counsel because he thought that
it would lead to a counterproductive “very aggressive fight,” and he believed he
could “keep [Bumgarner] . . . at bay” in light of their personal and professional
relationship.272 Armstrong also testified that he believed that when the S-4 was filed,
it would “satisfy [Bumgarner’s] concerns.” 273 This is consistent with
contemporaneous emails: On January 11, 2016, Bumgarner emailed MacInnis and
Armstrong, challenging the S-4, and wrote, “I briefly jumped Alan about this matter
and got the ‘My hands are tied; I have to support the deal.’ response.” 274 Armstrong
268
Id. at 623:20–626:19(Armstrong); id. at 921:8–15(Bumgarner). Bumgarner’s concerns were
ultimately validated; as I discussed above, ETE and Williams later revised their synergies estimate
downward to $126 million. JTX-0957.0002.
269
Trial Tr. at 620:6–13(Armstrong); id. at 908:18–910:10(Bumgarner).
270
Id. at 624:6–24(Armstrong); id. at 919:15–19(Bumgarner).
271
Id. at 637:12–638:17(Armstrong).
272
Id. at 637:19–638:17(Armstrong).
273
Id. at 638:6–13(Armstrong).
274
JTX-0356.0002.
45
forwarded the thread to MacInnis and asked, “[d]o you think we should call him?
Or just let this run its course.” 275
From November 2015 through July 2016, Armstrong and Bumgarner met
approximately weekly. 276 Much of their communication occurred either in person
or via Armstrong’s personal email accounts; Armstrong testified that he was “pretty
careful to have most of [his] conversation[s] with [Bumgarner] in person.”277 The
bulk of the email communication between Armstrong and Bumgarner during this
time involved two of Armstrong’s personal email addresses at Gmail.com and
Cox.net. 278 In 2016, two days after being asked at a deposition whether he emailed
Bumgarner, Armstrong deleted his Gmail account, though he did not delete his
Cox.net account.279 At trial, Armstrong testified that he deleted the Gmail account
because it had been corrupted and was sending unsolicited spam messages to his
contacts, including Chappel.280 As discussed below, I find this testimony
unconvincing. 281
Although Armstrong deleted his Gmail account, ETE was able to uncover
much of his email communication by subpoenaing Bumgarner’s accounts. 282 On
275
Id. at .0001.
276
Trial Tr. at 621:7–13(Armstrong); id. at 910:12–14(Bumgarner).
277
Id. at 623:2–12(Armstrong).
278
Defendants’ Demonstrative Ex. 3.
279
JTX-1437.0008–.0009; Trial Tr. at 632:1–18(Armstrong).
280
Trial Tr. at 632:5–18(Armstrong).
281
See infra § II.E.
282
JTX-1394.
46
December 6, 2015, Bumgarner emailed Armstrong and requested Armstrong’s
“edits and corrections” to a document compiling purported factual errors in
Williams’ and ETE’s public statements about the Merger.283 According to the
document, the supposed errors suggested that it was “rational[] [to] conclude there
has been a deliberate attempt to deceive public investors on the part of the directors
of [Williams] and the investment banks that advised them.”284 Armstrong met with
Bumgarner in person to discuss the document,285 which later evolved 286 into a
federal securities class action complaint filed by Bumgarner.287
Before filing the federal complaint, Bumgarner emailed his lawyer, with
Armstrong blind-carbon-copied, and asked, “when can we file ? how can we also
join/help the Delaware cases ?”288 On December 26, 2015, Armstrong also answered
various factual questions from Bumgarner related to the joint press release.289
Bumgarner filed the lawsuit against Williams and ETE on January 14, 2016, alleging
federal securities violations and seeking to enjoin the Merger.290 After filing the
283
JTX-0273.0001.
284
Id. at .0004.
285
JTX-0275; JTX-0276.
286
Trial Tr. at 932:22–9:33:10(Bumgarner).
287
See generally JTX-0368.
288
JTX-0300.0003. This presumably referred to cases seeking to enjoin the Merger.
289
JTX-0320.
290
JTX-0368.0018.
47
lawsuit, Bumgarner continued to correspond with Armstrong about facts related to
the Merger.291
Bumgarner also obtained a copy of Armstrong’s notes to himself regarding
the S-4, and he emailed a document to the Wall Street Journal that mirrored the
structure and substance of those notes.292 Armstrong testified at his deposition293
and at trial that he did not recall supplying those notes to Bumgarner, though he
“t[ook] responsibility” at trial for the fact that Bumgarner “got ahold of th[e]
document[].”294 Bumgarner also sought Armstrong’s review of a draft letter to the
SEC reporting purported misleading statements and omissions in the S-4.295
Armstrong testified that he did not try to help Bumgarner with the lawsuit,
and merely attempted to “educate him on the synergies” and “show him where all
the public information was.”296 Likewise, Bumgarner testified that Armstrong did
not help with the lawsuit, had nothing to do with Bumgarner’s decision to sue, and
told Bumgarner that he did not “have a very good case.” 297 Bumgarner also testified
that Armstrong “played it straight,” behaved like a “Boy Scout,” and “represented
the company.” 298
291
JTX-0522; Trial Tr. at 947:14–19(Bumgarner); id. at 668:10–13(Armstrong).
292
Compare JTX-0223, with JTX-0252.
293
Armstrong Dep. at 156:13–161:7 (2019).
294
Trial Tr. at 631:3–14(Armstrong)
295
JTX-0801.
296
Trial Tr. at 626:3–627:2(Armstrong).
297
Id. at 906:15–20(Bumgarner); id. at 970:20–23(Bumgarner); id. at 971:15–972:3(Bumgarner).
298
Id. at 910:20–22(Bumgarner).
48
Ultimately, Bumgarner’s claims were each dismissed or settled before the
agreed-upon June 28, 2016 Closing Date. On April 28, 2016, several of
Bumgarner’s claims were dismissed, 299 and his remaining claims were settled on
June 16, 2016. 300
Although the evidence demonstrates that Armstrong’s communications with
Bumgarner were intended to assuage concerns about the Merger synergy
disclosures, Armstrong did communicate anti-merger sentiments to others that were
then relayed to Bumgarner.301 In a December 22, 2015 email, Keith Bailey,
Williams’ former CEO, wrote to Bumgarner, “[h]eard this morning that Alan
[Armstrong] told the guy I had breakfast with that he had a 7/6 majority the night
before. That the activist investors threatened to sue if the deal wasn’t approved and
that flipped the two directors. . . . Alan also told this guy that at the December board
meeting he ‘unloaded’ on the directors who supported the deal for being
cowards.”302 However, when Bailey encouraged Armstrong to “give [ETE] the out”
to make it easier to address potential credit issues at Williams, Armstrong demurred,
stating that he preferred “other levers . . . to address ratings agency concerns.”303
299
Bumgarner, 2016 WL 1717206, at *6.
300
JTX-1295.
301
See JTX-0313.0001.
302
Id.303
JTX-0369.0001.
49
Bailey subsequently authored two letters to Williams stockholders encouraging them
to vote down the Merger.304
7. Williams Encourages Its Stockholders to Approve the Merger
Although some Williams directors and executives continued to question the
merits of the Merger during the energy market tohubohu,305 the record demonstrates
that Williams worked to obtain stockholder approval of the Merger and pressed
towards closing.
On November 24, 2015, the Williams Board recommended that Williams
stockholders vote for the Merger. 306 As I noted above, after the energy market began
to deteriorate, the Williams Board issued a press release on January 15, 2016
announcing that it was “unanimously committed to completing the transaction with
[ETE] per the [M]erger [A]greement . . . as expeditiously as possible and delivering
the benefits of the transaction to Williams’ stockholders.” 307 Williams publicly
reaffirmed this position on February 17, 2016,308 although two directors expressed
disagreement internally about the use of the word “unanimous,” which they
described as “trickery.” 309 Williams also sued ETE on April 6 and May 13, 2016,
seeking specific performance of the Merger Agreement, and issued press releases in
304
JTX-0580; JTX-1244.
305
See supra at 26–27.
306
Stip. ¶ 33.
307
JTX-0379.0001.
308
JTX-0553.0004.
309
JTX-0545.0001.
50
connection with those lawsuits stating that the Williams Board was “unanimously
committed to enforcing its rights under the merger agreement.”310
On May 24, 2016, the parties filed an updated S-4 with the SEC. 311 In the
S-4, the Williams Board recommended that stockholders vote for the Merger, though
it disclosed that certain Williams directors voted against the Merger and
“continue . . . to disagree with the recommendation of” the majority of the Williams
Board. 312 On May 25, 2016, Williams scheduled a special stockholder meeting to
vote on the Merger and reaffirmed that Williams “remain[ed] committed to holding
the stockholder vote and closing the transaction as soon as possible.”313 On June 15,
2016, Williams restated its recommendation that the stockholders approve the
Merger. 314 The Williams Board committee that was responsible for overseeing the
Merger also conducted a week-long investor roadshow during which they made
in-person visits and phone calls to discuss the Merger with institutional investors
and other stockholders. 315
310
JTX-0826.0001; see also JTX-0935.0001; JTX-1179.0001.
311
JTX-1218.
312
Id. at .0029–.0031.
313
JTX-1221.0001.
314
JTX-1287.
315
Trial Tr. at 61:14–23(Chappel); Sugg Dep. at 334:21–335:9.
51
On June 27, 2016, Williams held a special meeting of its stockholders to
approve the combination with ETE.316 Over 80% of votes cast were in support of
the Merger.317
8. Latham Declines to Render the 721 Opinion
The Merger ultimately failed to close due to the failure of a condition
precedent: Latham’s determination that it could not render the 721 Opinion. This
determination ultimately became the basis for my decision in 2016 declining to
enjoin ETE from terminating the Merger Agreement. 318
At trial in 2016, ETE’s head of tax, Brad Whitehurst, testified that he had an
“epiphany” in March 2016 that the precipitous drop in the value of ETE’s units
during the market turmoil could trigger a tax liability.319 Whitehurst testified that,
when reviewing the draft S-4 in March 2016, he realized for the first time that the
number of ETC shares that ETE would receive in exchange for the $6 billion cash
component—the hook stock—was fixed, not floating. 320 He testified that he
believed the fixed nature of the hook stock could pose a potential Section 721 issue,
and therefore brought the issue to Latham’s attention.321
316
Stip. ¶ 33.
317
Id.
318
See generally Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch.
June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017).
319
Williams Cos., 2016 WL 3576682, at *12.
320
JTX-1304.0038 at 150:19–151:23 (Whitehurst 2016 trial testimony).
321
JTX-1304.0041 at 162:23–163:22 (Whitehurst 2016 trial testimony).
52
The record in this trial proved Whitehurst’s 2016 testimony to be false.
Instead, it was Darryl Krebs, a vice president in ETE’s tax department who reported
to Whitehurst, who first identified that the hook stock was fixed. Krebs testified that
when he reviewed the S-4 in March 2016, he noticed that ETE’s hook stock appeared
to be fixed at 19% of ETC shares.322 This “stuck out to [Krebs] as a little surprising,”
so he raised it with Whitehurst, who reported back to Krebs a week later that the
hook stock was indeed fixed at 19% of ETC shares. 323 Whitehurst therefore asked
Krebs to “think about it and see if there’s any other implications.” 324
On March 28, 2016, Krebs emailed Whitehurst with the subject line, “Disaster
or Opportunity,” and wrote that he “was thinking about the ETC share issue some
more and another potential issue occurred to [him].” 325 Krebs raised the possibility
that the hook stock could pose “a disguised sale issue under [Section] 721,” and
asked whether Latham had “looked at / evaluated this potential outcome in their 721
[O]pinion.”326 He recommended that Latham assess this issue, and added that if
Latham could not issue the 721 Opinion, “we can’t meet all of the conditions
required to complete the merger,” and Williams “will either have to renegotiate or
322
Trial Tr. at 1080:20–1081:17(Krebs); id. at 1162:8–17(Whitehurst).
323
Id. at 1081:11–1082:12(Krebs); id. at 1162:8–1165:7(Whitehurst).
324
Id. at 1082:13–18(Krebs); id. at 1164:18–1165:7(Whitehurst).
325
JTX-0757.0001.
326
Id.53
the merger can’t be completed.”327 Krebs concluded his email by observing that
“[m]aybe there is a silver lining to the issue identified today.” 328
The next day, on March 29, 2016, Whitehurst called a Latham tax partner,
Tim Fenn, and asked that Latham investigate the issue.329 Latham then undertook
an “all hands on deck” analysis, during which it “pull[ed] in all of the associates in
Houston to start working on the transaction and doing research.” 330 In April 2016,
Latham devoted over 1,000 hours to the Section 721 issue. 331 Another partner at
Latham who worked on the matter, Larry Stein, described the task as “among the
most intense, if not the most intense process” he had experienced in his entire
career.332 While conducting its analysis, Latham participated in six calls with ETE’s
deal counsel, Wachtell, to “pressure test” Latham’s analysis.333 Stein and Fenn each
testified that these conversations with Wachtell reinforced Latham’s confidence in
its analysis that the 721 Opinion was problematic.334
In addition, on April 7, 2016, ETE retained William McKee, a tax attorney at
Morgan Lewis & Bockius (“Morgan Lewis”), to provide a second opinion and
327
Id.328
Id.329
Trial Tr. at 1462:1–13(Fenn); id. at 1129:24–1130:7(Whitehurst).
330
Id. at 1465:1–16(Fenn); id. at 1360:10–24(Stein).
331
Id. at 1465:1–1466:12(Fenn).
332
Id. at 1360:10–24(Stein); id. at 1468:10–1469:2(Fenn).
333
JTX-0837; JTX-0847; JTX-0848; JTX-0876; JTX-0892; JTX-0990; Trial Tr. at 1372:19–
1373:20(Stein); id. at 1435:9–1436:1(Stein); id. at 1485:23–1488:5(Fenn).
334
Trial Tr. at 1372:19–1373:20(Stein); id. at 1485:23–1488:22(Fenn).
54
determine whether there was a solution to the Section 721 issue. 335 McKee
concluded on April 11, 2016 that he would not be able to render a should-level 721
Opinion, albeit for reasons different than Latham’s.336 McKee then discussed his
conclusion with Latham. 337
On April 12, 2016, Latham reached a “tentative conclusion” that it could not
render the 721 Opinion, and then informed Williams’ deal counsel at Cravath.338
Less than three hours later, Cravath called Latham, disagreeing with Latham’s
conclusion, and stating that it believed it could render a “will-level” 721 Opinion.339
Cravath also discussed the issue with McKee the next day, at Whitehurst’s
request.340
Despite disagreeing with Latham’s assessment, Cravath proposed two
alternatives to Latham on April 14, 2016 that it contended would resolve the
Section 721 issue.341 Latham analyzed these proposals and, after consulting with
Wachtell and Morgan Lewis,342 determined that neither proposal would solve the
335
Id. at 1137:18–1138:3(Whitehurst); JTX-1306.0060 at 568:20–570:21 (McKee 2016 trial
testimony).
336
JTX-1306.0061 at 574:2–14 (McKee 2016 trial testimony).
337
Trial Tr. at 1484:23–1485:10(Fenn); id. at 1372:21–1373:20(Stein); id. at 1437:22–
1438:8(Stein); id. at 1147:13–20(Whitehurst).
338
JTX-1531; Trial Tr. at 1376:18–1377:15(Stein); Stip. ¶ 28.
339
JTX-0881.0001; JTX-0884.0001.
340
JTX-1306.0062 at 578:10–582:2 (McKee 2016 trial testimony); Trial Tr. at 1143:15–
1144:2(Whitehurst).
341
JTX-0950.
342
Trial Tr. at 1386:4–1391:11(Stein); id. at 1488:6–13(Fenn); JTX-0990; JTX-0877.0013–.0014;
JTX-0993; JTX-1119.
55
issue. 343 Latham reasoned that, because the proposals would not alter the economics
of the deal (which Cravath acknowledged 344), they would conflict with a line of tax
cases declining to give weight to non-economic amendments to transactions made
solely to avoid taxation.345
On April 18, 2016, the parties filed an Amendment to the Form S-4, stating
that “Latham & Watkins LLP has recently advised ETE that if the closing of the
merger were to occur as of the date of this proxy statement/prospectus it would not
be able to deliver the 721 Opinion.” 346
In late April 2016, Williams sought its own second opinion from Eric Sloan
of Gibson, Dunn & Crutcher.347 After three weeks of analysis, Sloan initially
determined that “it is tough to get to a should,” 348 though he concluded the next day
in a “close call”349 that he would be able to render a “weak should.” 350
On May 13, 2016, Williams sued ETE seeking to enjoin it from terminating
the Merger Agreement based on the failure of the 721 Opinion, which I denied on
343
Trial Tr. at 1379:13–1384:2(Stein); id. at 1481:21–1482:18(Fenn); id. at 1151:18–
24(Whitehurst); JTX-0986.0002–.0003; Williams Cos., 2016 WL 3576682, at *15–16.
344
Trial Tr. at 1008:1–4(Needham); JTX-1304.0015 at 58:8–17 (Van Ngo 2016 trial testimony).
345
See Comm’r v. Ct. Holding Co., 324 U.S. 331 (1945); Trial Tr. at 1380:16–1382:6(Stein); id.at 1404:12–1407:3(Stein); id. at 1440:22–1441:11(Stein); id. at 1150:6–1151:3(Whitehurst).
346
Stip. ¶ 29.
347
JTX-1053.
348
Trial Tr. 1052:5–8(Needham); JTX-1170.0001.
349
JTX-1199.0002.
350
JTX-1177.0001.
56
June 24, 2016 after trial.351 In my post-trial opinion denying specific performance,
I found that Latham’s determination that it would be unable to deliver the 721
Opinion was made in good faith and was not improperly motivated by any pressure
from ETE to avoid closing the Merger.352 I further held that because the 721 Opinion
was a condition precedent to closing, Williams was not entitled to an injunction
prohibiting ETE from terminating the Merger Agreement after the passage of the
Closing Date. 353
9. ETE Terminates the Merger After the Failure of the 721 Opinion
Williams and ETE had agreed to meet on June 28, 2016 at 9:00 AM to close
the Merger. 354 On June 28, 2016 at 9:00 AM, counsel for both parties met at the
offices of Wachtell, ETE’s counsel, with the necessary authority and all paperwork
to close, except for the 721 Opinion.355 The parties agree that Williams was ready,
willing, and able to close on June 28, 2016. 356 Counsel for ETE, however, informed
Williams that ETE would not close and would instead rely on the failure of the
condition precedent of Latham’s 721 Opinion. 357 Both before the market opened
and after it closed on June 28, 2016, Latham sent ETE and Williams letters indicating
351
Williams Cos., 2016 WL 3576682, at *2, 21.
352
Id. at *16.
353
Id. at *21.
354
Stip. ¶ 34.
355
Id. ¶ 35.
356
Id. ¶ 36.
357
Id.
57
that it could not deliver the 721 Opinion at those times. 358 On June 29, 2016, ETE
terminated the Merger Agreement due to the passage of the Outside Date under
Section 7.01(b)(i) of the Merger Agreement. 359
C. The Plaintiff Brings These Actions
This matter first came to me on April 6, 2016, when Williams filed an
expedited complaint challenging the Preferred Offering.360 Williams also filed a
lawsuit in Texas state court against Warren on the same day, also challenging the
Preferred Offering and contending that it constituted tortious interference with the
Merger Agreement.361 The Texas lawsuit was dismissed on May 24, 2016 because
it conflicted with a forum selection clause in the Merger Agreement. 362 On April
19, 2016, Williams filed an amended complaint in this matter. 363 ETE filed
counterclaims on May 3, 2016.364
On May 13, 2016, Williams initiated a separate action in this Court seeking
to enjoin ETE from terminating the Merger Agreement due to the failure of the 721
Opinion. 365 On May 24, 2016, the Defendants filed amended affirmative defenses
358
Id. ¶ 37.
359
Id. ¶ 38; Williams Cos., 2017 WL 5953513, at *8.
360
Verified Compl., Dkt. No. 1, Apr. 6, 2016.
361
JTX-0819.
362
JTX-1220.
363
Verified Am. Compl., Dkt. No. 48.
364
Def.’s Answer Pl.’s Verified Am. Compl., Affirmative Defenses, and Original Verified
Countercl., Dkt. No. 58.
365
Verified Compl., Dkt. No. 1, May 13, 2016.
58
and counterclaims, addressing both actions in this Court. 366 On June 14, 2016, I
ordered that the parties consolidate briefing and scheduling of the two actions to
litigate the issues concurrently. 367 I held a two-day expedited trial in both actions on
June 20 and 21, 2016 in Georgetown.
On June 24, 2016, I issued a post-trial memorandum opinion denying
Williams’ request to enjoin ETE from terminating the Merger because Latham’s
inability to deliver a 721 Opinion was a failure of a condition precedent under the
Merger Agreement.368 On June 27, 2016, the same day that Williams stockholders
approved the Merger, Williams appealed, and the Supreme Court affirmed my
Opinion in relevant part on March 23, 2017. 369
The parties thereafter filed amended claims and counterclaims.370 On
December 1, 2017, I granted Williams’ motion to dismiss ETE’s counterclaims in
part, denying ETE’s request for a breakup fee for the terminated Merger. 371 I denied
ETE’s motion for reargument of that decision on April 16, 2018. 372 On January 14,
2020, the parties filed cross-motions for summary judgment on the remaining
366
Defs.’ and Countercl. Pls.’ Am. Affirmative Defenses and Verified Countercl., Dkt. No. 79.
367
Scheduling and Coordination Order, Dkt. No. 101.
368
See generally Williams Cos., 2016 WL 3576682.
369
Williams Cos., 159 A.3d; see also JTX-1327.0001.
370
Verified Am. Compl., Dkt. No. 215; Defs.’ and Countercl. Pl.’s Second Am. and Suppl.
Affirmative Defenses and Verified Compl., Dkt. No. 219.
371
See generally Williams Cos., 2017 WL 5953513.
372
See generally Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2018 WL 1791995 (Del. Ch.
Apr. 16, 2018).
59
claims, which “centered largely on Williams’ right to the WPZ Termination Fee
Reimbursement.”373 ETE filed a motion for sanctions on May 20, 2020 (the “Motion
for Sanctions”).374 I issued an opinion on July 2, 2020 denying summary judgment
but resolving certain non-dispositive contractual issues, and I held that the Motion
for Sanctions was best dealt with at trial or a separate evidentiary hearing.375
I held a six-day trial in May 2021. The parties submitted post-trial briefing,376
and I heard oral argument on September 17, 2021. On September 23, 2021, the
parties submitted flowcharts outlining their claims, counterclaims, and defenses,377
and I considered the matter fully submitted as of that date.
II. ANALYSIS
A. Legal Standards
The disputes in this case primarily concern the application of the Merger
Agreement. “Delaware law adheres to the objective theory of contracts, i.e., a
contract’s construction should be that which would be understood by an objective,
reasonable third party.” 378 In practice, the objective theory of contracts requires the
373
Williams Cos., Inc. v. Energy Transfer LP, 2020 WL 3581095, at *10 (Del. Ch. July 2, 2020).
374
Defs. and Countercl. Pls.’ Mot. Sanctions or, Alternatively, an Evidentiary Hearing Spoliation
Evid., Dkt. No. 503 [hereinafter “Motion for Sanctions”].
375
Williams Cos., 2020 WL 3581095, at *21.
376
Williams OB; ETE OB; Pl.’s and Countercl.-Def.’s Posttrial Reply Br., Dkt. No. 640; Defs.’
and Countercl. Pls.’ Reply Br. Supp. Its Countercl., Dkt. No. 645.
377
See Dkt. Nos. 651, 652.
378
Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014) (quoting Osborn ex rel. Osborn v.
Kemp, 991 A.2d 1153, 1159 (Del. 2010)).
60
court to effectuate the parties’ intent,379 which, absent ambiguity, “must be
ascertained from the language of the contract.” 380 In other words, “[t]he Court will
interpret clear and unambiguous terms according to their ordinary meaning.”381
Where a contract is ambiguous, however, the Court “must look beyond the
language of the contract to ascertain the parties’ intentions.”382 “A contract is not
rendered ambiguous simply because the parties do not agree upon its proper
construction.”383 Instead, “ambiguity exists ‘[w]hen the provisions in controversy
are fairly susceptible of different interpretations or may have two or more different
meanings.’”384
B. Williams Proved a Claim for the WPZ Termination Fee Reimbursement
In my summary judgment opinion, I held that the Merger Agreement
permitted Williams the opportunity to recover the WPZ Termination Fee
Reimbursement even though ETE validly terminated the Merger due to the failure
of Latham’s 721 Opinion. 385 Section 5.06(f) of the Merger Agreement allocates the
risk regarding the WPZ Termination Fee Reimbursement as follows:
379
Zimmerman v. Crothall, 62 A.3d 676, 690 (Del. Ch. 2013).
380
Comet Sys., Inc. S’holders’ Agent v. MIVA, Inc., 980 A.2d 1024, 1030 (Del. Ch. 2008) (quoting
In re IAC/InterActive Corp., 948 A.2d 471, 494 (Del. Ch. 2008)).
381
GMG Cap. Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012)
(quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)).
382
Id. (quoting Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195
(Del. 1992)).
383
Id.384
Id. (quoting Eagle Indus., 702 A.2d at 1232).
385
Williams Cos., 2020 WL 3581095, at *11–14.
61
If the Company or Parent terminates this Agreement
pursuant to (A) Section 7.0l(b)(ii), (B) Section 7.01(d) or
(C) Section 7.01(b)(i) and, at the time of any such
termination pursuant to this clause (C) any condition set
forth in Section 6.01(b), 6.01(c), 6.01(d), 6.01(e), 6.03(a),
or 6.03(b) shall not have been satisfied, then, in each case,
Parent shall reimburse the Company for $410.0 million
(the “WPZ Termination Fee Reimbursement”) . . . . The
Company agrees that in no event shall the Company be
entitled to receive more than one WPZ Termination Fee
Reimbursement.386
ETE terminated the Merger Agreement under § 7.01(b)(i) due to the passage
of the Outside Date. 387 Therefore, ETE is liable to Williams for the WPZ
Termination Fee Reimbursement if “any condition set forth in Section 6.01(b),
6.01(c), 6.01(d), 6.01(e), 6.03(a), or 6.03(b)” was unsatisfied at the time ETE
terminated the Merger Agreement.388 Thus the parties allocated the risk of a failed
merger in light of Williams’ payment of the WPZ termination fee to facilitate the
Merger.
Williams asserts that four conditions set forth in those sections were unmet at
the time ETE terminated the Merger Agreement. First, Williams claims that ETE
breached the Capital Structure Representation by issuing the Preferred Offering.389
Section 6.03(a)(i) of the Merger Agreement required the Capital Structure
386
JTX-0209.0059 (§5.06(f)) (emphasis added).
387
See Williams Cos., 2020 WL 3581095, at *7.
388
JTX-0209.0059 (§5.06(f)).
389
Williams OB § I.A.
62
Representation to be true as of the Closing Date “except for any immaterial
inaccuracies.” 390
Second, Williams claims that ETE breached the Ordinary Course Covenant
and three Interim Operating Covenants by issuing the Preferred Offering. 391 Third,
Williams claims that ETE breached its obligation to use reasonable best efforts to
consummate the Merger, based on the failure of the 721 Opinion.392 Section 6.03(b)
of the Merger Agreement required ETE to “perform[] or compl[y]” with the
Ordinary Course Covenant, Interim Operating Covenants, and best efforts
obligations by the time of closing “in all material respects.”393 Finally, Williams
argues that ETE breached a representation that it knew of no facts that would prevent
the Merger “from qualifying as an exchange to which Section 721(a) of the [tax]
Code applies.”394 Section 6.03(a)(iv) required this representation to be true as of the
Closing Date except where the failure of the representation to be true “would not
reasonably be expected to have . . . a Parent Material Adverse Effect,” as defined in
the Merger Agreement.395
The parties agree that, subject to ETE’s affirmative defenses, Williams is
entitled to the WPZ Termination Fee Reimbursement if it prevails under any one of
390
JTX-0209.0063 (§6.03(a)(i)).
391
Williams OB § I.B.
392
Id. § II.B. See JTX-0209.0053 (§5.03(a)), .0060 (§5.07(a)).
393
JTX-0209.0063 (§6.03(b)).
394
Williams OB § II.A. See JTX-0209.0038 (§3.02(n)(i)).
395
JTX-0209.0063 (§6.03(a)(iv)).
63
these four theories. As explained below, I find that the Preferred Offering breached
at least the Ordinary Course Covenant, the Interim Operating Covenants, and the
Capital Structure Representation. I therefore need not consider whether ETE
separately breached its obligations with respect to the failure of the 721 Opinion.
C. ETE Breached the Ordinary Course Covenant and Interim Operating
Covenants
As described above, ETE agreed to several covenants restricting its actions
between signing and closing—the Ordinary Course Covenant and three Interim
Operating Covenants. In my summary judgment opinion, I held that “the Preferred
Offering did not comport with the requirements set forth in the operating
covenants.” 396 Two issues were left for trial: First, whether ETE’s violation of these
covenants was excused under the “in all material respects” qualifier, and second,
whether the Preferred Offering was nonetheless permitted under the $1 Billion
Equity Issuance Exception in the Parent Disclosure Letter.397
I discuss both in turn.
1. The Preferred Offering Did Not Comply with the Interim Operating
Covenants and Ordinary Course Covenant “In All Material Respects”
Section 6.03(b) of the Merger Agreement required, by the time of closing,
ETE to have “performed or complied” with the operating covenants “in all material
396
Williams Cos., 2020 WL 3581095, at *18.
397
Id. at *18–20.
64
respects.”398 ETE argues that the “in all material respects” qualifier adopts the
common law “material breach” standard. 399 That is incorrect.
This Court has consistently interpreted the qualifier “in all material respects”
to be “less onerous” for the party asserting breach than the common law material
breach standard. In Akorn, Inc. v. Fresenius Kabi AG, Vice Chancellor Laster
examined the meaning of the “in all material respects” qualifier in a merger
agreement.400 The Court reviewed treatises on M&A agreements and case law
interpreting the word “material” and determined that “in all material respects”
“limit[s] the operation of the [covenants to which it applies] to issues that are
significant in the context of the parties’ contract, even if the breaches are not severe
enough to excuse a counterparty’s performance under a common law [material
breach] analysis.”401
The Court therefore held that the “in all material respects” qualifier “calls for
a standard that is different and less onerous than the common law doctrine of
material breach”: It is meant to “exclude small, de minimis, and nitpicky issues that
should not derail an acquisition.”402 Since Akorn, this Court has repeatedly endorsed
that meaning of the “in all material respects” qualifier in the context of merger
398
JTX-0209.0063 (§6.03(b)).
399
ETE OB § III.A.3.a.
400
Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *84–86 (Del. Ch. Oct. 1, 2018), aff’d,
198 A.3d 724 (Del. 2018).
401
Akorn, 2018 WL 4719347, at *84–86 (emphasis added).
402
Id. at *85–86.
65
agreements. 403 And our Supreme Court recently adopted this interpretation in AB
Stable VIII LLC v. MAPS Hotels & Resorts One LLC.404 ETE offers no reason to
depart from that meaning here.
Applying the “in all material respects” standard as set forth in Akorn, I find
that the Preferred Offering’s violation of the operating covenants is not excused by
that standard. The record at trial demonstrated that achieving economic equivalence
between the ETC shares, which the former Williams stockholders would receive,
and the ETE common units, was “paramount” to Williams 405 and became “the most
important and time-consuming part of the[] negotiations.”406 As Warren admitted at
trial, “equality of distributions between ETC shares and ETE units was a key aspect
of the merger.” 407
Of particular concern to Williams was the possibility that Warren, a
significant ETE common unitholder who would control both ETE and ETC after the
403
Dermatology Assocs. of San Antonio v. Oliver St. Dermatology Mgmt. LLC, 2020 WL 4581674,
at *26 (Del. Ch. Aug. 10, 2020) (“in all material respects” excludes those “small, de minimis, and
nitpicky issues that should not derail an acquisition”); Snow Phipps Grp., LLC v. Kcake
Acquisition, Inc., 2021 WL 1714202, at *38 (Del. Ch. Apr. 30, 2021) (same); AB Stable VIII LLC
v. Maps Hotels & Resorts One LLC, 2020 WL 7024929, at *73 (Del. Ch. Nov. 30, 2020) (same),
aff’d, 2021 WL 5832875 (Del. Dec. 8, 2021); Channel Medsystems, Inc. v. Bos. Sci. Corp., 2019
WL 6896462, at *17 (Del. Ch. Dec. 18, 2019) (applying Akorn standard); In re Anthem-Cigna
Merger Litig., 2020 WL 5106556, at *134 n.426 (Del. Ch. Aug. 31, 2020) (distinguishing
“material breach” standard from “in all material respects” standard), aff’d sub nom. Cigna Corp.
v. Anthem, Inc., 251 A.3d 1015 (Del. 2021) (TABLE).
404
2021 WL 5832875, at *13 (Del. Dec. 8, 2021).
405
See supra note 38 and accompanying text.
406
See supra note 40 and accompanying text.
407
See supra note 38 and accompanying text.
66
Merger, could take actions that benefitted ETE unitholders at the expense of ETC.408
That is precisely what the Preferred Offering achieved. The Preferred Offering
guaranteed participants a cash distribution preference of 11 cents, plus an additional
17½ cents in accrual credits, regardless of whether any distributions were made to
common unitholders. 409 This had the effect of eliminating downside risk for
participants in the event of a distribution cut, which ETE had anticipated since
January 2016, 410 months before the Preferred Offering closed on March 8, 2016.411
Moreover, ETE made the Preferred Offering available only to ETE insiders,
with Warren, McReynolds and Davis receiving over 85% of the total preferred
units.412 And on the Closing Date—the relevant date for the purpose of assessing
materiality 413—ETE had in fact declared that if the Merger closed, it would cut
distributions on common units to zero for two years. 414 As one of ETE’s financial
advisors at Perella remarked, such a distribution cut “represent[ed] a wealth transfer
from non-participating to participating units.” 415
408
See supra note 36 and accompanying text.
409
Trial Tr. 371:20–373:1(Warren); JTX-0535.0019; JTX-0538.0002; Trial Tr. 351:1–
352:10(Warren).
410
See supra notes 123–24, 128–29, 150–51 and accompanying text.
411
See supra note 208 and accompanying text.
412
See supra note 213 and accompanying text.
413
JTX-0209.0063 (§6.03(b)).
414
See supra notes 241–42, 257 and accompanying text.
415
See supra note 186 and accompanying text.
67
For these reasons, I found in the Unitholder action that the Preferred Offering
“was a hedge meant to protect [ETE] insiders from the anticipated bad effects of the
coming merger”—an “opportunity to eliminate downside risk” that ETE “insiders
seized” “for themselves and their cronies.” 416 Indeed, by transforming the ETE
common units held by insiders into preferred units, ETE gained the ability to cut
distributions to zero on ETE common units, along with its matching obligation
regarding ETC dividends,417 while shielding its own insiders from the downside.
That is, ETE was able to preserve distributions to ETE insiders while cutting out
(among others) the former Williams stockholders. And as of the Closing Date, that
is exactly what ETE planned to do. 418 To Williams, the Preferred Offering destroyed
the economic equivalence between the ETC shares and certain ETE units, and it
signaled that Warren was willing to take actions adverse to ETC if they benefited
him. That is hardly the type of picayune issue immaterial to a Merger where, as
Warren himself admitted, “equality of distributions between ETC shares and ETE
units was a key aspect.” 419
416
Energy Transfer, 2018 WL 2254706, at *1, 24.
417
See supra note 42 and accompanying text.
418
See supra notes 241–42, 257–59 and accompanying text.
419
See supra note 39 and accompanying text.
68
ETE advances several arguments that, despite representing a wealth transfer
to ETE insiders, the Preferred Offering complied with the operating covenants “in
all material respects.” I find none of them persuasive.
First, ETE contends that the distribution preference was ultimately “of no
consequence” to Williams because the Merger never closed. 420 But ETE’s
obligation to pay the WPZ Termination Fee Reimbursement is only triggered if the
Merger failed to close. 421 If ETE’s argument was correct, Williams’ right to recover
the WPZ termination fee would be meaningless and unenforceable. Indeed, as I
have already held, “the benefits of § 5.06(f) would be illusory if (as ETE argues) the
termination . . . relieved ETE of all the conditions that could trigger the WPZ
Termination Fee Reimbursement.”422
Second, ETE contends that Williams was better off with the Preferred
Offering than it would have been if ETE had undertaken a contractually compliant
420
ETE OB § III.A.3.b.i.
421
JTX-0209.0059 (§5.06(f)).
422
Williams Cos., 2020 WL 3581095, at *13. None of ETE’s cited cases are to the contrary.
Matthew v. Laudamiel applied the common law materiality standard, which I have already held is
more onerous. 2014 WL 5499989, at *2 (Del. Ch. Oct. 30, 2014). In Great Lakes Chem. Corp. v.
Pharmacia Corp., the holding to which ETE refers had nothing to do with materiality. 788 A.2d
544, 549–50 (Del. Ch. 2001). Rather, the court there held that the plaintiff failed to allege that the
injury was caused by the breach. Id. Here, in contrast, I have already held at summary judgment
that causation is irrelevant because the Merger Agreement “contains no causal language that
suggests that to trigger the WPZ Termination Fee Reimbursement, the termination must result
from the unsatisfied condition.” Williams Cos., 2020 WL 3581095, at *12. Finally, Cedarview
Opportunities Master Fund, L.P. v. Spanish Broad. Sys., Inc. dealt with the question of damages,
not materiality. 2018 WL 4057012, at *12 (Del. Ch. Aug. 27, 2018).
69
equity issuance, such as an issuance of common units. 423 In particular, ETE contends
that an issuance of common units would have been “more dilutive to Williams.”424
But the diversion of cash flow from Williams stockholders to ETE insiders is a
distinct harm beyond the dilutive effect of an issuance of common units. Williams
agreed to some dilution in connection with the $1 Billion Equity Issuance Exception,
but it did not agree that ETE could divert distributions to ETE insiders while cutting
out Williams stockholders.425
Third, ETE argues that the Preferred Offering did not disrupt any of Williams’
contractual “economic equivalence rights.” 426 Specifically, ETE argues that the
Merger Agreement only guaranteed equivalence between dividends on ETC shares
and distributions on ETE common units, not ETE senior securities. 427 But this
proves too much; by creating a new class of securities to transfer wealth from
common unitholders to those other, favored, common unitholders allowed to
participate in the offering, ETE destroyed the equivalence between Williams
stockholders and the latter group of common unitholders. ETE next argues it could
have issued the very same Preferred Offering after closing.428 That may be true, but
is not pertinent. Regardless of what ETE could have done after closing relieved it
423
ETE OB § III.A.3.b.ii.
424
Id. at 66.
425
See infra § II.C.2.
426
ETE OB § III.A.3.b.iii.
427
Id.
428
Id.
70
of its contractual duties, its obligation was to comply with the operating covenants
at closing. 429 If ETE’s ability to act inconsistently with its operating covenants post-
closing excused its obligation to comply with them pre-closing, that obligation
would be rendered nugatory.
Finally, ETE argues that any dilution to Williams stockholders caused by the
Preferred Offering paled in comparison to the entire agreement’s value, and that
Williams demonstrated that the breach was immaterial by seeking to close the
Merger regardless. 430 At summary judgment, I rejected the general “proposition that
a party’s willingness to proceed with an agreement must mean that any violations
did not matter to it.”431 I instead cast the issue as a factual one for trial: “did
Williams’ perfervid desire to proceed despite the alleged breaches indicate that it
found ETE’s alleged violations immaterial?” 432
The evidence shows that Williams found ETE’s violations material. Multiple
Williams witnesses testified that they viewed the Preferred Offering as an
“outrageous”433 “sweetheart deal” for “the CEO of ETE and some small[,] selected
group of people”434 that was “a complete game changer with respect to what was
429
JTX-0209.0063 (§6.03(b)).
430
ETE OB § III.A.3.b.iv.
431
Williams Cos., 2020 WL 3581095, at *14.
432
Id. at *15.
433
See supra note 219 and accompanying text.
434
See supra note 221 and accompanying text.
71
bargained for in the merger agreement.” 435 One Williams stockholder lambasted the
Preferred Offering as “something similar” to a “fraudulent conveyance.”436
Williams also sued ETE in this Court and Warren personally in Texas state court
challenging the Preferred Offering while it was seeking to close the Merger. 437 The
record therefore demonstrates that Williams viewed the Preferred Offering to be
material despite its continued desire to close. A party may find a breach material in
light of its bargain, but still conclude that the transaction, net, is favorable. Such a
determination does not void its right to a remedy for the breach as provided by
contract under an “in all material respects” standard.
Accordingly, I find that Williams has proven that the Preferred Offering failed
to comply “in all material respects” with the operating covenants.
2. The $1 Billion Equity Issuance Exception Does Not Excuse ETE’s
Breach
The Ordinary Course Covenant and each of the Interim Operating Covenants
were subject to certain exceptions in Section 4.01(b) of the Parent Disclosure Letter.
With respect to the Ordinary Course Covenant, the Merger Agreement provided that
“[e]xcept as set forth in Section 4.01(b) of the Parent Disclosure Letter . . . Parent
shall, and shall cause each of its Subsidiaries to, carry on its business in the ordinary
435
See supra note 220 and accompanying text.
436
See supra note 218 and accompanying text.
437
See supra notes 360–61 and accompanying text.
72
course . . . .” 438 Likewise, each of the Interim Operating Covenants is preceded by
an identical “except as set forth in Section 4.01(b) of the Parent Disclosure Letter”
preamble.439
Section 4.01(b) of the Parent Disclosure Letter, in turn, organizes these
exceptions under headers that correspond to specific sections within Section 4.01(b)
of the Merger Agreement. 440 The $1 Billion Equity Issuance Exception falls under
a header titled, “Section 4.01(b)(v).”441
The parties dispute whether the $1 Billion Equity Issuance Exception creates
an exception to the Ordinary Course Covenant and all of the Interim Operating
Covenants, or just the Interim Operating Covenant located within Section 4.01(b)(v)
of the Merger Agreement, which prohibited the issuance of equity securities. As
discussed below, I find that both interpretations are reasonable, and therefore, the
“except as set forth in Section 4.01(b) of the Parent Disclosure Letter” qualifier in
the Merger Agreement is ambiguous.
ETE argues that the “[e]xcept as set forth in Section 4.01(b) of the Parent
Disclosure Letter” language in the Merger Agreement qualifies each of the operating
covenants, meaning that ETE could disregard any of them if it did so in connection
438
JTX-0209.0045 (§4.01(b)).
439
Id. at .0045 (§4.01(b)).
440
JTX-0194.0017–.0019.
441
Id. at .0018.
73
with an action permitted by Section 4.01(b) of the Parent Disclosure Letter.442 I find
this interpretation to be reasonable. I note that the “[e]xcept as set forth in Section
4.01(b) of the Parent Disclosure Letter” language is repeated twice—once before the
Ordinary Course Covenant, and once before the Interim Operating Covenants.443
Because Section 4.01(b) of the Parent Disclosure Letter contains no header
corresponding to the Ordinary Course Covenant, it would be reasonable to apply all
of the exceptions in Section 4.01(b) of the Parent Disclosure Letter to the Ordinary
Course Covenant; otherwise, the qualifier that precedes the Ordinary Course
Covenant would have no meaning. And if the phrase “[e]xcept as set forth in Section
4.01(b) of the Parent Disclosure Letter” creates an unqualified exception to the
Ordinary Course Covenant, it is reasonable to conclude that, when the identical
phrase appears again in front of the Interim Operating Covenants, it creates an
identical unqualified exception to those covenants.
I also note that the Parent Disclosure Letter states, “[t]he headings contained
in this Parent Disclosure Letter are for reference only and shall not affect in any way
the meaning or interpretation of this Parent Disclosure Letter.” 444 It is therefore
reasonable to disregard the headers—including numerical designations—in the
442
ETE OB § III.A.2.a.
443
JTX-0209.0045 (§4.01(b)).
444
JTX-0194.0002.
74
Parent Disclosure Letter referring to specific sections within Section 4.01(b) of the
Merger Agreement when interpreting the scope of the exceptions.
On the other hand, Williams argues that the exceptions in Section 4.01(b) of
the Parent Disclosure Letter are limited by the numerical designations in each of
their headers, such that the exceptions only qualify the covenants in the Merger
Agreement that correspond to those numerical designations. 445 This, too, I find a
reasonable interpretation. Through the headers, each exception in Section 4.01(b)
of the Parent Disclosure Letter refers to a single covenant within Section 4.01(b) of
the Merger Agreement.446 And the substance of each exception matches the
substance of the corresponding operating covenant. For example, the $1 Billion
Equity Issuance Exception falls under the header “Section 4.01(b)(v),” which
corresponds to a covenant in Section 4.01(b)(v) that prohibits the issuance of
equity.447 And Section 3.02 of the Merger Agreement explicitly provides that each
exception applies to its corresponding section or subsection in the Merger
Agreement. 448
Moreover, the headers are not ordered consecutively. For example, although
there are headers titled, “4.01(b)(ii)” and “4.01(b)(v),” there are no headers titled,
445
Williams OB § I.B.2.
446
JTX-0194.0017–.0019.
447
Compare id. at.0018 (Parent Disclosure Letter), with JTX-0209.0045(Merger Agreement).
448
JTX-0209.0030 (§3.02).
75
“4.01(b)(iii) or “4.01(b)(iv).”449 The nonconsecutive numbering of the headers
indicates that the exceptions under each header are meant to refer specifically to the
section in the Merger Agreement matching the header. Furthermore, Section 4.01(b)
of the Parent Disclosure Letter repeats certain exceptions under multiple headers.450
If each exception applied to all the operating covenants in Section 4.01(b) of the
Merger Agreement, there would be no need for such repetition. Williams’ proposed
interpretation is also consistent with the phrase “[e]xcept as set forth in Section
4.01(b) of the Parent Disclosure Letter,” which could reasonably be read to simply
refer the reader to Section 4.01(b) of the Parent Disclosure Letter to determine
whether there any exceptions to a particular covenant.
Because I find that both interpretations are reasonable, it is appropriate to
examine the extrinsic evidence to determine the parties’ intent. As I discussed
above, the parties’ drafting history demonstrates that they intended the $1 Billion
Equity Issuance Exception, which fell under a header titled, “Section 4.01(b)(v),” to
qualify only the Interim Operating Covenants in Section 4.01(b)(v) of the Merger
Agreement. Up until the day before signing, the $1 Billion Equity Issuance
Exception was located within Section 4.01(b)(v) of the Merger Agreement, not the
Parent Disclosure Letter.451 Witnesses aligned with both parties testified that they
449
JTX-0194.0017–.0019.
450
Id. at .0018–.0019 (§4.01(b)(v)(4), (x)(1), (xi)(4)); id. at .0017, .0019 (§4.01(b)(ii)(1), (xi)(3)).
451
See supra notes 67–72 and accompanying text.
76
only moved it to the Parent Disclosure Letter—along with several other
exceptions—to maintain confidentiality, and that they did not intend the moves to
be substantive. 452
The parties’ conduct after signing also confirms that they intended this
interpretation. Williams’ Company Disclosure Letter was structured in the same
manner as the Parent Disclosure Letter, with exceptions that fell under headers that
referred to specific sections within Williams’ operating covenants in the Merger
Agreement. 453 After signing, Williams planned its own equity issuance, which was
permitted by an exception in its Company Disclosure Letter but featured a waiver
on IDRs that was prohibited under another operating covenant. 454 Consistent with
the view that the equity issuance exception in the Company Disclosure Letter did
not permit the IDR waiver, Williams requested ETE’s consent, and ETE exercised
its right to refuse, a right that would have been nonexistent under ETE’s current
litigation-driven view of the language.455 Accordingly, I find that the parties
intended the $1 Billion Equity Issuance Exception to qualify the covenants within
Section 4.01(b)(v) of the Merger Agreement, but not the other Interim Operating
Covenants or the Ordinary Course Covenant.
452
See supra notes 76–79 and accompanying text.
453
See supra notes 83–85 and accompanying text.
454
See supra notes 82–84, 86–87 and accompanying text.
455
See supra notes 88–89 and accompanying text.
77
ETE next argues that, even if the $1 Billion Equity Issuance Exception refers
only to the Interim Operating Covenants at Section 4.01(b)(v) of the Merger
Agreement, it still cross-applies to other covenants, under the explicit terms of the
Agreement, where its “relevan[ce]” to those covenants is “reasonably apparent on
its face.” 456 ETE relies on the following provision of the Merger Agreement to
support this argument:
[A]ny information set forth in one Section or subsection of
the Parent Disclosure Letter shall be deemed to apply to
and qualify the Section or subsection of this Agreement to
which it corresponds in number and each other Section or
subsection of this Agreement to the extent that it is
reasonably apparent on its face in light of the context and
content of the disclosure that such information is relevant
to such other Section or subsection[.]457
Relying on the broad definition of “relevant” applicable to the Delaware Rules
of Evidence, ETE argues for a similarly broad interpretation of this provision, to
mean that an exception in the Parent Disclosure Letter applies to any covenant in the
Merger Agreement that is “logically related to” that covenant. 458 This reading
ignores that the provision requires the “relevan[ce]” of the exception to be
“reasonably apparent on [the] face” of the exception, which is clearly a limitation on
the breadth of the provision. 459 Indeed, in its briefing, ETE reads the “on its face”
456
ETE OB § III.A.2.c.
457
JTX-0209.0030 (§3.02) (emphasis added).
458
ETE OB § III.A.2.c.
459
JTX-0209.0030 (§3.02).
78
language out of the provision, describing it as the “reasonably apparent relevance”
standard. 460 If ETE’s reading were correct, the $1 Billion Equity Issuance Exception
would permit violations of any covenant so long as the violation was done in
connection with a compliant equity issuance. Accordingly, ETE argues that the
“reasonably apparent on its face” provision permitted ETE to violate the Ordinary
Course Covenant by engaging in a self-dealing transaction—the Preferred
Offering—that breached ETE’s own limited partnership agreement 461 because that
transaction was an equity issuance of under $1 billion.462 That is not a reasonable
interpretation of the provision.
Instead, I find that the plain meaning of the provision—that contract language
shall apply cross-sectionally where it is reasonably apparent on its face that the
language is relevant cross-sectionally—excuses actions that would otherwise breach
covenants where facially necessary to permit the activity provided by the
provision—that is, where absent cross-sectional applicability an inconsistency in the
contractual terms would result. For example, another exception under the “Section
4.01(b)(v)” header in the Parent Disclosure Letter allows ETE to “acquire units in
any of its Subsidiaries in an amount up to $2.0 billion in the aggregate.”463 It is
460
See ETE OB at 60 (“The text of the ‘reasonably apparent . . . relevance’ clause . . . .”); id. at 61
(“Under the ‘reasonably apparent relevance’ standard . . . .”).
461
Energy Transfer, 2018 WL 2254706, at *25.
462
See ETE OB at 61.
463
JTX-0194.0018 (§4.01(b)(v)(3)).
79
“reasonably apparent on [the] face” of this exception that it must cross-apply to the
covenant in Section 4.01(b)(iv) of the Merger Agreement, which states that ETE
may not “purchase, redeem or otherwise acquire any shares of . . . its Subsidiaries’
capital stock or other securities.”464 Otherwise, the exception would have no
meaning. This interpretation of the “reasonably apparent on its face” provision
comports with the ordinary meaning of the word “relevant,”465 and gives effect to
the requirement that the exception’s relevance to a covenant be “reasonably apparent
on [the] face” of the exception.466 In other words, the provision is a savings clause
for a draftsperson’s failure to adequately cross-reference a provision in the Merger
Agreement. 467
Applying this standard, the “relevan[ce]” of the $1 Billion Equity Issuance
Exception to the covenants ETE violated is not “reasonably apparent on [the] face”
of the exception, because ETE could have undertaken an equity issuance pursuant
to the exception that complied with each of the covenants. Because ETE could have
acted in compliance with the covenants without the application of the exception, its
relevance to the covenants is not facially apparent. Again, I held at summary
judgment that the Preferred Offering did not comport with ETE’s general Ordinary
464
JTX-0209.0045 (§4.01(b)(iv)).
465
Relevant, MERRIAM-WEBSTER (“having significant and demonstrable bearing on the matter at
hand”).
466
JTX-0209.0030 (§3.02).
467
See Trial Tr. 215:3–216:1(Van Ngo).
80
Course Covenant because “breaching its limited partnership agreement is not
‘ordinary course’ for the company.” 468 ETE does not dispute that it could have
structured the equity offering in a way that did not breach its partnership agreement.
And ETE also concedes that “ETE issued equity securities in the past, and it was
reasonably expected to do so during the Merger’s pendency.” 469 In other words,
ETE admits that certain equity issuances were ordinary course. Accordingly, the
$1 Billion Equity Issuance Exception is not facially relevant to the Ordinary Course
Covenant, because it is unnecessary to address a conflict with that covenant.
Likewise, I held at summary judgment that the Preferred Offering breached
ETE’s covenants that it would not (i) subject ETE to new distribution restrictions,
(ii) issue “securities in respect of . . . equity securities,” or (iii) amend its partnership
agreement.470 Again, ETE could have structured an equity offering in a way that
complied with each of those covenants. As a result, the relevance of the Equity
Issuance Exception to each is not facially apparent. For example, as ETE concedes,
equity issuances do not necessarily feature distribution restrictions.471 And if ETE
had issued equity out of the existing classes instead of swapping common units for
new preferred units, it would have complied with the covenant prohibiting ETE from
468
Williams Cos., 2020 WL 3581095, at *18.
469
ETE OB at 61.
470
Williams Cos., 2020 WL 3581095, at *18.
471
ETE OB at 61.
81
issuing “securities in respect of . . . equity securities.” Finally, ETE does not dispute
that it could have issued common units without amending its limited partnership
agreement.472 Simply put, none of the operating covenants breached by ETE
conflicted with the $1 Billion Equity Issuance Exception. Therefore, the exception’s
relevance to those covenants was not “reasonably apparent on its face.”
Accordingly, I find that the $1 Billion Equity Issuance Exception did not permit
ETE’s violations of its operating covenants.
* * *
Because I have found that Williams proved a claim for the WPZ Termination
Fee Reimbursement based on ETE’s breach of the operating covenants, I need not
discuss Williams’ other independent bases for proving its claim.473
I note, however, that Williams has also established a claim for the WPZ
Termination Fee Reimbursement based on the failure of the Capital Structure
Representation. Pursuant to the Capital Structure Representation, ETE represented
at signing that its capital structure consisted of three classes of equity securities:
The authorized equity interests of Parent consist of
common units representing limited partner interests in
Parent (“Parent Common Units”), Class D Units
representing limited partner interests in Parent (“Parent
472
ETE argues only that it would have to amend its partnership agreement to issue “new
securities.” Id. at 62.
473
Those bases generally involve the 721 Opinion.
82
Class D Units”) and a general partner interest in Parent
(“Parent General Partner Interest”).474
This representation was brought down to closing “except for any immaterial
inaccuracies.” 475 In my summary judgment opinion, I held that, because the
Preferred Offering created a fourth class of equity that was part of ETE’s capital
structure on the Closing Date, the Capital Structure Representation was false on that
date. 476 As with the covenant breaches, two issues were left for trial: first, whether
that inaccuracy was “immaterial,” and second, whether the $1 Billion Equity
Issuance Exception in the Parent Disclosure Letter permitted the inaccuracy. 477
I find that Williams proved that the falsity of the Capital Structure
Representation was material. In the context of representations in merger
agreements, this Court has held that “[a] fact is generally thought to be ‘material’ if
[there] is ‘a substantial likelihood that the . . . fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information
made available.’”478 As I held above, the Preferred Offering was material to
Williams stockholders because it created a new equity class that granted ETE
insiders a distribution preference, allowing ETE to preserve cash flow to those
474
JTX-0209.0030 (§3.02(c)(i)).
475
Id. at .0063 (§6.03(a)).
476
Williams Cos., 2020 WL 3581095, at *4, 20–21.
477
Id. at *20–21.
478
Frontier Oil v. Holly Corp., 2005 WL 1039027, at *38 (Del. Ch. Apr. 29, 2005); accord Akorn,
2018 WL 4719347, at *86.
83
insiders while cutting out the Williams stockholders. 479 I therefore find that the
Preferred Offering rendered the Capital Structure Representation materially
inaccurate.
Furthermore, the $1 Billion Equity Issuance Exception did not permit the
falsity of the Capital Structure Representation. Unlike the operating covenants, the
Capital Structure Representation is not qualified by the “except as set forth in Section
4.01(b) of the Parent Disclosure Letter” preamble.480 Accordingly, the only way that
the $1 Billion Equity Issuance Exception could apply to the Capital Structure
Representation is through the “reasonably apparent on its face” test. 481 For reasons
similar to the related discussion above, the exception’s applicability is not facially
apparent, because there is no inconsistency in the language. ETE promised that its
existing classes of equity would carry down to closing, but its representation
concerning the number of outstanding units for each class was not so brought
down. 482 In other words, ETE was free to issue up to $1 billion in equity out of an
existing class, as provided for in the Parent Disclosure Letter, and in that case the
Capital Structure Representation would have remained true at closing. Because ETE
could have issued equity under the $1 Billion Equity Issuance Exception in a way
479
See supra § II.C.1.
480
See JTX-0209.0030 (§3.02(c)(i)).
481
See id. at .0030 (§3.02).
482
Id. at .0063 (§6.03(a)(i)).
84
that complied with the Capital Structure Representation, it is not facially apparent
that the exception is applicable to the Capital Structure Representation.
Accordingly, I find that Williams has independently proven a claim for the
WPZ Termination Fee Reimbursement based on the Preferred Offering’s violation
of the Capital Structure Representation. Having found that Williams proved a claim
for the WPZ Termination Fee Reimbursement, I turn to ETE’s affirmative defenses.
D. ETE’s Affirmative Defenses and Counterclaims Fail
ETE asserts three affirmative defenses and counterclaims that it contends
prevent Williams from recovering the WPZ Termination Fee Reimbursement. First,
ETE argues that Williams violated a provision requiring cooperation with respect to
financing by refusing the Proposed Public Offering. 483 Second, ETE argues that
Williams breached an obligation to notify ETE of purportedly material omissions
from the S-4.484 Third, ETE contends that Williams breached various obligations
based on the purported actions taken by Armstrong and the dissenting Williams
directors to thwart the Merger. 485
“[A] defendant seeking to . . . assert [a] breach as an affirmative defense [to
performance] . . . bears the burden to show that [the] breach . . . excused its non-
483
ETE OB § III.C.1.
484
Id. § III.C.2.
485
Id. § III.C.3.
85
performance.” 486 As discussed below, I find that ETE has failed to prove each of
these affirmative defenses and counterclaims.
1. ETE Did Not Prove That Williams Violated the Financing
Cooperation Provision
ETE argues that by refusing to consent to the Proposed Public Offering,
Williams breached its obligation under Section 5.14 of the Merger Agreement to
“provide cooperation reasonably requested by [ETE] that is necessary or reasonably
required in connection with . . . financing . . . arranged by [ETE].” 487 ETE contends
that Section 5.14 provides “no reasonableness qualifier” on Williams’ duty to
provide cooperation.488 I disagree. Section 5.14 provides that Williams was only
required to “provide cooperation reasonably requested by [ETE].” 489 Williams was
therefore under no obligation to cooperate with a request by ETE that was
unreasonable.
It is reasonable for “a party [to] withhold consent to a transaction when the
decision is made for a legitimate business purpose.”490 The record demonstrated that
Williams withheld consent to the Proposed Public Offering on the advice of its
financial advisors because it discriminated against Williams stockholders, who were
486
TA Operating LLC v. Comdata, Inc., 2017 WL 3981138, at *22 (Del. Ch. Sept. 11, 2017).
487
ETE OB § III.C.1.
488
Id. at 95.
489
JTX-0209.0061 (§5.14) (emphasis added).
490
Union Oil Co. of California v. Mobil Pipeline Co., 2006 WL 3770834, at *11 (Del. Ch. Dec.
15, 2006).
86
unable to participate in the offering. 491 I find this to be a legitimate business purpose,
particularly given that, instead of merely withholding consent, Williams offered to
proceed with the offering if ETE allowed Williams stockholders to participate.492
That was a reasonable counteroffer, which ETE refused.493 Moreover, “an
obligation to take reasonable actions . . . does not require a party ‘to sacrifice its own
contractual rights for the benefit of its counterparty.’”494 The Proposed Public
Offering violated the Merger Agreement for many of the same reasons that the
Preferred Offering did—including because it involved new distribution restrictions
and issued “securities in respect of . . . equity securities.” 495 I therefore find that it
was reasonable for Williams to refuse to consent to the Proposed Public Offering.
2. ETE Did Not Prove a Disclosure Violation
ETE next contends that Williams breached its obligation under Section 5.01
of the Merger Agreement to inform ETE of material facts omitted from the S-4 and
to correct those omissions.496 In particular, ETE contends that Williams did not
disclose to ETE (i) the purported threats of consent solicitation from Meister and
491
See supra notes 187–92 and accompanying text.
492
See supra note 196 and accompanying text.
493
See supra note 197 and accompanying text.
494
Williams Field Servs. Grp., LLC v. Caiman Energy II, LLC, 2019 WL 4668350, at *34 (Del.
Ch. Sept. 25, 2019) (quoting Akorn, 2018 WL 4719347, at *91), aff’d sub nom. Williams Field
Servs. Grp., LLC v. Caiman Energy II, LCC, 237 A.3d 817 (Del. 2020).
495
See supra at 28–33, 81–82.
496
ETE OB § III.C.2.
87
Mandelblatt, and (ii) certain Williams directors’ criticism of its bankers’ financial
analyses. 497 Section 5.01 of the Merger Agreement provides, in relevant part,
If at any time prior to receipt of the Company Stockholder
Approval any information relating to TopCo, Parent or the
Company, or any of their respective Affiliates, directors or
officers, should be discovered by TopCo, Parent 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.498
First, as discussed above, ETE failed to prove that Meister and Mandelblatt
threatened the Williams directors with a consent solicitation, or that any perceived
threats influenced the Williams Board’s decision to approve the Merger
Agreement. 499 Williams was under no obligation to inform ETE of threats that did
not occur. Second, Williams disclosed that a minority of its directors voted against
entering into the Merger Agreement and “continue to disagree with the
recommendation of the majority of the [Williams] Board”; 500 it was not required to
497
Id. § III.C.2.
498
JTX-0209.0051 (§5.01).
499
See supra at 20–22.
500
JTX-1218.0165.
88
disclose “the ground for a disclosed director dissent,” including any purported
disagreement with the analysis of Williams’ bankers.501 Accordingly, ETE has
failed to prove a breach of Section 5.01.
3. Any Breach by Williams of the Best Efforts or Ordinary Course
Provisions Was Cured by the Closing Date
Finally, ETE argues that Williams breached three covenants based on the
actions of Armstrong and other dissenting Williams directors: Williams’ obligations
to (i) use reasonable best efforts to consummate the Merger; 502 (ii) “carry on its
business in the ordinary course”; 503 and (iii) use “reasonable best efforts to contest
and resist” litigation challenging the Merger.504 Williams was obligated to have
“performed or complied” with these covenants “by the time of the Closing.” 505
ETE contends that Williams breached these covenants because Armstrong
“covertly worked with anti-Merger co-conspirators.”506 As I have found, however,
Armstrong’s communications with Bumgarner, while not a model of corporate
governance best practices, were intended to assuage Bumgarner’s concerns about
the synergies estimates, not to thwart the Merger. 507
501
Newman v. Warren, 684 A.2d 1239, 1246 (Del. Ch. 1996).
502
JTX-0209.0053 (§5.03(a)).
503
Id. at .0041 (§4.01(a)).
504
Id. at .0053 (§5.03(a)).
505
Id. at .0063 (§6.02(b)).
506
ETE OB at 98.
507
See supra § I.B.6.
89
ETE also contends that Armstrong and other dissenting Williams directors
tried to “fan the deal break flames” by attempting to dissuade Cleveland and Stoney
from supporting the Merger, positioning Williams for a “walkaway payment,”
“working the press” to “write anti-ETE articles,” and suing Warren “in a thinly-
veiled publicity stunt.” 508 The evidence at trial refuted each of these contentions.
ETE introduced no evidence that Cleveland or Stoney felt pressured to switch their
votes; to the contrary, Stoney testified that she never felt pressure to reconsider her
position.509 Moreover, although Williams did ask its financial advisors to assess the
value of a potential breakup fee from ETE,510 the Williams Board resolved to
publicly support the Merger, 511 and ultimately sued to enjoin ETE from terminating
the Merger Agreement.512 And ETE has introduced no evidence that Williams’
Texas lawsuit against Warren challenging the Preferred Offering was intended to be
a “publicity stunt.” Instead, the lawsuit represented Williams’ view that the
Preferred Offering breached the Merger Agreement and was unfair to Williams
stockholders.
In any event, and more fundamentally, Williams’ obligation to comply with
these covenants was due “by the time of the Closing.” 513 And by June 28, 2016, the
508
ETE OB at 102.
509
See supra note 138 and accompanying text.
510
See supra note 142 and accompanying text.
511
See supra notes 139, 307–08, 310, 312–14 and accompanying text.
512
See supra note 351 and accompanying text.
513
JTX-0209.0063 (§6.02(b)).
90
date on which Williams and ETE had agreed to close, 514 Williams was in full
compliance: Williams had settled the Bumgarner lawsuit,515 sued ETE seeking to
enjoin it from terminating the Merger Agreement,516 obtained stockholder approval
of the Merger, 517 and showed up at the scheduled closing.518 Indeed, ETE concedes
that on June 28, 2016, Williams was ready, willing and able to close.519 Therefore,
even to the extent that, between signing and closing, the actions of Armstrong and
the dissenting Williams directors violated covenants, Williams “had abandoned its
flirtation” with those violations by the time of closing, “thereby curing its breach.”520
Accordingly, I find that ETE failed to prove any of its affirmative defenses or
counterclaims.
E. ETE Is Entitled to Monetary Sanctions for Armstrong’s Deletion of His
Gmail Account
On May 20, 2020, ETE filed the Motion for Sanctions based on Armstrong’s
deletion of the Gmail account he used to correspond with Bumgarner about the
Merger. 521 ETE asks the Court to make adverse findings, draw adverse inferences,
514
See supra note 50 and accompanying text.
515
See supra notes 299–300 and accompanying text.
516
See supra note 351 and accompanying text.
517
See supra note 317 and accompanying text.
518
See supra note 355 and accompanying text.
519
Stip. ¶ 36.
520
Akorn, 2018 WL 4719347, at *100.
521
See generally Motion for Sanctions.
91
award ETE attorneys’ fees and costs, and prohibit Williams from recovering
attorneys’ fees and costs. 522
“The Court has the power to issue sanctions for discovery abuses under its
inherent equitable powers, as well as the Court’s ‘inherent power to manage its own
affairs.’”523 “Sanctions serve three functions: a remedial function, a punitive
function, and a deterrent function.”524 With these functions in mind, the Court
considers the following factors in determining whether sanctions are appropriate:
(1) “the culpability or mental state of the party who destroyed the evidence”; (2) “the
degree of prejudice suffered by the complaining party”; and (3) “the availability of
lesser sanctions which would avoid any unfairness to the innocent party while, at the
same time, serving as a sufficient penalty to deter the conduct in the future.” 525 “The
Court has wide latitude to fashion an appropriate remedy, but the remedy must be
tailored to the degree of culpability of the spoliator and the prejudice suffered by the
complaining party.”526
With respect to the first element, I find that Armstrong’s destruction of his
Gmail account was spoliation of evidence. Although Armstrong testified at trial that
he deleted the Gmail account because it was sending spam messages to his
522
Id. ¶ 1.
523
Beard Rsch., Inc. v. Kates, 981 A.2d 1175, 1189 (Del. Ch. 2009) (quoting Residential Funding
Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 106 (2d Cir. 2002)).
524
Id.525
Id.526
Id. at 1189–90.
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contacts, 527 Williams failed to introduce any evidence corroborating that
testimony—such as an example of the spam emails. Given this lack of corroborating
evidence, and the fact that Armstrong deleted the account just two days after being
asked at a deposition if he emailed with Bumgarner about the Merger, 528 I do not
find his testimony to be credible.
Turning to the second element, however, ETE has failed to demonstrate that
Armstrong’s destruction of his Gmail account ultimately prejudiced ETE. ETE was
able to recover Armstrong’s communications with Bumgarner by subpoenaing
Bumgarner’s emails.529 Although ETE acknowledges this, it argues that Bumgarner
discarded most of his paper records, which may have included handwritten notes
from Armstrong, as well as Bumgarner’s notes from meetings with Armstrong.530
But even if true, ETE fails to explain how those handwritten notes would have been
recoverable through Armstrong’s deleted Gmail account. ETE also points out that
Armstrong communicated with Williams’ former CEO, Bailey, 531 and that he
testified that he may have done so from that Gmail account.532 But “an email, almost
by definition, has a sender and a receiver.”533 Therefore, “[e]ven if [Armstrong] had
527
See supra note 280 and accompanying text.
528
See supra note 279 and accompanying text.
529
See supra note 282 and accompanying text.
530
ETE OB § III.C.5.
531
See supra notes 301–03 and accompanying text.
532
Trial Tr. 688:9–689:11(Armstrong).
533
Beard Rsch, 981 A.2d at 1193 (declining to draw adverse inference based on deletion of emails).
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destroyed certain emails [to Bailey] on his end, the emails still would exist on the
other end and [c]ould have been produced.” 534
With respect to the third element, I find that making adverse inferences or
findings would be unfair to Williams in light of ETE’s lack of prejudice. Sanctions
in some form, however, are appropriate given Armstrong’s degree of culpability.
I therefore find that ETE is entitled to recover its fees and costs in connection with
subpoenaing Bumgarner’s email, and for bringing the Motion for Sanctions.
F. Williams Is Entitled to Attorneys’ Fees and Costs, and Interest
Section 5.06(g) of the Merger Agreement provides that Williams is entitled to
fees, costs, and interest if it is forced to bring a suit to collect the WPZ Termination
Fee Reimbursement and prevails:
[I]f . . . Parent fails promptly to pay any amount due
pursuant to Section . . . 5.06(f), and, in order to obtain such
payment, . . . the Company commences a suit that results
in . . . a judgment against Parent for the amount set forth
in Section . . . 5.06(f) . . . Parent shall pay to the Company
. . . the other party’s costs and expenses (including
reasonable attorneys’ fees and expenses) in connection
with such suit, together with interest on the amount of such
payment from the date such payment was required to be
made until the date of payment at the prime rate as
published in the Wall Street Journal in effect on the date
such payment was required to be made. 535
534
Id.535
JTX-0209.0059 (§5.06(g)).
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Because I have found that Williams is entitled to the WPZ Termination Fee
Reimbursement, Williams is also entitled to recover its reasonable fees and expenses
in bringing about this result.
III. CONCLUSION
For the foregoing reasons, judgment is entered in favor of the Plaintiff in the
amount of $410 million, plus interest at the contractual rate, and its reasonable
attorneys’ fees and expenses. The Defendants are entitled to their fees and expenses
for subpoenaing Bumgarner’s documents and bringing their Motion for Sanctions.
The parties should confer and submit a form of order consistent with this Opinion.
95