Williams Cos. Gets Its Day in Court Over ETE’s Cold Feet
Liz Hoffman Jun 20
, 2016 9:04 am ET http://blogs.wsj.com/moneybeat/2016/06/20/williams-cos-gets-its-day-in-court-over-etes-cold-feet/?mod=yahoo_hs
On Monday, Williams Cos. and Energy Transfer Equity head to court over their troubled merger. Once worth $33 billion and enthusiastically pursued by ETE and its billionaire chairman, Kelcy Warren, the deal is now worth about $20 billion after a steep slide in ETE shares, and its champion has gotten very, very cold feet.
Williams is seeking a court order that would keep ETE from walking away from the deal. ETE says its lawyers likely can’t give a tax opinion that is a condition for the merger to close.
There are a lot of allegation flying around, but the key legal issue is how one interprets “reasonable best efforts,” and whether ETE used them to get the all-important tax opinion from Latham & Watkins LLP. Fifteen witnesses, including lawyers on both sides and various valuation and tax experts, are set to testify at a two-day trial in Georgetown, Del., the southern seat of Delaware’s vaunted corporate court.
Look for Williams to paint ETE as a slippery rogue whose legal arguments are a touch too clever, and look for ETE to do a lot of “who, us?” ETE will likely try to focus on the actual tax treatment of the deal, while Williams would do better to avoid a discussion on the merits and instead paint the tax roadblock as a red herring.
This doesn’t happen often. Sure, litigation is a favorite corporate pastime, but it’s fairly rare for two merger parties to actually go to trial over a live deal. (It’s also unusual for tax lawyers to lose their nerve on an opinion.)
The Delaware court has broad powers to do what it thinks is fair, and judges have forced cold-footed buyers to close before. Tyson Foods had to complete its $2.3 billion purchase of meat packer IBP Inc. in 2001 after the court wasn’t swayed by Tyson’s arguments that it had been misled about IBP’s deteriorating financials.
That said, Williams’ and ETE’s merger agreement says Latham & Watkins has to be able to give the tax opinion, and Latham says it might not be able to. Other buyers have gotten out of deals by arguing for a plain reading of the language of their contract, no matter how poorly it squared with its spirit.
In the early days of the financial crisis, Cerberus Capital Management seized on inconsistencies in the language of its agreement to buy United Rentals to get out of the deal. And in 2013, Apollo Tyres used labor strife inside Cooper Tire & Rubber to run out the clock on the deal by arguing Cooper hadn’t held up its end of their agreement.
An instructive case is the one surrounding Hexion Specialty Chemical’s 2007 deal to buy rival Huntsman Hexion, backed by Apollo Global Management, sued to get out of the deal, arguing that Huntsman’s worsening financials were a “material adverse change” that voided the contract.
The judge disagreed, confirming that it’s basically impossible for regretful buyers to use deteriorating short-term results as an excuse to walk.
But a subthread in that case was just how far acquirers can go to get out of deals. Huntstman had produced a financial opinion that the combined company would be solvent. But Hexion, advised by Wachtell, Lipton, Rosen & Katz, hired Duff & Phelps to give a second opinion — one that found the opposite, providing a potential out for Hexion.
The judge found the solvency-opinion question wasn’t yet relevant, and Apollo later agreed to pay Huntsman about $1 billion in exchange for killing the deal. But the court was highly skeptical of Hexion’s tactics, and Williams/ETE strikes those same notes. (Wachtell advised ETE on the Williams deal, though not on the tax issue; expect to hear some discussion in court about that.)
Outside of court, in law firm corridors there is a lot of clucking going on by uninvolved tax and corporate lawyers about pinning a walkaway right on a change of heart by a company’s tax lawyers. It isn’t clear what impact this would have on the court, but it is likely some of those rumblings have made their way to Delaware.
Absent a last-minute settlement, this is likely to end in one of two ways. The court will either hold ETE to the deal by finding it hasn’t worked hard enough to find a fix to the tax snag. Or it will let ETE out, giving deal lawyers yet another thing to fight about when crafting closing conditions.
Either way, it’s likely to be the talk of the M&A scene for a while. Who said pipelines were boring?