Williams’ lawyers scoff at his explanation for a snag that brought the companies’ merger to a halt.
by David Marcus
Brad Whitehurst and Tim Fenn attempted to explain why Energy Transfer Equity LP (ETE) only discovered a problem fatal to ETE’s attempt to purchase Williams Cos. Inc. (WMB) six months after the deal was signed in testimony on Monday before Vice Chancellor Sam Glasscock III in the Court of Chancery in Georgetown, Del. ETE claims that it is unable to complete its purchase of Williams because Latham & Watkins LLP, where Fenn is a tax partner, is unable to give an opinion that the troubled deal qualifies for tax-free treatment under Section 721(a) of the Internal Revenue Code.
Williams believes that the tax issue is a pretext for ETE CEO Kelcy Warren to exit a deal initially valued at roughly $40 billion that he now regrets and is asking Glasscock to force ETE to go through with the transaction if Williams stockholders approve it on Monday. Warren himself was in the courtroom yesterday and is on the witness list, though other tax lawyers will take the stand before he does in the second day of a two-day trial before Glasscock.
Whitehurst, the head of tax at ETE, said that he misunderstood a fundamental aspect of the transaction structure and discovered the error only in late March. The companies signed the agreement in September. Under the terms of the deal, Williams would merge into ETC - a newly formed ETE subsidiary whose only asset is ETE partnership units. ETC would then issue stock backed by the ETE units to Williams stockholders, while ETE would pay $6.05 billion for a 19% stake in ETC, with the money also being paid to the Williams stockholders.
Whitehurst said he thought that the ETC stake ETE would receive would depend on the price of ETE partnership units - in other words, that the exchange ratio on that part of the deal was floating. In reality, the exchange ratio was fixed. When he discovered his error in March, he called Fenn and Laurence Stein, his tax lawyers at Latham, who did a thorough investigation of the issue and concluded they could not opine that the deal should qualify for tax-free treatment to ETE, a condition of the merger. Whitehurst at one point seemed to suggest that he diagrammed the structure of the transaction for the first time in March.
Williams claims that by late March, Warren’s desire to exit the transaction by any means available was abundantly clear. In cross-examining Whitehurst, Antony Ryan, a litigation partner at Cravath, Swaine & Moore LLP, Williams’s law firm, tried to cast doubt upon Whitehurst’s story by pointing out that he would have read the drafts of the filings with the SEC on the deal multiple times.
Fenn said that the decline in ETE helped was a key reason why his firm was unable to give the opinion mentioned in the parties’ merger agreement. He testified that he and his lawyers have spent 1,000 hours analyzing the issue since Whitehurst brought it to their attention in March. He admitted that he thought before the deal was signed that Latham would have no problem rendering the 721(a) opinion.
“I find it hard to believe there is no issue here,” Fenn testified under examination by Michael Holmes, a partner at Vinson & Elkins LLP in Houston and ETE’s lead trial lawyer.
On cross-examination, Kenneth Nachbar, a partner at Morris, Nichols, Arsht & Tunnell LLP, introduced the notes of a conversation among Whitehurst, Fenn and Stein to suggest that ETE was subtly pushing Latham not to give the opinion from the time Whitehurst contacted the firm in late March.
Under normal circumstances, Nachbar said, a client would be apoplectic if a law firm was unable to deliver a tax opinion it has said it would be able to give. But “nobody got upset” at ETE when that happened, Nachbar suggested.
Andrew Needham, a tax partner at Cravath who advised Williams, will take the stand on Tuesday morning to give his side of the issue, with an expert witness on the topic to follow. The trial is scheduled to end tomorrow, and Glasscock will likely have to issue a ruling by the end of the week, since the Williams stockholder vote is scheduled for Monday.
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