IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
THE WILLIAMS COMPANIES, INC., ) ) Plaintiff and ) Counterclaim Defendant, ) ) v. ) C.A. No. 12168-VCG ) ENERGY TRANSFER EQUITY, L.P. ) and LE GP, LLC, ) ) Defendants and ) Counterclaim Plaintiffs. ) ) ) THE WILLIAMS COMPANIES, INC., ) ) Plaintiff and ) Counterclaim Defendant, ) ) v. ) C.A. No. 12337-VCG ) ENERGY TRANSFER EQUITY, L.P., ) ENERGY TRANSFER CORP LP, ETE ) CORP GP, LLC, LE GP, LLC, and ) ENERGY TRANSFER EQUITY GP, ) LLC, ) ) Defendants and ) Counterclaim Plaintiffs. )
MEMORANDUM OPINION
Date Submitted: August 29, 2017 Date Decided: December 1, 2017
Kenneth J. Nachbar and Zi-Xiang Shen, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, DE; OF COUNSEL: Sandra C. Goldstein, Antony L. Ryan, and Kevin J. Orsini, of CRAVATH, SWAINE & MOORE LLP, New York, NY, Attorneys for the Plaintiff and Counterclaim Defendant.
Rolin P. Bissell, Tammy L. Mercer, and James M. Yoch, Jr., of YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, DE; OF COUNSEL: Michael C. Holmes, John C. Wander, Michael L. Charlson, and Craig E. Zieminski, of VINSON & ELKINS LLP, Dallas, TX, Attorneys for the Defendants and Counterclaim Plaintiffs.
GLASSCOCK, Vice Chancellor What, Langston Hughes asked, becomes of a dream deferred?1 When the
dream is a multi-billion-dollar merger that changing market conditions no longer
favor, it seems, it becomes a carcass that, like those of millions of turkeys featured
in the holiday feasts just past, is diligently picked over. The carcass here is the
remnant of the dreamed-of merger of The Williams Companies, Inc. (“Williams”)
and Energy Transfer Equity, L.P. (“ETE” or the “Partnership”). The matter came
before me just before its demise, as Williams unsuccessfully fought for injunctive
relief to force consummation, a result vigorously opposed by ETE. Thereafter, the
parties pursued actions against one another for contractual damages under the
merger agreement. Before me now is Williams’ Motion to Dismiss ETE’s
counterclaims. ETE, having successfully resisted Williams’ attempt to force
consummation of the merger, is in the unlikely position of arguing that it is also
entitled to a billion-dollar breakup fee under the merger agreement. ETE, however,
was able to walk away from the merger based on the failure of a condition precedent:
the inability of its counsel to opine that the merger “should” trigger favorable tax
treatment. Since none of the allegations of breach supporting ETE’s entitlement to
the breakup fee caused, or even relate to, ETE’s exercise of its right to avoid the
merger, and, fundamentally, because the contract language it relies on is not
1 Harlem, Langston Hughes, Collected Poems (1994).
1 supportive, I find ETE’s counterclaim seeking the breakup fee not viable. My
analysis of ETE’s remaining counterclaims is mixed. My reasoning follows.
I. BACKGROUND
This Memorandum Opinion assumes familiarity with the facts outlined in the
previous Opinions of both this Court and the Supreme Court. “The reader is
forewarned that this case involves a maze of corporate entities and an alphabet soup
of corporate names.”2 This Opinion includes only those facts necessary to my
analysis.
A. The Merger Agreement and Failure of a Condition
The parties are significant players in the energy pipeline business.3
Counterclaim Plaintiffs ETE and its affiliate Energy Transfer Corp LP (“ETC”) are
Delaware limited liability partnerships.4 Counterclaim Defendant Williams is a
Delaware corporation.5
Williams and ETE negotiated a merger as set out in an Agreement and Plan
2 Chester Cty. Emps.' Ret. Fund v. New Residential Inv. Corp., 2017 WL 4461131, at *1 (Del. Ch. Oct. 6, 2017) (quoting Veloric v. J.G. Wentworth, Inc., 2014 WL 4639217, at *2 (Del. Ch. Sept. 18, 2014)). 3 Williams Cos., Inc. v. Energy Transfer Equity, L.P. (Williams’ Second Action), 2016 WL 3576682, at *1 (Del. Ch. June 24, 2016). 4 In addition, Counterclaim Plaintiffs LE GP, LLC (“LE GP”), ETE Corp GP, LLC (“ETE Corp”), and Energy Transfer Equity GP, LLC (“ETE GP”) are Delaware limited liability companies. Defs.’ and Countercl. Pls.’ Second Am. & Supplemental Affirm. Defenses & Verified Countercl. (the “Countercl.” or the “Counterclaim Complaint”) ¶¶ 41–45. 5 Id. ¶ 46.
2 of Merger dated September 28, 2015 (the “Merger Agreement” or “Agreement”).6
Under the Merger Agreement, Williams would merge into ETC (the “Merger”) in
exchange for ETC stock, $6.05 billion in cash, and certain other rights.7 Post-Merger
ownership of ETC would be split, with 19% held by the Partnership and 81% by
former Williams stockholders.8
After ETE and Williams signed the Merger Agreement, the energy
industry―and particularly the outlook for ETE and Williams―declined
substantially.9 In reaction to this decline—although its precise motives are in
dispute—ETE issued new units to certain large ETE equity holders after signing the
Merger Agreement (the “Special Issuance”).10 Ultimately, ETE’s tax counsel,
Latham & Watkins LLP (“Latham”), decided that it could not issue a tax-related
opinion with the required confidence level to satisfy a condition precedent for the
Merger to close.11 Relying on the failure of this condition precedent, ETE exercised
its right to terminate the Agreement on June 29, 2016.12
6 Id. ¶ 48 (including a Letter Agreement dated May 24, 2016 and noting that the Merger Agreement was amended on May 1, 2016); Williams’ Second Action, 2016 WL 3576682 at *1. 7 Countercl. ¶ 48; Williams’ Second Action, 2016 WL 3576682 at *3. 8 Williams’ Second Action, 2016 WL 3576682 at *3, 6. 9 Countercl. ¶ 3. 10 Id. ¶¶ 143–46, 149–50, 158–59; Williams’ Second Action, 2016 WL 3576682 at *4. 11 Countercl. ¶¶ 171–77; Merger Agreement § 6.01(h). 12 Countercl. ¶ 7; Williams Cos., Inc. v. Energy Transfer Equity, L.P., 159 A.3d 264, 275 (Del. 2017) (denying Williams’ request to enjoin ETE from terminating the Merger Agreement).
3 B. Procedural History
The parties quickly became entangled in litigation. Williams challenged the
Special Issuance and filed its first Verified Complaint against the Partnership and
LE GP on April 6, 2016 (the “First Action”), arguing that equitable relief was
necessary to preserve the Merger Agreement.13 Williams filed a Verified Amended
Complaint on April 19, 2016 (the “Second Action”) against the Defendants to
specifically enforce the Agreement and compel ETE to comply.14 I found that ETE
was entitled to terminate the Agreement because Latham’s inability to issue the tax
opinion was a failure of a condition precedent under that Agreement.15 Williams
appealed to the Supreme Court, which affirmed, in pertinent part, the Opinion
below.16 Williams also filed suit against ETE CEO and Chairman Kelcy Warren in
Texas state court for tortious interference with contract, but the suit was dismissed
as incompatible with the forum selection clause in the Merger Agreement.17
Williams seeks contract damages in the current litigation. ETE brought
counterclaims and alleges that Williams breached provisions of the Agreement
13 Williams Cos., Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG (Del. Ch. Apr. 6, 2016); a separate challenge to ETE’s issuance is also proceeding before me. In re Energy Transfer Equity L.P. Unitholder Litig. (ETE Unitholder Litig.), 2017 WL 782495, at *1 (Del. Ch. Feb. 28, 2017). 14 The actions are now combined in the present matter. Williams Cos., Inc. v. Energy Transfer Equity, L.P., C.A. No. 12337-VCG (Del. Ch. Nov. 30, 2016). 15 Williams’ Second Action, 2016 WL 3576682 at *21. 16 Williams Cos., 159 A.3d at 275. 17 Countercl. ¶¶ 72, 168–69.
4 pertaining to (i) the board recommendation requirement, (ii) the forum selection
clause, and (iii) the reasonable best efforts, disclosure, and financing cooperation
requirements. ETE contends that, as a result of these breaches, Williams owes ETE
$1.48 billion (the “Termination Fee”) and other damages.18 Currently before me is
Williams’ Motion to Dismiss those counterclaims. Because these alleged breaches
largely rely on my interpretation of the Merger Agreement, I include significant
portions of that Agreement below.
C. The Board Recommendation Claim
ETE alleges that Williams breached the board recommendation and
reasonable best efforts provisions of the Agreement by making negative comments
about Warren in press releases, public filings, pleadings in a lawsuit against Warren
in Texas state court, and by “failing to reconsider the recommendation” of the
Merger in light of changes “described in [Williams’] Form S-4” that “gutted the
foundations for the original recommendation.”19 The required “Company Board
Recommendation” (or the “Recommendation”) was defined in Section 3.01(d) of
the Merger Agreement:
The Board of Directors of the Company duly and validly adopted resolutions (A) approving and declaring advisable this Agreement, the Merger and the other Transactions, (B) declaring that it is in the best interests of the stockholders of the Company that the Company enter into this Agreement and consummate the Merger and the other
18 Countercl. ¶ 8. 19 Id. ¶ 23.
5 Transactions on the terms and subject to the conditions set forth herein, (C) directing that the adoption of this Agreement be submitted to a vote at a meeting of the stockholders of the Company and (D) recommending that the stockholders of the Company adopt this Agreement ((A), (B), (C) and (D) being referred to herein as the “Company Board Recommendation”), which resolutions, as of the date of this Agreement, have not been rescinded, modified or withdrawn in any way.20
ETE’s contention relies on interpreting the Agreement to mean that the public
statements made by Williams, or Williams’ Board of Directors (the “Directors” or
the “Board”), constitute a withdrawal of the Company Board Recommendation or
designation as a “Company Adverse Recommendation Change” under Section
4.02.21 Williams argues that a proper construction of Section 4.02 allows for a
“Company Adverse Recommendation Change” only in the context of a formal board
resolution and that no such board resolution was enacted.22 Section 4.02 reads in
relevant part:
(d) Neither the Board of Directors of the Company nor any committee thereof shall (i)(A) withdraw (or modify or qualify in a manner adverse to [ETE]), or publicly propose to withdraw (or modify or qualify in a manner adverse to [ETE]), the Company Board Recommendation or (B) recommend the approval or adoption of, or approve or adopt, declare advisable or publicly propose to recommend, approve, adopt or declare advisable, any Company Takeover Proposal (any action described in this clause (i) being referred to as a “Company Adverse Recommendation Change”) or (ii) approve or recommend, or publicly
20 Merger Agreement § 3.01(d) (emphases added). 21 For ease of reference, any citation to a “section” refers to a section in the Merger Agreement, unless otherwise noted. 22 Pl.’s Br. in Supp. of Its Mot. to Dismiss & to Strike Defs. & Countercl. Pls.’ Second Am. & Supplemental Affirmative Defenses & Verified Countercl. (“Pl. Op. Br.”) at 23–30; Nov. 30, 2016 Oral Arg. Tr. at 8:14–9:14.
6 propose to approve or recommend, or cause or permit the Company or any of its Subsidiaries to execute or enter into any Company Acquisition Agreement.
(f) Nothing contained in this Section 4.02 or elsewhere in this Agreement shall prohibit the Company or any of its Subsidiaries from (i) taking and disclosing to its stockholders a position contemplated by Rule 14d-9, Rule 14e-2(a) or Item 1012(a) of Regulation M-A promulgated under the Exchange Act or (ii) making any disclosure to its stockholders if the Board of Directors of the Company or any of its Subsidiaries determines in good faith (after consultation with and receiving advice of its outside legal counsel) that the failure to do so would reasonably be likely to constitute a breach of its fiduciary duties to its stockholders under applicable Law; provided, however, that any such action or statement or disclosure made pursuant to clause (i) or clause (ii) shall be deemed to be a Company Adverse Recommendation Change unless the Board of Directors of the Company reaffirms its recommendation in favor of the Merger in such statement or disclosure or in connection with such action.23
ETE contends that violations of the Company Adverse Recommendation provision
in Section 4.02(d), which fall outside of the safe harbor in Section 4.02(f), are
necessarily a violation of the reasonable best efforts provision in Section 5.03, and
that Williams―by breaching Section 4.02(d)―is also in breach of Section 5.03.24
ETE also contends that violations of portions of Section 5.03 are “untethered to
consummation of the Merger” and that such claims should remain even if the Merger
23 Merger Agreement § 4.02(f) (emphases added). 24 Countercl. ¶¶ 9, 32.
7 failed.25 As a result of these and other breaches, ETE seeks unspecified damages.26
ETE also argues that Williams’ breach of the Company Adverse
Recommendation provision in Section 4.02(d) allowed ETE to terminate the
Agreement under Section 7.01(e), which permits termination by ETE “in the event
that a Company Adverse Recommendation Change shall have occurred.”27
Therefore, Williams became immediately liable for a $1.48 billion fee (the
“Company Termination Fee”) under Section 5.06(d)(iii).28 Section 5.06(d)(iii) states
that if the “Agreement is terminated by [ETE] pursuant to Section 7.01(e) [a
Company Adverse Recommendation change], then . . . [Williams] shall pay [ETE] .
. . an aggregate fee equal to $1.48 billion.”29 Thus, according to ETE, Williams’
breach of the Company Adverse Recommendation Change provision in Section
4.02(b) allowed ETE to terminate the Agreement under the permissible termination
provision in Section 7.01(e), but then required Williams to pay a $1.48 billion
Company Termination Fee under Section 5.06(d)(iii).30
25 Defs. & Countercl. Pls.’ Br. in Opp’n to Pl. and Countercl. Def.’s Mot. to Dismiss & to Strike Defs. and Countercl. Pls.’ Second Amended & Supplemental Affirmative Defenses & Verified Countercl. (“Defs. Ans. Br.”) 47–48. 26 The damages sought other than the $1.48 billion Company Termination Fee are left unclear in the Counterclaim Complaint. See Countercl. ¶¶ 32 (“By taking these actions, Williams breached Sections 4.01(b), 5.03, and 5.14 of the Merger Agreement, is not entitled to any post-termination relief, and is liable for damages.”), 86 (“Williams has, therefore, violated Sections 4.02 and 5.03 of the Merger Agreement, owes ETE $1.48 billion, and is not entitled to any relief.”). 27 Merger Agreement § 7.01(e). 28 Id. § 5.06(d)(iii). 29 Id. § 5.06(d)(iii). 30 Countercl. ¶ 51.
8 According to Williams, ETE could receive the $1.48 billion Termination Fee
only if ETE “validly terminated the Agreement under Section 7.01(e) because the
Williams Board effected a Company Adverse Recommendation Change.”31 Thus,
Williams contends, to the extent that ETE maintains that violations of the reasonable
best efforts clause in Section 5.01—or any other violations besides those under
Section 7.01(e) and Section 5.06(d)(iii)—could lead to Williams paying the
Company Termination Fee, those contentions are based on an inaccurate reading of
the Merger Agreement.32 Sections 5.06(b) and (c) specify the fees and expenses
owed to the parties when the Agreement is terminated under other circumstances.33
Williams argues that it does not owe ETE the $1.48 billion Termination Fee because
it did not effect a Company Adverse Recommendation Change under the
Agreement,34 which is, according to Williams, the only way for Williams to owe
ETE the $1.48 billion Termination Fee.
D. The Forum Selection Clause
ETE alleges that Williams’ lawsuit against Warren in Texas for tortious
interference with the Agreement (the “Texas Merger Action”) violates the forum
selection clause in Section 8.10(b) of the Merger Agreement.35 Section 8.10(b)
31 Pl.’s Reply Br. in Further Supp. of Its Mot. to Dismiss & to Strike Defs. and Countercl. Pls.’ Second Am. & Supplemental Affirmative Defenses & Verified Countercl. at 6. 32 Nov. 30, 2016 Oral Arg. 16:22–17:5. 33 Merger Agreement §§ 5.06(b)–(c). 34 Nov. 30, 2016 Oral Arg. Tr. 15:9–17:5. 35 Countercl. ¶ 33.
9 states that:
Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the Court of Chancery of the State of Delaware for the purposes of any suit, action or other proceeding arising out of or relating to this Agreement and the rights and obligations hereunder or the Transactions or for the recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations arising hereunder or the Transactions.36
Williams contends that it did not breach the clause because it sued Warren in his
personal capacity and Warren is not a party to the Merger Agreement.37 Regardless,
argues Williams, any such breach was immaterial and therefore not subject to
liability because Section 7.02 limits post-termination liability for everything except
“willful and material breach[es] of any of its representations, warranties, covenants
or agreements.”38 Even if a breach were material, according to Williams, ETE
suffered no cognizable damages.39 Alternatively, if there were damages, then
Williams argues that recovery would be prohibited because Section 5.02(a) of the
Agreement states that “all fees and expenses incurred in connection with this
Agreement and the Transactions shall be paid by the party incurring such fees or
expenses, whether or not the Transactions are consummated.”40
36 Merger Agreement § 8.10(b) (emphasis added). 37 Pl. Op. Br. at 52–53. 38 Merger Agreement § 7.02 (emphases added). 39 Pl. Op. Br. at 52. 40 Merger Agreement § 5.06(a).
10 E. The Additional Breach of Contract Claims
ETE argues that Williams breached Section 5.01 of the Agreement by failing
to disclose: (i) information about an internal proxy contest that may have influenced
Williams’ vote in approving the Agreement and for failing to promptly notify ETE
of the same,41 (ii) “the self-interests of the Williams Board and/or beliefs concerning
those self-interests,”42 and (iii) the “material fact that members of [Williams’]
[B]oard considered the possibility of a board-member-led proxy contest when voting
in favor of the [Merger]” in the Form S-4.43 Williams argues that it disclosed the
relevant facts and that, in any case, ETE “has pleaded (and can plead) no injury”
from any disclosure violations.44
Section 5.01 pertains to the preparation of the Form S-4 and the proxy
statement and states in pertinent part:
(a) If at any time prior to receipt of the Company Stockholder Approval any information relating to [ETE] or the Company, or any of their respective Affiliates, directors or officers, should be discovered by [ETE] or the Company which is required to be set forth in an amendment or supplement to either the Form S-4 or the Proxy Statement, so that either such document would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, the party that discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing such information
41 Countercl. ¶ 29. 42 Id. ¶ 130. 43 Id. ¶ 112. 44 Pl. Op. Br. at 42–48.
11 shall be promptly filed with the SEC and, to the extent required by Law, disseminated to the stockholders of the Company.45
The success of ETE’s allegations rest on whether I find that these omissions are
material and, if material, resulted in compensable damages.
ETE further alleges that Williams breached Sections 4.01(b) (carrying on
business in the ordinary course), 5.03 (reasonable best efforts), and 5.14 (reasonable
cooperation in financing arrangements) of the Agreement by refusing to provide the
information required―including certain financial information and a consent from
Williams’ auditor to include its audit reports related to that financial
information―for ETE to file a Form S-3 and complete a public equity offering.46
ETE’s contention is that Williams’ obligation to not unreasonably withhold consent
for ETE to “carry on its business in the ordinary course” under Section 4.01(b),
combined with the Letter Agreement’s allowance for “issuances of equity securities
with a value of up to $1.0 billion in the aggregate,”47 should be read together to mean
that a proposed issuance, by which ETE intended to finance the Merger in part, was
allowable. Williams’ consent was improperly withheld, placing Williams in breach
of Section 4.01(b).48 ETE alleges that this violation also breaches the reasonable
best efforts provision in Section 5.03 and a provision requiring cooperation in
45 Merger Agreement § 5.01(a) (emphasis added). 46 Countercl. ¶¶ 31–32. 47 Id. ¶ 154. 48 Id. ¶¶ 148–56.
12 financing arrangements in Section 5.14.49 Williams argues that Section 5.14 was not
triggered because its consent was not unreasonably withheld.50 Section 5.14 states
in relevant part:
Prior to the Effective Time, the Company shall, and shall cause its Subsidiaries and their respective Representatives to, provide cooperation reasonably requested by [ETE] that is necessary or reasonably required in connection with the Financing or any other financing that may be arranged by [ETE].51
The viability of these contentions depends on my finding that Williams’
consent was withheld improperly and that any such withholding of consent caused
injury to ETE.
In addition, Williams argues that alleged violations of Section 5.01(b)―which
pertains to preparing the Form S-4 and the proxy statement―did not result in
damages to ETE. Section 5.06 states in pertinent part:
(b) If this Agreement is terminated (i) by either the Company or [ETE] pursuant to Section 7.01(b)(iii) or (ii) by [ETE] pursuant to Section 7.01(c), then in each case of clauses (i) and (ii) the Company shall promptly upon written demand by [ETE] (and in any event no later than two business days after such written demand is delivered to the Company) reimburse [ETE], by wire transfer of same day federal funds to the account specified by [ETE], for all out-of-pocket fees and expenses incurred or paid by or on behalf of [ETE] or their respective Subsidiaries and Affiliates in connection with the Merger or related to the preparation, negotiation, execution and performance of this Agreement, the Commitment Letter, the Fee Letter and related transaction documents, including all fees and expenses of counsel,
49 Id. ¶¶ 32, 136; Merger Agreement §§ 4.01(b), 5.03, 5.14. 50 Pl. Op. Br. at 48–52. 51 Merger Agreement § 5.14 (emphases added).
13 financial advisors, accountants, experts and consultants retained by [ETE] or their respective Subsidiaries and Affiliates, such amount not to exceed $50.0 million in the case of clause (i) and $100.0 million in the case of clause (ii).
(c) If this Agreement is terminated by the Company pursuant to Section 7.01(d), then [ETE] shall promptly upon written demand by the Company (and in any event no later than two business days after such written demand is delivered to [ETE]) reimburse the Company, by wire transfer of same day federal funds to the account specified by the Company, for all out-of-pocket fees and expenses incurred or paid by or on behalf of the Company or its Subsidiaries and Affiliates in connection with the Merger or related to the preparation, negotiation, execution and performance of this Agreement and related transaction documents, including all fees and expenses of counsel, financial advisors, accountants, experts and consultants retained by the Company or its Subsidiaries and Affiliates, such amount not to exceed $100.0 million.52
II. ANALYSIS
The Counterclaim Defendants have moved to dismiss the counterclaims under
Court of Chancery Rule 12(b)(6). When reviewing such a motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.53
I need not, however, “accept conclusory allegations unsupported by specific facts or
. . . draw unreasonable inferences in favor of the non-moving party.”54 In addition,
52 Merger Agreement §§ 5.06(b)–(c). 53 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation marks omitted). 54 Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
14 I refer to certain documents and public filings that are incorporated by reference in
the Counterclaim Complaint.55
A. The Board Recommendation Claim
The most serious contention in the ETE counterclaims―from a damages
perspective, at least―is that Williams violated its contractual obligations regarding
the Board Recommendation in favor of the Merger, after which ETE terminated the
Agreement, triggering an obligation on Williams’ part to pay ETE a $1.48 billion
Termination Fee. ETE seeks specific performance of this provision.
The syllogism under which ETE seeks the Termination Fee is rather
complicated. First, ETE points out that under Section 3.01(d)(1), the Williams’
Board of Directors is required to cause the Company to adopt resolutions (a)
approving the Merger; (b) declaring that the Merger is in the best interest of its
stockholders; (c) directing a stockholder vote; and (d) recommending that the
stockholders adopt the Merger Agreement in that vote. Resolutions comprising (a),
(b), (c) and (d) are defined as the “Company Board Recommendation.”56 All parties
agree that the Williams’s Board initially complied with the Merger Agreement by
making this required Company Board Recommendation. Second, ETE points out
that Section 4.02(d)(i)(A) provides that neither Williams’ Board, “nor any
55 See Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016). 56 Merger Agreement § 3.01(d).
15 committee thereof,” shall “withdraw (or modify or qualify in a manner adverse to
[ETE], or publicly propose to withdraw, or modify or qualify in a manner adverse to
[Williams], the Company Board Recommendation.”57 ETE argues that, even though
the Williams Directors did not formally withdraw the Company Board
Recommendation, the Directors informally decided (in light of ETE’s perceived
disinclination to merge) that it was more lucrative to Williams to pursue negotiation
of a walk-away payment from ETE than to consummate the Merger. Third, ETE
contends that, in pursuit of the strategy just described, the Company took the
following actions during the pendency of the Merger: it (1) issued press releases
that signaled Williams’ pessimism about the Merger to the market; (2) sued ETE
CEO Kelcy Warren in Texas state court and used the pleadings to damage investor
confidence in Warren; (3) used the media to portray ETE in a negative light; and (4)
released a Form S-4 that undermined the financial projections used to initially
recommend the Merger to Williams’ stockholders. The actions described above,
according to ETE, amount to a de facto “withdrawal” of the Company Board
Recommendation sufficient to qualify as a breach of Section 4.02(d). Fourth, after
that breach, ETE exercised its right to terminate the Merger. Fifth, and finally, under
the remedies described in Section 5.06 of the Merger Agreement, termination in this
scenario entitles ETE to the Termination Fee.
57 Id. § 4.02(d)(i)(A).
16 ETE presses this argument despite the following undisputed facts: 1) Williams
sued ETE to specifically enforce consummation of the Merger, which ETE
strenuously (and successfully) opposed; 2) notwithstanding the supposed de facto
withdrawal of the Company Board Recommendation in favor of the Merger,
Williams’ Directors never acted formally to withdraw the resolutions; 3) the Board
affirmed the Company Board Recommendation several times during the pendency
of the Merger; 4) an overwhelming majority of Williams’ stock was voted in favor
of the Merger, after which ETE—not Williams—terminated the Merger upon failure
of a condition precedent.
Williams notes that ETE did not purport to terminate the Merger based on
breach of the Company Board Recommendation provision; instead, it relied on the
failure of the tax opinion to avoid the deal. Williams then makes the common-sense
observation that it would be passing strange for two parties to a merger agreement
to structure the agreement so that a party which desired to exit the agreement could
do so, over the other party’s objections, and at the same time receive the windfall of
a substantial termination fee. ETE does not suggest that it is not seeking a windfall
in the form of the Termination Fee; it simply notes that Delaware is a contractarian
state that leaves parties to the benefits of their bargains, good, bad, and indifferent.
ETE argues that Williams breached its duty not to modify the Company Board
Recommendation, after which breach ETE terminated the Merger, thereby
17 qualifying for the $1.48 billion Termination Fee. Accordingly, ETE asserts that if it
is entitled to the Termination Fee under the negotiated terms of the Agreement, our
Courts will enforce the contract, windfall or no. ETE is correct in noting that this is
a contractarian jurisdiction;58 however, I find the contract language, as written, fatal
to ETE’s contention here.
That is because the Agreement itself carefully defines the Company Board
Recommendation as a series of four recommendations to be made, via board
resolution, by the Williams’ Directors. It is undisputed that the Williams Board
created, via resolutions, a contractually compliant Company Board
Recommendation. There are no allegations in the Counterclaim Complaint that the
Directors, or any subcommittee thereof, ever formally modified (or expressed the
intent to so modify) the Recommendation. In fact, the Recommendation remained
in place through the vote on the Merger, which was overwhelmingly approved by
Williams’ stockholders. ETE, therefore, received what it bargained for. ETE has
not alleged facts which make it reasonably conceivable that the Board withdrew the
Recommendation.
ETE’s argument is really that the Board adopted a strategy under which the
58 Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072, 1075 (Del. Ch.), aff'd, 68 A.3d 1208 (Del. 2012), as corrected (July 12, 2012) (“I conclude that . . . consistent with Delaware's pro-contractarian public policy, the parties' agreement . . . should be entitled to specific performance and injunctive relief should be respected.”).
18 Company took a number of actions which ETE deems inimical to consummation of
the merger. As will be discussed below, those efforts may be contractually
meaningful in terms of the “best efforts” requirement that the Merger Agreement
imposed on Williams. However, the Agreement was careful to cabin ETE’s
entitlement to the Termination Fee to those situations in which Board (or
subcommittee) action modified (or proposed to modify) the required Company
Board Recommendation, after which ETE terminated the Merger.
Because I find the Merger Agreement sections discussed to be clear on their
face, I will not discuss further the parties’ various attempts to construe those
provisions in light of other provisions in the Agreement. Suffice it to say that ETE’s
reference to other contract provisions, attempting to demonstrate that the plain
reading of the sections I have described above is incompatible with the balance of
the Merger Agreement, I find unconvincing.
B. The Forum Selection Clause
During the pendency of the Merger, Williams brought an action against Kelcy
Warren, ETE’s principal, in Texas. The parties dispute the motive behind the
litigation, which involved ETE’s issuance of equity in ETE to insiders. The purpose
for that issuance is itself disputed. Williams characterizes the Texas litigation as in
aid of consummation of the Merger; ETE characterizes it as posturing in favor of
Williams’ negotiating a payment from ETE in return for Williams’ consent to
19 terminate the merger. In any event, ETE argues that the Texas litigation violated
Section 8.10(b), which provides that no party shall bring “actions relating to this
Agreement or the Transactions in any court other than the [Court of Chancery]” and
that each such party “irrevocably submits with regard to any such action or
proceeding . . . generally and unconditionally, to the personal jurisdiction of the
aforesaid courts.”59 According to ETE, the Texas court dismissed the suit for
violating the forum selection clause in Section 8.01(b) of the Merger Agreement.60
ETE seeks damages here, which it describes as the fees and costs of the Texas action,
arising from breach of the forum selection clause.
The parties argue forcefully about whether Warren was a party to the Merger
Agreement, and thus whether Section 8.01(b) applied to the Texas action, and
whether this Court had jurisdiction over Warren under the terms of the Merger
Agreement. Even if I assume that ETE has the best of that argument, and that ETE
is the proper party to seek as damages fees and costs incurred in a suit against Warren
in his personal capacity, ETE cannot recover those fees and costs here, because
Section 5.06(a) of the Agreement is, in that case, dispositive. That Section provides
that “all fees and expenses incurred in connection with this Agreement and the
Transactions shall be paid by the party incurring such fees or expenses, whether or
59 Merger Agreement § 8.10(b). 60 Defs. Ans. Br. 16.
20 not the Transactions are consummated.”61 In adopting that language, the parties
waived any right to receive fees and expenses for a breach of the Agreement—if a
breach it was—of the type ETE describes here.
I note that in addition to fees and costs, ETE argues that it suffered other
damages in connection with the representations made by Williams in the Texas
litigation, violating Merger Agreement provisions independent of the forum
selection clause. Those damages claims are incorporated in the discussion below.
C. The Additional Breach of Contract Claims
Aside from its arguments concerning the Termination Fee and breach of the
forum selection clause, ETE alleges other supposed breaches of the Agreement by
Williams.
ETE argues that, as market conditions changed, the Williams’ Board failed to
obtain an updated fairness opinion from its financial advisors and failed to make
disclosures to its stockholders concerning changes in market conditions. In addition,
ETE contends that Williams’ disclosures were materially incomplete concerning its
reasons for agreeing to the Merger in the first instance. According to ETE, those
include the threat of a proxy fight or consent solicitation―which caused some
Williams Directors to change their vote to favor the Merger―that was inadequately
disclosed. ETE next alleges that Williams failed to disclose various self-interests of
61 Merger Agreement § 5.06(a).
21 Williams’ Directors. Also, ETE alleges that Williams failed to update its Form S-4
to reflect that at least one of the potential proxy contests could have been led by at a
sitting Williams’ Board member, which according to ETE, influenced the other
Directors’ votes in the Merger. These disclosures, according to ETE, would have
been material to stockholders in making an informed vote concerning the Merger.
The disclosures—in addition to being required under common law—were required
under Section 5.01 of the Agreement.
Whether Williams’ Board breached duties to its stockholders either under
common law or the Agreement is a question of fact. Here, however, ETE seeks its
own damages under the Agreement. While failure of material disclosures may have
posed a threat of damages to the combined entity if the Merger had been
consummated, the Merger was in fact terminated by ETE. Damages are an element
of a breach of contract action.62 It is simply not reasonably conceivable that any
breach of the Williams Directors’ responsibility to obtain an updated fairness
opinion63 or make required disclosures to Williams stockholders could lead to
damages to ETE, in light of the failure of the Merger. Therefore, the Motion to
Dismiss must be granted with respect to this issue.
62 H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003) (“Under Delaware law, the elements of a breach of contract claim are: 1) a contractual obligation; 2) a breach of that obligation by the defendant; and 3) a resulting damage to the plaintiff.”). 63 I make no finding here that Williams was under a common law obligation to obtain an updated fairness opinion, as a duty to its stockholders.
22 Next, ETE notes that Williams failed to consent to a nearly $1 billion public
offering, by which ETE intended to finance, in part, the Merger. ETE argues that
Williams had a responsibility to cooperate with this equity financing, which required
Williams to submit certain financial information and a consent from Williams’
auditor to include certain audit reports related to that financial information.
According to Williams, the public offering was discriminatory to Williams’
stockholders, and it had a proper business purpose for withholding its consent. As
noted above, I have another action pending64 concerning this Special Issuance and
its effect on other non-participating stockholders. The contractual language
regarding Williams’ obligation in this situation is not clear to me, and my analysis
would benefit from extrinsic evidence regarding that obligation. A more serious
question is whether damages can flow from any breach, given that ETE terminated
the Agreement for failure of the unrelated condition precedent regarding tax
consequences. ETE also argues that Williams failed to use best efforts to
consummate the Merger as required by the Merger Agreement. To the extent that
ETE can prove such, again, damages are problematic. However, we are at the
motion to dismiss phase of this litigation. ETE argues that its willingness to exercise
its option to terminate the Merger Agreement, based on the failure of the condition
precedent, was informed by the results of Williams’ breach of the obligation to
64 See ETE Unitholder Litig., 2017 WL 782495, at *1.
23 approve the equity offering and failure of best efforts. It seeks, at a minimum, to
offset Williams’ own damages claims accordingly. While I am dubious that ETE
will ultimately prevail in demonstrating that Williams breached the Agreement in
this regard, and that damages flowed as a result, such an outcome is reasonably
conceivable. Therefore, resolution of these issues awaits a developed record and the
Motion to Dismiss this claim is denied.
III. CONCLUSION
For the foregoing reasons, the Plaintiff’s Motion to Dismiss the counterclaims
is granted in part and denied in part. I note that Williams has a motion outstanding
to strike ETE’s affirmative defenses, which rest on the same allegations as do the
counterclaims. The parties should consult and inform me whether any portion of
that Motion to Strike needs further judicial resolution. The parties should also
provide a Form of Order consistent with this Memorandum Opinion.