Williams Cos. v. Energy Transfer Equity, L.P. - 159 A.3d 264 (Del. 2017)

Rule:

Once a breach of a covenant is established, the burden is on the breaching party to show that the breach did not materially contribute to the failure of the transaction. The plaintiff has no obligation to show what steps the breaching party could have taken to consummate the transaction.

Facts:

Energy Transfer Equity, L.P. ("ETE") and Williams Companies, Inc., ("Williams") entered into a Merger Agreement, wherein ETE agreed to acquire the assets of Williams. The Merger Agreement contemplated two steps. In the first step, Williams would merge into a new entity, Energy Transfer Corp LP ("ETC"), a Delaware limited partnership taxable as a corporation. ETE would transfer $6.05 billion in cash to ETC in exchange for 19% of ETC's stock. The $6.05 billion and 81% of ETC's stock would be distributed to the Williams stockholders in exchange for their Williams stock. In step two, ETC would transfer the Williams assets to ETE in exchange for newly issued ETE Class E partnership units. The merger was conditioned upon the issuance of an opinion by ETE's tax counsel, Latham & Watkins LLP, that the second step of the transaction, the transfer of Williams' assets to ETE in exchange for the Class E partnership units, "should" be a tax-free exchange of a partnership interest for assets under Section 721(a) of the Internal Revenue Code (the “721 opinion”). After the parties entered into the Agreement, the energy market suffered a severe decline which caused a significant loss in the value of assets of the type held by Williams and ETE. This led to ETE raising an issue as to whether the IRS might view a portion of the $6.05 billion not as payment only for the ETC stock, but as payment in part for the Williams assets, thus rendering the second step of the merger taxable. This issue ultimately led to Latham being unwilling to issue the 721 opinion. Since the 721 opinion was a condition of the transaction, ETE indicated that it would not proceed with the merger. Williams then sought to enjoin ETE from terminating the Merger Agreement, arguing that ETE breached the Agreement by failing to "use commercially reasonable efforts" to obtain the 721 opinion and "reasonable best efforts" to consummate the transaction. The Court of Chancery rejected Williams’ argument and held that ETE did not breach its covenants. Williams appealed, arguing that the Court of Chancery erred by improperly deciding that ETE did not breach its efforts obligations because it interpreted "commercially reasonable efforts" and "reasonable best efforts" as imposing only a negative duty not to thwart or obstruct performance of the Agreement, rather than an affirmative duty to help ensure performance. Williams further averred that the Court of Chancery, after finding that ETE breached its covenants, should have shifted the burden to ETE to prove that its breach did not materially contribute to the failure of the closing condition.

Issue:

1. Did the Court of Chancery err in interpreting “commercially reasonable efforts” and “reasonable best efforts” as imposing only a negative duty to thwart or obstruct performance of the Agreement?
2. Did the alleged breach of ETE contribute to the failure of the Latham condition, thereby warranting the shift of burden of proof to ETE?

Answer:

1) Yes. 2) No.

Conclusion:

The Court held that the Court of Chancery did not properly analyze whether an LP breached its "efforts" covenants because it focused on the absence of any evidence to show that the LP caused the LP's tax counsel to withhold the I.R.C. § 721 opinion but the covenants required the LP to take all "reasonable" steps to solve problems and consummate the transaction. However, the Court held that the court did not improperly place the burden of proving causation upon Williams, the target firm, because the LP demonstrated that the record was barren of any indication that the action or inaction of the LP, other than simply drawing counsel's attention to the problem, contributed materially to counsel's inability to issue the § 721 opinion.