Good Faith on Taxes at Center of Energy Transfer Court Spat

  • Williams Cos., Energy Transfer in court over stalled merger
  • Both companies accuse each other of violating agreement

A key issue in the legal battle between Energy Transfer Equity LP and Williams Cos. over their stalled merger will be the sincerity of lawyers who concluded the deal between the pipeline operators is marred by tax complications, a judge said Tuesday.

“It matters if it was made in good faith,” Delaware Chancery Court Judge Sam Glasscock said of the lawyers’ findings that the combination can’t close because of tax issues. Glasscock heard arguments during a two-day trial in Georgetown over Williams’s claims that Energy Transfer is trying to scuttle the merger because of buyer’s remorse. The judge said he would hand down a ruling on Friday, ahead of a vote by Williams’s shareholders on June 27. 

Glasscock’s decision may end a months-long ordeal that has seen Energy Transfer and Williams battle each other both in and out of court over a deal that’s soured since it was announced in September. Back then, Energy Transfer agreed to pay $43.50 a share in either cash or stock, valuing the merger at $32.9 billion. The ensuing plunge in oil prices wiped out almost half the value of both companies, throwing into question the economics of the transaction and casting doubt on its completion.

‘More Credence’

The judge’s comments may be positive for Energy Transfer, said Brandon Barnes, a senior litigation analyst at Bloomberg Intelligence, in Washington. Energy Transfer shares surged as much as 21 percent before closing at $14.32. Williams shares fell 3 percent to $21.67.

“Proving a negative on the good faith issue is difficult,” Barnes said. “It could be a key indication that there may be light at the end of the tunnel for ETE where they could walk away from this deal without paying anything or being forced to actually close.”

Energy Transfer has repeatedly said the merger can’t be completed because the pipeline company hasn’t been able to get an opinion that finds the deal’s structure frees shareholders from tax liabilities. It sought the court’s permission to cancel the deal if it wasn’t able to get the opinion from its tax counsel, Latham & Watkins LLP, before the June 28 closing deadline.

Brandon Blossman, an analysts at Tudor Pickering Holt & Co., said Glasscock’s focus on good faith provides a “very clean way to parse” the case.

Tax Dispute

“If the answer is that Latham was acting in good faith and they can no longer deliver the opinion letter, you can’t close the deal,” said Blossman, who has hold ratings on both companies. “There is nothing else to talk about, the deal breaks and everyone goes home. Energy Transfer wouldn’t have to come up with $6 billion in cash that they have promised to Williams shareholders.”

Lawyers on both sides spent much of Tuesday explaining their views of the tax issue to Glasscock. Latham & Watkins attorneys concluded the deal might not pass regulatory muster, Laurence Stein, a partner at the firm, testified Tuesday. The law firm was hired by both companies to hand down the decision, as part of the merger agreement. “It would be very easy for the IRS” to find problems with the deal’s structure, Stein said.

Williams’s lawyers countered that such clearances are routinely given to U.S. mergers and buyouts. The company accused Energy Transfer Chief Executive Officer Kelcy Warren of using the tax issue as a pretext to scuttle the deal.

Flawed Analysis

Andrew Needham, a partner at Cravath Swaine & Moore LP, testified Tuesday he was baffled when Latham’s lawyers notified him in April that they’d found tax flaws in a deal signed eight months earlier and sought to persuade them that their analysis was flawed. In Needham’s view, Latham’s position on the tax question was “absurd and ridiculous.”

Tim Fenn, another Latham partner, testified Monday he was chagrined to discover the tax problem as the deal was nearing its June 28 closing date. “I wish I had seen this earlier,” he told Glasscock.

Energy Transfer’s argument on the tax issues is “not plausible,” Howard Abrams, a University of San Diego law professor specializing in tax issues, testified for Williams.

“I don’t believe it’s their true and independent opinion,” Abrams said of Latham & Watkins’s conclusion.

‘Preposterous’ Claim

In court papers filed before the trial, Energy Transfer called “preposterous” Williams’s claims that the law firm was following its orders by refusing to hand down the tax opinion.

Williams has an uphill battle convincing Glasscock that a reputable law firm such as Latham & Watkins acted in bad faith, said Larry Hamermesh, a Widener law professor who is an expert in Delaware corporate law.

“It looks suspicious that they only discovered the tax issue after Energy Transfer started thinking about walking away, but is that enough to show bad faith on the part of the law firm?” Hamermesh asked in an interview on Tuesday. “I think that’s a difficult argument to win.”

The case is Williams Companies Inc. v. Energy Transfer Equity LP, CA12337, Delaware Chancery Court (Georgetown).

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