The Williams Cos., Inc. v. Energy Transfer LP, C.A. No. 12168-VCG (Del. Ch. July 2, 2020)
The Court of Chancery will enforce a merger agreement’s plain and unambiguous terms, including parties’ agreed-upon conditions for liability of a termination fee. Termination fee litigation, however, often involves critical factual determinations, such as issues of materiality or best efforts that may require a trial to develop the appropriate record to determine liability.
In 2015, fuel pipeline giants The Williams Companies, Inc. and Energy Transfer LP (“ETE”) entered into a cash-plus-equity merger agreement. To enter the agreement, Williams had to terminate a previously agreed-to transaction and incur a $410 million termination fee. Williams and ETE agreed that if either party terminated the merger agreement under certain conditions, ETE would reimburse Williams $410 million. One of these conditions was if a certain deadline passed and ETE was not, at that time, in compliance with one of several contractual mandates.
As the market deteriorated, ETE wanted to exit the merger agreement and sought to stabilize dividends for its equity holders. After Williams declined to approve a proposed public offering of convertible units by ETE that would have excluded Williams’ stockholders, ETE made a private offering that achieved the same result, but that required ETE to amend its limited partnership agreement. Further, due to the changing market, the merger no longer qualified as a tax-free transaction, which had been a condition precedent to closing. As Williams sought to close the merger, ETE terminated the merger agreement, but the termination occurred after the deadline in the agreement. ETE’s justification for the late termination was its counsel’s inability to opine that the transaction would be tax-free. Among the relief sought by the parties in the ensuing litigation in the Delaware Court of Chancery, Williams sought reimbursement of the $410 million termination fee. The parties cross moved for summary judgment on that issue.
While the Court of Chancery was able to interpret the parties’ rights and obligations under the merger agreement’s plain and unambiguous terms, it was unable to resolve all questions of material fact without trial. Specifically, the Court of Chancery examined the merger agreement’s unambiguous terms regarding the termination fee. The Court found those terms required ETE to reimburse Williams $410 million if termination occurred after the termination deadline and certain conditions were unmet—without regard to whether the unsatisfied condition was itself the cause for the termination. In contrast to other provisions of the merger agreement, causation was not a requirement under the reimbursement provision. The merger agreement also contained a survival clause, in which ETE’s reimbursement obligation would survive even if the failure of a condition precedent—such as the tax-free status—would have otherwise permitted ETE to terminate the transaction. Turning to whether ETE’s breach was sufficient to trigger reimbursement liability for the termination fee, the Court found that a trial was required to determine a number of material factual issues. Those factual issues included whether Williams had found ETE’s alleged violations immaterial, whether ETE’s conduct to find a tax work-around fulfilled its best-effort duties under the agreement, whether the failure of the tax condition was material under the terms of the agreement, and whether ETE’s private offering was contractually permitted either as a carve-out or because its impact on Williams was immaterial.
