Delaware Supreme Court Affirms $600 Million Ruling against Energy Transfer in Williams Merger Fallout
By Yu-tyan Lin, LLM Candidate, Class of 2024, NYU School of Law
On October 10, 2023, in Energy Transfer, LP v. Williams Companies, Inc., 2023 WL 6561767 (Del. 2023), the Delaware Supreme Court affirmed three decisions from the Delaware Court of Chancery, compelling Energy Transfer, LP (ETE) to pay a $410 million fee, plus interest, and over $85 million in attorney’s fees, for withdrawing from a significant $38 billion merger with The Williams Companies (Williams). This decision marked the end of a legal battle from the failed merger between these two fuel pipeline companies.
In May 2015, Williams agreed to acquire units in Williams Partners LP (WPZ), with a $410 million termination fee if it terminated the WPZ transaction (WPZ termination fee). When ETE later proposed acquiring Williams that same year in an all-equity deal (Merger Agreement), it insisted on Williams’s terminating the WPZ deal. The Merger Agreement provided that if ETE terminated the transaction while in violation of its covenants under the Merger Agreement, ETE would be required to reimburse Williams for the WPZ termination fee. Furthermore, the Merger Agreement contained a provision awarding attorney’s fees to the prevailing party in any action to recover the WPZ termination fee. Finally, under the Merger Agreement, the Williams board of directors was required to pass a series of resolutions in support of the transaction; and if the Williams board decided against supporting the merger, Williams would have to pay a $1.48 billion breakup fee to ETE (Merger termination fee). The Williams board did adopt resolutions approving the Merger Agreement, subject to the company’s stockholders’ approval.
Between the execution of the Merger Agreement and its closing, however, commodity prices declined steeply with the result that ETE contemplated abandoning the deal with Williams. Thereafter, in order to avoid a “liquidity crunch,” ETE also examined options to raise more capital and eventually concluded a private offering exclusive to ETE insiders (Preferred Offering), which did not require Williams’s consent but ultimately resulted in litigation between ETE and Williams.
Meanwhile, ETE personnel discovered a potential tax issue—that the transaction would not be tax-free to investors as originally envisioned. Williams sued to prevent ETE from terminating the merger on that basis, but the Court of Chancery ruled it could, and ETE ultimately terminated the merger in June 2016.
As a consequence, Williams sought reimbursement of the WPZ termination fee, arguing that by conducting the Preferred Offering ETE had violated its covenants in the Merger Agreement. ETE countered with a claim seeking payment of the Merger termination fee based on alleged breaches by Williams. The Court of Chancery had found that ETE breached its covenants with the Preferred Offering, triggering reimbursement of the WPZ termination fee, and granted Williams its attorney’s fees. The court also rejected ETE’s counterclaim.
ETE subsequently appealed to the Delaware Supreme Court the 2017 dismissal of its counterclaim, the 2021 award that it reimburse Williams for the WPZ termination fee, and the 2022 decision that Williams’s attorney’s fee award was reasonable.
In this present case, the Delaware Supreme Court ruled as follows.
- Adverse Modification of Williams Board Recommendation for $1.48 Billion Termination Fee: The Delaware Supreme Court rejected ETE’s claim that subsequent public statements made by Williams constituted an adverse change in the approval of the merger by Williams, emphasizing that the explicit language of the Merger Agreement required an adverse modification to the recommendation by the Williams board of directors, which it found did not occur. The Court affirmed the Court of Chancery’s decision that ETE’s reading of the Merger Agreement was unreasonable and that Williams’s actions did not warrant awarding ETE the Merger termination fee.
- Breach of Merger Agreement’s Efforts Obligations: ETE also claimed that Williams violated the Efforts Obligations and Ordinary Course Covenant of the Merger Agreement—which required the parties exercise reasonable best efforts to consummate the merger—based on actions of its CEO and thus was not entitled to be reimbursed for the WPZ termination fee. The Delaware Supreme Court held that the Court of Chancery was correct to dismiss this claim, emphasizing that ETE “failed to prove Williams materially breached” this covenant.
- Application of Section 4.01(b)(v) of Parent Disclosure Letter to ETE’s Preferred Offering: ETE also argued that the Preferred Offering did not breach the Merger Agreement, which affected whether Williams would be reimbursed for the WPZ termination fee. The key issue was the interpretation of certain exceptions to some covenants in the Merger Agreement restricting ETE’s ability to issue equity securities. The Delaware Supreme Court agreed with the Court of Chancery’s finding that the contract language was ambiguous and deferred to the lower court’s determination that extrinsic evidence supported Williams’s interpretation on this issue.
- Award of Attorney’s Fees under Fee-Shifting Provision: Finally, ETE challenged the Court of Chancery’s approval of an award of more than $85 million in attorney’s fees to Williams under the fee-shifting provision relating to recoupment of the WPZ termination fee, by arguing, among other things, that the award was unreasonable because it was calculated based on a contingency agreement. After a detailed analysis, the Delaware Supreme Court found that the “Court of Chancery’s award of attorney’s fees and interest was not an abuse of discretion.”
In conclusion, the Delaware Supreme Court affirmed “the Court of Chancery’s well-reasoned opinions” and judgment that ETE must reimburse Williams for the WPZ termination fee and pay its attorney’s fees.