A dissent Thursday by Chief Justice Leo Strine of the Delaware Supreme Court has no practical consequences whatsoever. In The Williams Companies v. Energy Transfer Equity, Strine’s Supreme Court colleagues affirmed a Chancery Court ruling that allowed ETE to walk away from a $20 billion agreement to acquire Williams because ETE’s tax lawyers at Latham & Watkins declined in good faith to issue a tax opinion required in the merger agreement. The majority ruling means the deal is dead. ETE wins. Latham can begin to forget the awkwardness of defending its integrity at a 2016 trial in Chancery Court.
But Strine’s dissent implies that maybe Latham – and other deal lawyers – should not so quickly disregard the lessons of the ETE case. As the chief justice framed the case, the key question was not whether ETE coerced or deceived Latham because the company was looking for an escape hatch from the Williams deal nor whether the Latham tax partner who ultimately agreed with ETE and declined to provide the requisite tax opinion was “dishonest or a bad man.” The crux of the inquiry, Chief Justice Strine said, should have been whether ETE boxed its lawyers into delivering the result the company wanted.
“Lawyers by nature tend to be loyal to their clients. This is sort of baked into our professional rules,” the chief justice wrote. “The record leaves me sympathetic with the Latham tax lawyer when he said he could not get to yes. But … this record suggests to me the need for a view of the evidence through the right lens, not to exculpate the very conduct that put Latham in such an awkward position.”
In case you’ve forgotten, chief justice’s acerbic ETE dissent is a good reminder that no one is more astute than Strine about the dynamics of dealmaking. His spin on the case is that ETE manipulated Latham, taking advantage of lawyers’ baked-in eagerness to serve their clients. And regardless of the outcome of this case, Strine’s dissenting account is worth thinking about.
Here’s the background. When ETE agreed to acquire the gas pipeline company Williams in 2015, the deal called for Williams to merge into a newly created limited partnership and ETE pay $6 billion in cash for shares in the limited partnership. (I’m collapsing several complicated transactional steps.) The deal agreement included a requirement that Latham issue an opinion that the cash-for-shares exchange would be tax-free.
ETE suffered buyer’s remorse as gas prices declined in the months after the merger agreement was signed. Shares in the “the proposed transaction quickly became financially unpalatable to (ETE),” wrote Vice-Chancellor Sam Glasscock in his 62-page opinion in the case. “It became clear to the parties and to the interested public that (ETE) desired an exit from the merger agreement as strongly as it had desired to enter the agreement in the first place.”
With ETE trying to figure out if it could back away from the deal, the company’s senior tax executive Brad Whitehurst had what Vice-Chancellor Glasscock called an epiphany. Whitehurst said he had thought ETE’s $6 billion in cash was to be exchanged for a floating number of shares, valued at $6 billion, in the limited partnership Williams had merged into. The actual agreement called for ETE to receive a fixed percentage of shares, now worth a fraction of $6 billion. Whitehurst testified that he became concerned that the IRS “might attribute a portion of the $6.05 billion to the acquisition of the Williams assets, causing the second step in the merger to become a taxable event.” (That’s Chief Justice Strine’s description.)
Whitehurst called Latham partner Timothy Fenn to discuss his epiphany. (Fenn is not identified by name in the Delaware Supreme Court ruling but is named in the Chancery Court decision.) It’s important to note that until Whitehurst’s call in March 2016, Latham was planning to issue the tax opinion required in the merger agreement, even after its client, ETE, had second thoughts about the deal.
Fenn was initially skeptical about Whitehurst’s theory, but after consulting with other Latham lawyers as well as ETE’s deal counsel at Wachtell Lipton Rosen & Katz and litigation counsel at Vinson & Elkins, he told ETE that Latham “was likely unable” to issue the tax opinion required in the merger agreement. Latham officially informed ETE on April 11, 2016, that it had conclusively determined it could not provide the opinion. (Morgan Lewis & Bockius independently analyzed the issue for ETE and also concluded that the IRS might deem the cash-for-stock exchange a taxable “disguised sale.”)
Latham told Williams’ deal counsel at Cravath Swaine & Moore about the tax problem. Cravath proposed fixes. Latham said they wouldn’t work. On April 18, ETE put out a proxy amendment disclosing Latham’s position on the requisite tax opinion.
By then, ETE and Williams were already litigating in Chancery Court. Glasscock held an expedited trial in June 2016, featuring Latham lawyers and ETE executives as witnesses. The vice-chancellor issued his opinion only days after the trial. He concluded that Latham acted in good faith.
On appeal, Williams’ lawyers did not contest that holding but argued ETE breached its obligation under the merger agreement to do all it reasonably could to complete the merger. ETE could have directed Latham to work with Williams and its lawyers to solve the tax problem, Williams argued, or could have deployed its own executives to negotiate with Williams. Certainly, Williams said, ETE could have held off a public filing that disclosed Latham’s refusal to issue the requisite tax letter.
The Supreme Court majority said that Vice-Chancellor Glasscock didn’t use the right standard to analyze whether ETE had breached its obligations. It concluded, however, that his error didn’t really matter because the record didn’t show ETE’s actions “contributed materially” to Latham’s decision not to provide the tax opinion.
That’s where Chief Justice Strine parted company with the rest of the Delaware Supreme Court. He portrayed Latham not as a completely disinterested arbiter of potential tax liability but as a law firm trying to fulfill its duties to its client. “The Latham tax lawyer was put in an extremely awkward position by the manner in which the potential (tax) opinion issue was flagged by ETE itself and by ETE’s conduct after it asked the Latham tax lawyer to rethink his position based on his client’s musings,” the chief justice wrote. “By the time of trial, ETE had put the Latham tax lawyer as far out on a professional tree limb as it could without causing him to literally plummet to earth.”
Strine cast doubt on Whitehurst’s account of suddenly realizing the merger agreement called for ETE to pay $6 billion for a fixed percentage of shares in the limited partnership and that the declining value of the partnership could have tax consequences. “To my mind, it matters very much in determining whether ETE met its burden to assess whether Whitehurst, a primary operative for ETE on this transaction, was telling the truth,” the chief justice said. “If one does not believe that rather improbable claim, it colors everything that Whitehurst says he did or didn’t do.”
ETE’s position was that Whitehurst called Latham merely to raise, in all sincerity, a potential legal pitfall. Strine was skeptical. “When Whitehurst told the Latham tax lawyer his concerns, it was rather obvious that ETE did not wish to go through with the deal,” he wrote. “If somehow a condition excused closing, that would have made ETE ecstatic. When Whitehurst therefore started musing about the potential tax law implications of a provision in the agreement … it is difficult to imagine that he was not putting implicit, but undeniably extant, pressure on the Latham tax lawyer to have doubts about whether he could give the opinion.”
If one doubted Whitehurst’s tale of the epiphany, Strine said, his “legal curiosity would tend to look like an attempt to influence the Latham tax lawyer not to give the … opinion and it would also tend to suggest his communication with the Latham tax lawyer conveyed client pressure to get to no.”
The chief justice said he read the record of the trial to show that Latham and ETE made little effort to solve the tax problem. Latham waited nine days to alert ETE’s deal lawyers at Wachtell (“a lifetime by deal standards,” Strine said) and did not engage when Wachtell said it didn’t see a problem. “Instead of encouraging this type of cooperation and making absolutely clear to Latham that ETE wanted it to get to yes,” the chief justice said, “ETE took steps to keep Wachtell away from collaboration with Latham to get to yes.”
Latham didn’t inform Williams’ lawyers at Cravath of the potential tax problem until two weeks after Whitehurst’s call. By then, Latham had already decided not to issue the requisite opinion letter. And despite Cravath proposals to fix the tax problem, ETE publicly disclosed Latham’s position in a proxy filing, the Chief Justice said, effectively pinning Latham to its decision not to issue the letter. Latham didn’t even respond to Cravath until after the proxy filing, more than two weeks after Cravath suggested possible fixes. “By this time, Latham was in the public Klieg lights, its client ETE clearly did not wish to get to yes, and Whitehurst was not arguing that everyone get in a room and solve the problem,” Chief Justice Strine said.
Strine described Latham’s predicament as “undue professional pressure.” He said he sympathized. But he also said that sympathy should not exculpate Latham’s client. “The multiple forms of behavior that breached ETE’s affirmative obligation are exactly the kind of conduct that compromised the ability of the Latham tax lawyer to find a way to yes,” the chief justice wrote.
This time, Strine stood alone. But if you’re a deal lawyer (or a Chancery Court judge evaluating the conduct of deal lawyers) consider yourself warned: The chief justice is watching.
I emailed Williams counsel Sandra Goldstein of Cravath, Latham partner Fenn and ETE lawyer Michael Holmes of V&E with detailed questions about the chief justice’s dissent. Goldstein and Fenn did not respond. Holmes sent an email statement via a V&E spokesman. “We are pleased that the Delaware Supreme Court affirmed the Chancery Court’s well-reasoned opinion,” the statement said. “The Chancery Court, as the finder of fact, had the benefit of observing first-hand the witnesses and evidence at trial, and found, among other things, that the complex tax issue at hand was appropriately addressed in good faith and in compliance with the merger agreement. Williams did not appeal any of the Chancery Court’s factual findings.”