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Judge Allows Energy Transfer to Terminate Merger

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After the close on Brexit Friday, Judge Glasscock affirmed what Kelcy Warren warned shareholders on their recent conference call, which is that there is no Merger to approve, enabling Energy Transfer to walk away from their merger with Williams Inc with no penalty.  The market was correct to focus on the Judge’s comments about whether Latham & Watkins acted in good faith when notifying Energy Transfer and Williams that it could not affirm a favorable 721(a) ruling to allow the transaction to be treated by tax authorities as a tax-free exchange, an agreed upon condition of the merger. 


In the Judge’s opinion, he mentioned that he was skeptical of Energy Transfer’s motivations, but opted to focus on the L&W intent in deciding whether the merger could proceed.  Judge Glasscock concluded that Williams had failed to prove that Energy Transfer had materially breached its contractual obligation to undertake commercially reasonable efforts to receive the 721 tax opinion from Latham, and as such, Energy Transfer is entitled to terminate the Merger Agreement.


The most critical events occurred between March 29th and April 16th, during which time Energy Transfer’s Tax Chief and Latham realized that the precipitous drop in ETE units would make the proposed exchange taxable and prevent Latham from offering the 721 non-taxable opinion.   The activity during that period aligns with a considerable move higher in ETE units,, and a widening spread to WMB shares, as illustrated below




The Judge noted that both parties agreed to empower Latham, rather than an independent third party, to provide the 721 opinion, noting that is was against Latham’s reputational interests to first provide a “should” opinion, only to backtrack due to market conditions not contemplated in their initial analysis.  “In fact, it is a substantial embarrassment to Latham and it’s tax partners”, the Judge noted in his conclusion


Also noteworthy is the how the Williams Board approved the merger.  On September 24th, 2015 the board took an informal vote on the Merger which resulted in a 6-7 vote Against.  The board then went to dinner, and the next morning, a new vote resulted in a 8-5 Affirmation of the merger. 


Williams in now in the unenviable position of following through with their dividend cut and re-establishing the investment case for William shares, which highlighted many risks in their FOR recommendation, for a vote that at the moment has no binding implications.  Through a press release issued after the Court's ruling, Williams still encouraged shareholders to vote FOR at the June 27th special meeting, the day prior to the Merger date.  Williams plans to take "appropriate actions" to enforce their rights under the Merger Agreement.  At the moment, it is unclear the status of WMB shares which have been pledged through the Election Form, which Williams previously stated could not be traded prior to the effective date of the Merger.




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