The Williams Companies, Inc. v. Energy Transfer LP, et al.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE THE WILLIAMS COMPANIES, INC., ) ) ) Plaintiff and ) Counterclaim Defendant, ) v. ) C.A. No. 12168-VCG ) ENERGY TRANSFER LP, formerly ) known as ENERGY TRANSFER ) EQUITY, L.P., and LE GP, LLC, ) ) Defendants and ) Counterclaim Plaintiffs. ) ) ) ) THE WILLIAMS COMPANIES, INC., ) Plaintiff and ) Counterclaim Defendant, ) ) v. ) C.A. No. 12337-VCG ) ENERGY TRANSFER LP, formerly ) known as ENERGY TRANSFER ) EQUITY, L.P., ENERGY TRANSFER ) CORP LP, ETE CORP GP, LLC, LE GP, ) LLC and ENERGY TRANSFER ) EQUITY GP, LLC, ) ) Defendants and ) Counterclaim Plaintiffs. ) MEMORANDUM OPINION Date Submitted: September 23, 2021 Date Decided: December 29, 2021 Kenneth J. Nachbar, Susan W. Waesco, and Matthew R. Clark, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Antony L. Ryan, Kevin J. Orsini, Michael P. Addis, and David H. Korn, of CRAVATH, SWAINE & MOORE LLP, New York, New York, Attorneys for Plaintiff and Counterclaim Defendant The Williams Companies, Inc. Rolin P. Bissel, James M. Yoch, Jr., and Alberto E. Chávez, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Michael C. Holmes, John C. Wander, Craig E. Zieminski, and Andy E. Jackson, of VINSON & ELKINS LLP, Dallas, Texas, Attorneys for Defendants and Counterclaim Plaintiffs Energy Transfer LP, formerly Energy Transfer Equity, L.P.; Energy Transfer Corp LP; ETE Corp GP, LLC; LE GP, LLC; and Energy Transfer Equity GP, LLC. GLASSCOCK, Vice Chancellor This matter first came before me on Plaintiff The Williams Companies, Inc.’s (“Plaintiff” or “Williams”) motion to specifically enforce a merger agreement (the “Merger”) with Defendant Energy Transfer LP (“ETE”). Between signing and closing, market conditions changed, making the Merger less favorable to ETE, to the point that ETE’s CEO and board chairman, Kelcy Warren, foresaw a creditratings downgrade and regretted agreeing to the Merger. The same market conditions caused the failure of a condition precedent: that Latham & Watkins be able to certify that the Merger was structured in such a way that it should be a taxfree exchange of partnership units (the “721 Opinion”). In 2016, Williams sued to prevent ETE from terminating the merger agreement due to the failure of this condition. Despite recognizing that ETE wanted out of the merger agreement, I determined that the failure of the condition precedent independently gave ETE an exit right. Left in the case was Williams’ pursuit of a contractual breakup fee. 1 In denying specific performance, I noted ETE’s strong desire not to close, but also that “even a desperate man can be an honest winner of the lottery,” analogizing such luck to the tax-representation-out that had presented itself. In this action for liquidated damages, however, I also note that even this lucky winner must face the tax man. Having called a dirge for the Merger, ETE must pay 1 As detailed below, Williams and ETE negotiated a $410 million reimbursement that ETE was required to pay Williams in the event that the Merger failed and certain conditions were met. the piper. For the reasons given below, I find that ETE is contractually obligated to pay the breakup fee. I. BACKGROUND 2 The facts recited in this post-trial Opinion are the Court’s findings based on the record presented at trial. The following facts were either uncontested or proven by a preponderance of the evidence. “The reader is forewarned that this case involves a maze of corporate entities and an alphabet soup of corporate names.”3 This Opinion includes only those facts necessary to my analysis. A. The Parties Plaintiff and Counterclaim Defendant Williams is a Delaware corporation with its principal executive offices located in Tulsa, Oklahoma.4 Williams is a North American energy company focused on providing infrastructure to deliver natural gas products to market.5 Williams owns and operates interstate natural gas pipelines and gathering and processing operations throughout the country. 6 Williams stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol “WMB.”7 2 Where the facts are drawn from exhibits jointly submitted at trial, they are referred to according to the numbers provided on the parties’ joint exhibit list and with page numbers derived from the stamp on each JTX page (“JTX-__.__”). 3 Williams Cos., Inc. v. Energy Transfer Equity, 2017 WL 5953513 (Del. Ch. Dec. 1, 2017) (quoting Chester Cnty. Emps.’ Ret. Fund v. New Residential Inv. Corp., 2017 WL 4461131, at *1 (Del. Ch. Oct. 6, 2017)). 4 Pre-Trial Stipulation and Order, Dkt. No. 577 ¶ 10 [hereinafter “Stip.”]. 5 Id. 6 Id. 7 Id. 2 Williams is a party to the Agreement and Plan of Merger entered on September 28, 2015 (the “Merger Agreement”).8 Defendant and Counterclaim Plaintiff Energy Transfer LP, formerly known as Energy Transfer Equity, L.P., 9 is a Delaware limited partnership with its principal executive offices located in Dallas, Texas. 10 ETE’s family of companies owns and operates approximately 71,000 miles of natural gas, natural gas liquids, refined products and crude oil pipelines.11 ETE’s common units are traded on the NYSE under the symbol “ET.”12 Defendant and Counterclaim Plaintiff Energy Transfer Corp LP (“ETC”) is a Delaware limited partnership taxable as a corporation.13 Pursuant to the Merger, Williams would have merged with and into ETC.14 ETC is a party to the Merger Agreement and would have been the managing member of the general partner of ETE following the consummation of the Merger.15 8 Id. On October 19, 2018, Energy Transfer, L.P. changed its name to “Energy Transfer LP.” Id. ¶ 12. The parties agree that Energy Transfer Equity, L.P. is the same entity as Energy Transfer LP for the purposes of this litigation. Id. 10 Id. ¶ 11. 11 Id. 12 Id. 13 Id. ¶ 13. 14 Id. 15 Id. 9 3 Defendant and Counterclaim Plaintiff ETE Corp GP, LLC is a Delaware limited liability company, the general partner of ETC, and a party to the Merger Agreement. 16 Defendant and Counterclaim Plaintiff LE GP, LLC (“LE GP”) is a Delaware limited liability company, the general partner of ETE, and a party to the Merger Agreement. 17 Defendant and Counterclaim Plaintiff Energy Transfer Equity GP, LLC (“ETE GP”) is a Delaware limited liability company and a party to the Merger Agreement. 18 Pursuant to the Merger, ETE GP would have merged with LE GP such that ETE GP would have been the surviving company and general partner of ETE.19 Unless otherwise specified, I refer to these Defendants and Counterclaim Plaintiffs collectively as “ETE.” B. Factual Background 1. Williams Agrees to the WPZ Roll-Up Before ETE submitted an offer to purchase Williams, Williams entered into an agreement to undertake a separate roll-up transaction with its master limited 16 Id. ¶ 14. Id. ¶ 15. 18 Id. ¶ 16. 19 Id. 17 4 partnership, Williams Partners, L.P. (“WPZ”).20 The Williams Board approved the WPZ transaction on May 12, 2015.21 Williams and WPZ executed the transaction documents that day, and the next day, May 13, 2015, they issued a joint press release announcing the execution of the agreement. 22 The WPZ agreement required Williams to pay WPZ a termination fee of $410 million if it later terminated the WPZ transaction. 23 At the time the WPZ transaction was announced, ETE had not made a formal offer to purchase Williams, though it had expressed interest in doing so. Specifically, on May 6, 2015, a week before the WPZ transaction was announced, ETE’s Chief Executive Officer (“CEO”), Kelcy Warren, hosted a dinner at his home with Williams’ CEO, Alan Armstrong, Williams’ Chief Financial Officer (“CFO”) Don Chappel, and ETE’s then-CFO, Jamie Welch for the purpose of asking whether Williams would be interested in a merger with ETE.24 Warren did not make a formal offer to purchase Williams at this dinner,25 nor had he decided whether he wanted to make an offer. 26 Warren did not propose a price term for a potential offer,27 but 20 JTX-1218.0130. Id. 22 Id. 23 Id. 24 Trial Tr. at 137:21–138:3(Chappel); id. at 313:23–314:3(Warren). 25 Id. at 138:4–6(Chappel). 26 Id. at 312:15–314:19(Warren). 27 Id. at 138:7–9(Chappel). 21 5 Welch did outline a potential transaction structure. 28 Armstrong did not brief the Williams board of directors (the “Williams Board”) about the dinner. 29 2. The Parties Negotiate the Merger Agreement On May 19, 2015, ETE submitted a bid to purchase Williams in an all-equity deal. 30 As a condition to its offer, ETE required Williams to terminate the roll-up transaction with WPZ, which, as detailed above, would require Williams to pay WPZ a $410 million termination fee.31 Negotiations proceeded through the summer of 2015.32 Williams was represented by Cravath, Swaine & Moore (“Cravath”), and ETE was represented by Wachtell, Lipton, Rosen & Katz (“Wachtell”). The Williams Board formed a Strategic Review Administration Committee to evaluate and oversee a potential sale.33 a. Economic Equivalence Was “Paramount” to Williams The Merger contemplated an “Up-C” structure, in which Williams stockholders would receive shares in a new entity, ETC, instead of receiving ETE common units directly. 34 The Williams Board was therefore concerned that ETC shares could trade at a discount to ETE common units.35 The Williams Board was 28 Id. at 601:24–602:6(Armstrong). Id. at 603:1–3(Armstrong). 30 Stip. ¶ 17. 31 JTX-0202.0004. 32 Stip. ¶ 17. 33 JTX-1218.0134. 34 JTX-0026.0004. 35 E.g., Trial Tr. at 18:10–15(Chappel); id. at 316:24–317:9(Warren). 29 6 likewise concerned that, because Warren personally owned a significant number of ETE units and would control both ETE and ETC after the Merger, he might take actions that benefitted ETE at ETC’s expense.36 As a result, achieving economic equivalence between the ETE common units and the ETC shares was a key point of negotiation. Warren wrote to the Williams Board in a June 18, 2015 letter that Williams “stockholders would receive common shares in [ETC] that would mirror the economic attributes of ETE common units.”37 Chappel testified at trial that “economic equivalence was paramount” and that there was “engineering that was done to ensure that” ETE common units and ETC shares “traded as closely as we possibly could.”38 Warren admitted at trial that “equality of distributions between ETC shares and ETE units was a key aspect of the merger.” 39 Al Garner, a financial advisor to Williams from Lazard, testified that bargaining for economic equivalence was “the subject of most of the negotiations on the transaction” and “the most important and time-consuming part of the[] negotiations.” 40 Garner further testified that in the final months leading up to the execution of the merger agreement, economic equivalence took up the “lion’s share of the negotiation.”41 36 Trial Tr. at 482:9–483:2(McReynolds); id. at 605:7–22(Armstrong); JTX-1218.0161. JTX-0026.0004. 38 Trial Tr. at 18:24–19:3(Chappel). 39 Id. at 316:24–318:17(Warren). 40 Id. at 146:11–147:6(Garner). 41 Id. at 147:24–148:3(Garner). 37 7 As a result, the Merger Agreement featured various terms that were designed to achieve economic equivalence. For instance, the parties agreed that ETC would pay dividends on ETC shares that were equal to distributions paid on ETE common units through 2018.42 In addition, ETE agreed to provide ETC stockholders with an equalizing payment at the end of two years if ETC shares traded at a discount to ETE common units.43 Finally, the parties agreed to replace a portion of the all-equity consideration with a $6.05 billion cash payment that would be used by ETE to purchase shares in ETC, known as “hook stock,” which ensured that ETE’s and ETC’s interests were aligned.44 ETC would distribute this consideration to its stockholders, formerly Williams stockholders.45 3. The Merger Agreement The parties executed the Merger Agreement on September 28, 2015.46 Following the consummation of the Merger, ETC would own Class E Units representing approximately 57% of the limited partner interest of ETE, and the existing limited partners of ETE would own the remaining approximately 43% limited partner interest.47 ETE would own the Williams assets, as well as 42 JTX-0189.0006–.0007 (§5.15(b)(iii)); Trial Tr. at 19:5–20:16(Chappel); id. at 146:11– 147:14(Garner); id. at 317:24–318:5(Warren). 43 Trial Tr. at 19:5–20:16(Chappel). 44 Id. at 20:17–21:7(Chappel); id. at 147:7–14(Garner); id. at 418:19–422:1(Welch); id. at 988:16– 989:3(Needham); id. at 1230:23–12:31:1(Whitehurst). 45 Stip. ¶ 18. 46 Id. ¶ 17. See also JTX-0209. 47 Stip. ¶ 18. 8 approximately 19% of the outstanding ETC shares. 48 The former Williams stockholders would own the remaining approximately 81% of the ETC shares and would receive approximately $6.05 billion in cash consideration.49 Williams and ETE eventually agreed to a Closing Date of June 28, 2016 at 9:00 AM.50 The Merger Agreement featured several provisions that are at issue in this litigation, including a Capital Structure Representation, an Ordinary Course Covenant, and three Interim Operating Covenants. a. The Capital Structure Representation Under the Merger Agreement, ETE represented at signing that its capital structure was composed of three classes of equity securities—common units and Class D Units representing limited partnership interests in ETE, and a general partner interest in ETE—as well as the number of outstanding units in each class and the percentage of the general partner interest (the “Capital Structure Representation”): Capital Structure. (i) The authorized equity interests of Parent consist of common units representing limited partner interests in Parent (“Parent Common Units”), Class D Units representing limited partner interests in Parent (“Parent Class D Units”) and a general partner interest in Parent (“Parent General Partner Interest”). At the close of business on September 25, 2015 (the “Parent Capitalization Date”), (i) 1,044,764,836 Parent Common 48 Id. Id. 50 Id. ¶ 34. 49 9 Units were issued and outstanding, of which 5,776,462 consisted of Parent Restricted Units, (ii) 2,156,000 Parent Class D Units were issued and outstanding and (iii) there was an approximate 0.2576% Parent General Partner Interest. Except as set forth above, at the close of business on the Parent Capitalization Date, no equity securities or other voting securities of Parent were issued or outstanding. 51 The parties agreed that the representation regarding the three existing classes of equity—but not the representation regarding the number of outstanding units— would be brought down to closing, “except for any immaterial inaccuracies”: The representations and warranties of the Company set forth in Sections 3.01(c)(i) [] (Capital Structure) shall be true and correct as of the Closing Date as though made on such date (except to the extent any of such representations and warranties speak as of an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date), except for any immaterial inaccuracies. 52 Therefore, if ETE issued more units within its existing classes between signing and closing, the representation would remain true. If, however, ETE created a new class of equity interests, the representation would no longer be true at closing. The Capital Structure Representation was a “key element . . . in addressing the [Williams] [B]oard’s concerns about economic equivalence” because it ensured that ETE could not “issue a new security with rights that shifted value from what was 51 JTX-0209.0030 (§3.02(c)(i)). The Merger defines “Parent” to mean ETE, and “TopCo” to mean ETC. JTX-0209.0004. 52 Id. at .0063 (§6.03(a)(i)). 10 expected and what was modeled,” which could result in “a deal that was quite a bit different than the deal that was bargained for.”53 b. The Ordinary Course and Interim Operating Covenants ETE agreed to several covenants in the Merger Agreement regarding its conduct between signing and closing, four of which are at issue here. Each of these covenants are subject to exceptions, discussed below, identified in the Parent Disclosure Letter for Agreement and Plan of Merger (the “Parent Disclosure Letter”). First, ETE agreed to operate its business “in the ordinary course” (the “Ordinary Course Covenant”): Except as set forth in Section 4.01(b) of the Parent Disclosure Letter, expressly permitted by this Agreement, required by applicable Law or consented to in writing by the Company (such consent not to be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement to the Effective Time, Parent shall, and shall cause each of its Subsidiaries to, carry on its business in the ordinary course and shall use commercially reasonable efforts to preserve substantially intact its current business organizations, maintain its rights, franchises and Parent Permits and to preserve its relationships with significant customers and suppliers.54 The “ordinary course” obligation in turn entailed several specific restrictions on ETE between signing and closing (the “Interim Operating Covenants”). As with 53 54 Trial Tr. at 204:19–205:3(Van Ngo); id. at 28:3–11(Chappel). JTX-0209.0045 (§4.01(b)) (emphasis added). 11 the general Ordinary Course Covenant, the Interim Operating Covenants were subject to exceptions provided in the Parent Disclosure Letter: Without limiting the generality of the foregoing, except as set forth in Section 4.01(b) of the Parent Disclosure Letter, expressly permitted by this Agreement, required by applicable Law or consented to in writing by the Company (such consent not to be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement to the Effective Time, Parent shall not, and shall not permit any of its Subsidiaries to . . . . 55 Three of the Interim Operating Covenants are at issue here. First, ETE agreed that it would not take any actions resulting in new restrictions on distributions and payments of dividends: [Parent shall not, and shall not permit any of its Subsidiaries to] take any action that would result in Parent or any of its Subsidiaries becoming subject to any restriction not in existence on the date hereof with respect to the payment of distributions or dividends[.] 56 Second, ETE agreed to refrain from certain actions regarding its equity securities: [Parent shall not, and shall not permit any of its Subsidiaries to] split, combine or reclassify any of its equity securities or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for equity securities, other than transactions by a wholly owned Subsidiary of Parent which remains a wholly owned Subsidiary after consummation of such transaction[.]57 55 Id. (emphasis added). Id. at .0045 (§4.01(b)(ii)). 57 Id. at .0045 (§4.01(b)(iii)). 56 12 Third, ETE agreed not to amend certain organizational documents: [Parent shall not, and shall not permit any of its Subsidiaries to] amend (A) the organizational documents of TopCo, (B) the Parent Certificate of Partnership or the Parent Partnership Agreement (other than the Parent Partnership Agreement Amendment) or (C) the comparable organizational documents of any Subsidiary of Parent in any material respect[.]58 Section 6.03(b) of the Merger Agreement required ETE to have “performed or complied” with each of the Ordinary Course Covenant and the Interim Operating Covenants “by the time of the Closing” “in all material respects”: Performance of Obligations of TopCo and Parent. Each of TopCo and Parent shall have, in all material respects, performed or complied with all obligations required by the time of the Closing to be performed or complied with by it under this Agreement, and the Company shall have received a certificate signed on behalf of Parent by the chief executive officer or the chief financial officer of Parent to such effect.59 These covenants were designed to ensure that, between signing and closing, “the deal that was struck [wa]s preserved through the closing date” and were “part of the package of protections that the [Williams B]oard requested to address their concerns around economic equivalence.”60 58 Id. at .0046 (§4.01(b)(vi)). Id. at .0063 (§6.03(b)). 60 Trial Tr. at 21:8–23(Chappel); id. at 203:8–23(Van Ngo). 59 13 c. The Parties Negotiate the $1 Billion Equity Issuance Exception As I noted above, the Ordinary Course Covenant and each of the Interim Operating Covenants were subject to exceptions “set forth in Section 4.01(b) of the Parent Disclosure Letter.”61 Section 4.01(b) of the Parent Disclosure Letter, in turn, identifies these exceptions. 62 The exceptions are organized under headers that correspond to specific sections within Section 4.01(b) of the Merger Agreement.63 Under the header “Section 4.01(b)(v),” the Parent Disclosure Letter states, “Parent may make issuances of equity securities with a value of up to $1.0 billion in the aggregate” (the “$1 Billion Equity Issuance Exception”).64 The parties dispute whether the $1 Billion Equity Issuance Exception applies to all of the Ordinary Course and Interim Operating Covenants, or just the Interim Operating Covenant located within Section 4.01(b)(v) of the Merger Agreement, which prohibits ETE from issuing equity between signing and closing. The transaction documents include two provisions that are relevant to this interpretive question. First, the Parent Disclosure Letter states that “[t]he headings contained in this Parent Disclosure Letter are for reference only and shall not affect in any way 61 JTX-0209.0045 (§4.01(b)). JTX-0194.0017–.0019. 63 Id. Specifically, there are headers titled, “Section 4.01(b)(i),” “Section 4.01(b)(ii),” “Section 4.01(b)(v),” “Section 4.01(b)(vii),” “Section 4.01(b)(ix),” “Section 4.01(b)(x),” “Section 4.01(b)(xi),” “Section 4.01(b)(xii),” and “Section 4.01(b)(xiii).” Id. 64 Id. at .0018. 62 14 the meaning or interpretation of this Parent Disclosure Letter.” 65 Second, the Merger Agreement includes a savings clause stating that the disclosures in any section of the Parent Disclosure Letter apply to the corresponding section of the Merger Agreement, as well as to any other section of the Merger Agreement so long as the “relevan[ce]” to the other section “is reasonably apparent on its face”: [A]ny information set forth in one Section or subsection of the Parent Disclosure Letter shall be deemed to apply to and qualify the Section or subsection of this Agreement to which it corresponds in number and each other Section or subsection of this Agreement to the extent that it is reasonably apparent on its face in light of the context and content of the disclosure that such information is relevant to such other Section or subsection[.]66 The parties also introduced extrinsic evidence at trial regarding their intent with respect to these exceptions. Since the initial drafts, the Merger Agreement had included a prohibition on issuing equity between signing and closing.67 ETE then proposed adding the $1 Billion Equity Issuance Exception directly into this prohibition, rather than adding it into the Parent Disclosure Letter. 68 The $1 Billion Equity Issuance Exception was negotiated by Chappel and Welch, the CFOs for both parties.69 As the parties exchanged subsequent drafts, the $1 Billion Equity Issuance Exception remained directly within the equity issuance covenant of the Merger 65 Id. at .0002. JTX-0209.0030 (§3.02). 67 JTX-0056.0064 (§5.2(b)(xi)); JTX-0058.0047 (§4.01(b)(iv)). 68 JTX-0064.0170–.0171 (§4.01(b)(iv)(A)); Trial Tr. at 408:19–409:1(Welch). 69 Trial Tr. at 22:8–15(Chappel); id. at 404:15–405:1(Welch). 66 15 Agreement, instead of the Parent Disclosure Letter.70 Chappel and Welch both testified that they both understood the $1 Billion Equity Issuance Exception to apply only to the Interim Operating Covenant prohibiting equity issuances in Section 4.01(b)(v). 71 The day before signing, on September 27, 2015, Williams and ETE each moved several exceptions that had been drafted into individual covenants in the Merger Agreement to their respective disclosure letters.72 When the parties did so, they tied each exception to the corresponding Interim Operating Covenant from which it had been moved through the use of headers identifying those individual covenants by section.73 The $1 Billion Equity Issuance Exception was one of the exceptions that ETE moved into its Parent Disclosure Letter. 74 ETE removed the $1 Billion Equity Issuance Exception from Section 4.01(b)(v) of the Merger Agreement and placed it under a header in Section 4.01(b) of the Parent Disclosure Letter titled, “Section 4.01(b)(v).” 75 70 E.g., JTX-0146.0003; Tr.211:17–212:19(Van Ngo). Trial Tr. at 24:2–25:7(Chappel); id. at 409:2–413:5(Welch). 72 Compare JTX-0139.0055–.0061, with JTX-0160.0029–.0032 (moving exceptions from Merger Agreement §4.01(a) to Company Disclosure Letter); compare JTX-0162.0175–.0179, with JTX0167.0019–.0021 (moving exceptions from Merger Agreement §4.01(b) to Parent Disclosure Letter). 73 See JTX-0160.0029–.0032 (Company Disclosure Letter); JTX-0162.0175–.0179 (Parent Disclosure Letter). 74 JTX-0194.0018. 75 Compare JTX-0162.0176 (Merger Agreement §4.01(b)(v)), with JTX-0167.0020 (Parent Disclosure Letter). 71 16 The evidence presented at trial established that the parties moved the exceptions into the disclosure letters to maintain their confidentiality, and that they did not intend the moves to be substantive. Chappel testified at trial that the exceptions were moved to the disclosure letters “to maintain confidentiality” with respect to “sensitive issues,” and that they intended “no change in rights.” 76 Welch agreed that the exceptions were moved for confidentiality reasons. 77 Likewise, Minh Van Ngo, the Cravath attorney advising Williams on the Merger, testified that Cravath told Wachtell at that time “that we were fine with th[e] movement, with the understanding that it was nonsubstantive,” meaning, “just like it operate[d] if it were in the body of the merger agreement, . . . the exceptions in the disclosure schedule would apply only to the corresponding section of the merger agreement.”78 Van Ngo also testified that he told Wachtell that he understood the disclosure letters to be “section-specific.”79 76 Trial Tr. at 25:12–26:6(Chappel). Id. at 415:19–416:5(Welch). 78 Id. at 213:13–21(Van Ngo). 79 Id. at 215:3–8 (Van Ngo). Although David Katz, one of ETE’s deal counsel at Wachtell, testified in a deposition that he believed the $1 Billion Equity Issuance Exception applied to each of the covenants within Section 4.01(b) of the Merger Agreement, he admitted that he was not involved in drafting the Parent Disclosure Letter and that he did not know how his team determined the structure of the exceptions in the letter. Katz Dep. at 88:21–91:25. Rather, his interpretation was based solely on his reading of the Merger Agreement and Parent Disclosure Letter on the day of the deposition. Id. Accordingly, I find this testimony to be unpersuasive regarding the parties’ intent. 77 17 Van Ngo also testified that he told Wachtell he preferred the “‘reasonably apparent on its face’ formulation for the savings clause” and Wachtell responded, “[t]hat’s fine.” 80 Van Ngo testified that he understood the “reasonably apparent on its face” formulation was meant “to address obvious drafting errors and[/]or manifest errors on the parties” because “when you move sections . . . to a disclosure schedule,” “there’s a heightened risk that you have misalignment of the sections or that . . . you miss . . . certain cross references.” 81 In addition, the parties’ conduct after signing the Merger Agreement further demonstrates that they intended the exceptions that were moved into the disclosure letters to apply only to the specific covenants from which they were moved. After signing, Williams planned its own equity issuance.82 Like ETE, Williams was also subject to a restriction on the issuance of equity,83 and its Company Disclosure Letter included an exception permitting Williams to issue up to $1 billion in equity securities.84 And like the Parent Disclosure Letter, the Company Disclosure Letter was structured so that each exception fell under a header that corresponded to a specific covenant in the Merger Agreement. 85 80 Trial Tr. at 215:3–8(Van Ngo). Id. at 215:3–23 (Van Ngo). 82 Id. at 29:13–32:10(Chappel); id. at 416:6–417:18(Welch); JTX-0246.0001–.0002. 83 JTX-0209.0042 (§4.01(a)(v)). 84 JTX-0196.0025. 85 Id. at .0025–.0029. 81 18 Although Williams was therefore permitted to issue equity under this Company Disclosure Letter exception, the particular issuance that Williams planned involved the waiver of incentive distribution rights (“IDRs”),86 which was prohibited by a separate interim operating covenant. 87 Accordingly, before going forward with the planned issuance, Williams requested ETE’s consent to the waiver of IDRs.88 ETE refused to consent, and Williams did not proceed with the issuance. 89 If the parties had intended the $1 billion equity issuance exception in the Company Disclosure Letter to apply to all of Williams’ interim operating covenants, rather than just the equity issuance covenant, ETE’s consent would not have been required. d. The Merger Agreement Was Conditioned on a Tax Opinion The Merger Agreement was conditioned on ETE’s tax counsel, Latham & Watkins LLP (“Latham”), rendering the 721 Opinion—that the contribution by ETC of the Williams assets to ETE in exchange for the issuance of Class E units “should” be treated as tax free under Section 721 of the Internal Revenue Code. 90 The Merger Agreement also included certain representations and covenants related to the Section 721 tax treatment. First, ETE represented that it did not “know[] of the existence of any fact that would reasonably be expected to prevent” 86 Trial Tr. at 29:13–33:13(Chappel); id. at 416:6–417:23(Welch); JTX-0246.0001–.0002. JTX-0209.0043 (§4.01(a)(x)). 88 Trial Tr. at 32:11–33:13(Chappel); id. at 417:2–18(Welch); JTX-0246.0001–.0002. 89 Trial Tr. at 33:14–20(Chappel); id. at 417:19–23(Welch). 90 JTX-0209.0062 (§6.01(h)). 87 19 the Merger “from qualifying as an exchange to which Section 721(a) of the Code applies.” 91 This representation was brought down to closing, subject to the “Parent Material Adverse Effect” materiality standard.92 Williams also made a reciprocal representation, which was also brought down to closing, subject to a “Company Material Adverse Effect” materiality standard. 93 Second, the Merger Agreement included covenants that required ETE and Williams to use reasonable best efforts to consummate the Merger and commercially reasonable efforts to cause the contribution to qualify as tax-free under Section 721(a).94 4. The Williams Board Approves the Merger Following negotiations, the Williams Board met on September 24 and 25, 2015 to discuss the Merger.95 At the September 24, 2021 meeting, the Board took a “straw poll” and preliminarily rejected the Merger by a 6-to-7 vote.96 The next day, two Williams directors—Janice Stoney and Joe Cleveland—changed their votes, and the Board voted to approve the Merger 8-to-5.97 ETE contends that threats of a consent solicitation from two activist directors on the Williams Board, Keith Meister and Eric Mandelblatt, were a significant factor 91 Id. at .0038 (§3.02(n)(i)). Id. at .0063 (§6.03(a)(iv)). 93 Id. at .0026 (§3.01(n)(i)), .0062 (§6.02(a)(iv)). 94 Id. at .0053 (§5.03), .0060 (§5.07). 95 JTX-0137. 96 Id. at .0005. 97 Id. at .0006. 92 20 in the Williams Board’s decision to approve the Merger.98 The evidence presented at trial, however, established that Meister and Mandelblatt did not make any such threats. Both Meister and Mandelblatt testified that they did not threaten a consent solicitation. 99 This is consistent with testimony from other Williams directors, who generally testified that they did not perceive or recall perceiving threats from Meister and Mandelblatt. 100 Although one director, Kathleen Cooper, testified equivocally during a 2016 deposition that she thought she recalled Meister stating that he and Mandelblatt would initiate a consent solicitation if a deal was not reached, 101 her uncertain testimony is outweighed by the testimony of the other Williams directors. In any event, she acknowledged that to the extent there was such a threat, it did not “affect[] [her] feelings about the deal.”102 The other evidence presented by ETE does not support their argument that purported threats from Meister and Mandelblatt were a significant factor in the Williams’ Board’s decision to approve the Merger. Cooper’s October 22, 2015 email to Stoney lamenting that “we succumbed to the threats just at the wrong time rather than fighting for long-term shareholder value at [Williams]” referred to threats 98 Defs.’ and Countercl. Pl.’s Post-Trial Br., Dkt. No. 637 at 9–11 [hereinafter “ETE OB”]. Meister Dep. at 402:25–403:13; Mandelblatt Dep. at 377:19–25. 100 Trial Tr. at 856:18–21(Stoney); id. at 859:17–860:12(Stoney); Hinshaw Dep. at 276:9–14; Sugg Dep. at 314:11–18 (2018); Nance Dep. at 62:19–63:10; Izzo Dep. at 107:18–24; Smith Dep. at 167:9–169:15 (2018). ETE did not depose Cleveland, whose deposition was cancelled for medical reasons in 2019. ETE OB at 10 n.20. 101 Cooper Dep. at 31:11–33:25 (2016). 102 Id. at 32:21–23. 99 21 from when Meister and Mandelblatt joined the Board in early 2014, not threats in connection with the Merger. 103 Likewise, Armstrong’s notes to himself regarding “[t]hreatening Proxy contests” and “[t]hreatening personal liability in case of proxy fight”104 referred to these perceived 2014 threats and his general thoughts about the presence of activists in the Williams boardroom.105 Finally, while the September 24-25, 2015 Williams Board meeting minutes do discuss “appreciation of the practical consequences of a rejection of the” Merger, including “the likelihood of a consent solicitation to replace all or certain Directors” and the “expected response of Messrs. Mandelblatt and Meister,”106 the minutes make no mention of “threats” from Mandelblatt and Meister. This is consistent with Stoney’s testimony, during which she stated that the Board discussed the likelihood of a consent solicitation being launched and the likelihood of the outcome, but that no one had threatened a consent solicitation.107 Williams disclosed to stockholders in the Form S-4 registration statement (the “S-4”) filed with the Securities Exchange Commission (the “SEC”) that the Williams Board discussed a potential consent solicitation when evaluating the Merger. 108 103 JTX-0235.0001; JTX-0012. JTX-0223.0003. 105 Trial Tr. at 713:24–714:21(Armstrong); id. at 706:9–707:4(Armstrong). 106 JTX-0137.0004. 107 Trial Tr. at 854:7–856:21(Stoney). 108 JTX-1218.0148. 104 22 On September 28, 2015, the Williams Board approved and declared advisable the Merger. 109 As a result, Williams terminated the WPZ agreement and paid the $410 million termination fee to WPZ. 110 Under the Merger Agreement, if the Merger failed and certain conditions were met, ETE was required to reimburse Williams for the $410 million termination fee (the “WPZ Termination Fee Reimbursement”).111 5. The Energy Market Deteriorates In late 2015, commodity prices declined sharply, leading to a deterioration of the energy market.112 As a result, both Williams and ETE reassessed the Merger in light of their changing financial positions. ETE was concerned about its ability to finance the Merger. Warren was concerned that the $6.05 billion cash component of the Merger consideration was a “problem” 113 because the debt required to finance it could lead to a “potential ratings downgrade” to “junk status.”114 The ETE senior management team was likewise concerned about the cash component of the Merger consideration. 115 In light of these concerns about financing the cash consideration, by January 2016, Warren no longer wanted to close the Merger as it was structured.116 On 109 Stip. ¶ 33. Trial Tr. at 13:15–14:12(Chappel); JTX-0202.0004. 111 JTX-0209.0059 (§5.06(f)). 112 Trial Tr. at 33:21–34:3(Chappel). 113 Id. at 308:16–22(Warren). 114 Id. at 325:14–21(Warren). 115 Id. at 330:20–331:1(Warren). 116 Id. at 296:3–18(Warren). 110 23 January 7, 2016, Warren called a meeting of ETE executives and lawyers to discuss ETE’s “rights and obligations under the merger agreement” because, “as structured,” Warren believed the Merger “was not in ETE’s best interests.” 117 At the meeting, Warren expressed that he believed that the Merger, as structured with a cash consideration component, “would create a ratings downgrade” that would lead to an “implosion.”118 Warren indicated that he was “very much opposed to the” Merger and would “walk away” “[i]f he could, under the merger agreement.” 119 Four days later, on January 11, 2016, Warren spoke over the phone with Frank MacInnis, the Williams Chairman.120 On the call, Warren proposed a meeting to discuss a “restructuring” or “changes” to the Merger Agreement. 121 Warren stated that ETE also would not be able to restructure the deal to be “all-equity.” 122 The Williams Board minutes describing MacInnis’s summary of the call state that Warren “discussed the possibility of terminating the transaction and had mentioned the possibility of cutting distributions.” 123 At trial, Warren acknowledged it was possible that he told MacInnis that ETE might have to cut distributions if the Merger closed as structured.124 The following day, on January 12, 2016, Armstrong and 117 JTX-0331; Trial Tr. at 422:2–13(Welch). Trial Tr. at 422:21–423:5(Welch). 119 Id. at 423:23–424:14(Welch). 120 JTX-0357.0005. 121 Id. 122 JTX-0378.0002; Trial Tr. at 334:13–17(Warren). 123 JTX-0378.0002; Trial Tr. at 333:18–334:17(Warren); id. at 207:7–14(Van Ngo). 124 Trial Tr. at 333:18–334:7(Warren). 118 24 Chappel met with Tom Long, the then-CFO of an ETE subsidiary, who proposed changes to the terms of the deal. 125 Two days later, on January 14, 2016, Chappel and Williams’ financial advisor from Lazard, Al Garner, met with Warren and Welch.126 At this meeting, Warren and Welch expressed that the Merger was now “a problem.”127 In a contemporaneous email describing the discussion, a Lazard employee wrote that Warren and Welch stated that “ETE may be forced to cut distribution[s] to zero for 2 years.”128 Likewise, both Chappel and Garner testified at trial that at this meeting, Warren and Welch stated “that they would have to cut distributions to zero for two years.”129 Although Warren and Welch indicated that they “plan[ned] to ‘honor [the] agreement,’” they stated that if Williams were to “walk, ETE would not require [a] breakup fee” and they “also offered to ‘help’ purchase WPZ assets if [the] deal [is] called off.”130 Welch also stated that he believed the S-4 needed to disclose that Williams would be worth more as a standalone company than with “ETE with no distr[ibutions].”131 125 Id. at 34:15–35:23(Chappel). Id. at 35:24–36:8(Chappel); id. at 150:4–7(Garner); JTX-0374.0001. 127 JTX-0374.0001. 128 Id. 129 Trial Tr. at 36:9–23(Chappel); id. at 150:8–24(Garner); JTX-0327.0001. 130 JTX-0374.0001. 131 Id. 126 25 For its part, the Williams Board and management also had some internal dissent with respect to the merits of the Merger. As I discussed above, the Williams Board had approved the Merger in an 8-to-5 vote.132 This internal dissent continued during the market collapse. In December 2015, the Williams Board called a meeting to discuss the “dire” “state of the markets.” 133 Armstrong wanted to terminate the Merger, and he was a “strong voice” in that discussion.134 Armstrong encouraged Williams’ CFO, Chappel, to “accept forecast assumptions for Williams” and “pessimistic forecast assumptions for ETE,” though Chappel, who supported the Merger, had “strong support from the [B]oard to ensure that the forecasts were thoughtfully prepared, well-vetted, and balanced between optimism and pessimism and provided transparency to the [B]oard.”135 Armstrong did, however, present optimistic projections of Williams as a standalone company to the Board in February 2016 without vetting them with Chappel.136 Armstrong and other dissenting directors also included Stoney and Cleveland on emails expressing their disagreement regarding the merits of the Merger, including their 132 JTX-0137.0006. JTX-0308.0001–.0002. 134 Trial Tr. at 120:7–23(Chappel). 135 Id. at 121:13–22(Chappel). 136 Id. at 124:10–125:2(Chappel). 133 26 criticism of Williams’ banker’s financial analysis.137 Stoney testified that she nonetheless never felt pressure to reconsider her position. 138 Despite the internal dissent at Williams, the Williams Board determined at a January 15, 2016 meeting that the Merger Agreement was a “valuable asset” and resolved to issue a press release expressing its unanimous support for the Merger.139 The Williams Board issued that press release the same day, stating that it was “unanimously committed to completing the transaction.”140 Williams also asked its financial advisors, Lazard and Barclays, to assess the value of the Merger to Williams stockholders in light of the changing market conditions, 141 and to assess to value of a potential breakup fee from ETE. 142 Both concluded that the Merger still provided Williams stockholders with billions of dollars in value. 143 In response to ETE’s concerns about financing the cash component of the consideration, Williams proposed restructuring the Merger by swapping the cash component for equity at the then-current market value of ETE units. 144 ETE refused 137 See JTX-0437; JTX-0439; JTX-0755; JTX-1019; Tr.127:8–16(Chappel); JTX-0727; JTX-0743. 138 Trial Tr. at 865:5–866:7(Stoney). As I noted above, Cleveland did not testify at trial or deposition, after his deposition was cancelled for medical reasons in 2019. ETE OB at 10 n.20. 139 JTX-0378.0002. 140 JTX-0379.0001. 141 JTX-0441; JTX-0449; Trial Tr. at 38:3–39:18(Chappel); id. at 157:6–158:2(Garner). 142 JTX-0742; JTX-0741; Trial Tr. at 888:3–889:6(Stoney). 143 JTX-0441.0006, .0025; JTX-0449.0085; Trial Tr. at 38:3–39:18(Chappel); id. at 159:1– 160:16(Garner). 144 JTX-0382. 27 and countered with an offer to replace the cash consideration with ETE units at a valuation from before the energy market decline.145 a. ETE Crafts a Public Offering with a Distribution Preference To solve its leverage issues, ETE structured two equity issuances—a public offering, which Williams rejected (the “Proposed Public Offering”); and a private offering, which ETE completed without Williams’ consent (the “Preferred Offering”). The Preferred Offering ultimately became the subject of an action brought by ETE unitholders, in which I found that ETE breached its partnership agreement in connection with the offering (the “Unitholder action”). 146 Shortly after ETE raised the possibility of distribution cuts to Williams in January 2016, ETE retained Perella Weinberg Partners (“Perella”) to advise ETE on solutions to its potential leverage issues.147 One of the solutions Perella presented was the Proposed Public Offering.148 Perella and ETE explored other options too, such as selling assets and issuing common units, but concluded that those were not viable. 149 Perella and ETE also raised the possibility of cutting distributions,150 145 JTX-0382; Trial Tr. at 310:24–312:1(Warren). In re Energy Transfer Equity, L.P. Unitholder Litig., 2018 WL 2254706, at *22–25 (Del. Ch. May 17, 2018), aff’d sub nom. Levine v. Energy Transfer L.P., 223 A.3d 97 (Del. 2019). 147 Trial Tr. at 152:8–153:16(Garner); JTX-0382.0001; Trial Tr. at 435:13–19(McReynolds); id. at 458:4–459:19(McReynolds). 148 JTX-0330.0033; JTX-0426.0034; Trial Tr. at 340:9–343:2(Warren). 149 Trial Tr. at 436:19–437:14(McReynolds); id. at 438:19–439:13(McReynolds); id. at 1654:21– 1656:18(Bednar); Long Dep. at 96:9–19 (2019); Trial Tr. at 384:12–385:10(Warren). 150 Trial Tr. at 339:1–340:3(Warren); id. at 1662:18–21(Bednar); JTX-0400.0001. 146 28 though they deemed that “an option of last resort” due to the potential negative “longer-term implications” of cutting distributions, including on ETE’s credit rating. 151 However, ETE received positive responses from its credit rating agencies when it previewed to them the Proposed Public Offering.152 As originally conceived, participants would forgo distributions on their common units for a set period.153 In exchange for forgoing such distributions, participants would receive preferred units that paid discretionary distributions of up to 40% of the distributions paid on common units.154 At the end of the period, the distributions on participants’ common units would become unrestricted, and the participants’ preferred units would convert into additional common units, calculated based on the amount of distributions that participants forwent. 155 Perella first presented the Proposed Public Offering to ETE at a meeting with Warren on January 27, 2016.156 As originally proposed, the offering did not feature any distribution preference for participants. 157 Warren testified at trial that, at the time, ETE had considered the possibility of a two-year distribution cut, even though 151 Trial Tr. at 1648:22–1652:8(Bednar); id. at 438:3–18(McReynolds); id. at 1565:3– 17(Bramhall); id. at 301:14–23(Warren); McGovern Dep. at 32:24–34:9 (2018); JTX-0598.0016; Long Dep. at 65:23–67:3 (2016); JTX-0399.0006. 152 JTX-0679.0002. 153 JTX-0330.0033. 154 Id. 155 Id. 156 Id.; JTX-0426.0034; Trial Tr. at 340:9–343:2(Warren). 157 JTX-0330.0033; JTX-0426.0034; Trial Tr. at 340:9–343:2(Warren). 29 distribution cuts are “the last bucket you go to.”158 As the holder of over 190 million ETE units, however, Warren would lose over $200 million per year in personal cash flow if ETE eliminated distributions. 159 Warren therefore proposed that Perella add a distribution preference for participants in the offering. 160 In response, ETE’s advisors revised the offering to feature an 11 cent per quarter distribution preference, 161 a reduction from ETE’s historic distribution of 28½ cents per quarter. 162 Despite Warren’s support for a distribution preference, ETE’s CFO, Welch, expressed reservations. 163 Welch expressed to Warren and other ETE executives that he believed there was no justification for a distribution preference, and that a distribution preference would create “a superpriority class of holders versus all other common holders.”164 Welch believed that Warren was “looking to . . . ensure that there was a certain amount of cash, annual cash flow, that he would receive with certainty to, basically, support his living” if ETE cut distributions. 165 Warren insisted, however, that “there needed to be a minimum level of certainty on cash 158 Trial Tr. at 339:1–340:8(Warren); id. at 347:9–348:4(Warren); see also id. at 426:4– 429:19(Welch). 159 Trial Tr. at 334:18–335:24(Warren); id. at 388:6–389:24(Welch). 160 JTX-0434.0001; Trial Tr. at 464:24–466:6(McReynolds); id. at 399:3–401:24(Welch). 161 JTX-0434.0001; JTX-0457.0008; Trial Tr. at 464:24–466:6(McReynolds); id. at 1668:4– 1671:5(Bednar). 162 JTX-0430.0001. 163 Trial Tr. at 399:3–401:24(Welch). 164 Id. at 390:22–393:3(Welch); id. at 398:21–400:10(Welch); id. at 401:4–24(Welch). 165 Id. at 402:1–14(Welch); id. at 428:14–429:19(Welch). 30 flow on a going-forward basis, if he was to support” an offering. 166 Warren asserted that “the preferred payment was a necessary core part of [the] program . . . which was needed for him to support it.” 167 On February 8, 2016, Perella presented a revised proposal to the ETE Board. 168 This time, the proposal featured the 11-cent cash distribution preference, which would be paid regardless of whether ETE cut distributions on common units.169 One ETE director, John McReynolds, questioned whether the offering would “really save up to $1B[illion] if distributions actually later get cut.”170 At trial, he acknowledged that if distributions were cut to zero, the offering would not save ETE any money during that period. 171 In its February 8 presentation, Perella also posed distribution cuts as a potential alternative that would have “[n]o execution risk” and would “[s]atisf[y] rating agencies.”172 ETE sought additional advice from a second financial advisor, Goldman Sachs & Co. (“Goldman Sachs”), who gave a February 12, 2016 presentation suggesting a “[s]ubstantial distribution / dividend cut” if the Merger closed, among other alternatives.173 Goldman Sachs advised that a distribution cut 166 Id. at 389:5–24(Welch). Id. at 390:22–391:12(Welch). 168 JTX-0482.0002–.0016; Trial Tr. at 343:3–10(Warren). 169 JTX-0482.0008, .0012; Trial Tr. at 343:3–345:10(Warren). 170 JTX-0465.0003. 171 Id.; Trial Tr. at 468:13–17(McReynolds). 172 JTX-0486.0004–.0005. 173 JTX-0506.0003. 167 31 was “likely to be well received by [the] market given current trading levels and investor concerns.”174 In February 2016, ETE also ran models evaluating distribution cuts. 175 ETE sent the terms of the Proposed Public Offering to Williams on February 12, 2016. 176 ETE was not able to complete the offering unless Williams instructed its independent registered accounting firm to provide consent to the incorporation by reference of the firm’s report on Williams’ audited financial statements.177 ETE therefore requested Williams’ auditor’s consent to file with the SEC.178 The next day, on February 13, 2016, Williams responded that it believed the Proposed Public Offering would violate the Merger Agreement and that the Board was required to assess it. 179 Chappel also noted that Williams “reviewed potential additional actions that we could take to strengthen the WPZ and [Williams] credit profile.”180 In the meantime, the ETE Board met again on February 15, 2016, and discussed the Proposed Public Offering. 181 At this meeting, the ETE Board revised 174 Id. JTX-0461.0002; JTX-0475.0002; JTX-0579; JTX-0500.0001; Trial Tr. at 1579:7– 1583:15(Bramhall). 176 JTX-0507; Trial Tr. at 52:6–13(Chappel). 177 Stip. ¶ 25. 178 Trial Tr. at 52:14–20(Chappel). 179 JTX-0517.0001; Trial Tr. at 208:11–20(Van Ngo); id. at 53:10–22(Chappel); JTX-0537.0002. 180 JTX-0517.0001. 181 JTX-0535; JTX-0536.0001–.0002. 175 32 the distribution preference to include an additional 17½ cents of accrual credits, toward new units, per quarter, in addition to the 11-cent cash distribution. 182 This had the effect of preserving ETE’s historic distribution of 28½ cents for Proposed Public Offering participants, and therefore eliminated the risk of a distribution cut for those participants. Although ETE asserts that it added the accrual credits to ensure that the Proposed Public Offering would be marketable,183 the elimination of downside risk was an advantage to ETE insiders, including Warren and ETE senior management, who had pledged to “commit their units to th[e] program.” 184 ETE made this change itself before consulting Perella. 185 After ETE informed Perella of the change, a Perella analyst remarked that “[i]f cash distributions on common units are cut to zero, the preferred [payment in kind (“PIK”)] distributions don’t conserve cash in and of themselves—rather, they represent a wealth transfer from non-participating to participating units.” 186 b. Williams Declines to Consent to the Proposed Public Offering The Williams Board asked its financial advisors, Lazard and Barclays, to assess the Proposed Public Offering. 187 On February 17, 2016, both advisors 182 JTX-0535.0019; JTX-0538.0002; Trial Tr. at 351:1–352:10(Warren). ETE OB at 26–27; Trial Tr. at 1656:19–1658:3(Bednar); id. at 441:17–442:11(McReynolds); id. at 450:3–21(McReynolds). 184 JTX-0518.0001; JTX-0512.0001. 185 Trial Tr. at 1677:2–19(Bednar); JTX-0532.0001. 186 JTX-0537.0001. 187 Trial Tr. at 53:10–55:1(Chappel). 183 33 recommended that the Williams Board decline to consent.188 Although Williams believed that the Proposed Public Offering would have a positive impact on ETE’s leverage issues, 189 the advisors determined that because the Proposed Public Offering would allow participants to benefit disproportionately over nonparticipating unitholders (including future ETC stockholders) in the event of a distribution cut, it “would have an extraordinary detrimental impact on Williams shareholders.”190 Chappel agreed with this analysis.191 The Williams Board therefore declined to provide consent.192 On February 18, 2016, Williams informed ETE that it would not provide consent. 193 Although ETE contends that it was surprised by this news,194 ETE’s CFO admitted in the Unitholder action that Chappel had already informed him on February 13, 2016 that “he was not going to allow [Williams Co.’s] auditors to provide the consent.”195 The next day, Chappel and Williams’ general counsel met with Welch and ETE’s general counsel, and Chappel stated that Williams was open to other solutions, “including an offering that Williams shareholders could participate in on an equivalent basis to ETE shareholders, one that would treat 188 Id. at 54:5–22(Chappel). Id. at 113:5–16(Chappel). 190 Id. at 54:9–22(Chappel); id. at 162:22–168:23(Garner); JTX-0551.0008, .0010. 191 Trial Tr. at 54:23–55:1(Chappel). 192 Stip. ¶ 25. JTX-0549.0003. 193 Trial Tr. at 54:5–55:16(Chappel); JTX-0561.0002. 194 ETE OB at 27. 195 Energy Transfer, 2018 WL 2254706, at *6. 189 34 Williams shareholders fairly and so they would be in the same class as ETE shareholders.”196 ETE refused this proposal.197 Instead, ETE devised the private Preferred Offering, featuring a similar distribution preference, which I found in the Unitholder action was “a hedge meant to protect insiders from the anticipated bad effects of the coming merger.” 198 c. ETE Makes the Private Preferred Offering Unlike the Proposed Public Offering, the private Preferred Offering did not require the consent of Williams’ auditors. 199 On February 25, 2016, a few days before the ETE Board approved the Preferred Offering, Warren was asked on earnings call about potential distribution cuts at ETE and an ETE affiliate, ETP.200 Warren stated that there were “no contemplated distribution cuts at ETP whatsoever.” 201 With respect to ETE, however, Warren stated that although “ETE is very healthy” and “distribution cuts are not required,” “everybody knows obviously that that’s an option.”202 Warren added that “[i]t would be one of the last [buckets] that we would reach to, but it’s certainly possible.”203 196 JTX-0561; Trial Tr. at 56:1–57:7(Chappel). Trial Tr. at 57:8–14(Chappel). 198 Energy Transfer, 2018 WL 2254706, at *1. 199 Id. at *8. 200 JTX-0595.0013; Trial Tr. at 355:9–357:8(Warren). 201 JTX-0595.0013. 202 Id. 203 Id. 197 35 The next day, on February 26, 2016, Warren called an ETE Board meeting to discuss the Preferred Offering.204 The ETE Board met on February 28, 2016 and approved the Preferred Offering, 205 in a process which I found in the Unitholder action breached ETE’s limited partnership agreement because it involved, among other things, a “fatally flawed” conflicts committee and “untrue” board resolutions.206 ETE instructed its counsel not to inform Williams of the Preferred Offering until after it closed.207 ETE closed the Preferred Offering on March 8, 2016.208 The Preferred Offering created a new class of equity—Series A Convertible Preferred Units 209— which featured an increased distribution preference of 28½ cents.210 17½ cents of this was to be an accrual credit toward PIK distributions, saving ETE cash if common unit cash distributions continued without diminution.211 Unlike the Proposed Public Offering, the Preferred Offering was made available only to ETE insiders.212 Warren, McReynolds, and Ray Davis, ETE’s co-founder, received over 85% of the 204 JTX-0606. Id. at .0002; JTX-0638; Trial Tr. at 357:9–360:2(Warren). 206 Energy Transfer, 2018 WL 2254706, at *12, 20, 24–25. 207 Trial Tr. at 209:2–15(Van Ngo); Katz Dep. at 64:4–65:10; McReynolds Dep. at 191:11–192:17 (2019). 208 Stip. ¶ 26. 209 Id. 210 JTX-0713.0008; Trial Tr. at 169:9–172:3(Garner); id. at 490:13–492:11(Ruback). 211 JTX-1218.0045–.0046. 212 Trial Tr. at 169:9–170:10(Garner); JTX-0713.0008. 205 36 total preferred units. 213 Those to whom the Preferred Offering was extended were invited to participate pro rata based on their holdings of existing units.214 Warren and McReynolds participated in the Preferred Offering with respect to substantially all of their units.215 The market’s reaction to the Preferred Offering was mixed. One ETE investor suggested that the Preferred Offering could be a “sub-rosa plan to give management the ability to preserve payments to itself while shutting off distributions to common unit-holders entirely,” which “would not be consistent with [ETE’s] well-earned reputation.”216 An analyst wrote to McReynolds that “it looks to me (and the market, apparently) that [Warren] has insulated himself from a distribution cut, but ETE common holders are still on the hook for a potential distribution cut should one be required.”217 Williams and its stockholders were also concerned. One Williams stockholder admonished that “[t]he insiders at ETE are enriching themselves at the expense of the rest of the ETE shareholders” and decried the Preferred Offering as “something similar” to a “fraudulent conveyance.” 218 Garner testified that he 213 Trial Tr. at 1648:16–1750:18(Atkins). JTX-1218.0045. 215 Trial Tr. at 1748:16–19(Atkins); id. at 449:2–450:10(McReynolds); JTX-1218.0046. 216 JTX-0702.0001. 217 JTX-0705.0001. Trial Tr. at 474:9–24(McReynolds). 218 JTX-0711.0001–.0002; Trial Tr. at 475:1–17(McReynolds). 214 37 believed the Preferred Offering was “more outrageous than the prior one,” 219 and Chappel testified that he believed it “was a complete game changer with respect to what was bargained for in the merger agreement.”220 Likewise, Stoney described the Preferred Offering “as a sweetheart deal” for “the CEO of ETE and some small selected group of people.” 221 Meanwhile, ETE’s credit ratings agencies responded positively to the Preferred Offering. 222 Indeed, Fitch, one of the three major rating agencies, described the Preferred Offering as “a proactive step in enhancing [ETE’s] liquidity and managing acquisition leverage in a credit neutral manner.” 223 d. ETE Announces Plans to Cut Distributions In February and April 2016, Williams provided ETE with financial projections. 224 The February 10, 2016 projections, which were ratings agency updates, included both base-case and downside case forecasts. 225 Dylan Bramhall, ETE’s Vice President of Financial Planning and Analysis, 226 testified at trial that these forecasts indicated to ETE that Williams had “bottomed out” from late 2015 declines, “the numbers had stepped back up a little bit,” and ETE “felt that business 219 Trial Tr. at 169:16–18(Garner). Id. at 58:21–59:10(Chappel). 221 Id. at 866:17–867:5(Stoney). 222 JTX-0716. 223 Id. at .0001; Energy Transfer, 2018 WL 2254706, at *14. 224 JTX-0495. 225 Id. at .0010, .0022. 226 Trial Tr. at 1564:17–20(Bramhall). 220 38 was performing well enough to cover current distribution levels.”227 Bramhall testified that ETE understood the base-case projections to reflect Williams’ view “as [to] what was most expected.”228 In late March and early April 2016, ETE asked Williams to provide updated projections to incorporate in an amendment to the S-4. 229 Williams sent updated projections to ETE on April 7, 2016.230 Williams’ April 7 projections were bleaker than its projections from February 10. Compared to the February 10 base-case forecast, Williams’ April 7 forecast projected lower distributable cash flows for WPZ—by 15.8% in 2016 and 21.7% in 2017.231 But when compared against the February 10 downside forecast, the April 7 projections for WPZ’s distributable cash flows were lower by just 5.9% in 2016 and 11.3% in 2017.232 When Chappel sent the projections to ETE, he presented them as “based on the Downside Case that we presented . . . in February.”233 However, Long asked Chappel on April 15, 2016 whether the updated projections “represent [Williams’] most realistic projections,” or whether there were additional “adjustments that should be made to the projections to reflect [Williams’] most realistic 227 Id. at 1571:6–1572:5(Bramhall). Id. at 1632:16–1633:3(Bramhall). 229 Id. at 1572:6–20; JTX-0807. 230 JTX-0846. 231 Plaintiff’s Demonstrative Ex. 5 at 3. 232 Id. at 4. 233 JTX-0846.0001. 228 39 projections.” 234 Chappel replied that Williams viewed the April 7 projections “as appropriately capturing a discount for customer credit risk, a realistic risk in this environment,” and that he “d[id] not believe that additional adjustments [were] necessary.” 235 Bramhall testified that the projections in the April 7 update were a “surprise” that “caught everyone off guard” and demonstrated to ETE that “it was going to be difficult for WPZ to maintain [its] current distribution levels and keep leverage below five times.” 236 But he also acknowledged that by this point, ETE had already been “looking at what would happen on the [Williams] downside case as well.”237 In addition to Williams’ declining projections, ETE also revised its synergies estimates downward between February and April 2016. On February 23, 2016, ETE estimated Merger synergies between $195–$879 million annually.238 ETE increased its synergies estimate to between $403–889 million on March 9, 2016, 239 but on April 15, 2016, it reduced its base-case estimate to $126 million. 240 On April 18, 2016, six weeks after closing the Preferred Offering, ETE announced publicly in an amendment to the S-4 that if the Merger closed, it expected 234 JTX-0963.0001. Id. 236 Trial Tr. at 1572:6–1575:6(Bramhall). 237 Id. 238 JTX-0581.0003. 239 JTX-0686.0004. 240 JTX-0957.0002. 235 40 to eliminate common unit distributions for two years.241 ETE restated this expectation in the amended S-4 filed on May 24, 2016.242 The parties dispute what precipitated this announcement. Williams contends that ETE had anticipated a potential distribution cut since January 2016, shortly after the energy market began to crater.243 In contrast, ETE asserts that it only decided to cut distributions in April 2016, after a confluence of the bleaker financial projections from Williams on April 7, 2016 and the decreased synergies estimates in April 2016. 244 The evidence presented at trial demonstrated that ETE anticipated the potential distribution cuts as early as January 2016. As I noted above, Warren and Welch both raised the possibility of distribution cuts in January 2016, including specifically a two-year distribution cut mirrored by the anticipated cut that ETE ultimately announced. 245 Warren also testified that when Perella first presented the Proposed Public Offering in late January 2016, ETE had been considering the possibility of a two-year distribution cut.246 In February 2016, both of ETE’s advisors, Goldman Sachs and Perella, suggested distribution cuts as possible 241 JTX-0992.0046; Trial Tr. at 362:17–364:1(Warren). JTX-1218.0046; Trial Tr. at 483:3–11(McReynolds). 243 Pl.’s and Countercl. Def.’s Posttrial Br., Dkt. No. 630 at 37–43 [hereinafter “Williams OB”]. 244 ETE OB § II.D.4. 245 See supra notes 123–24, 128–29 and accompanying text. 246 See supra note 158 and accompanying text. 242 41 alternatives,247 and ETE ran models involving distribution cuts.248 On the February 25, 2016 earnings call, Warren definitively ruled out a distribution cut at ETP, but equivocated regarding an ETE distribution cut.249 ETE’s evidence that it only began to expect post-closing distribution cuts in April 2016 is unconvincing. When Long testified at the Unitholder trial that ETE only expected a distribution cut after it received Williams’ April 7 projections, he asserted that the new projections showed a “huge” “50 percent” drop in distributable cash flow.250 That was incorrect: As discussed above, even when compared to the more positive February 10 base-case projections instead of the downside case projections, the drop was actually 15.8% in 2016 and 21.7% in 2017.251 When deposed in this matter, Long acknowledged that the drop “wasn’t nearly as large” as what he had previously testified.252 Bramhall also admitted at trial that what Long characterized “as a 50 percent decrease . . . was, in fact, a 21 percent decrease.”253 Moreover, although Bramhall testified on direct examination that ETE did not begin to expect distribution cuts until early April 2016 and that before then, “executives at Energy Transfer were very opposed to distribution cuts,” 254 he 247 See supra notes 172–74 and accompanying text. See supra note 175 and accompanying text. 249 See supra notes 200–03 and accompanying text. 250 JTX-1387.0274:16–.0275:4 (Long Unitholder testimony). 251 See supra note 231 and accompanying text. 252 Long Dep. at 164:23–165:12 (2019). 253 Id. at 1594:6–20(Bramhall). 254 Id. at 1565:3–12(Bramhall); id. at 1567:5–12(Bramhall). 248 42 admitted on cross-examination that distribution cuts were “above [his] pay grade” and he “did not know what the executive team was discussing.” 255 Bramhall also conceded at trial that, even before receiving Williams’ April 7 projections, ETE had already incorporated Williams’ February 10 downside projections—which more closely approximated the April 7 projections—into its S-4 projections.256 As of the Closing Date, ETE continued to state that it expected to cut distributions on common units, including common units held by former Williams stockholders, to zero until March 31, 2018.257 Meanwhile, ETE expected that participants in the Preferred Offering would receive 28½ cents in value per quarter during the same period—including up to 11 cents in cash, 258 which would amount to over $150 million in cash flow for Warren personally. 259 6. Williams Defends Stockholder Actions Between signing and closing, Williams faced multiple stockholder actions challenging the Merger. Williams managed to prevent each of them from blocking the Merger by obtaining either a dismissal or settlement.260 255 Id. at 1576:4–1578:19(Bramhall). Id. at 1572:6–20(Bramhall). 257 See JTX-1218.0046. 258 Id. at .0045–.0046, .0054. 259 Trial Tr. at 371:20–373:1(Warren); JTX-1218.0046. 260 In re The Williams Cos., Inc. Merger Litig., No. 11844-VCG (Del. Ch. dismissed July 19, 2017); In re The Williams Cos., Inc. Stockholder Litig., No. 11236-VCG (De. Ch. dismissed Mar. 31, 2016); City of Birmingham Retirement & Relief Sys. v. Armstrong, No. 16-17-RGA, Dkt. No. 59, (D. Del. dismissed Mar. 7, 2016); Bumgarner v. Williams Cos., Inc., 2016 WL 1717206 (N.D. Okla. Apr. 28, 2016). 256 43 One of those lawsuits, brought by Williams stockholder and former executive John Bumgarner,261 was at issue in this litigation. ETE contends that Armstrong, who was “tasked with executing the Board’s directive to close the transaction,”262 flouted this directive by working covertly with Bumgarner to support his lawsuit and put a stop to the Merger.263 But the evidence presented at trial demonstrated that, although Armstrong did regularly communicate with Bumgarner, he did so in an attempt to allay Bumgarner’s opposition to the Merger, not in connection with a clandestine plot to thwart it. 264 Bumgarner had worked at Williams for approximately 25 years, retiring around 2001.265 At one time, Bumgarner was in charge of mergers and acquisitions at Williams and he was an advisor to the then-CEO. 266 After the Merger was announced, Bumgarner approached Armstrong and threatened litigation regarding the synergies estimates contained in joint press release announcing the Merger.267 In particular, Bumgarner took issue with a $2 billion estimate made by ETE that was 261 See generally Bumgarner, 2016 WL 1717206. Trial Tr. at 657:2–7(Armstrong). 263 ETE OB § II.B.1. 264 This is not to say that Armstrong’s tactics in attempting to assuage Bumgarner’s concerns represented a model of corporate governance best practices. 265 Trial Tr. at 903:6–904:11(Bumgarner); id. at 620:6–23(Armstrong). 266 Id. at 903:11–904:11(Bumgarner); id. at 620:6–23(Armstrong). 267 Id. at 625:3–626:19(Armstrong); id. at 699:6–700:3(Armstrong); id. at 719:22– 720:3(Armstrong). 262 44 referenced in the press release. 268 As former colleagues, Armstrong and Bumgarner were friends.269 Armstrong testified that, leveraging this relationship, he tried to explain to Bumgarner that the $2 billion estimate came from ETE, and that the Williams Board relied on its own synergies estimate of $200 million, which would be disclosed in the S-4. 270 Armstrong did not notify Williams’ counsel of Bumgarner’s threats, though he did inform the Chairman of Williams’ Board, Frank MacInnis. 271 At trial, Armstrong testified that he did not notify Williams’ counsel because he thought that it would lead to a counterproductive “very aggressive fight,” and he believed he could “keep [Bumgarner] . . . at bay” in light of their personal and professional relationship.272 Armstrong also testified that he believed that when the S-4 was filed, it would “satisfy [Bumgarner’s] concerns.” 273 This is consistent with contemporaneous emails: On January 11, 2016, Bumgarner emailed MacInnis and Armstrong, challenging the S-4, and wrote, “I briefly jumped Alan about this matter and got the ‘My hands are tied; I have to support the deal.’ response.” 274 Armstrong 268 Id. at 623:20–626:19(Armstrong); id. at 921:8–15(Bumgarner). Bumgarner’s concerns were ultimately validated; as I discussed above, ETE and Williams later revised their synergies estimate downward to $126 million. JTX-0957.0002. 269 Trial Tr. at 620:6–13(Armstrong); id. at 908:18–910:10(Bumgarner). 270 Id. at 624:6–24(Armstrong); id. at 919:15–19(Bumgarner). 271 Id. at 637:12–638:17(Armstrong). 272 Id. at 637:19–638:17(Armstrong). 273 Id. at 638:6–13(Armstrong). 274 JTX-0356.0002. 45 forwarded the thread to MacInnis and asked, “[d]o you think we should call him? Or just let this run its course.” 275 From November 2015 through July 2016, Armstrong and Bumgarner met approximately weekly. 276 Much of their communication occurred either in person or via Armstrong’s personal email accounts; Armstrong testified that he was “pretty careful to have most of [his] conversation[s] with [Bumgarner] in person.”277 The bulk of the email communication between Armstrong and Bumgarner during this time involved two of Armstrong’s personal email addresses at Gmail.com and Cox.net. 278 In 2016, two days after being asked at a deposition whether he emailed Bumgarner, Armstrong deleted his Gmail account, though he did not delete his Cox.net account.279 At trial, Armstrong testified that he deleted the Gmail account because it had been corrupted and was sending unsolicited spam messages to his contacts, including Chappel.280 As discussed below, I find this testimony unconvincing. 281 Although Armstrong deleted his Gmail account, ETE was able to uncover much of his email communication by subpoenaing Bumgarner’s accounts. 282 On 275 Id. at .0001. Trial Tr. at 621:7–13(Armstrong); id. at 910:12–14(Bumgarner). 277 Id. at 623:2–12(Armstrong). 278 Defendants’ Demonstrative Ex. 3. 279 JTX-1437.0008–.0009; Trial Tr. at 632:1–18(Armstrong). 280 Trial Tr. at 632:5–18(Armstrong). 281 See infra § II.E. 282 JTX-1394. 276 46 December 6, 2015, Bumgarner emailed Armstrong and requested Armstrong’s “edits and corrections” to a document compiling purported factual errors in Williams’ and ETE’s public statements about the Merger.283 According to the document, the supposed errors suggested that it was “rational[] [to] conclude there has been a deliberate attempt to deceive public investors on the part of the directors of [Williams] and the investment banks that advised them.”284 Armstrong met with Bumgarner in person to discuss the document,285 which later evolved 286 into a federal securities class action complaint filed by Bumgarner.287 Before filing the federal complaint, Bumgarner emailed his lawyer, with Armstrong blind-carbon-copied, and asked, “when can we file ? how can we also join/help the Delaware cases ?”288 On December 26, 2015, Armstrong also answered various factual questions from Bumgarner related to the joint press release.289 Bumgarner filed the lawsuit against Williams and ETE on January 14, 2016, alleging federal securities violations and seeking to enjoin the Merger.290 After filing the 283 JTX-0273.0001. Id. at .0004. 285 JTX-0275; JTX-0276. 286 Trial Tr. at 932:22–9:33:10(Bumgarner). 287 See generally JTX-0368. 288 JTX-0300.0003. This presumably referred to cases seeking to enjoin the Merger. 289 JTX-0320. 290 JTX-0368.0018. 284 47 lawsuit, Bumgarner continued to correspond with Armstrong about facts related to the Merger.291 Bumgarner also obtained a copy of Armstrong’s notes to himself regarding the S-4, and he emailed a document to the Wall Street Journal that mirrored the structure and substance of those notes.292 Armstrong testified at his deposition293 and at trial that he did not recall supplying those notes to Bumgarner, though he “t[ook] responsibility” at trial for the fact that Bumgarner “got ahold of th[e] document[].”294 Bumgarner also sought Armstrong’s review of a draft letter to the SEC reporting purported misleading statements and omissions in the S-4.295 Armstrong testified that he did not try to help Bumgarner with the lawsuit, and merely attempted to “educate him on the synergies” and “show him where all the public information was.”296 Likewise, Bumgarner testified that Armstrong did not help with the lawsuit, had nothing to do with Bumgarner’s decision to sue, and told Bumgarner that he did not “have a very good case.” 297 Bumgarner also testified that Armstrong “played it straight,” behaved like a “Boy Scout,” and “represented the company.” 298 291 JTX-0522; Trial Tr. at 947:14–19(Bumgarner); id. at 668:10–13(Armstrong). Compare JTX-0223, with JTX-0252. 293 Armstrong Dep. at 156:13–161:7 (2019). 294 Trial Tr. at 631:3–14(Armstrong) 295 JTX-0801. 296 Trial Tr. at 626:3–627:2(Armstrong). 297 Id. at 906:15–20(Bumgarner); id. at 970:20–23(Bumgarner); id. at 971:15–972:3(Bumgarner). 298 Id. at 910:20–22(Bumgarner). 292 48 Ultimately, Bumgarner’s claims were each dismissed or settled before the agreed-upon June 28, 2016 Closing Date. On April 28, 2016, several of Bumgarner’s claims were dismissed, 299 and his remaining claims were settled on June 16, 2016. 300 Although the evidence demonstrates that Armstrong’s communications with Bumgarner were intended to assuage concerns about the Merger synergy disclosures, Armstrong did communicate anti-merger sentiments to others that were then relayed to Bumgarner.301 In a December 22, 2015 email, Keith Bailey, Williams’ former CEO, wrote to Bumgarner, “[h]eard this morning that Alan [Armstrong] told the guy I had breakfast with that he had a 7/6 majority the night before. That the activist investors threatened to sue if the deal wasn’t approved and that flipped the two directors. . . . Alan also told this guy that at the December board meeting he ‘unloaded’ on the directors who supported the deal for being cowards.”302 However, when Bailey encouraged Armstrong to “give [ETE] the out” to make it easier to address potential credit issues at Williams, Armstrong demurred, stating that he preferred “other levers . . . to address ratings agency concerns.”303 299 Bumgarner, 2016 WL 1717206, at *6. JTX-1295. 301 See JTX-0313.0001. 302 Id. 303 JTX-0369.0001. 300 49 Bailey subsequently authored two letters to Williams stockholders encouraging them to vote down the Merger.304 7. Williams Encourages Its Stockholders to Approve the Merger Although some Williams directors and executives continued to question the merits of the Merger during the energy market tohubohu,305 the record demonstrates that Williams worked to obtain stockholder approval of the Merger and pressed towards closing. On November 24, 2015, the Williams Board recommended that Williams stockholders vote for the Merger. 306 As I noted above, after the energy market began to deteriorate, the Williams Board issued a press release on January 15, 2016 announcing that it was “unanimously committed to completing the transaction with [ETE] per the [M]erger [A]greement . . . as expeditiously as possible and delivering the benefits of the transaction to Williams’ stockholders.” 307 Williams publicly reaffirmed this position on February 17, 2016,308 although two directors expressed disagreement internally about the use of the word “unanimous,” which they described as “trickery.” 309 Williams also sued ETE on April 6 and May 13, 2016, seeking specific performance of the Merger Agreement, and issued press releases in 304 JTX-0580; JTX-1244. See supra at 26–27. 306 Stip. ¶ 33. 307 JTX-0379.0001. 308 JTX-0553.0004. 309 JTX-0545.0001. 305 50 connection with those lawsuits stating that the Williams Board was “unanimously committed to enforcing its rights under the merger agreement.”310 On May 24, 2016, the parties filed an updated S-4 with the SEC. 311 In the S-4, the Williams Board recommended that stockholders vote for the Merger, though it disclosed that certain Williams directors voted against the Merger and “continue . . . to disagree with the recommendation of” the majority of the Williams Board. 312 On May 25, 2016, Williams scheduled a special stockholder meeting to vote on the Merger and reaffirmed that Williams “remain[ed] committed to holding the stockholder vote and closing the transaction as soon as possible.”313 On June 15, 2016, Williams restated its recommendation that the stockholders approve the Merger. 314 The Williams Board committee that was responsible for overseeing the Merger also conducted a week-long investor roadshow during which they made in-person visits and phone calls to discuss the Merger with institutional investors and other stockholders. 315 310 JTX-0826.0001; see also JTX-0935.0001; JTX-1179.0001. JTX-1218. 312 Id. at .0029–.0031. 313 JTX-1221.0001. 314 JTX-1287. 315 Trial Tr. at 61:14–23(Chappel); Sugg Dep. at 334:21–335:9. 311 51 On June 27, 2016, Williams held a special meeting of its stockholders to approve the combination with ETE.316 Over 80% of votes cast were in support of the Merger.317 8. Latham Declines to Render the 721 Opinion The Merger ultimately failed to close due to the failure of a condition precedent: Latham’s determination that it could not render the 721 Opinion. This determination ultimately became the basis for my decision in 2016 declining to enjoin ETE from terminating the Merger Agreement. 318 At trial in 2016, ETE’s head of tax, Brad Whitehurst, testified that he had an “epiphany” in March 2016 that the precipitous drop in the value of ETE’s units during the market turmoil could trigger a tax liability.319 Whitehurst testified that, when reviewing the draft S-4 in March 2016, he realized for the first time that the number of ETC shares that ETE would receive in exchange for the $6 billion cash component—the hook stock—was fixed, not floating. 320 He testified that he believed the fixed nature of the hook stock could pose a potential Section 721 issue, and therefore brought the issue to Latham’s attention.321 316 Stip. ¶ 33. Id. 318 See generally Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017). 319 Williams Cos., 2016 WL 3576682, at *12. 320 JTX-1304.0038 at 150:19–151:23 (Whitehurst 2016 trial testimony). 321 JTX-1304.0041 at 162:23–163:22 (Whitehurst 2016 trial testimony). 317 52 The record in this trial proved Whitehurst’s 2016 testimony to be false. Instead, it was Darryl Krebs, a vice president in ETE’s tax department who reported to Whitehurst, who first identified that the hook stock was fixed. Krebs testified that when he reviewed the S-4 in March 2016, he noticed that ETE’s hook stock appeared to be fixed at 19% of ETC shares.322 This “stuck out to [Krebs] as a little surprising,” so he raised it with Whitehurst, who reported back to Krebs a week later that the hook stock was indeed fixed at 19% of ETC shares. 323 Whitehurst therefore asked Krebs to “think about it and see if there’s any other implications.” 324 On March 28, 2016, Krebs emailed Whitehurst with the subject line, “Disaster or Opportunity,” and wrote that he “was thinking about the ETC share issue some more and another potential issue occurred to [him].” 325 Krebs raised the possibility that the hook stock could pose “a disguised sale issue under [Section] 721,” and asked whether Latham had “looked at / evaluated this potential outcome in their 721 [O]pinion.”326 He recommended that Latham assess this issue, and added that if Latham could not issue the 721 Opinion, “we can’t meet all of the conditions required to complete the merger,” and Williams “will either have to renegotiate or 322 Trial Tr. at 1080:20–1081:17(Krebs); id. at 1162:8–17(Whitehurst). Id. at 1081:11–1082:12(Krebs); id. at 1162:8–1165:7(Whitehurst). 324 Id. at 1082:13–18(Krebs); id. at 1164:18–1165:7(Whitehurst). 325 JTX-0757.0001. 326 Id. 323 53 the merger can’t be completed.”327 Krebs concluded his email by observing that “[m]aybe there is a silver lining to the issue identified today.” 328 The next day, on March 29, 2016, Whitehurst called a Latham tax partner, Tim Fenn, and asked that Latham investigate the issue.329 Latham then undertook an “all hands on deck” analysis, during which it “pull[ed] in all of the associates in Houston to start working on the transaction and doing research.” 330 In April 2016, Latham devoted over 1,000 hours to the Section 721 issue. 331 Another partner at Latham who worked on the matter, Larry Stein, described the task as “among the most intense, if not the most intense process” he had experienced in his entire career.332 While conducting its analysis, Latham participated in six calls with ETE’s deal counsel, Wachtell, to “pressure test” Latham’s analysis.333 Stein and Fenn each testified that these conversations with Wachtell reinforced Latham’s confidence in its analysis that the 721 Opinion was problematic.334 In addition, on April 7, 2016, ETE retained William McKee, a tax attorney at Morgan Lewis & Bockius (“Morgan Lewis”), to provide a second opinion and 327 Id. Id. 329 Trial Tr. at 1462:1–13(Fenn); id. at 1129:24–1130:7(Whitehurst). 330 Id. at 1465:1–16(Fenn); id. at 1360:10–24(Stein). 331 Id. at 1465:1–1466:12(Fenn). 332 Id. at 1360:10–24(Stein); id. at 1468:10–1469:2(Fenn). 333 JTX-0837; JTX-0847; JTX-0848; JTX-0876; JTX-0892; JTX-0990; Trial Tr. at 1372:19– 1373:20(Stein); id. at 1435:9–1436:1(Stein); id. at 1485:23–1488:5(Fenn). 334 Trial Tr. at 1372:19–1373:20(Stein); id. at 1485:23–1488:22(Fenn). 328 54 determine whether there was a solution to the Section 721 issue. 335 McKee concluded on April 11, 2016 that he would not be able to render a should-level 721 Opinion, albeit for reasons different than Latham’s.336 McKee then discussed his conclusion with Latham. 337 On April 12, 2016, Latham reached a “tentative conclusion” that it could not render the 721 Opinion, and then informed Williams’ deal counsel at Cravath.338 Less than three hours later, Cravath called Latham, disagreeing with Latham’s conclusion, and stating that it believed it could render a “will-level” 721 Opinion.339 Cravath also discussed the issue with McKee the next day, at Whitehurst’s request.340 Despite disagreeing with Latham’s assessment, Cravath proposed two alternatives to Latham on April 14, 2016 that it contended would resolve the Section 721 issue.341 Latham analyzed these proposals and, after consulting with Wachtell and Morgan Lewis,342 determined that neither proposal would solve the 335 Id. at 1137:18–1138:3(Whitehurst); JTX-1306.0060 at 568:20–570:21 (McKee 2016 trial testimony). 336 JTX-1306.0061 at 574:2–14 (McKee 2016 trial testimony). 337 Trial Tr. at 1484:23–1485:10(Fenn); id. at 1372:21–1373:20(Stein); id. at 1437:22– 1438:8(Stein); id. at 1147:13–20(Whitehurst). 338 JTX-1531; Trial Tr. at 1376:18–1377:15(Stein); Stip. ¶ 28. 339 JTX-0881.0001; JTX-0884.0001. 340 JTX-1306.0062 at 578:10–582:2 (McKee 2016 trial testimony); Trial Tr. at 1143:15– 1144:2(Whitehurst). 341 JTX-0950. 342 Trial Tr. at 1386:4–1391:11(Stein); id. at 1488:6–13(Fenn); JTX-0990; JTX-0877.0013–.0014; JTX-0993; JTX-1119. 55 issue. 343 Latham reasoned that, because the proposals would not alter the economics of the deal (which Cravath acknowledged 344), they would conflict with a line of tax cases declining to give weight to non-economic amendments to transactions made solely to avoid taxation.345 On April 18, 2016, the parties filed an Amendment to the Form S-4, stating that “Latham & Watkins LLP has recently advised ETE that if the closing of the merger were to occur as of the date of this proxy statement/prospectus it would not be able to deliver the 721 Opinion.” 346 In late April 2016, Williams sought its own second opinion from Eric Sloan of Gibson, Dunn & Crutcher.347 After three weeks of analysis, Sloan initially determined that “it is tough to get to a should,” 348 though he concluded the next day in a “close call”349 that he would be able to render a “weak should.” 350 On May 13, 2016, Williams sued ETE seeking to enjoin it from terminating the Merger Agreement based on the failure of the 721 Opinion, which I denied on 343 Trial Tr. at 1379:13–1384:2(Stein); id. at 1481:21–1482:18(Fenn); id. at 1151:18– 24(Whitehurst); JTX-0986.0002–.0003; Williams Cos., 2016 WL 3576682, at *15–16. 344 Trial Tr. at 1008:1–4(Needham); JTX-1304.0015 at 58:8–17 (Van Ngo 2016 trial testimony). 345 See Comm’r v. Ct. Holding Co., 324 U.S. 331 (1945); Trial Tr. at 1380:16–1382:6(Stein); id. at 1404:12–1407:3(Stein); id. at 1440:22–1441:11(Stein); id. at 1150:6–1151:3(Whitehurst). 346 Stip. ¶ 29. 347 JTX-1053. 348 Trial Tr. 1052:5–8(Needham); JTX-1170.0001. 349 JTX-1199.0002. 350 JTX-1177.0001. 56 June 24, 2016 after trial.351 In my post-trial opinion denying specific performance, I found that Latham’s determination that it would be unable to deliver the 721 Opinion was made in good faith and was not improperly motivated by any pressure from ETE to avoid closing the Merger.352 I further held that because the 721 Opinion was a condition precedent to closing, Williams was not entitled to an injunction prohibiting ETE from terminating the Merger Agreement after the passage of the Closing Date. 353 9. ETE Terminates the Merger After the Failure of the 721 Opinion Williams and ETE had agreed to meet on June 28, 2016 at 9:00 AM to close the Merger. 354 On June 28, 2016 at 9:00 AM, counsel for both parties met at the offices of Wachtell, ETE’s counsel, with the necessary authority and all paperwork to close, except for the 721 Opinion.355 The parties agree that Williams was ready, willing, and able to close on June 28, 2016. 356 Counsel for ETE, however, informed Williams that ETE would not close and would instead rely on the failure of the condition precedent of Latham’s 721 Opinion. 357 Both before the market opened and after it closed on June 28, 2016, Latham sent ETE and Williams letters indicating 351 Williams Cos., 2016 WL 3576682, at *2, 21. Id. at *16. 353 Id. at *21. 354 Stip. ¶ 34. 355 Id. ¶ 35. 356 Id. ¶ 36. 357 Id. 352 57 that it could not deliver the 721 Opinion at those times. 358 On June 29, 2016, ETE terminated the Merger Agreement due to the passage of the Outside Date under Section 7.01(b)(i) of the Merger Agreement. 359 C. The Plaintiff Brings These Actions This matter first came to me on April 6, 2016, when Williams filed an expedited complaint challenging the Preferred Offering.360 Williams also filed a lawsuit in Texas state court against Warren on the same day, also challenging the Preferred Offering and contending that it constituted tortious interference with the Merger Agreement.361 The Texas lawsuit was dismissed on May 24, 2016 because it conflicted with a forum selection clause in the Merger Agreement. 362 On April 19, 2016, Williams filed an amended complaint in this matter. 363 ETE filed counterclaims on May 3, 2016.364 On May 13, 2016, Williams initiated a separate action in this Court seeking to enjoin ETE from terminating the Merger Agreement due to the failure of the 721 Opinion. 365 On May 24, 2016, the Defendants filed amended affirmative defenses 358 Id. ¶ 37. Id. ¶ 38; Williams Cos., 2017 WL 5953513, at *8. 360 Verified Compl., Dkt. No. 1, Apr. 6, 2016. 361 JTX-0819. 362 JTX-1220. 363 Verified Am. Compl., Dkt. No. 48. 364 Def.’s Answer Pl.’s Verified Am. Compl., Affirmative Defenses, and Original Verified Countercl., Dkt. No. 58. 365 Verified Compl., Dkt. No. 1, May 13, 2016. 359 58 and counterclaims, addressing both actions in this Court. 366 On June 14, 2016, I ordered that the parties consolidate briefing and scheduling of the two actions to litigate the issues concurrently. 367 I held a two-day expedited trial in both actions on June 20 and 21, 2016 in Georgetown. On June 24, 2016, I issued a post-trial memorandum opinion denying Williams’ request to enjoin ETE from terminating the Merger because Latham’s inability to deliver a 721 Opinion was a failure of a condition precedent under the Merger Agreement.368 On June 27, 2016, the same day that Williams stockholders approved the Merger, Williams appealed, and the Supreme Court affirmed my Opinion in relevant part on March 23, 2017. 369 The parties thereafter filed amended claims and counterclaims.370 On December 1, 2017, I granted Williams’ motion to dismiss ETE’s counterclaims in part, denying ETE’s request for a breakup fee for the terminated Merger. 371 I denied ETE’s motion for reargument of that decision on April 16, 2018. 372 On January 14, 2020, the parties filed cross-motions for summary judgment on the remaining 366 Defs.’ and Countercl. Pls.’ Am. Affirmative Defenses and Verified Countercl., Dkt. No. 79. Scheduling and Coordination Order, Dkt. No. 101. 368 See generally Williams Cos., 2016 WL 3576682. 369 Williams Cos., 159 A.3d; see also JTX-1327.0001. 370 Verified Am. Compl., Dkt. No. 215; Defs.’ and Countercl. Pl.’s Second Am. and Suppl. Affirmative Defenses and Verified Compl., Dkt. No. 219. 371 See generally Williams Cos., 2017 WL 5953513. 372 See generally Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2018 WL 1791995 (Del. Ch. Apr. 16, 2018). 367 59 claims, which “centered largely on Williams’ right to the WPZ Termination Fee Reimbursement.”373 ETE filed a motion for sanctions on May 20, 2020 (the “Motion for Sanctions”).374 I issued an opinion on July 2, 2020 denying summary judgment but resolving certain non-dispositive contractual issues, and I held that the Motion for Sanctions was best dealt with at trial or a separate evidentiary hearing.375 I held a six-day trial in May 2021. The parties submitted post-trial briefing,376 and I heard oral argument on September 17, 2021. On September 23, 2021, the parties submitted flowcharts outlining their claims, counterclaims, and defenses,377 and I considered the matter fully submitted as of that date. II. ANALYSIS A. Legal Standards The disputes in this case primarily concern the application of the Merger Agreement. “Delaware law adheres to the objective theory of contracts, i.e., a contract’s construction should be that which would be understood by an objective, reasonable third party.” 378 In practice, the objective theory of contracts requires the 373 Williams Cos., Inc. v. Energy Transfer LP, 2020 WL 3581095, at *10 (Del. Ch. July 2, 2020). Defs. and Countercl. Pls.’ Mot. Sanctions or, Alternatively, an Evidentiary Hearing Spoliation Evid., Dkt. No. 503 [hereinafter “Motion for Sanctions”]. 375 Williams Cos., 2020 WL 3581095, at *21. 376 Williams OB; ETE OB; Pl.’s and Countercl.-Def.’s Posttrial Reply Br., Dkt. No. 640; Defs.’ and Countercl. Pls.’ Reply Br. Supp. Its Countercl., Dkt. No. 645. 377 See Dkt. Nos. 651, 652. 378 Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014) (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010)). 374 60 court to effectuate the parties’ intent,379 which, absent ambiguity, “must be ascertained from the language of the contract.” 380 In other words, “[t]he Court will interpret clear and unambiguous terms according to their ordinary meaning.”381 Where a contract is ambiguous, however, the Court “must look beyond the language of the contract to ascertain the parties’ intentions.”382 “A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction.”383 Instead, “ambiguity exists ‘[w]hen the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings.’”384 B. Williams Proved a Claim for the WPZ Termination Fee Reimbursement In my summary judgment opinion, I held that the Merger Agreement permitted Williams the opportunity to recover the WPZ Termination Fee Reimbursement even though ETE validly terminated the Merger due to the failure of Latham’s 721 Opinion. 385 Section 5.06(f) of the Merger Agreement allocates the risk regarding the WPZ Termination Fee Reimbursement as follows: 379 Zimmerman v. Crothall, 62 A.3d 676, 690 (Del. Ch. 2013). Comet Sys., Inc. S’holders’ Agent v. MIVA, Inc., 980 A.2d 1024, 1030 (Del. Ch. 2008) (quoting In re IAC/InterActive Corp., 948 A.2d 471, 494 (Del. Ch. 2008)). 381 GMG Cap. Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012) (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)). 382 Id. (quoting Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992)). 383 Id. 384 Id. (quoting Eagle Indus., 702 A.2d at 1232). 385 Williams Cos., 2020 WL 3581095, at *11–14. 380 61 If the Company or Parent terminates this Agreement pursuant to (A) Section 7.0l(b)(ii), (B) Section 7.01(d) or (C) Section 7.01(b)(i) and, at the time of any such termination pursuant to this clause (C) any condition set forth in Section 6.01(b), 6.01(c), 6.01(d), 6.01(e), 6.03(a), or 6.03(b) shall not have been satisfied, then, in each case, Parent shall reimburse the Company for $410.0 million (the “WPZ Termination Fee Reimbursement”) . . . . The Company agrees that in no event shall the Company be entitled to receive more than one WPZ Termination Fee Reimbursement.386 ETE terminated the Merger Agreement under § 7.01(b)(i) due to the passage of the Outside Date. 387 Therefore, ETE is liable to Williams for the WPZ Termination Fee Reimbursement if “any condition set forth in Section 6.01(b), 6.01(c), 6.01(d), 6.01(e), 6.03(a), or 6.03(b)” was unsatisfied at the time ETE terminated the Merger Agreement.388 Thus the parties allocated the risk of a failed merger in light of Williams’ payment of the WPZ termination fee to facilitate the Merger. Williams asserts that four conditions set forth in those sections were unmet at the time ETE terminated the Merger Agreement. First, Williams claims that ETE breached the Capital Structure Representation by issuing the Preferred Offering.389 Section 6.03(a)(i) of the Merger Agreement required the Capital Structure 386 JTX-0209.0059 (§5.06(f)) (emphasis added). See Williams Cos., 2020 WL 3581095, at *7. 388 JTX-0209.0059 (§5.06(f)). 389 Williams OB § I.A. 387 62 Representation to be true as of the Closing Date “except for any immaterial inaccuracies.” 390 Second, Williams claims that ETE breached the Ordinary Course Covenant and three Interim Operating Covenants by issuing the Preferred Offering. 391 Third, Williams claims that ETE breached its obligation to use reasonable best efforts to consummate the Merger, based on the failure of the 721 Opinion.392 Section 6.03(b) of the Merger Agreement required ETE to “perform[] or compl[y]” with the Ordinary Course Covenant, Interim Operating Covenants, and best efforts obligations by the time of closing “in all material respects.”393 Finally, Williams argues that ETE breached a representation that it knew of no facts that would prevent the Merger “from qualifying as an exchange to which Section 721(a) of the [tax] Code applies.”394 Section 6.03(a)(iv) required this representation to be true as of the Closing Date except where the failure of the representation to be true “would not reasonably be expected to have . . . a Parent Material Adverse Effect,” as defined in the Merger Agreement.395 The parties agree that, subject to ETE’s affirmative defenses, Williams is entitled to the WPZ Termination Fee Reimbursement if it prevails under any one of 390 JTX-0209.0063 (§6.03(a)(i)). Williams OB § I.B. 392 Id. § II.B. See JTX-0209.0053 (§5.03(a)), .0060 (§5.07(a)). 393 JTX-0209.0063 (§6.03(b)). 394 Williams OB § II.A. See JTX-0209.0038 (§3.02(n)(i)). 395 JTX-0209.0063 (§6.03(a)(iv)). 391 63 these four theories. As explained below, I find that the Preferred Offering breached at least the Ordinary Course Covenant, the Interim Operating Covenants, and the Capital Structure Representation. I therefore need not consider whether ETE separately breached its obligations with respect to the failure of the 721 Opinion. C. ETE Breached the Ordinary Course Covenant and Interim Operating Covenants As described above, ETE agreed to several covenants restricting its actions between signing and closing—the Ordinary Course Covenant and three Interim Operating Covenants. In my summary judgment opinion, I held that “the Preferred Offering did not comport with the requirements set forth in the operating covenants.” 396 Two issues were left for trial: First, whether ETE’s violation of these covenants was excused under the “in all material respects” qualifier, and second, whether the Preferred Offering was nonetheless permitted under the $1 Billion Equity Issuance Exception in the Parent Disclosure Letter.397 I discuss both in turn. 1. The Preferred Offering Did Not Comply with the Interim Operating Covenants and Ordinary Course Covenant “In All Material Respects” Section 6.03(b) of the Merger Agreement required, by the time of closing, ETE to have “performed or complied” with the operating covenants “in all material 396 397 Williams Cos., 2020 WL 3581095, at *18. Id. at *18–20. 64 respects.”398 ETE argues that the “in all material respects” qualifier adopts the common law “material breach” standard. 399 That is incorrect. This Court has consistently interpreted the qualifier “in all material respects” to be “less onerous” for the party asserting breach than the common law material breach standard. In Akorn, Inc. v. Fresenius Kabi AG, Vice Chancellor Laster examined the meaning of the “in all material respects” qualifier in a merger agreement.400 The Court reviewed treatises on M&A agreements and case law interpreting the word “material” and determined that “in all material respects” “limit[s] the operation of the [covenants to which it applies] to issues that are significant in the context of the parties’ contract, even if the breaches are not severe enough to excuse a counterparty’s performance under a common law [material breach] analysis.”401 The Court therefore held that the “in all material respects” qualifier “calls for a standard that is different and less onerous than the common law doctrine of material breach”: It is meant to “exclude small, de minimis, and nitpicky issues that should not derail an acquisition.”402 Since Akorn, this Court has repeatedly endorsed that meaning of the “in all material respects” qualifier in the context of merger 398 JTX-0209.0063 (§6.03(b)). ETE OB § III.A.3.a. 400 Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *84–86 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018). 401 Akorn, 2018 WL 4719347, at *84–86 (emphasis added). 402 Id. at *85–86. 399 65 agreements. 403 And our Supreme Court recently adopted this interpretation in AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC.404 ETE offers no reason to depart from that meaning here. Applying the “in all material respects” standard as set forth in Akorn, I find that the Preferred Offering’s violation of the operating covenants is not excused by that standard. The record at trial demonstrated that achieving economic equivalence between the ETC shares, which the former Williams stockholders would receive, and the ETE common units, was “paramount” to Williams 405 and became “the most important and time-consuming part of the[] negotiations.”406 As Warren admitted at trial, “equality of distributions between ETC shares and ETE units was a key aspect of the merger.” 407 Of particular concern to Williams was the possibility that Warren, a significant ETE common unitholder who would control both ETE and ETC after the 403 Dermatology Assocs. of San Antonio v. Oliver St. Dermatology Mgmt. LLC, 2020 WL 4581674, at *26 (Del. Ch. Aug. 10, 2020) (“in all material respects” excludes those “small, de minimis, and nitpicky issues that should not derail an acquisition”); Snow Phipps Grp., LLC v. Kcake Acquisition, Inc., 2021 WL 1714202, at *38 (Del. Ch. Apr. 30, 2021) (same); AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020 WL 7024929, at *73 (Del. Ch. Nov. 30, 2020) (same), aff’d, 2021 WL 5832875 (Del. Dec. 8, 2021); Channel Medsystems, Inc. v. Bos. Sci. Corp., 2019 WL 6896462, at *17 (Del. Ch. Dec. 18, 2019) (applying Akorn standard); In re Anthem-Cigna Merger Litig., 2020 WL 5106556, at *134 n.426 (Del. Ch. Aug. 31, 2020) (distinguishing “material breach” standard from “in all material respects” standard), aff’d sub nom. Cigna Corp. v. Anthem, Inc., 251 A.3d 1015 (Del. 2021) (TABLE). 404 2021 WL 5832875, at *13 (Del. Dec. 8, 2021). 405 See supra note 38 and accompanying text. 406 See supra note 40 and accompanying text. 407 See supra note 38 and accompanying text. 66 Merger, could take actions that benefitted ETE unitholders at the expense of ETC.408 That is precisely what the Preferred Offering achieved. The Preferred Offering guaranteed participants a cash distribution preference of 11 cents, plus an additional 17½ cents in accrual credits, regardless of whether any distributions were made to common unitholders. 409 This had the effect of eliminating downside risk for participants in the event of a distribution cut, which ETE had anticipated since January 2016, 410 months before the Preferred Offering closed on March 8, 2016.411 Moreover, ETE made the Preferred Offering available only to ETE insiders, with Warren, McReynolds and Davis receiving over 85% of the total preferred units.412 And on the Closing Date—the relevant date for the purpose of assessing materiality 413—ETE had in fact declared that if the Merger closed, it would cut distributions on common units to zero for two years. 414 As one of ETE’s financial advisors at Perella remarked, such a distribution cut “represent[ed] a wealth transfer from non-participating to participating units.” 415 408 See supra note 36 and accompanying text. Trial Tr. 371:20–373:1(Warren); JTX-0535.0019; JTX-0538.0002; Trial Tr. 351:1– 352:10(Warren). 410 See supra notes 123–24, 128–29, 150–51 and accompanying text. 411 See supra note 208 and accompanying text. 412 See supra note 213 and accompanying text. 413 JTX-0209.0063 (§6.03(b)). 414 See supra notes 241–42, 257 and accompanying text. 415 See supra note 186 and accompanying text. 409 67 For these reasons, I found in the Unitholder action that the Preferred Offering “was a hedge meant to protect [ETE] insiders from the anticipated bad effects of the coming merger”—an “opportunity to eliminate downside risk” that ETE “insiders seized” “for themselves and their cronies.” 416 Indeed, by transforming the ETE common units held by insiders into preferred units, ETE gained the ability to cut distributions to zero on ETE common units, along with its matching obligation regarding ETC dividends,417 while shielding its own insiders from the downside. That is, ETE was able to preserve distributions to ETE insiders while cutting out (among others) the former Williams stockholders. And as of the Closing Date, that is exactly what ETE planned to do. 418 To Williams, the Preferred Offering destroyed the economic equivalence between the ETC shares and certain ETE units, and it signaled that Warren was willing to take actions adverse to ETC if they benefited him. That is hardly the type of picayune issue immaterial to a Merger where, as Warren himself admitted, “equality of distributions between ETC shares and ETE units was a key aspect.” 419 416 Energy Transfer, 2018 WL 2254706, at *1, 24. See supra note 42 and accompanying text. 418 See supra notes 241–42, 257–59 and accompanying text. 419 See supra note 39 and accompanying text. 417 68 ETE advances several arguments that, despite representing a wealth transfer to ETE insiders, the Preferred Offering complied with the operating covenants “in all material respects.” I find none of them persuasive. First, ETE contends that the distribution preference was ultimately “of no consequence” to Williams because the Merger never closed. 420 But ETE’s obligation to pay the WPZ Termination Fee Reimbursement is only triggered if the Merger failed to close. 421 If ETE’s argument was correct, Williams’ right to recover the WPZ termination fee would be meaningless and unenforceable. Indeed, as I have already held, “the benefits of § 5.06(f) would be illusory if (as ETE argues) the termination . . . relieved ETE of all the conditions that could trigger the WPZ Termination Fee Reimbursement.”422 Second, ETE contends that Williams was better off with the Preferred Offering than it would have been if ETE had undertaken a contractually compliant 420 ETE OB § III.A.3.b.i. JTX-0209.0059 (§5.06(f)). 422 Williams Cos., 2020 WL 3581095, at *13. None of ETE’s cited cases are to the contrary. Matthew v. Laudamiel applied the common law materiality standard, which I have already held is more onerous. 2014 WL 5499989, at *2 (Del. Ch. Oct. 30, 2014). In Great Lakes Chem. Corp. v. Pharmacia Corp., the holding to which ETE refers had nothing to do with materiality. 788 A.2d 544, 549–50 (Del. Ch. 2001). Rather, the court there held that the plaintiff failed to allege that the injury was caused by the breach. Id. Here, in contrast, I have already held at summary judgment that causation is irrelevant because the Merger Agreement “contains no causal language that suggests that to trigger the WPZ Termination Fee Reimbursement, the termination must result from the unsatisfied condition.” Williams Cos., 2020 WL 3581095, at *12. Finally, Cedarview Opportunities Master Fund, L.P. v. Spanish Broad. Sys., Inc. dealt with the question of damages, not materiality. 2018 WL 4057012, at *12 (Del. Ch. Aug. 27, 2018). 421 69 equity issuance, such as an issuance of common units. 423 In particular, ETE contends that an issuance of common units would have been “more dilutive to Williams.”424 But the diversion of cash flow from Williams stockholders to ETE insiders is a distinct harm beyond the dilutive effect of an issuance of common units. Williams agreed to some dilution in connection with the $1 Billion Equity Issuance Exception, but it did not agree that ETE could divert distributions to ETE insiders while cutting out Williams stockholders.425 Third, ETE argues that the Preferred Offering did not disrupt any of Williams’ contractual “economic equivalence rights.” 426 Specifically, ETE argues that the Merger Agreement only guaranteed equivalence between dividends on ETC shares and distributions on ETE common units, not ETE senior securities. 427 But this proves too much; by creating a new class of securities to transfer wealth from common unitholders to those other, favored, common unitholders allowed to participate in the offering, ETE destroyed the equivalence between Williams stockholders and the latter group of common unitholders. ETE next argues it could have issued the very same Preferred Offering after closing.428 That may be true, but is not pertinent. Regardless of what ETE could have done after closing relieved it 423 ETE OB § III.A.3.b.ii. Id. at 66. 425 See infra § II.C.2. 426 ETE OB § III.A.3.b.iii. 427 Id. 428 Id. 424 70 of its contractual duties, its obligation was to comply with the operating covenants at closing. 429 If ETE’s ability to act inconsistently with its operating covenants postclosing excused its obligation to comply with them pre-closing, that obligation would be rendered nugatory. Finally, ETE argues that any dilution to Williams stockholders caused by the Preferred Offering paled in comparison to the entire agreement’s value, and that Williams demonstrated that the breach was immaterial by seeking to close the Merger regardless. 430 At summary judgment, I rejected the general “proposition that a party’s willingness to proceed with an agreement must mean that any violations did not matter to it.”431 I instead cast the issue as a factual one for trial: “did Williams’ perfervid desire to proceed despite the alleged breaches indicate that it found ETE’s alleged violations immaterial?” 432 The evidence shows that Williams found ETE’s violations material. Multiple Williams witnesses testified that they viewed the Preferred Offering as an “outrageous”433 “sweetheart deal” for “the CEO of ETE and some small[,] selected group of people”434 that was “a complete game changer with respect to what was 429 JTX-0209.0063 (§6.03(b)). ETE OB § III.A.3.b.iv. 431 Williams Cos., 2020 WL 3581095, at *14. 432 Id. at *15. 433 See supra note 219 and accompanying text. 434 See supra note 221 and accompanying text. 430 71 bargained for in the merger agreement.” 435 One Williams stockholder lambasted the Preferred Offering as “something similar” to a “fraudulent conveyance.”436 Williams also sued ETE in this Court and Warren personally in Texas state court challenging the Preferred Offering while it was seeking to close the Merger. 437 The record therefore demonstrates that Williams viewed the Preferred Offering to be material despite its continued desire to close. A party may find a breach material in light of its bargain, but still conclude that the transaction, net, is favorable. Such a determination does not void its right to a remedy for the breach as provided by contract under an “in all material respects” standard. Accordingly, I find that Williams has proven that the Preferred Offering failed to comply “in all material respects” with the operating covenants. 2. The $1 Billion Equity Issuance Exception Does Not Excuse ETE’s Breach The Ordinary Course Covenant and each of the Interim Operating Covenants were subject to certain exceptions in Section 4.01(b) of the Parent Disclosure Letter. With respect to the Ordinary Course Covenant, the Merger Agreement provided that “[e]xcept as set forth in Section 4.01(b) of the Parent Disclosure Letter . . . Parent shall, and shall cause each of its Subsidiaries to, carry on its business in the ordinary 435 See supra note 220 and accompanying text. See supra note 218 and accompanying text. 437 See supra notes 360–61 and accompanying text. 436 72 course . . . .” 438 Likewise, each of the Interim Operating Covenants is preceded by an identical “except as set forth in Section 4.01(b) of the Parent Disclosure Letter” preamble.439 Section 4.01(b) of the Parent Disclosure Letter, in turn, organizes these exceptions under headers that correspond to specific sections within Section 4.01(b) of the Merger Agreement. 440 The $1 Billion Equity Issuance Exception falls under a header titled, “Section 4.01(b)(v).”441 The parties dispute whether the $1 Billion Equity Issuance Exception creates an exception to the Ordinary Course Covenant and all of the Interim Operating Covenants, or just the Interim Operating Covenant located within Section 4.01(b)(v) of the Merger Agreement, which prohibited the issuance of equity securities. As discussed below, I find that both interpretations are reasonable, and therefore, the “except as set forth in Section 4.01(b) of the Parent Disclosure Letter” qualifier in the Merger Agreement is ambiguous. ETE argues that the “[e]xcept as set forth in Section 4.01(b) of the Parent Disclosure Letter” language in the Merger Agreement qualifies each of the operating covenants, meaning that ETE could disregard any of them if it did so in connection 438 JTX-0209.0045 (§4.01(b)). Id. at .0045 (§4.01(b)). 440 JTX-0194.0017–.0019. 441 Id. at .0018. 439 73 with an action permitted by Section 4.01(b) of the Parent Disclosure Letter.442 I find this interpretation to be reasonable. I note that the “[e]xcept as set forth in Section 4.01(b) of the Parent Disclosure Letter” language is repeated twice—once before the Ordinary Course Covenant, and once before the Interim Operating Covenants.443 Because Section 4.01(b) of the Parent Disclosure Letter contains no header corresponding to the Ordinary Course Covenant, it would be reasonable to apply all of the exceptions in Section 4.01(b) of the Parent Disclosure Letter to the Ordinary Course Covenant; otherwise, the qualifier that precedes the Ordinary Course Covenant would have no meaning. And if the phrase “[e]xcept as set forth in Section 4.01(b) of the Parent Disclosure Letter” creates an unqualified exception to the Ordinary Course Covenant, it is reasonable to conclude that, when the identical phrase appears again in front of the Interim Operating Covenants, it creates an identical unqualified exception to those covenants. I also note that the Parent Disclosure Letter states, “[t]he headings contained in this Parent Disclosure Letter are for reference only and shall not affect in any way the meaning or interpretation of this Parent Disclosure Letter.” 444 It is therefore reasonable to disregard the headers—including numerical designations—in the 442 ETE OB § III.A.2.a. JTX-0209.0045 (§4.01(b)). 444 JTX-0194.0002. 443 74 Parent Disclosure Letter referring to specific sections within Section 4.01(b) of the Merger Agreement when interpreting the scope of the exceptions. On the other hand, Williams argues that the exceptions in Section 4.01(b) of the Parent Disclosure Letter are limited by the numerical designations in each of their headers, such that the exceptions only qualify the covenants in the Merger Agreement that correspond to those numerical designations. 445 This, too, I find a reasonable interpretation. Through the headers, each exception in Section 4.01(b) of the Parent Disclosure Letter refers to a single covenant within Section 4.01(b) of the Merger Agreement.446 And the substance of each exception matches the substance of the corresponding operating covenant. For example, the $1 Billion Equity Issuance Exception falls under the header “Section 4.01(b)(v),” which corresponds to a covenant in Section 4.01(b)(v) that prohibits the issuance of equity.447 And Section 3.02 of the Merger Agreement explicitly provides that each exception applies to its corresponding section or subsection in the Merger Agreement. 448 Moreover, the headers are not ordered consecutively. For example, although there are headers titled, “4.01(b)(ii)” and “4.01(b)(v),” there are no headers titled, 445 Williams OB § I.B.2. JTX-0194.0017–.0019. 447 Compare id. at.0018 (Parent Disclosure Letter), with JTX-0209.0045(Merger Agreement). 448 JTX-0209.0030 (§3.02). 446 75 “4.01(b)(iii) or “4.01(b)(iv).”449 The nonconsecutive numbering of the headers indicates that the exceptions under each header are meant to refer specifically to the section in the Merger Agreement matching the header. Furthermore, Section 4.01(b) of the Parent Disclosure Letter repeats certain exceptions under multiple headers.450 If each exception applied to all the operating covenants in Section 4.01(b) of the Merger Agreement, there would be no need for such repetition. Williams’ proposed interpretation is also consistent with the phrase “[e]xcept as set forth in Section 4.01(b) of the Parent Disclosure Letter,” which could reasonably be read to simply refer the reader to Section 4.01(b) of the Parent Disclosure Letter to determine whether there any exceptions to a particular covenant. Because I find that both interpretations are reasonable, it is appropriate to examine the extrinsic evidence to determine the parties’ intent. As I discussed above, the parties’ drafting history demonstrates that they intended the $1 Billion Equity Issuance Exception, which fell under a header titled, “Section 4.01(b)(v),” to qualify only the Interim Operating Covenants in Section 4.01(b)(v) of the Merger Agreement. Up until the day before signing, the $1 Billion Equity Issuance Exception was located within Section 4.01(b)(v) of the Merger Agreement, not the Parent Disclosure Letter.451 Witnesses aligned with both parties testified that they 449 JTX-0194.0017–.0019. Id. at .0018–.0019 (§4.01(b)(v)(4), (x)(1), (xi)(4)); id. at .0017, .0019 (§4.01(b)(ii)(1), (xi)(3)). 451 See supra notes 67–72 and accompanying text. 450 76 only moved it to the Parent Disclosure Letter—along with several other exceptions—to maintain confidentiality, and that they did not intend the moves to be substantive. 452 The parties’ conduct after signing also confirms that they intended this interpretation. Williams’ Company Disclosure Letter was structured in the same manner as the Parent Disclosure Letter, with exceptions that fell under headers that referred to specific sections within Williams’ operating covenants in the Merger Agreement. 453 After signing, Williams planned its own equity issuance, which was permitted by an exception in its Company Disclosure Letter but featured a waiver on IDRs that was prohibited under another operating covenant. 454 Consistent with the view that the equity issuance exception in the Company Disclosure Letter did not permit the IDR waiver, Williams requested ETE’s consent, and ETE exercised its right to refuse, a right that would have been nonexistent under ETE’s current litigation-driven view of the language.455 Accordingly, I find that the parties intended the $1 Billion Equity Issuance Exception to qualify the covenants within Section 4.01(b)(v) of the Merger Agreement, but not the other Interim Operating Covenants or the Ordinary Course Covenant. 452 See supra notes 76–79 and accompanying text. See supra notes 83–85 and accompanying text. 454 See supra notes 82–84, 86–87 and accompanying text. 455 See supra notes 88–89 and accompanying text. 453 77 ETE next argues that, even if the $1 Billion Equity Issuance Exception refers only to the Interim Operating Covenants at Section 4.01(b)(v) of the Merger Agreement, it still cross-applies to other covenants, under the explicit terms of the Agreement, where its “relevan[ce]” to those covenants is “reasonably apparent on its face.” 456 ETE relies on the following provision of the Merger Agreement to support this argument: [A]ny information set forth in one Section or subsection of the Parent Disclosure Letter shall be deemed to apply to and qualify the Section or subsection of this Agreement to which it corresponds in number and each other Section or subsection of this Agreement to the extent that it is reasonably apparent on its face in light of the context and content of the disclosure that such information is relevant to such other Section or subsection[.]457 Relying on the broad definition of “relevant” applicable to the Delaware Rules of Evidence, ETE argues for a similarly broad interpretation of this provision, to mean that an exception in the Parent Disclosure Letter applies to any covenant in the Merger Agreement that is “logically related to” that covenant. 458 This reading ignores that the provision requires the “relevan[ce]” of the exception to be “reasonably apparent on [the] face” of the exception, which is clearly a limitation on the breadth of the provision. 459 Indeed, in its briefing, ETE reads the “on its face” 456 ETE OB § III.A.2.c. JTX-0209.0030 (§3.02) (emphasis added). 458 ETE OB § III.A.2.c. 459 JTX-0209.0030 (§3.02). 457 78 language out of the provision, describing it as the “reasonably apparent relevance” standard. 460 If ETE’s reading were correct, the $1 Billion Equity Issuance Exception would permit violations of any covenant so long as the violation was done in connection with a compliant equity issuance. Accordingly, ETE argues that the “reasonably apparent on its face” provision permitted ETE to violate the Ordinary Course Covenant by engaging in a self-dealing transaction—the Preferred Offering—that breached ETE’s own limited partnership agreement 461 because that transaction was an equity issuance of under $1 billion.462 That is not a reasonable interpretation of the provision. Instead, I find that the plain meaning of the provision—that contract language shall apply cross-sectionally where it is reasonably apparent on its face that the language is relevant cross-sectionally—excuses actions that would otherwise breach covenants where facially necessary to permit the activity provided by the provision—that is, where absent cross-sectional applicability an inconsistency in the contractual terms would result. For example, another exception under the “Section 4.01(b)(v)” header in the Parent Disclosure Letter allows ETE to “acquire units in any of its Subsidiaries in an amount up to $2.0 billion in the aggregate.”463 It is 460 See ETE OB at 60 (“The text of the ‘reasonably apparent . . . relevance’ clause . . . .”); id. at 61 (“Under the ‘reasonably apparent relevance’ standard . . . .”). 461 Energy Transfer, 2018 WL 2254706, at *25. 462 See ETE OB at 61. 463 JTX-0194.0018 (§4.01(b)(v)(3)). 79 “reasonably apparent on [the] face” of this exception that it must cross-apply to the covenant in Section 4.01(b)(iv) of the Merger Agreement, which states that ETE may not “purchase, redeem or otherwise acquire any shares of . . . its Subsidiaries’ capital stock or other securities.”464 Otherwise, the exception would have no meaning. This interpretation of the “reasonably apparent on its face” provision comports with the ordinary meaning of the word “relevant,”465 and gives effect to the requirement that the exception’s relevance to a covenant be “reasonably apparent on [the] face” of the exception.466 In other words, the provision is a savings clause for a draftsperson’s failure to adequately cross-reference a provision in the Merger Agreement. 467 Applying this standard, the “relevan[ce]” of the $1 Billion Equity Issuance Exception to the covenants ETE violated is not “reasonably apparent on [the] face” of the exception, because ETE could have undertaken an equity issuance pursuant to the exception that complied with each of the covenants. Because ETE could have acted in compliance with the covenants without the application of the exception, its relevance to the covenants is not facially apparent. Again, I held at summary judgment that the Preferred Offering did not comport with ETE’s general Ordinary 464 JTX-0209.0045 (§4.01(b)(iv)). Relevant, MERRIAM-WEBSTER (“having significant and demonstrable bearing on the matter at hand”). 466 JTX-0209.0030 (§3.02). 467 See Trial Tr. 215:3–216:1(Van Ngo). 465 80 Course Covenant because “breaching its limited partnership agreement is not ‘ordinary course’ for the company.” 468 ETE does not dispute that it could have structured the equity offering in a way that did not breach its partnership agreement. And ETE also concedes that “ETE issued equity securities in the past, and it was reasonably expected to do so during the Merger’s pendency.” 469 In other words, ETE admits that certain equity issuances were ordinary course. Accordingly, the $1 Billion Equity Issuance Exception is not facially relevant to the Ordinary Course Covenant, because it is unnecessary to address a conflict with that covenant. Likewise, I held at summary judgment that the Preferred Offering breached ETE’s covenants that it would not (i) subject ETE to new distribution restrictions, (ii) issue “securities in respect of . . . equity securities,” or (iii) amend its partnership agreement.470 Again, ETE could have structured an equity offering in a way that complied with each of those covenants. As a result, the relevance of the Equity Issuance Exception to each is not facially apparent. For example, as ETE concedes, equity issuances do not necessarily feature distribution restrictions.471 And if ETE had issued equity out of the existing classes instead of swapping common units for new preferred units, it would have complied with the covenant prohibiting ETE from 468 Williams Cos., 2020 WL 3581095, at *18. ETE OB at 61. 470 Williams Cos., 2020 WL 3581095, at *18. 471 ETE OB at 61. 469 81 issuing “securities in respect of . . . equity securities.” Finally, ETE does not dispute that it could have issued common units without amending its limited partnership agreement.472 Simply put, none of the operating covenants breached by ETE conflicted with the $1 Billion Equity Issuance Exception. Therefore, the exception’s relevance to those covenants was not “reasonably apparent on its face.” Accordingly, I find that the $1 Billion Equity Issuance Exception did not permit ETE’s violations of its operating covenants. * * * Because I have found that Williams proved a claim for the WPZ Termination Fee Reimbursement based on ETE’s breach of the operating covenants, I need not discuss Williams’ other independent bases for proving its claim.473 I note, however, that Williams has also established a claim for the WPZ Termination Fee Reimbursement based on the failure of the Capital Structure Representation. Pursuant to the Capital Structure Representation, ETE represented at signing that its capital structure consisted of three classes of equity securities: The authorized equity interests of Parent consist of common units representing limited partner interests in Parent (“Parent Common Units”), Class D Units representing limited partner interests in Parent (“Parent 472 ETE argues only that it would have to amend its partnership agreement to issue “new securities.” Id. at 62. 473 Those bases generally involve the 721 Opinion. 82 Class D Units”) and a general partner interest in Parent (“Parent General Partner Interest”).474 This representation was brought down to closing “except for any immaterial inaccuracies.” 475 In my summary judgment opinion, I held that, because the Preferred Offering created a fourth class of equity that was part of ETE’s capital structure on the Closing Date, the Capital Structure Representation was false on that date. 476 As with the covenant breaches, two issues were left for trial: first, whether that inaccuracy was “immaterial,” and second, whether the $1 Billion Equity Issuance Exception in the Parent Disclosure Letter permitted the inaccuracy. 477 I find that Williams proved that the falsity of the Capital Structure Representation was material. In the context of representations in merger agreements, this Court has held that “[a] fact is generally thought to be ‘material’ if [there] is ‘a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.’”478 As I held above, the Preferred Offering was material to Williams stockholders because it created a new equity class that granted ETE insiders a distribution preference, allowing ETE to preserve cash flow to those 474 JTX-0209.0030 (§3.02(c)(i)). Id. at .0063 (§6.03(a)). 476 Williams Cos., 2020 WL 3581095, at *4, 20–21. 477 Id. at *20–21. 478 Frontier Oil v. Holly Corp., 2005 WL 1039027, at *38 (Del. Ch. Apr. 29, 2005); accord Akorn, 2018 WL 4719347, at *86. 475 83 insiders while cutting out the Williams stockholders. 479 I therefore find that the Preferred Offering rendered the Capital Structure Representation materially inaccurate. Furthermore, the $1 Billion Equity Issuance Exception did not permit the falsity of the Capital Structure Representation. Unlike the operating covenants, the Capital Structure Representation is not qualified by the “except as set forth in Section 4.01(b) of the Parent Disclosure Letter” preamble.480 Accordingly, the only way that the $1 Billion Equity Issuance Exception could apply to the Capital Structure Representation is through the “reasonably apparent on its face” test. 481 For reasons similar to the related discussion above, the exception’s applicability is not facially apparent, because there is no inconsistency in the language. ETE promised that its existing classes of equity would carry down to closing, but its representation concerning the number of outstanding units for each class was not so brought down. 482 In other words, ETE was free to issue up to $1 billion in equity out of an existing class, as provided for in the Parent Disclosure Letter, and in that case the Capital Structure Representation would have remained true at closing. Because ETE could have issued equity under the $1 Billion Equity Issuance Exception in a way 479 See supra § II.C.1. See JTX-0209.0030 (§3.02(c)(i)). 481 See id. at .0030 (§3.02). 482 Id. at .0063 (§6.03(a)(i)). 480 84 that complied with the Capital Structure Representation, it is not facially apparent that the exception is applicable to the Capital Structure Representation. Accordingly, I find that Williams has independently proven a claim for the WPZ Termination Fee Reimbursement based on the Preferred Offering’s violation of the Capital Structure Representation. Having found that Williams proved a claim for the WPZ Termination Fee Reimbursement, I turn to ETE’s affirmative defenses. D. ETE’s Affirmative Defenses and Counterclaims Fail ETE asserts three affirmative defenses and counterclaims that it contends prevent Williams from recovering the WPZ Termination Fee Reimbursement. First, ETE argues that Williams violated a provision requiring cooperation with respect to financing by refusing the Proposed Public Offering. 483 Second, ETE argues that Williams breached an obligation to notify ETE of purportedly material omissions from the S-4.484 Third, ETE contends that Williams breached various obligations based on the purported actions taken by Armstrong and the dissenting Williams directors to thwart the Merger. 485 “[A] defendant seeking to . . . assert [a] breach as an affirmative defense [to performance] . . . bears the burden to show that [the] breach . . . excused its non- 483 ETE OB § III.C.1. Id. § III.C.2. 485 Id. § III.C.3. 484 85 performance.” 486 As discussed below, I find that ETE has failed to prove each of these affirmative defenses and counterclaims. 1. ETE Did Not Prove That Williams Violated the Financing Cooperation Provision ETE argues that by refusing to consent to the Proposed Public Offering, Williams breached its obligation under Section 5.14 of the Merger Agreement to “provide cooperation reasonably requested by [ETE] that is necessary or reasonably required in connection with . . . financing . . . arranged by [ETE].” 487 ETE contends that Section 5.14 provides “no reasonableness qualifier” on Williams’ duty to provide cooperation.488 I disagree. Section 5.14 provides that Williams was only required to “provide cooperation reasonably requested by [ETE].” 489 Williams was therefore under no obligation to cooperate with a request by ETE that was unreasonable. It is reasonable for “a party [to] withhold consent to a transaction when the decision is made for a legitimate business purpose.”490 The record demonstrated that Williams withheld consent to the Proposed Public Offering on the advice of its financial advisors because it discriminated against Williams stockholders, who were 486 TA Operating LLC v. Comdata, Inc., 2017 WL 3981138, at *22 (Del. Ch. Sept. 11, 2017). ETE OB § III.C.1. 488 Id. at 95. 489 JTX-0209.0061 (§5.14) (emphasis added). 490 Union Oil Co. of California v. Mobil Pipeline Co., 2006 WL 3770834, at *11 (Del. Ch. Dec. 15, 2006). 487 86 unable to participate in the offering. 491 I find this to be a legitimate business purpose, particularly given that, instead of merely withholding consent, Williams offered to proceed with the offering if ETE allowed Williams stockholders to participate.492 That was a reasonable counteroffer, which ETE refused.493 Moreover, “an obligation to take reasonable actions . . . does not require a party ‘to sacrifice its own contractual rights for the benefit of its counterparty.’”494 The Proposed Public Offering violated the Merger Agreement for many of the same reasons that the Preferred Offering did—including because it involved new distribution restrictions and issued “securities in respect of . . . equity securities.” 495 I therefore find that it was reasonable for Williams to refuse to consent to the Proposed Public Offering. 2. ETE Did Not Prove a Disclosure Violation ETE next contends that Williams breached its obligation under Section 5.01 of the Merger Agreement to inform ETE of material facts omitted from the S-4 and to correct those omissions.496 In particular, ETE contends that Williams did not disclose to ETE (i) the purported threats of consent solicitation from Meister and 491 See supra notes 187–92 and accompanying text. See supra note 196 and accompanying text. 493 See supra note 197 and accompanying text. 494 Williams Field Servs. Grp., LLC v. Caiman Energy II, LLC, 2019 WL 4668350, at *34 (Del. Ch. Sept. 25, 2019) (quoting Akorn, 2018 WL 4719347, at *91), aff’d sub nom. Williams Field Servs. Grp., LLC v. Caiman Energy II, LCC, 237 A.3d 817 (Del. 2020). 495 See supra at 28–33, 81–82. 496 ETE OB § III.C.2. 492 87 Mandelblatt, and (ii) certain Williams directors’ criticism of its bankers’ financial analyses. 497 Section 5.01 of the Merger Agreement provides, in relevant part, If at any time prior to receipt of the Company Stockholder Approval any information relating to TopCo, Parent or the Company, or any of their respective Affiliates, directors or officers, should be discovered by TopCo, Parent or the Company which is required to be set forth in an amendment or supplement to either the Form S-4 or the Proxy Statement, so that either such document would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, the party that discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by Law, disseminated to the stockholders of the Company.498 First, as discussed above, ETE failed to prove that Meister and Mandelblatt threatened the Williams directors with a consent solicitation, or that any perceived threats influenced the Williams Board’s decision to approve the Merger Agreement. 499 Williams was under no obligation to inform ETE of threats that did not occur. Second, Williams disclosed that a minority of its directors voted against entering into the Merger Agreement and “continue to disagree with the recommendation of the majority of the [Williams] Board”; 500 it was not required to 497 Id. § III.C.2. JTX-0209.0051 (§5.01). 499 See supra at 20–22. 500 JTX-1218.0165. 498 88 disclose “the ground for a disclosed director dissent,” including any purported disagreement with the analysis of Williams’ bankers.501 Accordingly, ETE has failed to prove a breach of Section 5.01. 3. Any Breach by Williams of the Best Efforts or Ordinary Course Provisions Was Cured by the Closing Date Finally, ETE argues that Williams breached three covenants based on the actions of Armstrong and other dissenting Williams directors: Williams’ obligations to (i) use reasonable best efforts to consummate the Merger; 502 (ii) “carry on its business in the ordinary course”; 503 and (iii) use “reasonable best efforts to contest and resist” litigation challenging the Merger.504 Williams was obligated to have “performed or complied” with these covenants “by the time of the Closing.” 505 ETE contends that Williams breached these covenants because Armstrong “covertly worked with anti-Merger co-conspirators.”506 As I have found, however, Armstrong’s communications with Bumgarner, while not a model of corporate governance best practices, were intended to assuage Bumgarner’s concerns about the synergies estimates, not to thwart the Merger. 507 501 Newman v. Warren, 684 A.2d 1239, 1246 (Del. Ch. 1996). JTX-0209.0053 (§5.03(a)). 503 Id. at .0041 (§4.01(a)). 504 Id. at .0053 (§5.03(a)). 505 Id. at .0063 (§6.02(b)). 506 ETE OB at 98. 507 See supra § I.B.6. 502 89 ETE also contends that Armstrong and other dissenting Williams directors tried to “fan the deal break flames” by attempting to dissuade Cleveland and Stoney from supporting the Merger, positioning Williams for a “walkaway payment,” “working the press” to “write anti-ETE articles,” and suing Warren “in a thinlyveiled publicity stunt.” 508 The evidence at trial refuted each of these contentions. ETE introduced no evidence that Cleveland or Stoney felt pressured to switch their votes; to the contrary, Stoney testified that she never felt pressure to reconsider her position.509 Moreover, although Williams did ask its financial advisors to assess the value of a potential breakup fee from ETE,510 the Williams Board resolved to publicly support the Merger, 511 and ultimately sued to enjoin ETE from terminating the Merger Agreement.512 And ETE has introduced no evidence that Williams’ Texas lawsuit against Warren challenging the Preferred Offering was intended to be a “publicity stunt.” Instead, the lawsuit represented Williams’ view that the Preferred Offering breached the Merger Agreement and was unfair to Williams stockholders. In any event, and more fundamentally, Williams’ obligation to comply with these covenants was due “by the time of the Closing.” 513 And by June 28, 2016, the 508 ETE OB at 102. See supra note 138 and accompanying text. 510 See supra note 142 and accompanying text. 511 See supra notes 139, 307–08, 310, 312–14 and accompanying text. 512 See supra note 351 and accompanying text. 513 JTX-0209.0063 (§6.02(b)). 509 90 date on which Williams and ETE had agreed to close, 514 Williams was in full compliance: Williams had settled the Bumgarner lawsuit,515 sued ETE seeking to enjoin it from terminating the Merger Agreement,516 obtained stockholder approval of the Merger, 517 and showed up at the scheduled closing.518 Indeed, ETE concedes that on June 28, 2016, Williams was ready, willing and able to close.519 Therefore, even to the extent that, between signing and closing, the actions of Armstrong and the dissenting Williams directors violated covenants, Williams “had abandoned its flirtation” with those violations by the time of closing, “thereby curing its breach.”520 Accordingly, I find that ETE failed to prove any of its affirmative defenses or counterclaims. E. ETE Is Entitled to Monetary Sanctions for Armstrong’s Deletion of His Gmail Account On May 20, 2020, ETE filed the Motion for Sanctions based on Armstrong’s deletion of the Gmail account he used to correspond with Bumgarner about the Merger. 521 ETE asks the Court to make adverse findings, draw adverse inferences, 514 See supra note 50 and accompanying text. See supra notes 299–300 and accompanying text. 516 See supra note 351 and accompanying text. 517 See supra note 317 and accompanying text. 518 See supra note 355 and accompanying text. 519 Stip. ¶ 36. 520 Akorn, 2018 WL 4719347, at *100. 521 See generally Motion for Sanctions. 515 91 award ETE attorneys’ fees and costs, and prohibit Williams from recovering attorneys’ fees and costs. 522 “The Court has the power to issue sanctions for discovery abuses under its inherent equitable powers, as well as the Court’s ‘inherent power to manage its own affairs.’”523 “Sanctions serve three functions: a remedial function, a punitive function, and a deterrent function.”524 With these functions in mind, the Court considers the following factors in determining whether sanctions are appropriate: (1) “the culpability or mental state of the party who destroyed the evidence”; (2) “the degree of prejudice suffered by the complaining party”; and (3) “the availability of lesser sanctions which would avoid any unfairness to the innocent party while, at the same time, serving as a sufficient penalty to deter the conduct in the future.” 525 “The Court has wide latitude to fashion an appropriate remedy, but the remedy must be tailored to the degree of culpability of the spoliator and the prejudice suffered by the complaining party.”526 With respect to the first element, I find that Armstrong’s destruction of his Gmail account was spoliation of evidence. Although Armstrong testified at trial that he deleted the Gmail account because it was sending spam messages to his 522 Id. ¶ 1. Beard Rsch., Inc. v. Kates, 981 A.2d 1175, 1189 (Del. Ch. 2009) (quoting Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 106 (2d Cir. 2002)). 524 Id. 525 Id. 526 Id. at 1189–90. 523 92 contacts, 527 Williams failed to introduce any evidence corroborating that testimony—such as an example of the spam emails. Given this lack of corroborating evidence, and the fact that Armstrong deleted the account just two days after being asked at a deposition if he emailed with Bumgarner about the Merger, 528 I do not find his testimony to be credible. Turning to the second element, however, ETE has failed to demonstrate that Armstrong’s destruction of his Gmail account ultimately prejudiced ETE. ETE was able to recover Armstrong’s communications with Bumgarner by subpoenaing Bumgarner’s emails.529 Although ETE acknowledges this, it argues that Bumgarner discarded most of his paper records, which may have included handwritten notes from Armstrong, as well as Bumgarner’s notes from meetings with Armstrong.530 But even if true, ETE fails to explain how those handwritten notes would have been recoverable through Armstrong’s deleted Gmail account. ETE also points out that Armstrong communicated with Williams’ former CEO, Bailey, 531 and that he testified that he may have done so from that Gmail account.532 But “an email, almost by definition, has a sender and a receiver.”533 Therefore, “[e]ven if [Armstrong] had 527 See supra note 280 and accompanying text. See supra note 279 and accompanying text. 529 See supra note 282 and accompanying text. 530 ETE OB § III.C.5. 531 See supra notes 301–03 and accompanying text. 532 Trial Tr. 688:9–689:11(Armstrong). 533 Beard Rsch, 981 A.2d at 1193 (declining to draw adverse inference based on deletion of emails). 528 93 destroyed certain emails [to Bailey] on his end, the emails still would exist on the other end and [c]ould have been produced.” 534 With respect to the third element, I find that making adverse inferences or findings would be unfair to Williams in light of ETE’s lack of prejudice. Sanctions in some form, however, are appropriate given Armstrong’s degree of culpability. I therefore find that ETE is entitled to recover its fees and costs in connection with subpoenaing Bumgarner’s email, and for bringing the Motion for Sanctions. F. Williams Is Entitled to Attorneys’ Fees and Costs, and Interest Section 5.06(g) of the Merger Agreement provides that Williams is entitled to fees, costs, and interest if it is forced to bring a suit to collect the WPZ Termination Fee Reimbursement and prevails: [I]f . . . Parent fails promptly to pay any amount due pursuant to Section . . . 5.06(f), and, in order to obtain such payment, . . . the Company commences a suit that results in . . . a judgment against Parent for the amount set forth in Section . . . 5.06(f) . . . Parent shall pay to the Company . . . the other party’s costs and expenses (including reasonable attorneys’ fees and expenses) in connection with such suit, together with interest on the amount of such payment from the date such payment was required to be made until the date of payment at the prime rate as published in the Wall Street Journal in effect on the date such payment was required to be made. 535 534 535 Id. JTX-0209.0059 (§5.06(g)). 94 Because I have found that Williams is entitled to the WPZ Termination Fee Reimbursement, Williams is also entitled to recover its reasonable fees and expenses in bringing about this result. III. CONCLUSION For the foregoing reasons, judgment is entered in favor of the Plaintiff in the amount of $410 million, plus interest at the contractual rate, and its reasonable attorneys’ fees and expenses. The Defendants are entitled to their fees and expenses for subpoenaing Bumgarner’s documents and bringing their Motion for Sanctions. The parties should confer and submit a form of order consistent with this Opinion. 95
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