Key negotiators for The Williams Companies in its failed 2016 merger with Energy Transfer Equity testified Monday in the Delaware Court of Chancery about an equity offering executed by ETE that they say breached the parties’ $38 billion merger agreement because of how unfair it was to Williams shareholders.
The testimony was part of the first day of a projected six-day trial that will determine who is responsible for a $410 million breakup fee Williams paid after Energy Transfer backed out of the deal in June 2016.
The trial, which is underway in Vice Chancellor Sam Glasscock III’s court, is the final chapter of a five-year legal battle the parties have been embroiled in, which began even before the merger fell apart. Williams and ETE already have one trial under their belt before Vice Chancellor Glasscock from June 2016, which was a two-day expedited matter that gave ETE the legal clearance to terminate the deal.
The court left multiple issues to be determined at the current trial, including whether ETE’s spring 2016 private offering of convertible preferred units was a material breach of the merger agreement.
Williams argues that ETE breached an operating covenant that forbade it from issuing equity and undermined the economic equivalence of ETE’s and Williams’ shareholders — something that Williams said it fought hard to obtain when it negotiated the deal. Williams claims the offering did this by issuing a new class of stock that yielded priority distributions for a select group of ETE stockholders, including Chief Executive Kelcy Warren, over Williams investors.
ETE argues that the merger agreement included an exception that allowed it to issue up to $1 billion in equity securities, that the transaction was within the exception and that it was done to protect ETE’s credit rating and help finance the deal. It also argues that it first tried to issue a public offering of CPUs, but after Williams refused to cooperate, it was forced to make it a private offering.
The first three witnesses of the trial detailed how the ETE offering unfolded and why they thought it was bad for Williams and a material breach to the parties’ agreement.
First up was former Williams Chief Financial Officer Don Chappel, who said he first learned of the proposed public offering in February 2016 after then-ETE CFO Tom Long sent him a draft of the offering and asked him to tell Williams’ auditors to provide the consent needed so ETE could file the appropriate documentation with the U.S. Securities & Exchange Commission.
Chappel said “upon review,” he found “unusual terms” in the offering that were “seriously adverse” to Williams investors and that the offering was “not really allowed” under the merger agreement. He said he asked Williams’ financial advisors, Barclays and Lazard, to review the proposed offering, and that after review the advisors recommended that Williams decline to approve it. Chappel said that ended up being the outcome at a Feb. 17, 2016, Williams board meeting.
But on cross-examination, Chappel testified “yes” when ETE lawyer Andy Jackson asked him if he thought ETE was “being sincere” in describing its significant leverage issues, if it was important that the merger agreement provided flexibility to both sides in day-to-day operation and that ETE was allowed to execute a private offering per the terms laid out in the parent disclosure letter — the document that governed ETE’s covenants in the merger agreement.
One of Williams’ financial advisors, Lazard Vice President of Investment Banking Albert Garner, took the stand next.
During his testimony, Garner said he and Chappel met with Warren and Energy Transfer executive Jamie Welch in January 2016 in Dallas, where Warren and Welch informed him that ETE was unsure “whether they could sustain their credit rating” and suggested that they terminate the transaction and/or cut partnership distributions for two years. After the meeting, Garner said Williams asked Lazard to “look at the deal and help analyze the financial implications,” and that Lazard determined the deal was “more valuable than it was at the beginning” because of the $6 billion cash component that was added later to the agreement.
After Chappel asked Garner and his Lazard colleagues to evaluate ETE’s proposed public offering in February 2016, he said it would result Williams in shareholders receiving “nada” and recommended Williams reject it.
“We’d no longer be in the same position as Kelcy Warren or other ETE insiders,” Garner said. “We should be locking in 24 cents of value (for ETE) and our shareholders would be getting nothing.”
Once the private offering occurred, Garner said it was “among the most extreme in terms of unequal economics” in his 40-year career. “There was nothing quite like this,” he said.
When ETE lawyer James Yoch of Young Conaway Stargatt & Taylor cross-examined Garner, the banker admitted that his initial reaction when he learned of ETE’s proposed public offering was that “We [Williams] should be doing the same” and that “given the distress in the market” he was “very aware that up to $1 billion could be issued.”
Cravath, Swaine & Moore M&A lawyer Minh Van Ngo, Williams’ lead legal advisor for the ETE merger, testified last on Monday, and he corroborated his predecessors’ testimony that the ETE equity offering was bad news for Williams.
He said he only got notice of ETE going forward with a private offering after some of ETE’s legal advisors at Wachtell, Lipton, Rosen & Katz called him in March 2016 to let him know that ETE would be issuing an 8-K later that day announcing the news.
Van Ngo said he asked one of the Wachtell lawyers, David Katz, that given ETE’s obligations under the merger, “why are you telling me now?
“He said sheepishly that ‘I’ve been under strict instructions not to disclose this to you,’” Van Ngo recalled.
Van Ngo testified that he disagrees with ETE’s position that the private offering fits under the $1 billion equity issuance exception in the merger agreement because it only applied to ETE’s operating covenants — which restrict conduct of a party between signing and closing — and didn’t apply to the representations part of the agreement — which concerns facts.
“I don’t think it’s reasonably apparent on its face that the exception should apply,” he said.
During cross-examination, V&E lawyer Craig Zieminski challenged the M&A lawyer’s understanding of “reasonably apparent” — a transactional term that ETE describes in court documents as a “low standard” to meet in which negotiators can determine there is a reasonably apparent relevance between provisions when evaluating non-corresponding covenants.
“I don’t read this exception to say (ETE) could issue preferred equity. … If you read the exception in the entire contract, the better reading is that you can’t issue preferred equity because it’s a new class (of securities),” Van Ngo said.
The Vice Chancellor cut the day short in the early afternoon due to a scheduling issue. Van Ngo’s testimony continues first thing Tuesday morning.