Kelcy Warren had it easy compared to Alan Armstrong.
Armstrong, the chief executive officer of The Williams Companies, was on the witness stand for almost all of Wednesday — most of it cross-examination— during day three of the six-day showdown in Delaware chancery court between Williams and Energy Transfer Equity regarding their failed $38 billion merger. Warren, founder of Energy Transfer and chairman of its board, was only on the stand for two hours, give or take, when he testified in the trial Tuesday.
That’s largely because ETE’s lawyers are accusing Armstrong of destroying evidence of his attempt to thwart the merger two days after a 2016 deposition, during which ETE alleges Armstrong provided false testimony. ETE has asked the court for a spoliation presumption. Meanwhile, on Tuesday, Warren was accused of discussing his testimony with his lawyers during a break, but the confrontation with Williams’ counsel only lasted a couple of minutes.
We’ll get to the takeaways of each company leader’s testimony in a minute, but first, some background.
At issue in the trial, the second before Vice Chancellor Sam Glasscock III, is who should be responsible for the $410 million breakup fee that Williams incurred when the deal died in the summer of 2016. The parties faced off in a first trial in June 2016, which resulted in ETE gaining the legal clearance to back out of the deal. Williams argues ETE should be on the hook for the breakup fee because it materially breached various operating covenants that were critical components of the parties’ merger agreement.
The two primary ways ETE breached its agreements, Williams argues, occurred when ETE issued a private offering of convertible preferred stock behind Williams’ back that deepened ETE insiders’ pockets while hurting Williams investors and when ETE failed to get a tax issue squared away with its outside lawyers at Latham & Watkins after the firm conveyed that it couldn’t deliver a “721 opinion,” which would clear the way for the transaction to be tax-free.
According to court documents, the private offering that ETE ended up issuing was essentially structured the same way that the proposed public offering was, which included a preferred cash component for those participating. Williams argues this was problematic because it protected ETE insiders while Williams shareholders got nothing in the instance that there was a distribution cut, which came into play because ETE eventually announced to the market that it anticipated cutting distributions post-merger. One of the key components of the merger agreement included equal distributions among Williams and ETE shareholders.
The trial is formatted so that when one side calls an adverse witness, direct examination occurs first. Williams is currently putting on its case, which meant that when Williams lawyers called Warren to testify, he was first questioned by one of ETE’s lawyers, John Wander of Vinson & Elkins.
During Warren’s and Armstrong’s direct examinations, both Wander and Williams lead lawyer Antony Ryan of Cravath, Swaine & Moore gave their clients the opportunity to provide their side of the story on topics that were sure to get brought up during cross-examination in a more confrontational, “yes or no” questioning format.
Armstrong’s Testimony
One of ETE’s legal arguments is that Williams breached its obligation to use reasonable best efforts to consummate the merger. ETE claims Armstrong, who was openly opposed to the deal, played a large role in Williams’ failure of this obligation because he engaged in a monthslong campaign to subvert the merger by helping an anti-merger investor, John Bumgarner, draft a federal securities lawsuit by providing him material, nonpublic information about why the deal was bad for Williams stockholders.
ETE also claims that Armstrong lied to the Williams board by not telling the directors about an initial meeting with Warren, which led Williams to think ETE was not interested in a deal and to move forward with a roll-up transaction with its affiliated company, WPZ. Once the ETE-Williams merger was signed, Williams had to cancel the WPZ deal, which led to the $410 million breakup fee Williams now seeks from ETE.
During direct examination by Ryan, Armstrong said he did not inform the Williams board about a spring 2015 meeting he had with Warren and then-ETE CFO Jamie Welch because it turned out to be like all of his other conversations with Warren at that point: “nothing consequential to report.”
“I said if he [Warren] wanted to make an offer to do it in writing and I’d look,” Armstrong testified. “But I wasn’t in favor because I thought Williams was undervalued at the time.”
Armstrong said that after he learned from Bumgarner that he was threatening legal action against Williams and ETE for their merger, he did not tell Williams’ lawyers because he had a good relationship with him and thought he could appease him by trying to address his concerns.
“I had a long relationship with John … I had worked with John long enough to know that I would rather be on his side in the fight in working with him than fighting in public with him and was fairly certain I could keep him at bay,” Armstrong said.
Armstrong said he had deleted the personal Gmail account that the Bumgarner exchanges went through because the account “had gotten so corrupted with spam” that his contacts were receiving emails from Armstrong asking to wire money. He said he did not think that deleting the account would automatically delete the emails as well.
After Armstrong learned ETE’s lawyers sought the emails from his Gmail account, Armstrong said he “worked with counsel quickly” to get Google to provide “whatever they had available” by issuing a subpoena. He said IT professionals also came to Armstrong’s house so they could look through “all our home computers, phones and iPads” to find “anything we could.
“I absolutely did everything [I] could,” Armstrong said.
ETE learned of the Gmail communications after Bumgarner produced documents as a third party in the litigation. Ryan asked Armstrong if he was aware of any email exchanges between him and Bumgarner missing from the document he produced, and Armstrong answered “no.”
When it was V&E lawyer Michael Holmes’ turn to cross-examine Armstrong, he began with an observation: that Armstrong seems to “have a pretty good memory of things” he had already testified about — an observation that stood in contrast to the many “I don’t recall’s” and “I don’t remember’s” that followed over the next few hours when Holmes asked Armstrong a question.
Holmes brought up the fact that during direct, Armstrong had mentioned that he tried to “be careful about” keeping most of his conversations with Bumgarner in-person instead of over email.
“That’s because you wanted no record,” Holmes asserted.
Armstrong provided what seemed to be a non-answer answer.
Information that ETE alleges Armstrong funneled to Bumgarner included nonpublic, material information about flaws in Williams’ investment bankers’ fairness opinions and information about how two of Williams’ directors obtained the necessary votes to approve the merger only after threatening legal action to some of their fellow board members.
Holmes pulled up one email that Armstrong had sent to himself and one that Bumgarner had sent Wall Street Journal reporter Alison Sider. He pointed out the language in both emails was extremely similar.
“You agree it would be odd for Bumgarner to come up with the exact same language in his document as in yours,” Holmes said.
“Yes,” Armstrong replied.
Holmes pulled up another email that Bumgarner sent to Armstrong on Dec. 6, 2015 to another of Armstrong’s personal email accounts — one that he testified on direct as also getting examined by IT but that he ended up also deleting because his information from that account had ended up on the “dark web,” forcing Armstrong and his wife to also change their bank accounts and other personal information.
“Need your edits and corrections,” Bumgarner wrote in the email, which ETE alleges included a document with information that ended up his federal securities lawsuit.
On another email, Bumgarner wrote that he wanted to “get ducks lined up before [next] Thursday.”
Holmes showed another email from Bumgarner from Thursday, Dec. 17, 2015. It was a three-page email to his lawyer he retained in the federal securities litigation, Larry Pinkerton of Tulsa. Also copied on the email was Keith Goddard, who had agreed to serve as an expert in that litigation, Holmes said.
“When can we file?” Bumgarner said toward the bottom the email. “How can we also join/help the Delaware cases (alluding to other shareholder lawsuits that had been filed in Delaware challenging the merger)”
The last person copied was Armstrong, via a “blind copy.”
Armstrong said he didn’t recall reading the email.
Warren’s Testimony
On Tuesday, Warren testified that it is “one of the biggest regrets” of his career that ETE called off the merger with Williams.
“They were some of the finest assets in the natural gas industry,” Warren said of Williams. “I believe the assets combined with ours made for a powerhouse of a company. It will have been one of the biggest regrets of my career.”
Williams accuses Warren, in particular, of pulling the reins on the deal and using his influence as the 80% owner of the general partner that controls ETE’s board to move forward with the private offering for his own financial benefit.
During his direct examination with Wander, Warren said that after Williams executives refused to work with him on restructuring the merger in response to the oil price crash, ETE tried to orchestrate a public offering of preferred units to improve the company’s balance sheet and help with its credit rating. But Williams wouldn’t sign off on that either, he said. Warren said ETE actually preferred a public offering over private because “everyone got the same deal. He also said that the private offering helped with forestalling a distribution cut for investors.
“I was pleading with these guys that ‘we’re in a box here, let’s help each other out,’ and no one would engage with me,” Warren said. “I couldn’t figure it out.”
During cross-examination, Cravath lawyer Kevin Orsini pointed out that Warren — whose income at Energy Transfer relies on distributions since he doesn’t have a salary — made more than $200 million in 2016 off his distributions as a way to argue that Warren and other insiders had an extreme advantage through the private offering structure.
Since ETE ended up announcing that it expected to cut distributions after the deal closed, Orsini asked, wouldn’t that cancel out the money that ETE raised through the private offering it did?
“I think that’s fair,” Warren answered.
Warren said he first learned of the tax issue after Brad Whitehurst, a member of ETE’s senior management who at the time was head of tax at the company, discovered it and told Warren that by his calculations it could leave ETE on the hook for $2 billion in taxes. Warren said that was problematic because, while the company had enough liquid assets to fund the $6 billion cash portion of the deal, the company did not have an extra $2 billion laying around.
“I thought, ‘What else could go wrong with this deal?’” Warren recalled. “I told him [Whitehurst] to go fix it. … I was extremely concerned.”
After Latham told ETE that it would be unable to issue the ‘721 opinion, Orsini asked Warren if he recalled Williams’ legal advisors at Cravath proposing a solution to the ‘721 issue.
“You testified in 2016 that right in the middle of all of this, the ETE board had very little knowledge other than knowing there was a proposal,” Orsini said.
“I don’t remember, I’m sure it’s true but I don’t recall,” Williams said.