159 A.3d 264
Del.2017Background
- ETE (buyer) and Williams (seller) entered a two-step merger: Williams would merge into ETC; ETC would transfer Williams’ assets to ETE in exchange for newly issued ETE Class E units. Closing was conditioned on ETE’s tax counsel (Latham) opining that the second step “should” qualify as tax-free under I.R.C. §721(a).
- The Merger Agreement required parties to use “commercially reasonable efforts” to obtain the 721 opinion and “reasonable best efforts” to consummate the merger.
- After market declines, ETE’s unit price fell sharply; ETE worried the fixed-share structure made the $6.05 billion cash payment disproportionate and that the IRS might treat part of the cash as payment for assets (disguised sale risk).
- ETE’s Head of Tax (Whitehurst) raised the issue with Latham in late March 2016; Latham later concluded in good faith it could not issue the 721 opinion. Other counsel (Morgan Lewis) independently reached the same view; Williams’ counsel (Cravath) disagreed and proposed fixes that Latham found unworkable.
- Williams sued, alleging ETE breached its effort covenants (by not affirmatively pursuing the 721 opinion) and was estopped from terminating based on ETE’s pre-signing representation that it knew of no facts likely to prevent §721 treatment. The Court of Chancery found Latham acted in good faith and ruled for ETE; the Supreme Court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of “commercially reasonable efforts” / “reasonable best efforts” | Covenants impose affirmative duties to take reasonable steps (not merely avoid obstruction); ETE failed to act affirmatively to secure the 721 opinion. | Covenants required no more than not thwarting the condition; Latham’s independent, good-faith refusal ends the matter. | Court erred in narrowly framing the covenants as only negative duties, but result stands because factual findings show no material contribution by ETE to Latham’s refusal. |
| Burden on causation once breach shown | If ETE breached, burden should shift to ETE to prove breach did not materially contribute to failure of condition. | Burden should remain on Williams to show actions that would have caused Latham to issue the opinion. | Agreed burden shifts to breaching party; here findings show ETE met its burden (no evidence its conduct materially contributed). |
| Equitable estoppel based on pre-signing representation | ETE warranted it knew of no facts that would likely prevent §721 treatment; Williams relied on that and was prejudiced. | ETE did not withhold facts it knew; Latham’s later tax theory did not exist at signing. | Estoppel fails: no evidence ETE knew of the tax theory at signing or concealed facts; Williams’ estoppel claim rejected. |
| Deference to Court of Chancery fact findings | Williams contends some factual findings ignore record of ETE’s obstructive conduct. | ETE relies on Chancery’s detailed factual findings (including Latham’s independent, good-faith decision). | Appellate review defers to Chancery’s factual findings; those findings are not clearly erroneous and support affirmation. |
Key Cases Cited
- Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008) (interpreting effort covenants to require affirmative steps to resolve problems and consummate transactions)
- SV Inv. Partners, LLC v. ThoughtWorks, Inc., 37 A.3d 205 (Del. 2011) (principle that a party’s breach that materially contributes to nonoccurrence of a condition excuses performance and shifts burden)
- Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir. 1979) (breaching party must show there was nothing significant it could have done to avoid adverse result)
- Waggoner v. Laster, 581 A.2d 1127 (Del. 1990) (equitable estoppel elements and reliance requirements)