Deal Certainty and Expert Opinions in M&A Transactions: A Trap for the Unwary?

When Energy Transfer Equity announced that it was acquiring Williams Companies on September 28, 2015, the press hailed the transaction as a coup for ETE. It was still making headlines several months later, but by that time the spotlight had shifted to ETE’s outside tax counsel, which said that it could not deliver a legal opinion that was required for the transaction to close. ETE was accused by Williams of suffering from an acute case of buyer’s remorse and saw the failure to deliver the opinion as an opportunity to walk away from a deal that had become financially unattractive. Vice Chancellor Glasscock’s 2016 decision in Williams Cos. v. Energy Transfer Equity, LP highlights the extent to which closing conditions that are within the discretion of third parties can significantly impair closing certainty.


ETE’s proposed acquisition of Williams was heavily negotiated and involved a complex, multi-step, tax-sensitive structure that required ETE to pay $6 billion in cash and issue shares of publicly traded stock to Williams’ stockholders. The transaction was subject to customary closing conditions, including a mutual closing condition that ETE’s outside tax counsel deliver an opinion to Williams and ETE to the effect that one step of the transaction should qualify as a tax-free exchange under the applicable provisions of the Internal Revenue Code. The merger agreement also required ETE and Williams to use “commercially reasonable efforts” to satisfy all of the closing conditions.

Following the announcement of the deal, the price of oil and natural gas experienced a significant decline and the value of the assets used in the transport of energy, including the assets held by Williams and ETE, declined with it. By late February 2016, shares of both ETE and Williams had plummeted by more than 60% and shed a combined $37 billion in market value. In this context, according to testimony in the case, ETE’s tax director reassessed certain aspects of the transaction structure in late March 2016 and raised concerns with ETE’s outside tax counsel that the IRS might not view the transaction as a tax-free exchange. At the time the merger agreement was executed, ETE’s outside tax counsel believed that it could deliver the required tax opinion and, in fact, considered the issue “fairly straightforward.” However, after considering the issues raised by ETE’s tax director, and taking into account the circumstances existing at the time, ETE’s outside tax counsel ultimately concluded that it could not deliver the required tax opinion. Although Williams’ outside tax counsel “disagreed fervently” with the conclusion reached by ETE’s outside tax counsel, it proposed alternative transaction structures to address the issues that ETE’s outside tax counsel had raised. ETE rejected those proposals on the basis that none of the alternative structures proposed by Williams changed the analysis enough to allow ETE’s counsel to deliver the desired tax opinion.

With the “outside date” in the merger agreement fast approaching, Williams filed a lawsuit in the Delaware Court of Chancery to attempt to force ETE to close the transaction. Williams contended that ETE’s outside tax counsel’s decision to not deliver the tax opinion was based on its desire to accommodate ETE by providing a pretext for ETE to terminate the merger agreement. Williams also argued that, by raising concerns regarding the transaction structure to its outside tax counsel and rejecting the alternative transaction structures proposed by Williams’ outside tax counsel, ETE had not used “commercially reasonable efforts” to satisfy all of the closing conditions as it was required to do under the merger agreement. After a two day expedited trial, the court held that ETE was not required to close the transaction, and ETE terminated the merger agreement on June 29, 2016.

Key Takeaways from the Court’s Decision

If a closing condition requires a named expert to deliver an opinion, the court will not second guess the “subjective good-faith determination” of that expert.  In other words, the court will not substitute its own judgment as long as the determination to deliver (or not deliver) the opinion was based on the named expert’s independent expertise as applied to the facts of the transaction.  In Williams, the court held that ETE’s outside tax counsel had acted in good faith when it determined that it could not deliver the required tax opinion because, among other things:

  • ETE’s outside tax counsel “took its responsibility seriously” and “devoted considerable effort…and extensively analyzed the regulations and case law regarding the issue”;
  • having to “backtrack in a way that cause[d] [the] deal to come to a cropper” is not in the reputational interest of ETE’s outside tax counsel; and
  • the record was “bereft of any explicit or implicit direction” by ETE to its outside tax counsel to reach a particular outcome.

Delaware courts will interpret closing conditions as written and will not imply terms or conditions that were not bargained for.  The court noted that ETE and Williams could have contracted for several different options, e.g., requiring a different level of certainty for the condition-precedent opinion, designating an independent third party to make such a determination, or opting for an objective standard, which could be provided by a court or by an arbitrator. Instead, they assigned this responsibility specifically to ETE’s outside tax counsel. Consequently, the court was not willing to force ETE to close the transaction and thereby accept a risk—“potential imposition of substantial tax liability…without the comfort of a tax opinion” from ETE’s outside tax counsel—that the parties did not contract for.

To avoid the problem that Williams faced, deal participants should consider naming more than one expert when drafting closing conditions that require the delivery of an opinion. In this case, Williams’ outside counsel was willing to provide the desired tax opinion but the condition did not allow for that possibility. It is also possible in some transactions to include alternative tax structuring language in the merger agreement that would be implemented in the event a third party is unable to render an opinion.

“Commercially reasonable efforts” should be understood as an objective standard requiring a party to do those things that are objectively reasonable to produce the desired outcome in the context of the agreement reached by the parties.  In finding that ETE did not breach its obligation to use commercially reasonable efforts to obtain the tax opinion from its outside tax counsel, the court largely relied on the fact that the record demonstrated that no such commercially reasonable actions were available to ETE. The court excused ETE’s failure to entertain Williams’ restructuring proposals on the basis that the proposals would not have changed its outside tax counsel’s analysis.  The court distinguished prior cases in which breaches of efforts clauses had been found, noting that, in those cases, there had been evidence of affirmative actions taken by a party to frustrate the satisfaction of a closing condition.  The court could not find any indication that the action or inaction of ETE (other than simply drawing its outside tax counsel’s attention to the problem) contributed to its outside tax counsel’s inability to issue the tax opinion.

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Although many aspects of ETE’s proposed acquisition of Williams were unique, tax opinion closing conditions are often included in transactions where the purchase price has a substantial stock component, since tax treatment is often a critical element of such a transaction. Tax opinions are not, of course, binding on taxing authorities, and the Williams case is a stark reminder that deal participants should carefully evaluate whether the risk of failure to satisfy a closing condition (i.e., not obtaining a required tax or other third party opinion) outweighs the usefulness of the receipt of the opinion.  If an opinion is critical, deal participants should consider whether the merger agreement could include provisions designed to mitigate the risks associated with closing conditions that are within the discretion of third parties.