I suspect Glasscock is giving them one more chance to settle before announcing his decision. With the enormity of the consequences of this decision, I also suspect they are having serious discussions before throwing in the towel on settlement.
Glasscock will rule by Friday. Williams problem resides in Stein's testimony below and the fact that both companies agreed to retain Latham as the sole party to issue the opinion. If the judge believes Stein's testimony, ETP likely wins. There is no provision for a second opinion, mediation of an unfavorable opinion or other remedy for Williams.
Latham & Watkins attorneys concluded the deal might not pass regulatory muster, Laurence Stein, a partner at the firm, testified Tuesday. The law firm was hired by both companies to hand down the decision, as part of the merger agreement. “It would be very easy for the IRS” to find problems with deal’s structure, Stein said.
While there will be several issues litigated in Delaware Chancery next week, the case likely turns on whether the judge believes a tax opinion cannot be issued by Latham/ETP, or this is just a suitable pretext to avoid the deal. Glasscock is an experienced judge and knows his way around a M&A agreement. Whichever why the decision goes, both parties should get a fair hearing on their respective positions.
At the end of the call, Warren indicated ETE would be open to a restructuring of the deal with shares only as consideration. The deal as currently structured is off, but there is a path to finalizing the merger if WMB will take all shares in lieu of cash. ETE has a strong legal position. The agreement states the 721 tax opinion is a prerequisite to closing, and both parties initially agreed this opinion must come from L&W.
Listening to the CC. ETP/ETE made clear the deal as currently structured cannot close due to the inability of L&W to render the 721 tax opinion which is a condition to closing. Sounds like ETP/ETE is open to a potential renegotiation, but none appear on the horizon at this time.
KMI is prudently managing its assets and liabilities in a difficult energy environment. While most MLP's continue to try to maintain their quarterly payments to shareholders, this path places these entities in peril. Banks are in the process of recognizing bad loans across the energy spectrum. Debt markets will only be available to MLP's at prohibitively expensive costs, if at all. The other alternative for these MLP's is to issue more units when unit prices are already depressed. This leads to large shareholder dilution.
KMI recognized this dilemma and bit the bullet on the dividend in order to be self funding and self sustainable without accessing the debt or equity markets. Their change to a C corp. also gives them more flexibility than the master limited partnership structure. They are prudent in walking away from low margin projects or projects which face the likelihood of regulatory disapproval. This may make for a rough road in the near term, but long term KMI's sustainability and profitability will exceed MLP's that continue down the path mentioned above.
It comes down to the provision below. Specifically, whether ETE used commercially reasonable efforts to secure the tax opinion from Latham which is referenced in 6.02(d). This opinion is a condition precedent to closing the merger. I suspect the issue of whether ETE used commercially reasonable efforts or obstructed the issuance of the Tax opinion will also end up before the court similar to the potential dilution issue.
(b) The Company, TopCo and Parent shall each use its commercially reasonable efforts to obtain the Tax opinions described in Sections 6.01(h), 6.02(d) and 6.03(d), including by making representations, warranties and covenants requested by counsel in order to render such Tax opinions. Each of the Company, TopCo and Parent shall use its commercially reasonable efforts not to knowingly take or cause to be taken any action that would cause to be untrue (or knowingly fail to take or cause not to be taken any action which inaction would cause to be untrue) any of the representations, warranties and covenants made to counsel in furtherance of such Tax opinions
I think ETE would pay the termination fee tomorrow if they could, but they can't. The termination section 7.01 of the ETE/WMB agreement lists events that allow for termination by either party. Absent the occurrence of one of those events, and in the event of ETE attempted termination, WMB could sue for specific performance of the agreement. To date, none of those events have occurred.
The last event, still outstanding, that could allow for termination is the failure to procure WMB shareholder approval. If WMB shareholders approve the deal, the deal closes or ETE gets sued if it tries to avoid the deal. I suspect Delaware Chancery, which is known for enforcing agreements as written, would mandate closure at the terms in the agreement.