In the recent opinion by Vice Chancellor Glasscock, The Williams Companies, Inc. v. Energy Equity, L.P., C.A. No. 12168-VCG (Del. Ch. June 24, 2016), the Court of Chancery considered a request by plaintiff to enjoin defendant, Energy Equity, L.P. (“ETE” or the “Partnership”) from attempting to terminate a Merger Agreement as a result of its inability to obtain a tax opinion that was a condition precedent to closing the deal with plaintiff, The Williams Companies, Inc. (“Williams”).
As a condition precedent to consummation of the Merger Agreement was the issuance of an opinion by ETE’s tax attorneys, Latham & Watkins LLP (“Latham”), that a specific transaction between Energy Transfer Corp LP (a corporation into which Williams would merge) and the Partnership “should” be treated by the tax authorities as a tax-free exchange under Section 721(a) of the Internal Revenue Code (the “721 Opinion”).
The Court noted that “commercially reasonably efforts” was not defined in the Merger Agreement, and is “not addressed with particular coherence in [Delaware] case law.” The Court noted that In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008), the term “reasonable best efforts”—a similar term also used in the Merger Agreement—was equated with “good faith in the context of the contract at issue.”
In clarifying what is meant by “commercially reasonable efforts”, Vice Chancellor Glasscock provided:
I find that, by agreeing to make “commercially reasonable efforts” to achieve the 721 Opinion, the Partnership necessarily submitted itself to an objective standard—that is, it bound itself to do those things objectively reasonable to produce the desired 721 Opinion, in the context of the agreement reached by the parties.
In denying plaintiff’s request, the Court found that ETE did not materially breach its contractual obligations by failing to use “commercially reasonable efforts” to secure the required 721 Opinion. Rather, the Court concluded that Latham, at the time of trial, could not in good faith opine that tax authorities should treat the specific exchange in question as tax free under Section 721(a). Further, the Court found that no evidence was provided that ETE failed to use commercially reasonable efforts to obtain the 721 Opinion. Accordingly, the Court found that ETE was contractually entitled to terminate the deal.
Notably, the Court found that ETE had significant motivation to avoid the deal based on the drastic fall in energy prices along with the drop in value of the assets contemplated by the deal. However, although this motivation was clear, the Court stated: “Just as motive alone cannot establish criminal guilt, however, motive to avoid a deal does not demonstrate lack of a contractual right to do so.”