Updates on the Williams/ETE Merger

By: David J. Herzig

On Saturday, I posted about a merger gone bad that I thought only a couple partnership tax people would find interesting.

Essentially, a $38 Billion merger was torpedoed because neither, Latham, Morgan Lewis nor Gibson Dunn could conclude that the merger qualified as tax-free under 721.[1]  The fight between the the tax attorneys was whether the transaction was truly a partnership formation eligible under 721 with a 731 distribution or if the transaction was a disguised sale under the anti-Otey regulations (Treas. Reg. § 1.707-3).[2]  Chancery Court Vice Chancellor Sam Glasscock [http://courts.delaware.gov/opinions/list.aspx?ag=court%20of%20chancery%5] ruled, since there was enough uncertainty that the proposed transaction could not be eligible for 721 treatment under a should opinion standard, Energy Transfer Equity (ETE) could back out of the deal.  Williams stated that they will appeal.

I honestly thought no one would care about the post.  But, it looks like people care, so I will try to keep up with the case and post updates here.  I actually have some other thoughts on the transaction that I will post as they become more developed.

To some of the updates, here is a link to a letter to the shareholders of the Williams Companies by the former CEOs of Williams.  Interestingly enough they mention in the letter, “you will receive NO cash distributions from ETC for two years after the merger.” This would seem to indicate that the companies were structuring the merger to avail themselves of the two year presumption of non-sale in the regulations (1.707-3(c)).  This fact was not mentioned in the Delaware court opinion.

Here is a link to the S-4 filing of the merger there are detailed statements inside the S-4 that are not in the opinion.

I have also asked for the trial transcript to get some more details.  If anyone wants to help me get these faster, please email me!

[1] The basic rules are if the contribution and distribution are treated as unrelated events, section 721(a)(1) usually prevents the contributing partner and the partnership from recognizing gain or loss on the contribution, and section 731 ordinarily prevents the partner and the partnership from recognizing any gain or loss on the distribution. Under the anti-Otey regulations, if the contribution and distribution are properly treated as a single transaction, sections 721 and 731 will not apply. Instead, the transaction will be treated as a taxable sale or exchange between the partner and the partnership under section 1001.

[2] For those unfamiliar with this rule, imagine a sale transaction where one party wants to be paid for property.  If the sale was for a profit, there would be immediate taxation.  Suppose you did not want to pay tax immediately could you use a partnership as a conduit to avoid taxation.  That was Otey v. Commissioner, 70 T.C. 312 (1978), aff’d per curiam, 634 F.2d 1046 (6th Cir. 1980).  In Otey, there was a contribution of property to a partnership followed by a borrowing in the partnership.  This borrowing was then used to pay the partner that contributed the property.  Effectively, by using the partnership rules, the parties turned a taxable transaction into a tax deferred transaction.  In response to the Otey transaction, Treasury enacted regulations under 707 to prevent the Otey transaction. See, Treas. Reg.§ 1.707-3.

2 thoughts on “Updates on the Williams/ETE Merger

  1. With respect to distributions of operating cash flow from Energy Transfer, the partnership in which ETC (the successor to Williams) was a partner, wouldn’t those distributions have been exempt from the disguised sale regulations under Treas. Reg. § 1.707-4(b)(2), thereby allowing dividends to the ETC shareholders to be made within the two years period?

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