Latham – The Surly Subgroup

By: David J. Herzig

Great news, the awesome clerks at the Delaware Courts were nice enough to help me get my hands on the trial transcript. I guess I have some heavy reading to do now. My goal is to first look through the transcript to see if anything jumps off the pages. My longer goal is to try to create a tax opinion using the transcript and any depositions if necessary. I would like to see whether I agreed with Cravath or L&W. After all, the judge did not decide whether the transaction withstood a should opinion. Rather, he plotted the various opinions and decided that there was not a sufficient cluster to consider a should opinion was warranted.

[As a quick aside, I can’t believe that all the documents are not readily available for free on the court web site. The judge (chancellor) references the trial transcript in his opinion, yet, the supporting document is not available on-line for free. I have free lexis access as an academic and can find portions of documents but not the docket or the document. As a member of society, this certainly raises an access to justice problem. Thankfully, the clerks are super helpful and accommodated me.]

I also have received some thoughtful responses and theories about the case. I will be wrapping them up into my opinion post later (sorry you have to follow me on twitter (@professortax) to know when it hits or better yet keep checking surlysubgroup.com). But some of the best initial thoughts take into account some of my concerns.

First, I am still not sure why there was an out in the deal base on the should opinion. Continue reading “More Merger Mayhem: Tax Lawyers Testifying” →

By: David J. Herzig

I remember one of my first days at GT we were advising on a corporate merger. At the end of the process (of course), the M&A group asked tax to sign off on the deal. Everything was done and this was supposed to be a rubber stamp. Well, as you can guess by now, the tax consequences of the deal as structure were disastrous and the whole deal had to be restructured. I remember vividly the corporate lawyers saying as they walked out the door, this is why we never ask tax anything!

Today, a judge killed the proposed $38 billion merger between Energy Transfer Equity (“ETE”) and the Williams Companies. Chancery Court Vice Chancellor Sam Glasscock ruled that ETE could back out of the deal because of taxes. [UPDATE: The link is not consistently working so here is the web link to the court: http://courts.delaware.gov/opinions/list.aspx?ag=court%20of%20chancery%5D Latham & Watkins, actually, tax lawyers at three top firms (L&W, Gibson Dunn and Morgan Lewis and one law professor) could not opine that the deal was tax neutral under 721 despite one law professor and Cravath saying the deal worked. This opinion is a rather big deal for M&A lawyers. Usually, conditions precedent like this won’t allow one side to back out of a transaction.

This is a tax blog not a M&A blog, so, I thought I could show how a $38 billion deal was structured and some lessons that could be learned by examining the deal post-mortem. The post is rather long but I hope super interesting to partnership tax people.

As a total aside, the tax side sounds to me like cover. The $6B payout to Williams shareholders as part of the deal was bridge financing. This bridge financing dried up when the value of the assets dropped to about half after the agreement because of a drop in energy prices. From the opinion, “In light of its obligation to deliver $6.05 billion in cash, the Partnership and its Chairman Kelcy Warren have become increasingly troubled with its potential overall debt levels.” But failure to conduct a proper thought experiment regarding the guaranteed payment by the tax lawyers created the controversy.

According to the ruling, “The Proposed Transaction is an unusual structure, accommodating Williams’ desire for its stockholders to continue to be holders of publicly traded common stock (as opposed to partnership units) and to receive a substantial cash payment, in return for Williams’ assets being acquired by the Partnership.”

L&W was asked by ETE to issue a should opinion that “ETC 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”).” L&W could not issue the opinion and the Chancellor allowed, quite unusually, ETE to pull out of the deal.

Now, it was not like Williams was without adequate counsel. Cravath, Swaine & Moore LLP was deal and tax counsel to them and Gibson, Dunn & Crutcher LLP was additional deal counsel. For that matter, Morgan, Lewis & Bockius LLP (tax counsel) and Wachtell, Lipton, Rosen & Katz (deal counsel) also served as counsel to to ETE.

According to the opinion here was the proposed deal:

Continue reading “Tax Lawyers Kill $38 Billion Merger” →