The Court of Chancery addressed the terms of a Merger Agreement executed in September 2015. Pursuant to the Merger Agreement, Energy Transfer Equity, L.P. (“ETE”), a Delaware limited partnership, would acquire The Williams Company, a Delaware corporation (“Williams”). Both ETE and Williams are substantial participants in the gas pipeline business.
As a condition precedent to the merger, Latham & Watkins LLP, counsel to ETC (“Latham”) was required to deliver a legal opinion to both parties to the effect that specific transactions within the merger agreement “should” be treated as a tax-free exchange under Section 721(a) of the Internal Revenue Code (the “721 Opinion”). The merger agreement required that ETC use “commercially reasonable efforts” to obtain the 721 Opinion, but failed to define the phrase “commercially reasonable efforts.”
In March 2016, after a significant decline in the energy market and the value of assets being transferred by Williams in the merger, Latham realized that it could not issue the 721 Opinion for tax-based reasons. In April 2016, Williams filed suit against ETC alleging that it had failed to use commercially reasonable efforts to obtain the 721 Opinion.
Although Latham was not named as a defendant, the Court began its analysis by ruling that Latham acted in good faith, noting that Latham devoted over 1000 attorney hours to determining whether the 721 Opinion could be delivered. Next, the Court determined that ETE’s efforts to obtain the 721 Opinion were commercially reasonable because they were “objectively reasonable” and there were no actions that ETC could have taken to make Latham issue the 721 Opinion.
BOTTOM LINE: The importance of choosing diligent and experienced counsel to issue closing opinions cannot be overstated. If the counsel requested to provide the opinion fails to exercise due diligence and determine in good faith whether it can or cannot provide the opinion post-execution of a merger agreement, the counsel’s client may be liable for failing to exercise “commercially reasonable efforts” to obtain the opinion.