Delaware Supreme Court Affirmation of Merger Termination Based on Failure to Satisfy Tax Covenant

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2017-04-07

Posted by Scott Barshay and Ross Fieldston, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Friday, April 7, 2017
Editor's Note: Scott Barshay and Ross Fieldston are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Barshay, Mr. Fieldston, Justin Hamill, Patrick Karsnitz, Stephen Lamb and Jeffrey Marell. This post is part of the Delaware law series; links to other posts in the series are available here.

In a 4-1 split decision in The Williams Cos., Inc. v. Energy Transfer Equity, L.P., et al., the Delaware Supreme Court affirmed the Court of Chancery’s decision permitting termination of a merger agreement by the acquirer based on the failure of the acquirer to obtain a tax opinion from its counsel, the receipt of which was a condition precedent to the closing of the merger. The Supreme Court held that even though the Court of Chancery did not properly analyze whether the acquirer met its covenants to use “commercially reasonable efforts” to obtain the tax opinion and “reasonable best efforts” to consummate the transaction, the acquirer had met its burden of proving that any alleged breach did not materially contribute to the failure to obtain the tax opinion. In his dissent, Chief Justice Strine argued that the evidence suggested that the acquirer failed to fulfill its covenant to use commercially reasonable efforts to obtain the tax opinion.