On March 23, 2017, the Delaware Supreme Court affirmed the Court of Chancery's ruling in The Williams Companies, Inc. v. Energy Transfer Equity, L.P., (Del. Ch. June 24, 2016), despite finding that the Chancery Court erred in holding that acquirer, Energy Transfer Equity, L.P. (ETE), did not breach its covenant to exert commercially reasonable efforts to obtain an opinion from its tax counsel (The Williams Companies, Inc. v. Energy Transfer Equity, L.P., (Del. Mar. 23, 2017)). In a 4-1 split decision (with Chief Justice Strine dissenting), the Supreme Court deferred to the Delaware Chancery Court's findings of fact (which it characterized as not being "clearly erroneous") that any alleged breach of the efforts covenant did not materially contribute to the failure of ETE's tax counsel to deliver its opinion (and thereby the failure of the tax condition contained in the merger agreement).

The case stems from the merger agreement dated September 28, 2015, among ETE, several ETE affiliates and the target company, The Williams Companies, Inc. (WMB), which contemplated a unique and complex structure that was intended to provide a significant cash payment to WMB's stockholders while preserving the tax-free treatment of the transaction. WMB filed the suit to enjoin ETE from terminating the merger agreement on the basis of ETE's tax counsel failing to deliver its opinion that the transaction should qualify as tax-free under IRC Section 721.

WMB contended that ETE should be enjoined from terminating the merger agreement because it breached its:

The Chancery Court found that ETE did not breach either the efforts covenant or the representation and ruled in favor of ETE, holding that ETE's tax counsel had determined in good faith that it could not deliver the tax opinion and ETE had a contractual right to enforce the closing condition.

For a detailed discussion of the Chancery Court's opinion, see Legal Update, The Williams Companies v. ETE: Chancery Court Allows Termination of Merger Agreement, Finding Good Faith and No Breach of Efforts Covenant by Buyer.

The Delaware Supreme Court affirmed the Chancery Court's ruling that allowed ETE to terminate the merger agreement. However, contrary to the Chancery Court, the Delaware Supreme Court found that ETE breached its covenant to exert commercially reasonable efforts to obtain the tax opinion. The Supreme Court held that both a "commercially reasonable efforts" tax covenant and a "reasonable best efforts" covenant to close the transaction placed "an affirmative obligation on the parties to take all reasonable steps to obtain the tax opinion and otherwise complete the transaction." The court additionally described this standard as requiring the buyer to take "all reasonable steps to solve problems." Applying this standard, the Delaware Supreme Court found that there was sufficient evidence from which the lower court could have concluded that the buyer breached these covenants.

Despite its finding of a breach, in a 4-1 split decision, the Supreme Court deferred to the Delaware Chancery Court's findings of fact that any alleged breach of the efforts covenant did not materially contribute to the failure of ETE's tax counsel to deliver its opinion (and thereby the failure of the tax condition contained in the merger agreement). In their decision, they referred to a footnote in the Chancery Court's opinion which stated that, even if ETE had breached its covenant and had the burden of proving the breach did not cause the condition to fail, the record was "barren of any indication" that ETE's actions materially contributed to its tax counsel's failure to deliver the tax opinion.

Chief Justice Strine, as the sole dissenter, did not think the record was as clear and thought the case deserved to be reviewed again with the proper perspective (with ETE required to prove its conduct did not materially contribute to its tax counsel's failure to deliver the opinion).

The Supreme Court's decision clarifies that a best efforts covenant (whether it be "commercially reasonable" or "reasonable best") creates an affirmative duty to take all reasonable actions to complete the acquisition, and is not limited to a duty not to thwart or obstruct a deal. In determining what efforts are required by the efforts covenants, practitioners may find instructive the following factors that the Delaware Supreme Court specifically identified as potentially demonstrating evidence of the breach, including that the party:

(Williams, at *7-8.)