Kelcy Warren said in December that he feared for the future of Energy Transfer Equity LP (ETE) if the entity had to complete its planned acquisition of Williams Cos. (WMB) - Get Report , said former ETE CFO Jamie Welch Monday morning in taped deposition in a trial where Williams is seeking to force ETE to close the troubled deal.
Welch, whom Warren fired in February, said that Warren feared closing the Williams deal "could create an implosion" at ETE because of possible credit ratings downgrades at the pipeline company and it subsidiaries.
Warren's testimony came on the first day of a two-day trial before Vice Chancellor Sam Glasscock III in the Court of Chancery in Georgetown, DE. Williams shareholders are scheduled to vote on the deal on June 27, the day before the transaction must close without giving ETE the right to walk from the deal.
Williams opted to play 24 minutes of Warren's taped deposition testimony even though Glasscock offered to read the transcript instead because Williams believes the testimony is important to its case, Kenneth Nachbar, a lawyer for Williams at Morris, Nichols, Arsht & Tunnell LLP, told the judge. Welch's testimony supported Williams's argument that Warren is desperate to get out of the deal and is trying to violate the terms of the merger agreement to do so.
Welch said Warren was "clearly opposed to the transaction" by December, three months after the companies signed an agreement that initially valued Williams at $38 billion, because energy prices fell dramatically in the fall. Welch said that Kinder Morgan's (KMI) - Get Report reduction of its distribution by 75% on Dec. 8 was a powerful sign of the difficulty that confronts companies throughout the industry, Welch said.
With Welch's taped testimony Williams attempted to frame the two issues in the case. ETE claims that it has the right to walk from the deal because its tax counsel at Latham & Watkins LLP are unable to opine that the deal qualifies for tax-free treatment under Section 721 of the internal revenue code. Williams argues that ETE pressured Latham to withhold the opinion as a pretext for getting out of the deal. Williams also claims that ETE violated the merger agreement by issuing convertible preferred units to Warren and others in March.
Those units include cash distributions to holders, which Welch said Warren required because distributions on his ETE units are his only source of income.
The 721 issue could take up much of the two-day trial. Brad Whitehurst, ETE's head of tax, began testifying late Monday morning, and Latham tax partners Tim Fenn and Laurence Stein were to take the stand next along with William McKee, a tax partner at Morgan, Lewis & Bockius LLP who gave a second opinion on the 721 issue to ETE. Andrew Needham, a tax partner at Cravath, Swaine & Moore LLP, Williams' outside counsel, is also on the witness list.
Cravath's Minh Van Ngo took the stand Monday morning. Van Ngo, one of the M&A partners on the deal, said under direct examination by Cravath litigation partner Sandra Goldstein that Cravath had proposed two alternate structures that would have merited tax-free treatment. Van Ngo held up well under sharp cross examination. Van Ngo told the court that Cravath's Needham had called the 721 issue "bogus," a contention that will be explored at length during the rest of the trial.
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