When companies engage in multiple merger discussions, it can be unclear what they should and shouldn’t disclose to investors regarding those talks. A recent appellate decision touched on those issues in a complicated case.
On May 11, the 10th Circuit Court of Appeals ruled that an energy company with a pending merger didn’t have a duty to disclose the discussions it was having meanwhile with a competitor on a separate merger, which would have threatened the pending deal. The 10th Circuit therefore affirmed the district court’s dismissal of a lawsuit that claimed the company misled investors by omission. While the case, Employees’ Retirement System of The State Of Rhode Island v. The Williams Companies, is mostly isolated to its set of facts, it is a reminder to public companies and their counsel of the litigation that can spring from a web of M&A discussions.
The case centered around a 2015 merger agreement between pipeline operating firm The Williams Companies and Williams Partners LP, or WPZ. WPZ is a master limited partnership for which The Williams Companies was the general partner that owned 60 percent of its limited-partnership units. Williams announced in May 2015 that it would merge with WPZ, meaning Williams would incorporate WPZ entirely into its structure rather than being a holding company that owned a majority of its shares. After the announcement, investors bought up units of WPZ, and its stock price spiked.
But a month later Energy Transfer Equity, a competitor, would announce its merger plans with Williams. The deal ETE proposed would preclude the one Williams struck with WPZ. The plaintiffs in the putative class sued Williams and WPZ, claiming they paid an inflated price for the WPZ units because they didn’t know that Williams was discussing a merger with ETE that would effectively kill the WPZ deal. They also claimed that Williams and WPZ executives made misleading public remarks that the Williams-WPZ merger was “a done deal.”
ETE began courting Williams for a merger back in early 2014, and Williams had rebuffed those advances until February 2015, when its CEO told ETE’s board chair that Williams was open to “strategic proposals.” Some talks between Williams and ETE occurred even as Williams was planning to buy up a full stake in WPZ.
Williams and WPZ agreed on May 12, 2015, that they would merge. However, a week later ETE made Williams an acquisition offer, but on the condition that Williams didn’t go through with its pending WPZ deal. After a month of consideration Williams rejected the offer and then issued a press release saying that it had explored an unsolicited acquisition offer — but it didn’t name ETE as the prospective buyer. But ETE issued its own press release announcing its interest in acquiring Williams, which ETE said would benefit investors more than the WPZ merger. WPZ shares dropped 7.6 percent that day at close. In September the Williams board voted to merge with ETE and terminate the agreement with WPZ.
The plaintiffs claimed that Williams had a duty to disclose its merger talks with ETE under SEC Rule 10b-5. But the 10th Circuit held that 10b-5 doesn’t create “an affirmative duty to disclose any and all information” except “when necessary to make statements made … not misleading.” The court cited the 2011 Supreme Court decision in Matrixx Initiatives, Inc. v. Siracusano.
“Defendants would have a duty to disclose ETE’s formal proposal only if they had said something … that was rendered false by the ETE proposal. But they had not,” according to the panel opinion written by Judge Harris Hartz. “Their statements were consistent with the possibility that the WPZ merger would have to be cancelled because of a future event, such as a merger with an outside entity.”
The plaintiffs also claimed that Williams presented its merger with WPZ as “a done deal” with no risk of termination. They pointed to remarks that Williams and WPZ executives made while presenting the deal to analysts the day of the their merger announcement.
Donald Chappel, CFO of both Williams and WPZ, said the merger’s consummation depended on shareholder approval, but that there was “no risk around the WPZ vote because Williams has [a] majority of the votes, so the outcome of the WPZ vote is already known.”
The 10th Circuit said that assessment was improperly taken out of context. “Chappel did not state that any other element of the merger was guaranteed. Indeed, by pointing out that one element was ‘no risk,’ he was implying that there was a risk with respect to each of the other elements,” according to the opinion.
Determining whether a company has a duty to disclose merger talks “is a highly factual analysis,” said Tamara Seelman, who co-chairs Gordon Rees Scully Mansukhani’s securities litigation practice group in Denver. “It depends on the industry, the companies, the statements that were made and the type of merger.”
That being the case, the 10th Circuit opinion doesn’t broadly clarify the disclosure duty in terms of case law, but it does underscore the need for companies to be consistent in their statements to investors, Seelman said. Companies need to make sure that their statements to investors line up with their actions, she added. But sometimes an M&A situation can become so complicated that it’s best to have securities counsel review it in case it warrants a disclosure.
“There comes a point where if something seems inconsistent, you should probably consult counsel,” Seelman said. That might include a situation like the one Williams experienced, where the company shook hands on one deal yet its board is seriously considering a conflicting one.
The Williams case also exemplifies how executives need to avoid making statements suggesting that a transaction is a done deal when there are still conditions to be met, Seelman said.
Even though the courts eventually agreed that Williams’ remarks were taken out of context, that language was seized upon to spawn the lawsuit in the first place. “Had those statements not been made, the complaint might not have been filed,” she said.
The Williams-ETE merger was never consummated. ETE would later terminate the $33 billion transaction in June 2016 when its outside counsel at Latham & Watkins failed to deliver a required tax opinion. In March 2017, the Delaware Supreme Court upheld ETE’s right to terminate.
On Thursday — six days after the 10th Circuit published its opinion — Williams announced a redoubled effort to buy the rest of WPZ’s shares. In the pending merger, Williams would acquire the remaining 26 percent stake of WPZ it doesn’t own for $10.5 billion.
— Doug Chartier