Williams Board Escapes Suit Over Alleged Merger Maneuver

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By Michael Greene

A Williams Cos. shareholder can’t pursue claims that directors took an improper defensive measure to thwart an acquisition by Energy Transfer Equity LP, the Delaware Chancery Court ruled May 15 ( Ryan v. Armstrong , 2017 BL 161600, Del. Ch., No. 12717-VCG, 5/15/17 ).

Shareholder Walter Ryan Jr. failed to show that he was excused from asking Williams’ board to take action, Vice Chancellor Sam Glasscock III wrote in dismissing the lawsuit. Under Delaware law, a pre-suit demand on the board to take legal action or a demonstration of why such a demand would be futile is a threshold requirement for a derivative action filed on a company’s behalf.

The ruling clarifies that the existence of an underlying claim alleging that directors took an unreasonable defensive measure, by itself, doesn’t excuse a pre-suit demand.

Under the Delaware Supreme Court’s 1985 landmark ruling in Unocal v. Mesa Petroleum Co., Delaware courts will apply enhanced judicial scrutiny to a board decision to take defensive measures in response to perceived hostile takeover threats.

“While certain case law in this area is difficult to reconcile, I find that the fact that an action implicates enhanced scrutiny under Unocal is insufficient on its own to satisfy” demand futility, Glasscock said.

Break-Up Fee

Ryan sued on Williams’ behalf, seeking to recoup losses the company suffered when it canceled a deal to acquire its affiliate Williams Partners LP (WPZ). He claimed that Williams directors—motivated by a desire to entrench themselves—entered into the WPZ deal in order rebuff acquisition overtures from rival pipeline giant Energy Transfer.

After Williams accepted a merger offer from Energy Transfer, the company was forced to pay a termination fee of more than $400 million to exit the WPZ deal. Energy Transfer ultimately walked away from its $33 billion agreement to buy Williams for unrelated reasons.

The court also rejected Ryan’s argument that a pre-suit demand would have been futile. It found that Ryan’s complaint lacked particularized allegations “about the motives, background, or relationships of any of the Director Defendants other than” Chief Executive Officer Alan Armstrong.“There are no particularized allegations regarding what this ‘majority’ received via board service, that receipt of any compensation was material to them, or that they were in any way beholden to Armstrong,” Glasscock said.

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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