Securities Regulation Daily Wrap Up, MERGERS AND ACQUISITIONS—N.D. Okla.: Safe harbor prevents class action over Energy Transfer-Williams merger, (Apr 29, 2016)

By R. Jason Howard, J.D.

The Northern District of Oklahoma has granted a motion to dismiss a class action complaint for failure to state a claim on allegations that the defendants, The Williams Companies, Inc. and Energy Transfer Equity, L.P., made false and misleading statements in the solicitation of proxies for a shareholder vote on a proposed merger (Bumgarner v. The Williams Companies¸ April 28, 2016, Frizzell, G.).

Proxy solicitations. In response to the allegations, the defendants argued that the statements made during the proxy solicitations fall under safe harbor for forward looking statements and the Tenth Circuit’s “bespeaks caution” doctrine, that the “statements are not false or misleading on their face,” that the plaintiff failed to plead facts giving rise to a strong inference of scienter, and that one of the statements was not part of a proxy solicitation.

Alleged misrepresentations. In addressing the forward looking statements, the court said that six of the eight statements referenced in the amended complaint were forward looking statements regarding the expected effects of the proposed merger.

The plaintiff alleged the defendants stated that the proposed merger was expected to produce more than $2 billion in revenue, specifically EBITDA. According to the complaint, the defendants included this statement—and statements concerning specific, component synergies included in the $2 billion total—in a press release announcing the proposed merger, in an investor presentation delivered in conjunction with the press release, in a subsequent publication titled “Williams Commercial Revenue Synergy Opportunities,” and in a draft S-4 registration statement defendants filed with the SEC. The plaintiff also alleged that at least some of the executive officers and one or more directors had knowledge the statements were false or misleading.

Further allegations were made that the defendants had stated that the proposed merger was not expected to impact Williams’ credit rating but that the rating was downgraded on the news and that ETE’s officers knew the statements were not true. A press release which stated the Williams shareholders would have “synergies of up to $400 million per annum” as a result of the proposed merger was a misrepresentation because, under the terms of the proposed merger, any cost savings would be shared equally between ETE and Williams shareholders and because the estimate was unrealistic given that the $400 million in synergies would have to come out of a total of $530.7 million of expenses.

Safe harbor. In rebutting the defendants’ allegations, the plaintiff argued that safe harbor does not apply when a forward-looking statement is made with actual knowledge that the statement was false or misleading and cited Schaffer v. Evolving Sys., Inc. (D. Colo. 1998) and In re Cigna Corp. Sec. Lit. (E.D. Penn. 2006), in support of that contention.

Taking exception, the court explained that those “cases mischaracterize the structure of the safe harbor provision” in that the various safe harbors are listed disjunctively, and operate independently of each other. Accordingly, said the court, “a forward-looking statement identified as such and accompanied by meaningful cautionary statements qualifies for the protection of the safe harbor regardless of the state of mind of the individual making or approving the statement.”

Turning to the press release, investor presentation, Synergy publication, and draft S-4, the court said that they each, with one exception, can be identified as forward looking statements by the use of the words, “anticipate,” “expects,” “will,” “potential,” and “variations or similar expressions.”

The Synergies publication, while not containing any of those words, was identified by the court as forward looking and being a clear estimate of future earnings, especially, continued the court, considering its inclusion in a presentation titled “Williams Commercial/Revenue Synergy Opportunities,” which included “statements regarding the merger of ETE and Williams, the expected future performance of the combined company … , and the combined company’s future financial condition, operating results, strategy and plans.”

The plaintiff also argued that false statements were made by ETE’s CFO during a television interview and that the S-4 registration statement contained material omissions because it failed to address an error in a press release with one of ETE’s other partnerships in the corporate family that shortly preceded the vote of the Williams board of directors in favor of the proposed merger on September 28, 2015. The court found the defendants arguments persuasive on those allegations as well.

Conclusion. The court said that none of the statements or omissions referenced in the amended complaint as being false or misleading could support a claim for violation of Section 14 but, the court continued, the order should in no way “be taken as approval or disapproval of the proposed merger, or of the wisdom of acceptance or rejection by the shareholders.”

The case is No. 16-CV-26-GKF-FHM.

Attorneys: Laurence Lindsay Pinkerton (Pinkerton Law, P.C.) for John Bumgarner. Antony L. Ryan (Cravath, Swaine & Moore LLP) for Williams Companies, Inc. Clifford Louis Thau (Vinson & Elkins LLP) and Jessica Lynn Dickerson (McAfee & Taft) for Energy Transfer Equity, L.P.

Companies: Williams Companies, Inc.; Energy Transfer Equity, L.P.

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