Lawsuit Alleges That Williams CEO Secretly Undermined Billion Dollar Deal

COMMENTARY

An unusual case of corporate intrigue in the energy industry is winding its way through the legal system with potentially far-reaching consequences for policing corporate governance and the bounds of mergers and acquisitions, particularly the rules of the game when a party wants out of a deal.

Energy Transfer LP, a Texas-based diversified energy company with more than 86,000 miles of pipeline traversing 36 states, accused Williams Companies’ chief executive officer of covertly plotting to undermine a failed 2016 merger between the two energy companies, a deal that would have created the nation’s largest natural gas transporter worth about $33 billion.

The tumult at Williams and CEO Alan Armstrong’s personal conduct to scuttle a tie-up that he opposed (and which could have resulted in his ouster) present a compelling case study in corporate governance at the highest levels of American business.

A Delaware Court of Chancery judge will determine if the alleged actions by Armstrong—including using a personal email account, a series of private meetings and leaks to reporters—to scuttle the merger mean that Energy Transfer can avoid paying a $1.5 billion breakup fee. Energy Transfer attorneys argued in a hearing today that Armstrong’s actions should void the agreement.

“This case puts everything we thought we knew about the failed merger into a new light,” said energy industry analyst James Lucier, a managing director at Capital Alpha. “Most investors have blamed [Energy Transfer] Kelcy Warren and the collapse in oil prices for the bad outcome. In fact, if these allegations hold true, we now see that Armstrong has a lot of explaining to do for conduct that goes beyond the pale of normal board-room brawling.”

It is rare for a major company such as Energy Transfer to publicly accuse another CEO of trying to tank a merger deal. Such allegations are usually made behind the scenes or in private.

The details contained in court filings are extraordinary and read like something out of a spy novel. Energy Transfer alleges that Armstrong plotted with a former employee to undermine the merger deal, through secret meetings and hidden communications over a personal email account Armstrong shared with his wife.

Armstrong’s alleged inappropriate behavior is part of a pattern of conduct in which he has been accused by numerous board members of failing to uphold his responsibilities as chief executive officer. Six directors resigned en masse in 2016, in opposition to Armstrong’s leadership.

Two board members wrote scathing resignation letters accusing Armstrong of mismanagement, including an “abysmal operational and financial track record,” according to one letter by Eric W. Mandelblatt, who added that Armstrong “lacks the necessary judgement and character to lead the Company forward.”

“In its attempt to avoid the consequences of its own conduct, Energy Transfer has made a series of unfounded allegations and legal arguments,” according to a Williams Company statement. “We believe Williams is entitled to judgment in its favor and look forward to the final resolution of this dispute.”

Armstrong’s behavior and the battles on the Williams board illustrate what Warren Buffett recently highlighted as a peril of independent corporate directors—especially in overseeing merger deals. Such deals usually sail through, Buffett wrote in his latest annual letter to shareholders, because CEOs rarely bring in outside advisers who offer dissenting opinions.

“When seeking directors, CEOs don’t look for pit bulls,” Buffett wrote. “It’s the cocker spaniel that gets taken home.”

Energy Transfer is hoping for summary judgment, asking a judge to throw out Williams’ lawsuit seeking to enforce a $1.5 billion breakup fee to compensate the Oklahoma-based natural gas company for the ill-fated marriage of rivals.

Energy Transfer’s filing details how Armstrong allegedly worked behind closed doors to dismantle the merger from the inside. The main allegation is that the CEO used his private email and secret meetings to provide nonpublic information to John Bumgarner, a former Williams executive, in filing a lawsuit to legally challenge the marriage of energy industry giants publicly supported by Williams’ board.

Energy Transfer and Williams companies embarked on one of the largest energy mergers ever in Sept. 2015. But after energy prices fell, the companies failed to seal the deal. Citing a tax flaw, Energy Transfer sought to dissolve the merger.

Delaware’s Supreme Court affirmed in 2017 that Energy Transfer had the right to end the merger after being unable to provide sufficient tax documentation. Williams argued that the tax issue was a pretext for Energy Transfer to cripple the deal. 

Energy Transfer counterclaimed that the actions of Armstrong sullied the merger from the beginning and should prevent Williams from pursuing the breakup fee.

Bumgarner, a stockholder and former senior vice president of Williams, filed a lawsuit against the merger in Jan. 2016, claiming that the Williams board attempted to deceive investors about the merger’s financial benefits.

Armstrong and Bumgarner began exchanging emails in Dec. 2015 from Armstrong’s personal email accounts and met in person “two to three times per month” both before and after Bumgarner filed his lawsuit. “Armstrong testified falsely about his interactions with Bumgarner, before destroying evidence of those interactions two days later,” according to the Energy Transfer filing.

Bumgarner also sent Wall Street Journal energy reporter Alison Sider non-public documents and notes that Armstrong prepared regarding the merger in Nov. 2015, and he promised her more “board room stories to be told about threats.”

When questioned about the similarities between his internal notes and the information that the Wall Street Journal obtained, Armstrong did not admit that he sent Bumgarner his notes, but he acknowledged “plagiaristic resemblances,” according to the court filing.

“You’ve got these two behemoths led by guys who just don’t like each other fighting over some share of $1.5 billion,” according to an energy industry expert who sought anonymity to speak freely so as to not alienate clients. “On some level this is about money, but for these guys it’s also deeply personal. If what Energy Transfer is alleging is true, that will only fuel the fire. I can’t imagine anything pissing Kelcy off more than someone who he believes was a dishonest broker.”

There’s no indication when the judge might issue a ruling in the case.

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Samantha Hafermann is an Iowa-based freelance reporter covering financial markets, corporate governance and the energy industry.