M & A - Named Expert (Tax) Opinion (in a Tax-Free Reorg Deal) as Closing Condition

The one place in the M&A practice that you still have opinion requirements is on issues such as tax opinions, where it may well be a condition to closing, particularly in a deal intended to qualify as a tax-free reorganization, that one or both of the parties receive a specified tax opinion.

The one principal difference here from the old practice (typical M&A deal called for opinions of counsel as closing conditions, where the buyer would receive an opinion of the seller's counsel and the seller would receive an opinion of the buyer's counsel as closing conditions) is that often the agreement will require that a party receive an opinion from its own counsel as a condition to going forward. That obviously presents a concern about possible client influence, and possible manipulation, if a party wants to get out of the transaction for reasons having nothing to do with the subject matter of the opinion.

In Williams Companies, Inc. v. Energy Transfer Equity, L.P. (Del. Ch. Ct., June 24, 2016), it was a closing condition to Energy Transfer's obligation to go forward that it receive an opinion of its tax counsel, Latham & Watkins, that the transaction met the requirements for a favorable tax treatment. The litigation arose because Latham advised the parties that it couldn't give the opinion. Williams argued that the motivation for getting out of the deal had nothing to do with tax, but since oil prices had collapsed, the deal had become economically disadvantageous to Energy Transfer. Litigation in the Delaware Chancery Court ensued. The Delaware court applied the condition literally that the condition to closing was that Energy Transfer receive an opinion of Latham & Watkins at a "should" confidence level that the desired tax treatment was available. It is currently on appeal to the Delaware Supreme Court.

A couple of things to remember---the agreement could have said, as some agreements do, that if a party can't get an opinion from its own tax counsel, the condition would nevertheless be satisfied if the counterparty produces an opinion of its own tax counsel. Do not sole-source the condition or name the expert.