424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-234080

 

 

LOGO

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

 

 

Dear Stockholder of SemGroup Corporation:

On September 15, 2019, SemGroup Corporation (“SemGroup”) entered into an Agreement and Plan of Merger (the “merger agreement”) with Energy Transfer LP (“Energy Transfer”) and Nautilus Merger Sub LLC, a wholly owned subsidiary of Energy Transfer (“Merger Sub”), pursuant to which Merger Sub will merge with and into SemGroup (the “merger”), with SemGroup surviving the merger as a direct wholly owned subsidiary of Energy Transfer.

In the merger, SemGroup stockholders will receive, for each share of Class A Common Stock, par value $0.01 per share, of SemGroup (the “SemGroup common stock”) that they own as of immediately prior to the effective time of the merger (the “effective time”), a combination of (i) $6.80 in cash, without interest (the “per share cash amount”), and (ii) 0.7275 (the “exchange ratio”) of a common unit representing a limited partner interest in Energy Transfer (the “ET common units” and together with the per share cash amount, the “merger consideration”).

Each share of SemGroup Series A Cumulative Perpetual Convertible Preferred Stock, par value of $0.01 per share (the “SemGroup preferred stock”), outstanding immediately prior to the effective time will, at the election of the holders of a majority of such shares in accordance with the Certificate of Designations of Series A Cumulative Perpetual Convertible Preferred Stock of SemGroup, filed with the Secretary of State of the State of Delaware on January 19, 2018 (the “Certificate of Designations”), either (i) convert into shares of SemGroup common stock immediately prior to the effective time and receive the merger consideration, (ii) be exchanged for a “Substantially Equivalent Security” (as defined in the Certificate of Designations) of Energy Transfer or (iii) be redeemed by SemGroup for cash at a price per share of SemGroup preferred stock equal to 101% of the liquidation preference (as defined below).

Shares of SemGroup common stock are currently traded on the New York Stock Exchange (the “NYSE”) under the symbol “SEMG,” and ET common units are currently traded on the NYSE under the symbol “ET.”

In connection with the merger, SemGroup will hold a special meeting of its stockholders (the “special meeting”) to consider and vote on a proposal to approve and adopt the merger agreement (the “merger proposal”). The affirmative vote of the holders of a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon at the special meeting is required to approve the merger proposal. At the special meeting, SemGroup stockholders will also vote on proposals to approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to SemGroup’s named executive officers in connection with the merger, which is not a condition to the merger (the “advisory compensation proposal”), and the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes cast at the special meeting to adopt the merger proposal (the “adjournment proposal”). Approval of the advisory compensation proposal will require the affirmative vote of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting. Approval of the adjournment proposal will require the affirmative vote of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting.

The special meeting will be held on December 4, 2019 at Two Warren Place, 5th Floor, 6120 South Yale Avenue, Tulsa, Oklahoma 74136, at 9:00 a.m. local time. Stockholders of record as of October 25, 2019 (the “record date”) are entitled to vote at the special meeting. The members of the SemGroup board unanimously recommend that SemGroup stockholders vote “FOR” the merger proposal, “FOR” the advisory compensation proposal and “FOR” the adjournment proposal.

In connection with the execution of the merger agreement, on September 15, 2019, SemGroup, Energy Transfer, Merger Sub and WP SemGroup Holdco, LLC, a holder of approximately 85.72% of the issued and outstanding shares of SemGroup preferred stock (“WP SemGroup”), which, on an as-converted basis, represents approximately 11.22% of the outstanding shares of SemGroup common stock as of the record date, entered into a support agreement (the “support agreement”). Pursuant to the support agreement, WP SemGroup agreed to, among other things, vote all of its shares in favor of adoption of the merger agreement and against alternative transactions and to elect to require SemGroup to redeem all of the SemGroup preferred stock at a cash purchase price per share equal to 101% of the liquidation preference thereof, which is generally calculated as $1,000 plus accrued and accumulated dividends on the preferred stock as adjusted in accordance with the Certificate of Designations (the “liquidation preference”) and which was $1,130.28 per share as of the record date. As a result, all shares of SemGroup preferred stock outstanding as of immediately prior to the effective time will be redeemed by SemGroup at a cash purchase price per share equal to 101% of the liquidation preference.

 

 

Your vote is very important. Information about the special meeting, the merger and the other business to be considered by the SemGroup stockholders at the special meeting is contained in the accompanying proxy statement/prospectus, which we urge you to read. In particular, see the section titled “Risk Factors” beginning on page 21 of the accompanying document.

The SemGroup board of directors has unanimously determined that the terms of the merger agreement and the transactions contemplated thereby, including the merger, are fair to, and in the best interests of, SemGroup and its stockholders, and recommends that the SemGroup stockholders vote in favor of the proposal to approve and adopt the merger agreement and the transactions contemplated thereby, including the merger.

 

  Sincerely,
 

LOGO

Thomas R. McDaniel

 

Chairman, Board of Directors

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under the accompanying document or determined that the accompanying document is accurate or complete. Any representation to the contrary is a criminal offense.

The accompanying document is dated October 30, 2019 and is first being mailed to the SemGroup stockholders on or about October 31, 2019.


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LOGO

  

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON DECEMBER 4, 2019

Dear Stockholder of SemGroup Corporation:

On December 4, 2019, SemGroup will hold a special meeting of stockholders (the “special meeting”) at Two Warren Place, 5th Floor, 6120 South Yale Avenue, Tulsa, Oklahoma 74136 at 9:00 a.m., local time. Only SemGroup stockholders of record at the close of business on October 25, 2019, the record date, are entitled to receive this notice and to vote at the special meeting or any adjournment or postponement of that meeting. The special meeting has been called for the following purposes:

 

  1.

To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger dated as of September 15, 2019 (the “merger agreement”), by and among SemGroup, Energy Transfer LP (“Energy Transfer”) and Nautilus Merger Sub LLC (“Merger Sub”), pursuant to which, among other things, Merger Sub will be merged with and into SemGroup (the “merger”), with SemGroup surviving the merger as a direct wholly owned subsidiary of Energy Transfer, and the transactions contemplated thereby (the “merger proposal”);

 

  2.

To consider and cast an advisory (non-binding) vote on specified compensation that may be received by SemGroup’s named executive officers in connection with the merger (the “advisory compensation proposal”);

 

  3.

To consider and vote upon any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the merger proposal (the “adjournment proposal”); and

 

  4.

To transact such other business as may properly come before the special meeting and any adjournment or postponement thereof.

The SemGroup board of directors has unanimously approved and adopted the merger agreement and is submitting the merger agreement to the SemGroup stockholders for approval and adoption at the special meeting. The merger agreement will be approved and adopted upon receiving the affirmative vote of the holders of a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon at the special meeting.

Whether or not you plan to attend the special meeting, please submit your proxy with voting instructions as soon as possible. If you hold shares of SemGroup stock in your name as a stockholder of record, please complete, sign, date and return the accompanying proxy card in the enclosed self-addressed stamped envelope, use the toll-free telephone number shown on the proxy card or use the internet website shown on the proxy card. If you hold shares of SemGroup stock through a bank or broker, please use the voting instructions you have received from your bank or broker. Submitting your proxy will not prevent you from attending the special meeting and voting in person. Please note, however, that if you hold shares of SemGroup stock through a bank or broker, and you wish to vote in person at the special meeting, you must obtain from your bank or broker a proxy issued in your name.

You may revoke your proxy by attending the special meeting and voting your shares of SemGroup stock in person at the special meeting. You may also revoke your proxy at any time before it is voted by giving written notice of revocation to the Secretary of SemGroup at the address provided with the proxy card at or before the special meeting or by submitting a proxy with a later date.

Other sections of the proxy statement/prospectus describe the proposals listed above in more detail, as well as other matters contemplated in connection with the proposed merger. Before voting, please carefully read the proxy statement/prospectus in its entirety, including the merger agreement and all other annexes and including documents incorporated by reference, for further information relevant to the business to be transacted at the special meeting. In particular, see “Proposal 1: The Merger,” beginning on page 34, for a description of the transactions contemplated by the merger agreement, and “Risk Factors,” beginning on page 21, for an explanation of the risks associated with the merger and the other transactions contemplated by the merger agreement.


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SemGroup’s board of directors (the “SemGroup board of directors”) has (i) determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to, and in the best interests of SemGroup and its stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby, including the merger, (iii) approved the execution, delivery and performance by SemGroup of the merger agreement and the consummation of the transactions contemplated thereby, including the merger, (iv) resolved to recommend adoption of the merger agreement by SemGroup’s stockholders and (v) directed that the merger agreement be submitted to the stockholders of SemGroup for its adoption.

The SemGroup board of directors recommends that the SemGroup stockholders vote:

 

  1.

FOR” the merger proposal;

 

  2.

FOR” the advisory compensation proposal; and

 

  3.

FOR” the adjournment proposal.

A complete list of registered SemGroup stockholders entitled to vote at the special meeting will be available for inspection at the principal place of business of SemGroup at Two Warren Place, 6120 South Yale Avenue, Suite 1500, Tulsa, Oklahoma 74136, during regular business hours for a period of no less than ten days before the special meeting and at the place of the special meeting during the special meeting.

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN. The merger between Energy Transfer and SemGroup cannot be completed without the adoption of the merger proposal by the affirmative vote of the holders of a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon at the special meeting.

If you have any questions concerning the merger or the other transactions contemplated by the merger agreement or the accompanying proxy statement/prospectus or would like additional copies, please contact SemGroup’s proxy solicitor:

D.F. King & Co., Inc.

48 Wall Street, 22nd Floor

New York, New York 10005

Email: SEMG@dfking.com

Stockholders may call toll free: (866) 207-3626

Banks and Brokers may call collect: (212) 269-5550

 

By Order of the Board of Directors,

LOGO

SUSAN S. LINDBERG

Executive Vice President and General Counsel

October 30, 2019


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ADDITIONAL INFORMATION

This document, which forms part of a registration statement on Form S-4 filed with the U.S. Securities and Exchange Commission (the “SEC”), constitutes a proxy statement of SemGroup under Section 14(a) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to the solicitation of proxies for the special meeting of stockholders of SemGroup, or any adjournment or postponement thereof, to, among other things, approve and adopt the merger agreement and the transactions contemplated thereby. This document is also a prospectus of Energy Transfer under Section 5 of the U.S. Securities Act of 1933, as amended (the “Securities Act”), for ET common units that will be issued to stockholders of SemGroup in the merger pursuant to the merger agreement.

As permitted under the rules of the SEC, this document incorporates by reference important business and financial information about Energy Transfer and SemGroup from other documents filed with the SEC that are not included in or delivered with this document. Please read the section titled “Where You Can Find More Information.” You can obtain any of the documents incorporated by reference into this document from the SEC’s website at www.sec.gov. This information is also available to you without charge upon your request in writing or by telephone from Energy Transfer or SemGroup at the following addresses and telephone numbers:

 

Energy Transfer LP
8111 Westchester Drive, Suite 600

Dallas, Texas 75225
Attention: Investor Relations
Telephone: (214) 981-0795

  

SemGroup Corporation

Two Warren Place

6120 South Yale Avenue, Suite 1500

Tulsa, Oklahoma 74136

Attention: Investor Relations

Phone: (918) 524-8081

Please note that copies of the documents provided to you will not include exhibits, unless the exhibits are specifically incorporated by reference into the documents or this document.

You may obtain certain of these documents at Energy Transfer’s website, www.energytransfer.com, and at SemGroup’s website, www.semgroup.com. None of the information contained on the website of Energy Transfer or SemGroup is incorporated by reference into this document.

In order to receive timely delivery of the documents in advance of the special meeting, your request should be received no later than November 26, 2019. If you request any documents, Energy Transfer or SemGroup will mail them to you by first class mail, or another equally prompt means, within one business day after receipt of your request.

If you have any questions about the merger or the consideration that you will receive in connection with the merger, including any questions relating to the transmittal of materials, or would like additional copies of the letter of transmittal (which is being mailed to SemGroup stockholders separately), you may contact SemGroup’s proxy solicitor at the address and telephone number listed below. You will not be charged for any additional letters of transmittal that you request.

The Solicitation Agent for the Special Meeting is:

D.F. King & Co., Inc.

48 Wall Street, 22nd Floor

New York, New York 10005

Email: SEMG@dfking.com

You may obtain information regarding the Special Meeting

from the Solicitation Agent as follows:

Stockholders may call toll free: (866) 207-3626

Banks and Brokers may call collect: (212) 269-5550


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CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER AND SPECIAL MEETING

     1  

SUMMARY

     8  

Information About the Companies

     8  

The Merger

     8  

Merger Consideration

     8  

Treatment of SemGroup Preferred Stock

     8  

Treatment of SemGroup Equity Awards

     9  

Support Agreement

     10  

Risk Factors

     10  

Special Meeting of SemGroup Stockholders

     10  

Recommendation of the SemGroup Board of Directors and Reasons for the Merger

     11  

Opinion of SemGroup’s Financial Advisor

     11  

Interests of SemGroup’s Directors and Executive Officers in the Merger

     12  

Regulatory Approvals Required for the Merger

     12  

Appraisal Rights

     12  

NYSE Listing of ET Common Units

     13  

Delisting and Deregistration of SemGroup Common Stock

     13  

Conditions to Completion of the Merger

     13  

Non-Solicitation by SemGroup

     13  

Breakup Fee and Expense Reimbursement

     14  

Accounting Treatment of the Transactions

     15  

Material U.S. Federal Income Tax Consequences of the Merger

     15  

Comparison of Rights of SemGroup Stockholders and Energy Transfer Unitholders

     15  

Expected Timing of the Merger

     16  

Litigation Related to the Merger

     16  

Advisory Vote on Specified Compensation

     16  

Energy Transfer Selected Historical Consolidated Financial Data

     17  

SemGroup Selected Historical Consolidated Financial Data

     18  

Unaudited Comparative Per Unit Information of Energy Transfer and Per Share Information of SemGroup

     19  

RISK FACTORS

     21  

Risks Factors Related to the Merger

     21  

Tax Risks Related to the Merger

     25  

Tax Risks Related to Owning ET Common Units Following the Merger

     25  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     27  

INFORMATION ABOUT THE COMPANIES

     28  

Energy Transfer LP

     28  

SemGroup Corporation

     28  

Nautilus Merger Sub LLC

     28  

SPECIAL MEETING OF SEMGROUP STOCKHOLDERS

     29  

Date, Time and Place of the Special Meeting

     29  

Admission to the Special Meeting

     29  

Purpose of the Special Meeting

     29  

Recommendation of the SemGroup Board of Directors

     29  

Record Date; Stockholders Entitled to Vote; Outstanding Shares Held

     29  

Quorum

     30  

Failure to Vote; Abstentions

     30  

Broker Non-Votes

     30  

Required Vote

     30  

Shares Beneficially Owned by Directors and Executive Officers

     31  

 

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Proxies

     31  

Shares Held in Street Name

     31  

How to Submit Your Proxy

     31  

Revoking Your Proxy

     32  

Adjournments and Postponements

     32  

Inspector of Election

     32  

Proxy Solicitation

     32  

Householding of Special Meeting Materials

     33  

Other Business

     33  

PROPOSAL 1: THE MERGER

     34  

Effects of the Merger

     34  

Background of the Merger

     34  

Recommendation of the SemGroup Board of Directors and Reasons for the Merger

     41  

Opinion of SemGroup’s Financial Advisor

     44  

Energy Transfer’s Reasons for the Merger

     52  

SemGroup Unaudited Prospective Financial Information

     52  

Interests of SemGroup’s Directors and Executive Officers in the Merger

     54  

Securities Ownership of Certain Beneficial Owners and Management

     59  

Merger Expenses, Fees and Costs

     63  

Expected Timing of the Merger

     64  

No Energy Transfer Unitholder Approval

     64  

Accounting Treatment of the Transactions

     64  

Regulatory Approvals

     64  

Exchange of Shares

     65  

Listing of ET Common Units Issued in the Transactions; Delisting and Deregistration of SemGroup Common Stock After the Transactions

     66  

Litigation Related to the Merger

     66  

THE MERGER AGREEMENT

     67  

The Merger

     67  

Merger Closing and Effective Time

     67  

Directors and Officers

     67  

Merger Consideration

     68  

Conditions to the Merger

     68  

Appraisal Rights

     69  

Representations and Warranties

     73  

Definition of Material Adverse Effect

     75  

Conduct of Business Pending the Merger

     76  

Mutual Access

     80  

Non-Solicitation by SemGroup

     80  

SemGroup Employee Equity-Based Awards

     85  

Employee Matters

     85  

Regulatory Approvals and Efforts to Close the Merger

     86  

Indemnification and Insurance

     87  

Tulsa Office

     88  

Financing Assistance

     88  

Other Covenants and Agreements

     88  

Termination of the Merger Agreement

     88  

Effect of Termination

     90  

Breakup Fee and Energy Transfer Expenses

     90  

Other Fees and Expenses

     91  

Amendment and Waiver

     91  

Governing Law

     91  

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     92  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF ET COMMON UNIT OWNERSHIP

     95  

COMPARISON OF RIGHTS OF ENERGY TRANSFER COMMON UNITHOLDERS AND SEMGROUP COMMON STOCKHOLDERS

     121  

PROPOSAL 2: ADVISORY VOTE ON SPECIFIED COMPENSATION

     138  

LEGAL MATTERS

     139  

EXPERTS

     139  

SEMGROUP STOCKHOLDER PROPOSALS

     140  

WHERE YOU CAN FIND MORE INFORMATION

     142  

ANNEX A – AGREEMENT AND PLAN OF MERGER

     A-1  

ANNEX B – SUPPORT AGREEMENT

     B-1  

ANNEX C – OPINION OF JEFFERIES LLC

     C-1  

ANNEX D – SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

     D-1  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND SPECIAL MEETING

Set forth below are questions that you, as a stockholder of SemGroup, may have regarding the merger and the special meeting of SemGroup stockholders and brief answers to those questions. For a more complete description of the legal and other terms of the merger, please read this entire document, including the merger agreement, which is attached as Annex A to this proxy statement/prospectus, and the documents incorporated by reference into this document. You may obtain a list of the documents incorporated by reference into this document in the section “Where You Can Find More Information.”

 

Q:

Why am I receiving these materials?

 

A:

SemGroup and Energy Transfer have entered into a merger agreement, pursuant to which they have agreed that SemGroup would become a subsidiary of Energy Transfer and SemGroup will cease to be a separate publicly traded company. In the merger, SemGroup stockholders will receive, for each share of SemGroup common stock they own as of immediately prior to the effective time of the merger, a combination of (i) $6.80 in cash, without interest (the “per share cash amount”), and (ii) 0.7275 (the “exchange ratio”) of a common unit representing a limited partner interest in Energy Transfer (the “ET common units” and, together with the per share cash amount, the “merger consideration”). See “The Merger Agreement – Merger Consideration” on page 68.

In order to complete the merger, SemGroup stockholders must vote to approve and adopt the merger agreement and the transactions contemplated thereby. This document is being delivered to you as both a proxy statement of SemGroup and a prospectus of Energy Transfer in connection with the merger. It is the proxy statement by which the SemGroup board of directors is soliciting proxies from you to vote in favor of the proposal to approve and adopt the merger agreement at the special meeting or at any adjournment or postponement of the special meeting. It is also the prospectus for the offering by Energy Transfer of ET common units in the merger.

 

Q:

What am I being asked to consider and vote on?

 

A:

SemGroup stockholders are being asked to consider and vote on the following proposals:

 

  (1)

to approve and adopt the merger agreement (attached as Annex A to this document)

  and the transactions contemplated thereby (the “merger proposal”);

 

  (2)

to approve, on an advisory (non-binding) basis, specified compensation that may be received by SemGroup’s named executive officers in connection with the merger (the “advisory compensation proposal”);

 

  (3)

to approve any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the proposal to approve and adopt the merger proposal (the “adjournment proposal”); and

 

  (4)

to transact such other business as may properly come before the special meeting and any adjournment or postponement thereof (at the present time, SemGroup knows of no other matters that will be presented for consideration at the special meeting).

 

Q:

How does the SemGroup board of directors recommend that I vote on the matters to be considered at the special meeting?

 

A:

The SemGroup board of directors recommends that the stockholders of SemGroup vote:

 

    FOR” the merger proposal;

 

    FOR” the advisory compensation proposal; and

 

    FOR” the adjournment proposal.

See “Proposal 1: The Merger – Recommendation of the SemGroup Board of Directors and Reasons for the Merger” beginning on page 41.

In considering the recommendation of the SemGroup board of directors with respect to the merger proposal, you should be aware that some of SemGroup’s directors and executive officers have interests in the merger that are different

 

 

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from, or in addition to, the interests of SemGroup stockholders generally. See “Proposal 1: The Merger – Interests of SemGroup’s Directors and Executive Officers in the Merger” beginning on page 54.

 

Q:

What will happen in the merger?

 

A:

If the merger is completed, Merger Sub will be merged with and into SemGroup, with SemGroup surviving the merger as a direct wholly owned subsidiary of Energy Transfer. The merger will become effective on such date and at such time that the certificate of merger is filed with the Secretary of State of the State of Delaware, or such later date and time as may be agreed upon by Energy Transfer and SemGroup and set forth in the certificate of merger. Throughout this document, this date and time is referred to as the “effective time” of the merger.

 

Q:

What will SemGroup stockholders receive for their shares of SemGroup common stock and SemGroup preferred stock in the merger?

 

A:

At the effective time of the merger, holders of shares of SemGroup common stock will receive, for each share of SemGroup common stock they own as of immediately prior to the merger, a combination of (i) $6.80 in cash, without interest, and (ii) 0.7275 of an ET common unit.

Each share of SemGroup preferred stock outstanding as of immediately prior to the merger will be redeemed by SemGroup for cash at a price per share of SemGroup preferred stock equal to 101% of the liquidation preference thereof, which is generally calculated as $1,000 plus accrued and accumulated dividends on the preferred stock as adjusted in accordance with the Certificate of Designations (the “liquidation preference”) and which was $1,130.28 per share as of the record date.

In connection with the execution of the merger agreement, on September 15, 2019, SemGroup, Energy Transfer, Merger Sub and WP SemGroup Holdco, LLC, a holder of approximately 85.72% of the issued and outstanding shares of SemGroup preferred stock (“WP SemGroup”), which represents approximately 11.22% of the outstanding shares of SemGroup common stock and

SemGroup preferred stock, on an as-converted basis, as of the record date, entered into a support agreement (the “support agreement”). Pursuant to the support agreement, WP SemGroup agreed to, among other things, vote all of its shares in favor of adoption of the merger agreement and against alternative transactions and to elect to require SemGroup to redeem all of the SemGroup preferred stock at a cash purchase price per share equal to 101% of the liquidation preference. A copy of the support agreement is attached as Annex B to this proxy statement/prospectus.

 

Q:

What will happen to SemGroup equity awards in the merger?

 

A:

Restricted Share Units. Each award of restricted share units, vested or unvested (other than those held by non-employee directors of SemGroup) (each, a “SemGroup RSU award”), that is outstanding immediately prior to the effective time will be assumed by Energy Transfer and converted into a restricted unit award to receive a number of ET common units equal to the number of shares of SemGroup common stock subject to such SemGroup RSU award immediately prior to the effective time multiplied by a ratio equal to the per share cash amount divided by the closing price of one ET common unit on the NYSE on the day prior to the closing date plus the exchange ratio (such ratio, the “equity exchange ratio”), rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup RSU award”). Each assumed SemGroup RSU award will otherwise be subject to the same terms and conditions as were applicable to such award immediately prior to the effective time and fully accelerate upon a termination without cause, for good reason or a result of the holder’s death or disability.

Restricted Stock Awards. Each restricted stock award (other than those held by non-employee directors of SemGroup) (each, a “SemGroup restricted stock award”) will be assumed by Energy Transfer and converted into a restricted unit award representing a contractual right upon vesting to receive a number of ET common units equal to the product obtained by multiplying (x) the number of shares of SemGroup common

 

 

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stock subject to such SemGroup restricted stock award immediately prior to the effective time by (y) the equity exchange ratio, rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup restricted stock award”). Each assumed SemGroup restricted stock award will otherwise be subject to the same terms and conditions as were applicable to the SemGroup award immediately prior to the effective time, have distribution equivalent rights and fully accelerate upon a termination without cause, for good reason or a result of the holder’s death or disability.

Performance Share Units. Each award of performance share units that corresponds to shares of SemGroup common stock (each, a “SemGroup PSU award”) that is outstanding and vested as of the effective time will be cancelled in exchange for the payment of the merger consideration with respect to the number of shares of SemGroup common stock underlying such vested SemGroup PSU awards. Each SemGroup PSU award that is outstanding and unvested as of the effective time will automatically, and without any required action of the holder thereof, be cancelled without consideration.

Director Restricted Share Awards. Each restricted stock award and SemGroup restricted share unit award that is outstanding immediately prior to the effective time and held by a non-employee director of SemGroup (each, a “director restricted share award”) will, as of the effective time, become fully vested and will be cancelled in exchange for the payment of the merger consideration with respect to the total number of shares of SemGroup common stock subject to such director restricted share award.

The compensation committee of the board of directors of SemGroup has determined to vest all SemGroup PSU awards that were outstanding on September 15, 2019 at target performance levels as of immediately prior to the effective time.

 

Q:

If I am a SemGroup stockholder, will I receive dividends in the future?

 

A:

Before completion of the merger, SemGroup expects to pay regular quarterly dividends on

  shares of SemGroup common stock, which currently are $0.4725 per share, at times and intervals consistent with its prior practice and as permitted by the merger agreement. Your receipt of this regular quarterly dividend will not reduce the per share merger consideration. Once the merger is completed, to the extent shares of SemGroup common stock are exchanged for ET common units, when distributions are declared by the board of directors of LE GP, LLC, (the “ET board of directors”), the general partner of Energy Transfer (“ET GP”), and paid by Energy Transfer, former SemGroup stockholders will receive distributions on ET common units that they receive in the merger in accordance with Energy Transfer’s partnership agreement. If the merger does not close before SemGroup pays its regular quarterly dividend for the fourth quarter of 2019, SemGroup will adjust the dividend record date to match the Energy Transfer distribution payment schedule, subject to Energy Transfer’s consent and approval by the SemGroup board of directors. For additional information, please read “Summary – Unaudited Comparative Per Unit Information of Energy Transfer and Per Share Information of SemGroup” beginning on page 19.

Current Energy Transfer unitholders will continue to receive distributions on their common units in accordance with Energy Transfer’s partnership agreement. For a description of the distribution provisions of Energy Transfer’s partnership agreement, please read “Comparison of Rights of Energy Transfer Common Unitholders and SemGroup Common Stockholders” beginning on page 121.

 

Q:

What vote of stockholders is required to approve and adopt the merger agreement?

 

A:

The merger proposal must be approved and adopted by the affirmative vote of the holders of a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon at the special meeting. Because approval is based on the affirmative vote of holders of at least a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, a SemGroup stockholder’s failure to vote,

 

 

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  an abstention from voting or the failure of a SemGroup stockholder who holds his or her shares in “street name” through a bank, broker or other nominee to give voting instructions to such bank, broker or other nominee (a “broker non-vote”) will have the same effect as a vote “AGAINST” approval of the merger proposal.

Pursuant to the support agreement, WP SemGroup has committed to vote all of its shares of SemGroup preferred stock, representing approximately 11.22% of the total voting power of the issued and outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis as of the record date, in favor of the merger proposal.

 

Q:

What vote of stockholders is required to approve the other matters to be considered at the special meeting?

 

A:

Approval of the advisory compensation proposal requires the affirmative vote of the holders of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting. The vote of SemGroup stockholders on the advisory compensation proposal is advisory in nature and will not be binding on Energy Transfer or the SemGroup board of directors and will not affect whether the compensation is paid. Abstentions will be the equivalent of a vote “AGAINST” the advisory compensation proposal. Broker non-votes will have no effect on the adoption of the advisory compensation proposal.

Any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the merger proposal requires the affirmative vote of the holders of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting. Unless the SemGroup board of directors fixes a new record date for the adjourned special meeting, or law otherwise requires, no notice of the adjourned special meeting will be given so long as the time and place to which the special meeting is adjourned

are announced at the special meeting adjourning and, at the adjourned special meeting only such business is transacted as might have been transacted at the original special meeting. Abstentions will be the equivalent of a vote “AGAINST” the adjournment proposal. Broker non-votes will have no effect on the adoption of the adjournment proposal.

 

Q:

Who counts the votes?

 

A:

We have engaged D.F. King & Co., Inc., as our independent agent, to receive and tabulate votes at the special meeting. D.F. King & Co., Inc. will separately tabulate “FOR,” “AGAINST” or “ABSTAIN” votes, as applicable. D.F. King & Co., Inc. has also been retained to be our election inspector to certify the results, determine the existence of a quorum and the validity of proxies, and perform any other acts required under the Delaware General Corporation Law (the “DGCL”).

 

Q:

What constitutes a quorum for the special meeting?

 

A:

A quorum shall consist of the holders of record of a majority of the issued and outstanding shares of SemGroup common stock, including shares of the SemGroup preferred stock, on an as-converted basis, entitled to vote at the special meeting, present in person or represented by proxy.

 

Q:

When and where will the special meeting be held?

 

A:

The special meeting is scheduled to be held at Two Warren Place, 5th Floor, 6120 South Yale Avenue, Tulsa, Oklahoma 74136 on December 4, 2019 at 9:00 a.m., local time.

 

Q.

Who is entitled to vote at the special meeting?

 

A:

All SemGroup stockholders who hold shares of SemGroup common stock and SemGroup preferred stock at the close of business on the record date, October 25, 2019, are entitled to receive notice of and to vote at the special meeting and any adjournment or postponement thereof, provided that such shares remain outstanding on the date of the special meeting.

 

 

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Q:

What are the expected U.S. federal income tax consequences to a SemGroup stockholder as a result of the merger?

 

A:

For U.S. federal income tax purposes, with respect to the cash SemGroup stockholders receive in the merger, the stockholder will generally recognize gain or loss in an amount equal to the difference between the amount of cash received and the stockholder’s adjusted basis in the portion of the SemGroup common stock treated as sold in the merger. In general, no gain or loss should be recognized by a SemGroup stockholder with respect to the portion of the SemGroup common stock treated as exchanged for ET common units pursuant to the merger. For a more detailed discussion of the material U.S. federal income tax consequences of the merger to SemGroup stockholders, please see the section titled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 92.

 

Q:

Are there any risks in the merger that I should consider?

 

A:

Yes. There are risks associated with all business combinations, including the merger. These risks are discussed in more detail in the section titled “Risk Factors” beginning on page 21.

 

Q:

How do I vote at the special meeting?

 

A:

After you have carefully read this document, please respond by completing, signing and dating your proxy card and returning it in the enclosed postage-paid envelope or by submitting your proxy or voting instruction by telephone or through the internet as soon as possible so that your shares of SemGroup common stock or SemGroup preferred stock will be represented and voted at the special meeting.

If your shares of SemGroup common stock are held in “street name,” please refer to your proxy card or the information forwarded by your broker or other nominee to see which options are available to you. The internet and telephone proxy submission procedures are designed to authenticate SemGroup stockholders and to

allow you to confirm that your instructions have been properly recorded.

If you are a record holder of shares of SemGroup common stock or SemGroup preferred stock, the method you use to submit a proxy will not limit your right to vote in person at the special meeting if you later decide to attend the special meeting. If your shares of SemGroup common stock or SemGroup preferred stock are held in the name of a broker or other nominee, you must obtain a proxy, executed in your favor from the holder of record, to be able to vote in person at the special meeting.

 

Q:

If my shares of SemGroup common stock are held in “street name” by my broker or other nominee, will my broker or other nominee vote my units without instructions from me?

 

A:

No. Your broker will not be able to vote your shares of SemGroup common stock without instructions from you. Please follow the procedure your broker provides to vote your shares.

 

Q:

If I am planning on attending the special meeting in person, should I still submit a proxy?

 

A:

Yes. Whether or not you plan to attend the special meeting, you should submit a proxy. Shares of SemGroup common stock or SemGroup preferred stock will not be voted if the holder of such shares does not submit a proxy and then does not vote in person at the special meeting.

 

Q:

What do I do if I want to change my vote after I have delivered my proxy card?

 

A:

You may change your vote at any time before shares of SemGroup common stock or SemGroup preferred stock are voted at the special meeting. You can do this in any of the three following ways:

 

    by sending a written notice to the Secretary of SemGroup in time to be received before the special meeting stating that you revoke your proxy;

 

   

by completing, signing and dating another proxy card and returning it by mail in time to be received before the special meeting or

 

 

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by submitting a later dated proxy by telephone or the internet, in which case your later-submitted proxy will be recorded and your earlier proxy revoked; or

 

    if you are a holder of record, or if you hold a proxy in your favor executed by a holder of record, by attending the special meeting and voting in person.

If your shares of SemGroup common stock or SemGroup preferred stock are held in an account at a broker or other nominee, you should contact your broker or other nominee to change your vote.

 

Q:

What should I do if I receive more than one set of voting materials for the special meeting?

 

A:

You may receive more than one set of voting materials for the special meeting and the materials may include multiple proxy cards or voting instruction cards. For example, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive according to the instructions on it to ensure that all of your shares are voted.

 

Q:

Can I submit my proxy by telephone or the internet?

 

A:

Yes. In addition to mailing your proxy, you may submit it telephonically or on the internet. Instructions for using the telephone or internet to vote are described on your proxy card. For further information, please see the section titled “Special Meeting of SemGroup Stockholders – How to Submit Your Proxy” beginning on page 31.

 

Q:

How do I exchange my shares of SemGroup common stock for merger consideration?

 

A:

As soon as reasonably practicable following the effective time of the merger, the exchange agent appointed by Energy Transfer and SemGroup will mail to each holder of shares of SemGroup common stock (whose shares were cancelled and converted into the right to receive the

  merger consideration) (i) a letter of transmittal and (ii) instructions for use in effecting the surrender of the shares of SemGroup common stock in exchange for, as applicable, cash, ET common units (which will be issued in book-entry form) and cash in lieu of any fractional common units. You should read these instructions carefully. Assuming that you complete and submit the letter of transmittal in accordance with its instructions and surrender your shares of SemGroup common stock for cancellation, you will not need to take any further action in order to receive the merger consideration.

 

Q:

How will I receive the merger consideration to which I am entitled?

 

A.

You will be paid the merger consideration to which you are entitled upon the surrender to the exchange agent of your shares of SemGroup common stock and a duly completed and validly executed letter of transmittal. More information on the documentation you are required to deliver to the exchange agent may be found under the section titled “Proposal 1: The Merger – Exchange of Shares” beginning on page 65. Any ET common units that you receive in the merger will be issued in book-entry form and you will receive cash in lieu of any fractional ET common units. No interest will be paid or will accrue on any cash amounts received as merger consideration or in lieu of any fractional common units.

 

Q:

What happens if I sell my shares of SemGroup common stock after the record date but before the special meeting?

 

A:

The record date of the special meeting is earlier than the date of the special meeting and the date that the merger is expected to be completed. If you transfer your shares of SemGroup common stock after the record date but before the date of the special meeting, you will retain your right to vote at the special meeting (provided that such shares remain outstanding on the date of the special meeting), but you will not have the right to receive the merger consideration to be received by SemGroup stockholders in the merger. In order to receive the merger consideration, you must hold your shares through the completion of the merger.

 

 

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Q:

Do I have appraisal rights?

 

A:

Yes. Holders of SemGroup common stock may exercise appraisal rights in connection with the merger under Delaware law with respect to shares of SemGroup common stock. Holders of SemGroup preferred stock are not entitled to appraisal rights with respect to shares of SemGroup preferred stock. For additional information, please read the section titled “The Merger Agreement – Appraisal Rights” on page 69.

 

Q:

Is completion of the merger subject to any conditions?

 

A:

Yes. In addition to the approval and adoption of the merger agreement by SemGroup stockholders, completion of the merger requires the receipt of the necessary regulatory approvals, the absence of a material adverse effect on Energy Transfer or SemGroup and the satisfaction or, to the extent permitted by applicable law, waiver of the other conditions specified in the merger agreement. For additional information on these conditions, please read the section titled “The Merger Agreement – Conditions to the Merger” beginning on page 68.

 

Q:

When do you expect to complete the merger?

 

A:

Energy Transfer and SemGroup are working to complete the merger as promptly as practicable. Energy Transfer and SemGroup currently expect to complete the merger in late 2019, subject to the receipt of SemGroup stockholder approval, regulatory approvals and the satisfaction of other usual and customary closing conditions. However, no assurance can be given as to when, or whether, the merger will occur.

 

Q:

What happens if the merger is not completed?

 

A:

If the SemGroup stockholders do not approve and adopt the merger agreement or if the merger is not completed for any other reason, SemGroup stockholders will not receive any payment for their shares of SemGroup common

  stock in connection with the merger. Instead, SemGroup would remain an independent public company and shares of SemGroup common stock would continue to be listed and traded on the NYSE. Under specified circumstances, SemGroup may be required to pay Energy Transfer a breakup fee of $54,500,000 or up to $27,250,000 in expenses as described in the section titled “The Merger Agreement – Breakup Fee and Energy Transfer Expenses” beginning on page 90.

 

Q:

Who can I contact with questions about the special meeting or the merger and related matters?

 

A:

If you have any questions about the merger and the other matters contemplated by this document or how to submit your proxy or voting instruction card or if you need additional copies of this document or the enclosed proxy card or voting instruction card, you should contact SemGroup’s proxy solicitor, D.F. King & Co., Inc. Stockholders may call toll free at (866) 207-3626. Banks and brokers may call collect at (212) 269-5550. You may also contact SemGroup, Attention: Investor Relations, Two Warren Place, 6120 South Yale Avenue, Suite 1500 Tulsa, Oklahoma 74136, telephone: (918) 524-8081.

 

 

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SUMMARY

This summary highlights selected information from this document. You are urged to carefully read the entire document and the other documents referred to and incorporated in this document because the information in this section does not provide all the information that might be important to you with respect to the merger agreement, the merger and the other matters being considered at the special meeting. See “Where You Can Find More Information.” Each item in this summary refers to the page of this document on which that subject is discussed in more detail.

Information About the Companies (See page 28)

Energy Transfer LP is a publicly traded limited partnership owning and operating a diversified portfolio of energy assets. Energy Transfer’s core operations include complementary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, natural gas liquids (“NGL”) and refined product transportation and terminalling assets; NGL fractionation; and various acquisition and marketing assets. Energy Transfer, through its ownership of Energy Transfer Operating, L.P., also owns Lake Charles LNG Company, as well as limited partner interests and the general partner interests of publicly traded master limited partnerships Sunoco LP and USA Compression Partners, LP.

SemGroup Corporation provides gathering, transportation, storage, distribution, marketing and other midstream services to producers, refiners of petroleum products and other market participants in the Gulf Coast, Midwest and Rocky Mountain regions of the U.S. and Canada. SemGroup operates a world-class marine terminal strategically located on the Houston Ship Channel.

Nautilus Merger Sub LLC is a Delaware limited liability company and wholly owned subsidiary of Energy Transfer. Merger Sub has not carried on any activities to date, other than activities incidental to its formation or undertaken in connection with the transactions contemplated by the merger agreement.

The Merger (See page 34)

Energy Transfer and SemGroup have entered into a merger agreement, pursuant to which Energy Transfer will acquire SemGroup, and SemGroup will cease to be a publicly held company.

The merger agreement is attached as Annex A to this document, and both Energy Transfer and SemGroup encourage you to read it carefully and in its entirety because it is the legal document that governs the merger.

Merger Consideration (See page 68)

In the merger, SemGroup stockholders will receive, for each share of SemGroup common stock they own as of immediately prior to the effective time of the merger (the “effective time”), a combination of $6.80 in cash (the “per share cash amount”) and 0.7275 (the “exchange ratio”) of an ET common unit (collectively, the “merger consideration”).

No fractional ET common units will be issued. Former SemGroup stockholders to whom fractional units would have otherwise been issued will be entitled to receive, subject to applicable withholding, a cash payment equal to such stockholders’ proportionate interest in the net proceeds from the sale of the aggregated fractional units that would have been issued in the merger.

Treatment of SemGroup Preferred Stock (See page 68)

In accordance with that certain Certificate of Designations of Series A Cumulative Perpetual Convertible Preferred Stock of SemGroup Corporation, filed with the Secretary of State of the State of Delaware on



 

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January 19, 2018 (the “Certificate of Designations”), each share of Series A Cumulative Perpetual Convertible Preferred Stock, par value $0.01 per share, of SemGroup (the “SemGroup preferred stock”) that is issued and outstanding as of immediately prior to the effective time will, at the election of the holders of a majority of such shares, either (i) convert into shares of common stock immediately prior to the effective time and receive the merger consideration, (ii) be exchanged for a “Substantially Equivalent Security” (as defined in the Certificate of Designations) or (iii) be redeemed by SemGroup for cash at a price per share equal to 101% of the liquidation preference. Pursuant to the support agreement described below, WP SemGroup Holdco, LLC (“WP SemGroup”), which owns a majority of the shares of outstanding SemGroup preferred stock, has agreed to elect to require SemGroup to redeem all of the SemGroup preferred stock for cash at a price per share equal to 101% of the liquidation preference thereof, which is generally calculated as $1,000 plus accrued and accumulated dividends on the preferred stock as adjusted in accordance with the Certificate of Designations and which was $1,130.28 per share as of the record date.

Treatment of SemGroup Equity Awards (See page 55)

Restricted Share Units. Each award of restricted share units, vested or unvested (other than those held by non-employee directors of SemGroup) (each, a “SemGroup RSU award”), that is outstanding immediately prior to the effective time will be assumed by Energy Transfer and converted into a restricted unit award to receive a number of ET common units equal to the number of shares of SemGroup common stock subject to such SemGroup RSU award immediately prior to the effective time multiplied by a ratio equal to the per share cash amount divided by the closing price of one ET common unit on the NYSE on the date prior to the closing date plus the exchange ratio (the “equity exchange ratio”), rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup RSU award”). Each assumed SemGroup RSU award will otherwise be subject to the same terms and conditions as were applicable to such award immediately prior to the effective time and fully accelerate upon a termination without cause, for good reason or as a result of the holder’s death or disability.

Restricted Stock Awards. Each restricted stock award (other than those held by non-employee directors of SemGroup) (each, a “SemGroup restricted stock award”) that is outstanding immediately prior to the effective time will be assumed by Energy Transfer and converted into a restricted unit award representing a contractual right upon vesting to receive a number of ET common units equal to the product obtained by multiplying (x) the number of shares of SemGroup common stock subject to such SemGroup restricted stock award immediately prior to the effective time by (y) the equity exchange ratio, rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup restricted stock award”). Each assumed SemGroup restricted stock award will otherwise be subject to the same terms and conditions as were applicable to the SemGroup award immediately prior to the effective time, have distribution equivalent rights and fully accelerate upon a termination without cause, for good reason or as a result of the holder’s death or disability.

Performance Share Units. Each award of performance share units that corresponds to shares of SemGroup common stock (each, a “SemGroup PSU award”) that is outstanding and vested as of the effective time will be cancelled in exchange for the payment of the merger consideration with respect to the number of shares of SemGroup common stock underlying such vested SemGroup PSU award. Each SemGroup PSU award that is outstanding and unvested as of the effective time will automatically, and without any required action of the holder thereof, be cancelled without consideration.

Director Restricted Share Awards. Each SemGroup restricted stock award and SemGroup restricted share unit award that is outstanding immediately prior to the effective time and held by a non-employee director of SemGroup and that is outstanding immediately prior to the effective time (each, a “director restricted share award”) will, as of the effective time, become fully vested and will be cancelled in exchange for the payment of the merger consideration with respect to the total number of shares of SemGroup common stock subject to such director restricted share award.



 

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The compensation committee of the board of directors of SemGroup has determined to vest all SemGroup PSU awards that were outstanding on September  15, 2019 at target performance levels as of immediately prior to the effective time.

Support Agreement (See page 68)

Contemporaneously with the execution of the merger agreement, Energy Transfer, Merger Sub, SemGroup and WP SemGroup, a holder of approximately 85.72% of the issued and outstanding shares of SemGroup preferred stock, which represents 11.22% of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, as of the record date, entered into a support agreement (the “support agreement”). Pursuant to the support agreement, WP SemGroup agreed to, among other things, vote all of its shares in SemGroup that it owns as of the record date for the SemGroup stockholder meeting (i) in favor of the adoption of the merger agreement, (ii) against any acquisition proposal, and (iii) against any action, agreement, transaction or proposal that is intended, would reasonably be expected or the result of which would reasonably be expected, to materially impede, interfere with, delay, postpone, discourage, frustrate the purposes of or adversely affect the merger or the other transactions contemplated by the merger agreement. In addition, WP SemGroup and SemGroup agreed to amend the Certificate of Designations to provide for the redemption in cash of all of the shares of SemGroup preferred stock in connection with the closing of the merger at a price of 101% of the liquidation preference, and WP SemGroup has agreed to make an election to have the shares of SemGroup preferred stock redeemed at such price. A copy of the support agreement is attached as Annex B to this proxy statement/prospectus.

Risk Factors (See page 21)

The merger is, and upon the completion of the merger, the combined company will be, subject to a number of risks, which are described in the section titled “Risk Factors” beginning on page 21. You should carefully read and consider these risks in deciding whether to vote for the approval and adoption of the merger agreement and the transactions contemplated thereby.

Special Meeting of SemGroup Stockholders (See page 29)

Date, time and place. The special meeting will be held on December 4, 2019 at Two Warren Place, 5th Floor, 6120 South Yale Avenue, Tulsa, Oklahoma 74136, at 9:00 a.m. local time.

Proposals being considered. The special meeting is being held to consider and vote on the following proposals:

 

   

Proposal 1: to approve and adopt the merger agreement (attached as Annex A to this document) and the transactions contemplated thereby;

 

   

Proposal 2: to approve, on an advisory (non-binding) basis, specified compensation that may be received by SemGroup’s named executive officers in connection with the merger;

 

   

Proposal 3: any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the proposal to approve and adopt the merger agreement and the transactions contemplated thereby; and

 

   

Proposal 4: to transact such other business as may properly come before the special meeting and any adjournment or postponement thereof (at the present time, SemGroup knows of no other matters that will be presented for consideration at the special meeting).

Record Date; Voting Rights. The record date for the determination of SemGroup stockholders entitled to notice of and to vote at the special meeting is October 25, 2019. Only SemGroup stockholders who held shares of SemGroup common stock and SemGroup preferred stock of record at the close of business on October 25, 2019,



 

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or proxy holders therefor, are entitled to vote at the special meeting and any adjournment or postponement of the special meeting. Each holder of shares of SemGroup common stock is entitled to one vote per share of SemGroup common stock. Each holder of shares of SemGroup preferred stock is entitled to a number of votes equal to the number of votes such holder would have had if all shares of SemGroup preferred stock held by such holder had been converted into shares of SemGroup common stock as of the record date.

Quorum. A “quorum” shall consist of the holders of record of a majority of the issued and outstanding shares of SemGroup common stock, including shares of the SemGroup preferred stock, on an as-converted basis, entitled to vote at the special meeting, present in person or by proxy. There must be a quorum for the special meeting to be held.

Vote Required. The vote required for each proposal are as follows:

 

   

Proposal 1 – the merger proposal. The affirmative vote of the holders of a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon at the special meeting is required to approve the merger proposal. The failure of any SemGroup stockholder to submit a vote (e.g., by not submitting a proxy or not voting in person), broker non-votes and any abstention by a SemGroup stockholder will have the same effect as a vote “AGAINST” approval of the merger proposal.

 

   

Proposal 2 – the advisory compensation proposal. The affirmative vote of the holders of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting is required to approve the advisory compensation proposal. Any abstention by a SemGroup stockholder will have the same effect as a vote “AGAINST” the advisory compensation proposal, but broker non-votes will have no effect on the adoption of the advisory compensation proposal.

 

   

Proposal 3 – the adjournment proposal. The affirmative vote of the holders of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting is required to approve the adjournment proposal. Any abstention by a SemGroup stockholder will have the same effect as a vote “AGAINST” the adjournment proposal, but broker non-votes will have no effect on the adoption of the adjournment proposal.

Recommendation of the SemGroup Board of Directors and Reasons for the Merger (See page 41)

The SemGroup board of directors has unanimously determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, SemGroup and its stockholders, and recommends that the SemGroup stockholders vote to approve and adopt the merger agreement and the transactions contemplated thereby, including the merger. In addition, the SemGroup board of directors recommends that the SemGroup stockholders vote to approve, on an advisory (non-binding) basis, specified compensation that may be received by SemGroup’s named executive officers in connection with the merger and to approve any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the merger proposal. In reaching its decision to approve and adopt the merger agreement and recommend to the SemGroup stockholders that they vote to approve and adopt the merger agreement and the transactions contemplated thereby, the SemGroup board of directors consulted with SemGroup management and its financial and legal advisors and considered the factors described in the section titled “Proposal 1: The Merger – Recommendation of the SemGroup Board of Directors and Reasons for the Merger” beginning on page 41.

Opinion of SemGroup’s Financial Advisor (See page 44)

The SemGroup board of directors retained Jefferies LLC (“Jefferies”) as its financial advisor in connection with, among other things, the merger. At a meeting of the SemGroup board of directors on September 15, 2019,



 

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Jefferies rendered its opinion, to the effect that, as of that date and based upon and subject to the various assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken as set forth in its opinion, the merger consideration of (i) $6.80 in cash, without interest and (ii) 0.7275 of an ET common unit per share of SemGroup common stock to be received by the holders of SemGroup common stock, other than Cancelled Shares, Subsidiary Shares and Dissenting Shares (each as defined in the merger agreement) pursuant to the merger agreement was fair, from a financial point of view, to the holders of such SemGroup common stock (other than SemGroup and its affiliates) (“Public Common Stock Holders”), as more fully described in the section entitled “Opinion of SemGroup’s Financial Advisor” beginning on page 44.

The full text of the written opinion of Jefferies, dated as of September 15, 2019, is attached hereto as Annex C. Jefferies’ opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Jefferies in rendering its opinion. SemGroup encourages you to read Jefferies’ opinion carefully and in its entirety. Jefferies’ opinion was directed to the SemGroup board of directors (in its capacity as such) and addresses only the fairness, from a financial point of view, of the merger consideration to be received by the Public Common Stock Holders pursuant to the merger agreement to such Public Common Stock Holders. It does not address the relative merits of the transactions contemplated by the merger agreement as compared to any alternative transaction or opportunity that might be available to SemGroup, nor does it address the underlying business decision by SemGroup to engage in the merger or the terms of the merger agreement or the documents referred to therein. Jefferies’ opinion does not constitute a recommendation as to how any securityholder should vote on the merger or any matter related thereto.

Interests of SemGroup’s Directors and Executive Officers in the Merger (See page 54)

In considering the recommendation of the SemGroup board of directors that you vote to approve and adopt the merger agreement and the merger, you should be aware that aside from their interests as SemGroup stockholders, SemGroup’s directors and executive officers have interests in the merger that are different from, or in addition to, those of other SemGroup stockholders generally. The members of the SemGroup board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to the SemGroup stockholders that the merger agreement and the merger be adopted. See “Proposal 1: The Merger – Background of the Merger”, and “Proposal 1: The Merger – Recommendation of the SemGroup Board of Directors and Reasons for the Merger.” SemGroup’s stockholders should take these interests into account in deciding whether to vote “FOR” the merger proposal. These interests are described in more detail below, and certain of them are quantified in the narrative and the tables below.

Regulatory Approvals Required for the Merger (See page 64)

Governmental and regulatory approvals are required to complete the transactions contemplated by the merger agreement. These approvals include the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). Energy Transfer and SemGroup each filed the required notification and report forms under the HSR Act on October 3, 2019 and on October 16, 2019 were informed by the Federal Trade Commission (the “FTC”) that the waiting period was terminated. At any time before or after the completion of the merger, the Antitrust Division of the Department of Justice, the FTC, foreign antitrust authorities, or others could take action under the antitrust laws as deemed necessary or desirable in the public interest, including without limitation seeking to enjoin the completion of the merger or to permit completion only subject to regulatory concessions or conditions.

Appraisal Rights (See page 69)

Under Section 262 of the DGCL, holders of SemGroup common stock will have the right to obtain an appraisal of the value of their shares of SemGroup common stock in connection with the merger. Holders of



 

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SemGroup preferred stock are not entitled to appraisal rights with respect to shares of SemGroup preferred stock. To perfect appraisal rights, a SemGroup stockholder must not vote for the adoption of the merger agreement, must continue to hold their shares of SemGroup common stock through the effective date and must strictly comply with all of the procedures required under Delaware law, including submitting a written demand for appraisal to SemGroup prior to the special meeting. Failure to strictly comply with Section 262 of the DGCL by a SemGroup stockholder may result in termination or waiver of that stockholder’s appraisal rights. Because of the complexity of Delaware law relating to appraisal rights, if any SemGroup stockholder is considering exercising his, her or its appraisal rights, Energy Transfer and SemGroup encourage such SemGroup stockholder to seek the advice of his, her or its own legal counsel. The text of Section  262 of the DGCL as in effect with respect to this transaction is included as Annex D to this document.

NYSE Listing of ET Common Units (See page 66)

ET common units are currently listed on the NYSE under the ticker symbol “ET.” It is a condition to closing that the ET common units to be issued in the merger to SemGroup stockholders be approved for listing on the NYSE, subject to official notice of issuance.

Delisting and Deregistration of SemGroup Common Stock (See page 66)

SemGroup common stock is currently listed on the NYSE under the ticker symbol “SEMG.” If the merger is completed, SemGroup common stock will cease to be listed on the NYSE and will be deregistered under the Exchange Act.

Conditions to Completion of the Merger (See page 68)

The obligations of Energy Transfer, on the one hand, and SemGroup, on the other hand, to complete the merger are subject to the fulfillment (or waiver) of the following conditions:

 

   

SemGroup Stockholder Approval. Approval and adoption of the merger agreement by holders of a majority of the outstanding SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote at the special meeting.

 

   

No Injunction. No injunction or law prohibiting the merger.

 

   

Regulatory Approvals. Expiration or termination of any applicable waiting period under the HSR Act (early termination of the waiting period under the HSR Act was granted on October 16, 2019).

 

   

Registration Statement. The registration statement (of which this document forms a part) must be effective, and no proceeding for the purpose of suspending the effectiveness of the registration statement has been initiated or threatened by the SEC.

 

   

NYSE Listing. Approval for listing on the NYSE, subject to official notice of issuance, of the ET common units to be issued in the merger.

 

   

Accuracy of Representations; No Material Adverse Effect. Accuracy of the other party’s representations, except with certain exceptions, where the failure to be accurate would not have a material adverse effect on SemGroup or Energy Transfer, as applicable.

 

   

Compliance with Covenants. Material compliance with each party’s covenants.

Neither Energy Transfer nor SemGroup can give any assurance that all of the conditions to the merger will either be satisfied or waived or that the merger will occur.

Non-Solicitation by SemGroup (See page 80)

The merger agreement contains a detailed provision prohibiting SemGroup from soliciting or engaging in discussions with any person with respect to a potential alternative transaction, providing non-public information



 

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about SemGroup or recommending or agreeing to an alternative takeover proposal, unless the SemGroup board of directors determines that the alternative proposal is, or could reasonably be expected to lead to, a “superior offer” (as defined in the merger agreement) and such alternative proposal was not made or received in violation of the non-solicitation prohibitions.

If the SemGroup board of directors determines that a proposal is a superior offer and decides to change its recommendation to stockholders in favor of the merger or terminate the merger agreement in order to accept a superior offer, SemGroup must first negotiate in good faith with Energy Transfer for 72 hours to modify the current transaction such that the alternative transaction would no longer constitute a superior offer (or for 48 hours if the acquisition proposal is modified by the party making such acquisition proposal).

Termination of Merger Agreement (See page 88)

The merger agreement can be terminated in the following circumstances:

 

   

Mutual Agreement. Mutual agreement of Energy Transfer and SemGroup.

 

   

End Date. Termination by either party, if the merger has not closed by June 30, 2020, which may be automatically extended to September 30, 2020 in certain circumstances.

 

   

Final Injunction or Other Law. Termination by either party, if a permanent injunction has been issued or other law has been enacted prohibiting the merger.

 

   

Stockholder Rejection. Termination by either party, if SemGroup stockholders fail to approve and adopt the merger agreement at the special meeting.

 

   

Superior Offer. Termination by SemGroup, prior to SemGroup stockholder approval of the merger, in order to accept a superior offer, but SemGroup must have first negotiated with Energy Transfer for 72 hours to modify the current transaction and, prior to terminating the merger agreement, must have paid to Energy Transfer the $54.5 million breakup fee described below.

 

   

Change in Recommendation. Termination by Energy Transfer, if the SemGroup board of directors changes its recommendation to the SemGroup stockholders to vote for the merger.

 

   

Breach of Representations or Covenants. Termination by either party, if the other party has breached its representations or covenants in a way that causes a closing condition to fail, including a willful and material breach of the non-solicitation obligations by SemGroup.

Breakup Fee and Expense Reimbursement (See page 90)

Breakup Fee. SemGroup must pay Energy Transfer a breakup fee of $54.5 million (the “breakup fee”) in the following circumstances:

 

   

Termination to Accept Superior Offer. SemGroup terminates the merger agreement in order to accept a superior offer.

 

   

Willful Breach of Non-Solicitation Obligations. Energy Transfer terminates the merger agreement prior to the approval of the merger agreement by the SemGroup stockholders because SemGroup has willfully and materially breached its non-solicitation obligations.

 

   

Change in Recommendation Following an Alternative Proposal. Energy Transfer terminates the merger agreement because the SemGroup board of directors changes its recommendation for the merger, and prior to the termination of the merger agreement, a third party shall have made an acquisition proposal for SemGroup that has not been withdrawn.

 

   

Failure to Call a Stockholders’ Meeting by the End Date Following an Alternative Proposal. Energy Transfer terminates the merger agreement because SemGroup breaches its obligation under the merger



 

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agreement to call the special meeting, and prior to the termination of the merger agreement, a third party shall have made an acquisition proposal for SemGroup that has not been withdrawn.

 

   

Stockholder Rejection Following an Alternative Proposal with Subsequent Deal. Either party terminates the merger agreement because the SemGroup stockholders do not approve and adopt the merger agreement at the special meeting, and prior to such termination (1) an alternative proposal is made to SemGroup prior to the special meeting and not withdrawn and (2) SemGroup enters into an agreement providing for or consummates an alternative takeover transaction involving 75% of the assets or equity of SemGroup within 12 months after the termination of the merger agreement.

 

   

Change of Recommendation Following an Intervening Event. Energy Transfer terminates the merger agreement because the SemGroup board of directors changes its recommendation and SemGroup enters into an agreement providing for or consummates an alternative takeover transaction involving 75% of the assets or equity of SemGroup within 12 months after the termination of the merger agreement.

Energy Transfer Expense Reimbursement. If either party terminates the merger agreement because the SemGroup board of directors changes its recommendation for the merger, and in circumstances otherwise where the breakup fee is not payable, then SemGroup will reimburse Energy Transfer’s documented out-of-pocket expenses up to $27.25 million. If SemGroup has reimbursed Energy Transfer’s expenses, and Energy Transfer later would become entitled to a breakup fee pursuant to a provision above, the expense reimbursement will be credited against the breakup fee.

Accounting Treatment of the Transactions (See page 64)

In accordance with accounting principles generally accepted in the United States and in accordance with Financial Accounting Standards Board’s Accounting Standards Codification Topic 805-Business Combinations, Energy Transfer will account for the merger as an acquisition of a business.

Material U.S. Federal Income Tax Consequences of the Merger (See page 92)

To the extent that a SemGroup stockholder is treated as exchanging SemGroup common stock for cash pursuant to the merger, such stockholder generally will recognize gain or loss in an amount equal to the difference, if any, between the amount of cash received and the stockholder’s adjusted basis in the portion of the SemGroup common stock treated as sold in the merger. In general, no gain or loss should be recognized by a SemGroup stockholder upon the exchange of the remaining portion of such stockholder’s SemGroup common stock for ET common units pursuant to the merger.

All SemGroup stockholders are urged to consult their own tax advisors for a full understanding of the U.S. federal, state, local and foreign tax consequences of exchanging shares of SemGroup common stock pursuant to the merger and of owning and disposing of ET common units in light of their particular circumstances. For a more detailed discussion of the material U.S. federal income tax consequences to SemGroup stockholders of the merger, please see the section titled “Material U.S. Federal Income Tax Consequences of the Merger.”

Comparison of Rights of SemGroup Stockholders and Energy Transfer Unitholders (See page 121)

The rights of SemGroup stockholders are currently governed by SemGroup’s amended and restated certificate of incorporation and bylaws (together, the “SemGroup organizational documents”), as well as the DGCL. SemGroup stockholders who receive ET common units in the merger will become Energy Transfer common unitholders upon completion of the merger, and their rights as such will be governed by Energy Transfer’s certificate of limited partnership, partnership agreement and the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”). As a result, these SemGroup stockholders will have different rights once



 

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they become common unitholders of Energy Transfer due to the differences in the governing documents of and laws applicable to SemGroup and Energy Transfer. The key differences are described in the section titled “Comparison of Rights of Energy Transfer Common Unitholders and SemGroup Common Stockholders,” and among the most important differences are:

 

   

Under the SemGroup organizational documents, SemGroup stockholders have the right to vote for the election of directors who manage the affairs of the corporation. Energy Transfer common unitholders are not entitled to elect the directors of Energy Transfer’s general partner or directly or indirectly participate in the management or operation of Energy Transfer.

 

   

Approval of the SemGroup stockholders is required to authorize the issuance of SemGroup common stock in excess of the authorized number of shares of SemGroup common stock set forth in the SemGroup certificate of incorporation. In addition, under the rules of the NYSE, subject to certain exceptions, SemGroup stockholders must approve the issuance of SemGroup common stock equal to or in excess of 20% of the voting power outstanding before the issuance. In contrast, Energy Transfer’s partnership agreement authorizes Energy Transfer to issue an unlimited number of additional limited partner interests and other equity securities that are senior to, equal in rank with or junior to the common units on terms and conditions established by Energy Transfer’s general partner in its sole discretion without the approval of Energy Transfer’s common unitholders. In addition, as a limited partnership, Energy Transfer is exempt from the rule of the NYSE that would require stockholder approval for the issuance of equity equal to or in excess of 20% of the number of outstanding equity of a company.

 

   

SemGroup stockholders are entitled to receive dividends as and when declared by the SemGroup board of directors out of funds legally available for such payment, subject to any preferential dividend rights of holders of outstanding shares of preferred stock. Energy Transfer’s partnership agreement requires that Energy Transfer distribute, within 50 days after the end of each quarter, all of its available cash to its partners as of the applicable record date.

 

   

Shares of SemGroup’s common stock are not redeemable. In contrast, if at any time Energy Transfer’s general partner and its affiliates hold more than 90% of the outstanding limited partner interests of any class, the general partner has the right to acquire all of the remaining interests of the class held by unaffiliated persons.

Expected Timing of the Merger (See page 64)

Energy Transfer and SemGroup currently expect to complete the merger in late 2019, subject to the receipt of required SemGroup stockholder and regulatory approvals and the satisfaction or waiver of the other conditions to completion of the merger. Because many of the conditions to completion of the merger are beyond the control of Energy Transfer and SemGroup, the exact timing for completion of the merger cannot be predicted with any degree of certainty.

Litigation Related to the Merger (See page 66)

Since the initial public announcement of the merger by Energy Transfer and SemGroup on September 16, 2019, SemGroup, the members of the SemGroup board of directors, Energy Transfer and Merger Sub have been named as defendants in lawsuits brought by and on behalf of SemGroup stockholders challenging the proposed transaction. These lawsuits seek, among other things, to enjoin the consummation of the merger. Energy Transfer and SemGroup believe that the claims asserted in these lawsuits are without merit and plan to vigorously defend against them.

Advisory Vote on Specified Compensation (See page 138)

SemGroup is requesting the SemGroup stockholders’ approval, on an advisory (non-binding) basis, of specified compensation that may be payable to SemGroup’s named executive officers in connection with the merger.



 

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Energy Transfer Selected Historical Consolidated Financial Data

The following table shows Energy Transfer’s selected audited historical consolidated financial data as of and for each of the years ended December 31, 2018, 2017, 2016, 2015 and 2014 and unaudited consolidated financial data for each of the six months ended June 30, 2019 and 2018 and are derived from Energy Transfer’s consolidated financial statements.

Energy Transfer is not required to furnish pro forma financial information with respect to the merger in this proxy statement/prospectus because SemGroup would not be a significant subsidiary under any of the financial conditions specified in Rule 1-02(w) of SEC Regulation S-X, substituting 20% for 10% in each of those conditions in accordance with Rule 11.01(b)(1) of SEC Regulation S-X.

You should read the historical financial data in connection with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto set forth in Energy Transfer’s Annual Report on Form 10-K for the year ended December 31, 2018 and Energy Transfer’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which are incorporated by reference into this document. See “Where You Can Find More Information.”

 

     Six Months Ended June 30,      Year Ended December 31,  
(Dollars in millions, except per unit data)        2019              2018          2018     2017     2016     2015     2014  

Income Statement Data:

                

Revenues:

                

Refined product sales

   $ 8,203      $ 8,203      $ 18,345     $ 11,975     $ 10,097     $ 11,321     $ 18,372  

Crude sales

     7,871        7,500        14,415       10,706       7,205       8,425       16,759  

NGL sales

     4,398        4,591        9,109       6,972       4,841       3,935       5,845  

Gathering, transportation and other fees

     4,302        3,097        6,797       4,435       4,172       4,200       3,733  

Natural gas sales

     1,727        2,086        4,452       4,172       3,619       3,671       5,386  

Other

     497        523        969       2,263       1,858       4,544       4,340  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     26,998        26,000        54,087       40,523       31,792       36,096       54,435  

Operating income

     3,746        2,226        5,348       2,721       1,851       2,287       2,389  

Other income (expense)

                

Interest expense, net of interest capitalized

     (1,168      (976      (2,055     (1,922     (1,804     (1,622     (1,368

Equity in earnings of unconsolidated affiliates

     142        171        344       144       270       276       332  

Impairment of investments in unconsolidated affiliates

     –           –           –          (313     (308     –          –     

Gains on acquisitions

     –           –           –          –          83       –          –     

Losses on extinguishment of debt

     (18      (106      (112     (89     –          (43     (25

Gains (losses) on interest rate derivatives

     (196      72        47       (37     (12     (18     (157

Other, net

     42        56        62       206       124       20       168  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

     2,548        1,443        3,634       710       204       900       1,339  

Income tax expense (benefit) from continuing operations

     160        58        4       (1,833     (258     (123     325  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     2,388        1,385        3,630       2,543       462       1,023       1,014  

Loss from discontinued operations, net of income taxes

     –           (263      (265     (177     (462     38       60  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     2,388        1,122        3,365       2,366       –          1,061       1,074  

Net income (loss) attributable to noncontrolling interest and redeemable noncontrolling interest

     640        404        1,671       1,412       (995     (128     441  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to Partners.

   $ 1,748      $ 718      $ 1,694     $ 954     $ 995     $ 1,189     $ 633  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per Limited Partner unit:

                

Basic

   $ 0.67      $ 0.62      $ 1.16     $ 0.85     $ 0.94     $ 1.11     $ 0.58  

Diluted

   $ 0.66      $ 0.62      $ 1.15     $ 0.83     $ 0.92     $ 1.11     $ 0.58  

Cash distributions per unit to Limited Partners:

                

Paid

   $ 0.61      $ 0.61      $ 1.22     $ 1.15     $ 1.14     $ 1.02     $ 0.75  

Declared

   $ 0.61      $ 0.61      $ 1.22     $ 1.17     $ 1.14     $ 1.08     $ 0.80  


 

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SemGroup Selected Historical Consolidated Financial Data

The following table shows SemGroup’s selected audited historical consolidated financial data as of and for each of the years ended December 31, 2018, 2017, 2016, 2015 and 2014 and unaudited consolidated financial data for each of the six months ended June 30, 2019 and 2018 and are derived from SemGroup’s consolidated financial statements. You should read the following data in connection with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto set forth in SemGroup’s Annual Report on Form 10-K for the year ended December 31, 2018 and SemGroup’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which are incorporated by reference into this document. See “Where You Can Find More Information.”

 

     Six Months Ended June 30,     Year Ended December 31,  
(Dollars in thousands, except per share
amounts
)
   2019     2018     2018     2017     2016     2015     2014  

Revenues

   $ 1,242,172     $ 1,257,403     $ 2,503,262     $ 2,081,917     $ 1,332,164     $ 1,455,094     $ 2,122,579  

Expenses:

              

Costs of products sold

     896,952       908,221       1,823,095       1,514,891       873,431       979,549       1,623,358  

Operating

     141,204       160,036       284,769       254,764       212,099       224,443       246,613  

General and administrative

     55,067       49,363       91,568       113,779       84,183       97,366       87,845  

Depreciation and amortization

     123,047       102,291       209,254       158,421       98,804       100,882       98,397  

Loss (gain) on disposal or impairment, net

     7,492       (1,742     (3,563     13,333       16,048       11,472       32,592  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,223,762       1,218,169       2,405,123       2,055,188       1,284,565       1,413,712       2,088,805  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from equity method investments

     26,646       26,965       57,672       67,331       73,757       81,386       64,199  

Gain (loss) on issuance of common units by equity method investee

     –          –          –          –          (41     6,385       29,020  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     45,056       66,199       155,811       94,060       121,315       129,153       126,993  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense (income):

              

Interest expense

     75,562       78,365       149,714       103,009       62,650       69,675       49,044  

Loss on early extinguishment of debt

     –          –          –          19,930       –          –          –     

Foreign currency transaction loss (gain)

     (1,277     5,608       9,501       (4,709     4,759       (1,067     (86

Loss on sale or impairment of non-operated equity method investment

     –          –          –          –          30,644       (14,517     (34,211

Other income, net

     (2,326     (1,483     (2,380     (4,632     (1,269     (1,284     13,675  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     71,959       82,490       156,835       113,598       96,784       52,807       28,422  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (26,903     (16,291     (1,024     (19,538     24,531       76,346       98,571  

Income tax expense (benefit)

     (10,691     19,470       23,304       (2,388     11,268       33,530       46,513  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (16,212     (35,761     (24,328     (17,150     13,263       42,816       52,058  

Loss from discontinued operations, net of income taxes

     –          –          –          –          (1     (4     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (16,212     (35,761     (24,328     (17,150     13,262       42,812       52,057  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: net income attributable to noncontrolling interest

     16,214       –          2,421       –          11,167       12,492       22,817  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SemGroup

   $ (32,426   $ (35,761   $ (26,749   $ (17,150   $ 2,095     $ 30,320     $ 29,240  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SemGroup per common share

              

Basic

   $ (0.81   $ (0.60   $ (0.65   $ (0.24   $ 0.04     $ 0.69     $ 0.69  

Diluted

   $ (0.81   $ (0.60   $ (0.65   $ (0.24   $ 0.04     $ 0.69     $ 0.68  


 

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Unaudited Comparative Per Unit Information of Energy Transfer and Per Share Information of SemGroup

The following table sets forth for the periods presented (i) the historical earnings from continuing operations and book value per ET common unit and historical Energy Transfer cash distributions, (ii) the historical earnings from continuing operations and book value per share of SemGroup common stock and historical SemGroup dividends, (iii) the unaudited pro forma earnings and book value per unit/share information after giving effect to the merger and (iv) the equivalent pro forma per unit/share attributable to 0.7275 of an ET common unit that will be received for each share of SemGroup common stock in the merger.

You should read this information in conjunction with (i) the selected historical consolidated financial data included elsewhere in this document and (ii) the historical consolidated financial statements of Energy Transfer and SemGroup and related notes thereto that are incorporated by reference into this document. The unaudited pro forma per unit/share information does not purport to represent what the actual results of operations of Energy Transfer and SemGroup would have been had the merger been completed in another period or to project Energy Transfer’s and SemGroup’s results of operations that may be achieved if the merger is completed.

 

    Six Months Ended
June 30, 2019
    Year Ended
December 31, 2018
 

Historical – Energy Transfer

   

Earnings from Continuing Operations Per Unit:

   

Basic

  $ 0.67     $ 1.17  

Diluted

    0.66       1.16  

Cash distributions per ET common unit

    0.61       1.22  

Book value per unit – Diluted (1)

    7.91       7.83  

Historical – SemGroup

   

Earnings from Continuing Operations Per Share:

   

Basic

  $ (0.81   $ (0.65

Diluted

    (0.81     (0.65

Cash dividends paid per share of common stock

    0.945       1.89  

Book value per share –
Diluted (1)

    16.28       18.70  

Pro Forma Combined

   

Earnings Per Unit/Share:

   

Basic

  $ 0.63     $ 1.09  

Diluted

    0.63       1.08  

Book value per unit/share – Diluted (1)

    8.03       7.94  

Equivalent Pro Forma Per
Unit/Share (2)

   

Earnings Per Unit/Share:

   

Basic

  $ 0.46     $ 0.79  

Diluted

    0.46       0.79  

Book value per unit/share – Diluted (1)

    5.84       5.78  

 

(1)

Represents a period-end amount.

(2)

Equivalent pro forma earnings and book value amounts are calculated by multiplying Energy Transfer’s pro forma amounts by the exchange ratio of 0.7275 of an ET common unit.



 

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ET common units are currently listed on the NYSE under the ticker symbol “ET.” SemGroup common stock is currently listed on the NYSE under the ticker symbol “SEMG.”

The table below presents closing prices for ET common units and shares of SemGroup common stock on (i) September 13, 2019, the last trading day before the public announcement of the execution of the merger agreement and (ii) October 25, 2019, a recent trading day before the date of this document. This table also presents the equivalent market value per share of SemGroup common stock on September 13, 2019 and October 25, 2019. The equivalent market value per share of SemGroup common stock has been

determined by multiplying the closing prices of ET common units on those dates by the exchange ratio of 0.7275 of an ET common unit and adding $6.80, which represents the cash portion of the merger consideration.

Although the exchange ratio is fixed, the market prices of ET common units and SemGroup common stock will fluctuate before the merger is completed and the market value of the merger consideration ultimately received by SemGroup stockholders will depend on the closing price of ET common units on the day the merger is consummated. Thus, SemGroup stockholders will not know the exact value of the merger consideration they will receive until the closing of the merger.

 

     ET
Common Units
     SemGroup
Common Stock
     Equivalent Market
Value per ET
Common Unit
 

September 13, 2019

   $ 14.02      $ 10.28      $ 17.00  

October 25, 2019

   $ 12.55      $ 16.00      $ 15.93  

The table below sets forth, for the calendar quarters indicated, the high and low sale prices per ET common unit and per share of SemGroup common stock on the NYSE. The table also shows the amount of cash distributions and cash dividends declared per ET common unit and per share of SemGroup common stock for the calendar quarters indicated. The information in the table below is historical only. ET and SemGroup urge SemGroup stockholders to obtain current market quotations for ET common units and SemGroup common stock.

 

     ET Common Units      SemGroup Common Stock  
     High      Low      Cash
Distributions
     High      Low      Cash
Dividends
 

2019

                 

Fourth Quarter (through October 25, 2019)(1)

   $ 13.21      $ 12.25      $ –        $ 16.60      $ 15.82      $ –    

Third quarter(2)

     15.26        12.96        0.3050        17.10        8.10        –    

Second quarter

     15.87        13.62        0.3050        15.90        11.06        0.4725  

First quarter

     15.98        12.97        0.3050        17.73        13.27        0.4725  

2018

                 

Fourth quarter

   $ 18.17      $ 11.68      $ 0.3050      $ 22.96      $ 12.86      $ 0.4725  

Third quarter

     19.19        16.78        0.3050        26.79        20.85        0.4725  

Second quarter

     17.96        13.73        0.3050        26.40        20.45        0.4725  

First quarter

     19.34        12.80        0.3050        30.95        20.20        0.4725  

2017

                 

Fourth quarter

   $ 18.71      $ 15.64      $ 0.3050      $ 30.60      $ 21.35      $ 0.4500  

Third quarter

     18.50        16.18        0.2950        29.05        22.60        0.4500  

Second quarter

     19.82        15.03        0.2850        36.65        22.55        0.4500  

First quarter

     20.05        17.62        0.2850        43.05        32.48        0.4500  

 

(1)

Cash distributions and dividends in respect of the fourth quarter of fiscal year 2019 have not been declared or paid.

(2)

Cash distributions by Energy Transfer in respect of the third quarter of fiscal year 2019 have been declared but not yet paid. Cash dividends by SemGroup in respect of the third quarter of fiscal year 2019 have not been declared or paid.



 

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RISK FACTORS

In addition to the other information included and incorporated by reference into this document, including the matters addressed in the section titled “Cautionary Statement Regarding Forward-Looking Statements,” you should carefully consider the following risks before deciding whether to vote for the approval and adoption of the merger agreement and the transactions contemplated thereby. In addition, you should read and consider the risks associated with each of the businesses of Energy Transfer and SemGroup. These risks can be found in Energy Transfer’s and SemGroup’s respective Annual Reports on Form 10-K for the year ended December 31, 2018, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC and incorporated by reference into this proxy statement/prospectus. For further information regarding the documents incorporated into this document by reference, please see the section titled “Where You Can Find More Information.” Realization of any of the risks described below, any of the events described under “Cautionary Statement Regarding Forward-Looking Statements” or any of the risks or events described in the documents incorporated by reference could have a material adverse effect on Energy Transfer’s, SemGroup’s or the combined company’s business, financial condition, cash flows and results of operations and could result in a decline in the trading prices of their respective common units or common stock.

Risks Factors Related to the Merger

Because the market price of ET common units will fluctuate prior to the consummation of the merger, SemGroup stockholders cannot be sure of the market value of ET common units that they will receive in the merger.

At the time the merger is completed, SemGroup stockholders will receive, for each share of SemGroup common stock they own as of immediately prior to the merger, a combination of $6.80 in cash and 0.7275 of an ET common unit. At the time that SemGroup stockholders cast their votes regarding approval of the merger agreement and the merger, SemGroup stockholders will not know the actual market value of the ET common units that they will receive when the merger is finally completed. The actual market value of the ET common units, when received by SemGroup common stockholders, will depend on the market value of those units on that date. This market value may be less than the value of the ET common units on the date of the merger agreement and on the date that SemGroup stockholders vote on the merger agreement. These fluctuations in the market value of ET common units may be caused by changes in the businesses, operations, results and prospects of both Energy Transfer and SemGroup, market expectations of the likelihood that the merger will be completed and the timing of the completion, general market and economic conditions or other factors.

The merger is subject to various closing conditions, and any delay in completing the merger may reduce or eliminate the benefits expected and delay the payment of the merger consideration to SemGroup’s common stockholders.

The merger is subject to the satisfaction of a number of other conditions beyond the parties’ control that may prevent, delay or otherwise materially adversely affect the completion of the merger. These conditions include, among other things, SemGroup stockholder approval and the expiration or termination of any applicable waiting period under the HSR Act. Energy Transfer and SemGroup cannot predict with certainty whether and when any of these conditions will be satisfied. Any delay in completing the merger could cause the combined company not to realize, or delay the realization, of some or all of the benefits that the companies expect to achieve from the merger. In such context, the date on which SemGroup’s common stockholders will receive the merger consideration is also uncertain.

Certain executive officers and directors of SemGroup have interests in the merger that are different from, or in addition to, the interests of SemGroup stockholders generally, which could have influenced their decision to support or approve the merger.

Certain executive officers and directors of SemGroup are parties to agreements or participants in other arrangements that give them interests in the merger that may be different from, or be in addition to, your interests

 

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as a stockholder of SemGroup. You should consider these interests in voting on the merger. We have described these different interests under “Proposal 1: The Merger – Interests of SemGroup’s Directors and Executive Officers in the Merger.”

The merger agreement limits SemGroup’s ability to pursue alternatives to the merger.

The merger agreement contains provisions that make it more difficult for SemGroup to sell its business to a party other than Energy Transfer. These provisions include the general prohibition on SemGroup soliciting any acquisition proposal (as defined in the section titled “The Merger Agreement – Non-Solicitation by SemGroup”) or offer for a competing transaction from a third party, and the requirement that SemGroup pay Energy Transfer a breakup fee of $54.5 million or up to $27.25 million of Energy Transfer’s expenses if the merger agreement is terminated in specified circumstances, including in the event SemGroup terminates the merger agreement in response to an acquisition proposal from a third party that the SemGroup board of directors determines constitutes a superior offer. In addition, even if the SemGroup board of directors receives a superior offer, it must, prior to accepting any offer from a competing bidder, provide Energy Transfer with the opportunity to amend the merger agreement such that the third-party offer no longer constitutes a superior offer. See “The Merger Agreement – Termination of the Merger Agreement” and “The Merger Agreement – Breakup Fee and Energy Transfer Expenses.” The foregoing may discourage a third party that might have an interest in acquiring all or a significant part of SemGroup from considering or proposing an acquisition, even if that party were prepared to pay consideration with a higher per share value than the current proposed merger consideration.

Furthermore, the breakup fee and the Energy Transfer expense reimbursement provisions may result in a potential competing acquiror proposing to pay a lower per share price to acquire SemGroup than it might otherwise have proposed to pay.

SemGroup’s financial estimates are based on various assumptions that may not prove to be correct.

The financial estimates set forth in the forecast included under “Proposal 1: The Merger – SemGroup Unaudited Prospective Financial Information” are based on assumptions of, and information available to, SemGroup at the time they were prepared and provided to the SemGroup board of directors and its financial advisors. SemGroup cannot know whether such assumptions will prove correct. Any or all of such estimates may turn out to be wrong. Such estimates can be adversely affected by inaccurate assumptions or by known or unknown risks and uncertainties, many of which are beyond Energy Transfer’s and SemGroup’s control. Many factors mentioned in this proxy statement/prospectus, including the risks outlined in this “Risk Factors” section and the events or circumstances described under “Cautionary Statement Regarding Forward-Looking Statements,” will be important in determining Energy Transfer’s and SemGroup’s future results. As a result of these contingencies, actual future results may vary materially from SemGroup’s estimates. In view of these uncertainties, the inclusion of SemGroup’s financial estimates in this proxy statement/prospectus is not and should not be viewed as a representation that the forecast results will be achieved.

SemGroup’s financial estimates were not prepared with a view toward public disclosure, and such financial estimates were not prepared with a view toward compliance with published guidelines of any regulatory or professional body. Further, any forward-looking statement speaks only as of the date on which it is made, and Energy Transfer and SemGroup undertake no obligation, other than as required by applicable law, to update the financial estimates herein to reflect events or circumstances after the date those financial estimates were prepared or to reflect the occurrence of anticipated or unanticipated events or circumstances.

The financial estimates included in this proxy statement/prospectus have been prepared by, and are the responsibility of, SemGroup alone. Moreover, neither SemGroup’s independent accountants, Grant Thornton LLP, nor any other independent accountants, have compiled, examined or performed any procedures with respect to SemGroup’s prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and, accordingly, Grant Thornton LLP assumes

 

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no responsibility for, and disclaims any association with, SemGroup’s prospective financial information. The reports of Grant Thornton LLP incorporated by reference herein relate exclusively to the historical financial information of the entities named in those reports and do not cover any other information in this proxy statement/prospectus and should not be read to do so. See “Proposal 1: The Merger – SemGroup Unaudited Prospective Financial Information.”

A different set of factors and conditions affect ET common units and could have a negative impact on the unit price.

Upon completion of the merger, SemGroup common stockholders who receive ET common units will become equityholders in Energy Transfer. The businesses of Energy Transfer and the other companies it has acquired and may acquire in the future are different in many respects from those of SemGroup. There is a risk that various factors, conditions and developments which would not affect the price of SemGroup’s common stock could negatively affect the price of ET common units. Please see the section titled “Cautionary Statement Regarding Forward-Looking Statements” for a summary of some of the key factors that might affect Energy Transfer and the prices at which ET common units may trade from time to time. SemGroup stockholders are also urged to read carefully the risk factors included in Energy Transfer’s Annual Report on Form 10-K for the year ended December 31, 2018 and any subsequent Quarterly Reports on Form 10-Q, which are incorporated by reference into this document.

SemGroup common stockholders will have a reduced ownership and voting interest after the merger and will exercise less influence over management.

SemGroup common stockholders currently have the right to vote in the election of the SemGroup board of directors and other matters affecting SemGroup. When the merger occurs, each SemGroup common stockholder will become a unitholder of Energy Transfer with a percentage ownership of the combined company that is much smaller than such stockholder’s percentage ownership of SemGroup. Based on the number of ET common units and shares of SemGroup common stock outstanding as of October 25, 2019, SemGroup common stockholders will own approximately 2.2% of the outstanding ET common units after the merger. Energy Transfer unitholders are not entitled to elect the directors of Energy Transfer’s general partner. In addition, Energy Transfer unitholders have only limited voting rights on matters affecting Energy Transfer’s business and, therefore, limited ability to influence management’s decisions regarding its business. Because of this, SemGroup common stockholders will have less influence on the management and policies of Energy Transfer than they have now on the management and policies of SemGroup.

ET common units to be received by SemGroup common stockholders as a result of the merger will have different rights from SemGroup common stock.

Following completion of the merger, SemGroup common stockholders will no longer hold shares of SemGroup common stock, but will instead be unitholders of Energy Transfer. There are important differences between the rights of SemGroup stockholders and the rights of Energy Transfer unitholders. See “Comparison of Rights of Energy Transfer Common Unitholders and SemGroup Common Stockholders” for a discussion of the different rights associated with SemGroup common stock and ET common units.

If the merger agreement is terminated, under certain circumstances, SemGroup may be obligated to reimburse Energy Transfer for costs incurred related to the merger or pay a breakup fee to Energy Transfer. These costs could require SemGroup to seek loans or use SemGroup’s available cash that would have otherwise been available for operations, dividends or other general corporate purposes.

In certain circumstances, SemGroup would be responsible for reimbursing Energy Transfer for up to $27.25 million in expenses related to the transaction or may be obligated to pay a breakup fee to Energy Transfer of $54.5 million. If the merger agreement is terminated, the breakup fee required to be paid, if any, by SemGroup

 

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under the merger agreement may require SemGroup to seek loans or borrow amounts to enable it to pay these amounts to Energy Transfer. In either case, payment of these amounts would reduce the cash SemGroup has available for operations, dividends or other general corporate purposes. See “The Merger Agreement – Breakup Fee and Energy Transfer Expenses.”

The failure to successfully combine the businesses of Energy Transfer and SemGroup in the expected time frame may adversely affect Energy Transfer’s future results, which may adversely affect the value of the ET common units that SemGroup stockholders would receive in the merger.

The success of the merger will depend, in part, on the ability of Energy Transfer to realize the anticipated benefits from combining the businesses of Energy Transfer and SemGroup. To realize these anticipated benefits, Energy Transfer’s and SemGroup’s businesses must be successfully combined. If the combined company is not able to achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual integration may result in additional and unforeseen expenses, which could reduce the anticipated benefits of the merger.

Energy Transfer and SemGroup, including their respective subsidiaries, have operated and, until the completion of the merger, will continue to operate independently. It is possible that the integration process could result in the loss of key employees, as well as the disruption of each company’s ongoing businesses or inconsistencies in their standards, controls, procedures and policies. Any or all of those occurrences could adversely affect the combined company’s ability to maintain relationships with customers and employees after the merger or to achieve the anticipated benefits of the merger. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Energy Transfer and SemGroup.

The pendency of the merger could materially adversely affect the future business and operations of SemGroup or result in a loss of SemGroup employees.

In connection with the pending merger, it is possible that some customers, suppliers and other persons with whom SemGroup has a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with SemGroup as a result of the merger, which could negatively impact revenues, earnings and cash flows of SemGroup, as well as the market price of shares of SemGroup common stock, regardless of whether the merger is completed. Similarly, current and prospective employees of SemGroup may experience uncertainty about their future roles with Energy Transfer and SemGroup following completion of the merger, which may materially adversely affect the ability of SemGroup to attract and retain key employees.

Failure to complete the merger could negatively affect the stock price of SemGroup and its future businesses and financial results.

If the merger is not completed, the ongoing business of SemGroup may be adversely affected and SemGroup will be subject to several risks and consequences, including the following:

 

   

under the merger agreement, SemGroup may be required, under certain circumstances, to pay Energy Transfer a breakup fee of $54.5 million or Energy Transfer’s expenses up to $27.25 million;

 

   

SemGroup will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees;

 

   

under the merger agreement, SemGroup is subject to certain restrictions on the conduct of its business prior to completing the merger without Energy Transfer’s consent, which may adversely affect its ability to execute certain of its business strategies; and

 

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matters relating to the merger may require substantial commitments of time and resources by SemGroup management, which could otherwise have been devoted to other opportunities that may have been beneficial to SemGroup as an independent company.

In addition, if the merger is not completed, SemGroup may experience negative reactions from the financial markets and from its customers and employees. SemGroup also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against SemGroup to attempt to force it to perform its obligations under the merger agreement.

Pending litigation against Energy Transfer and SemGroup could result in an injunction preventing completion of the merger, the payment of damages in the event the merger is completed and/or may adversely affect the combined company’s business, financial condition or results of operations following the merger.

In connection with the merger, purported stockholders of SemGroup have filed a stockholder class action lawsuit against Energy Transfer, SemGroup, Merger Sub and the SemGroup board of directors in the United States District Court for the District of Delaware. Among other remedies, the plaintiffs seek to enjoin the merger. If a final settlement is not reached, or if a dismissal is not obtained, these lawsuits could prevent or delay completion of the merger and result in substantial costs to Energy Transfer and SemGroup, including any costs associated with the indemnification of directors. Additional lawsuits may be filed against Energy Transfer and/or SemGroup related to the merger. Any litigation relating to the merger could distract Energy Transfer or SemGroup from pursuing the consummation of the merger and other potentially beneficial business opportunities. Further, the defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect the combined company’s business, financial condition or results of operations. See the section titled “Proposal 1: The Merger – Litigation Related to the Merger.”

Tax Risks Related to the Merger

Your exchange of SemGroup common stock for ET common units could be fully taxable in certain circumstances.

In general, a U.S. holder of SemGroup common stock should recognize gain or loss only to the extent that such U.S. holder is treated as exchanging a portion of such U.S. holder’s SemGroup common stock for cash pursuant to the merger. However, the exchange of SemGroup common stock for ET common units pursuant to the merger would be fully taxable for U.S. federal income tax purposes if, immediately after the merger Energy Transfer were characterized, for U.S. federal income tax purposes, as an “investment company.” Energy Transfer is seeking a private letter ruling from the IRS to the effect that, for U.S. federal income tax purposes, Energy Transfer will not be characterized as an “investment company.” For a more detailed discussion, please see “Material U.S. Federal Income Tax Consequences of the Merger.”

Tax Risks Related to Owning ET Common Units Following the Merger

Energy Transfer may engage in transactions that cause you to be subject to taxation in a manner different from other holders of ET common units.

Following the merger, in the event Energy Transfer divests itself of any SemGroup common stock, all or a portion of any gain or loss recognized as a result of a divestiture of such stock may be required to be allocated to former SemGroup stockholders. In addition, a former SemGroup stockholder may also be required to recognize its share of “built-in gain” upon certain distributions by Energy Transfer to that unitholder of other Energy Transfer property (other than money) within seven years following the merger. No special distributions will be made to the former SemGroup stockholders with respect to any tax liability for such transactions. Please see “Material U.S. Federal Income Tax Consequences of ET Common Unit Ownership – Tax Consequences of Unit Ownership – Allocation of Income, Gain, Loss and Deduction.”

 

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Other Risks

Following the merger, in addition to the risks described above, holders of ET common units, for U.S. federal income tax purposes, will continue to be subject to the risks that holders of ET common units are currently subject to, which are described in Energy Transfer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as updated by any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, all of which are filed with the SEC and incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” for the location of information incorporated by reference in this proxy statement/prospectus.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This document includes “forward-looking statements” about Energy Transfer and SemGroup that are subject to risks and uncertainties. All statements other than statements of historical fact included in this document are forward-looking statements. Statements using words such as “anticipate,” “believe,” “intend,” “project,” “plan,” “expect,” “continue,” “estimate,” “goal,” “forecast,” “may,” “will,” or similar expressions help identify forward-looking statements.

Except for their respective obligations to disclose material information under U.S. federal securities laws, neither Energy Transfer nor SemGroup undertakes any obligation to release publicly any revisions to any forward-looking statements, to report events or circumstances after the date of this document, or to report the occurrence of unanticipated events.

Forward-looking statements involve a number of risks and uncertainties, and actual results or events may differ materially from those projected or implied in those statements. Important factors that could cause such differences include, but are not limited to:

 

   

the expected timing of closing the merger and benefits of the merger;

 

   

the matters described in the section titled “Risk Factors;”

 

   

cyclical or other downturns in demand;

 

   

adverse changes in economic or industry conditions;

 

   

changes in the securities and capital markets;

 

   

changes affecting customers or suppliers;

 

   

changes in laws or regulations, third-party relations and approvals, and decisions of courts, regulators and/or governmental bodies;

 

   

effects of competition;

 

   

developments in and losses resulting from claims and litigation;

 

   

changes in operating conditions and costs;

 

   

the extent of Energy Transfer’s or SemGroup’s ability to achieve its operational and financial goals and initiatives; and

 

   

Energy Transfer’s continued taxation as a partnership and not as a corporation.

In addition, the acquisition of SemGroup by Energy Transfer is subject to the satisfaction of certain conditions and the absence of events that could give rise to the termination of the merger agreement, the possibility that the merger does not close, risks that the proposed acquisition disrupts current plans and operations and business relationships or poses difficulties in attracting or retaining employees, the possibility that the costs or difficulties related to the integration of the two companies will be greater than expected and the possibility that the anticipated benefits from the merger cannot or will not be fully realized.

All written and oral forward-looking statements attributable to Energy Transfer or SemGroup or persons acting on behalf of Energy Transfer or SemGroup are expressly qualified in their entirety by such factors. For additional information with respect to these factors, please see the section entitled “Where You Can Find More Information.”

 

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INFORMATION ABOUT THE COMPANIES

Energy Transfer LP

Energy Transfer is a Delaware limited partnership with common units traded on the NYSE under the symbol “ET.” Energy Transfer owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with a strategic footprint in all of the major domestic production basins. Energy Transfer, through its ownership of Energy Transfer Operating, L.P., also owns Lake Charles LNG Company, as well as limited partner interests and the general partner interests in Sunoco LP and USA Compression Partners, LP, both of which are publicly traded master limited partnerships engaged in diversified energy-related services.

The activities in which Energy Transfer is engaged, all of which are in the United States, are as follows:

 

   

Natural gas operations, including the following:

 

   

natural gas midstream and intrastate transportation and storage; and

 

   

interstate natural gas transportation services.

 

   

Crude oil, NGL and refined products transportation, terminalling services and acquisition and marketing activities, as well as NGL storage and fractionation services.

Energy Transfer’s executive offices are located at 8111 Westchester Drive, Suite 600, Dallas, Texas 75225, and its telephone number is (214) 981-0700.

SemGroup Corporation

SemGroup is a Delaware corporation with common stock traded on the NYSE under the symbol “SEMG.” SemGroup moves energy across North America through a network of pipelines, processing plants, refinery-connected storage facilities and deep-water marine terminals with import and export capabilities. SemGroup serves as a versatile connection between upstream oil and gas producers and downstream refiners and end users. Key areas of operation and growth include western Canada, the Mid-Continent and the Gulf Coast. SemGroup is committed to safe, environmentally sound operations.

SemGroup’s key operations include:

 

   

transporting, storing, terminalling and trucking crude oil;

 

   

gathering, compressing, treating, processing and selling natural gas;

 

   

storing and terminalling refined petroleum products; and

 

   

operating a world-class marine terminal strategically located on the Houston Ship Channel.

SemGroup’s operations are conducted directly and indirectly through its primary operating segments: U.S. Liquids, U.S. Gas and Canada. U.S. Liquids includes SemGroup’s U.S. crude oil operations, including the Houston Fuel Oil Terminal Company. U.S. Gas contains the SemGas segment. Canada includes the operations of the SemCAMS segment.

SemGroup’s principal executive offices are located at Two Warren Place, 6120 South Yale Avenue, Suite 1500, Tulsa, Oklahoma 74136, and its telephone number is (918) 524-8100.

Nautilus Merger Sub LLC

Merger Sub is a Delaware limited liability company and a wholly owned subsidiary of Energy Transfer. Merger Sub was formed on September 12, 2019 solely for the purpose of consummating the merger and has no operating assets. Merger Sub has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the merger agreement.

Merger Sub’s principal executive offices are located at 8111 Westchester Drive, Suite 600, Dallas, Texas 75225, and its telephone number is (214) 981-0700.

 

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SPECIAL MEETING OF SEMGROUP STOCKHOLDERS

This section contains information about the special meeting of SemGroup stockholders that has been called, among other reasons, to approve and adopt the merger agreement and the transactions contemplated thereby and to approve, on an advisory (non-binding) basis, specified compensation that may be received by SemGroup’s named executive officers in connection with the merger. This document is being furnished to SemGroup stockholders in connection with the solicitation of proxies by the SemGroup board of directors to be used at the special meeting. SemGroup is first mailing this document and enclosed proxy card on or about October 31, 2019.

Date, Time and Place of the Special Meeting

A special meeting of SemGroup stockholders will be held at Two Warren Place, 5th Floor, 6120 South Yale Avenue, Tulsa, Oklahoma 74136 on December 4, 2019, starting at 9:00 a.m., local time (unless it is adjourned or postponed to a later date).

Admission to the Special Meeting

All SemGroup stockholders are invited to attend the special meeting. Persons who are not SemGroup stockholders may attend only if invited by SemGroup. If you own shares in “street” or “nominee” name, you must bring proof of ownership (e.g., a current broker’s statement) in order to be admitted to the special meeting.

Purpose of the Special Meeting

 

   

Proposal 1: To consider and vote upon a proposal to approve and adopt the merger agreement and the transactions contemplated thereby;

 

   

Proposal 2: To consider and cast an advisory (non-binding) vote on specified compensation that may be received by SemGroup’s named executive officers in connection with the merger;

 

   

Proposal 3: To consider and vote upon any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the proposal to approve and adopt the merger agreement and the transactions contemplated thereby; and

 

   

Proposal 4: To transact such other business as may properly come before the special meeting and any adjournment or postponement thereof (at the present time, SemGroup knows of no other matters that will be presented for consideration at the special meeting).

Recommendation of the SemGroup Board of Directors

The SemGroup board of directors has unanimously determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, SemGroup and its stockholders, and recommends that the SemGroup stockholders vote to approve and adopt the merger agreement and the transactions contemplated thereby, including the merger. In addition, the SemGroup board of directors recommends that the SemGroup stockholders vote to approve, on an advisory (non-binding) basis, specified compensation that may be received by SemGroup’s named executive officers in connection with the merger and to approve any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the merger proposal.

SemGroup stockholders should carefully read this document in its entirety for more detailed information concerning the merger agreement and the transactions contemplated thereby. In particular, SemGroup stockholders are directed to the merger agreement, which is attached hereto as Annex A.

Record Date; Stockholders Entitled to Vote; Outstanding Shares Held

The SemGroup board of directors has designated the close of business on October 25, 2019 as the “record date” that will determine the stockholders who are entitled to receive notice of, and to vote at, the special meeting

 

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or at any adjournment or postponement of the special meeting. Only holders of record at the close of business on the record date are entitled to vote at the special meeting. At the close of business on the record date, there were (i) 79,606,089 shares of SemGroup common stock outstanding, held by approximately 2,239 holders of record and (ii) 350,000 shares of SemGroup preferred stock outstanding, held by approximately seven holders of record. Each holder of shares of SemGroup common stock is entitled to one vote per share of SemGroup common stock held. Each holder of shares of SemGroup preferred stock is entitled to a number of votes equal to the number of votes such holder would have had if all shares of SemGroup preferred stock held by such holder had been converted into shares of SemGroup common stock as of the record date. As of the record date, the outstanding shares of SemGroup preferred stock were convertible into an aggregate of 11,987,820 shares of SemGroup common stock and such amount represents an equal number of votes that may be cast at the special meeting in person or by proxy by holders of such stock. There are no other classes of SemGroup stock outstanding. Accordingly, the total number of shares entitled to vote at the special meeting, giving effect to the SemGroup preferred stock, on an as-converted basis, is 91,593,909.

Quorum

A “quorum” shall consist of the holders of record of a majority of the issued and outstanding shares of SemGroup common stock and shares of SemGroup preferred stock, on an as-converted basis, entitled to vote at the special meeting, present in person or by proxy. There must be a quorum for the special meeting to be held. If you submit a timely, properly executed proxy or voting instruction card, then you will be considered part of the quorum so long as your shares are voted on at least one item of business, other than a procedural motion.

Failure to Vote; Abstentions

The failure of any SemGroup stockholder to submit a vote (e.g., by not submitting a proxy or not voting in person) and any abstention by a SemGroup stockholder will have the same effect as a vote “AGAINST” the merger proposal. In addition, abstentions are counted as shares present and entitled to vote and will have the same effect as votes “AGAINST” the advisory compensation proposal and the adjournment proposal.

Broker Non-Votes

Under the rules that govern brokers who have record ownership of shares that they hold in street name for their clients who are the beneficial owners of the shares, brokers have the discretion to vote such shares on routine matters, but not on non-routine matters absent direction from the stockholder, including the merger proposal, the advisory compensation proposal and the adjournment proposal. Broker non-votes occur when shares held by a broker are not voted with respect to a proposal because (1) the broker has not received voting instructions from the beneficial owner, and (2) the broker lacks the authority to vote the shares at his or her discretion. Because approval of the merger proposal requires the affirmative vote of at least a majority of the outstanding shares of SemGroup common stock, and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon at the special meeting, a broker non-vote will have the same effect as a vote “AGAINST” approval of the merger proposal. Because approval of each of the advisory compensation proposal and the adjournment proposal requires the affirmative vote of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting, a broker non-vote will have no effect on the approval of the advisory compensation proposal or the adjournment proposal.

Required Vote

The merger proposal must be approved and adopted by the affirmative vote of the holders of a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon at the special meeting. Abstentions and broker non-votes will be the equivalent of a vote “AGAINST” the merger proposal.

 

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Approval of the advisory vote on the advisory compensation proposal requires the affirmative vote of the holders of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting. Abstentions will be the equivalent of a vote “AGAINST” the advisory compensation proposal. Broker non-votes will have no effect on the adoption of the advisory compensation proposal.

Approval of the adjournment proposal the affirmative vote of the holders of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting. Abstentions will be the equivalent of a vote “AGAINST” a proposal to adjourn the special meeting. Broker non-votes will have no effect on the adoption of the adjournment proposal.

Shares Beneficially Owned by Directors and Executive Officers

The members of the SemGroup board of directors and executive officers of SemGroup beneficially owned an aggregate of 846,232 shares of SemGroup common stock as of October 25, 2019. These shares represent in total approximately 1% of the total voting power of SemGroup’s voting securities on an as-converted basis.

Proxies

You may vote in person by ballot at the special meeting or by submitting a proxy. Please submit your proxy even if you plan to attend the special meeting. If you attend the special meeting, you may vote by ballot, thereby canceling any proxy previously given.

Voting instructions are included on your proxy card. If you properly give your proxy and submit it to SemGroup in time for it to be voted, one of the individuals named as your proxy will vote your shares as you have directed. You may vote for or against the proposals or abstain from voting.

Shares Held in Street Name

If you hold shares of SemGroup common stock in the name of a bank, broker or other nominee, you should follow the instructions provided by your bank, broker or nominee when voting your shares of SemGroup common stock or when granting or revoking a proxy.

Absent specific instructions from you, your broker is not empowered to vote your shares of SemGroup common stock at the special meeting. The shares of SemGroup common stock not voted because brokers lack power to vote them without instructions are also known as “broker non-votes.”

How to Submit Your Proxy

By Mail: To submit your proxy by mail, simply mark your proxy, date and sign it, and if you are a record holder of shares of SemGroup common stock or SemGroup preferred stock, return it in the postage-paid envelope provided. If the envelope is missing, please address your completed proxy card to the address on your proxy card. If you are a beneficial owner, please refer to your instruction card or the information provided to you by your bank, broker, custodian or record holder.

By Telephone: If you are a SemGroup stockholder of record, you can submit your proxy by telephone by calling the toll-free telephone number on your proxy card. Telephone voting is available 24 hours a day and will be accessible until 12:00 a.m. Eastern time on December 3, 2019. Easy-to-follow voice prompts allow you to submit your proxy and confirm that your instructions have been properly recorded. If you are a beneficial owner, please refer to your instruction card or the information provided by your bank, broker, custodian or record holder for information on whether telephone voting is offered. If you submit your proxy by telephone you do not need to return your proxy card. If you are located outside the United States, Canada and Puerto Rico, please read your proxy card or other materials for additional instructions.

 

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By Internet: You can also choose to submit your proxy on the internet. If you are a SemGroup stockholder of record, the website for internet voting is on your proxy card. Internet voting is available 24 hours a day and will be accessible until 12:00 a.m. Eastern time on December 3, 2019. If you are a beneficial owner, please refer to your instruction card or the information provided by your bank, broker, custodian or record holder for information on whether internet voting is offered. As with telephone voting, you will be given the opportunity to confirm that your instructions have been properly recorded. If you submit your proxy on the internet, you do not need to return your proxy card.

In Person: If you are a SemGroup stockholder of record, you may vote by ballot at the special meeting or send a representative with an acceptable proxy that has been signed and dated. If your shares of SemGroup common stock or SemGroup preferred stock are held in the name of a bank, broker, custodian or other nominee, you must obtain a proxy, executed in your favor, from the holder of record, to be able to vote at the special meeting.

Revoking Your Proxy

If you submit a completed proxy card with instructions on how to vote your shares of SemGroup common stock or SemGroup preferred stock and then wish to revoke your instructions, you should submit a notice of revocation to the Secretary of SemGroup as soon as possible. You may revoke your proxy by internet, telephone or mail at any time before it is voted by:

 

   

timely delivery of a valid, later-dated proxy or timely submission of a later-dated proxy by telephone or internet;

 

   

written notice to the Secretary of SemGroup before the special meeting that you have revoked your proxy; or

 

   

voting by ballot at the special meeting.

Adjournments and Postponements

Any adjournment of the special meeting, if necessary, to solicit additional proxies in favor of adjournment proposal requires the affirmative vote of the holders of a majority of the shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class, entitled to vote thereon and present in person or represented by proxy at the special meeting. Unless the SemGroup board of directors fixes a new record date for the adjourned special meeting, or law otherwise requires, no notice of the adjourned special meeting will be given so long as the time and place to which the special meeting is adjourned are announced at the special meeting adjourning and, at the adjourned special meeting only such business is transacted as might have been transacted at the original special meeting.

In addition, at any time prior to convening the special meeting, the special meeting may be postponed without the approval of SemGroup stockholders. If postponed, SemGroup will publicly announce the new meeting date. Similar to adjournments, any postponement of the special meeting for the purpose of soliciting additional proxies will allow SemGroup stockholders who have already sent in their proxies to revoke them at any time prior to their use.

Inspector of Election

The SemGroup board of directors has appointed a representative of Computershare Trust Company, N.A. to act as the inspector of election at the special meeting.

Proxy Solicitation

Energy Transfer and SemGroup will each bear their own costs related to the merger and the retention of any information agent or other service provider in connection with the merger, except for the expenses incurred in

 

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connection with the filing, printing and mailing of this document, which will be shared equally. This proxy solicitation is being made by SemGroup on behalf of the SemGroup board of directors. SemGroup has hired D.F. King & Co., Inc. to assist in the solicitation of proxies. In addition to this mailing, proxies may be solicited by directors, officers or employees of SemGroup or its affiliates in person or by telephone or electronic transmission. None of the directors, officers or employees will be directly compensated for such services.

Householding of Special Meeting Materials

Unless SemGroup has received contrary instructions, SemGroup may send a single copy of this proxy statement/prospectus to any household at which two or more stockholders reside if SemGroup believes the stockholders are members of the same family. Each stockholder in the household will continue to receive a separate proxy card. This process, known as “householding,” reduces the volume of duplicate information received at your household and helps to reduce SemGroup’s expenses.

Other Business

The SemGroup board of directors is not currently aware of any business to be acted upon at the special meeting other than the matters described in this document. If, however, other matters are properly brought before the special meeting, the persons appointed as proxies will have discretion to vote or act on those matters as in their judgment is in the best interest of SemGroup and its stockholders.

 

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PROPOSAL 1: THE MERGER

Effects of the Merger

Upon satisfaction or waiver of the conditions to closing in the merger agreement, on the closing date, Merger Sub, a wholly owned subsidiary of Energy Transfer formed for the purpose of effecting the merger, will merge with and into SemGroup, and SemGroup will be the surviving company in the merger and become a direct wholly owned subsidiary of Energy Transfer. At the effective time, each share of SemGroup common stock issued and outstanding immediately prior to the effective time (other than shares (w) held by SemGroup in treasury, (x) held directly by Energy Transfer or Merger Sub, (y) held by subsidiaries of the parties or (z) held by any holder who properly exercises and perfects appraisal rights in respect of such shares) will be cancelled and converted into the right to receive (i) $6.80 in cash, without interest, and (ii) 0.7275 of an ET common unit (collectively, the “merger consideration”). In addition, all shares of SemGroup preferred stock outstanding as of immediately prior to the effective time will be redeemed by SemGroup at a cash purchase price per share equal to 101% of the liquidation preference. SemGroup will take all actions as may be necessary so that at the effective time, each outstanding award of restricted share units, restricted stock awards and performance share units of SemGroup will be treated as described in “The Merger Agreement – SemGroup Employee Equity-Based Awards.”

Background of the Merger

The terms of the merger are the result of arm’s length negotiations between Energy Transfer and SemGroup. The following is a summary of the events leading up to the signing of the merger agreement and the key meetings, negotiations, discussions and actions by and between Energy Transfer and SemGroup and their respective advisors that preceded the public announcement of the acquisition.

As part of SemGroup’s ongoing strategic planning process, the SemGroup board of directors, together with SemGroup’s executive management team, regularly reviews and assesses SemGroup’s long-term strategic plans and goals, opportunities, overall industry trends, the competitive environment in which SemGroup operates and SemGroup’s short- and long-term performance. As part of these reviews, the SemGroup board of directors, with the assistance of SemGroup’s advisors, considered whether various strategic actions, including business combination transactions and joint venture opportunities, would be in the best interests of SemGroup and would enhance value for SemGroup’s stockholders. Arising out of such a strategic evaluation and in conjunction with the SemGroup board of directors’ ongoing analysis, from March 2019 through the announcement of the transaction, the SemGroup board of directors evaluated the merits of a joint venture opportunity that would involve the contribution by SemGroup of most of its crude oil related assets, including the Houston Fuel Oil Terminal Company assets, in exchange for ownership in a newly formed joint venture and cash (the “proposed joint venture”) with Company A, a large North American oil and gas infrastructure company. As part of such analysis, the SemGroup board of directors also considered whether the pursuit of the transaction might preclude future flexibility or might enhance or detract from the ability to pursue future consolidation or change of control transactions, including the allocation of the SemGroup executive management team’s time and resources to such a transaction in addition to pursuing and executing SemGroup’s strategic growth initiatives and maintaining operational excellence.

On July 12, 2019, representatives of SemGroup received an unsolicited acquisition proposal from Energy Transfer for an aggregate value of $15.56 per share of SemGroup common stock, which represented a 25.0% premium to SemGroup’s then-current trading price. Representatives of SemGroup posted the acquisition proposal to the SemGroup board of directors and the SemGroup board of directors determined to discuss the proposal early the next week.

On July 15, 2019, the SemGroup board of directors convened via telephone for an update meeting including representatives of Jefferies to discuss the proposed joint venture as well as initial impressions of the Energy

 

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Transfer proposal. No financial analysis of the Energy Transfer proposal was presented at that time and Energy Transfer had not yet given an indication of the relative mix of cash and equity consideration at such time. The SemGroup board of directors instructed Jefferies to continue its analysis. Jefferies had previously been retained by SemGroup management and the SemGroup board of directors on January 16, 2019 to act as a financial advisor in connection with the evaluation of various strategic transactions that may arise from time to time, including preliminary discussions regarding a business combination with Company B, an oil and gas gathering and processing company with operations in the United States, which were terminated soon thereafter. The SemGroup board of directors instructed Mr. Carlin Conner, President and Chief Executive Officer of SemGroup, to respond to Mr. Kelcy Warren, Chief Executive Officer and Chairman of the ET board of directors, in order to investigate the Energy Transfer acquisition proposal.

On July 16, 2019, Messrs. Conner and Warren spoke via telephone regarding the acquisition proposal and agreed to meet in Dallas, Texas in August.

On July 17, 2019, the SemGroup board of directors convened again via telephone for an update to discuss Energy Transfer’s proposal as well as certain aspects of the proposed joint venture with Company A.

On August 1, 2019, Mr. Conner met with Mr. Warren in Dallas, Texas to discuss the potential acquisition of SemGroup by Energy Transfer and potential commercial projects between the two companies. Messrs. Conner and Warren, together with Mr. Thomas E. Long who later joined the meeting, discussed several economic and operational factors that may influence Energy Transfer’s and SemGroup’s view of a potential acquisition of SemGroup by Energy Transfer. Messrs. Conner and Warren agreed to discuss further if, after Mr. Conner discussed with the SemGroup board of directors, the SemGroup board of directors determined to further investigate a business combination with Energy Transfer.

On August 14, 2019, the SemGroup board of directors convened again, together with representatives from SemGroup’s executive management team, Jefferies, and Kirkland and Ellis LLP (“Kirkland”), via telephone for a special meeting to discuss Energy Transfer’s proposal as well as the status of the proposed joint venture transaction with Company A. Kirkland had previously been retained by SemGroup management and the SemGroup board of directors in January 2019 to assist in matters relating to a strategic transaction involving Company B. At the meeting, the SemGroup board of directors discussed, among other things, continuing to pursue SemGroup’s corporate strategy, including the proposed joint venture with Company A, in tandem with the evaluation of Energy Transfer’s proposal. At the request of the SemGroup board of directors, Jefferies presented its financial analysis of the Energy Transfer proposal based on publicly-available information. The SemGroup board of directors authorized Mr. Conner to further discuss the proposed transaction with Mr. Warren.

On August 19, 2019, Mr. Conner and Mr. Warren spoke via telephone to discuss, among other things, the economic terms of Energy Transfer’s July 12 proposal.

On August 20, 2019, Company A revised the terms of its proposal by reducing the implied value of SemGroup’s assets and modified the structure of the proposed joint venture. Representatives of SemGroup reported Company A’s revised terms of the proposed joint venture to the SemGroup board of directors that same day. Mr. Thomas R. McDaniel instructed representatives of SemGroup’s executive management team and Jefferies to prepare a revised analysis of the proposed joint venture transaction for the SemGroup board of directors to review at a special meeting of the SemGroup board of directors later in August.

That same week, on August 22, 2019, Company C, a private equity firm, reported that Company C had met with a stockholder of SemGroup and, following such discussions, proposed to Mr. Conner that Company C would be willing to acquire SemGroup in a take-private transaction for an indicative value of $16.50 per share of SemGroup common stock, subject to confirmation from Company C’s investment committee. That same day, Mr. Conner reported Company C’s proposal to the SemGroup board of directors. The SemGroup board of directors determined to further evaluate the proposals from Energy Transfer and, if and when received, Company C together with the revised terms of the proposed joint venture with Company A, and other strategic options.

 

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On August 23, 2019, Energy Transfer submitted a revised acquisition proposal that improved Energy Transfer’s initial, July 12, 2019 proposal. Energy Transfer proposed that it would acquire SemGroup for $17.00 per share of SemGroup common stock, which represented a 78.9% premium to SemGroup’s then-current trading price, and that Energy Transfer and SemGroup would enter into a confidentiality agreement to commence sharing certain commercial and legal information. That same day, SemGroup and Energy Transfer executed a confidentiality agreement and began to share certain confidential commercial and legal information.

On August 25, 2019, SemGroup executed a confidentiality agreement with Company C. SemGroup shared certain confidential information with Company C and at the request of the SemGroup board of directors, representatives of Jefferies requested that Company C confirm its oral proposal from August 22.

Each confidentiality and standstill agreement entered into by SemGroup that is described in this section contained customary “standstill” and “don’t ask, don’t waive” provisions, subject to a customary “fall away” provision, which provided that the restrictions in the “standstill” would terminate if, among other things, SemGroup entered into a business combination agreement with a person or group that would result in SemGroup’s common equity holders owning less than 50% of the common or equivalent equity of the surviving entity resulting from such business combination. These standstill provisions also did not prohibit the counterparty from making a non-public proposal to SemGroup.

On August 26, 2019, SemGroup received a non-binding written acquisition proposal from Energy Transfer that clarified certain transaction details including (i) that the consideration would consist of 60% equity and 40% cash, with the equity component reflecting an exchange ratio of 0.7275 Energy Transfer common units per share of SemGroup common stock, and (ii) the assumed redemption of SemGroup preferred stock at 101% premium of the liquidation preference.

On August 27, 2019, at a special meeting, the SemGroup board of directors, together with representatives of the SemGroup executive management team, Kirkland and Jefferies, evaluated Energy Transfer’s revised acquisition proposal. The SemGroup board of directors discussed its view of the strategic alternatives available to SemGroup at the time, including soliciting additional offers, remaining a standalone company, and the timing of evaluating and responding to proposals. Thereafter, the SemGroup board of directors determined that it would not agree to exclusivity with any counterparty at such time. Further, the SemGroup board of directors instructed representatives of Jefferies to proceed with a market check process in order to seek additional indications of value for SemGroup from other counterparties. The SemGroup board of directors also discussed the appropriate framework for evaluating potential offers from different counterparties, including strategic buyers and private equity firms, as well as the potential value achievable from entering into the proposed joint venture transaction with Company A. That same day, representatives of Jefferies contacted a group of strategic and financial counterparties to gauge interest in a strategic transaction, including Company D, a publicly-traded midstream company with operations in the United States; Company E, a publicly-traded midstream company with operations in the United States and Canada; Company F, a private equity firm with a diverse investment profile; Company G, a private equity firm with an energy-industry investment focus; and Company H, a private equity fund with an infrastructure investment focus. That same day, Energy Transfer sent SemGroup a proposed exclusivity agreement.

On August 28, 2019, an energy industry focused private equity firm, Company I, requested the opportunity to submit a proposal with respect to a take-private, or similar, acquisition of SemGroup. Representatives of Jefferies encouraged Company I to do so, though no proposal was ultimately submitted. That same day and acting at the instruction of the SemGroup board of directors, representatives of Jefferies informed representatives of Energy Transfer that SemGroup would not agree to negotiate on an exclusive basis at this time and the parties agreed to a meeting on September 3, 2019 in Dallas, Texas.

On August 29, 2019, Company G submitted a proposal to acquire SemGroup in a take-private transaction for $15.00 per share of SemGroup common stock, which represented a 73.0% premium to SemGroup’s then-

 

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current trading price and proposed the redemption of SemGroup preferred stock at 101% of the liquidation preference. Company G also proposed that SemGroup and Company G enter into exclusive negotiations for 60 days. That same day, Company H indicated that, after finishing its initial review of publicly-available information regarding SemGroup, it would not submit a proposal.

On August 30, 2019, Company C informed representatives of Jefferies that Company C did not receive approval from its investment committee in order to affirm its August 22 oral proposal.

On September 3, 2019, representatives of SemGroup, including members of the SemGroup executive management team, Jefferies, Kirkland and Mr. McDaniel, met with representatives of Energy Transfer, including members of Energy Transfer’s executive management team, BofA Securities, Inc. (“BofA Merrill Lynch”), financial advisor to Energy Transfer, and Latham and Watkins LLP (“Latham”), legal counsel to Energy Transfer, in Dallas, Texas to discuss commercial and financial due diligence matters. Materials were prepared by each respective company and their advisors in order to facilitate the due diligence discussions.

On September 4, 2019, Latham sent a draft of the merger agreement to Kirkland. The draft contemplated, among other things: (i) a reverse triangular merger that would be partially tax-free to SemGroup’s stockholders; (ii) non-solicitation provisions that would allow the SemGroup board of directors, under certain circumstances, to change its recommendation in the event of a superior proposal or intervening event and to terminate the merger agreement to accept a superior proposal; and (iii) an unspecified breakup fee payable by SemGroup in the event the agreement was terminated by SemGroup to accept a superior proposal, or by Energy Transfer following a change in recommendation, or by SemGroup in connection with the entry into an alternative proposal. Members of SemGroup management and representatives of Kirkland discussed and evaluated the terms of the draft merger agreement over the following days. That same day, Energy Transfer provided SemGroup with a due diligence request list.

On September 5, 2019, Company D submitted to Jefferies a non-binding proposal regarding the acquisition of all of the outstanding SemGroup common stock in exchange for Company D stock valued at approximately $12.00 per share, which represented a 37.5% premium to SemGroup’s then-current trading price. Company D’s proposal did not specify treatment of the SemGroup preferred stock. Thereafter, there were no further substantive communications with Company D regarding a potential strategic transaction between SemGroup and Company D.

That same day, SemGroup populated a virtual data room (“VDR”) as well as a physical data room for due diligence purposes. Shortly thereafter, SemGroup opened access to its VDR to Energy Transfer and its legal and financial advisors.

On September 6, 2019, SemGroup received a proposal from Company E offering to acquire SemGroup for an indicative value of $13.50 per share of SemGroup common stock, which represented a 53.1% premium to SemGroup’s then-current trading price but did not indicate whether such consideration would be cash or stock at such time nor the treatment of SemGroup preferred stock.

That same day, SemGroup received a proposal from Company F offering to acquire SemGroup in a take-private transaction (i) for consideration in the range of $13.50 to $15.00 per share of SemGroup common stock, which represented a 53 to 70% premium to SemGroup’s then-current trading price, (ii) that contemplated the redemption of SemGroup preferred stock at 101% of the liquidation preference, and (iii) proposed that SemGroup and Company F enter into exclusive negotiations through October 15, 2019 in furtherance thereof.

That same day, representatives from each of Energy Transfer’s and SemGroup’s executive management teams, Jefferies, Kirkland, BofA Merrill Lynch, and Latham convened via teleconference to participate in due diligence sessions regarding, among other things, human resources and environmental, health and safety matters. The next day, the same group convened via telephone to discuss tax due diligence matters.

 

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Throughout the market check process, representatives of SemGroup and Jefferies posted to the SemGroup board of directors each of the proposals, and declinations to submit any such proposal, to the SemGroup board of directors in substantially real time. The SemGroup board of directors agreed to refrain from an in-depth discussion on any such matters until the SemGroup board of directors convened to evaluate the preliminary results of the market check process.

On September 8, 2019, the SemGroup board of directors held a special meeting and invited representatives from each of SemGroup’s executive management team, Jefferies, and Kirkland to attend. At this meeting, representatives of Jefferies presented, and the SemGroup board of directors reviewed, the preliminary outcome of the market check process and the financial analyses related to the proposals received to date. The SemGroup board of directors decided to (i) pursue negotiation of a definitive acquisition agreement with Energy Transfer on a non-exclusive basis and (ii) provide Company A with the opportunity to make a proposal to acquire SemGroup for additional value or to improve the terms of the proposed joint venture transaction. The SemGroup board of directors authorized Jefferies and Kirkland to continue to hold preliminary meetings and share information under confidentiality and standstill agreements with these and other potential parties to a strategic combination. In addition, the SemGroup board of directors asked to be kept informed of any additional approaches by potential strategic counterparties on a substantially concurrent basis. That same day, representatives of Jefferies contacted Company A to advise per the SemGroup board of directors’ instruction. Later that same day, representatives from each of Energy Transfer’s and SemGroup’s executive management teams, Jefferies, Kirkland, BofA Merrill Lynch, and Latham convened via teleconference to participate in a legal due diligence session.

On September 9, 2019, a large, publicly-traded infrastructure company, Company J, requested from representatives of Jefferies the opportunity to submit a proposal with respect to an acquisition transaction of SemGroup. The representatives of Jefferies encouraged the representatives of Company J to do so. That same day, Messrs. McDaniel and Warren discussed on the phone Energy Transfer’s strategic rationale regarding integration of the SemGroup assets into Energy Transfer’s business together with Energy Transfer’s succession planning strategy.

On September 10, 2019, SemGroup executed a confidentiality agreement with Company E under substantially similar terms as the other confidentiality agreements except that the standstill provision also obligated SemGroup to refrain from solicitation activities in respect of Company E securities. That same day, representatives from each of Energy Transfer’s and SemGroup’s executive management teams, Jefferies, Kirkland, BofA Merrill Lynch, and Latham convened via teleconference to discuss additional commercial due diligence matters. After such discussions, representatives of Energy Transfer confirmed its acquisition proposal of $6.80 in cash and 0.7275 of an ET common unit per share of SemGroup common stock, subject to satisfactory completion of its confirmatory due diligence efforts. Representatives of Jefferies contacted representatives of each of Company E, Company F and Company G and encouraged them to increase their respective offers.

That same evening, Kirkland returned a draft of the merger agreement to Latham reflecting, among other things, (i) broader operational discretion during the pendency of the acquisition transaction in accordance with SemGroup’s fiscal budget and capital expenditure plan, (ii) revisions to certain employee compensation matters, including that SemGroup’s performance share units would vest at target at closing, (iii) a “hell-or-high-water” standard in respect of clearance under United States anti-competition laws, (iv) covenants in respect of Energy Transfer’s obligation to maintain an office in the Tulsa, Oklahoma metropolitan area for two years after closing and to maintain SemGroup’s charitable giving efforts, and (v) a proposed breakup fee equal to 2% of the equity value of SemGroup.

On September 11, 2019 and in response to Jefferies’ encouragement to revise the terms of the proposed joint venture, Company A proposed a transaction that would involve the contribution by SemGroup of most of its crude oil related assets, including the Houston Fuel Oil Terminal Company assets, in exchange for 50% ownership in a newly formed joint venture and cash. These terms reflected a lower ownership percentage and less cash than had been previously proposed by Company A. The SemGroup board of directors received the revised proposed joint venture terms that same day and, in the interest of comparing each potential counterparty’s

 

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best and final proposals, the SemGroup board of directors requested that representatives of Jefferies solicit additional merger consideration from Energy Transfer. On that same day, representatives of Jefferies conducted a financial due diligence session with representatives of Energy Transfer. On September 12, 2019, SemGroup executed a confidentiality agreement with each of Company F and Company G. That same day, Company J communicated to representatives of Jefferies that it declined to submit a proposal with respect to the acquisition of SemGroup, and Company E increased its proposed valuation to $14.25 per share of SemGroup common stock, which represented a 46.2% premium to SemGroup’s then-current trading price. That same day, representatives of Jefferies contacted representatives of Energy Transfer to negotiate for additional merger consideration. Energy Transfer declined to increase its offer of September 10th but reaffirmed its acquisition proposal of $6.80 in cash and 0.7275 an ET common unit per share of SemGroup common stock.

On September 12, 2019, Latham returned a draft of the merger agreement to Kirkland. The draft reflected, among other things, a breakup fee equal to 6% of the equity value of SemGroup, certain carve-outs and exclusions to the “hell-or-high-water” provision and reserved comment in respect of certain employee compensation matters pending additional information regarding the treatment thereof.

On September 13, 2019, in discussions between representatives of Jefferies and the applicable company, Company F indicated that, subject to incremental due diligence, it would be positioned to offer consideration to SemGroup’s stockholders at the high end of its September 6 proposal, while Company G indicated that it would not improve the terms of its August 29 proposal.

Throughout the balance of the market check process, representatives of Jefferies and SemGroup’s executive management team informed the SemGroup board of directors of the status of discussions. At no point prior to announcement of the proposed acquisition transaction with Energy Transfer did representatives of Jefferies disclose to a potential counterparty that the market check process had completed or otherwise preclude an increased proposal. As in the preliminary stages of the market check process, the SemGroup board of directors refrained from making decisions until the SemGroup board of directors had the benefit of the full results of the market check process, and the legal and financial analysis thereof, and any revisions to the terms of the proposed joint venture with Company A.

On September 13, 2019, the SemGroup board of directors convened telephonically to discuss the status of the market check process as well as the definitive documentation with Energy Transfer. Representatives of Jefferies (i) summarized that the market check process was unable to generate a higher valuation and that Energy Transfer’s offer, as delineated on September 10, 2019, remained the proposal that would generate the highest value to stockholders, (ii) summarized that SemGroup received indications of interest from Company D for $12.00 per share, Company E for $14.25 per share, Company F for $13.50 to $15.00 per share, Company G for $15.00 per share, and Energy Transfer for an aggregate value of $17.00 per share, and (iii) disclosed de minimis conflicts of both Jefferies and members of the deal team, which the SemGroup board of directors determined to be immaterial both individually and in the aggregate. Representatives of Jefferies discussed various aspects of the potential transaction, including, without limitation, (w) a situation update and a summary of key transaction terms proposed by each potential counterparty that submitted a proposal, (x) an overview and sensitivity analysis of valuation assumptions in respect of Energy Transfer’s proposal, (y) an overview of the valuation analyses of Energy Transfer and SemGroup, followed by detail regarding public market trading multiples, discounted cash flow analyses, and (z) a comparison of broker research target price estimates for ET and SemGroup. The SemGroup board of directors discussed the merits of the transaction and the financial analyses provided by Jefferies, together with the value to SemGroup’s stockholder expected to be achieved if the transaction were consummated. At the request of Mr. McDaniel, Kirkland reiterated the SemGroup board of directors’ fiduciary duties in respect of its consideration of a strategic transaction of this nature and discussed the timing of the proposed acquisition transaction with Energy Transfer. Kirkland also summarized the status of negotiations with Energy Transfer with respect to the merger agreement, including, (a) a proposed private letter ruling regarding the partially tax-free nature of the transaction, (b) treatment of the SemGroup preferred stock in compliance with the terms of the certificate of designations governing the terms thereof, (c) SemGroup’s non-solicitation obligations, including the prohibition against SemGroup soliciting an acquisition proposal during the pendency

 

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of the merger, (d) the break-up fee, (e) the “hell-or-high-water” standard and burden of risk in respect of clearance under United States anti-competition laws, and (f) the negative operating covenants during the pendency of the merger, including in respect of employee retention matters and charitable giving commitments.

Throughout the day on September 14, 2019, Energy Transfer and SemGroup agreed on the remaining key terms with respect to the merger agreement, including the treatment of the SemGroup preferred stock, certain covenants in respect of the interim operating period, the “hell-or-high-water” provision, the value of the breakup fee and expense reimbursement. Representatives of each of Kirkland and Latham exchanged drafts of the merger agreement.

Later that evening, Latham provided to representatives of Kirkland and SemGroup, a draft support agreement to be executed by WP SemGroup, the beneficial holder of approximately 85.7% of the SemGroup preferred stock, whereby WP SemGroup would agree to, among other things, vote all of the shares in SemGroup that it owns as of the record date for the SemGroup stockholder meeting (i) in favor of the adoption of the merger agreement, (ii) against any alternative acquisition proposal, and (iii) against any action, agreement, transaction or proposal that is intended, would reasonably be expected or the result of which would reasonably be expected, to materially impede, interfere with, delay, postpone, discourage, frustrate the purposes of or adversely affect the merger or the other transactions contemplated by the merger agreement. In addition, the draft support agreement contemplated that WP SemGroup and SemGroup would amend the Certificate of Designations such that the preferred stockholders could elect to receive cash in an amount equal to 101% of the liquidation preference of the preferred stock in connection with the merger and that WP SemGroup would agree to make such an election.

On September 15, 2019, legal counsel to WP SemGroup returned a draft of the support agreement to Latham reflecting, among other things, revised covenants related to voting and transfer restrictions, and the parties’ termination rights with respect to the support agreement.

Also on September 15, 2019, the ET board of directors held a special meeting to approve the merger, the merger agreement and the related transactions. After discussion, the merger, the merger agreement and the related transactions were unanimously approved and adopted by the ET board of directors.

That same day, the SemGroup board of directors convened a special meeting to discuss the proposed acquisition transaction with Energy Transfer, including the proposed final terms of the merger agreement. Representatives of Kirkland made a presentation to the SemGroup board of directors with respect to various matters, including, without limitation, (i) the board’s fiduciary duties in connection with its consideration of the transaction, (ii) an overview of the key terms of the merger agreement, including the compensation committee’s determination in respect of employee matters, (iii) an overview of the non-solicitation provisions of the merger agreement, (iv) the proposed support agreement by WP SemGroup, majority holder of the SemGroup preferred stock, (v) an illustrative timeline for the transaction from signing to closing, assuming the SemGroup board of directors approved the acquisition transaction, (vi) an update of SemGroup’s legal due diligence efforts, and (vii) a summary of the resolutions to come before the board in connection with the proposed acquisition transaction. Jefferies then provided a fairness presentation and responded to questions from the SemGroup board of directors. Thereafter, Jefferies orally rendered its fairness opinion to the SemGroup board of directors that, as of September 15, 2019, and based upon and subject to the assumptions made and limitations to be set forth in the opinion, the merger consideration to be received by the holders of SemGroup common stock (other than SemGroup and its affiliates) pursuant to the merger agreement is fair, from a financial point of view. Jefferies subsequently confirmed its fairness opinion in writing. After discussion, the SemGroup board of directors unanimously (i) determined that the merger agreement and transactions contemplated thereby, were advisable and in the best interests of SemGroup and its stockholders, (ii) approved the execution and delivery of the merger agreement, the performance by SemGroup of its covenants and agreements contained therein and the consummation of the transactions contemplated by the merger agreement, (iii) directed that the merger agreement be submitted to SemGroup stockholders at a special meeting of stockholders for its adoption, (iv) resolved to recommend that SemGroup stockholders approve the merger agreement and transactions contemplated thereby, including the merger, and (v) approved other matters related to the merger agreement.

 

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That evening, representatives of each of Kirkland and Latham finalized the merger agreement, disclosure schedules and ancillary documents, following which SemGroup and Energy Transfer executed and delivered the merger agreement that same day. Contemporaneously with the execution of the merger agreement, SemGroup, Energy Transfer and WP SemGroup executed the support agreement and SemGroup executed the Certificate of Designations.

Prior to the opening of U.S. stock markets on September  16, 2019, each of SemGroup and Energy Transfer issued a news release announcing the proposed acquisition transaction.

Recommendation of the SemGroup Board of Directors and Reasons for the Merger

On September 15, 2019, the SemGroup board of directors unanimously (a) determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to, and in the best interests of, SemGroup and its stockholders, (b) approved and declared advisable the merger agreement and the transactions contemplated thereby, including the merger, (c) approved the execution, delivery and performance of the merger agreement and the consummation of the transactions contemplated thereby, including the merger, (d) resolved to recommend adoption of the merger agreement by the SemGroup stockholders, and (e) directed that the merger agreement be submitted to the stockholders of SemGroup for its adoption. The SemGroup board of directors unanimously recommends that holders of SemGroup common stock vote “FOR” the SemGroup merger proposal and “FOR” the SemGroup compensation advisory proposal and “FOR” the SemGroup adjournment proposal.

In the course of reaching its determinations and recommendations, the SemGroup board of directors consulted with SemGroup’s senior management and its outside legal and financial advisors and considered several potentially positive factors that weighed in favor of the merger, including the following (not necessarily presented in order of relative importance):

 

   

Aggregate Value and Composition of the Consideration.

 

   

The fact that the merger consideration has an implied value per share of SemGroup common stock of $17.00, based on the closing price of ET common units as of September 13, 2019 (the last trading day prior to the approval of the merger agreement), and represented a premium of approximately 65.0% to the closing share price of SemGroup common stock on September 13, 2019, which the SemGroup board of directors regarded as an attractive valuation relative to other transactions and peer comparisons;

 

   

The fact that the benefits that SemGroup was able to obtain as a result of negotiations with Energy Transfer, including an increase in the price per share from the time of initial discussions with Energy Transfer to the final implied value of $17.00 per share of SemGroup common stock, and the SemGroup board of directors’ belief that this was the highest price per share that Energy Transfer would be willing to pay;

 

   

The fact that the cash portion of the merger consideration provides SemGroup stockholders with immediate certainty of value while the equity component of the merger consideration offers SemGroup stockholders the opportunity to participate in the future earnings and growth of Energy Transfer;

 

   

The belief that, giving regard to the extensive strategic review process undertaken by SemGroup as part of the market check process, it is unlikely that any other party or parties would be prepared to pay a higher price to acquire SemGroup at this time;

 

   

Synergies and Strategic Considerations

 

   

The belief of the SemGroup board of directors that Energy Transfer’s strategy for immediate integration of the SemGroup assets will maximize return on its asset base;

 

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The belief that the ET board of directors’ familiarity with and understanding of SemGroup’s business, results of operations, financial and market position, and its expectations concerning SemGroup’s future prospects will continue to drive value with respect to SemGroup’s assets;

 

   

The SemGroup board of directors’ ongoing evaluation of strategic alternatives for maximizing shareholder value over the long term, including the SemGroup executive management team’s stand-alone plan or proposed joint venture opportunity, and the potential risks, rewards and uncertainties associated with such alternatives, and the SemGroup board of directors’ belief that the proposed transaction with Energy Transfer was the most attractive option available to SemGroup stockholders;

 

   

The belief that the merger would improve the cost of capital and expand the scale, operational diversity and geographic footprint of the combined company;

 

   

The fact that both Energy Transfer and SemGroup are focused on investing in innovation and technology, and the belief that the combined company will be able to develop and implement technologies more economically and efficiently and deploy those technologies across a broader base of assets;

 

   

The belief that the combined company’s geographic and customer diversification, enhanced assets and stronger financial position will provide for greater access to the capital markets and improve the combined company’s competitiveness going forward;

Opinion of Financial Advisor

 

   

The fact that Jefferies delivered a written opinion that, as of the date of the opinion and based upon and subject to the assumptions made and limitations set forth in the opinion, the merger consideration to be received by the holders of SemGroup common stock (other than SemGroup and its affiliates) pursuant to the merger agreement is fair, from a financial point of view;

Likelihood of Completion of the Transaction

 

   

The belief that the transaction will be consummated prior to June 30, 2020, or September 30, 2020 if extended under certain specified circumstances, due to the limited number and customary nature of the closing conditions as well as Energy Transfer’s affirmative obligation to take, or cause to be taken, any and all steps and undertakings in respect of requirements under applicable regulations so as to enable closing to occur as promptly as practicable;

 

   

The fact that WP SemGroup, which owned 85.7% of the voting power of the SemGroup preferred stock and 11.15% of the voting power of the SemGroup common stock and SemGroup preferred stock on an as-converted basis, voting as a single class, as of September 15, 2019, supports the merger, as evidenced by its execution of the support agreement;

Favorable Terms of the Merger Agreement

 

   

The belief that, in coordination with SemGroup’s legal advisors, the terms of the merger agreement, taken as a whole, including the parties’ representations, warranties, covenants and conditions to closing, and the circumstances under which the merger agreement may be terminated, are reasonable;

 

   

The fact that SemGroup has the ability, under certain circumstances, to provide information to and to engage in discussions or negotiations with a third party that makes an unsolicited acquisition proposal; and

 

   

The fact that the SemGroup board of directors has the ability to terminate the merger agreement under certain circumstances, including to enter into an agreement providing for a superior

 

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proposal, subject to certain conditions (including payment of a breakup fee and an expense reimbursement to Energy Transfer and certain rights of Energy Transfer, giving it the opportunity to match such superior proposal).

The SemGroup board of directors also considered and balanced against the potentially positive factors a number of uncertainties, risks and other countervailing factors in its deliberations concerning the merger and the merger agreement, including the following (not necessarily presented in order of relative importance):

 

   

The fact that the exchange ratio in the merger agreement provides for a fixed number of ET common units, and, as such, SemGroup stockholders cannot be certain at the time of the special meeting of the market value of the merger consideration they will receive, and the possibility that SemGroup stockholders could be adversely affected by a decrease in the trading price of ET common units before the closing of the merger;

 

   

The fact that the market price of SemGroup common stock could be affected by many factors, including: (i) if the merger agreement is terminated, the reason or reasons for such termination and whether such termination resulted from factors adversely affecting SemGroup; (ii) the possibility that, as a result of the termination of the merger agreement, possible acquirers may consider SemGroup to be an unattractive acquisition candidate; and (iii) the possible sale of SemGroup common stock by short-term investors following an announcement that the merger agreement was terminated;

 

   

The risks and contingencies relating to the announcement and pendency of the merger, including the potential for diversion of management and employee attention and the potential effect of the combination on the businesses of both companies and the restrictions on the conduct of SemGroup’s business during the period between the execution of the merger agreement and the completion of the transactions contemplated thereby;

 

   

The potential challenges and difficulties in integrating the operations of SemGroup into Energy Transfer and the risk that the anticipated cost savings and operational and other synergies between the two companies, or other anticipated benefits of the merger, might not be realized, may only be achieved over time or might take longer to realize than expected;

 

   

The fact that SemGroup would be required to (i) pay Energy Transfer a breakup fee of $54.5 million if the SemGroup board of directors were to terminate the merger agreement in order for SemGroup to enter into a superior proposal, should one be made or (ii) reimburse Energy Transfer for up to $27.25 million of its expenses in certain circumstances, including if the SemGroup stockholders do not approve the merger agreement. The SemGroup board of directors believed that the breakup fee and expense reimbursement amount are consistent with comparable transactions and would not be preclusive of other offers. In addition, if the merger agreement is terminated, SemGroup will generally be required to pay its own expenses associated with the transaction;

 

   

The fact that there are restrictions in the merger agreement on SemGroup’s ability to solicit competing bids to acquire it and to entertain other acquisition proposals unless certain conditions are satisfied;

 

   

The fact that the restrictions on SemGroup’s conduct of business prior to completion of the transaction could delay or prevent SemGroup from undertaking business opportunities that may arise or taking other actions with respect to its operations during the pendency of the transaction; and

 

   

The SemGroup board of directors considered risks of the type and nature described under the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” beginning on pages 27 and 21, respectively.

After taking into account the factors set forth above, as well as others, the SemGroup board of directors concluded that the risks, uncertainties, restrictions and potentially negative factors associated with the transaction were outweighed by the potential benefits of the transaction to SemGroup stockholders.

 

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The foregoing discussion of factors considered by SemGroup is not intended to be exhaustive but summarizes the material factors considered by the SemGroup board of directors. In light of the variety of factors considered in connection with their evaluation of the merger agreement and the transaction, SemGroup did not find it practicable to, and did not, quantify, rank or otherwise assign relative weights to the specific factors considered in reaching their determinations and recommendations. Moreover, each member of the SemGroup board of directors applied his or her own personal business judgment to the process and may have given different weight to different factors. The SemGroup board of directors based its recommendation on the totality of the information presented, including thorough discussions with, and questioning of, SemGroup’s senior management and the SemGroup board of directors’ outside legal and financial advisors.

In considering the recommendation of the SemGroup board of directors to approve the merger agreement, holders of SemGroup common stock should be aware that the executive officers and directors of SemGroup have certain interests in the transaction that may be different from, or in addition to, the interests of SemGroup stockholders generally. See the section entitled “—Interests of SemGroup’s Directors and Executive Officers in the Merger” beginning on page 54.

It should be noted that this explanation of the reasoning of the SemGroup board of directors and certain information presented in this section is forward-looking in nature and should be read in light of the factors set forth in “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 27.

Opinion of SemGroup’s Financial Advisor

The SemGroup board of directors retained Jefferies as its financial advisor in connection with, among other things, the merger. At a meeting of the SemGroup board of directors on September 15, 2019, Jefferies rendered its opinion, to the effect that, as of that date and based upon and subject to the various assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken as set forth in its opinion, the merger consideration to be received by the Public Common Stock Holders pursuant to the merger agreement was fair, from a financial point of view, to the Public Common Stock Holders.

The full text of the written opinion of Jefferies, dated as of September 15, 2019, is attached hereto as Annex C. Jefferies’ opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Jefferies in rendering its opinion. SemGroup encourages you to read Jefferies’ opinion carefully and in its entirety. Jefferies’ opinion was directed to the SemGroup board of directors (in its capacity as such) and addresses only the fairness from a financial point of view, of the merger consideration to be received by the Public Common Stock Holders pursuant to the merger agreement to such Public Common Stock Holders. It does not address the relative merits of the transactions contemplated by the merger agreement as compared to any alternative transaction or opportunity that might be available to SemGroup, nor does it address the underlying business decision by SemGroup to engage in the merger or the terms of the merger agreement or the documents referred to therein. Jefferies’ opinion does not constitute a recommendation as to how any securityholder should vote on the merger or any matter related thereto. The summary of the opinion of Jefferies set forth below is qualified in its entirety by reference to the full text of the opinion.

In arriving at its opinion, Jefferies, among other things:

 

   

reviewed a draft dated September 15, 2019 of the merger agreement;

 

   

reviewed certain publicly available financial and other information regarding SemGroup;

 

   

reviewed certain publicly available financial and other information regarding Energy Transfer;

 

   

reviewed certain information furnished to Jefferies by the management of SemGroup and Energy Transfer, including financial forecasts and estimates and analyses provided by the management of

 

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SemGroup and Energy Transfer, relating to the business, operations and prospects of each of SemGroup and Energy Transfer, respectively;

 

   

held discussions with members of the senior management of SemGroup and Energy Transfer concerning the matters described above;

 

   

held discussions, at the direction of the SemGroup board of directors with selected third parties to solicit indications of interest in the possible acquisition of all or a part of SemGroup;

 

   

reviewed the unit trading price history and valuation multiples for SemGroup and Energy Transfer and compared them with those of certain publicly traded entities that Jefferies deemed relevant in evaluating SemGroup and Energy Transfer;

 

   

compared the proposed financial terms of the merger with the financial terms of certain other transactions that Jefferies deemed relevant; and

 

   

conducted such other financial studies, analyses and investigations as Jefferies deemed appropriate.

In Jefferies’ review and analysis and in rendering its opinion, Jefferies assumed and relied upon, but assumed no responsibility to independently investigate or verify, the accuracy and completeness of all financial and other information that was (i) supplied or otherwise made available by or on behalf of SemGroup or Energy Transfer, (ii) publicly available to Jefferies (including, without limitation, the information described above) or (iii) otherwise reviewed by Jefferies. Jefferies relied on assurances of the management of SemGroup and Energy Transfer and other representatives of SemGroup and Energy Transfer that they are not aware of any facts or circumstances that would make such information incomplete, inaccurate or misleading or of any relevant information that was omitted or undisclosed to Jefferies. In Jefferies’ review, Jefferies did not obtain an independent evaluation or appraisal of any of the assets or liabilities (contingent, derivative, off-balance sheet or otherwise), nor did Jefferies conduct a physical inspection of any of the properties or facilities, of SemGroup, Energy Transfer or any other entity, and Jefferies was not furnished with, and assumed no responsibility to obtain or conduct, any such evaluations, appraisals or physical inspections.

With respect to the financial forecasts and estimates provided to and examined by Jefferies, Jefferies’ opinion noted that projecting future results of any company is inherently subject to uncertainty. SemGroup informed Jefferies, however, and Jefferies assumed, that such financial forecasts and estimates relating to SemGroup that Jefferies was directed to use for purposes of its analyses and opinion were reasonably prepared on bases reflecting the best then-available estimates and good faith judgments of the management of SemGroup as to the future financial performance of SemGroup and the other matters covered thereby. With respect to the financial forecasts and estimates relating to Energy Transfer that the management of Energy Transfer provided to Jefferies and confirmed as appropriate for use in Jefferies’ analyses with respect to Energy Transfer, Jefferies was informed by Energy Transfer, and Jefferies assumed, that such financial forecasts and estimates are a reasonable basis upon which to evaluate Energy Transfer. Jefferies expressed no opinion as to the respective financial forecasts of SemGroup or Energy Transfer or the assumptions on which they are made.

Jefferies’ opinion was based on economic, monetary, regulatory, market and other conditions existing and which could be evaluated as of the date of its opinion. Jefferies expressly disclaimed any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion of which Jefferies becomes aware after the date of its opinion. Jefferies’ opinion noted that the credit, financial and stock markets, and the industry in which SemGroup and Energy Transfer operate, have experienced and may continue to experience volatility and Jefferies expressed no view or opinion as to any potential effects of such volatility on SemGroup, Energy Transfer or the merger.

Jefferies made no independent investigation of, and Jefferies expressed no view or opinion as to, any legal, regulatory, accounting or tax matters affecting SemGroup, Energy Transfer or the merger, and Jefferies assumed the correctness in all respects meaningful to its analyses and opinion, SemGroup, Energy Transfer or the merger

 

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of all legal, regulatory, accounting and tax advice given to SemGroup or the SemGroup board of directors, including, without limitation, advice as to the legal, regulatory, accounting and tax consequences of the terms of, and transactions contemplated by, the merger, the merger agreement and related documents. In addition, in preparing its opinion, Jefferies did not take into account any tax consequences of the transaction to any Public Common Stock Holder. Jefferies assumed that the final form of the merger agreement would be substantially similar to the last draft reviewed by Jefferies, and when signed by the parties thereto, would not differ from the last draft reviewed by Jefferies in any respect meaningful to its analyses or opinion. Jefferies also assumed that the merger and related transactions will be consummated in compliance with all applicable laws, documents and other requirements, in accordance with their terms without waiver, modification or amendment of any term, condition or agreement that would be meaningful in any respect to its analyses or opinion and that, in the course of obtaining the necessary regulatory or third-party approvals, consents and releases for the merger and related transactions, including with respect to any divestitures or other requirements, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on SemGroup, Energy Transfer, the merger or the contemplated benefits of the merger.

Jefferies’ opinion noted that the opinion was for the use and benefit of the SemGroup board of directors (in its capacity as such) in its evaluation of the merger. Jefferies was not requested to, and Jefferies did not, participate in the structuring of the merger. Jefferies’ opinion did not address the relative merits of the transactions contemplated by the merger agreement as compared to any alternative transaction or opportunity that might be available to SemGroup, nor did it address the underlying business decision by SemGroup to engage in the merger, the terms of the merger agreement or the documents referred to therein, including the form or structure of the merger or any term, aspect or implication of any agreements, arrangements or understandings entered into in connection with, or contemplated by or resulting from, the merger or otherwise. Jefferies’ opinion does not constitute a recommendation as to how any securityholder or any other person should vote on or act with respect to the merger or any other matter. Jefferies’ opinion was limited to the fairness to Public Common Stock Holders, from a financial point of view, of the merger consideration, without regard to individual circumstances of specific holders of such units that may distinguish such holders or the securities of SemGroup held by such holders, and Jefferies was not asked to address, and its opinion did not address, the fairness, financial or otherwise, to, or any other consideration of, the holders of any class of securities, creditors or other constituencies of SemGroup, other than Public Common Stock Holders. Furthermore, Jefferies expressed no view or opinion as to the fairness, financial or otherwise, of the amount or nature of any compensation or other consideration payable or to be received by any officers, directors or employees of any parties to the merger or merger agreement, or any class of such persons, in connection with the merger relative to the merger consideration or otherwise. Jefferies’ opinion was authorized by the Fairness Committee of Jefferies LLC.

In preparing its opinion, Jefferies performed a variety of financial and comparative analyses. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis and the applications of those methods to the particular circumstances and, therefore, is not necessarily susceptible to partial analysis or summary description. Jefferies believes that its analyses must be considered as a whole. Considering any portion of Jefferies’ analyses or the factors considered by Jefferies, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the conclusion expressed in Jefferies’ opinion. In addition, Jefferies may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuations resulting from any particular analysis described below should not be taken to be Jefferies’ view of the merger consideration’s actual value. Accordingly, the conclusions reached by Jefferies were based on all analyses and factors taken as a whole and also on the application of Jefferies’ own experience and judgment.

In performing its analyses, Jefferies made numerous assumptions with respect to industry performance, general business, economic, monetary, regulatory, market and other conditions and other matters, many of which are beyond SemGroup’s, Energy Transfer’s and Jefferies’ control. The analyses performed by Jefferies were not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable

 

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than suggested by such analyses. In addition, analyses relating to the per share value of SemGroup common stock and per unit value of ET common units does not purport to be an appraisal or to reflect the prices at which the SemGroup common stock or ET common units may actually be sold. The analyses performed were prepared solely as part of Jefferies’ analysis of the fairness, from a financial point of view, of the merger consideration to be received by the Public Common Stock Holders pursuant to the merger agreement to such Public Common Stock Holders, and were provided to the SemGroup board of directors in connection with the delivery of Jefferies’ opinion.

The merger consideration to be received by the Public Common Stock Holders pursuant to the merger agreement was determined through negotiation between SemGroup and Energy Transfer, and the decision by SemGroup to enter into the merger agreement was solely that of the SemGroup board of directors. Jefferies’ opinion and financial analyses were only one of many factors considered by the SemGroup board of directors in its evaluation of the merger and should not be viewed as determinative of the views of the SemGroup board of directors or the management of SemGroup with respect to the merger or the merger consideration.

Analysis of the Merger Consideration

The following is a summary of the material financial and comparative analyses performed by Jefferies in connection with Jefferies’ delivery of its opinion and that was presented to the SemGroup board of directors on September 15, 2019. The financial analyses summarized below include information presented in tabular format. In order to understand fully Jefferies’ analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the Jefferies’ analyses. Considering the data described below without considering the full narrative description of Jefferies’ analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Jefferies’ analyses.

Jefferies expressly consented to the inclusion in the entirety of its opinion as Annex C.

Implied Premia Analysis

Jefferies calculated and compared certain implied transaction premia using the closing price for the shares of SemGroup common stock on September 13, 2019, the closing price for the shares of ET common units on September 13, 2019, and the implied value of the merger consideration to be paid by Energy Transfer for each share of SemGroup common stock pursuant to the merger agreement. For purposes of its analysis, Jefferies calculated an implied value for the merger consideration of $17.00, referred to as the implied merger consideration value, by adding (i) an implied value for the unit consideration per share (calculated by multiplying the exchange ratio of 0.7275 pursuant to the merger agreement by $14.02, the closing price for the ET common units on September 13, 2019), and (ii) the cash consideration of $6.80 per SemGroup share. Jefferies calculated the premium represented by the implied merger consideration value of $17.00 per share of SemGroup common stock relative to:

 

   

$10.28, the closing price of the shares of SemGroup common stock on September 13, 2019, referred to as the SemGroup current closing price;

 

   

$9.16, the volume weighted average price, referred to as the VWAP, of shares of SemGroup common stock over the 10-trading-day period ended September 13, 2019, referred to as the SemGroup 10-day VWAP;

 

   

$9.08, the VWAP of shares of SemGroup common stock over the 20-trading-day period ended September 13, 2019, referred to as the SemGroup 20-day VWAP;

 

   

$9.43, the VWAP of shares of SemGroup common stock over the 30-trading-day period ended September 13, 2019, referred to as the SemGroup 30-day VWAP;

 

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$23.20, the highest closing trading price of shares of SemGroup common stock over the 52-week period ended September 13, 2019, referred to as the SemGroup 52-week high;

 

   

$8.21, the lowest closing trading price of shares of SemGroup common stock over the 52-week period ended September 13, 2019, referred to as the SemGroup 52-week low; and

 

   

$12.00, the median Wall Street research price targets of shares of SemGroup common stock, referred to as the SemGroup median consensus share price target.

The results of these calculations are as follows:

 

SemGroup Reference Share Price

   Implied Premium Represented
by the Implied Merger
Consideration Value of
$17.00 per SemGroup Share
 

SemGroup current closing price of $10.28

     65.4

SemGroup 10-day VWAP of $9.16

     85.6

SemGroup 20-day VWAP of $9.08

     87.3

SemGroup 30-day VWAP of $9.43

     80.3

SemGroup 52-Week high of $23.20

     (28.6 )% 

SemGroup 52-Week low of $8.21

     109.9

SemGroup median consensus of $12.00

     41.7

Selected Public Companies Analysis

Using publicly available information, selected analyst reports and information provided by SemGroup and Energy Transfer, Jefferies analyzed (i) the selected financial data of SemGroup with similar data of ten crude oil and refined products public companies that Jefferies judged to be comparable to SemGroup for purposes of its valuation analysis and (ii) the selected financial data of Energy Transfer with similar data of six large cap pipeline public companies that Jefferies judged to be comparable to Energy Transfer for purposes of its valuation analysis. These companies, which are referred to as comparable public companies, were selected because they were deemed to be similar to SemGroup or Energy Transfer, as applicable, in one or more respects, including the nature of their business, size, diversification and financial performance. No specific numeric or other similar criteria were used to select the comparable public companies and all criteria were evaluated in their entirety without application of definitive qualifications or limitations to individual criteria. As a result, a significantly larger or smaller company with substantially similar lines of business and business focus may have been included while a similarly sized company with less similar lines of business and greater diversification may have been excluded. The comparable public companies were:

Comparable public companies with respect to SemGroup:

 

   

Enbridge Inc.

 

   

Plains All American Pipeline, L.P.

 

   

Magellan Midstream Partners, L.P.

 

   

Phillips 66 Partners LP

 

   

Shell Midstream Partners, L.P.

 

   

Tallgrass Energy, LP

 

   

NuStar Energy L.P.

 

   

Holly Energy Partners, L.P.

 

   

PBF Logistics LP

 

   

Delek Logistics Partners, LP

 

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Comparable public companies with respect to Energy Transfer:

 

   

Enterprise Products Partners L.P.

 

   

Kinder Morgan, Inc.

 

   

The Williams Companies, Inc.

 

   

MPLX LP

 

   

Plains All American Pipeline, L.P.

 

   

Magellan Midstream Partners, L.P.

No comparable public company utilized in the comparable public companies analysis is identical to SemGroup or Energy Transfer. In evaluating the selected comparable public companies, Jefferies made numerous judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond SemGroup’s, Energy Transfer’s and Jefferies’ control. Mathematical analysis, such as determining the median, is not in itself a meaningful method of using comparable company data.

In its analysis, Jefferies derived and compared distribution yields for SemGroup, Energy Transfer and the selected comparable public companies as of September 13, 2019. This analysis indicated the following average and median reference ranges for the benchmarks as set forth below:

 

SemGroup – Comparable Public Companies

   Average     Median  

Current Distribution Yield

     8.4     8.4

2020E Distribution Yield

     8.8     8.7

Energy Transfer – Comparable Public Companies

            

Current Distribution Yield

     6.5     6.2

2020E Distribution Yield

     7.1     6.6

Using the reference ranges for the benchmarks set forth below, which ranges were selected by Jefferies in its professional judgment, Jefferies determined implied per share of SemGroup common stock value ranges and implied per ET common unit value ranges as follows:

 

Benchmark

   SemGroup
Range
   Implied per share
of SemGroup
common stock
Value Range
   Energy
Transfer
Range
   Implied per ET
common unit
Value Range

Current Distribution Yield

   11.5% – 10.5%    $16.43 – $18.00    8.0% – 7.0%    $15.25 – $17.43

2020E Distribution Yield

   12.5% – 11.5%    $15.12 – $16.43    8.5% – 7.5%    $14.35 – $16.27

Using the implied per share of SemGroup common stock value ranges and implied per ET common unit value ranges (multiplied by the exchange ratio), plus the per share cash amount, Jefferies determined ranges of the implied exchange ratio of the value per share of SemGroup common stock to such total merger consideration as follows:

 

Benchmark

   Implied Exchange Ratio Range

Current Distribution Yield

   0.844x – 1.006x

2019E Distribution Yield

   0.811x – 0.953x

 

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In its analysis, Jefferies also derived and compared multiples of enterprise value to adjusted EBITDA for SemGroup, Energy Transfer and the selected comparable public companies as of September 13, 2019. This analysis indicated the following average and median reference ranges for the benchmarks as set forth below:

 

SemGroup – Comparable Public Companies

   Average      Median  

EV / 2019E EBITDA

     11.7x        11.8x  

EV / 2020E EBITDA

     11.0x        11.1x  

Energy Transfer – Comparable Public Companies

             

EV / 2019E EBITDA

     11.2x        11.1x  

EV / 2020E EBITDA

     10.7x        10.4x  

Using the reference ranges for the benchmarks set forth below, which ranges were selected by Jefferies in its professional judgment, Jefferies determined implied per share of SemGroup common stock value ranges and implied per ET common unit value ranges as follows:

 

Benchmark

  

SemGroup
Range

  

Implied per share
of SemGroup
common stock
Value Range

  

Energy
Transfer
Range

  

Implied per ET
common unit Value
Range

EV / 2019E EBITDA

   10.5x – 12.5x    $7.81 – $18.09    9.0x –11.0x    $15.03 – $23.59

EV / 2020E EBITDA

   10.0x – 12.0x    $13.10 – $24.95    8.5x – 10.5x    $13.18 – $21.81

Using the implied per share of SemGroup common stock value ranges and implied per ET common unit value ranges (multiplied by the exchange ratio), plus the per share cash amount, Jefferies determined ranges of the implied exchange ratio of the value of per share SemGroup common stock to such total merger consideration as follows:

 

Benchmark

   Implied Exchange Ratio Range

EV / 2019E EBITDA

   0.326x – 1.020x

EV / 2020E EBITDA

   0.578x – 1.522x

Discounted Cash Flow Analysis

Jefferies performed a discounted cash flow analysis to estimate the present value of cash available for dividends of SemGroup and distributable cash flow of Energy Transfer from calendar year 2020 through calendar year 2024 using financial projections provided by SemGroup and Energy Transfer, discount rates of 10.77% and 9.77% with respect to SemGroup, discount rates of 10.15% and 9.15% with respect to Energy Transfer, terminal yield values of 12.50% and 11.50% with respect to SemGroup and terminal yield values of 8.50% and 7.50% with respect to Energy Transfer.

The discounted cash flow analysis indicated a range of implied present values per share of SemGroup common stock of $18.99 to $20.47 and a range of implied present values per ET common unit of $18.00 to $19.97. Using the implied SemGroup common stock value ranges and implied per ET common unit value ranges (multiplied by the exchange ratio), plus the per share cash amount, Jefferies determined a range of implied exchange ratios of the value per share of SemGroup common stock to such total merger consideration of 0.890x to 1.029x.

 

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Selected Transactions Analysis

Using publicly available information, Jefferies analyzed the premiums offered in ten selected comparable mergers announced since January 2013, which are collectively referred to as the selected comparable transactions:

 

Date

  

Buyer

  

Seller

05/10/19

  

IFM Global Infrastructure Fund

  

Buckeye Partners LP

08/29/17

  

Zenith Energy Inc.

  

Arc Logistics Partners L.P.

05/18/17

  

Energy Transfer Partners

  

PennTex Midstream Partners

09/06/16

  

Enbridge, Inc.

  

Spectra Energy Corp.

07/13/15

  

MPLX LP

  

MarkWest Energy Partners LP

11/12/14

  

Enterprise Products Partners L.P.

  

Oiltanking Partners L.P.

10/13/14

  

Targa Resources Partners LP

  

Atlas Energy L.P.

10/10/13

  

Regency Energy Partners

  

PVR Partners

05/06/13

  

Inergy Midstream

  

Crestwood Midstream Partners

01/29/13

  

Kinder Morgan Energy Partners L.P.

  

Copano Energy, L.L.C.

For each of the selected comparable transactions, Jefferies calculated the premium represented by the offer price over the target company’s closing unit or share price one trading day, seven trading days and 30 trading days prior to the transaction’s announcement. The analysis indicated the following premiums for those time periods prior to announcement:

 

Time Period Prior to Announcement

   75th
Percentile
    Mean     Median     25th
Percentile
 

1 Trading Day

     25.2     19.1     16.6     14.6

7 Trading Days Average

     24.1     19.0     18.3     13.1

30 Trading Days Average

     23.5     17.1     15.9     11.1

Using the reference ranges for each of the 25th percentile to the 75th percentile premiums for each of the transaction categories listed above, Jefferies performed a premiums paid analysis using the closing prices of the SemGroup common stock one trading day, seven trading days and 30 trading days prior to September 13, 2019. This analysis indicated a range of implied prices for SemGroup common stock of $10.62 to $12.87. Using the implied prices for SemGroup common stock and the closing price per ET common unit on September 13, 2019, Jefferies calculated the range of implied exchange ratios per share of SemGroup common stock to each ET common unit of 0.757x to 0.918x.

General

Jefferies’ opinion was one of many factors taken into consideration by the SemGroup board of directors in making its determination to approve the merger and should not be considered determinative of the views of the SemGroup board of directors or SemGroup management with respect to the merger or the merger consideration.

Jefferies was selected by the SemGroup board of directors based on Jefferies’ qualifications, expertise and reputation. Jefferies is an internationally recognized investment banking and advisory firm. Jefferies, as part of its investment banking business, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements, financial restructurings and other financial services.

SemGroup has paid Jefferies a fee of approximately $4,500,000, (i) $250,000 of which was paid upon the execution of its engagement letter and $250,000 of which was paid each month for the following 5 months and (ii) $3,000,000 of which was paid upon delivery of Jefferies’ opinion. SemGroup also agreed to pay Jefferies an additional fee of $1,500,000 upon closing of the merger. SemGroup has also agreed to reimburse Jefferies for

 

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certain expenses incurred. SemGroup has also agreed to indemnify Jefferies against certain liabilities arising out of or in connection with the services rendered and to be rendered by it under its engagement. Jefferies has not, in the past two years, provided financial advisory and/or financing services to SemGroup or Energy Transfer. Jefferies did not, as of the date of its opinion, maintain a market in the securities of SemGroup or Energy Transfer, but in the ordinary course of business, Jefferies and its affiliates may trade or hold securities of SemGroup or Energy Transfer for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions in those securities. In addition, in the future Jefferies may seek to provide financial advisory and financing services to Energy Transfer or entities that are affiliated with Energy Transfer, for which Jefferies would expect to receive compensation. Jefferies’ opinion was furnished for the use and benefit of the SemGroup board of directors in connection with its consideration of the merger and was not intended to be used for any other purpose, without Jefferies’ prior written consent.

Energy Transfer’s Reasons for the Merger

The merger between Energy Transfer and SemGroup will increase Energy Transfer’s scale across multiple regions and provide increased connectivity for Energy Transfer’s crude oil and NGL transportation businesses. In evaluating the merger, the ET board of directors consulted with Energy Transfer’s management and legal and financial advisors. The ET board of directors determined the merger to be in the best interests of Energy Transfer based on, among other factors, its belief that the merger will:

Enhance Energy Transfer’s Crude Oil and NGL Businesses. Energy Transfer believes that the acquisition will significantly enhance its crude oil transportation, terminalling and export capabilities. In particular, the acquisition of the Houston Fuel Oil Terminal (“HFOTCO”) will provide Energy Transfer’s customers with a world class crude oil terminal on the Houston Ship Channel with 18.2 million barrels of crude oil storage capacity, five deep-water ship docks and seven barge docks. Energy Transfer expects to construct an approximately 75-mile crude oil pipeline to provide a strategic connection between HFOTCO and Energy Transfer’s Nederland terminal, which are two of the largest crude oil terminals in the U.S. Further, Energy Transfer expects the merger will expand its crude oil and NGL infrastructure in the Rockies and in the Mid-Continent region by adding crude oil gathering assets in the DJ Basin in Colorado and the Anadarko Basin in Oklahoma and Kansas, as well as crude oil and NGL pipelines connecting the DJ Basin and Anadarko Basin with crude oil terminals in Cushing, Oklahoma.

Increase Fee-Based Revenues. Energy Transfer expects that the merger will result in increased fee-based cash flows from fixed-fee contracts.

Accretive to Cash Flow. The merger is expected to be accretive to Energy Transfer’s distributable cash flow per ET common unit, both immediately and over the long-term.

Create Synergies and Cost Savings. Energy Transfer expects the combination of Energy Transfer’s significant infrastructure with SemGroup’s complementary assets will allow the combined company to pursue additional commercial opportunities, enhance Energy Transfer’s ability to serve customers and achieve cost savings.

Maintain Investment Grade Status. While enhancing Energy Transfer’s growth profile, Energy Transfer does not believe the merger will compromise Energy Transfer’s investment grade credit metrics.

SemGroup Unaudited Prospective Financial Information

SemGroup does not as a matter of course make public long-term forecasts or internal projections as to future performance, revenues, earnings or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. However, in connection with its evaluation of the merger, SemGroup’s management prepared certain unaudited internal financial forecasts with respect to SemGroup, which were provided to the

 

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SemGroup board of directors in connection with their evaluation of the proposed merger. Such forecasts were also provided to Jefferies for its use and reliance in connection with its financial analysis and opinion described in the section entitled “– Opinion of SemGroup’s Financial Advisor.” The inclusion of this information should not be regarded as influential on your decision whether to vote for or against the merger proposal or as an indication that any of SemGroup, Energy Transfer, their respective advisors or other representatives or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future performance or events, or that it should be construed as financial guidance, and such summary projections set forth below should not be relied on as such.

This information was prepared solely for internal use and is subjective in many respects. While presented with numeric specificity, the unaudited prospective financial information reflects numerous estimates and assumptions that were deemed to be reasonable as of the respective dates, but are inherently uncertain and may be beyond the control of SemGroup’s management. These assumptions include, but are not limited to, SemGroup’s and Energy Transfer’s future results, oil and gas industry activity, commodity prices, demand for natural gas and crude oil, general economic and regulatory conditions and other matters described in the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.” The unaudited prospective financial information reflects both assumptions as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. SemGroup and Energy Transfer can give no assurance that the unaudited prospective financial information and the underlying estimates and assumptions will be realized.

In addition, since the unaudited prospective financial information is inherently forward looking and covers multiple years, such information by its nature becomes less predictive with each successive year. Actual results may differ materially from those set forth below, and important factors that may affect actual results and cause the unaudited prospective financial information to be inaccurate include, but are not limited to, risks and uncertainties relating to SemGroup’s business, industry performance, the regulatory environment, general business and economic conditions and other matters described under the section of this proxy statement/prospectus entitled “Risk Factors.” See also “Cautionary Statement Regarding Forward-Looking Statements” and “Where You Can Find More Information.”

The unaudited prospective financial information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with GAAP, published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither SemGroup’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the unaudited prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability. The report of the independent registered public accounting firm to SemGroup contained in its Annual Report on Form 10-K for the year ended December 31, 2018, which is incorporated by reference into this proxy statement/prospectus, relates to historical financial information of SemGroup, and such report does not extend to the projections included below and should not be read to do so. The unaudited prospective financial information set forth in this section of this proxy statement/prospectus entitled “SemGroup Unaudited Prospective Financial Information” has been prepared by, and is the responsibility of, SemGroup’s management.

Furthermore, the unaudited prospective financial information does not take into account any circumstances or events occurring after the date it was prepared. SemGroup and Energy Transfer can give no assurance that, had the unaudited prospective financial information been prepared either as of the date of the merger agreement or as of the date of this proxy statement/prospectus, similar estimates and assumptions would be used. Except as required by applicable securities laws, SemGroup and Energy Transfer do not intend to, and disclaim any obligation to, make publicly available any update or other revision to the unaudited prospective financial information to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated

 

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events, even in the event that any or all of the underlying assumptions are shown to be in error, including with respect to the accounting treatment of the merger under GAAP, or to reflect changes in general economic or industry conditions.

The unaudited prospective financial information does not take into account all the possible financial and other effects on SemGroup or Energy Transfer of the merger, the effect on SemGroup or Energy Transfer of any business or strategic decision or action that has been or will be taken as a result of the merger agreement having been executed, or the effect of any business or strategic decisions or actions which would likely have been taken if the merger agreement had not been executed, but which were instead altered, accelerated, postponed or not taken in anticipation of the merger. Further, the unaudited prospective financial information does not take into account the effect on SemGroup or Energy Transfer of any possible failure of the merger to occur. None of SemGroup, Energy Transfer, or their respective affiliates, officers, directors, advisors or other representatives has made, makes or is authorized in the future to make any representation to any SemGroup or Energy Transfer stockholder or other person regarding SemGroup’s or Energy Transfer’s ultimate performance compared to the information contained in the unaudited prospective financial and operating information or that the forecasted results will be achieved. The inclusion of the unaudited prospective financial and operating information herein should not be deemed an admission or representation by SemGroup, Energy Transfer, their respective advisors or any other person that it is viewed as material information of SemGroup or Energy Transfer, particularly in light of the inherent risks and uncertainties associated with such forecasts. The summary of the unaudited prospective financial information included below is not being included to influence your decision whether to vote in favor of the merger proposal or any other proposal to be considered at the special meeting, but is being provided solely because it was made available to the SemGroup board of directors and SemGroup’s financial advisor in connection with the merger.

In light of the foregoing, and considering that the special meeting will be held several months after the unaudited prospective financial information was prepared, as well as the uncertainties inherent in any forecasted information, SemGroup’s stockholders are cautioned not to place undue reliance on such information, and SemGroup urges all SemGroup stockholders to review SemGroup’s most recent SEC filings for a description of SemGroup’s reported financial results and Energy Transfer’s most recent SEC filings for a description of Energy Transfer’s reported financial results. See the section entitled “Where You Can Find More Information.”

The following table presents selected unaudited prospective financial data for the fiscal years ending 2018 through 2022.

 

     2019E      2020E      2021E      2022E  
     ($ in millions)  

Adjusted EBITDA

   $ 413      $ 476      $ 521      $ 624  

Cash Available for Dividends

   $ 142      $ 152      $ 170      $ 219  

For purposes of the unaudited prospective financial information presented herein, Adjusted EBITDA is calculated as net income (loss) before interest expense, income tax expense (benefit), depreciation and amortization and adjusted for selected items that SemGroup believes impact the comparability of financial results between reporting periods.

For purposes of the unaudited prospective financial information presented herein, cash available for dividend is calculated as Adjusted EBITDA less interest expense, cash taxes, maintenance capital expenditures, preferred distributions and non-controlling interests.

Interests of SemGroup’s Directors and Executive Officers in the Merger

In considering the recommendation of the SemGroup board of directors that you vote to approve and adopt the merger agreement and the merger, you should be aware that aside from their interests as SemGroup

 

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stockholders, SemGroup’s directors and executive officers have interests in the merger that are different from, or in addition to, those of other SemGroup stockholders generally. The members of SemGroup’s board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to the SemGroup stockholders that the merger agreement and the merger be adopted. See the section above entitled “– Background of the Merger,” and the section entitled “–Recommendation of the SemGroup Board of Directors and Reasons for the Merger.” SemGroup’s stockholders should take these interests into account in deciding whether to vote “FOR” the merger proposal. These interests are described in more detail below, and certain of them are quantified in the narrative and the table below.

Treatment of Equity-Based Awards

Under the merger agreement equity-based awards held by SemGroup directors and executive officers as of the effective time of the merger will be treated at the effective time of the merger as follows:

 

   

Restricted Share Units. Each award of restricted share units, vested or unvested (other than those held by non-employee directors of SemGroup) (each, a “SemGroup RSU award”), that is outstanding immediately prior to the effective time will be assumed by Energy Transfer and converted into a restricted unit award to receive a number of ET common units equal to the number of shares of SemGroup common stock subject to such SemGroup RSU award immediately prior to the effective time multiplied by a ratio equal to the per share cash amount divided by the closing price of one ET common unit on the NYSE on the day prior to the closing date plus the exchange ratio (the “equity exchange ratio”), rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup RSU award”). Each assumed SemGroup RSU award will otherwise be subject to the same terms and conditions as were applicable to such award immediately prior to the effective time and fully accelerate upon a termination without cause, for good reason or as a result of the holder’s death or disability.

 

   

Restricted Stock Awards. Each restricted stock award (other than those held by non-employee directors of SemGroup) (each, a “SemGroup restricted stock award”) that is outstanding immediately prior to the effective time will be assumed by Energy Transfer and converted into a restricted unit award representing a contractual right upon vesting to receive a number of ET common units equal to the product obtained by multiplying (x) the number of shares of SemGroup common stock subject to such SemGroup restricted stock award immediately prior to the effective time by (y) the equity exchange ratio, rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup restricted stock award”). Each assumed SemGroup restricted stock award will otherwise be subject to the same terms and conditions as were applicable to the SemGroup award immediately prior to the effective time, have distribution equivalent rights and fully accelerate upon a termination without cause, for good reason or as a result of the holder’s death or disability.

 

   

Performance Share Units. Each award of performance share units that corresponds to shares of SemGroup common stock (each, a “SemGroup PSU award”) that is outstanding and vested as of the effective time, will be cancelled in exchange for the payment of the merger consideration with respect to the number of shares of SemGroup common stock underlying such vested SemGroup PSU award. Each SemGroup PSU award that is outstanding and unvested as of the effective time will automatically, and without any required action of the holder thereof, be cancelled without consideration.

 

   

Director Restricted Share Awards. Each SemGroup restricted stock award and SemGroup restricted share unit award that is outstanding immediately prior to the effective time and held by a non-employee director of SemGroup and that is outstanding immediately prior to the effective time (each, a “director restricted share award”) will, as of the effective time, become fully vested and will be cancelled in exchange for the payment of the merger consideration with respect to the total number of shares of SemGroup common stock subject to such director restricted share award.

 

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The compensation committee of the board of directors of SemGroup has determined to vest all SemGroup PSU awards that were outstanding on September 15, 2019 at target performance levels as of immediately prior to the effective time.

The number of unvested equity-based awards held by each director and executive officer of SemGroup as of October 25, 2019 is set forth below. As of October 25, 2019, none of the SemGroup non-employee directors or executive officers held SemGroup RSU awards (other than Dave Gosse). For an estimate of the amounts that would be payable to each of SemGroup’s named executive officers upon the vesting and settlement of their unvested equity-based awards, see “– Quantification of Payments and Benefits to SemGroup’s Named Executive Officers” below.

 

Name of Non-Employee
Director / Executive Officer

   No. of Shares of SemGroup
Restricted Stock Awards
     No. of Shares of SemGroup Common
Stock Underlying SemGroup PSU
Awards (at target)
     Total  

Non-Employee Directors

        

Ronald A. Ballschmiede

     10,270        –           10,270  

Sarah Barpoulis

     10,666        –           10,666  

Karl F. Kurz

     9,675        –           9,675  

Thomas R. McDaniel

     13,640        –           13,640  

James H. Lytal

     10,468        –           10,468  

William J. McAdam

     10,270        –           10,270  

Executive Officers

        

Carlin Conner

     123,969        115,041        239,010  

Thomas F. DeLorbe (1)

     25,379        14,612        39,991  

Robert N. Fitzgerald

     61,305        53,633        114,938  

Susan L. Lindberg

     29,329        27,180        56,509  

Timothy R. O’Sullivan (1)

     38,674        15,789        54,463  

David Minielly

     52,872        25,910        78,782  

Shaun Revere

     55,185        29,311        84,496  

Dave Gosse (2)

     44,268        22,010        66,278  

 

(1)

Messrs. O’Sullivan and DeLorbe transitioned to non-executive roles as of January 1, 2019.

(2)

The number of shares included herein for Mr. Gosse represents the number of shares subject to Mr. Gosse’s SemGroup RSU awards. Mr. Gosse does not hold any SemGroup restricted stock awards.

Severance Agreements

SemGroup is party to an employment agreement with Carlin Conner, and severance agreements with each of its other executive officers (other than Mr. Gosse) (the “executive severance agreements”). Mr. Gosse is not party to an employment agreement or severance agreement, and is not otherwise entitled to enhanced change in control severance benefits. In the event Mr. Gosse’s employment is terminated, he will receive the severance benefits to which he is entitled under Canadian law.

Mr. Conner’s employment agreement and the executive severance agreements generally provide for severance payments and benefits in connection with qualifying terminations of employment, which are enhanced in the event such qualifying termination of employment occurs within a certain period of time following a change in control, or, in the case of Mr. Conner, prior to a change in control. The following section outlines the benefits that SemGroup’s executive officers are eligible to receive under their respective agreements if they experience a qualifying termination of employment in connection with the merger (which constitutes a change in control under the executive severance agreements and Mr. Conner’s employment agreement).

Mr. Conner is entitled to the following severance benefits under his employment agreement in the event his employment is terminated without cause or by Mr. Conner for good reason (each as defined in his employment

 

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agreement) within six (6) months prior to or twenty-four (24) months following a change in control: (i) earned but unpaid base salary, earned but unpaid annual bonus for the prior calendar year, payment for unused vacation (prorated form January 1 to the termination date), and unreimbursed business expenses, (ii) three (3) times the sum of Mr. Conner’s annual base salary and target annual bonus, payable in a lump sum six (6) months following his termination, (iii) reimbursement for reasonable fees and costs for outplacement services incurred by Mr. Conner within six (6) months following his termination, subject to a maximum of $10,000, and (iv) eighteen (18) months of COBRA continuation at any out-of-pocket premium cost that does not exceed the out-of-pocket premium cost applicable to similarly situated active employees (and their eligible dependents), provided, however, that if Mr. Conner is eligible for retiree benefits provided under any welfare benefit plan, program, policy, practice or procedure of the SemGroup Parties, Mr. Conner will be entitled to receive such retiree benefits in lieu of such COBRA continuation benefits (the “COBRA continuation or retiree benefits”).

Each of SemGroup’s executive officers (other than Messrs. Conner and Gosse) is entitled to the following severance benefits if terminated without cause or by the applicable executive for good reason (each as defined in the applicable severance agreement) on or within twenty-four (24) months following a change in control under his or her respective executive severance agreement: (i) earned but unpaid base salary, earned but unpaid annual bonus for the prior calendar year, payment for unused vacation, and any accrued benefits, (ii) two (2) times the sum of the executive’s annual base salary and target annual bonus, payable in a lump sum six (6) months following the executive’s termination, (iii) reimbursement for reasonable fees and costs for outplacement services incurred by the executive within six (6) months following his or her termination, subject to a maximum of $10,000, and (iv) the COBRA continuation or retiree benefits.

Mr. Conner’s employment agreement and the executive severance agreements each provide that payment of the severance benefits is contingent upon the executive’s execution and non-revocation of a general release of claims. Such agreements also subject the executives to certain restrictive covenants, including non-competition, non-solicitation, confidentiality and non-disparagement covenants.

Each executive severance agreement and employment agreement includes a Code Section 280G cutback provision that provides that in the event the severance payments would constitute an excess parachute payment (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended), then such payments will be reduced to the minimum extent necessary so that no portion of such payments, as so reduced, constitutes an excess parachute payment. The compensation committee of the SemGroup board of directors has also reserved the right to accelerate the payment of SemGroup PSU awards or 2019 annual bonuses to the extent reasonably necessary to mitigate the amount of any excess parachute payments.

2019 Annual Bonuses

The merger agreement sets forth the treatment of the 2019 annual bonuses for SemGroup employees who, as of immediately prior to the effective time, are eligible to receive a bonus under SemGroup’s annual bonus programs and continue to be employed following closing. Such employees will receive a cash bonus for 2019 in an amount equal to no less than 100% of the target amount of such employees’ annual bonus. The 2019 annual bonuses will be paid in accordance with Energy Transfer’s regular bonus payment schedule (but in any event prior to March 15, 2020), subject to the applicable employee’s continued employment through December 31, 2019, provided that if such employee is terminated without cause prior to December 31, 2019, such employee will receive a pro-rated 2019 annual bonus based on the number of days such employee was employed during 2019 prior to termination.

Indemnification and Insurance

Pursuant to the terms of the merger agreement, SemGroup’s directors and executive officers will be entitled to certain ongoing indemnification and coverage under directors’ and officers’ liability insurance policies from the surviving corporation. Such indemnification is further described in the section entitled “The Merger Agreement – Indemnification and Insurance.”

 

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Quantification of Payments and Benefits to SemGroup’s Named Executive Officers

Item 402(t) of Regulation S-K requires disclosure of compensation arrangements or understandings with SemGroup’s named executive officers that are based on or otherwise related to the merger, whether present, deferred or contingent. The individuals disclosed within this section and referred to as the “named executive officers” are SemGroup’s principal executive officer, principal financial officer and three most highly compensated executive officers other than the principal executive officer and principal financial officer for SemGroup’s most recently completed fiscal year.

The table set forth below includes the amount of payments and benefits that each of SemGroup’s named executive officers could potentially receive that is based on or otherwise relates to the merger under the merger agreement and any other plan, agreement or arrangement. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules, and in this section such term is used to describe the merger-related compensation payable to the SemGroup named executive officers. These payments include the payments described above and are not in addition to those described in previous sections. The amounts presented in the table below do not necessarily represent what each named executive officer will actually receive, and are calculated based on particular assumptions, as outlined below. These payments are specifically identified in this fashion to allow for a non-binding advisory vote of SemGroup’s stockholders regarding these payments and benefits.

The amounts in the table below were calculated using the following assumptions: (i) the consummation of the merger occurs on October 25, 2019 (which is the assumed date solely for purposes of this golden parachute compensation disclosure), (ii) the value of accelerated equity awards is determined by multiplying the number of shares of SemGroup common stock subject to each SemGroup equity award outstanding as of October 25, 2019 by $16.65, the average closing price of the SemGroup common stock over the first five trading days following the first public announcement of the merger, (iii) the employment of each of the named executive officers will be terminated by SemGroup on October 25, 2019 in a manner that constitutes a qualifying termination under the Executive Severance Agreements, (iv) each named executive officer has properly executed any documents and complied with all requirements necessary in order to receive the benefits noted below (including, for example, execution and non-revocation of a release of claims), and (v) the named executive officer’s base salary and annual target bonus remain unchanged from those in place as of October 25, 2019. Some of the assumptions used in the table below are subject to change and, as a result, the actual amounts to be received by any of the individuals below may differ from the amounts set forth below.

 

Name

   Cash
($) (2)
     Equity
($) (3)
     Perquisites/
Benefits

($) (4)
     Other
($) (5)
     Total ($)  

Carlin G. Conner

     3,708,000        3,979,517        40,981        618,000        8,346,498  

Robert N. Fitzgerald

     1,494,640        1,913,717        33,128        307,720        3,749,206  

Susan S. Lindberg

     1,106,880        940,875        38,415        207,540        2,293,710  

Timothy R. O’Sullivan (1)

     1,086,400        906,809        38,415        203,700        2,235,324  

Thomas F. DeLorbe (1)

     1,035,603        665,850        28,155        194,176        1,923,784  

 

(1)

Messrs. O’Sullivan and DeLorbe transitioned to non-executive roles as of January 1, 2019.

(2)

Represents cash severance to which the named executive officers are entitled to under their respective employment agreement or severance agreement in the event of a qualifying termination in connection with the merger. Such cash severance is comprised of (i) a lump sum cash payment equal to two times (or three times in the case of Mr. Conner only) the sum of (x) the executive’s base salary (which amounts to $618,000 for Mr. Conner, $439,600 for Mr. Fitzgerald, $345,900 for Ms. Lindberg, $339,500 for Mr. O’Sullivan, and $323,626 for Mr. DeLorbe), plus (y) the executive’s target annual bonus (which amounts to $618,000 for Mr. Conner, $307,720 for Mr. Fitzgerald, $207,540 for Ms. Lindberg, $203,700 for Mr. O’Sullivan, and $194,176 for Mr. DeLorbe). The cash severance is a “double-trigger” payment and is only payable to the named executive officer upon a termination without cause or for good reason within 24 months following

 

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  the merger, or, in the case of Mr. Conner, within 6 months prior to the merger (a “Qualifying CIC Termination”).
(3)

Represents the dollar value of equity-based awards held by each named executive officer assuming a per share price of $16.65, which is the average closing price of SemGroup common stock for the five trading days following the first public announcement of the merger. The SemGroup Restricted Share awards included herein will accelerate in connection with a termination of employment without cause or for good reason, and the SemGroup PSU awards included herein will accelerate immediately prior to closing with performance deemed achieved at target. The values included herein for the SemGroup Restricted Share awards and SemGroup PSU awards therefore represent a “double trigger” and “single trigger” benefit, respectively. See “Treatment of Equity-Based Awards” for the number of equity-based awards held by each of the named executive officers as of October 25, 2019 (the latest practicable date).

 

Name

   SemGroup Restricted Share
Awards ($)
     SemGroup PSU
Awards ($)
 

Carlin G. Conner

     2,064,084        1,915,433  

Robert N. Fitzgerald

     1,020,728        892,990  

Susan S. Lindberg

     488,328        452,547  

Timothy R. O’Sullivan

     643,922        262,887  

Thomas F. DeLorbe

     422,560        243,290  

 

(4)

Represents, with respect to each named executive officer, the value of (i) 18 months of COBRA continuation (which amounts to $30,981 for Mr. Conner, $23,128 for Mr. Fitzgerald, $28,415 for Ms. Lindberg, $28,415 for Mr. O’Sullivan, and $18,155 for Mr. DeLorbe), and (ii) reimbursement of outplacement services up to $10,000. Such benefits are “double-trigger” benefits, payable to the named executive officers upon a Qualifying CIC Termination under their respective employment agreement or executive severance agreement.

(5)

Represents, with respect to each named executive officer, his or her 2019 annual bonus at target performance levels payable in accordance with the terms of the Merger Agreement, as further described in the “2019 Annual Bonus” section above.

Securities Ownership of Certain Beneficial Owners and Management

To SemGroup’s knowledge, the following tables set forth certain information regarding the beneficial ownership of SemGroup common stock and SemGroup preferred stock as of the close of business on October 25, 2019 (except as noted in the footnotes below) and with respect to: (1) each person known by SemGroup to beneficially own 5% or more of the outstanding shares of SemGroup common stock and SemGroup preferred stock; (2) each member of the SemGroup board of directors; (3) each named executive officer of SemGroup; and (4) the members of the SemGroup board of directors and SemGroup’s current executive officers as a group.

 

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Principal Stockholders

The following table contains information regarding the only persons SemGroup knows of that beneficially own more than 5% of outstanding shares of SemGroup common stock or SemGroup preferred stock as of October 25, 2019 (except as noted below). Percentage of class amounts are based on 79,606,089 shares of SemGroup common stock and 350,000 shares of SemGroup preferred stock outstanding as of October 25, 2019. Percentage of all outstanding voting stock amounts is based on 91,593,909, which, as of October 25, 2019, is the sum of (i) outstanding shares of SemGroup common stock and (ii) 11,987,820, which represents the number of shares of SemGroup common stock underlying the SemGroup preferred stock, on an as-converted basis.

 

Name and Address

   Number of
Shares of
SemGroup
Common Stock
   Percentage of
Outstanding
SemGroup
Common
Stock
  Number of
Shares of
SemGroup
Preferred Stock
   Percentage of
Outstanding
SemGroup
Preferred
Stock
  Percentage
of All
Outstanding
Voting
Stock

The Vanguard Group, Inc.
100 Vanguard Blvd.
Malvern, PA 19355

   7,984,257 (1)    10.03%   –       –      8.72%

Dimensional Fund Advisors LP
Building One
6300 Bee Cave Road
Austin, Texas 78746

   6,666,079 (2)    8.37%   –       –      7.28%

Brookfield Public Securities Group LLC
Brookfield Place
250 Vesey St., 15th Floor
New York, NY 10281-1023

   5,645,499 (3)    7.09%   –       –      6.16%

BlackRock, Inc.
55 East 52nd Street
New York, NY 10055

   5,621,465 (4)    7.06%   –       –      6.14%

Tortoise Capital Advisors, L.L.C.
11550 Ash Street, Suite 300
Leawood, KS 66211

   4,878,930 (5)    6.13%   25,000 (6)    7.14%   6.26%

WP SemGroup Holdco, LLC
c/o Warburg Pincus LLC
450 Lexington Avenue
New York, NY 10017

   –       –      300,000 (7)(8)    85.72%   11.22%

Atlas Point Energy Infrastructure Fund, LLC
100 Saint Paul St.
Denver, CO 80206

   –       –      25,000 (9)    7.14%   *

 

*

Less than one percent.

(1)

Information is as of May 31, 2019 and is based on Amendment No. 7 to Schedule 13G dated June 10, 2019, which was filed by The Vanguard Group, Inc. The Vanguard Group, Inc. reported: (i) sole voting power over 91,045 of such shares; (ii) shared voting power over 20,162 of such shares; (iii) sole dispositive power over 7,897,204 of such shares; and (iv) shared dispositive power over 87,053 of such shares. Vanguard Fiduciary Trust Company, a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 66,891 shares as a result of its serving as investment manager of collective trust accounts, and Vanguard Investments Australia, Ltd., a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 44,316 shares as a result of its serving as investment manager of collective trust accounts.

 

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(2)

Information is as of December 31, 2018 and is based on Amendment No. 1 to Schedule 13G dated February 8, 2019, which was filed by Dimensional Fund Advisors LP. Dimensional Fund Advisors LP reported (i) sole voting power over 6,523,020 of such shares; and (ii) sole dispositive power over 6,666,079 of such shares as the investment advisor to four investment companies registered under the Investment Company Act of 1940 and as investment manager or sub-adviser to certain other commingled funds, group trusts and separate accounts which may possess voting and/or investment power over such shares that are owned by such funds, and may be deemed to be the beneficial owner of such shares held by such funds.

(3)

Information is as of December 31, 2018 and is based on a Schedule 13G dated February 14, 2019, which was filed by Brookfield Public Securities Group LLC (“PSG”), Brookfield Asset Management Inc. (“BAM”), and Partners Limited. PSG, BAM, and Partners Limited reported (i) shared voting power over 4,859,204 of such shares; and (ii) shared dispositive power over 5,645,499 of such shares. According to the Schedule 13G, BAM is the indirect owner of PSG, which is the investment advisor to various funds or accounts that are the record owners of such shares and BAM may be deemed to beneficially own such shares; and Partners Limited is the sole owner of BAM’s Class B Limited Voting Shares and therefore may be deemed to share beneficial ownership of such shares. The address of Partners Limited is 181 Bay Street, Suite 330, Toronto, Ontario, Canada M5J 2T3. The address of BAM is 181 Bay Street, Suite 330, Toronto, Ontario, Canada, M5J 2T3.

(4)

Information is as of December 31, 2018 and is based on Amendment No. 6 to Schedule 13G dated February 6, 2019, which was filed by BlackRock, Inc. BlackRock, Inc. reported: (i) sole voting power over 5,402,990 of such shares; and (ii) and sole dispositive power over 5,621,465 of such shares as the parent holding company or control person of BlackRock Life Limited, BlackRock (Netherlands) B.V., BlackRock Advisors, LLC, BlackRock Asset Management Canada Limited, BlackRock Asset Management Ireland Limited, BlackRock Asset Management Schweiz AG, BlackRock Financial Management, Inc., BlackRock Fund Advisors, BlackRock Institutional Trust Company, National Association, BlackRock Investment Management (UK) Ltd., BlackRock Japan Co., Ltd., BlackRock Investment Management (Australia) Limited, and BlackRock Investment Management, LLC.

(5)

Information is as of December 31, 2018 and is based on a Schedule 13G dated February 13, 2019, which was filed by Tortoise Capital Advisors, L.L.C. (“TCA”) and Tortoise MLP & Pipeline Fund, a series of Managed Portfolio Series, a Delaware statutory trust (“TORIX”). TCA reported (i) sole voting power over 9,963 of such shares; (ii) shared voting power over 4,868,967 of such shares; (iii) sole dispositive power over 9,963 of such shares; and (iv) shared dispositive power over 4,868,967 of such shares. TORIX reported (i) shared voting power over 4,446,273 of such shares; and (ii) shared dispositive power over 4,446,273 of such shares. TCA reported that it acts as an investment advisor to certain investment companies, including TORIX. TCA, by virtue of investment advisory agreements with certain investment companies, has all investment and voting power over securities owned of record by such investment companies and these investment companies may be deemed to be the beneficial owner of the securities they own of record because they have the right to acquire investment and voting power through termination of their investment advisory agreement with TCA. TCA therefore reported that it shares voting power and dispositive power over shares owned of record by these investment companies and TORIX has reported that it shares voting power and dispositive power over the shares owned of record by it. TCA reported that it also acts as an investment advisor to certain managed accounts and under contractual agreements with these managed account clients, TCA has investment and voting power. TCA reported that it shares investment and voting power over the shares held by these client managed accounts despite a delegation of investment and voting power to TCA because the clients have the right to acquire investment and voting power through termination of their agreements with TCA and TCA may be deemed the beneficial owner of such shares. The address of TORIX is 615 East Michigan Street, Milwaukee, Wisconsin 53202.

(6)

Based on information provided to SemGroup by TCA on July 12, 2019, as of June 30, 2019 TCA has (i) sole voting and dispositive power over 9,963 of such shares; and (ii) shared voting and dispositive power over 15,037 of such shares. The foregoing shares of SemGroup preferred stock are convertible into 856,274 shares of SemGroup common stock as of October 25, 2019. TCA indicated that it acts as an investment advisor to certain investment companies registered under the Investment Company Act of 1940. TCA, by virtue of investment advisory agreements with these investment companies, has all investment and voting power over

 

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  securities owned of record by these investment companies. However, despite their delegation of investment and voting power to TCA, these investment companies may be deemed to be the beneficial owners under Rule 13d-3 of the Exchange Act of the securities they own of record because they have the right to acquire investment and voting power through termination of their investment advisory agreement with TCA. Thus, TCA indicated that it shares voting power and dispositive power over the securities owned of record by these investment companies.
(7)

Except as described in note 9 to this table, information is as of June 30, 2019 and is based on a Schedule 13G dated July 25, 2019 (the “Warburg 13G”), which was filed by WP SemGroup Holdings, L.P. (“WP SemGroup LP”), WP Cayman SemGroup Holdings, L.P. (“WP Cayman SemGroup LP”), Warburg Pincus (Europa) Private Equity XII (Cayman), L.P. (“WP Europa PE XII LP”), Warburg Pincus (Cayman) XII, L.P. (“WP Cayman XII LP”), Warburg Pincus (Cayman) XII GP LLC (“WP Cayman XII GP LLC”), Warburg Pincus Partners II (Cayman), L.P. (“WPP II Cayman LP”), Warburg Pincus (Bermuda) Private Equity GP Ltd. (“WP Bermuda PE GP”), Charles R. Kaye, and Joseph P. Landy. According to the Schedule 13G, as of June 30, 2019, WP SemGroup LP may have been deemed to be the beneficial owner of 10,051,574 shares of SemGroup common stock, which represented the shares of SemGroup common stock underlying 300,000 shares of SemGroup preferred stock, on an as-converted basis, as of such date. The Schedule 13G further reported that each of WP Cayman SemGroup LP, as general partner of WP SemGroup LP; WP Europa PE XII LP, as general partner of WP Cayman SemGroup LP; WP Cayman XII LP, as general partner of WP Europa PE XII LP; WP Cayman XII GP LLC, as general partner of WP Cayman XII LP; WPP II Cayman LP, as sole member of WP Cayman XII GP LLC; WP Bermuda PE GP, as general partner of WPP II Cayman LP; and each of Charles R. Kaye and Joseph P. Landy, as sole Directors and Co-Chairmen of WP Bermuda PE GP may be deemed to be the beneficial owner of the shares of SemGroup common stock beneficially owned by WP SemGroup LP, but each disclaimed beneficial ownership of such shares. The address of all reporting persons in the Warburg 13G is c/o Warburg Pincus & Co, 450 Lexington Ave., New York, New New York 10017. On September 25, 2019, Energy Transfer filed a Schedule 13D disclosing its entry into the support agreement. As a result of its entry into the support agreement, Energy Transfer may be deemed to beneficially own the 10,051,574 shares of SemGroup common stock underlying the 300,000 shares of SemGroup preferred stock owned by WP SemGroup LP, but Energy Transfer disclaims beneficial ownership of such shares.

(8)

Such shares of SemGroup preferred stock are convertible into 10,275,273 shares of SemGroup common stock as of October 25, 2019; the increase in the number of shares of SemGroup common stock underlying such shares of SemGroup preferred stock as of October 25, 2019 compared to the number of shares of SemGroup common stock reported in the Warburg 13G reflects the increase in the liquidation preference on SemGroup preferred shares from accrued dividends since June 30, 2019.

(9)

Based on information provided to SemGroup by the holder on July 11, 2019, as of June 30, 2019 the following persons may exercise voting and/or dispositive powers with respect to such shares: Paul McPeeters – Portfolio Manager; Adam Karpf – Portfolio Manager; Christopher Linder – Senior Analyst; and Lance Marr – Senior Analyst. Such shares of SemGroup preferred stock are convertible into 856,273 shares of SemGroup common stock as of October 25, 2019.

Stock Ownership of Directors and Executive Officers

The following table sets forth, as of October 25, 2019, the beneficial ownership of SemGroup common stock by:

 

   

each of SemGroup’s directors;

 

   

each of SemGroup’s named executive officers; and

 

   

all of SemGroup’s directors and executive officers as a group.

 

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None of SemGroup’s directors or executive officers beneficially owns any shares of SemGroup preferred stock.

 

Name

   Shares of SemGroup
Common Stock
Beneficially Owned (1)
     Percentage
of Class

Ronald A. Ballschmiede (2)

     43,205      *

Sarah M. Barpoulis (3)

     40,442      *

Carlin G. Conner

     251,473      *

Karl F. Kurz

     48,780      *

James H. Lytal

     35,058      *

William J. McAdam (4)

     64,300      *

Thomas R. McDaniel (5)

     60,653      *

Thomas F. DeLorbe (7)

     44,555      *

Robert N. Fitzgerald (6)

     133,039      *

Susan L. Lindberg

     29,329      *

Timothy R. O’Sullivan (7)

     82,536      *

All executive officers and directors as a group (12 people)

     846,232      1.06%

 

*

Less than one percent.

(1)

Shares beneficially owned include shares of restricted SemGroup common stock held by SemGroup’s directors and executive officers over which they have voting power but not investment power as follows: Mr. Ballschmiede – 10,270 shares; Ms. Barpoulis – 10,666 shares; Mr. Conner – 123,969 shares; Mr. Kurz – 9,675 shares; Mr. Lytal – 10,468 shares; Mr. McAdam – 10,270 shares; Mr. McDaniel – 13,640 shares; Mr. DeLorbe – 25,379 shares; Mr. Fitzgerald – 61,305 shares; Ms. Lindberg – 29,329 shares; and Mr. O’Sullivan – 38,674 shares; and all executive officers and directors as a group – 431,917 shares. Otherwise, except to the extent noted below, each named person has sole voting and dispositive power over their respective shares reported.

(2)

Includes 12,008 shares of SemGroup common stock held of record by the RAB GRAT 2016-1 grantor annuity trust, of which Mr. Ballschmiede is the sole trustee and sole annuitant.

(3)

Includes 11,433 shares of SemGroup common stock held of record by the Sarah M. Barpoulis Living Trust dated September 17, 2003, of which Ms. Barpoulis and her spouse are co-trustees. Each trustee has independent voting power and dispositive power over the shares held in the trust.

(4)

Includes (a) 25,000 shares of SemGroup common stock held of record by the C. Stephanie McAdam Living Trust dated November 6, 2009, of which Mr. McAdam and his spouse are co-trustees and (b) 20,000 shares of SemGroup common stock held of record by the William J. McAdam Living Trust dated November 6, 2009 of which Mr. McAdam and his wife are co-trustees. Each trustee has independent control and voting power of these trusts.

(5)

Includes 47,013 shares of SemGroup common stock held of record by the McDaniel Trust dated July 26, 2000, of which Mr. McDaniel and his spouse are co-trustees. Each trustee has independent voting power and dispositive power over the shares held in the trust.

(6)

Includes 10 shares of SemGroup common stock held by son.

(7)

Messrs. O’Sullivan and DeLorbe transitioned to non-executive roles as of January 1, 2019.

Merger Expenses, Fees and Costs

All fees, costs and expenses incurred by Energy Transfer and SemGroup in connection with the merger will be paid by the party incurring those fees, costs or expenses, whether or not the merger is completed, except that the fees and expenses incurred in connection with the printing, filing and mailing of this document (including applicable SEC filing fees) and filing fees payable under the HSR Act and foreign antitrust laws will be borne equally by Energy Transfer and SemGroup.

 

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In the event of a termination of the merger agreement under certain circumstances, SemGroup may be required to pay Energy Transfer a breakup fee of $54,500,000. Additionally, in certain circumstances, upon termination of the merger agreement, SemGroup may be obligated to pay Energy Transfer’s costs and expenses related to the merger in an amount not to exceed $27,250,000. See “The Merger Agreement – Breakup Fee and Energy Transfer Expenses.”

Expected Timing of the Merger

Energy Transfer and SemGroup currently expect to complete the merger in late 2019, subject to the receipt of required SemGroup stockholder approval and regulatory approvals and the satisfaction or waiver of the other conditions to completion of the merger. Because many of the conditions to completion of the merger are beyond the control of Energy Transfer and SemGroup, the exact timing for completion of the merger cannot be predicted with any degree of certainty.

No Energy Transfer Unitholder Approval

Energy Transfer unitholders are not required to approve the merger agreement or the merger or the issuance of ET common units in connection with the merger.

Accounting Treatment of the Transactions

In accordance with accounting principles generally accepted in the United States and in accordance with Financial Accounting Standards Board’s Accounting Standards Codification Topic 805-Business Combinations, Energy Transfer will account for the merger as an acquisition of a business.

Regulatory Approvals

The following is a summary of the material regulatory requirements for completion of the transactions.

Antitrust. Under the HSR Act, and related rules, certain transactions, including the merger, may not be completed until notifications have been given and information furnished to the Antitrust Division and the FTC and all statutory waiting period requirements have been satisfied. Energy Transfer and SemGroup each filed the required notification and report forms under the HSR Act on October 3, 2019 and on October 16, 2019 were informed by the FTC that the waiting period was terminated.

At any time before or after the effective time of the merger, the Antitrust Division, the FTC or foreign antitrust authorities could take action under the U.S. or foreign antitrust laws, including seeking to prevent the merger, to rescind the merger or to conditionally approve the merger upon the divestiture of assets of Energy Transfer or SemGroup or subject to other remedies. In addition, U.S. state attorneys general could take action under the antitrust laws as they deem necessary or desirable in the public interest, including, without limitation, seeking to enjoin the completion of the merger or permitting completion subject to regulatory concessions or conditions. Private parties may also seek to take legal action under the antitrust laws under some circumstances. There can be no assurance that a challenge to the merger on antitrust grounds will not be made or, if such a challenge is made, that it would not be successful.

General. Pursuant to the terms of the merger agreement, Energy Transfer and SemGroup have agreed to use their respective reasonable best efforts to take, or cause their subsidiaries to take, all actions necessary to obtain all regulatory approvals required to consummate the merger.

Pursuant to the merger agreement, Energy Transfer has agreed to take, or cause to be taken, any and all steps and to make, or cause to be made, any and all undertakings necessary to avoid or eliminate each and every impediment to consummation of the transactions contemplated by the merger agreement under regulatory laws (as defined in the merger agreement), including taking any action (including any action that limits Energy Transfer’s freedom of action, ownership or control with respect to, or its ability to retain or hold, any of the

 

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businesses, assets, product lines or properties of Energy Transfer) as may be required in order to obtain all approvals and other confirmations or to avoid the commencement of any action to prohibit the merger, or, in the alternative, to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any action or proceeding seeking to prohibit the merger or delay the closing beyond the end date.

Exchange of Shares

Computershare Trust Company, N.A. will serve as the exchange agent for purposes of issuing the merger consideration.

As soon as reasonably practicable after the effective time (and not later than the 5th business day following the effective time), the exchange agent will mail to each holder of shares of SemGroup common stock which at the effective time were converted into the right to receive the merger consideration, (i) a letter of transmittal and (ii) instructions for use in effecting the surrender of the shares of SemGroup common stock in exchange for the merger consideration, including, cash, ET common units (which will be issued in book-entry form) and cash in lieu of any fractional ET common units. Such holders will be paid the merger consideration to which they are entitled upon the surrender to the exchange agent of such shares of SemGroup common stock and a duly completed and validly executed letter of transmittal and any other documents required by the exchange agent. No interest will be paid or will accrue on any cash amounts received as merger consideration or in lieu of any fractional ET common units.

No distributions with respect to ET common units with a record date after the effective time will be paid to the holder of any unsurrendered shares of SemGroup common stock with respect to the ET common units represented by such shares, and no cash payment in lieu of fractional ET common units will be paid to any such holder, until such shares of SemGroup common stock have been surrendered in accordance with the terms of the merger agreement. Subject to applicable laws, following surrender of any such shares of SemGroup common stock, the record holders of such shares will be paid, without interest, (i) promptly after such surrender, the number of whole ET common units to which such holder is entitled, payment by cash or check of the amount of cash merger consideration to which such holder is entitled, together with any cash payable in lieu of fractional ET common units to which such holder is entitled, and the amount of distributions with a record date after the effective time theretofore paid with respect to such whole ET common units and (ii) at the appropriate payment date, the amount of distributions with a record date after the effective time and a payment date subsequent to the surrender of such shares of SemGroup common stock payable with respect to such whole ET common units.

All merger consideration issued upon the surrender for exchange of shares of SemGroup common stock in accordance with the terms of the merger agreement and any cash paid in lieu of fractional ET common units or as distributions pursuant to the merger agreement will be deemed to have been issued (or paid) in full satisfaction of all rights pertaining to such shares of SemGroup common stock. After the effective time, the stock transfer books of SemGroup will be closed, and there will be no further registration of transfers on the stock transfer books of SemGroup common stock. If, after the effective time, shares of SemGroup common stock are presented to SemGroup or the exchange agent for any reason, they will be cancelled and exchanged as provided in the merger agreement. If any shares of SemGroup common stock have been lost, stolen or destroyed, the exchange agent will issue the merger consideration to be paid with respect to such shares, upon the making of an affidavit of the fact by the person claiming their shares of SemGroup common stock to be lost, stolen or destroyed and, if required by Energy Transfer, the posting of a bond, in such amount as Energy Transfer determines, as indemnity against any claim that many be made against it with respect to such claimed lost stolen or destroyed shares.

Each of Energy Transfer, Merger Sub and the exchange agent will be entitled to deduct and withhold from the merger consideration otherwise payable to any holder of shares, such amounts as are required to be withheld or deducted under the Internal Revenue Code of 1986, as amended (the “Code”), or any tax law with respect to the making of such payment. To the extent that amounts are withheld and paid over to the applicable governmental entity, such withheld or deducted amounts will be treated as having been paid to the holder of the shares of SemGroup common stock, in respect of which such deduction and withholding were made.

 

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One year after the effective time, any portion of the exchange fund that remains undistributed to former SemGroup stockholders will be delivered to Energy Transfer and any holders of shares of SemGroup common stock who have not surrendered such shares to the exchange agent in compliance with the merger agreement may thereafter look only to Energy Transfer for payment of their claim for the applicable merger consideration, any cash in lieu of fractional common units, and any distributions payable pursuant to the merger agreement.

Listing of ET Common Units Issued in the Transactions; Delisting and Deregistration of SemGroup Common Stock After the Transactions

It is a condition to the completion of the transactions that the ET common units deliverable to the stockholders of SemGroup as contemplated by the merger agreement will have been approved for listing (subject, if applicable, to official notice of issuance) for trading on the NYSE. Upon completion of the merger, the SemGroup common stock will cease to be listed on the NYSE and will subsequently be deregistered under the Exchange Act.

Litigation Related to the Merger

On October 15, 2019, a putative class action lawsuit captioned Thompson v. SemGroup Corporation, et al., Case No. 1:19CV01948, was filed in the United States District Court for the District of Delaware. Also on October 15, 2019, a putative class action lawsuit captioned Walpole v. SemGroup Corp. et al., Case No. 1:19CV01957 was filed in the United States District Court for the District of Delaware. On October 18, 2019, a putative class action lawsuit captioned Topley v. SemGroup Corp. et al., 1:19CV09630 was filed in the United States District Court for the Southern District of New York. On October 28, 2019, a putative class action lawsuit captioned Lawrence v. SemGroup Corporation et al., 1:19CV02035 was filed in the United States District Court for the District of Delaware. Each of the petitions names as defendants the members of the SemGroup board of directors, as well as SemGroup, Energy Transfer or Merger Sub.

The plaintiffs in the above mentioned lawsuits allege purported claims challenging the merger and this proxy statement/prospectus filed in connection with the merger. According to the plaintiffs, this proxy statement/prospectus is allegedly misleading because, among other things, it fails to disclose certain information concerning, in general, (a) SemGroup’s or Energy Transfer’s financial projections and (b) certain financial information regarding Jefferies’ analyses in connection with the merger. Based on these allegations, and in general, the plaintiffs allege that (i) SemGroup and the members of SemGroup’s board of directors have violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and (ii) the members of SemGroup’s board of directors, Energy Transfer or Merger Sub have violated Section 20(a) of the Exchange Act.

The defendants believe the allegations of the foregoing actions lack merit and intend to contest each lawsuit vigorously.

 

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THE MERGER AGREEMENT

The following section summarizes material provisions of the merger agreement. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. This summary is subject to, and qualified in its entirety by reference to, the merger agreement, which is attached as Annex A to this document and is incorporated by reference herein. The rights and obligations of the parties are governed by the express terms and conditions of the merger agreement and not by this summary or any other information contained in this document. You are urged to read the merger agreement carefully and in its entirety before making any decisions regarding the merger.

The merger agreement summary is included in this document only to provide you with information regarding the terms and conditions of the merger agreement, and not to provide any other factual information about Energy Transfer or SemGroup or their respective subsidiaries, affiliates or businesses. Accordingly, the representations and warranties and other provisions of the merger agreement should not be read alone, but instead should be read together with the information provided elsewhere in this document and in the documents incorporated by reference herein. See “Where You Can Find More Information.”

The representations, warranties and covenants contained in the merger agreement and described in this document were made only for purposes of the merger agreement and as of specific dates and may be subject to more recent developments, were made solely for the benefit of the other parties to the merger agreement and may be subject to limitations agreed upon by the contracting parties, including being qualified by reference to confidential disclosures which may modify, qualify or create exceptions to the representations and warranties, for the purposes of allocating risk between the parties to the merger agreement instead of establishing these matters as facts, and may apply standards of materiality in a way that is different from what may be viewed as material by you or other investors. The representations and warranties contained in the merger agreement do not survive the effective time of the merger. Moreover, information concerning the subject matter of the representations, warranties, covenants and agreements may change after the date of the merger agreement. Energy Transfer and SemGroup will provide additional disclosure in their filings with the SEC, to the extent that they are aware of the existence of any material facts that are required to be disclosed under federal securities laws and that might otherwise contradict the terms and information contained in the merger agreement and will update such disclosure as required by federal securities laws.

The Merger

The merger agreement by and among Energy Transfer, Merger Sub and SemGroup provides for the merger of Merger Sub with and into SemGroup, with SemGroup as the surviving entity and becoming a wholly owned subsidiary of Energy Transfer. The certificate of incorporation and bylaws of SemGroup immediately prior to the effective time of the merger will be the certificate of incorporation and bylaws of SemGroup after the merger unless and until such are amended following the merger.

Merger Closing and Effective Time

The closing of the merger will be on the second business day after the satisfaction or waiver of the conditions to closing, which are described in the section titled “– Conditions to the Merger” unless Energy Transfer and SemGroup agree in writing to a different date. The merger will be effective at the time the certificate of merger is filed with the Secretary of State of the State of Delaware or at such later time as the parties agree upon and is specified in the certificate of merger in accordance with the DGCL and the Delaware LLC Act (the “effective time”).

Directors and Officers

Certain directors and officers of Energy Transfer will be the initial directors and officers of SemGroup following the effective time and will hold their respective positions until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

 

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Merger Consideration

At the effective time, each share of SemGroup common stock outstanding immediately prior to the effective time (other than shares (w) held by SemGroup in treasury, (x) held directly by Energy Transfer or Merger Sub, (y) held by subsidiaries of the parties or (z) held by any holder who properly exercises and perfects appraisal rights in respect of such shares) will be cancelled and converted into the right to receive:

 

   

$6.80 in cash without interest; and

 

   

0.7275 of an ET common unit and cash in lieu of any fractional ET common units.

In accordance with the Certificate of Designations, each share of SemGroup preferred stock outstanding immediately prior to the effective time shall, at the election of the holders of a majority of such shares, either (i) convert into shares of SemGroup common stock immediately prior to the effective time and receive the merger consideration, (ii) be exchanged for a “Substantially Equivalent Security” (as defined in the Certificate of Designations) or (iii) be redeemed by SemGroup for cash at a price per share equal to 101% of the liquidation preference. Pursuant to the support agreement, WP SemGroup, which owns a majority of the outstanding SemGroup preferred stock, has agreed to elect to require SemGroup to redeem all of the SemGroup preferred stock for cash at a price per share equal to 101% of the liquidation preference thereof, which is generally calculated as $1,000 plus accrued and accumulated dividends on the preferred stock as adjusted in accordance with the Certificate of Designations and which was $1,130.28 per share as of the record date.

Conditions to the Merger

Conditions to Each Party’s Obligations

Each party’s obligation to complete the merger is subject to the fulfillment or waiver of the following conditions at or prior to the effective time:

 

   

the merger agreement must have been approved by the holders of a majority of the outstanding shares of SemGroup common stock and SemGroup preferred stock, on an as-converted basis, voting as a single class;

 

   

the absence of any law, injunction, order or decree by any court or governmental entity of competent jurisdiction which prohibits or prevents the consummation of the merger;

 

   

the expiration or termination of any waiting period under the HSR Act must have occurred (early termination of the waiting period under the HSR Act was granted on October 16, 2019); and

 

   

the registration statement on Form S-4 (of which this document forms a part) must be effective and the absence of any SEC stop order or the initiation or threat of any proceedings seeking a stop order.

Conditions to SemGroup’s Obligations

The obligation of SemGroup to effect the merger is further subject to the fulfillment, or waiver by SemGroup prior to the effective time, of the following conditions:

 

   

the representations and warranties of Energy Transfer and Merger Sub in the merger agreement must be true and correct as of the date of the merger agreement and as of the closing date as though made at the closing date (without giving effect to any materiality, material adverse effect and similar qualifiers) except where the failure to be true and correct would not, in the aggregate, have a material adverse effect on Energy Transfer and Merger Sub, provided that the representations and warranties that speak only as of a particular date or period need only be true and correct as of such date or period, except:

 

   

the representations and warranties of Energy Transfer and Merger Sub regarding the capitalization of Energy Transfer and its subsidiaries must be true and correct except for immaterial inaccuracies both as of the date of the merger agreement and as of the closing date as though made at the closing date, except for immaterial inaccuracies; and

 

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the representations and warranties of Energy Transfer and Merger Sub regarding the absence of a material adverse effect at Energy Transfer since June 30, 2019 must be true and correct as of the date of the merger agreement and as of the closing date;

 

   

Energy Transfer must have performed, in all material respects, all of its obligations and complied with all covenants required by the merger agreement to be performed or complied with prior to the effective time;

 

   

Energy Transfer must have delivered to SemGroup a certificate, certifying to the effect that the two foregoing conditions to closing have been satisfied; and

 

   

ET common units to be issued in the merger must have been approved for listing on the NYSE, subject to official notice of issuance;

Conditions to Energy Transfer’s Obligations

The obligation of Energy Transfer to effect the merger is further subject to the fulfillment, or waiver by Energy Transfer, at or prior to the effective time, of the following conditions:

 

   

the representations and warranties of SemGroup in the merger agreement must be true and correct as of the date of the merger agreement and as of the closing date as though made at the closing date (without giving effect to any materiality, material adverse effect and similar qualifiers) except where the failure to be true and correct would not, in the aggregate, have a material adverse effect on SemGroup, provided that the representations and warranties that speak only as of a particular date or period need only be true and correct as of such date or period, except:

 

   

the representations and warranties of SemGroup regarding the equity interests of SemGroup must be true and correct except for immaterial inaccuracies both as of the date of the merger agreement and as of the closing date as though made at the closing date; and

 

   

the representations and warranties of SemGroup regarding the absence of a material adverse effect at SemGroup since June 30, 2019 must be true and correct as of the date of the merger agreement and as of the closing date;

 

   

SemGroup must have performed, in all material respects, all of its obligations and complied with all covenants required by the merger agreement to be performed or complied with prior to the effective time; and

 

   

SemGroup must have delivered to Energy Transfer a certificate, certifying to the effect that the two foregoing conditions to closing have been satisfied.

Appraisal Rights

Holders of SemGroup common stock who do not vote for the adoption of the merger and who otherwise comply with the applicable statutory procedures of Section 262 of the DGCL will have the right to obtain an appraisal of the value of their shares of SemGroup common stock in connection with the merger. This means that stockholders are entitled to obtain a judicial determination of the fair value of their shares of SemGroup common stock (exclusive of any element of value arising from the accomplishment or expectation of the merger) determined by the Delaware Court of Chancery and entitled to receive payment based upon that valuation, together with a fair rate of interest, in lieu of any consideration to be received under the merger agreement. Holders of SemGroup preferred stock are not entitled to appraisal rights with respect to shares of SemGroup preferred stock.

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to perfect appraisal rights. This summary, however, is not a complete statement of law pertaining to appraisal rights under Delaware law and is qualified in its

 

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entirety by the full text of Section 262 of the DGCL, which is attached hereto as Annex D. The preservation and exercise of appraisal right requires strict and timely adherence to the applicable provisions of the DGCL. Failure to follow the requirements of Section 262 of the DGCL for perfecting appraisal rights may result in the loss of such rights. All references in this summary to a “stockholder” are to the record holder of SemGroup common stock on the record date for the special meeting unless otherwise indicated.

If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 of the DGCL contained in Annex D hereto carefully and should consult your legal advisor since failure to timely and properly comply with the requirements of Section 262 of the DGCL will result in the loss of your appraisal rights under the DGCL. All demands for appraisal must be received prior to the vote on the merger agreement and should be addressed to SemGroup Corporation, Two Warren Place, 6120 South Yale Avenue, Suite 1500, Tulsa, Oklahoma 74136, Attention: General Counsel, and should be executed by, or on behalf of, the record holder of the shares of SemGroup common stock. Holders of SemGroup common stock who desire to exercise their appraisal rights must not vote in favor of the merger agreement and must continuously hold their shares of SemGroup common stock through the effective date of the merger.

Under Section 262 of the DGCL, where a merger agreement relating to a proposed merger is to be submitted for adoption at a meeting of stockholders, as in the case of the special meeting, the corporation, not less than 20 days prior to such meeting, must notify each of its stockholders who was a stockholder on the record date for notice of such meeting with respect to shares for which appraisal rights are available, that appraisal rights are so available, and must include in each such notice a copy of Section 262 of the DGCL. This document constitutes such notice to the holders of SemGroup common stock and Section 262 of the DGCL is attached to this document as Annex D.

If you wish to exercise appraisal rights you must not vote for the adoption of the merger agreement and must deliver to SemGroup, before the vote on the proposal to adopt the merger agreement, a written demand for appraisal of your shares of SemGroup common stock. If you sign and return a proxy card that does not contain voting instructions or submit a proxy by telephone or through the internet that does not contain voting instructions, you will effectively waive your appraisal rights because such shares represented by the proxy will, unless the proxy is revoked, be voted for the adoption of the merger agreement. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must submit a proxy containing instructions to vote against the adoption of the merger agreement or abstain from voting on the adoption of the merger agreement. Neither voting against the adoption of the merger agreement, nor abstaining from voting or failing to vote on the proposal to adopt the merger agreement, will in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262 of the DGCL.

A demand for appraisal will be sufficient if it reasonably informs SemGroup of the identity of the stockholder and that such stockholder intends thereby to demand appraisal of such stockholder’s shares of common stock. This written demand for appraisal must be separate from any proxy or vote abstaining from or voting against the adoption of the merger agreement. If you wish to exercise appraisal rights, you must be the record holder of such shares of SemGroup common stock on the date the written demand for appraisal is made and you must continue to hold such shares of record through the effective date of the merger. Accordingly, a stockholder who is the record holder of shares of SemGroup common stock on the date the written demand for appraisal is made, but who thereafter transfers such shares prior to the effective date of the merger, will lose any right to appraisal in respect of such shares.

Only a holder of record of shares of SemGroup common stock on the record date for the special meeting is entitled to assert appraisal rights for such shares of common stock registered in that holder’s name. To be effective, a demand for appraisal by a stockholder must be made by, or on behalf of, such stockholder of record. The demand should set forth, fully and correctly, the stockholder’s name as it appears, with respect to shares evidenced by certificates, on his or her stock certificate, or, with respect to book-entry shares, on the stock ledger. Beneficial owners who do not also hold their SemGroup shares of record may not directly make appraisal

 

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demands to SemGroup. The beneficial holder must, in such cases, have the owner of record, such as a broker, bank or other nominee, submit the required demand in respect of those shares of SemGroup common stock. If shares of SemGroup common stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares of SemGroup common stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares of SemGroup common stock as a nominee for others, may exercise his or her right of appraisal with respect to the shares of SemGroup common stock held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares of SemGroup common stock as to which appraisal is sought. Where no number of shares of SemGroup common stock is expressly mentioned, the demand will be presumed to cover all shares of SemGroup common stock held in the name of the record owner.

If you hold your shares of SemGroup common stock in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker or the other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

If a stockholder who demands appraisal under Delaware law fails to perfect, or effectively withdraws or loses his or her rights to appraisal as provided under Delaware law, each share of SemGroup common stock held by such stockholder will be deemed to have been converted at the effective time into the right to receive the merger consideration, without interest thereon, less any withholding taxes. A stockholder may withdraw his or her demand for appraisal and agree to accept the merger consideration by delivering to us a written withdrawal of his or her demand for appraisal and acceptance of the merger consideration within 60 days after the effective date of the merger (or thereafter with the consent of the surviving entity). Notwithstanding the foregoing, no appraisal proceeding in the Delaware Court of Chancery will be dismissed as to any stockholder without the approval of the Delaware Court of Chancery, and such approval may be conditioned upon such terms as the Court deems just; provided, however, that any stockholder who has not commenced an appraisal action or joined that proceeding as a named party may withdraw his or her demand for appraisal and agree to accept the merger consideration offered within 60 days after the effective date.

Within 10 days after the effective date, the surviving entity will notify each stockholder who properly asserted appraisal rights under Section 262 of the DGCL and has not voted for the adoption of the merger agreement of the effective date of the merger. Within 120 days after the effective date, but not thereafter, either the surviving entity, or any stockholder who has complied with the requirements of Section 262 of the DGCL and who is otherwise entitled to appraisal rights, may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of SemGroup common stock held by all stockholders entitled to appraisal. A person who is the beneficial owner of shares of SemGroup common stock held in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file the petition described in the previous sentence. Upon the filing of the petition by a stockholder, service of a copy of such petition shall be made upon the surviving entity. We have has no obligation to file such a petition in the event there are dissenting stockholders. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify the stockholder’s previously written demand for appraisal. We have no present intent to file an appraisal petition, and stockholders seeking to exercise appraisal rights should not assume that the surviving entity will file such a petition or that it will initiate any negotiations with respect to the fair value of such shares of SemGroup common stock. Accordingly, stockholders who desire to have their shares of SemGroup common stock appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262 of the DGCL.

The costs of the appraisal action may be determined by the Delaware Court of Chancery and made payable by the parties as the Court deems equitable. The Court also may order that all or a portion of the expenses

 

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incurred by any stockholder in connection with an appraisal, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the shares entitled to appraisal.

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to us, SemGroup will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Delaware Court of Chancery with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares of SemGroup common stock and with whom agreements as to the value of their shares of SemGroup common stock have not been reached by the surviving entity. After notice to dissenting stockholders who demanded appraisal of their shares of SemGroup common stock, the Delaware Court of Chancery is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 of the DGCL and who have become entitled to the appraisal rights provided thereby. The Delaware Court of Chancery may require the stockholders who have demanded appraisal for their shares of SemGroup common stock to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder.

Within 120 days after the effective date, any stockholder (including any beneficial owner of shares entitled to appraisal rights) that has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the surviving entity a statement setting forth the aggregate number of shares of SemGroup common stock not voted in favor of the merger and with respect to which demands for appraisal have been timely received and the aggregate number of holders of those shares. These statements must be mailed to the stockholder within 10 days after a written request by such stockholder for the information has been received by the surviving entity, or within 10 days after expiration of the period for delivery of demands for appraisal under Section 262 of the DGCL, whichever is later.

In addition, Section 262 requires the Delaware Court of Chancery to dismiss appraisal proceedings as to all shares of SemGroup common stock if, immediately before the merger, such shares were listed on a national securities exchange unless (i) the total number of shares entitled to appraisal exceeds 1% of the outstanding shares of SemGroup common stock eligible for appraisal, or (ii) the value of the consideration provided in the merger for such total number of shares entitled to appraisal exceeds $1 million (such conditions, the “ownership thresholds”). Because shares of SemGroup common stock are listed on a national securities exchange and is expected to continue to be listed on such exchange immediately before the merger, at least one of the ownership thresholds must be met in order for SemGroup stockholders to be entitled to seek appraisal with respect to such shares of common stock.

After determination of the stockholders entitled to appraisal of their shares of SemGroup common stock, the Delaware Court of Chancery will appraise the shares of SemGroup common stock, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective date through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment. When the value is determined, the Delaware Court of Chancery will direct the payment of such value, with interest thereon accrued during the pendency of the proceeding, if the Delaware Court of Chancery so determines, to the stockholders entitled to receive the same, upon surrender by such stockholders of their certificates and book-entry shares.

In determining the fair value of the shares of SemGroup common stock, the Delaware Court of Chancery is required to take into account all relevant factors. Accordingly, such determination could be based upon considerations other than, or in addition to, the market value of the shares of SemGroup common stock, including, among other things, asset values and earning capacity. In Weinberger v. UOP, Inc., the Delaware

 

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Supreme Court stated, among other things, that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered in an appraisal proceeding. We may argue in an appraisal proceeding that, for purposes of such a proceeding, the fair value of the shares of SemGroup common stock is less than the merger consideration. Therefore, the value so determined in any appraisal proceeding could be the same as, or more or less than, the merger consideration.

Section 262 of the DGCL provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court construed Section 262 of the DGCL to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” In view of the complexity of Section 262 of the DGCL, stockholders who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisors.

Any stockholder who has duly demanded and perfected an appraisal in compliance with Section 262 of the DGCL will not, after the effective date of the merger, be entitled to vote his or her shares for any purpose or be entitled to the payment of dividends or other distributions thereon, except dividends or other distributions payable to holders of record of shares of SemGroup common stock as of a date prior to the effective date of the merger.

If you desire to exercise you appraisal rights, you must not vote for the adoption of the merger agreement and you must strictly comply with the procedures set forth in Section 262 of the DGCL.

Failure to take any required step in connection with the exercise of appraisal rights will result in the termination or waiver of such rights.

Representations and Warranties

The merger agreement contains general representations and warranties made by each of Energy Transfer and Merger Sub, on the one hand, and SemGroup on the other, to the other party, regarding aspects of their respective businesses, financial condition and structure, as well as other facts pertinent to the merger. These representations and warranties are in many respects subject to materiality, knowledge and other similar qualifications contained in the merger agreement and expire at the effective time. The representations and warranties of each of Energy Transfer and Merger Sub, on the one hand, and SemGroup on the other, were made solely for the benefit of the other party. In addition, those representations and warranties were intended not as statements of actual fact, but rather as a way of allocating risk between the parties, were modified by the disclosure schedules attached to the merger agreement, were subject to the materiality standard described in the merger agreement (which may differ from what may be viewed as material by you) and were made only as of the date of the merger agreement and the closing date of the merger or another date as is specified in the merger agreement. Information concerning the subject matter of these representations or warranties may have changed since the date of the merger agreement. Energy Transfer and SemGroup will provide additional disclosure in their SEC reports to the extent that they are aware of the existence of any material facts that are required to be disclosed under federal securities laws and that might otherwise contradict the terms and information contained in the merger agreement and will update such disclosure as required by federal securities laws.

SemGroup

SemGroup made a number of representations and warranties to Energy Transfer and Merger Sub, including representations and warranties related to the following matters:

 

   

the organization, qualification to do business and good standing of SemGroup and its subsidiaries;

 

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the capital structure of SemGroup and its subsidiaries;

 

   

the authority of SemGroup, and the governmental and regulatory approvals necessary, to enter into the merger agreement and consummate the transactions contemplated thereby, and the absence of any loss, or creation of any lien, or violation of the organizational documents of SemGroup and its subsidiaries or any applicable laws resulting from the consummation of the transactions contemplated by the merger agreement;

 

   

SemGroup and its subsidiaries’ SEC filings and the financial statements contained therein;

 

   

SemGroup’s internal controls over financial reporting and disclosure controls and procedures;

 

   

the absence of undisclosed liabilities for SemGroup and its subsidiaries;

 

   

SemGroup and its subsidiaries’ compliance with laws and permits;

 

   

SemGroup and its subsidiaries’ environmental liabilities;

 

   

SemGroup and its subsidiaries’ employee benefit plans and other employee benefits matters;

 

   

the conduct of SemGroup and its subsidiaries’ business and the absence of certain adverse changes or events since June 30, 2019;

 

   

litigation, investigations, claims or judgments against SemGroup or its subsidiaries;

 

   

the accuracy of the information supplied by SemGroup and its subsidiaries for this document and the registration statement of which it is a part;

 

   

certain regulatory matters related to SemGroup and its subsidiaries;

 

   

SemGroup and its subsidiaries’ taxes, tax returns and other tax matters;

 

   

certain labor matters related to SemGroup and its subsidiaries;

 

   

SemGroup and its subsidiaries’ intellectual property;

 

   

SemGroup and its subsidiaries’ owned and leased real property and rights-of-way;

 

   

SemGroup and its subsidiaries’ insurance policies;

 

   

the receipt by the SemGroup board of directors of an opinion from Jefferies related to the fairness of the merger consideration to be received by holders of SemGroup common stock;

 

   

SemGroup and its subsidiaries’ material contracts and the absence of a material breach of such contracts;

 

   

investment banker, broker or finder fees in connection with the consummation of the merger;

 

   

the inapplicability of Delaware’s anti-takeover statute restrictions; and

 

   

the absence of any additional Energy Transfer or Merger Sub representations or warranties beyond those in the merger agreement.

Energy Transfer

Energy Transfer and Merger Sub each also made a number of representations and warranties to SemGroup, including representations and warranties related to the following matters:

 

   

organization, qualification to do business and good standing of Energy Transfer and its subsidiaries;

 

   

the equity interests of Energy Transfer and capital structure of Merger Sub;

 

   

the authority of Energy Transfer and Merger Sub, and governmental and regulatory approvals necessary, to enter into the merger agreement and consummate the transactions contemplated thereby,

 

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and the absence of any loss, or creation of any lien, or violation of the organizational documents of Energy Transfer and its subsidiaries, or any applicable laws resulting from the consummation of the transactions contemplated by the merger agreement;

 

   

Energy Transfer and its subsidiaries’ SEC filings and the financial statements contained therein;

 

   

Energy Transfer’s internal controls over financial reporting and disclosure controls and procedures;

 

   

the absence of undisclosed liabilities for Energy Transfer and its subsidiaries;

 

   

Energy Transfer and its subsidiaries’ compliance with laws and permits;

 

   

Energy Transfer and its subsidiaries’ environmental liabilities;

 

   

Energy Transfer and its subsidiaries’ employee benefit plans and other employee benefits matters;

 

   

the conduct of Energy Transfer and its subsidiaries’ business and the absence of certain adverse changes or events since June 30, 2019;

 

   

litigation, investigations, claims or judgments against Energy Transfer or its subsidiaries;

 

   

the accuracy of the information supplied by Energy Transfer or its subsidiaries for this document and the registration statement of which it is a part;

 

   

certain regulatory matters related to Energy Transfer and its subsidiaries;

 

   

Energy Transfer’s taxes and tax returns and other tax matters;

 

   

certain labor matters related to Energy Transfer and its subsidiaries;

 

   

Energy Transfer and its subsidiaries’ owned and leased real property and rights-of-way;

 

   

Energy Transfer and its subsidiaries’ insurance policies;

 

   

Energy Transfer and its subsidiaries’ material contracts and the absence of a material breach of such contracts;

 

   

investment banker, broker or finder fees in connection with the consummation of the merger;

 

   

the lack of ownership of SemGroup common stock by Energy Transfer, its subsidiaries and affiliates;

 

   

Energy Transfer’s funds to consummate the merger and the other transactions contemplated by the merger agreement; and

 

   

the absence of any additional SemGroup representations or warranties beyond those in the merger agreement.

Definition of Material Adverse Effect

Many of the representations and warranties of Energy Transfer, Merger Sub and SemGroup are qualified by a material adverse effect standard. For purposes of the merger agreement, “material adverse effect,” with respect to either Energy Transfer or SemGroup, is defined to mean an event, change, effect, development or occurrence that has had, or is reasonably likely to have, a material adverse effect on the business, financial condition or continuing results of operations of either (i) Energy Transfer and its subsidiaries, taken as a whole or (ii) SemGroup and its subsidiaries, taken as a whole, as the case may be, in either case, other than any event, change, effect, development or occurrence:

 

   

disclosed in any of the applicable party’s SEC filings prior to the date of the merger agreement (excluding any disclosure set forth in any risk factor section, or in any section relating to forward looking statements) or as disclosed on the applicable party’s disclosure schedule to the merger agreement;

 

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generally affecting the economy, the financial or securities markets, or political, legislative or regulatory conditions, in the United States or elsewhere in the world (so long as it does not disproportionately affect the applicable party relative to similarly situated industry companies); or

 

   

resulting from or arising out of:

 

  (A)

changes or developments in the industries in which the applicable party or its subsidiaries conduct their business;

 

  (B)

changes or developments in prices for oil, natural gas or other commodities or for the applicable party’s raw material inputs and end products;

 

  (C)

the announcement or the existence of, or compliance with the merger agreement or the transactions contemplated thereby (including its impact on the relationships of the applicable party and its subsidiaries with employees, labor unions, customers, suppliers or partners, and including any lawsuit, action or other proceeding with respect to the merger or the other transactions contemplated by the merger agreement);

 

  (D)

taking of any action at the written request of (i) Energy Transfer or Merger Sub, in the case of SemGroup, or (ii) SemGroup, in the case of Energy Transfer;

 

  (E)

adoption, implementation, promulgation, repeal, modification, reinterpretation or proposal of any rule, regulation, ordinance, order, protocol or any other law of or by governmental entity, or market administrator;

 

  (F)

changes in GAAP or accounting standards or interpretations thereof;

 

  (G)

earthquakes, any weather-related or other force majeure event, or outbreak, or escalation of hostilities or acts of war or terrorism;

 

  (H)

failure by the applicable party to meet any financial projections or forecasts or estimates of revenues, earnings or other financial metrics for any period (although this exclusion does not affect a determination that the underlying event, change, effect, development or occurrence resulted in, or contributed to, a material adverse effect); or

 

  (I)

any changes in the share price or trading volume of the equity interests of Energy Transfer or SemGroup, as the case may be, or in their respective credit ratings (although this exclusion does not affect a determination that the underlying event, change, effect, development or occurrence resulted in, or contributed to, a material adverse effect);

except, in each case with respect to subclauses (A) and (B) and (E) through (G) above, to the extent disproportionately affecting Energy Transfer or SemGroup, as the case may be, and its subsidiaries, taken as a whole, relative to other similarly situated companies in the industries in which such party and its subsidiaries operate.

Conduct of Business Pending the Merger

SemGroup

SemGroup has agreed that, until the earlier of the termination of the merger agreement or the effective time, except (i) as required by law or any applicable stock exchange or regulatory authority, (ii) as may be agreed in writing by Energy Transfer (which consent will not be unreasonably withheld, delayed or conditioned), (iii) as may be contemplated or required by the merger agreement or (iv) as set forth on SemGroup’s disclosure schedule to the merger agreement, SemGroup:

 

   

will conduct the business of SemGroup and its subsidiaries in the ordinary course of business; and

 

   

will use commercially reasonable efforts to preserve intact their present lines of business, maintain its rights and franchises and preserve its relationships with customers and suppliers.

 

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SemGroup has further agreed that, on behalf of itself and its subsidiaries, until the earlier of the termination of the merger agreement or the effective time, except (i) as required by law or any applicable stock exchange or regulatory authority, (ii) as may be agreed in writing by Energy Transfer (which consent will not be unreasonably withheld, delayed or conditioned), (iii) as may be contemplated or required by the merger agreement or (iv) as set forth on SemGroup’s disclosure schedule, SemGroup:

 

   

will not adopt any amendment to its certificate of incorporation or bylaws, and will not permit its subsidiaries to do so;

 

   

will not permit its subsidiaries to split, combine or reclassify its capital stock or authorize the issuance of any other securities in lieu thereof, except for transactions by a wholly owned subsidiary of SemGroup which remains a wholly owned subsidiary after such transaction;

 

   

except in the ordinary course of business, will not, and not permit its subsidiaries to, authorize or pay any dividend or make any distribution with respect to outstanding shares of capital stock, except (1) by a subsidiary to SemGroup or its subsidiaries in the ordinary course, (2) those required under the organizational documents of the entity in effect on the date of the merger agreement and (3) regular quarterly cash distributions with customary record and payment dates on SemGroup common stock, not in excess of $0.4725 per share per quarter;

 

   

will not, and will not permit its material subsidiaries to, adopt a plan of complete or partial liquidation, dissolution, merger, or any reorganization, or enter into a letter of intent or agreement in principle with respect thereto, other than the merger, or reorganizations solely among SemGroup and its wholly owned subsidiaries or among its wholly owned subsidiaries;

 

   

will not, and will not permit its subsidiaries to, make any acquisition or make any loans, advances or capital contributions to, or investments in excess of $10 million, except (1) as contemplated by SemGroup’s fiscal 2019-2020 budget and capital expenditure plan or (2) among SemGroup and its wholly owned subsidiaries or among its wholly owned subsidiaries; that in each case, would not be expected to prevent, materially impede or materially delay the merger;

 

   

will not, and will not permit its subsidiaries to, sell, lease, license, transfer, exchange or swap or dispose of any properties or non-cash assets with a value of more than $10 million, except (1) of obsolete or worthless equipment, (2) of inventory, commodities and produced hydrocarbons, crude oil and refined products in the ordinary course of business or (3) among SemGroup and its wholly owned subsidiaries or among its wholly owned subsidiaries;

 

   

will not, and will not permit its subsidiaries to, (A) authorize any capital expenditures in excess of $10 million, except (1) as contemplated by SemGroup’s fiscal 2019-2020 budget and capital expenditure plan or (2) those made in response to any emergency, (B) authorize or commit to make any charitable contributions not authorized or contractually committed prior to the date of the merger agreement or (C) make any charitable contribution except as set forth on the SemGroup disclosure schedule;

 

   

except as required by any SemGroup benefit plan as in effect on the date of the merger agreement, will not, and will not permit its subsidiaries to, (1) increase the compensation or benefits payable or provided to SemGroup’s directors, officers, employees or other service providers, other than customary increases consistent with past practice for non-officer level employees, not to exceed 2% in the aggregate, (2) enter into or amend any employment, change of control, severance or retention agreement with any director, officer or employee, except (x) for customary employment agreements entered into with newly hired employees outside of the United States who are not officers or (y) for severance agreements entered into with employees who are not officers in connection with terminations of employment, in each case, in the ordinary course of business consistent with past practice, (3) establish, adopt, enter into, terminate or amend SemGroup benefit plan, except as expressly permitted under clause (2) above, as required by applicable law or for annual renewals of group benefit plans in the ordinary course of business consistent with past practice that would not result in material

 

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additional or increased costs, (4) enter into, terminate or amend any collective bargaining agreement, (5) make any change in SemGroup or its material subsidiaries’ key management structure, including the hiring of additional officers or the termination of existing officers (other than for cause), (6) grant any SemGroup equity awards, or (7) enter into or make any loans or advances to any of its officers, directors, employees, agents, or consultants (other than those for travel or reasonable business expenses);

 

   

will not, and will not permit its subsidiaries to, materially change financial accounting policies or procedures or any of its methods of reporting material items for financial accounting purposes, except as required by GAAP, SEC rule or policy or law;

 

   

will not, and will not permit its subsidiaries to, issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares of its capital stock or other ownership interest in SemGroup or any of its subsidiaries or any securities convertible into or exchangeable for any such shares or ownership interest, or any rights, warrants or options to acquire any such shares of capital stock, ownership interest or convertible or exchangeable securities or take any action to cause to be exercisable any otherwise unexercisable option under any existing SemGroup benefit plans (except as otherwise provided in the merger agreement or the terms of any unexercisable or unexercised options or warrants outstanding on the date of the merger agreement), other than (1) issuances of SemGroup common stock in respect of the exercise or settlement of any SemGroup equity awards outstanding on the date of the merger agreement, (2) the sale of SemGroup shares pursuant to the SemGroup employee stock purchase plan with respect to the offering period currently underway as of the date of the merger agreement, or (3) for transactions among SemGroup and its wholly owned subsidiaries or among its wholly owned subsidiaries;

 

   

will not, and will not permit its subsidiaries to acquire any shares of the capital stock of any of them or any rights, warrants or options to acquire any such shares, except for transactions among SemGroup and its subsidiaries or among its subsidiaries;

 

   

will not, and will not permit its subsidiaries to become liable for any indebtedness for borrowed money or any guarantee of such indebtedness, except (1) in the ordinary course of business, (2) among SemGroup and its wholly owned subsidiaries or among its wholly owned subsidiaries, (3) incurred to replace, renew, extend, refinance or refund any existing indebtedness on substantially the same or more favorable terms, (4) for any guarantees by SemGroup of indebtedness of its subsidiaries or guarantees by its subsidiaries of indebtedness of SemGroup or any SemGroup subsidiary and (5) incurred pursuant to SemGroup’s credit agreement or the credit agreement of SemCAMS, a joint venture of SemGroup, not to exceed $50 million; in each case, provided that such indebtedness does not impose or result in any additional restrictions or limitations that would be material to SemGroup and its subsidiaries, or, following the closing of the merger, Energy Transfer and its subsidiaries, other than any obligation to make payments on such indebtedness and other than any restrictions or limitations to which SemGroup or any subsidiary is subject as of the date of the merger agreement;

 

   

other than in the ordinary course of business, will not, and will not permit its subsidiaries to, modify, amend or terminate, or waive any rights under any SemGroup material contract or under any SemGroup permit, in a manner or with an effect that is materially adverse to SemGroup and its subsidiaries;

 

   

will not, and will not permit its subsidiaries to, waive, release, assign, settle or compromise any claim, action or proceeding, other than waivers, releases, assignments, settlements or compromises (1) equal to or lesser than the amounts reserved for it on the balance sheet as of June 30, 2019 or (2) that do not exceed $10 million;

 

   

will not (except in the ordinary course of business (1) change its fiscal year or any material method of tax accounting, (2) make, change or revoke any material tax election, (3) enter into any closing agreement, with respect to, or otherwise settle or compromise, any material tax liability, (4) file any material amended tax return, or (5) surrender a claim for a material refund of taxes;

 

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except as otherwise permitted by the merger agreement or for transactions between SemGroup and its subsidiaries or among its subsidiaries, will not, and will not permit its subsidiaries, to prepay, redeem, repurchase, defease, cancel or otherwise acquire any indebtedness or guarantees thereof of SemGroup or any subsidiary, other than at (1) stated maturity, (2) prepayment and repayment of existing indebtedness in connection with any replacement, renewal, extension, refinancing or refund thereof, (3) prepayment and repayment of revolving loans in the ordinary course of business, and (4) any required amortization payments and mandatory prepayments, in each case in accordance with the terms of the instrument governing such indebtedness as in effect on the date of the merger agreement; and

 

   

will not, and will not permit any of its subsidiaries to, agree to take any of the foregoing actions.

Energy Transfer

Energy Transfer has agreed that, until the earlier of the termination of the merger agreement or the effective time, except (i) as required by law or any applicable stock exchange or regulatory authority, (ii) as may be agreed in writing by SemGroup (which consent will not be unreasonably withheld, delayed or conditioned), (iii) as may be contemplated or required by the merger agreement, or (iv) as set forth on Energy Transfer’s disclosure schedule to the merger agreement, Energy Transfer:

 

   

will conduct the business of Energy Transfer and its subsidiaries in the ordinary course of business; and

 

   

will use commercially reasonable efforts to preserve intact their present lines of business, maintain its rights and franchises and preserve its relationships with customers and suppliers.

Energy Transfer has further agreed that, until the earlier of the termination of the merger agreement or the effective time, except (i) as required by law or any applicable stock exchange or regulatory authority, (ii) as may be agreed in writing by SemGroup (which consent will not be unreasonably withheld, delayed or conditioned), (iii) as may be contemplated or required by the merger agreement, or (iv) as set forth on Energy Transfer’s disclosure schedule, Energy Transfer:

 

   

will not adopt any amendment to Energy Transfer’s organizational documents or the organizational documents and governance arrangement of ET GP;

 

   

will not, and will not permit their subsidiaries to, split, combine or reclassify any of their equity interests or other ownership interests or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or equity interests, except for any such transaction by a wholly owned subsidiary of Energy Transfer which remains a wholly owned subsidiary after such transaction;

 

   

except in the ordinary course of business, will not, and will not permit its subsidiaries that are not wholly owned by Energy Transfer or wholly owned subsidiaries of such subsidiaries to, authorize or pay any dividends on or make any distribution with respect to its outstanding equity securities, except (1) by any subsidiaries only to Energy Transfer or any subsidiary of Energy Transfer in the ordinary course of business, (2) as required under the applicable organizational documents of such entity in effect on the date of the merger agreement and (3) regular quarterly cash distributions with respect to the common units and the Energy Transfer Operating, L.P. preferred units as set forth in Energy Transfer’s disclosure schedule;

 

   

will not, and will not permit any of its material subsidiaries to, adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization, other than the merger, consolidation, restructuring or reorganization solely among Energy Transfer and its subsidiaries or among Energy Transfer’s subsidiaries;

 

   

will not permit any of Energy Transfer’s subsidiaries to, make any acquisition or any other person or business or make loans, advances or capital contributions to, or investments in, any other person that would reasonably be expected to prevent, materially impede or materially delay the consummation of the merger;

 

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will not issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any equity interest or other ownership interest in Energy Transfer or any securities convertible into or exchangeable for any such equity interest or other ownership interest, or any rights, warrants or options to acquire any such equity interest, ownership interest or convertible or exchangeable securities or take any action to cause to be exercisable any otherwise unexercisable option under any existing Energy Transfer benefit plans, other than (1) issuances of common units in respect of any exercise of Energy Transfer equity awards and settlement of any Energy Transfer equity awards outstanding on the date of the merger agreement or as may be granted after the date of the merger agreement as permitted in the merger agreement, (2) the sale of ET common units pursuant to the exercise of options if necessary to effectuate an option direction upon exercise or for withholding of taxes, (3) the grant of equity compensation awards under the Energy Transfer equity plans, or (4) for transactions among Energy Transfer and its subsidiaries or among Energy Transfer’s subsidiaries;

 

   

will not acquire any equity securities of Energy Transfer or any rights, warrants or options to acquire any such equity securities, except for transactions among Energy Transfer and its subsidiaries or among Energy Transfer’s subsidiaries;

 

   

take any action or fail to take any action that would reasonably be expected to cause Energy Transfer to be treated, for U.S. federal income tax purposes, as a corporation; and

 

   

will not, and will not permit any of its subsidiaries to, agree to take any of the foregoing actions.

Mutual Access

Until the effective time or the earlier termination of the merger agreement, Energy Transfer and SemGroup agreed to afford the other party and its representatives, reasonable access during normal business hours to its and its subsidiaries’ personnel and properties, contracts, commitments, books and records and any reports, schedules or documents filed or received by it pursuant to law, together with such other accounting, financing, operating, environmental and other information as a party may reasonably request. Notwithstanding the obligations described above, neither SemGroup nor Energy Transfer is required to afford such access if it would unreasonably disrupt the operations of such party or its subsidiaries, would cause a violation of any agreement to which it or its subsidiaries is party, would cause a risk of a loss privilege to such party or its subsidiaries or would violate the law. Neither SemGroup or Energy Transfer or any of their respective representatives are permitted to perform onsite procedures on property of the other party or its subsidiaries without prior written consent. SemGroup and Energy Transfer are required to comply, and cause their respective subsidiaries and representatives to comply, with their respective obligations under the confidentiality agreement between SemGroup and Energy Transfer.

Non-Solicitation by SemGroup

Termination of Discussions

SemGroup agreed to, immediately following the execution of the merger agreement, cease and terminate any discussions related to any acquisition proposal (as defined below), and to cause its subsidiaries and their respective directors, officers and employees, and to use reasonable best efforts to cause its representatives, to cease and terminate such discussions.

Non-Solicitation Obligations

Subject to certain exceptions summarized below, from the date of the merger agreement until the earlier of the effective time or the termination of the merger agreement, SemGroup has agreed that it will not, and it will cause its subsidiaries, and its and their respective officers, directors, employees and representatives not to, directly or indirectly:

 

   

solicit, initiate, seek or knowingly encourage, induce or facilitate (including by way of furnishing non-public information) any proposal or offer or any inquiries regarding the making or submission of

 

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any proposal or offer, including any proposal or offer to SemGroup’s stockholders, that constitutes, or would reasonably be expected to lead to, an acquisition proposal;

 

   

furnish any non-public information regarding SemGroup or any of its subsidiaries, or afford access to the business, properties, books or records of SemGroup or any of its subsidiaries, in connection with or in response to an acquisition proposal or any inquiries regarding an acquisition proposal;

 

   

engage or participate in or otherwise facilitate any discussions or negotiations with any person (other than Energy Transfer, Merger Sub or their respective directors, officers, employees, affiliates or representatives) with respect to an acquisition proposal;

 

   

approve, endorse or recommend (or publicly propose to approve, endorse or recommend) any inquiry, proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal;

 

   

enter into any letter of intent, term sheet, memorandum of understanding, merger agreement, acquisition agreement, exchange agreement or duly execute any other agreement (whether binding or not) with respect to any inquiry, proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal or requiring SemGroup to abandon, terminate or fail to consummate the merger or any other transaction contemplated by the merger agreement;

 

   

unless the SemGroup board of directors, or any committee thereof, concludes in good faith, after consultation with its outside legal counsel, that the failure to take such action would be inconsistent with the fiduciary duties of the SemGroup board of directors to SemGroup’s stockholders, amend or grant any waiver, release or modification under, or fail to enforce, any standstill or similar agreement with respect to any of SemGroup or its subsidiaries’ equity securities, or

 

   

resolve, propose or agree to do any of the foregoing.

Exceptions to Non-Solicitation Provision

Notwithstanding its non-solicitation obligations described above, prior to obtaining SemGroup stockholder approval of the merger agreement, SemGroup may furnish non-public information regarding SemGroup or any of its subsidiaries, or afford access to the business, properties, books or records of SemGroup or any of its subsidiaries, and engage and participate in discussions and negotiations in response to an unsolicited, written and bona fide acquisition proposal that the SemGroup board of directors, or any committee thereof, concludes in good faith, after consultation with its financial advisors and outside legal counsel, constitutes or could reasonably be expected to result in a superior offer (as defined below) if (1) such acquisition proposal was received after the date of the merger agreement and did not result from a material breach of SemGroup’s non-solicitation obligations, (2) SemGroup notifies Energy Transfer in the manner required by the merger agreement and (3) SemGroup furnishes any non-public information to the maker of the acquisition proposal only pursuant to a confidentiality agreement that is not less restrictive to such person than the confidentiality agreement between SemGroup and Energy Transfer and any such information not previously provided to Energy Transfer will be provided or made available to Energy Transfer on a substantially concurrent timeline.

SemGroup’s non-solicitation obligations described above do not prohibit SemGroup from:

 

   

informing any person that SemGroup is a party to the merger agreement and of the non-solicitation restrictions therein; or

 

   

disclosing factual information regarding the business, financial condition or results of operations of SemGroup, including in the ordinary course of business with its partners, other members or other equityholders in any jointly owned subsidiary of SemGroup with respect to such subsidiary, or the fact that an acquisition proposal has been made, the identity of the party making such proposal or the material terms of such proposal or otherwise, to the extent SemGroup determines that such information is required to be disclosed under applicable law or that the failure to make such disclosure is reasonably likely to be inconsistent with the SemGroup board of directors’ fiduciary duties; provided,

 

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however, that any such disclosure that relates to the approval, recommendation or declaration of advisability by the SemGroup board of directors with respect to the merger agreement or an acquisition proposal will be deemed to be a change of the SemGroup board of directors recommendation to approve and adopt the merger agreement unless the SemGroup board of directors publicly states that its recommendation of the merger agreement has not changed or refers to the prior recommendation.

Additionally, SemGroup and its boards of directors will be permitted to disclose to the SemGroup’s stockholders a position or to issue a “stop, look and listen” communication under applicable Exchange Act rules, provided, however, any such disclosure that relates to the approval of the SemGroup board of directors with respect to the merger agreement or an acquisition proposal will be deemed to be a change of the SemGroup board of directors recommendation to approve and adopt the merger agreement unless it states its recommendation of the merger agreement has not changed or refers to the prior recommendation.

SemGroup is also permitted to seek clarifications of certain acquisition proposals. SemGroup has agreed to notify Energy Transfer promptly (orally and in writing and no later than 24 hours thereafter) upon the receipt of an acquisition proposal or any inquiry or request for discussions or negotiations regarding an acquisition proposal or for non-public information. Such notice must include the identity of the person making such acquisition proposal and if in writing, a copy of such written acquisition proposal and any related draft agreements, or, if oral, a reasonably detailed summary thereof, in each case, including any modifications made. Thereafter, SemGroup must keep Energy Transfer informed in all material respects on a prompt basis with respect to any change to the material terms of any such acquisition proposal (and no later than 24 hours following any such change).

Obligation to Recommend and Maintain its Recommendation to Approve and Adopt the Merger Agreement

SemGroup, through the SemGroup board of directors, has agreed, subject to its right to change its recommendation in the circumstances described below, to recommend the approval of the merger agreement to its stockholders and to use its reasonable best efforts to solicit from its stockholders proxies in favor of the approval and adoption of the merger agreement and to take all other action necessary or advisable to secure the vote or consent of the SemGroup stockholders.

Except as permitted below, neither SemGroup nor the SemGroup board of directors nor any committee thereof may:

 

   

withhold, withdraw amend, qualify or modify, including by failing to include the recommendation of the SemGroup board of directors in this proxy statement/prospectus;

 

   

approve, adopt, authorize, resolve or recommend, or propose to approve, adopt, authorize, resolve or recommend, or allow SemGroup or any of its subsidiaries to execute or enter into, any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement, option agreement, joint venture agreement, partnership agreement or other similar contract or any tender or exchange offer providing for, with respect to, or in connection with, any acquisition proposal;

 

   

fail to reaffirm the recommendation of the SemGroup board of directors within five business days of a request therefor by Energy Transfer following the date on which any acquisition proposal or material modification thereto is received by SemGroup or is published, sent or communicated to SemGroup’s stockholders, provided that if the SemGroup stockholders’ meeting is scheduled to be held within five business days of such request, within three business days after such request and, in any event, prior to the date of the SemGroup stockholders’ meeting (provided, that Energy Transfer may not make any such request on more than two occasions with respect to each acquisition proposal, which for these purposes includes any revision, amendment, update or supplement to such acquisition proposal);

 

   

fail to publicly announce, within five business days after a tender offer or exchange offer relating to the securities of SemGroup shall have been commenced, a statement disclosing that the SemGroup board

 

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of directors recommends rejection of such tender offer or exchange offer and affirms the recommendation of the SemGroup board of directors; or

 

   

approve any transaction under, or any third party becoming, an “interested stockholder” under, Section 203 of the DGCL (or similar concepts under any other applicable takeover law) (each of the above is sometimes referred to as a change of recommendation).

Notwithstanding the foregoing, SemGroup is permitted to withdraw or make a change of recommendation and/or terminate the merger agreement at any time prior to the receipt of the SemGroup stockholder approval if all of the following conditions are met:

 

   

SemGroup has received a written acquisition proposal or following the occurrence of an intervening event (as defined below);

 

   

in the case of a written acquisition proposal:

 

   

such acquisition proposal did not result from a material breach of SemGroup’s non-solicitation obligations;

 

   

the SemGroup board of directors determines in good faith after consultation with its financial advisors and outside legal counsel that (i) such acquisition proposal constitutes a superior offer (as defined below) and (ii) the failure to make a change of recommendation or terminate the merger agreement would be reasonably likely to be inconsistent with the fiduciary duties owed by the SemGroup board of directors to the SemGroup stockholders under applicable law;

 

   

in the case of an intervening event, following consultation with outside legal counsel, the SemGroup Board determines that the failure to make a change of recommendation would be reasonably likely to be inconsistent with the fiduciary duties owed by the SemGroup board of directors to the SemGroup stockholders under applicable law; and

 

   

in either case:

 

   

SemGroup provides Energy Transfer 72 hours’ prior written notice of its intention to take such action which will include the reasons for the change in recommendation or information on the superior proposal;

 

   

after providing such notice and prior to making such a change of recommendation in connection with an intervening event or a superior offer or terminating the merger agreement to accept a superior offer, SemGroup will negotiate in good faith with Energy Transfer during such 72-hour period (to the extent that Energy Transfer desires to negotiate) to revise the terms of the merger agreement to permit the SemGroup board of directors not to effect a change of recommendation in connection with an intervening event or such that the acquisition proposal no longer constitutes a superior offer; and

 

   

the SemGroup board of directors will have determined in good faith following such 72-hour period, after consultation with its outside legal counsel and financial advisors, that the acquisition proposal would continue to constitute a superior offer or that the SemGroup board of directors’ fiduciary duties would continue to require a change of recommendation with respect to such intervening event, in each case if any changes proposed in writing by Energy Transfer were given effect.

Regardless of its compliance with the foregoing, without Energy Transfer’s consent, SemGroup may not change its recommendation or terminate the merger agreement to accept a superior offer for a period of 72 hours after it has provided written notice to Energy Transfer of its intention to change its recommendation or terminate the merger agreement, and in the event that the acquisition proposal is thereafter modified by the party making such acquisition proposal, SemGroup will provide Energy Transfer written notice of such modification and shall not be permitted to change its recommendation or terminate the merger agreement and shall again negotiate in good faith with Energy Transfer for a period of 48 hours.

 

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Definition of Acquisition Proposal, Acquisition Transaction, Intervening Event and Superior Offer

As used above, an “acquisition proposal” means any bona fide offer or proposal, whether or not in writing, or any bona fide written indication of interest, received from or made public by a third party relating to any acquisition transaction.

An “acquisition transaction” means any transaction or series of related transactions in which a third person directly or indirectly:

 

   

acquires assets of SemGroup and its subsidiaries equal to 25% or more of SemGroup’s consolidated assets or to which 25% or more of SemGroup’s consolidated revenues or earnings are attributable; or

 

   

acquires “beneficial ownership” (as defined in the Exchange Act) of 25% or more of any class of equity securities of SemGroup entitled to vote on the approval and adoption of the merger agreement.

An “intervening event” means any material event, development or occurrence that is not known or reasonably foreseeable (or if known or reasonably foreseeable, the material consequences of which were not known or reasonably foreseeable), to or by the SemGroup board of directors as of the date of the merger agreement, which event, fact, circumstance, development, occurrence, magnitude or material consequence becomes known to or by the SemGroup board of directors prior to the SemGroup stockholders approving the merger agreement; however, to the extent that the intervening event relates to an event involving Energy Transfer or its subsidiaries, then such event will not constitute an intervening event if such event is:

 

   

generally affecting the economy, the financial or securities markets, or political, legislative or regulatory conditions, in each case in the United States or elsewhere, unless such event disproportionately affects Energy Transfer and its subsidiaries (taken as a whole), relative to other similarly situated companies in the industries in which Energy Transfer and its subsidiaries operate; or

 

   

resulting from or arising out of (a) changes or developments in the industries in which Energy Transfer or its subsidiaries conduct business, (b) changes or developments in prices for oil, natural gas or other commodities or for Energy Transfer’s raw material inputs and end products, (c) the announcement or existence of, compliance with or performance under, the merger agreement (including the impact thereof on the relationships of Energy Transfer or its subsidiaries with employees, labor unions, customers, suppliers or partners and including any lawsuit or other proceeding with respect to the transactions contemplated by the merger agreement, (d) adoption, implementation, promulgation, repeal, modification, reinterpretation or proposal of any rule, regulation ordinance or law of or by any governmental entity or market administrator, (e) failure by Energy Transfer to meet financial projections or forecasts or estimates of financial metrics for any period (though this exception will not affect a determination on the event underlying the failure or intervening event), or (f) changes in the unit price or trading volume of ET common units or the credit rating of Energy Transfer or any of its subsidiaries (though this exception will not affect a determination that an event underlying the change has resulted in an intervening event); except with respect to clauses (a), (b) and (d), to the extent the event disproportionately affects Energy Transfer and its subsidiaries (taken as a whole) relative to other similarly situated companies in the industries in which Energy Transfer and its subsidiaries operate.

A “superior offer” means a written acquisition proposal to acquire at least:

 

   

75% of the equity securities of SemGroup; or

 

   

75% of the assets of SemGroup and its subsidiaries, taken as a whole,

in each case on terms that the SemGroup board of directors, or any committee thereof, determines, in good faith, after consultation with its outside legal counsel and its financial advisor, is:

 

   

if accepted, reasonably likely to be consummated; and

 

   

more favorable to SemGroup’s stockholders (including, without limitation, from a financial point of view) than the merger and the transactions contemplated by the merger agreement (taking into account

 

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any proposal by Energy Transfer to amend or modify the terms of the merger agreement which are committed to in writing),

after taking into account such factors deemed relevant by the SemGroup board of directors, or any committee thereof, including the form of consideration, timing, likelihood of consummation, required approvals and conditions to consummation.

SemGroup Employee Equity-Based Awards

Restricted Share Units. Each award of restricted share units, vested or unvested (other than those held by non-employee directors of SemGroup) (each, a “SemGroup RSU award”), that is outstanding immediately prior to the effective time will be assumed by Energy Transfer and converted into a restricted unit award to receive a number of ET common units equal to the number of shares of SemGroup common stock subject to such SemGroup RSU award immediately prior to the effective time multiplied by a ratio equal to the per share cash amount divided by the closing price of one ET common unit on the NYSE on the day prior to the closing date plus the exchange ratio (the “equity exchange ratio”), rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup RSU award”). Each assumed SemGroup RSU award will otherwise be subject to the same terms and conditions as were applicable to such award immediately prior to the effective time and fully accelerate upon a termination without cause, for good reason or as a result of the holder’s death or disability.

Restricted Stock Awards. Each restricted stock award (other than those held by non-employee directors of SemGroup) (each, a “SemGroup restricted stock award”) that is outstanding immediately prior to the effective time will be assumed by Energy Transfer and converted into a restricted unit award representing a contractual right upon vesting to receive a number of ET common units equal to the product obtained by multiplying (x) the number of shares of SemGroup common stock subject to such SemGroup restricted stock award immediately prior to the effective time by (y) the equity exchange ratio, rounded up or down to the nearest whole ET common unit (each, an “assumed SemGroup restricted stock award”). Each assumed SemGroup restricted stock award will otherwise be subject to the same terms and conditions as were applicable to the SemGroup award immediately prior to the effective time, have distribution equivalent rights and fully accelerate upon a termination without cause, for good reason or as a result of the holder’s death or disability.

Performance Share Units. Each award of performance share units that corresponds to shares of SemGroup common stock (each, a “SemGroup PSU award”) that is outstanding and vested as of the effective time, will be cancelled in exchange for the payment of the merger consideration with respect to the number of shares of SemGroup common stock underlying such vested SemGroup PSU award. Each SemGroup PSU award that is outstanding and unvested as of the effective time will automatically, and without any required action of the holder thereof, be cancelled without consideration.

Director Restricted Share Awards. Each SemGroup restricted stock award and SemGroup restricted share unit award that is outstanding immediately prior to the effective time and held by a non-employee director of SemGroup and that is outstanding immediately prior to the effective time (each, a “director restricted share award”) will, as of the effective time, become fully vested and will be cancelled in exchange for the payment of the merger consideration with respect to the total number of shares of SemGroup common stock subject to such director restricted share award.

The compensation committee of the board of directors of SemGroup has determined to vest all SemGroup PSU awards that were outstanding on September 15, 2019 at target performance levels as of immediately prior to the effective time.

Employee Matters

Energy Transfer has agreed that it will or will cause its subsidiaries, for one year after the effective time, to provide to each individual employed by SemGroup or its subsidiaries immediately prior to the effective time and

 

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who continue employment during such time period with (i) annual base salary or wages that are no less favorable than the annual base salary or wages provided to such current employees immediately prior to the effective time, (ii) severance benefits that are no less favorable than the severance benefits in effect for such employees as immediately prior to the effective time and (iii) other compensation and employee benefits that are substantially comparable in the aggregate to either, Energy Transfer’s election, (A) the other compensation and employee benefits provided to similarly situated employees of Energy Transfer and its subsidiaries or (B) the other compensation and employee benefits provided to such employees immediately prior to the effective time (excluding equity compensation, defined benefit and supplemental pensions and retiree medical benefits).

For purposes of vesting, eligibility to participate, and, solely for vacation and paid time off policies, severance plans and policies, and disability plans and policies, determining levels of benefits, but not, for the avoidance of doubt, for purposes of benefit accrual under any defined benefit pension plan under the benefit plans of Energy Transfer and its subsidiaries providing benefits to such employees after the effective time, each such employee will be credited with his or her years of service with SemGroup and its subsidiaries and their respective predecessors before the effective time, to the same extent as such employee was entitled, before the effective time, to credit for such service under any similar SemGroup benefit plan in which such employee participated or was eligible to participate immediately prior to the effective time, provided that it does not result in a duplication of benefits for the same period of service. In addition, (i) each such employee will be immediately eligible to participate, without any waiting time, in any and all benefit plans of Energy Transfer and its subsidiaries providing benefits to such employee after the effective time to the extent coverage under such plans is comparable to a benefit plan in which the employee participated prior to the effective time, (ii) for purposes of each benefit plan of Energy Transfer and its subsidiaries providing medical, dental, pharmaceutical and/or vision benefits to such employee after the effective time, Energy Transfer will use commercially reasonable efforts to cause all pre-existing condition exclusions and actively-at-work requirements to be waived for such employee and his or her dependents, unless and to the extent the individual was subject to the same such conditions under a comparable benefit plan prior to the effective time.

Each employee who as of immediately prior to the effective time is eligible for an annual bonus under a SemGroup benefit plan for 2019, is employed by the surviving corporation or its affiliates on December 31, 2019 and is not terminated for cause shall receive an annual bonus for 2019 (to the extent such bonus is not otherwise paid prior to the effective time) in an amount equal to not less than 100% of the target amount of such bonus; provided that if such employee is terminated without cause prior to December 31, 2019, such employee shall remain entitled to receive a pro-rated portion of his or her bonus for 2019.

Regulatory Approvals and Efforts to Close the Merger

Each of SemGroup and Energy Transfer has agreed to use, and to cause their respective subsidiaries to use, reasonable best efforts to take promptly all actions and to do promptly and assist and cooperate with the other party in doing all things necessary, proper or advisable to complete the merger and the transactions contemplated by the merger agreement, including using reasonable best efforts to:

 

   

obtain all necessary actions or nonactions, waivers, clearances, consents and approvals from governmental entities and make all necessary registrations and filings and take any other steps necessary to obtain any action or nonaction, waiver, clearance, consent or approval from, or to avoid any action or proceeding by, any governmental entity;

 

   

obtain all necessary consents, approvals or waivers from third parties other than any governmental entity;

 

   

defend any lawsuits or other legal proceedings, whether judicial or administrative, challenging the merger agreement or the transactions contemplated by the merger agreement; and

 

   

execute and deliver any additional instruments necessary to consummate the transactions contemplated by the merger agreement.

 

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Energy Transfer and SemGroup have also agreed to:

 

   

make their respective filings under the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”) within 15 business days of the date of the merger agreement and cooperate with each other to make available to the other party information as the other party may reasonably request in order to make its HSR Act filing or respond to requests by any relevant governmental entity;

 

   

use reasonable best efforts to take, or cause to be taken, all other actions and do, or cause to be done, all other things advisable to consummate and make effective the transactions contemplated by the merger agreement; and

 

   

keep each other apprised of the status of such matters, including promptly furnishing the other with copies of notices or other communications or correspondence between SemGroup or Energy Transfer, or any of their respective subsidiaries or affiliates, and any third party and/or any governmental entity with respect to such transactions.

Energy Transfer and SemGroup have agreed, prior to transmitting, to permit counsel for the other parties opportunity to review and provide comments to any communications, advocacy, white papers, information responses or other submission to any governmental entity in connection with the merger or the other transactions contemplated by the merger agreement, and that neither party will participate in any substantive meeting or discussion with any governmental entity in connection with the proposed transactions without prior consultation with the other party and, to the extent not prohibited by such governmental entity, the opportunity for such other party to attend and participate. In addition, Energy Transfer, Merger Sub and SemGroup have agreed to use their respective reasonable best efforts to satisfy the conditions to each party’s obligations to close the merger, as described below.

Energy Transfer has agreed to take, or cause to be taken, all steps and to make, or cause to be made, all undertakings necessary to avoid or eliminate every impediment to consummation of the transactions contemplated by the merger agreement under regulatory laws so as to enable the closing to occur as promptly as practicable and in any event no later than the End Date (as defined in “– Termination of the Merger Agreement”), including, (i) the sale, divestiture, license, transfer or other disposition of any businesses, assets, equity interests, product lines or properties of Energy Transfer (or any of its subsidiaries or affiliates), (ii) creating, terminating, amending, modifying or divesting of any contracts, agreements, commercial arrangements, relationships, ventures, rights or obligations of Energy Transfer (or its subsidiaries or affiliates), (iii) agreeing to restrictions, impairments, agreements or actions that would limit Energy Transfer’s or its subsidiaries’ or affiliates’ freedom of action with respect to, or their ability to own, manage, operate or conduct businesses, assets, equity interests, product lines or properties or (iv) any other remedy or condition of any kind, in each case as may be required in order to obtain all approvals or to avoid the commencement of any action to prohibit the merger, or to avoid the entry of, or to effect the dissolution of, any order in any action or proceeding seeking to prohibit the merger or delay the closing beyond the End Date.

Indemnification and Insurance

Energy Transfer and Merger Sub have agreed that all rights to exculpation, indemnification and advancement of expenses now existing in favor of the current or former directors, officers or employees of SemGroup or its subsidiaries will survive the merger and continue in full force and effect. Energy Transfer and the surviving corporation will, to the fullest extent permitted under applicable law, indemnify and hold harmless each current and former director, officer or employee of SemGroup or any of its subsidiaries and each person who served as a director, officer, member, trustee or fiduciary of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or enterprise if such service was at the request or for the benefit of SemGroup or any of its subsidiaries against any costs or expenses, judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any actual or threatened claim, action, suit, proceeding or investigation, arising out of or in connection with any action or omission by them in their capacities as such.

 

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The parties have agreed that for six years from the effective time, (i) Energy Transfer and the surviving corporation will maintain the exculpation, indemnification and advancement of expenses provisions of SemGroup’s and any of its subsidiary’s organization documents or in any indemnification agreements of SemGroup or its subsidiaries with any of their respective directors, officers or employees; however, all rights to indemnification in respect of any action pending or asserted or any claim made within such period will continue until the disposition of such action or resolution of such claim and (ii) Energy Transfer will maintain the coverage provided by the policies of directors’ and officers’ liability insurance and fiduciary liability insurance in effect as of the effective time by SemGroup and its subsidiaries, subject to certain limitations, but Energy Transfer shall not be required to pay annual premiums in excess of 300% of the last annual premium paid by SemGroup prior to the date of the merger agreement, or SemGroup may elect, prior to the effective time, to purchase a tail policy for such coverage, but the cost of such policy may not exceed 6 times the maximum amount Energy Transfer would be required to pay in annual premiums as described above. If a tail policy is purchased, the surviving corporation will, and Energy Transfer will cause the surviving corporation to, maintain such policy in full force and effect, and continue to honor the obligations thereunder.

Tulsa Office

Energy Transfer has agreed to maintain an office in the Tulsa, Oklahoma metropolitan area for at least two years following the closing of the merger.

Financing Assistance

SemGroup has agreed it will, and will cause its subsidiaries and their respective representatives to, use reasonable best efforts to provide reasonable and customary cooperation in connection with any financing by Energy Transfer or any of its respective subsidiaries in connection with the merger or otherwise, but will not be required to pay any commitment fee, provide any security or incur any liability in connection with any financing prior to the effective time.

Other Covenants and Agreements

The merger agreement contains additional agreements between the parties relating to the following matters, among other things:

 

   

taking such actions to render state takeover laws to be inapplicable to the merger and the other transactions contemplated by the merger agreement;

 

   

making certain public announcements regarding the terms of the merger agreement or the transactions contemplated thereby;

 

   

taking steps as may be required to cause any dispositions of SemGroup common stock or acquisitions of ET common units resulting from the merger agreement transactions to be exempt under Rule 16b-3 under the Exchange Act;

 

   

the listing on the NYSE of the ET common units to be issued as consideration in connection with the merger;

 

   

SemGroup will give notice of, convene and hold a meeting of its stockholders as promptly as reasonably practicable after the registration statement on Form S-4, of which this document forms a part, is declared effective under the Securities Act; and

 

   

each party will provide reasonable access to personnel, properties, books and record.

Termination of the Merger Agreement

The merger agreement may be terminated in accordance with its terms at any time prior to the effective time, whether before or after SemGroup stockholder approval:

 

   

by mutual written consent of Energy Transfer and SemGroup;

 

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by either Energy Transfer or SemGroup, if the merger is not completed on or prior to June 30, 2020, provided, that if all of the conditions to closing, other than legal prohibitions or regulatory approvals, have been satisfied or are capable of being satisfied at such time, the end date will be automatically extended to September 30, 2020 (such date, as it may be extended from June 30, 2020, is referred to as the “End Date”); and provided, further, that such right to terminate the merger agreement will not be available to a party if the material breach by such party of any representation, warranty, covenant or other agreement of such party set forth in the merger agreement caused the failure of the closing to occur by the End Date;

 

   

by either Energy Transfer or SemGroup, if an injunction or other law is entered, enacted or becomes effective permanently restraining, enjoining or otherwise prohibiting the consummation of the merger and such injunction or other law will have become final and non-appealable; provided that the party seeking to avail itself of such right to terminate will have used its reasonable best efforts to remove such injunction to the extent so required by the merger agreement; or

 

   

by either Energy Transfer or SemGroup, if SemGroup’s stockholder meeting (including any adjournments or postponements thereof) has concluded, at which a vote upon the adoption of the merger agreement was taken, and without receiving the approval of the merger agreement.

Energy Transfer may also terminate the merger agreement:

 

   

if SemGroup breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the merger agreement, which breach or failure to perform (i) would result in a failure of a closing condition and (ii) by its nature, cannot be cured prior to the End Date or, if by its nature such breach or failure is capable of being cured by the End Date, SemGroup does not or ceases to diligently attempt to cure such breach or failure in such a manner that would make it reasonably likely that such breach or failure will be cured prior to the End Date, in each case, after receiving written notice from Energy Transfer describing such breach or failure in reasonable detail (provided that Energy Transfer is not then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement); or

 

   

prior to obtaining SemGroup stockholder approval, (i) in the event of a change of recommendation or (ii) SemGroup willfully and materially breaches any of its obligations not to solicit acquisition proposals or change its recommendation pursuant to the merger agreement.

SemGroup may also terminate the merger agreement:

 

   

if Energy Transfer breached or failed to perform any of its representations, warranties, covenants or other agreements contained in the merger agreement, which breach or failure to perform (i) would result in a failure of a closing condition and (ii) by its nature, cannot be cured prior to the End Date or, if by its nature such breach or failure is capable of being cured by the End Date, Energy Transfer does not or ceases to diligently attempt to cure such breach or failure after receiving written notice from SemGroup describing such breach or failure in reasonable detail (provided that SemGroup is not then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement); or

 

   

prior to obtaining SemGroup stockholder approval (only if SemGroup has complied with its obligations not to solicit acquisition proposals or change its recommendation pursuant to the merger agreement) in order to enter into a definitive agreement with respect to a superior offer (which it enters into with or promptly following the termination of the merger agreement); provided that any such purported termination by SemGroup will be void and of no force or effect unless SemGroup pays Energy Transfer the Breakup Fee summarized below.

 

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Effect of Termination

If the merger agreement is validly terminated (other than any obligations to pay breakup fees or expenses, and certain other provisions of the merger agreement, including the enforcement of the terms of the merger agreement) there will be no liability on the part of SemGroup or Energy Transfer to the other except as related to breakup fees and expenses, and except that no party will be relieved or released from any liabilities arising out of or the result of, fraud or willful or intentional breach of any covenant or agreement or willful or intentional breach of any representation or warranty in the merger agreement.

Breakup Fee and Energy Transfer Expenses

SemGroup has agreed to reimburse Energy Transfer for its expenses incurred in connection with the merger transaction, up to $27.25 million if:

 

   

Energy Transfer or SemGroup terminates the merger agreement because the SemGroup stockholders do not vote in favor of the proposal to approve and adopt the merger agreement and prior to the stockholder meeting, a third party has made and publicly announced or disclosed an acquisition proposal which has not been withdrawn prior to the stockholder meeting; or

 

   

Energy Transfer terminates the merger agreement prior to SemGroup stockholder approval, due to a change of recommendation by the SemGroup board of directors, and the breakup fee (defined below) is not otherwise required to be paid pursuant to the merger agreement.

SemGroup has further agreed to pay Energy Transfer $54.5 million (referred to as the “breakup fee”) less any Energy Transfer expenses previously reimbursed by SemGroup if:

 

   

SemGroup terminates the merger agreement after having complied with the covenants that permit SemGroup to terminate the merger agreement to enter into a definitive agreement regarding a superior offer;

 

   

Energy Transfer terminates the merger agreement because SemGroup has willfully and materially breached any of its obligations not to solicit acquisition proposals or change its recommendation pursuant to the merger agreement;

 

   

Energy Transfer terminates the merger agreement because (i) prior to SemGroup stockholder approval, there is a change of recommendation by the SemGroup board of directors or (ii) SemGroup fails to call the stockholders’ meeting in violation of its obligation to do so, and in either case, prior to such termination, a third party has made and publicly announced or disclosed an acquisition proposal which has not been withdrawn prior to termination;

 

   

Energy Transfer or SemGroup terminates the merger agreement because of the failure to obtain stockholder approval of the merger agreement at the stockholder meeting and prior to the stockholder meeting, a third party has made and publicly announced or disclosed an acquisition proposal which has not been withdrawn prior to the stockholder meeting and within 12 months after such termination, SemGroup has consummated or entered into an agreement to consummate (which may be consummated after such 12-month period) an acquisition transaction; or

 

   

Energy Transfer terminates the merger agreement due to a change of recommendation and within 12 months after such termination, SemGroup has consummated or entered into an agreement to consummate (which may be consummated after such 12-month period) an acquisition transaction.

“Acquisition transaction” is defined in “– Non-Solicitation by SemGroup – Definition of Acquisition Proposal, Acquisition Transaction, Intervening Event and Superior Offer,” except that when the term is used in this section, the references to 25% are to 75%.

Upon the payment of the breakup fee or Energy Transfer expenses pursuant to the merger agreement, no party will have any further liability under the merger agreement to SemGroup or its stockholders or Energy

 

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Transfer or its unitholders, as applicable. Notwithstanding the foregoing, the payment of the breakup fee or Energy Transfer expenses will not release any party from liability arising out of or the result of fraud. In no event will SemGroup be required to pay the breakup fee on more than one occasion. If SemGroup fails to pay promptly, the breakup fee or Energy Transfer expenses when due under the merger agreement, it will also pay to Energy Transfer interest, accruing from the due date and the reasonable out-of-pocket expenses, including legal fees, in connection with any action taken to collect payment.

Other Fees and Expenses

Other than as provided in the provisions of the merger agreement summarized above, whether or not the merger is completed, all costs and expenses incurred in connection with the merger, the merger agreement and the transactions contemplated thereby will be paid by the party incurring or required to incur such expenses, except that the fees and expenses incurred in connection with the printing, filing and mailing of this document (including applicable SEC filing fees) and filing fees payable under the HSR Act and foreign antitrust laws will be borne equally by Energy Transfer and SemGroup.

Amendment and Waiver

At any time prior to the effective time, any provision of the merger agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by SemGroup, Energy Transfer and Merger Sub or, in the case of a waiver, by the party against whom the waiver is to be effective; provided, however, that after receipt of SemGroup stockholder approval, if any such amendment or waiver will by applicable law or in accordance with the rules and regulations of the NYSE require further approval of the stockholders of SemGroup, the effectiveness of such amendment or waiver will be subject to the approval of the stockholders of SemGroup. Notwithstanding the foregoing, no failure or delay by any party to the merger agreement in exercising any right under the merger agreement will operate as a waiver thereof nor will any single or partial exercise thereof preclude any other or further exercise of any other right under the merger agreement.

Governing Law

The merger agreement is governed by the laws of the State of Delaware (without giving effect to any choice or conflict of law provision or rule).

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

The following section contains a discussion of the material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) of SemGroup common stock.

The discussion of U.S. federal income tax consequences is based upon the Code, existing and proposed Treasury regulations promulgated under the Code (the “Treasury Regulations”) and administrative rulings and court decisions, all as in effect on the date of this document. These laws may change, possibly retroactively, and any such change could affect the accuracy of the statements and conclusions set forth in this discussion. For purposes of this discussion, the term “U.S. holder” means a beneficial owner of SemGroup common stock that is for U.S. federal income tax purposes (i) an individual citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation) organized under the laws of the United States, any state thereof or the District of Columbia; (iii) a trust if (a) it is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) it has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person; or (iv) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source.

Except as otherwise expressly provided herein, this discussion (1) only addresses U.S. holders that hold their SemGroup common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment); (2) does not address all aspects of U.S. federal income taxation that may be relevant to a U.S. holder in light of such U.S. holder’s particular circumstances or that may be applicable to holders subject to special treatment under U.S. federal income tax law (including, for example, banks, financial institutions, insurance companies, tax-exempt organizations, dealers in securities or currencies, individual retirement accounts, real estate investment trusts, mutual funds, traders in securities that elect mark-to-market treatment, holders who acquired SemGroup common stock pursuant to the exercise of employee stock options or otherwise as compensation, entities or arrangements treated as partnerships for U.S. federal income tax purposes, holders who hold their SemGroup common stock as part of a hedge, straddle, constructive sale, conversion transaction or other risk reduction transaction, U.S. holders whose functional currency is not the U.S. dollar, U.S. holders of SemGroup preferred stock, U.S. holders subject to special tax accounting rules as a result of any item of gross income with respect to SemGroup common stock being taken into account in an applicable financial statement and U.S. expatriates and former citizens or long-term residents of the United States); and (3) does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction or under any U.S. federal laws other than those pertaining to the federal income tax.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes is a beneficial owner of SemGroup common stock, the tax treatment of a partner in that partnership generally will depend on the status of the partner and the activities of the partnership. Holders of SemGroup common stock that are partnerships or partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them of the merger.

ALL HOLDERS OF SEMGROUP COMMON STOCK SHOULD CONSULT THEIR TAX ADVISOR REGARDING THE PARTICULAR FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF THE MERGER.

Tax Consequences of the Merger to U.S. holders of SemGroup Common Stock

Each U.S. holder of SemGroup common stock generally will be treated as having (i) sold an undivided portion of each share of SemGroup common stock exchanged by such holder pursuant to the merger (equal to the percentage that (a) the per share cash amount received by such holder in exchange for its shares of SemGroup common stock pursuant to the merger bears to (b) the fair market value of the total merger consideration it received (i.e., the per share cash amount plus the fair market value of the ET common units as of the closing date of the merger)) for cash and (ii) contributed the remaining undivided portion of each share of SemGroup common stock to Energy Transfer in exchange for the ET common units.

 

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With respect to the portion of each share of SemGroup common stock that a U.S. holder is treated as selling for cash, such U.S. holder generally will recognize gain or loss in an amount equal to the difference, if any, between the amount of cash received (including the amount of any cash received in lieu of a fractional ET common unit) and such holder’s adjusted basis in the portion of each share of SemGroup common stock treated as sold for cash. Generally, such gain or loss will be long-term capital gain or loss if the holder’s holding period for such share of SemGroup common stock exchanged is greater than one year as of the closing of the merger. The deductibility of capital losses is subject to limitations.

With respect to the portion of each share of SemGroup common stock that a U.S. holder is treated as contributing to Energy Transfer in exchange for ET common units, such U.S. holder generally should not recognize gain or loss. The aggregate tax basis of the ET common units received by such U.S. holder pursuant to the merger will be the same as the aggregate tax basis of the portion of each share of SemGroup common stock treated as exchanged therefor, increased by such U.S. holder’s share of nonrecourse liabilities of Energy Transfer. The holding period of the ET common units received in exchange for SemGroup common stock pursuant to the merger will include the holding period of the portion of the SemGroup common stock surrendered in exchange therefor.

A U.S. holder who acquired different blocks of SemGroup common stock at different times should consult its own tax advisor regarding such U.S. holder’s holding period in ET common units received in exchange for SemGroup common stock pursuant to the merger.

Classification of Energy Transfer for U.S. Federal Income Tax Purposes

The expected U.S. federal income tax consequences of the merger are dependent, in part, upon Energy Transfer being treated as a partnership for U.S. federal income tax purposes at the time of the merger. If Energy Transfer were to be treated as a corporation for U.S. federal income tax purposes at the time of the merger, the merger would likely be a fully taxable transaction to SemGroup common stockholders. The discussion above assumes that Energy Transfer will be classified as a partnership for U.S. federal income tax purposes at the time of the merger. Please read the discussion of the opinion of Latham & Watkins LLP that Energy Transfer will be classified as a partnership for U.S. federal income tax purposes at the time of the merger below under “Material U.S. Federal Income Tax Consequences of ET Common Unit Ownership – Partnership Status.”

SemGroup and Energy Transfer intend that the merger will be treated for U.S. federal income tax purposes, in part, as a contribution of a portion of each share of SemGroup common stock to Energy Transfer that qualifies under Section 721(a) of the Code to the extent a SemGroup stockholder receives ET common units as merger consideration. In order for the contribution to qualify under Section 721(a) of the Code, among other things, Energy Transfer must not be treated for purposes of Section 721(b) of the Code as a partnership which would be treated as an investment company (within the meaning of Section 351 of the Code) if the partnership were incorporated (an “investment company partnership”).

Section 721(b) of the Code provides that Section 721(a) of the Code will not apply to gain realized on a transfer of property to an investment company partnership. In general, the Treasury Regulations under Section 351(e) of the Code define an “investment company” to mean any corporation more than 80% of the value of whose assets are held for investment and are stocks or securities as defined by the statute. In the case of stock and securities of a corporate subsidiary, the stock and securities of such corporate subsidiary are disregarded and the parent corporation is treated as owning its ratable share of the subsidiary’s assets, provided in each case that the parent corporation owns 50% or more of the voting power or value of the subsidiary corporation’s stock. There is no explicit look-through rule for securities of a publicly traded partnership subsidiary. The Treasury Regulations also provide that the determination of whether an entity is an investment company will ordinarily be made by reference to the circumstances in existence immediately after the transfer in question.

The determination of whether Energy Transfer will be treated as an investment company partnership for purposes of Section 721(b) of the Code will be based on the relative values of the assets held by Energy Transfer

 

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and its ratable share of the assets of any subsidiary that Energy Transfer is treated as owning, including as a result of the merger. Energy Transfer is primarily a holding company and its principal assets prior to the merger are the limited partnership interests and non-economic general partner interest in Energy Transfer Operating, L.P. (“ETO”), which is a publicly traded partnership. Unlike with corporate subsidiaries, there is no explicit look-through rule for securities of a publicly traded partnership subsidiary, but Energy Transfer believes that such publicly traded partnership securities should be disregarded if the applicable ownership threshold is met. If Energy Transfer’s general partner interest and limited partnership interest in ETO are disregarded and Energy Transfer is treated as owning its ratable share of ETO’s assets for purposes of Section 721(b) of the Code, Energy Transfer believes that it will not be an investment company partnership for such purposes immediately following the merger. The discussion above assumes that Energy Transfer will not be classified as an investment company partnership for U.S. federal income tax purposes.

Energy Transfer is seeking a private letter ruling from the IRS that Energy Transfer’s direct and indirect equity ownership interests in ETO will be disregarded and Energy Transfer will be deemed to own its ratable share of ETO’s assets for purposes of determining whether Energy Transfer is an investment company partnership provided that Energy Transfer owns directly, or indirectly through wholly-owned corporate subsidiaries, 50% or more of the capital and profits interests in ETO. However, there can be no guarantee or assurance that such ruling will be obtained or that such ruling will be obtained prior to when the SemGroup stockholders are required to vote on the merger. The merger agreement requires the parties to report the merger as an exchange governed by Section 721(a) of the Code to the extent that each SemGroup stockholder exchanges a portion of each share of SemGroup common stock to Energy Transfer for ET common units, unless otherwise required by an adverse “determination” as defined in Section 1313 of the Code. If the IRS does not issue the private letter ruling and the IRS were to prevail in an assertion, or a court were to conclude, that Energy Transfer was an investment company partnership immediately following the merger, then Section 721(a) of the Code would not apply and the SemGroup stockholders would be treated as having sold all of their SemGroup common stock to Energy Transfer in a fully taxable transaction.

Backup Withholding

Payments received in exchange for shares of SemGroup common stock pursuant to the merger generally are subject to information reporting, and may be subject to backup withholding at the applicable rate (currently, 24%) if the holder of such shares or other payee fails to provide a valid taxpayer identification number and comply with certain certification procedures by properly completing IRS Form W-9 or otherwise establishing an exemption from backup withholding. Backup withholding is not an additional tax. Rather, the U.S. federal income tax liability of the person subject to backup withholding will be reduced by the amount of tax withheld. If backup withholding results in an overpayment of U.S. federal income taxes, a refund may be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF ET COMMON UNIT OWNERSHIP

This section is a summary of the material U.S. federal income tax consequences that may be relevant to individual citizens or residents of the United States owning ET common units received in the merger and, unless otherwise noted in the following discussion, is the opinion of Latham & Watkins LLP, counsel to Energy Transfer’s general partner and Energy Transfer, insofar as it relates to legal conclusions with respect to matters of U.S. federal income tax law. This section is based upon current provisions of the Code, the Treasury Regulations and current administrative rulings and court decisions, all of which are subject to change. Later changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. Unless the context otherwise requires, references in this section to Energy Transfer include its operating subsidiaries.

The following discussion does not comment on all federal income tax matters affecting Energy Transfer or its unitholders and does not describe the application of the alternative minimum tax that may be applicable to certain unitholders. Moreover, the discussion focuses on unitholders who are individual citizens or residents of the United States and has only limited application to corporations, estates, entities treated as partnerships for U.S. federal income tax purposes, trusts, nonresident aliens, U.S. expatriates and former citizens or long-term residents of the United States or other unitholders subject to specialized tax treatment, such as banks, insurance companies and other financial institutions, tax-exempt institutions, foreign persons (including, without limitation, controlled foreign corporations, passive foreign investment companies and foreign persons eligible for the benefits of an applicable income tax treaty with the United States), individual retirement accounts (IRAs), real estate investment trusts (REITs) or mutual funds, dealers in securities or currencies, traders in securities, U.S. persons whose “functional currency” is not the U.S. dollar, persons holding their units as part of a “straddle,” “hedge,” “conversion transaction” or other risk reduction transaction, persons subject to special tax accounting rules as a result of any item of gross income with respect to ET common units being taken into account in an applicable financial statement and persons deemed to sell their units under the constructive sale provisions of the Code. In addition, the discussion only comments, to a limited extent, on state, local and foreign tax consequences. Accordingly, Energy Transfer encourages each prospective unitholder to consult his own tax advisor in analyzing the state, local and foreign tax consequences particular to him of the ownership or disposition of common units and potential changes in applicable laws, including the impact of the recently enacted U.S. tax reform legislation.

No ruling has been requested from the Internal Revenue Service (the “IRS”) regarding Energy Transfer’s characterization as a partnership for tax purposes. Instead, Energy Transfer will rely on opinions of Latham & Watkins LLP. Unlike a ruling, an opinion of counsel represents only that counsel’s best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made herein may not be sustained by a court if contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for ET common units, including the prices at which ET common units trade. In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will result in a reduction in cash available for distribution to Energy Transfer’s unitholders and Energy Transfer’s general partner and thus will be borne indirectly by Energy Transfer unitholders and Energy Transfer’s general partner. Furthermore, the tax treatment of Energy Transfer, or of an investment in Energy Transfer, may be significantly modified by future legislative or administrative changes or court decisions. Any modifications may or may not be retroactively applied.

All statements as to matters of U.S. federal income tax law and legal conclusions with respect thereto, but not as to factual matters, contained in this section, unless otherwise noted, are the opinion of Latham & Watkins LLP and are based on the accuracy of the representations made by Energy Transfer and Energy Transfer’s general partner.

Notwithstanding the above, and for the reasons described below, Latham & Watkins LLP has not rendered an opinion with respect to the following specific federal income tax issues: (i) the treatment of a unitholder whose common units are loaned to a short seller to cover a short sale of common units (please read “– Tax Consequences of Unit Ownership – Treatment of Short Sales”); (ii) whether all aspects of Energy Transfer’s

 

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monthly method for allocating taxable income and losses is permitted by existing Treasury Regulations (please read “Disposition of Common Units – Allocations Between Transferors and Transferees”); and (iii) whether Energy Transfer’s method for taking into account Section 743 adjustments is sustainable in certain cases (please read “– Tax Consequences of Unit Ownership – Section 754 Election” and “– Uniformity of Units”).

Partnership Status

A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner of a partnership is required to take into account his share of items of income, gain, loss and deduction of the partnership in computing his federal income tax liability, regardless of whether cash distributions are made to him by the partnership. Distributions by a partnership to a partner are generally not taxable to the partnership or the partner unless the amount of cash distributed to him is in excess of the partner’s adjusted basis in his partnership interest. Section 7704 of the Code provides that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to as the “Qualifying Income Exception,” exists with respect to publicly traded partnerships of which 90% or more of the gross income for every taxable year consists of “qualifying income.” Qualifying income includes income and gains derived from the transportation and processing of certain minerals and natural resources, including crude oil, natural gas and other products of a type that are produced in a petroleum refinery or natural gas processing plant, the retail and wholesale marketing of propane, the transportation of propane and natural gas liquids, certain related hedging activities, certain activities that are intrinsic to other qualifying activities, and Energy Transfer’s allocable share of Energy Transfer’s subsidiaries’ income from these sources. Other types of qualifying income include interest (other than from a financial business), dividends, real property rents, gains from the sale of real property and gains from the sale or other disposition of capital assets held for the production of income that otherwise constitutes qualifying income. Energy Transfer estimates that less than 3% of its current gross income is not qualifying income; however, this estimate could change from time to time. Based upon and subject to this estimate, the factual representations made by Energy Transfer and Energy Transfer’s general partner and a review of the applicable legal authorities, Latham & Watkins LLP is of the opinion that at least 90% of Energy Transfer’s current gross income constitutes qualifying income. The portion of Energy Transfer’s income that is qualifying income may change from time to time.

The IRS has made no determination as to Energy Transfer’s status or the status of Energy Transfer’s operating subsidiaries for federal income tax purposes. Instead, Energy Transfer will rely on the opinion of Latham & Watkins LLP on such matters. It is the opinion of Latham & Watkins LLP that, based upon the Code, the Treasury Regulations, published revenue rulings and court decisions and the representations described below that:

 

   

Energy Transfer will be classified as a partnership for federal income tax purposes; and

 

   

each of Energy Transfer’s operating subsidiaries, except as otherwise identified to Latham & Watkins LLP, will be disregarded as an entity separate from Energy Transfer or will be treated as a partnership for federal income tax purposes.

In rendering its opinion, Latham & Watkins LLP has relied on factual representations made by Energy Transfer and Energy Transfer’s general partner. The representations made by Energy Transfer and Energy Transfer’s general partner upon which Latham & Watkins LLP has relied include:

 

   

neither Energy Transfer nor any of Energy Transfer’s partnership or limited liability company subsidiaries, other than those identified as such to Latham & Watkins LLP, have elected or will elect to be treated as a corporation for federal income tax purposes; and

 

   

for each taxable year, more than 90% of Energy Transfer’s gross income has been and will be income of the type that Latham & Watkins LLP has opined or will opine is “qualifying income” within the meaning of Section 7704(d) of the Code.

 

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Energy Transfer believes that these representations have been true in the past, are true as of the date hereof and expect that these representations will continue to be true in the future.

If Energy Transfer fails to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery (in which case the IRS may also require Energy Transfer to make adjustments with respect to Energy Transfer’s unitholders or pay other amounts), Energy Transfer will be treated as if Energy Transfer had transferred all of its assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which Energy Transfer fails to meet the Qualifying Income Exception, in return for stock in that corporation, and then distributed that stock to the unitholders in liquidation of their interests in Energy Transfer. This deemed contribution and liquidation should be tax-free to unitholders and Energy Transfer so long as Energy Transfer, at that time, does not have liabilities in excess of the tax basis of its assets. Thereafter, Energy Transfer would be treated as a corporation for federal income tax purposes.

If Energy Transfer were treated as an association taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, Energy Transfer’s items of income, gain, loss and deduction would be reflected only on its tax return rather than being passed through to its unitholders, and Energy Transfer’s net income would be taxed to it at corporate rates. In addition, any distribution made to a unitholder would be treated as taxable dividend income, to the extent of Energy Transfer’s current and accumulated earnings and profits, or, in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholder’s tax basis in his common units, or taxable capital gain, after the unitholder’s tax basis in his common units is reduced to zero. Accordingly, taxation as a corporation would result in a material reduction in a unitholder’s cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units.

The discussion below is based on Latham & Watkins LLP’s opinion that Energy Transfer will be classified as a partnership for federal income tax purposes.

Limited Partner Status

Unitholders of Energy Transfer will be treated as partners of Energy Transfer for federal income tax purposes. Also, unitholders whose common units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of their common units will be treated as partners of Energy Transfer for federal income tax purposes.

A beneficial owner of common units whose units have been transferred to a short seller to complete a short sale would appear to lose his status as a partner with respect to those units for federal income tax purposes. Please read “– Tax Consequences of Unit Ownership – Treatment of Short Sales.”

Income, gains, losses or deductions would not appear to be reportable by a unitholder who is not a partner for federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for federal income tax purposes would therefore appear to be fully taxable as ordinary income. These holders are urged to consult their tax advisors with respect to the tax consequences to them of holding ET common units. The references to “unitholders” in the discussion that follows are to persons who are treated as partners in Energy Transfer for federal income tax purposes.

Tax Consequences of Unit Ownership

Flow-Through of Taxable Income

Subject to the discussion below under “– Entity-Level Collections,” Energy Transfer will not pay any federal income tax. Instead, each unitholder will be required to report on his income tax return his share of

 

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Energy Transfer’s income, gains, losses and deductions without regard to whether Energy Transfer makes cash distributions to him. Consequently, Energy Transfer may allocate income to a unitholder even if he has not received a cash distribution. Each unitholder will be required to include in income his allocable share of Energy Transfer’s income, gains, losses and deductions for Energy Transfer’s taxable year ending with or within his taxable year. Energy Transfer’s taxable year ends on December 31.

Treatment of Distributions

Distributions by Energy Transfer to a unitholder generally will not be taxable to the unitholder for federal income tax purposes, except to the extent the amount of any such cash distribution exceeds his tax basis in his common units immediately before the distribution. Energy Transfer’s cash distributions in excess of a unitholder’s tax basis generally will be considered to be gain from the sale or exchange of the common units, taxable in accordance with the rules described under “– Disposition of Common Units.” Any reduction in a unitholder’s share of Energy Transfer’s liabilities for which no partner, including the general partner, bears the economic risk of loss, known as “nonrecourse liabilities,” will be treated as a distribution by Energy Transfer of cash to that unitholder. To the extent Energy Transfer’s distributions cause a unitholder’s “at-risk” amount to be less than zero at the end of any taxable year, he must recapture any losses deducted in previous years. Please read “– Limitations on Deductibility of Losses.”

A decrease in a unitholder’s percentage interest in Energy Transfer because of Energy Transfer’s issuance of additional common units will decrease his share of Energy Transfer’s nonrecourse liabilities, and thus will result in a corresponding deemed distribution of cash. This deemed distribution may constitute a non-pro rata distribution. A non-pro rata distribution of money or property may result in ordinary income to a unitholder, regardless of his tax basis in his common units, if the distribution reduces the unitholder’s share of Energy Transfer’s “unrealized receivables,” including depreciation, recapture and/or substantially appreciated “inventory items,” each as defined in Section 751 of the Code, and collectively, “Section 751 Assets.” To that extent, the unitholder will be treated as having been distributed his proportionate share of the Section 751 Assets and then having exchanged those assets with Energy Transfer in return for the non-pro rata portion of the actual distribution made to him. This latter deemed exchange will generally result in the unitholder’s realization of ordinary income, which will equal the excess of (i) the non-pro rata portion of that distribution over (ii) the unitholder’s tax basis (often zero) for the share of Section 751 Assets deemed relinquished in the exchange.

Basis of Common Units

Please read “Material U.S. Federal Income Tax Consequences of the Merger – Tax Consequences of the Merger to U.S. holders of SemGroup Common Stock” for a discussion of how to determine the initial tax basis of ET common units received in the merger. That basis will be increased by a unitholder’s share of Energy Transfer’s income, by any increases in his share of Energy Transfer’s nonrecourse liabilities and, on the disposition of an ET common unit, by his share of certain items related to business interest not yet deductible by him due to applicable limitations. Please read “– Limitations on Interest Deductions.” That basis will be decreased, but not below zero, by distributions from Energy Transfer, by the unitholder’s share of Energy Transfer’s losses, by any decreases in his share of Energy Transfer’s nonrecourse liabilities, by his share of Energy Transfer’s excess business interest (generally, the excess of Energy Transfer’s business interest over the amount that is deductible) and by his share of Energy Transfer’s expenditures that are not deductible in computing taxable income and are not required to be capitalized. A unitholder will have no share of Energy Transfer’s debt that is recourse to Energy Transfer’s general partner to the extent of the general partner’s “net value” as defined in the Treasury Regulations promulgated under Section 752 of the Code, but will have a share, generally based on his share of profits, of Energy Transfer’s nonrecourse liabilities. Please read “– Disposition of Common Units – Recognition of Gain or Loss.”

 

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Limitations on Deductibility of Losses

The deduction by a unitholder of his share of Energy Transfer’s losses will be limited to the tax basis in his units and, in the case of an individual unitholder, estate, trust, or corporate unitholder (if more than 50% of the value of the corporate unitholder’s stock is owned directly or indirectly by or for five or fewer individuals or some tax-exempt organizations), to the amount for which the unitholder is considered to be “at risk” with respect to Energy Transfer’s activities, if that is less than his tax basis. A common unitholder subject to these limitations must recapture losses deducted in previous years to the extent that distributions cause his at-risk amount to be less than zero at the end of any taxable year. Losses disallowed to a unitholder or recaptured as a result of these limitations will carry forward and will be allowable as a deduction to the extent that his at-risk amount is subsequently increased, provided such losses do not exceed such common unitholder’s tax basis in his common units. Upon the taxable disposition of a common unit, any gain recognized by a unitholder can be offset by losses that were previously suspended by the at-risk limitation but may not be offset by losses suspended by the basis limitation. Any loss previously suspended by the at-risk limitation in excess of that gain would no longer be utilizable.

In general, a unitholder will be at risk to the extent of the tax basis of his units, excluding any portion of that basis attributable to his share of Energy Transfer’s nonrecourse liabilities, reduced by (i) any portion of that basis representing amounts otherwise protected against loss because of a guarantee, stop loss agreement or other similar arrangement and (ii) any amount of money he borrows to acquire or hold his units, if the lender of those borrowed funds owns an interest in Energy Transfer, is related to the unitholder or can look only to the units for repayment. A unitholder’s at-risk amount will increase or decrease as the tax basis of the unitholder’s units increases or decreases, other than tax basis increases or decreases attributable to increases or decreases in his share of Energy Transfer’s nonrecourse liabilities.

In addition to the basis and at-risk limitations on the deductibility of losses, the passive loss limitations generally provide that individuals, estates, trusts and some closely-held corporations and personal service corporations can deduct losses from passive activities, which are generally trade or business activities in which the taxpayer does not materially participate, only to the extent of the taxpayer’s income from those passive activities. The passive loss limitations are applied separately with respect to each publicly traded partnership. Consequently, any passive losses Energy Transfer generates will only be available to offset its passive income generated in the future and will not be available to offset income from other passive activities or investments, including Energy Transfer’s investments or a unitholder’s investments in other publicly traded partnerships, or the unitholder’s salary, active business or other income. Passive losses that are not deductible because they exceed a unitholder’s share of income Energy Transfer generates may be deducted in full when he disposes of his entire investment in Energy Transfer in a fully taxable transaction with an unrelated party. The passive loss limitations are applied after other applicable limitations on deductions, including the at-risk rules and the basis limitation.

A unitholder’s share of Energy Transfer’s net income may be offset by any of Energy Transfer’s suspended passive losses, but it may not be offset by any other current or carryover losses from other passive activities, including those attributable to other publicly traded partnerships.

An additional loss limitation may apply to certain of Energy Transfer’s unitholders for taxable years beginning after December 31, 2017, and before January 1, 2026. A non-corporate unitholder will not be allowed to take a deduction for certain excess business losses in such taxable years. An excess business loss is the excess (if any) of a taxpayer’s aggregate deductions for the taxable year that are attributable to the trades or businesses of such taxpayer (determined without regard to the excess business loss limitation) over the aggregate gross income or gain of such taxpayer for the taxable year that is attributable to such trades or businesses plus a threshold amount. The threshold amount is equal to $255,000, or $510,000 for taxpayers filing a joint return. Any losses disallowed in a taxable year due to the excess business loss limitation may be used by the applicable unitholder in the following taxable year if certain conditions are met. Unitholders to which this excess business

 

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loss limitation applies will take their allocable share of Energy Transfer’s items of income, gain, loss and deduction into account in determining this limitation. This excess business loss limitation will be applied to a non-corporate unitholder after the passive loss limitations and may limit such unitholders’ ability to utilize any losses Energy Transfer generates that are allocable to such unitholder and that are not otherwise limited by the basis, at-risk and passive loss limitations described above.

Limitations on Interest Deductions

Energy Transfer’s ability to deduct interest paid or accrued on indebtedness properly allocable to a trade or business, “business interest,” may be limited in certain circumstances. Should Energy Transfer’s ability to deduct business interest be limited, the amount of taxable income allocated to Energy Transfer’s unitholders in the taxable year in which the limitation is in effect may increase. However, in certain circumstances, a unitholder may be able to utilize a portion of a business interest deduction subject to this limitation in future taxable years. Prospective unitholders should consult their tax advisors regarding the impact of this business interest deduction limitation on an investment in ET common units.

In addition, the deductibility of a non-corporate taxpayer’s “investment interest expense” is generally limited to the amount of that taxpayer’s “net investment income.” Investment interest expense includes:

 

   

interest on indebtedness properly allocable to property held for investment;

 

   

Energy Transfer’s interest expense attributed to portfolio income; and

 

   

the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.

The computation of a unitholder’s investment interest expense will take into account interest on any margin account borrowing or other loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment or (if applicable) qualified dividend income. The IRS has indicated that the net passive income earned by a publicly traded partnership will be treated as investment income to its unitholders. In addition, the unitholder’s share of Energy Transfer’s portfolio income will be treated as investment income.

Entity-Level Collections

If Energy Transfer were required or elect under applicable law to pay any federal, state, local or foreign income tax on behalf of any unitholder or Energy Transfer’s general partner or any former unitholder, Energy Transfer is authorized to pay those taxes from its funds. That payment, if made, will be treated as a distribution of cash to the unitholder on whose behalf the payment was made. If the payment is made on behalf of a person whose identity cannot be determined, Energy Transfer is authorized to treat the payment as a distribution to all current unitholders. Energy Transfer is authorized to amend its partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under its partnership agreement is maintained as nearly as is practicable. Payments by Energy Transfer as described above could give rise to an overpayment of tax on behalf of an individual unitholder in which event the unitholder would be required to file a claim in order to obtain a credit or refund.

Allocation of Income, Gain, Loss and Deduction

After giving effect to special allocation provisions with respect to Energy Transfer’s convertible units, if Energy Transfer has a net profit, its items of income, gain, loss and deduction will be allocated among Energy

 

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Transfer’s general partner and the common unitholders in accordance with their percentage interests in Energy Transfer. If Energy Transfer has a net loss, that loss will be allocated to all common unitholders in accordance with their percentage interests in Energy Transfer to the extent of their positive capital accounts, as adjusted for certain items in accordance with applicable Treasury Regulations, and to Energy Transfer’s general partner in accordance with its percentage interest in Energy Transfer.

Specified items of Energy Transfer’s income, gain, loss and deduction will be allocated to account for any difference between the tax basis and fair market value of any property contributed to Energy Transfer that exists at the time of such contribution, referred to in this discussion as the “Contributed Property.” Following the merger, in the event Energy Transfer divests itself of any SemGroup common stock, all or a portion of any gain or loss recognized as a result of a divestiture of such stock may be required to be allocated to former SemGroup stockholders. In addition, a former SemGroup stockholder may also be required to recognize its share of “built-in gain” upon certain distributions by Energy Transfer to that unitholder of other Energy Transfer property (other than money) within seven years following the merger. No special distributions will be made to the former SemGroup stockholders with respect to any tax liability for such transactions. In the event Energy Transfer issues additional common units or engages in certain other transactions in the future, “reverse Section 704(c) Allocations,” similar to the Section 704(c) Allocations described above will be made to Energy Transfer’s common unitholders immediately prior to such issuance or other transactions to account for the difference between the “book” basis for purposes of maintaining capital accounts and the fair market value of all property held by Energy Transfer at the time of such issuance or future transaction. In addition, items of recapture income will be allocated to the extent possible to the unitholder who was allocated the deduction giving rise to the treatment of that gain as recapture income in order to minimize the recognition of ordinary income by some unitholders. Finally, although Energy Transfer does not expect that its operations will result in the creation of negative capital accounts (subject to certain adjustments), if negative capital accounts (subject to certain adjustments) nevertheless result, items of Energy Transfer’s income and gain will be allocated in an amount and manner sufficient to eliminate such negative balance as quickly as possible.

An allocation of items of Energy Transfer’s income, gain, loss or deduction, other than an allocation required by the Code to eliminate the difference between a partner’s “book” capital account, credited with the fair market value of Contributed Property, and “tax” capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the “Book-Tax Disparity,” will generally be given effect for federal income tax purposes in determining a partner’s share of an item of income, gain, loss or deduction only if the allocation has “substantial economic effect.” In any other case, a partner’s share of an item will be determined on the basis of his interest in Energy Transfer, which will be determined by taking into account all the facts and circumstances, including:

 

   

his relative contributions to Energy Transfer;

 

   

the interests of all the partners in profits and losses;

 

   

the interest of all the partners in cash flow; and