UPDATE 3-Williams sues ETE and CEO Warren over share offering

(Adds Energy Transfer response, shareholder quote, background)
By Michael Erman and Mike Stone
April 6 (Reuters) - Williams Companies Inc (NYSE:WMB) WMB.N sued
Energy Transfer Equity LP ETE.N and its Chief Executive Kelcy
Warren on Wednesday, claiming they violated the U.S. pipeline
companies' merger agreement by making a private preferred share
offering to ETE's top investors.
Williams argued that the offering in March, which prompted a
public rift between the companies, was designed to siphon money
to Warren and away from Williams and ETE shareholders.

"Warren devised the special offering as a means to shield
his own personal financial interests in ETE - namely, the
distributions he stands to receive from ETE on his ETE common
units - from the economic uncertainty that has been facing ETE
in recent months," Williams said in a lawsuit filed in a Texas
district court.
Another Williams lawsuit filed against ETE on Wednesday, in
the Delaware Court of Chancery, remains under seal.
Williams, based in Tulsa, Oklahoma, said in a statement it
was committed to the nearly $14 billion deal and hoped to hold a
stockholder vote to close it as soon as possible.
The offering at the center of the lawsuit effectively
protects Warren and other top shareholders from a cut in
distributions by ETE, a master limited partnership.
The offering to top investors, which ETE said would help it
pay down debt from the merger, would provide convertible units
in exchange for a temporary cut in distributions. These
investors would eventually receive equity in exchange for the
convertible units even if other ETE shareholders had their
distributions reduced.
Energy Transfer said in a filing with the Securities and
Exchange Commission that it would vigorously defend itself
against the lawsuits. It said it believes that it has complied,
and intends to comply, with its obligations under the merger
agreement.
Dallas billionaire Warren is ETE's largest shareholder and
controls the company through its general partner. He received
more than $200 million in distributions from the company over
the last year.
He set his sights on Williams last year in order to
transform his empire into one of the biggest pipeline networks
in the world but the timing was poor. A prolonged drop in oil
and gas prices has made the deal more difficult to finance and
to justify to shareholders.
ETE would need to take on a heavy debt load to fund the $6
billion cash portion of the deal. Williams said in the Texas
lawsuit that ETE has looked into how it might be able to walk
away from the merger even though the terms do not allow that.
ETE has also fired its chief financial officer and slashed
projections for cost savings from the Williams tie-up, making
investors highly skeptical about whether the deal would close.
"The news stream around this deal over the last several
months has not been constructive," Quinn Kiley, managing
director at Advisory Research Inc, which owned around 9 million
ETE shares and 3.7 million Williams shares as of the end of
2015. "It's hurt holders on either side, and created a negative
spin cycle."
Williams shareholders, who will receive mostly ETE stock for
their shares if the deal is completed, have yet to vote on the
deal.
ETE said in March it had originally intended to offer the
preferred units to all of its shareholders, but Williams did not
consent to a public offering. ETE said it did not ask Williams
for its consent on the private offering.
Shareholders including Warren, who hold around 31.5 percent
of Energy Transfer's units, participated in the offering and
agreed to take smaller distributions for up to nine quarters.
Other shareholders participating in the offering include
Energy Transfer's President Jon McReynolds and Chief Commercial
Officer Marshall "Mackie" McCrea, according to SEC filings.
Shares of Williams rose 68 cents, or 4.6 percent, at $15.49,
while ETE shares rose 49 cents, or 7.6 percent, to $6.94.