In re El Paso Corp. S'holder Litig., C.A. No. 6949-CS (Del. Ch. Feb. 29, 2012) (Strine, C.)
In this memorandum opinion, the Court of Chancery denied the stockholder plaintiffs’ motion to enjoin a merger (the “Merger”) between El Paso Corporation (“El Paso”) and Kinder Morgan, Inc. (“Kinder Morgan”). In analyzing the requirements for securing preliminary injunctive relief, the Court found that plaintiffs had demonstrated on the truncated record a probability of success on the merits and a likelihood of irreparable injury if the Merger were not enjoined. In balancing the equities, however, the Court determined that the El Paso stockholders were well positioned to accept or reject the Merger – the only offer on the table – and declined to intervene and potentially deprive the El Paso stockholders of that opportunity.
On May 24, 2011, El Paso announced publicly that it would spin off its exploration and production (“E&P”) business. Three months later, and before the spin-off was effected, Kinder Morgan approached El Paso and offered to acquire the entire company for $25.50 per share in cash and stock. Kinder Morgan’s overture began a process that ultimately led to Kinder Morgan and El Paso entering into a merger agreement on October 16, 2011. The combined cash and stock merger consideration at the time of signing was valued at $26.87 per share, $1.37 more than Kinder Morgan’s initial offer but $0.68 less than a September 18, 2011 agreement in principle between El Paso’s CEO Doug Foshee and Kinder Morgan’s CEO and controlling stockholder Rich Kinder. The Court recognized that the Kinder Morgan deal would provide the El Paso stockholders with a substantial premium to El Paso’s unaffected market price.
In analyzing the probability of success of plaintiffs’ loyalty claims, the Court found – based on the preliminary record – that certain aspects of the process leading to the premium deal prompted concern. The Court focused on the conduct of Mr. Foshee and El Paso’s financial advisors Goldman Sachs and Morgan Stanley. The Court observed that El Paso’s independent board of directors (the “Board”) had placed considerable reliance on the company’s CEO, Mr. Foshee in connection with the price negotiations with the buyer, Kinder Morgan. It further noted that Kinder Morgan intended to sell El Paso’s E&P business in order to finance its overall purchase of El Paso. During the negotiation process, Mr. Foshee spoke with the head of El Paso’s E&P business about the possibility of formulating a management bid to acquire the asset. The preliminary record did not make clear when Mr. Foshee first considered a management bid for the E&P assets, but gave rise to an inference that Mr. Foshee was considering this opportunity with El Paso management during the time that he was involved in negotiations over the Merger terms with Mr. Kinder. Mr. Foshee did not disclose to the Board that he was considering a management proposal to acquire the E&P business. After the Merger terms were agreed upon and the Merger Agreement signed, Mr. Foshee approached Mr. Kinder about the possibility of the submission of a bid by El Paso management for the E&P assets. The Court held on a preliminary record that that plaintiffs probably could ultimately prove that the potential management buyout of the E&P business created a conflict for Mr. Foshee because of its potential for undermining his incentive to negotiate aggressively in the hope that Kinder Morgan would be more receptive to his management buyout proposal as a result.
The Court also criticized Goldman Sachs’ involvement in the process. Goldman Sachs was El Paso’s longstanding financial advisor and also owned 19% (or $4 billion worth) of Kinder Morgan stock and controlled two of Kinder Morgan’s board seats, which were filled with senior Goldman Sachs principals. It was also asserted that the lead Goldman Sachs banker working for El Paso personally owned approximately $340,000 of Kinder Morgan stock. Goldman Sachs set up an internal “Chinese wall,” and El Paso limited Goldman Sachs’ role to advising on the potential spin-off and did not permit Goldman Sachs to advise on the potential transaction with Kinder Morgan. El Paso instead retained Morgan Stanley to advise on the Merger. Despite these measures, the Court found on the preliminary record that Goldman Sachs had a potent conflict. The Court reasoned that in light of this conflict Goldman Sachs’ involvement remained problematic despite its limited representation. In this regard, the Court explained that, because the Board was comparing the advantages of the Merger to the spin-off, Goldman Sachs’ advice with respect to the spin-off could have had an influence on the Board’s views as to the advantages of the Merger, in which Goldman Sachs had a financial interest. Also, the Court found that Morgan Stanley’s fee structure incentivized it to favor the Merger (for which Morgan Stanley would get a $35 million fee) over the spin-off or any other strategic alternative (for which Morgan Stanley would not get any fee). Based on the apparent issues with respect to Mr. Foshee, Goldman Sachs, and Morgan Stanley, the Court found that, at least for purposes of this preliminary application, plaintiffs had established a reasonable probability that they would succeed at proving on a full record a breach of fiduciary duty.
The Court then turned to an analysis of irreparable harm. The Court found in this regard that the independent Board members would likely be protected from monetary damages by El Paso’s exculpatory charter provision, that Mr. Foshee was alone unlikely to be in a position to satisfy a half billion dollar verdict, and that it would be difficult to prove Goldman Sachs or Kinder Morgan was an aider and abettor and therefore liable for damages. The Court thus concluded that the adequacy of a money damages, post-trial remedy for El Paso’s stockholders was not apparent and that plaintiffs had shown that there was a likelihood of irreparable injury if the Merger were not enjoined.
The Court then turned to the balance of the equities. The Court focused on the question of whether it should intervene in light of the fact that the El Paso stockholders were to be presented with a fully informed opportunity to accept or reject the Merger and that no rival bid for El Paso had surfaced. Before answering the question, the Court analyzed the injunctive relief sought by plaintiffs, which it characterized as “an odd mixture of mandatory injunctive relief.” Essentially, plaintiffs requested an injunction that would (i) direct El Paso to shop itself despite the no-shop provision in the Merger Agreement and (ii) authorize El Paso to terminate the Merger Agreement on grounds not allowed by the Merger Agreement and without paying the termination fee. If no superior transaction resulted from this process, plaintiffs proposed order further provided that the Court would lift the injunction and force Kinder Morgan to complete the Merger. The Court noted that such an injunction was an affirmative injunction and not a traditional negative injunction that could be imposed without an evidentiary hearing or undisputed facts, and that it would pose serious inequity on Kinder Morgan by stripping it of its contractual rights while simultaneously obliging it to adhere to its obligations. The Court therefore denied plaintiffs’ motion for a preliminary injunction, finding that the balance of equities weighed in favor of permitting the El Paso stockholders the opportunity to decide for themselves whether to accept or reject the Merger by way of a fully informed stockholder vote.