March 5, 2012
On February 29, 2012, Chancellor Strine of the Delaware Court of Chancery issued an opinion that is highly critical of the sale process run by El Paso Corporation in connection with its $21.1 billion acquisition by Kinder Morgan, Inc. See In re El Paso Corporation Shareholder Litigation, No. 6949-CS (Delaware Court of Chancery). The Court focuses on various alleged conflicts of interest involving El Paso’s CEO and its financial advisor, which persuaded the Court that the plaintiffs have a reasonable probability of success on a claim that the merger was tainted by breaches of fiduciary duty. But despite the "disturbing nature of some of the behavior," the Court concluded that the balance of hardships did not support a preliminary injunction because the "stockholders should not be deprived of the chance to decide for themselves about the Merger."
As set forth in the Court’s opinion, the CEO of El Paso undertook sole responsibility for negotiating the sale of the company, and failed to disclose to the Board of Directors his interest in working with other El Paso managers in making a bid to buy El Paso’s exploration and production business from Kinder Morgan following completion of the merger. In the Court’s view, this conflict was compounded by the fact that El Paso relied in part on advice given by its longtime financial advisor, which owned 19% of Kinder Morgan (a $4 billion investment) and controlled two Kinder Morgan board seats. On top of this, the lead banker to El Paso personally owned approximately $340,000 of Kinder Morgan stock, which remained undisclosed throughout negotiations.
The Court’s opinion underscores a number of important points M&A practitioners should be mindful of in connection with a sale process:
It is noteworthy that the Court’s decision not to issue a preliminary injunction in light of the potentially serious conflicts of interest and the questionable decisions made by the Board conflicts with the decision in In re Del Monte Foods Company Shareholders Litigation. In that case, Vice Chancellor Laster issued a preliminary injunction enjoining a stockholder vote on the proposed merger for a period of 20 days, and further enjoined the enforcement of specific deal protection measures pending the vote, in light of alleged improper actions on the part of the company’s financial advisor. In El Paso, the Chancellor clearly expresses his view that it is not appropriate for the Court to interfere with stockholders’ right to vote for or against a transaction, absent a credible rival bid. The Chancellor also notes that the Court should not use its authority to reform a merger contract negotiated by sophisticated parties, including no-shops and termination rights, without an evidentiary hearing or undisputed facts.
Chancellor Strine’s opinion highlights the continuing heightened level of skepticism that the Court will display towards the actions of fiduciaries and advisors that may appear to be tainted by potential conflicts of interest. But the opinion also serves as a strong statement from the Chancellor of the proper role of the Court in merger situations where no rival bid has emerged and stockholders can exercise their informed vote to accept or decline a merger proposal.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you work or any of the following:
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