Settled: December 03, 2012
On October 16, 2011, Kinder Morgan Inc. (Kinder Morgan) publicly announced that it had agreed to acquire all of the outstanding shares of El Paso Corporation (El Paso) in a combined cash and stock transaction worth approximately $21.1 billion (the merger), or approximately $26.87 for each El Paso share based on the closing price of Kinder Morgan's stock on October 14, 2011, the last trading day prior to the public announcement of the merger (the merger price). The merger price consisted of a combination of cash and/or stock and warrants to purchase a share of Kinder Morgan stock.
According to a company press release, the merger would create "the nation's biggest empire of oil and gas pipelines" with a combined enterprise value of $94 billion.
Under the terms of the merger, El Paso shareholders could elect to receive, for each El Paso share held: (i) $25.91 in cash; (ii) 0.9635 shares of Kinder Morgan common stock; or (iii) $14.65 in cash plus 0.4187 shares of Kinder Morgan common stock, subject to an aggregate pro rata split of 57 percent cash and 43 percent stock. In addition, El Paso shareholders were to receive 0.640 Kinder Morgan warrants per El Paso share held.
Following the announcement of the Merger, a number of El Paso shareholders filed complaints in Delaware Chancery Court asserting breach of fiduciary duty claims against El Paso's Board of Directors (the Board), as well as aiding and abetting claims against Kinder Morgan and the Board's financial advisor, Goldman Sachs & Co. (Goldman).
On November 18, 2011, Delaware Chancellor Leo E. Strine, Jr. appointed Pipefitters Local Union #537 Trust Funds as co-lead plaintiff of the consolidated action, along with co-lead plaintiffs Pompano Beach Police & Firefighters' Retirement System, Saratoga Advantage Trust Energy & Basic Materials Portfolio, and Saratoga Advantage Trust Mid Capitalization Portfolio (together, the plaintiffs).
Immediately after being appointed, the plaintiffs launched discovery on an expedited basis, issuing multiple document requests to defendants El Paso, the Board, Kinder Morgan, and Goldman Sachs. The plaintiffs also issued third-party subpoenas requesting documents from El Paso's financial advisor Morgan Stanley and its legal advisor Wachtel Lipton Rosen & Katz, as well as from Kinder Morgan's legal advisor Weil Gotshal & Manges LLP and its financial advisors, Evercore Group LLC, and Barclays Capital Inc.
On November 29, 2011, the plaintiffs filed their Verified Consolidated Class Action Complaint (the complaint). In the complaint, the plaintiffs alleged that the Board breached its fiduciary duties to El Paso's shareholders. Among other things, the plaintiffs alleged that the merger price was inadequate and the product of a negotiation process that was irremediably tainted by El Paso's conflicted financial advisor, Goldman. ;At the time of the merger negotiations, Goldman held a 19.1 percent ownership stake in Kinder Morgan, the company's acquiror. Accordingly, the plaintiffs alleged that Goldman's ownership interest in Kinder Morgan led it to steer the Board to approve the merger at a price that did not represent the best value reasonably obtainable for El Paso's shareholders. Additionally, the plaintiffs alleged that in approving the merger, the Board abandoned a previously-announced, highly-touted plan to split or "spin-off" El Paso's pipeline business segment from its exploration and production business segment, and form two standalone, publicly traded companies.
In early December, the plaintiffs began reviewing over a quarter of a million pages of documents produced by defendants and third parties. Between December 9, 2011 and January 6, 2012, the plaintiffs deposed seven officers, Board members and financial advisors of El Paso and Kinder Morgan.
Following fact discovery, on January 13, 2012, the plaintiffs moved to preliminarily enjoin the merger due to the conflicts that corrupted the Board's sales process, and the defects that skewed the valuation analyses performed by Goldman and the Board's other financial advisor, Morgan Stanley. The defendants opposed the motion, and on February 9, 2012, the parties argued the motion in a six-hour hearing in the Delaware Court of Chancery.
On February 29, 2012, Chancellor Strine issued a written decision denying the Motion for Preliminary Injunction, but finding that "plaintiffs [had] a reasonable likelihood of success in proving that the Merger was tainted by disloyalty," though "the balance of harms counsel[ed] against a preliminary injunction."
Following the issuance of the court's decision, El Paso adjourned its shareholder meeting to approve the merger until March 9, 2012.
On March 9, 2012, El Paso held its special meeting of shareholders, and the merger was approved and thereafter closed on May 25, 2012.
Subsequent to the denial of their Motion for Preliminary Injunction, the plaintiffs continued to litigate the action in pursuit of a damage remedy based on their view that the merger consideration was inadequate and the product of breaches of fiduciary by the Board, aided and abetted by Goldman and Kinder Morgan.
On April 23, 2012, the court entered a Stipulation and Order Governing Case Schedule which provided, among other things, for a trial commencing on March 4, 2013. Pursuant to that Order, the plaintiffs served additional discovery requests upon the defendants and certain third parties, received and reviewed productions of documents in response to those requests, while continuing to seek the production of additional documents, filed a Motion for Class Certification, and prepared an amended complaint.
On July 18, 2012, the parties reached an agreement in principle to settle and release all claims asserted in the action for $110 million in cash. The stipulation of settlement expressly notes that "[a]s a result of this lawsuit as well as other factors, El Paso did not pay the $20 million fee or any indemnity payments allegedly owed to Goldman under the terms of its engagement," and, as such, that money that would otherwise have gone to Goldman was used to fund the recovery for shareholders.
The court approved the settlement terms as fair and reasonable on December 3, 2012.