Delaware Courts and the Weakening of the Duty of Loyalty: In re El Paso Corp. Securities Litigation (Injunctive Relief)(Part 5)

With a finding that plaintiffs had sufficiently alleged "a reasonable likelihood of success in proving that the Merger was tainted by disloyalty" and a finding that an action for damages would be inadequate, the court considered whether an injunction was in order.   

Plaintiffs for the most part sought to enjoin not the merger agreement (although at oral argument they agreed they would accept this remedy), but sought what the court described as:

an odd mixture of mandatory injunctive relief whereby I affirmatively permit El Paso to shop itself in parts or in whole during the period between now and June 30, 2012, in contravention of the no-shop provision of the Merger Agreement, and allow El Paso to terminate the Merger Agreement on grounds not permitted by the Merger Agreement and without paying the termination fee. 

In other words, plaintiffs wanted the court to correct the faulty process.  Given the alleged conflicts of interest, shareholders wanted the court to allow for a process that would ensure that the company was sold for the highest possible price.

This, the court suggested, "would pose serious inequity to Kinder Morgan, which did not agree to be bound by such a bargain."  More importantly, the injunction would potentially cause "more harm than good" to shareholders by allowing Kinder Morgan to walk away from the offer.  "The injunction the plaintiffs posit would be one that would sanction El Paso in breaching many covenants in the Merger Agreement and that would bring about facts that would mean that El Paso could not satisfy the conditions required for Kinder Morgan to have an obligation to close."

The court also hinted that the efforts to shop the company were unlikely to succeed.

Although it is true that the absence of a pre-signing market check and the presence of strong deal protections may explain the absence of a competing bid, the reality is that this is a highprofile transaction, litigation has been pending since early autumn 2011, and no bidder has emerged indicating that it would bid for any part of El Paso absent the deal protections.

At the same time, by refusing to issue the injunction, shareholders would have an opportunity to collectively express their judgment on the transaction when they voted on the merger.  

Putting aside the expectations of Kinder Morgan, which is arguably stuck with the risk of having dealt with potentially faithless fiduciaries, the real question is whether the court should intervene when the El Paso stockholders have a chance to turn down the Merger at the ballot box.

As a result, as the court reasoned, "the record does not instill in me the confidence to deny, by grant of an injunction, El Paso’s stockholders from accepting a transaction that they may find desirable in current market conditions, despite the disturbing behavior that led to its final terms." So, there would be no relief for the alleged conflicts of interest.  As the court noted: "We all wish we could have it all ways. But that is not real life, nor is it equitable." 

Primary materials in this case, including the opinion, can be found at the DU Corporate Governance web site.

J Robert Brown Jr.