Delaware Courts and the Weakening of the Duty of Loyalty: In re El Paso Corp. Securities Litigation (The Facts As Alleged) (Part 2)
So what happened?
El Paso, a pipeline operator, was considering a strategic plan to divide the company into two by spinning off the exploration and production business, retaining only the natural gas pipeline business. While the plan was under consideration, Kinder Morgan approached El Paso about purchasing the entire company. Kinder apparently really wanted just the pipeline but was willing to purchase the entire company to get it. Goldman Sachs owned 19% of the shares of Kinder Morgan and had two representatives on the Kinder board.
Goldman had been providing El Paso with advice on the plan to split the company into two pieces. With respect to the interest from Kinder Morgan, however, El Paso retained Morgan Stanley to provide advice. The CEO of El Paso was assigned the task of negotiating with Kinder Morgan. The two sides agreed to a price of $27.55 in cash and stock. Shortly afterwards, Kinder withdrew the bid. As the court described:
Instead of telling Kinder where to put his drilling equipment, [the CEO of El Paso] backed down. In a downward spiral, El Paso ended up taking a package that was valued at $26.87 as of signing on October 16, 2011, comprised of $25.91 in cash and stock, and a warrant with a strike price of $40 – some $13 above Kinder Morgan’s then-current stock price of $26.89 per share – and no protection against ordinary dividends.
The deal involved a substantial premium over the market price for El Paso and Morgan Stanley advised that the deal was "more attractive in the immediate term than doing the spin-off and had less execution risk, because Kinder Morgan had agreed to a great deal of closing certainty." The merger agreement contained a no shop provision and provided for a termination fee of $650 million or 3.1% of the equity value of the deal.
Shareholders brought suit seeking to challenge the transaction, arguing that there were conflicts of interest in the negotiating process. The court had to first consider whether plaintiffs have alleged sufficient facts to make out conflicts of interest.
Primary materials in this case, including the opinion, can be found at the DU Corporate Governance web site.