In re El Paso Corp. Shareholder Litigation: Court Denies Plaintiffs’ Motion to Enjoin Merger Negotiated by CEO
In In re El Paso Corp. S’holder Litig., Consolidated Civil Action No. 6949-CS (Del. Ch. Mar. 6, 2012), El Paso shareholders sought a preliminary injunction to stop a merger between El Paso Corporation (“El Paso”) and Kinder Morgan, Inc. (“KM”). The court sympathized with the plaintiffs but denied their motion, holding that an injunction was inappropriate because the plaintiffs could obtain adequate relief in a monetary damages claim.
According to the allegations, the El Paso-KM merger discussions began after El Paso’s public announcement that it would spin-off its exploration and production business. After the announcement, KM made an unsolicited offer to acquire the entirety of El Paso’s business at a price of $25.50 per share in cash and stock, which El Paso’s board of directors (“Board”) declined. After KM threatened to go public with its interest, El Paso’s Board sent El Paso’s CEO, Doug Foshee (“Foshee”), to begin negotiations with KM. The Board wanted $28 per share in cash and stock, but on September 18, 2011, Foshee agreed in principle with KM on a price of $27.55 per share in cash and stock. Less than a week later, KM retracted its bid. Rather than holding firm, El Paso accepted a package consisting of $25.91 per share in cash and stock, a warrant with a strike price of $40, and no protection against ordinary dividends. The final merger agreement contained terms that effectively prevented El Paso from soliciting bids from other companies.
The final deal between El Paso and KM came at a premium to El Paso’s then-current stock price, but the El Paso shareholders argued that the El Paso-KM merger was a result of questionable decisions by the Board and by Foshee. Allegedly, the Board failed to solicit other bids; the Board agreed to terms in the merger agreement that prevented solicitation of other bids; the Board appointed Foshee as El Paso’s sole negotiator; the Board failed to take a stronger negotiating position; the Board allowed KM to retract its bid; the Board agreed to the $25.91 price, which was $1.64 less than KM’s retracted bid; Foshee accepted a price lower than the Board had authorized; and Foshee had a secret desire to work with other El Paso managers to buy back El Paso’s exploration and production business from KM after the merger.
Other issues the plaintiffs had with the merger included Goldman Sachs’ (“GS”) role and its alleged conflict of interest. GS acted as a financial advisor to El Paso on the spin-off proposal, but also owned 19% of KM and controlled two seats on KM’s Board. Further, GS’ lead advisor personally owned approximately $340,000 in KM stock. El Paso brought in Morgan Stanley to advise on the merger, but GS “continued its role as primary financial advisor to El Paso for the spin-off, and was asked to continue to provide financial updates to the Board that would enable the El Paso directors to compare the spin-off to the [m]erger.” Goldman also allegedly “refused to concede Morgan Stanley should be paid anything if the spin-off, rather than the [m]erger, was consummated.”
In light of the actions and decisions by Foshee, the Board, and GS, the court found the plaintiffs had demonstrated a reasonable probability of success on the merits under the Revlon standard. Specifically, the court said, “[w]hen there is a reason to conclude that debatable tactical decisions were motivated not by a principled evaluation of the risks and benefits to the company’s stockholders, but by a fiduciary’s consideration of his own financial or other personal self-interests, then the core animating principle of Revlon is implicated.”
The court considered the alternatives to an injunction. While an action for damages was possible, recovery against the board was unlikely. (“On this record, it appears unlikely that the independent directors of El Paso – who are protected by an exculpatory charter provision – could be held liable in monetary damages for their actions.”). And, although Foshee was described as a “wealthy man,” he was “unlikely” to be “good for a verdict of more than half a billion dollars.” As a result, an action for damages would not make investors whole.
Nonetheless, despite the absence of this alternative remedy, the court denied the plaintiffs’ motion for injunctive relief. The court noted that the plaintiffs sought an “odd mixture of mandatory injunctive relief” allowing El Paso to shop itself to other bidders in breach of the merger agreement, to terminate the agreement without paying the stipulated termination fee, and to force KM to proceed with the merger if El Paso failed to find a superior bid. The court refused to extend the principles of equity this far, stating that “reality cannot justify the sort of odd injunction that the plaintiffs desire, which would violate accepted standards for the issuance of affirmative injunctions and attempt to force [KM] to consummate a different deal than it bargained for.”
The court also considered that El Paso’s shareholders still wielded veto power because they retained the right to vote against the potential merger.
The primary materials for this case may be found at the DU Corporate Governance website.