Thursday, March 1, 2012
Yesterday Chancellor Leo Strine "reluctantly" declined to issue an injunction to prevent a vote of El Paso's shareholders on proposed merger with Kinder Morgan. Goldman Sachs owns 19% of Kinder Morgan, and Goldman Sachs was El Paso's financial advisor on the transaction. In any normal world, that would raise loyalty concerns and trigger an entire fairness review. Here, not so much:
“I reluctantly deny the plaintiffs’ motion for a preliminary injunction, concluding that the El Paso stockholders should not be deprived of the chance to decide for themselves about the merger, despite the disturbing nature of some of the behavior leading to its terms[.]”
How conflicted is Goldman in this transaction? Well, the lower the buyout price, the higher the relative return for Goldman as a Kinder Morgan investor. That's pretty conflicted, especially if El Paso was relying on Goldman to play a central role in negotiating a price and issue a fairness opinion. In any event, Goldman held the position that it was transparent with everyone, recusing themselves from board discussions and disclosing their interests. El Paso also hired a second financial advisor to double source the advice it was getting.
Given that all the information about Goldman's conflict has been disclosed to shareholders in advance of the vote and that shareholders are still capable of saying no, Strine is letting it go to them. Anyone familiar with the Delaware code will remember that under Section 144, a fully informed stockholder vote can cleanse a transaction where there are director conflicts. Strine is allowing the deal to move forward on the basis that a fully informed shareholder vote may be capable of cleansing the Goldman conflict in this deal.
As an aside, The American Lawyer has a lengthy piece on the Chancery Court under Chancellor Strine. It's a good read.