Just four months after blasting investment bankers at Goldman Sachs for using a “relative” valuation technique to “dress up” a suboptimal deal into a fair one in In re Southern Peru Corp., 2011 WL 4907799 (Del. Ch.)(see the December 2011 issue of BVUpdate), Vice Chancellor Leo Strine of the Delaware Court of Chancery charged Goldman Sachs with using “questionable” and “suspicious” valuations to exert a “troubling” influence over Kinder Morgan’s recent billion-dollar bid for El Paso Corp. In reviewing shareholders’ request to enjoin the merger, Strine found that multiple “concealed motives” and conflicted interests had tainted the deal with breaches of fiduciary duty, included among them:
- Goldman Sachs stood on both sides of the transaction, ostensibly advising the El Paso board on the financial soundness of the Kinder Morgan bid (for a $20 million fee) while also owning roughly 19% of Kinder Morgan (worth nearly $4 billion) and occupying two seats on the Kinder board.
- The lead Goldman advisor to the El Paso board failed to disclose that he personally owned $340,000 worth of Kinder stock.
- After Morgan Stanley was brought in to “cleanse” any perceived conflicts, Goldman was able to accomplish the “remarkable feat,” Strine said, of giving the new i-bankers an incentive to favor the merger by tying their fees to the completion of the deal.
El Paso fiduciaries—particularly the CEO—also made “debatable negotiation and tactical choices,” Strine said. Given such “disturbing” behavior, the plaintiffs were likely to prove the deal was tainted, and yet the court declined to grant an injunction, preferring to leave the outcome up to a broader vote. Indeed, El Paso shareholders “overwhelmingly” approved the merger last month, with only one major stockholder, a California pension fund, objecting. (And perhaps preparing a request for statutory fairness and appraisal: Stay tuned.) Read the complete digest of In re El Paso Corp. Shareholders Litig., 2012 Del. Ch. LEXIS 46 (Feb. 29, 2012) in the next Business Valuation Update; the court’s opinion will be posted soon at BVLaw.
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