Bloomberg News

Kinder Morgan’s El Paso Buyout Tainted by Conflicts, Lawyer Says

February 13, 2012

Feb. 10 (Bloomberg) -- Kinder Morgan Inc.’s proposed $21.1 billion buyout of rival pipeline operator El Paso Corp. was tainted by Goldman Sachs Group Inc.’s conflicting interests in the deal and should be barred, a lawyer for El Paso investors said.

Goldman Sachs, which holds a 19 percent stake in Houston- based Kinder Morgan, improperly served as an adviser to El Paso on the acquisition offer, said Mark Lebovitch, a lawyer for pension funds from Louisiana, Florida and New York that sued over the deal.

“If there was ever a conflict that can’t be neutralized, this is it,” Lebovitch told Delaware Chancery Court Judge Leo Strine yesterday at an injunction hearing in Wilmington. “The word ‘conflict’ just doesn’t do it justice.”

Strine said he will rule by March 6 on whether the buyout can proceed. During yesterday’s almost six-hour hearing, Strine said evidence in the case raises questions about whether “there were powerful, unchecked conflicts of interest” that played a role in the El Paso buyout.

The business practices of Goldman Sachs, the fifth-largest U.S. bank by assets, have been criticized during the past two years after the New York-based company agreed to pay $550 million to resolve government claims that marketing materials about investments linked to subprime mortgages had “incomplete information.”

Largest Penalty

It was the largest penalty ever levied by the U.S. Securities and Exchange Commission against a Wall Street firm. Goldman Sachs also faced questions from politicians and labor unions about its compensation system after getting taxpayer aid during the financial crisis.

“Given all the bad press Goldman has gotten recently, it might have been better if they’d taken a pass on serving as an adviser in this deal,” Charles Elson, a finance professor at the University of Delaware who runs the school’s Weinberg Center for Corporate Governance, said in an interview Feb. 8.

Lawyers for the pension funds contend in court papers that Goldman Sachs has long-standing ties to Kinder Morgan, helping Richard Kinder, the firm’s chief executive officer, take the Houston-based pipeline operator private in 2006.

Goldman Sachs, in addition to the stake in Kinder Morgan, has its designees in two of the company’s board seats, the fund’s lawyers say. Last year, the investment bank reaped millions of dollars by leading Kinder Morgan’s initial public offering, they said.

El Paso Advice

Goldman Sachs also advised El Paso over the years, the investors’ lawyers said. When Kinder approached the rival pipeline company about a buyout last year, El Paso executives called in Goldman Sachs as an adviser.

El Paso’s board ultimately agreed to Kinder’s bid, which includes both cash and stock and provides a 37 percent premium to shareholders, officials for the company said last year. El Paso investors contend the offer, valued in court papers at $25.91 a share, was too low.

Lebovitch told the judge yesterday that Goldman’s dual roles as investor and adviser in the El Paso deal tainted the pipeline company’s consideration of Kinder Morgan’s offer.

CEO Conflicted?

Goldman officials were “motivated to get the deal done” and didn’t properly evaluate the benefits of El Paso spinning off parts of its business or continuing independent operations, the investors’ lawyer argued.

El Paso officials also had conflicting interests in the deal, Lebovitch said. He noted that Douglas Foshee, the pipeline company’s chief executive officer, had approached Kinder about pursuing a management-led bid for El Paso’s energy-exploration unit.

Never Informed

Foshee never informed El Paso’s board or the company’s shareholders that he and a group of executives were considering a bid for the unit while he negotiated with Kinder on the offer for the whole company, the investors’ lawyer said.

Paul Rowe, one of El Paso’s lawyers, dismissed Foshee’s approach to Kinder over the unit as meaningless and trivial.

“The level of interest and action was so light” that El Paso directors considered it not to be material when they learned of Foshee’s discussions of a management-led buyout of the unit, Rowe said.

Strine, though, said the El Paso CEO’s approach to Kinder “raises significant concerns” about whether he negotiated the buyout of the entire company in good faith.

‘Done Things Differently’

The judge also said arguments from El Paso’s and Goldman Sachs’s lawyers downplayed the seriousness of the investment bank’s conflicts.

“I’m supposed to ignore conflicts of interest,” Strine said. “There is a price for even the appearance of a conflict.”

John Hardiman, a lawyer for Goldman Sachs, said the investment bank’s managers “heard loud and clear” the judge’s concerns about its handling of conflict issues tied to the El Paso deal.

“In retrospect, when you look back at a lot of the decisions, we wouldn’t have been here if we’d done things differently,” Hardiman said about Goldman Sachs’s handling of its role in the deal.

Strine said El Paso shareholders are scheduled to vote on the Kinder Morgan buyout on March 6 and can reject it if they think the offer amounts to a “stinky, shady deal.”

El Paso investors are hoping Strine will take note of a colleague’s finding last year that Barclays Plc had a conflict when it served as a financial adviser to Del Monte Foods Co. in a buyout by private-equity firms led by KKR & Co.

Del Monte Buyout

Chancery Judge Travis Laster found Barclays officials had a conflict because they provided some of the financing to the private-equity firms buying the maker of Meow Mix cat food and Milk Bone dog biscuits.

The judge put the deal on hold until the company could make more disclosures about Barclay’s role in the acquisition. Del Monte and Barclays later agreed to pay $89.4 million to settle investor suits over the buyout that cited the conflict.

“This Goldman case is being driven by the idea that these conflict cases in Chancery are hot right now,” Larry Hamermesh, a professor at Widener University’s law school in Wilmington who specializes in corporate law, said in a interview Feb. 8.

Kinder Morgan rose 1.8 percent to $32.64 in New York Stock Exchange composite trading. El Paso gained 0.9 percent to $27.32.

The case is In re El Paso Corp. Shareholder Litigation, Consolidated 6949-CS, Delaware Chancery Court (Wilmington).

--With assistance from Sophia Pearson in Philadelphia and Mike Lee in Dallas. Editors: Stephen Farr, Glenn Holdcraft

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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