Bloomberg News

Kinder Morgan to Pay $110 Million to Settle El Paso Suits

September 08, 2012

Kinder Morgan Inc. will pay $110 million to end lawsuits by investors over its purchase of gas- pipeline owner El Paso Corp. in a settlement that includes concessions by Goldman Sachs Group Inc. (GS:US), according to court papers.

Kinder Morgan, the biggest U.S. pipeline operator, agreed to settle claims that El Paso investors were shortchanged in the $21.1 billion buyout, which provided $25.91 a share, lawyers for El Paso shareholders said in a Delaware Chancery Court filing yesterday.

Those investors also criticized Goldman Sachs, who served as El Paso’s financial adviser in the sale, for having conflicting interests in the buyout. New York-based Goldman Sachs, which at one time owned 19 percent of Houston-based Kinder Morgan, agreed to forgo its $20 million fee in the El Paso deal as part of the settlement, according to the filing.

Kinder and Goldman Sachs officials denied any wrongdoing as part of the settlement and said they agreed to the accord “solely to avoid the substantial burden, expense, inconvenience and distraction of continued litigation,” according to the filing.

The settlement comes after Kinder Morgan officials said in July that second-quarter profit fell as the pipeline company cut the value of some of its assets it agreed to sell to obtain regulatory approval for the El Paso acquisition. Net income fell to $153 million from $230 million a year earlier, officials said July 18.

‘Best Interest’

Larry Pierce, a spokesman for Kinder Morgan, said in an e- mailed statement the settlement covers suits in Delaware, Texas and New York.

“The company believes that resolving these claims at this time, avoiding the expense and uncertainty of continued litigation, and putting this matter behind it are in the best interest of its shareholders,” Pierce wrote in the statement. He declined to comment in a telephone interview to specify how Kinder Morgan is funding the settlement.

David Wells, a spokesman for Goldman Sachs, declined to comment on the settlement in a telephone interview yesterday.

Kinder Morgan closed its acquisition of Houston-based El Paso in May, two months after a judge refused to block a shareholder vote on the takeover. Pierce said yesterday that 95 percent of El Paso’s shareholders voted to accept Kinder’s offer, which provided a 47 percent premium.

Damage Claims

Delaware Chancery Court Judge Leo Strine concluded in March that investors shouldn’t be denied the right to decide whether to accept the offer “despite the disturbing nature of some of the behavior leading to its terms.” Strine allowed investors to proceed with damage claims against Kinder executives, Goldman Sachs officials and former El Paso managers over their handling of the deal.

Goldman Sachs’s role in Kinder Morgan’s buyout of El Paso drew investors’ and the judge’s ire because of the bank’s ties to both companies.

Pension funds from Louisiana, Florida and New York that invested in El Paso argued Goldman Sachs bankers helped Richard Kinder, the firm’s chief executive officer, take the pipeline operator private in 2006. At one time, Goldman Sachs had designees in two Kinder Morgan board seats because of its ownership stake in the energy company.

Goldman Sachs, the fifth-largest U.S. bank by assets, also had advised El Paso over the years, the investors said in court papers. When Kinder approached its rival about a takeover last year, El Paso called in Goldman Sachs to help.

The pension funds’ lawyers argued Goldman Sachs had a financial incentive to advise El Paso’s managers to accept a lower price than they might have negotiated.

Fee Demand Dropped

“Goldman’s staggering conflict of interest was obvious from the outset: With a stake in KMI worth over $4 billion, every dollar shaved off the buyout price represented $150 million of savings for Goldman,” the funds argued.

In June, Goldman Sachs officials moved to sell more than 36 million of its shares in Kinder at $31.88 apiece to net about $1.2 billion, the Wall Street Journal newspaper reported. Goldman Sachs now owns 5.56 percent of Kinder Morgan, according to data compiled by Bloomberg. Pierce said yesterday that Goldman no longer has designees on Kinder’s board.

Along with forgoing its fee for serving as one of El Paso’s advisers in the buyout, Goldman Sachs officials also are dropping demands that Kinder Morgan cover legal fees tied to the court fight over the acquisition, according to court filings outlining the settlement.

Foshee Claims

Goldman Sachs hired lawyers from New York-based Sullivan & Cromwell and Wilmington-based Richards, Layton & Finger to represent it in the Delaware suit filed by El Paso investors. Pierce said in an e-mail that he didn’t know the size of Goldman’s legal fees.

The settlement also resolves El Paso shareholders’ conflict-of-interest claims against former Chief Executive Officer Douglas Foshee, according to the court filing.

Investors accused Foshee of approaching Kinder about pursuing a management-led bid for El Paso’s energy-exploration unit while negotiating the potential purchase of the whole company.

Foshee never informed El Paso’s board or shareholders that he and a group of executives were considering buying the unit, investors argued in court papers. In his ruling allowing El Paso shareholders to vote on the buyout offer, Strine criticized Foshee’s decision to approach Kinder officials about the unit.

“He did not tell anyone but his management conferees that he was contemplating an MBO because he knew that would have posed all kinds of questions about the negotiations with Kinder Morgan and how they were to be conducted,” the judge said.

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

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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