Kinder Morgan Inc., the biggest U.S. pipeline provider after buying El Paso Corp., won a Delaware court’s approval of a $110 million settlement of investor lawsuits over the 2011 acquisition.
Chancery Court Judge Leo Strine in Wilmington said yesterday in court that the accord provided a “very large monetary settlement” of El Paso shareholders’ claims they were shortchanged in the $21.1 billion buyout by Kinder Morgan and that El Paso financial adviser Goldman Sachs Group Inc. (GS:US) had conflicting interests in the deal.
The settlement comes after Kinder Morgan officials said in October that third-quarter profit rose on increased natural gas transportation charges stemming from utilities burning more gas in power plants. Net income jumped 76 percent to $379 million from $215 million a year ago, the company said on Oct. 17.
Under the terms of the settlement, Houston-based Kinder Morgan is paying the $110 million to El Paso shareholders while Goldman Sachs agreed to forgo its $20 million fee in the acquisition to help fund the accord, according to court filings. At yesterday’s hearing, Strine also approved $26 million in legal fees and expenses for investors’ lawyers.
“We are pleased to have the matter resolved,” Larry Pierce, a Kinder Morgan spokesman, said in an e-mail.
David Wells, a spokesman for New York-based Goldman Sachs, declined to comment on approval of the settlement.
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 earlier this year that 95 percent of El Paso’s shareholders voted to accept Kinder’s offer, which provided a 47 percent premium.
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 Morgan, Goldman Sachs 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, 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.
In June, Goldman Sachs officials sold more than 36 million of its shares in Kinder Morgan at $31.88 each to net about $1.2 billion, the Wall Street Journal reported. Pierce of Kinder Morgan and Wells of Goldman Sachs said yesterday that the investment firm has completely sold its stake in the pipeline provider.
Along with forgoing its adviser fee, Goldman Sachs officials dropped demands that Kinder Morgan cover the investment firm’s legal fees in the case, according to court filings.
The settlement also resolves El Paso shareholders’ conflict-of-interest claims against former CEO Douglas Foshee.
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 investors that he and a group of executives were considering buying the unit, investors argued in court papers. In his ruling clearing the way for the El Paso shareholder vote, Strine criticized Foshee’s decision to approach Kinder officials about the unit.
Four El Paso shareholders objected to the settlement, according to court filings. Some of the objectors said the accord didn’t provide enough compensation for shareholders while others objected to the $26 million in fees and expenses sought by plaintiffs’s lawyers. Strine rebuffed the objections after finding settlement was a “substantial achievement” for El Paso investors.
The judge said the settlement of the El Paso buyout suits should be a primer for company executives, directors and their advisers on how to identify and handle potential conflicts in future deals.
“This should not have gone down how it did,” the judge said.
The case is In re El Paso Corp. Shareholder Litigation, Consolidated 6949-CS, Delaware Chancery Court (Wilmington).
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