Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, will face claims in court that it had conflicting interests when it advised El Paso Corp. in its $21.1 billion buyout by oil-pipeline operator Kinder Morgan Inc.
Delaware Chancery Court Judge Leo Strine will hear arguments in Wilmington today from El Paso shareholders that Kinder Morgan’s $25.91-a-share bid for the pipeline company should be put on hold so other potential offers can be pursued. The original offer was tainted by Goldman Sachs’s conflicting roles in the deal, lawyers for pension funds and other investors said in court filings.
“This case presents a rare combination of deliberate indifference to an adviser’s flagrant conflicts with the soft but powerful harm from undisclosed management conflicts,” lawyers for the investors said in a Feb. 3 filing.
Goldman Sachs’s business practices have been criticized over 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.”
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,” said Charles Elson, a finance professor at the University of Delaware who runs the school’s Weinberg Center for Corporate Governance.
Lawyers for Goldman Sachs and El Paso countered in their court filings that the investment bank took “reasonable measures” to deal with potential conflicts and Goldman’s advisers didn’t compromise El Paso directors’ consideration of the buyout proposal.
Lawyers for a Louisiana pension fund contend 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 wound up with a 19 percent stake in Kinder Morgan and has its designees in two of the company’s board seats, the fund’s lawyers say. The investment bank then reaped millions of dollars by leading Kinder Morgan’s initial public offering in 2011, they said.
Didn’t Provide Enough
Goldman Sachs also had 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 $25.91-a-share bid, which includes both cash and stock, and provides a 37 premium to shareholders, officials for the company said last year. Investors contend the offer didn’t provide enough for their El Paso shares.
“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 presented approximately $150 million of savings for Goldman,” the investors’ lawyers said in the filing.
Investors’ lawyers contend Goldman Sachs officials convinced El Paso directors that Kinder Morgan’s bid was the best option and downplayed advantages of continuing independent operations or spinning off parts of the company.
‘Eyes Wide Open’
In their court filings, Goldman Sachs officials counter the bank took steps to deal with any potential conflict, including having Goldman directors on Kinder Morgan’s board recuse themselves from considering the deal.
The bank also made sure El Paso officials were aware of Goldman Sachs’s stake in Kinder Morgan and that they brought the firm’s advisers in “with their eyes wide open,” lawyers for Goldman Sachs said in their Jan. 26 filing.
El Paso also had Goldman Sachs’s advice double-checked by executives of Morgan Stanley & Co., which served as a second adviser in the deal, Goldman Sachs’s lawyers said.
Still, El Paso’s decision to bring Goldman Sachs in as an adviser drew the ire of Morgan Stanley executives, court filings show.
Steve Munger, a Morgan Stanley banker, said in an e-mail that Goldman Sachs had an “enormous conflict” in the case and that the investment bank’s decision to serve as one of El Paso’s advisers was “GS at its most shameless,” investors’ lawyers said in their filing.
Goldman Sachs’s attorneys said that investors’ lawyers portrayed the bank as a wrongdoer simply because it had relationships with both sides of a buyout.
“Every piece of Goldman Sachs’s advice is painted in the most dastardly terms, allegedly motivated by rapacious and crude objectives,” the firm’s lawyers said.
Strine will have to decide whether the efforts of Goldman Sachs and El Paso to ensure potential conflicts didn’t taint consideration of Kinder Morgan’s offer inoculated the firms from liability, said Larry Hamermesh, a professor at Widener University’s law school in Wilmington who specializes in corporate law.
Del Monte Case
“If a board is fully aware an adviser has a conflict, and decides to look past that and hire them anyway, I don’t see much problem with that,” Hamermesh said.
El Paso investors are hoping Strine will take note of a colleague’s recent finding that Barclays Plc executives had a conflict when they served as a financial adviser to Del Monte Foods Co. in a buyout by private-equity firms led by KKR & Co.
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.
“I think this Goldman case is being driven by the idea that these conflict cases in Chancery are hot right now,” Hamermesh said.
The case is In re El Paso Corp. Shareholder Litigation, Consolidated 6949-CS, Delaware Chancery Court (Wilmington).