El Paso shareholders seek to block vote on merger

WILMINGTON, Del Thu Feb 9, 2012 6:55pm EST

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WILMINGTON, Del Feb 9 (Reuters) - El Paso Corp's chief executive tainted the company's proposed $21 billion sale to rival oil pipeline company Kinder Morgan Inc by not disclosing his personal interest in acquiring certain El Paso assets, El Paso shareholders argued on Thursday.

They told a Delaware chancery court that these alleged conflicts of interest, plus those of deal adviser Goldman Sachs Group Inc, so badly marred the merger that the court should block a shareholder vote scheduled for next month.

Chancery Court Judge Leo Strine described the alleged conflicts as "disturbing" but appeared to reject the idea of enjoining a shareholder vote. Instead he said he could let shareholders decide if they wanted to approve the deal and allow them to sue for damages caused by the conflicts.

Strine, who said he would soon decide whether to enjoin the vote, also pointed out the damage that shareholders would suffer if he blocked the deal, since that could prompt Kinder Morgan to walk away and El Paso's stock might tank.

"You want me to enjoin the stink, but only until June 30 and then you still get the stink," said Strine.

El Paso agreed in October to be acquired for $26.87 per share in cash, stock and warrants, combining the two largest natural gas pipeline operators in North America.

As part of the Kinder Morgan deal, El Paso also abandoned a previously announced plan to spin off its exploration and production business to shareholders.

Mark Lebovitch, a lawyer for El Paso shareholders, told Strine an injunction against the deal would give El Paso's management a chance to consider the breakup and sale of the company's assets, which could bring more money stockholders.

Strine, the court's chief judge, did most of the talking during the six-hour hearing, pressing lawyers for El Paso, Kinder Morgan and Goldman Sachs to explain the motives of key players in the deal.

Lebovitch said that El Paso's chief executive and the main negotiator for the company, Douglas Foshee, might have had an interest in depressing the price of his company because he hoped to cut a side deal to buy unwanted assets from Kinder Morgan.

"The principle negotiator has a conflict that's not disclosed," said Strine. "This is a very unusual pattern of negotiation."

El Paso's attorney said shareholders were basing their accusations against Foshee on little more than his musings.

Goldman Sachs also appeared to have conflicting motives, the shareholders said: It collected a $20 million fee as a financial adviser to El Paso, while also holding a 19 percent stake in Kinder Morgan.

For every dollar shaved off the price Kinder Morgan agreed to pay for El Paso's stock, the shareholders said, Goldman made $150 million on its investment in Kinder Morgan.

In addition, although Goldman did only minimal work on the deal, the bank still expected to collect its fee, El Paso's attorney said. Strine suggested Goldman surrender its compensation. That suggestion was swiftly rejected by Goldman's attorney, who also denied there was any conflict.

Shares of El Paso closed up 0.8 percent at $27.32 while shares of Kinder Morgan climbed 1.8 percent to $32.64.

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