Opinion

Alison Frankel

Will Goldman learn its lesson from El Paso shareholder settlement?

By Alison Frankel
September 11, 2012

Late Friday, Kinder Morgan announced a $110 million settlement with El Paso Corp shareholders who asserted that Kinder’s $21.1 billion acquisition of El Paso was tainted by Goldman Sachs’s involvement on both sides of the deal. You remember the case: As Chancellor Leo Strine of Delaware Chancery Court detailed in a scathing opinion in March, Goldman served as a financial adviser to El Paso even though it simultaneously held a $4 billion investment (a 19 percent ownership stake) at Kinder Morgan. Strine refused to enjoin a shareholder vote on the merger but encouraged plaintiffs’ lawyers to press on with claims for money damages, finding “a reasonable likelihood of success in proving that the merger was tainted by disloyalty.”

The settlement certainly reflects Strine’s skeptical view of the sale process. The $110 million from El Paso is as good a recovery for shareholders as we’ve seen in an M&A breach-of-fiduciary-duty suit, topping last year’s settlement in another celebrated conflict-of-interest case — against Del Monte and Barclays — by more than $20 million. (The recently upheld $2 billion judgment in the Southern Peru Copper case is a bit different, since it involved alleged self-dealing by a controlling shareholder.)

But what about Goldman Sachs? Strine’s ruling in March sent mixed messages about Goldman’s potential liability. The chancellor heaped scorn upon Goldman for refusing to be bothered with such trifles as conflicts of interest, calling the bank’s behavior “furtive” and “troubling,” and citing an email from Morgan Stanley, a co-adviser to El Paso, that described Goldman as “shameless.” Strine also said, however, that shareholder lawyers at Bernstein Litowitz Berger & Grossmann, Grant & Eisenhofer and Labaton Sucharow would have a tough time making out an aiding-and-abetting case against Goldman. Nevertheless, the plaintiffs were clearly determined not to settle the case without some contribution by Goldman Sachs. In the final settlement, that contribution came in the form of Goldman Sachs waiving payments from El Paso: a $20 million advisory fee and indemnity for Goldman’s legal costs. In essence, that means Goldman is funding upwards of $20 million of the settlement, since you can bet that its lawyers at Sullivan & Cromwell charged in excess of $1 million on the case. (A Goldman Sachs spokesman declined to comment, and Goldman counsel John Hardiman of S&C did not return my call.)

That’s about as much as the $23 million Barclays paid (in cash) in the Del Monte settlement, but Barclays’ share of the deal, as a percentage of the entire settlement, was bigger. And the $20 million or so that Goldman gave up in fees and legal costs is dwarfed by the $1.2 billion profits the bank reportedly took on the sale of 36 million shares of Kinder Morgan after the El Paso deal was approved.

In other words, Goldman’s contribution to the El Paso shareholder litigation isn’t remotely big enough to make a dent in the armor of hubris Strine described in his opinion in March. But shame may be. Though Goldman’s spokesman wouldn’t confirm it, this settlement appears to mark the first time the investment bank has agreed to forgo an advisory fee as a result of litigation. That’s plain embarrassing, as is knowing that two once-loyal clients have been forced to pay a record settlement because of your behavior. As I noted at the time of Strine’s ruling, the chancellor seemed to threaten more black marks against Goldman if the bank and El Paso didn’t agree to settle the case, using shame to prod Goldman to come up with money for shareholders despite weaknesses in their legal theory.

We’ve heard previous predictions that scandals would prompt change: Last October, after the Del Monte settlement, shareholder lawyers Stuart Grant of G&E and Randall Baron of Robbins Geller Rudman & Dowd told me that the case had put Wall Street on notice that courts will not tolerate conflicts; and Strine’s ruling in the El Paso case in March prompted the Wall Street Journal‘s money and investing editor to call for a zero tolerance policy on financial adviser conflicts. Does the Goldman contribution to the El Paso settlement mark a turning point? We’ll have to keep watching Delaware dockets to find out.

One other note on the El Paso deal: In a proposed notice to shareholders, plaintiffs’ lawyers disclosed that they plan to request an award of no more than 24 percent of the settlement, or $26.4 million, and $800,000 in expenses. That pot will be divided among lawyers who prosecuted cases in Delaware, Texas and New York.

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