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September 8, 2012 12:49 am
Shareholders in El Paso, the oil and gas company that was bought by pipeline operator Kinder Morgan earlier this year, have won $110m from the company to resolve a legal action over alleged conflicts of interest.
The case has become a touchstone for critics who say big investment banks are often conflicted when making deals. The settlement is the largest ever to resolve such a case relating to the takeover of one company by another.
Three pension funds had led a legal action in Delaware highlighting the role of Goldman Sachs, the investment bank, as both the manager of funds holding 19 per cent of Kinder Morgan, with two directors on its board, and one of the advisers to El Paso.
Kinder Morgan said in a statement that it believed the takeover had benefited both its own shareholders and El Paso’s, but “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”.
The agreed cash and shares takeover, valuing El Paso at $38bn including debt, was announced in October last year and was swiftly followed by a slew of legal actions.
Ruling on the deal in February, Delaware chancellor Leo Strine called Goldman Sachs’ handling of its conflicts “incomplete and inadequate”.
He lambasted the bank and El Paso for “debatable negotiating and tactical choices,” but allowed the merger to proceed, arguing that there was no better option available for El Paso’s shareholders.
At an investor meeting in March, 95 per cent of the votes cast went to approve the deal, which closed in May. The stock element left El Paso’s shareholders with 32 per cent of the merged group.
Responding to concerns about its role, Goldman Sachs has said that it had encouraged El Paso to get independent advice from another investment bank and Morgan Stanley had been hired. It said that it was transparent with El Paso about its relationship with Kinder Morgan and the Goldman directors on the Kinder board had recused themselves from discussions about the takeover.
However, Mr Strine criticised Morgan Stanley’s role, because the bank was hired under terms that meant it would be paid its fee only if the deal went through.
Goldman Sachs declined to comment on Friday.
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