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The Revlon doctrine does not exist as a license for courts to second-guess reasonable, but arguable, questions of business judgment in the change of control context, but to ensure that the directors take reasonable steps to obtain the highest value reasonably attainable and that their actions are not compromised by impermissible considerations, such as self-interest. So long as the directors made reasonable decisions for a proper purpose, they meet their duty under Revlon and the court must defer.
The plaintiffs were stockholders of El Paso that sought to enjoin a vote on a proposed Merger with Kinder Morgan that offers El Paso a combination of cash, stock, and warrants now valued at $30.37 per share, or a 47.8% premium over El Paso's stock price thirty days before Kinder Morgan made its first bid. At the time of signing, the Merger consideration was worth $26.87 per share, and has appreciated since the announcement because Kinder Morgan's stock has grown in value. The Merger resulted from a non-public overture that Kinder Morgan made in the wake of El Paso's public announcement that it would spin off its E&P business. The market had reacted favorably to the May 24, 2011 announcement of the spin-off, and El Paso's stock price had risen, although El Paso believed that its stock price would rise further when the spin-off was actually effected. The first time after the spin-off announcement that Kinder Morgan expressed its interest in acquiring El Paso was on August 30, 2011, when Kinder Morgan offered El Paso $25.50 per share in cash and stock. The El Paso Board fended this off weakly, despite believing that the price was not attractive and that Kinder Morgan was hoping to preempt any market competition for El Paso's pipeline business by acquiring all of El Paso before the spin-off was effected. On September 9, 2011, Kinder Morgan threatened to go public with its interest in buying El Paso. Rather than seeing this as a chance to force Kinder Morgan into an expensive public struggle, the Board entered into negotiations with Kinder Morgan. On September 16, 2011, El Paso asked Kinder Morgan for a bid of $28 per share in cash and stock, deploying the company's CEO, Doug Foshee, as its sole negotiator. Foshee reached an agreement in principle with Rich Kinder two days later on a deal at $27.55 per share in cash and stock, subject to due diligence by Kinder Morgan. The basic terms of the agreement in principle were memorialized in a series of term sheets exchanged between the parties between September 20, 2011 and September 22, 2011.
Soon thereafter, on September 23, 2011, Kinder said that it cannot stand by its bid. In response, Foshee backed down. In a downward spiral, El Paso ended up taking a package that was valued at $26.87 as of signing on October 16, 2011, comprised of $25.91 in cash and stock, and a warrant with a strike price of $40 – some $13 above Kinder Morgan's then-current stock price of $26.89 per share – and no protection against ordinary dividends. Still, the deal was at a substantial premium to market, and the Board was advised that the offer was more attractive in the immediate term than doing the spin-off and had less execution risk, because Kinder Morgan had agreed to a great deal of closing certainty. Thus, the Board approved the Merger and on October 16, 2011, the parties entered into the "Merger Agreement." The Merger Agreement contains a commitment from El Paso to assist Kinder Morgan in the sale of the E&P business, which Kinder Morgan hoped could be accomplished before the closing of the Merger. The Merger Agreement also contains a "no-shop" provision preventing El Paso from affirmatively soliciting higher bids, but gives the Board a fiduciary out in the event it receives a "Superior Proposal" from a third party for more than 50% of El Paso's equity securities or consolidated assets. These measures preclude El Paso from abandoning the Merger in order to pursue a sale of the E&P assets because the E&P assets make up less than 50% of El Paso's consolidated assets. By contrast, El Paso could terminate the Merger Agreement to pursue a sale of the pipeline business (which makes up more than 50% of the company's consolidated assets), but Kinder Morgan has a right to match any such Superior Proposal. In the event that the Board accepts a Superior Proposal, El Paso must pay a $650 million termination fee to Kinder Morgan. In terms of the overall deal size, the termination fee represents 3.1% of the equity value and 1.69% of the enterprise value of El Paso as implied by the Merger Agreement. Thus, to buy just the pipeline business, an interloper would have to pay a termination fee that was, say, 5.1% of the equity value and 2.5% of the enterprise value of El Paso's pipeline business, assuming it comprised around 60.3% of El Paso's equity value and 67% of El Paso's enterprise value at the time of signing.
Should the plaintiffs’ injunction be granted?
Putting aside the expectations of Kinder Morgan, which was arguably stuck with the risk of having dealt with potentially faithless fiduciaries, the real question is whether the court should intervene when the El Paso stockholders have a chance to turn down the Merger at the ballot box. Unlike a situation when this court will enjoin a transaction whose tainted terms are precluding another available option that promises higher value, no rival bid for El Paso exists. The plaintiffs' own request for an injunction was oddly telling. In their many papers, they did not seek a preliminary injunction against the Merger Agreement in its traditional form, which is one that lasts until it is overturned on appeal. Such an injunction would likely persist beyond June 30, 2012, the drop-dead date in the Merger Agreement. That would allow Kinder Morgan to walk away on that date. Rather, the plaintiffs wanted an odd mixture of mandatory injunctive relief whereby the court affirmatively permits El Paso to shop itself in parts or in whole during the period between now and June 30, 2012, in contravention of the no-shop provision of the Merger Agreement, and allow El Paso to terminate the Merger Agreement on grounds not permitted by the Merger Agreement and without paying the termination fee set forth in the Merger Agreement, but then to lift the injunction and then force Kinder Morgan to consummate the Merger "if no superior transactions emerge." That was not a traditional negative injunction that can be done without an evidentiary hearing or undisputed facts. Furthermore, that sort of injunction would pose serious inequity to Kinder Morgan, which did not agree to be bound by such a bargain. The injunction the plaintiffs posit would be one that would sanction El Paso in breaching many covenants in the Merger Agreement and that would bring about facts that would mean that El Paso could not satisfy the conditions required for Kinder Morgan to have an obligation to close.
The court shared the plaintiffs' frustration that the traditional tools of equity may not provide the kind of fine instrument that enables optimal protection of stockholders in this context. The kind of troubling behavior exemplified here can result in substantial wealth shifts from stockholders to insiders that are hard for the litigation system to police if stockholders continue to display a reluctance to ever turn down a premium-generating deal when that is presented. The negotiation process and deal dance present ample opportunities for insiders to forge deals that, while "good" for stockholders, are not "as good" as they could have been, and then to put the stockholders to a Hobson's choice. The resulting deals might have been good for investors, but the suspicion that they were not on the "best" terms available lingered for rational reasons. Be that as it may, that reality cannot justify the sort of odd injunction that the plaintiffs desire, which would violate accepted standards for the issuance of affirmative injunctions and attempt to force Kinder Morgan to consummate a different deal than it bargained for. Fundamentally, the plaintiffs said that the court can issue a preliminary injunction that allows El Paso a free option. It can shop any or all of itself, terminate the Merger Agreement without paying the break fee, and do what it wishes until the injunction expires. If something it likes comes along, El Paso should be able to take it, cost free. But if nothing does, then the injunction will expire and Kinder Morgan would somehow – supposedly by judicial compulsion – be forced to close, despite the pervasive breach of fundamental provisions of the Merger Agreement, including the one requiring El Paso to help Kinder Morgan to sell for itself the same assets the plaintiffs seek to have El Paso market. If the assumption about judicial compulsion is right, the plaintiffs do not seek a traditional negative injunction, but rather mandatory relief that can only be granted after a trial and a careful evaluation of Kinder Morgan's legitimate interests. If the plaintiffs do not view the injunction as one involving the court compelling Kinder Morgan to close upon the injunction's expiration if the El Paso stockholders approve the Merger, then the plaintiffs are asking to be granted an injunction that, to the court’s view, would likely relieve Kinder Morgan of any obligation to close because its contractual rights would have been materially breached.