Kinder Morgan

El Paso-Kinder Morgan: A board's worst nightmare

March 7, 2012: 1:56 PM ET

In the merger negotiation process, El Paso's board didn't seem to have control of CEO Doug Foshee.

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE -- Many of us remember the campfire stories from our youth, designed to enthrall and terrify. For independent board members today, the equivalent is stories told around a conference table about CEOs they thought they knew -- and later found out they could not trust.

In a court opinion, Judge Leo Strine's description of what has happened in the El Paso-Kinder Morgan merger sounds like the kind of board horror story that elicits director fear and dread.

Merger and acquisition decisions can be tense situations for boards under any circumstance. They arouse heightened liability concerns surrounding any perceived lapses in board oversight or judgment. In the fall of 2011, according to Judge Strine's account, the El Paso board put too much faith in El Paso CEO Doug Foshee and their investment banking advisors.

According to Judge Strine's description of the facts, following the public announcement that El Paso would spin-off its energy exploration and production business, Kinder Morgan (KMI) made a non-public offer to buy El Paso (EP) on August 30, 2011, which the El Paso board rebuffed. When Kinder Morgan said it would publicize its intent, the El Paso board hired two advisors: Goldman Sachs (GS) (conflicted due to deep ties to Kinder Morgan through board seats and stock ownership) and Morgan Stanley (MS).

"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," and "Foshee reached an agreement in principle with Rich Kinder two days later" for $27.55, Strine wrote. On September 23, according to Judge Strine, Kinder Morgan said the amount it had promised was too high and "instead of telling Kinder where to put his drilling equipment, Foshee backed down."

Foshee then accepted a still lower price on October 16 and, based on the advice of Morgan Stanley and Goldman Sachs, El Paso entered into a merger agreement with no-shop provisions, limiting El Paso's future flexibility to accept higher bids. More

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