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'Chancery' and El Paso E&P

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March 07, 2012 – Comments (0) | RELATED TICKERS: EP.DL , KMP , GS

I first learned of the phrase 'chancery' in the title of a document called 'In the Court of Chancery of the State of Deleware'. I googled the word and discovered that 'chancery' refers to  a court where equity disputes go to be settled. It is a place to settle things like conflicts of interest that might impact the value you get or your shares in the sale of a business you own.

According to Miriam Webster the phrase 'in chancery' refers to being in court. It also has a second meaning, 'in a hopelesss predicament'. 

I found the word 'chancery' when I read about the proposed merger of El Paso corporation, a gas pipeline and gas exploration company with Kinder Morgan. It seems Kinder Morgan wants to buy El Paso, keep the pipelines and sell off the exploration half to fund the purchase. 

 http://online.wsj.com/public/resources/documents/ElPasoOpinion03052012.pdf 

The link I just posted brings you to the judges opinion where he decides if the merger can go forward despite numerous conflicts of interest, such as;

El Paso CEO  Doug Foshee was named the sole negotiator for El Paso shareholders, despite secretly negotiating with Kinder for the purchase of the E&P half of the business after the merger. Obviously the less Kinder pays, the less they might sell the E&P back to Foshee for.

 He kept that motive secret, negotiated the Merger, and then approached Kinder Morgan’s CEO on two occasions to try to interest him in the idea.  In other words, when El Paso’s CEO was supposed to be getting the maximum price from Kinder Morgan, he actually had an interest in not doing that

Goldman Sachs owns 19% of Kinder Morgan. Goldman Sachs was chosen to advise the board of El Paso in the negotiations vs Kinder Morgan.

 This undisclosed conflict of interest compounded the reality that the Board and management of El Paso relied in part on advice given by a financial advisor, Goldman, Sachs & Co., which owned 19% of Kinder Morgan (a $4 billion investment) and controlled two Kinder Morgan board seats.  Although Goldman’s conflict was known, inadequate efforts to cabin its role were made.  When a second investment bank was brought in to address Goldman’s economic incentive for a deal with, and on terms that favored, Kinder Morgan, Goldman continued to intervene and advise El Paso on strategic alternatives, and with its friends in El Paso management, was able to achieve a remarkable feat: giving the new investment bank an incentive to favor the Merger by making sure that this bank only got paid if El Paso adopted the strategic option of selling to Kinder Morgan.  In other words, the conflict-cleansing bank only got paid if the option Goldman’s financial incentives gave it a reason to prefer was the one chosen.  On top of this, the lead Goldman banker advising El Paso did not disclose that he personally owned approximately $340,000 of stock in Kinder Morgan.  

Because the deal was a 'cash and stock' purchase, Foshee let Kinder Morgan out of a deal for $27.55/share that would be worth over $31.00/share today, in favor of one for $25.91.

I could tell you more of the intriguing details of the systemic corruption upon which your investment depends, but the judges opinion is just a good read and I do not want to spoil the ending.

For me, this one is "too hard" to get involved in and I am glad I am not a shareholder.

It also seems to hard for most of us here at CAPs, because I did not read anything about it in the pitches, so it would seem that nobody is actually doing 'due diligence'.

Best wishes,

Steven 

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