Chancery Court rules on Goldman Sachs deal conflicts


We've noted the many conflicts of interests that Goldman Sachs was straddling in the Kinder Morgan acquisition of the El Paso Corporation.

Shareholders of the latter ended up suing the buyer, arguing that Goldman Sachs' conflicted role led to an undervalued offer. Goldman Sachs was the banker to both firms, for starters. Not only that but it held a huge stake in Kinder Morgan, a long-time client, via its private equity unit.

From the El Paso side, Goldman Sachs also apparently stood to make a fee of $20 million, even as it suggested that the firm hire another banker to help mitigate the conflicts. The case turned up even juicier information. El Paso directors apparently weren't informed that the lead banker from Goldman Sachs on the El Paso account personally owned $340,000 worth of Kinder Morgan stock.

So how did the Delaware Court of Chancery rule on all this?

"In the end he decided that if shareholders, who are being told of the troubling facts, can live with it and vote for it, he can hold his nose and let the deal move forward. It doesn't mean that down the road the defendants, if they don't settle, won't be looking at big damages," notes Deal Journal.

Still, "This case isn't over. The court found that the plaintiffs have a reasonable likelihood of prevailing on the merits of the case and the lawsuit has now turned into a damages action."

Courts are starting to take a closer look at the conduct of investment banks, which ought to be of high concern at all banks.

For more:
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