» 2012 » October

Kinder Morgan Settles with El Paso Shareholders for $110 Million

Kinder Morgan, the Houston-based energy firm, agreed to pay a total of $110 million to settle lawsuits by shareholders. The litigation stems from Kinder Morgan’s October 2011 acquisition of the natural gas producer El Paso Corp., also headquartered in Houston, for $21.1 billion.

Shortly after the merger announcement, El Paso shareholders filed a number of putative class action lawsuits against the company’s board of directors, alleging they had breached their fiduciary duty to the shareholders. The suits, filed in Delaware, Texas and New York, also alleged that El Paso and Kinder Morgan aided and abetted the directors in their breach.

According to a recent filing with the SEC, El Paso shareholders moved to block the merger in February of this year, but the motion was denied in a Delaware court.

As of May 24, the merger was complete and settlement discussions, facilitated by a mediator, began between the parties. An agreement in principle for a $110 million settlement was reached in July. The settlement agreement must still be approved by the Delaware Chancery Court.

Kinder Morgan said in a statement that the merger had benefited all parties, including the El Paso shareholders, but that it wished to resolve the claims to avoid the uncertainty and expense of further litigation. A Kinder Morgan spokesperson told Bloomberg News that the acquisition offered a 47 percent premium to El Paso’s shareholders, and that 95 percent of them voted for the deal.

In July, Kinder Morgan officials announced that second-quarter profit had fallen, with net income dropping to $153 million compared to $230 million in the same period the previous year. The company had cut the value of certain assets it sold in order to get regulatory approval for the acquisition of El Paso.

Goldman Sachs Group Inc. also made concessions in the settlement deal, due to alleged conflicts of interest. The investment banking firm was a financial adviser to El Paso in the sale, while it owned a multi-billion dollar stake in Kinder Morgan. The firm’s top energy banker also held a personal stake of $340,000 in Kinder Morgan. Under the terms of the settlement, Goldman will waive its $20 million fee. In previous rulings, Judge Leo Strine of the Delaware Chancery Court had pointed out the conflict of interest, and described Goldman’s behavior as “troubling” and “furtive.”

Kinder Morgan and Goldman Sachs officials did not admit to any wrongdoing in the settlement.

Gregory D. Jordan is an Austin business attorney, Austin employment lawyer, and Austin business litigation lawyer. To learn more, visit Theaustintriallawyer.com.

Chesapeake Energy Begins Charging Royalty Owners for Costs

Chesapeake Energy, the gas driller, has allegedly begun reinterpreting thousands of contracts with royalty owners from Texas to Pennsylvania. The company is now deducting costs from the royalties it pays, even in contracts that arguably contain a no-cost clause. Royalty owners have filed at least a dozen lawsuits alleging unpaid royalties, with two of them seeking class action status.

The dispute comes down to the language of the contracts, which can be very complex. Even with a no-cost provision, Chesapeake has argued successfully in the past that another provision to pay royalties based on “market value,” allows it to deduct costs, including production and marketing expenses, from the royalties it pays to landowners.

Chesapeake instituted the changes in April, with gas prices nearing a 10-year low, a drop of 30 percent from prices in 2010. The company dismissed its CEO, Aubrey McClendon, citing conflicts of interest, and Chesapeake lost $9 billion in market value. Declining profits allegedly drove the firm to reinterpret its contracts, passing costs on to royalty owners. Chesapeake has drilling rights on more than 15 million acres of land.

One Texas accountant told Bloomberg News that she has the exact same contract with Chesapeake and with Plains Energy, to drill on property she owns in Louisiana. She only discovered that she was being charged for costs when Plains refunded the charges and Chesapeake did not.

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