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by contributor Andrew Por, Cohen & Gresser | Published April 3, 2012 at 1:34 PM

On Feb. 29 Chancellor Leo Strine Jr. of the Delaware Court of Chancery declined to grant a preliminary injunction to enjoin the merger of El Paso Corp. and Kinder Morgan Inc. in a case where plaintiff El Paso stockholders sought to have their cake, and eat it too. While this curious case casts a bright light on corporate dealmaking and conflicts of interest, it is ultimately Strine's pragmatic judicial reasoning that makes it interesting.

The transaction in question is a proposed merger of El Paso, a publicly traded Delaware corporation, and pipeline owner Kinder Morgan; plaintiffs were El Paso stockholders who sought to enjoin the proposed merger, alleging debatable negotiating tactics and decisions made by El Paso fiduciaries and their financial advisers, tactics and decisions allegedly colored by conflicts of interests. Yet despite the court's clear disapproval of the negotiating process, the court was unwilling to grant the equitable relief the El Paso stockholder plaintiffs sought.

As the court explained in its opinion, in order to obtain a preliminary injunction blocking the merger under the standard adopted under Revlon v. MacAndrews & Forbes Holdings Inc., plaintiffs were required to demonstrate: (a) a reasonable probability of success on the merits; (b) irreparable harm if an injunction is not issued; and (c) a balance of equities favoring the issuance of an injunction. While the court was willing to accept that plaintiffs were likely to succeed on the merits based on the record and that they faced irreparable harm without an injunction, they were ultimately unsuccessful in persuading the court that the balance of equities favored the granting of injunctive relief.

Plaintiffs did not seek the traditional equitable remedy of enjoining the merger until it is overturned on appeal, which might have resulted in an alternate ruling; rather, they sought an "odd mixture of mandatory injunctive relief" whereby the court would bind Kinder Morgan but permit El Paso to seek out better offers. More specifically, El Paso shareholders sought an injunction whereby the court would (i) permit El Paso to continue to shop itself, either in parts or in whole, in contravention of the no-shop provision of the merger agreement (Kinder Morgan intends to sell off El Paso's exploration and development business after the merger is consummated), while allowing them to terminate under circumstances not permitted under the agreement (and without paying the termination fee) and (ii) lift the injunction and force Kinder Morgan to consummate the merger in the event that no superior transactions emerged, something the court was unwilling to do without an evidentiary hearing or undisputed facts. The court noted that such an arrangement was not bargained for by Kinder Morgan and would result in serious inequity to the buyer as a result. The unusual and overly ambitious relief sought by plaintiffs undoubtedly made it more difficult for the court to find a balance of equities favoring El Paso stockholders.

The court ultimately decided that the granting of the sought-for injunction could very well "pose more harm than good" to El Paso stockholders, and instead decided to leave the decision of the merger with the El Paso stockholders themselves. It appears that the decision of the court was rooted in the realities of the case as much as the legalities; it indicated that it might well have decided to enjoin the proposed merger where it precluded another available option to shareholders that promised a higher value.

Alas, no such offer was made, and so plaintiffs are left with the prospect of accepting (or declining) a "good" deal (the proposed merger promises a 47.7% premium over El Paso's stock price 30 days before Kinder Morgan's first bid), but perhaps not the best deal that might otherwise have been made under different circumstances, a situation the court described as putting the El Paso stockholders to a "Hobson's choice," or a take-it-or-leave-it scenario.

Observers of Delaware jurisprudence will appreciate the case as a logical and, more importantly, pragmatic decision. The decision also leaves open to the plaintiffs, of course, the option of initiating a monetary damages claim against the actors involved in the alleged bad-faith negotiations.

Andrew Por is an associate in the corporate group at Cohen & Gresser LLP. He advises publicly and privately held companies and funds in acquisitions, securities offerings, corporate governance matters and securities law compliance.

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