PE Deals of the Year
Douglas Foshee became the latest villain in the Delaware case law on management buyouts on Feb. 29.
Delaware Court of Chancery Chancellor Leo E. Strine Jr. castigated the El Paso Corp. CEO for negotiating the energy company's $38 billion sale to Kinder Morgan Inc. while he had his eye on El Paso's exploration and production unit. In a 33-page opinion where he refused to enjoin a shareholder vote on the sale, Strine intimated that Foshee gave Kinder Morgan a good deal on El Paso in hopes that Kinder Morgan's CEO, Richard Kinder, would return the favor by selling El Paso's E&P unit to a group led by Foshee. The facts in the opinion suggest the reality was more complicated than he made it out to be, but Strine may have wanted to make a cautionary tale of Foshee's shortsightedness.
Late in the opinion, Strine lamented the management buyouts of 2006 and 2007: "[T]he early actions of poorly policed, conflicted CEOs in baking up deals with their favorite private equity sponsors before any market check (or often even board knowledge) likely dampened the competition among private equity firms that could have generated the highest price if proper conduct occurred and the right process had been used. The resulting deals might have been good for investors, but the suspicion that they were not on the 'best' terms available lingers for rational reasons."
Foshee's behavior doesn't fit that description. El Paso announced in May that it was planning to spin off its E&P unit to shareholders, which was tantamount to putting the unit -- and perhaps the company -- up for sale. The El Paso board should have had a good idea of the unit's value and been able to resist an effort by Foshee to buy the unit too cheaply.
As Strine observed in a footnote, $81 million of the $90 million that Foshee stands to receive from El Paso's sale comes from stock and options, which would seem to have given him an incentive to get the best price for the company. He had no stake in El Paso or its E&P unit that could have been rolled over in a buyout. Foshee was deposed at length, and Strine cites the deposition in his opinion, but he at no point suggests that Foshee talked to a private equity firm about a possible deal for the E&P unit.
Strine also buries in a footnote the agreement to sell the E&P unit to a consortium led by Apollo Global Management LLC for $7.15 billion, the outcome of a process Kinder Morgan ran. The judge never says whether Foshee tried to put together a bidding group.
At the very least, Foshee was foolish in suggesting to El Paso CFO John Sult and Brent Smolik, president of the E&P unit, the possibility of buying it. But Strine's characterization of his motives and his suggestion that he could be personally liable for over $500 million in damages are undeniably harsh. They're also a stern warning to CEOs and buyout firms that the Delaware courts will police management buyouts far more aggressively than they did during the buyout boom.
The El Paso Corp. decision isn't the first dustup Douglas Foshee has had with a Delawarean. In 2000, he resigned as CEO of Nuevo Energy Co. when Charles Elson, head of the Nuevo board's compensation committee, a University of Delaware professor and a longtime governance activist, persuaded the board to substitute stock options for part of a cash bonus already granted to Foshee. Plains Exploration & Production Co. bought Nuevo for $945 million in 2004.
In 2001, Foshee became CFO at Halliburton Co., where he dealt with asbestos litigation as well as a Securities and Exchange Commission accounting probe that preceded his tenure. In 2003 El Paso tapped him as CEO, and he restructured to focus on oil and gas production and pipelines. In 2009 he was named as one of three trustees for the federal government's 78% American International Group Inc. stake but stepped down in 2010.
A 1982 graduate of Southwest Texas State University (now Texas State University-San Marcos) who earned an M.B.A. from Rice University in 1992, Foshee was a banker focused on energy before joining energy investment firm Torch Energy Advisors Inc. in 1993. -- D.M.