In re Kinder Morgan, Inc. S’holders Litig.

Largest Merger & Acquisition Class Action Recovery in History

In November 2010, Shawnee County District Court Judge David Bruns in Topeka, Kansas granted final approval of a $200 million settlement of a class action lawsuit arising from the leveraged buyout of Kinder Morgan, Inc. Not only is the case one of the largest securities class action cases to be settled in 2010, it is also believed to be the largest post-merger common fund settlement ever.

Kinder Morgan was a preeminent energy transportation and distribution company that, while incorporated in Kansas, was headquartered in Houston, Texas. As an energy infrastructure provider, it owned an interest in or operated over 50,000 miles of oil and gas pipelines and terminals. It also owned and operated retail natural gas distribution businesses with nearly 900,000 customers in Canada and over 200,000 in Colorado, Nebraska and Wyoming. Kinder Morgan became an attractive target for a form of private equity leveraged buyout. In this type of buyout scheme, some management, despite fiduciary responsibilities to shareholders, essentially both buy and sell a company while in possession of detailed knowledge about the target’s future potential. Instead of a competitive-bidding style takeover effort, management in these instances can team up with pre-selected private equity buyers and discourage other suitors.

Plaintiffs alleged that in the spring of 2006, defendants, including company insiders led by co-founder Richard Kinder, along with non-management participants led by The Goldman Sachs Group, “improperly developed a proposal to take [Kinder Morgan] private” for $100 per share – a price that did not reflect the fair value of the company – without permission from Kinder Morgan’s board. The non-management defendant buyout group also consisted of entities controlled by Carlyle Group, Riverstone and AIG. Plaintiffs alleged that defendants were lying in wait while the company paid down its debt and became poised for excellent growth and profitability in the near future, and if the $22 billion acquisition were to be approved, Kinder Morgan’s infrastructure-related investments already made at the expense of the company’s shareholders would begin bearing fruit after defendants had taken the company private in what would be the third largest leveraged buyout transaction in history.

Once defendants’ acquisition intentions were announced, a Special Committee of non-management directors was formed, but plaintiffs alleged that the Special Committee was either unwilling or unable to pursue sufficient alternative options. Plaintiffs also alleged that the insider defendants attempted to conceal the true value of the company from the Special Committee. Documents that the Special Committee requested from the buyout group were not provided. The offer price was increased to $107.50 in August 2006, although plaintiffs contend that the proposed price did not reflect full value. In fact, early in the process, the Special Committee had decided the offer price needed to be at least $110 per share. Plaintiffs alleged that the $107.50 price was a result of the improper influence of Mr. Kinder. Then, on August 28, 2006, the board of Kinder Morgan publicly announced that it had approved the merger agreement.

The litigation began in both Kansas and Texas courts at the time of the first offer of $100 per share, and all actions were eventually consolidated in Kansas. A special master was appointed before the merger to coordinate pretrial activity. However, the special master decided against plaintiffs on December 18, 2006, recommending plaintiffs’ motion to enjoin a shareholder vote be denied and further writing that the business judgment rule would be a “formidable, if not conclusive, barrier” to plaintiffs’ ultimate success on the merits. On December 19, 2006, the merger vote was held, and Kinder Morgan announced that the merger would proceed.

The “business judgment rule” can protect defendants and destroy plaintiffs’ cases when a judge or jury decides a board has acted in the company’s interest in good faith and with independence. A mere “bad decision” by the board may not be actionable, and judges are reluctant to second-guess the business decisions of boards. Plaintiffs must show that actions are disloyal and/or in bad faith. In this case, the special master’s report illustrated the high risk to plaintiffs’ counsel in going forward, expending their firms’ time and money on a contingent basis with no guarantees of recovery or success. Even if plaintiffs were to prevail in proving defendants breached their fiduciary duties, they would still face the task of establishing an appropriate amount of damages given the lack of competing offers.

The special master’s report and shareholder vote notwithstanding, plaintiffs’ counsel persevered and litigation continued over the next few years. In February 2009, a nationwide class was certified in the action. Over 30 depositions were taken and over 650,000 pages of documents were produced by defendants and third parties. When the $200 million settlement was reached, five separate summary judgment motions were pending before the court.

The $200 million settlement achieved by plaintiffs’ counsel excludes defendants and their immediate family members and majority-owned affiliates. It brings the total recovery to the class members (who held their shares and were cashed out at $107.50) to a level at or near the original Special Committee amount without further subjecting the class to the considerable risks of recovering absolutely nothing that continued litigation would have brought. The settlement is the largest recovery resulting from a corporate takeover litigation case to date. “We’re pleased we were able to achieve such a phenomenal settlement for shareholders,” commented Robbins Geller Rudman & Dowd LLP partner Randall J. Baron.

In re Kinder Morgan, Inc. S'holders Litig., No. 06-C-801 (Kan. Dist. Ct., Shawnee Cty.).