One rule of thumb for defendants: The more big-time plaintiffs' lawyers who are suing you, the bigger a problem you've got. By that standard, Kinder Morgan and El Paso should be starting to worry a bit about the $21 billion deal they announced Sunday. Earlier this week I reported on the first shareholder class action alleging that the deal terms (which include a $650 million breakup fee for Kinder Morgan and partial payment to El Paso shareholders in the form of warrants) shortchange El Paso shareholders. Within days, four more shareholder suits claiming exactly the same thing had cropped up.
I'm not going to focus on the merits of the suits, although I should report that a spokesman left word that El Paso believes the claims are meritless. Instead, it's worth taking a look at what this rash of filings signifies about the burgeoning practice of shareholder M&A litigation.
Robbins Geller Rudman & Dowd filed the first El Paso class action in Harris County, Texas. Robbins partner Randall Baron told me the firm brought the case in Texas, where El Paso is headquartered, because it believes state courts there have deep familiarity with the oil and gas industry. After filing that first suit, Robbins Geller has followed up with two more parallel class actions against El Paso and Kinder Morgan in Harris County. (The second and third complaints are here and here.)
The two other cases were filed on behalf of different name plaintiffs. When I emailed Baron to ask why the separate suits, he said it was "just timing of referrals [from co-counsel]." But presumably, having three suits on file in Texas on behalf of three different El Paso shareholders, including a municipal pension system, will strengthen the bids of both Robbins Geller and Texas state courts to hold onto control of the litigation.
That's now an issue because on Wednesday, Labaton Sucharow filed a rival class action challenging the deal in Delaware Chancery Court. (The fourth new suit is a Chancery Court derivative claim against the El Paso board.) The Labaton case, filed on behalf of a union trust fund, raises essentially the same allegations as the Robbins Geller filings.
So who gets to lead the litigation? If this were a securities class action, that would be easy. The defendants would remove the litigation to federal court, where a judge would pick a lead plaintiff under the rules set down in the Private Securities Litigation Reform Act. The El Paso suits, however, are M&A class actions, in which there's no set procedure for picking a lead plaintiff or lead law firm. (The same is true in derivative suits, as I've previously reported.)
The boom in M&A shareholder litigation has led to a secondary boomlet in venue disputes between Delaware Chancery Court and other state and federal courts where the suits are filed. Delaware judges typically frown upon any litigation maneuver that compromises Delaware's authority as the ultimate arbiter of commercial disputes. But it's easy to see why a Texas court might want to hold onto a case involving a major Texas business. Baron of Robbins Geller told me he didn't know how the venue split would be resolved in the El Paso litigation; Michael Stocker of Labaton declined to comment.
Last October, securities litigation guru Joseph Grundfest of Stanford Law School delivered a Francis G. Pileggi lecture proposing that corporations amend their charters to avoid dueling jurisdiction muddles like this. As DealBook's Deal Professor explained, Grundfest's idea, in which companies would specify that shareholder litigation take place in the venue of incorporation, would have the effect of channeling litigation to Delaware. That, of course, is just what Delaware and its judges want.
The Grundfest proposal has been adopted by at least two dozen corporations, but until it's universal -- or until Congress decides to take up the issue of M&A shareholder litigation -- there are going to be venue battles. El Paso's a big case with good plaintiffs' firms staking claims in two appropriate jurisdictions. It's going to be instructive to see how this plays out.
UPDATE: Late Friday afternoon two more El Paso class actions hit the docket in Delaware Chancery Court, further complicating the question of who will lead the injunction and derivative cases challenging Kinder Morgan's $21 billion proposed acquisition. One is another derivative suit, this one filed by the formidable team of Grant & Eisenhofer, Bernstein Litowitz Berger & Grossmann, and Pomerantz Haudek Grossman & Gross. The other is the second Delaware class action requesting an injunction barring the deal, brought by Murray Frank and Finkelstein & Krinsk.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
Follow us on Twitter: @ReutersLegal