Chancellor Leo Strine of Delaware Chancery Court is thoroughly sick of what he perceives as Goldman Sachs' disregard for the M&A rules everyone else plays by. His 34-page decision Wednesday in a shareholder challenge to Kinder Morgan's $21.1 billion acquisition of El Paso Corp is filled with scorn for Goldman's eagerness to remain an adviser to longtime client El Paso even though Goldman held a $4 billion stake and two board seats at Kinder Morgan. Writing four months after he took Goldman to task for manipulating valuations in the Southern Peru Copper case, Strine used works like "tainted," "furtive," and "troubling" to describe the investment bank's continuing influence on El Paso CEO Douglas Foshee, even after it was supposed to be walled off from the Kinder deal.

"This behavior," Strine wrote, "makes it difficult to conclude that the (El Paso) board's less-than-aggressive negotiating strategy and its failure to test Kinder Morgan's bid actively in the market through even a quiet, soft market check were not compromised by the conflicting financial incentives of these key players."

That's tough talk, and Strine supplied some juicy details about Goldman's conduct to back it. For one thing, the chancellor wrote, Goldman's lead El Paso banker, Steve Daniel, didn't inform El Paso that he personally had a $340,000 investment in Kinder Morgan. According to Strine, Goldman and El Paso also structured the fee arrangement for Morgan Stanley -- the financial adviser the board engaged for the Kinder Morgan negotiations in order to wall off Goldman -- so that Morgan Stanley was only paid if El Paso agreed to the acquisition. And Goldman chairman Lloyd Blankfein, Strine wrote, made a really peculiar call to El Paso CEO Foshee to assure Goldman's continued role as an El Paso adviser. Strine quoted from the "obsequious" draft script Steve Daniel prepared for Blankfein: "Hello Doug -- it's been a long time since we have had the chance to visit/[I] wanted to reach out and say thank you for everything from [Goldman] ..../You have been very good to [Goldman] in having us help on all kinds of transactions over the years ..../And of course I was very pleased you reached out to us on this most recent matter [the Kinder Morgan proposal]."

Goldman was only making $20 million in advisory fees (and a spot in M&A league tables) from El Paso, Strine wrote. So the bank's strenuous efforts to make sure El Paso accepted Kinder Morgan's offer certainly appeared to be motivated by the benefits the deal would bring to Kinder Morgan -- thus enhancing Goldman's $4 billion stake in Kinder. "Goldman's claim that it was capable of putting aside its $4 billion investment in Kinder Morgan when advising El Paso on its strategic options is hard to square with the record evidence demonstrating the lengths to which Goldman would go to secure an advisory fee of $20 million from El Paso -- a fraction of the dollar size of its Kinder Morgan investment -- in connection with the merger," Strine wrote. "At this stage, I am unwilling to view Goldman as exemplifying an Emersonian non-foolishly inconsistent approach to greed, one that involves seeking lucre in a conflicted situation while simultaneously putting the chance for greater lucre out of its 'collective' mind." (I think he was refering to the philospher Ralph Waldo Emerson.)

Bad news for Goldman must be good news for shareholder lawyers from Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer, right? Not necessarily. Strine declined to enjoin a shareholder vote on the acquisition because he didn't want to preclude shareholders from approving the Kinder Morgan offer, which may be their best option. He went even farther than that, though. Strine noted Bernstein Litowitz and G&E can pursue after-the-fact money damages against the defendants, but cautioned that they'd have a hard time making out an aiding and abetting case against Goldman. Despite finding "a reasonable likelihood of success in proving that the merger was tainted by disloyalty," the chancellor said it was "at best doubtful" that shareholders could tag Goldman for any shortfall in the price they got from Kinder Morgan because Goldman disclosed its biggest conflict (though not its only one) to the El Paso board.

Delaware law, said Delaware's leading jurist, simply leaves him powerless to right Goldman's wrongs. "I share the plaintiffs' frustration that the traditional tools of equity may not provide the kind of fine instrument that enables optimal protection of stockholders in this context," the chancellor wrote. "The kind of troubling behavior exemplified here can result in substantial wealth shifts from stockholders to insiders that are hard for the litigation system to police." (Goldman counsel John Hardiman of Sullivan & Cromwell referred me to a Goldman spokesman, who sent an email response to the ruling: "We respect the judge's opinion but want to be clear that we stood by our client through this process, encouraging them to get independent views from another adviser. We were also transparent with El Paso about our relationship with Kinder Morgan and the related issues.")

Strine meanwhile left El Paso CEO Foshee dangling on a meat hook. As I've explained, shareholder lawyers asserted that Foshee -- who served as El Paso's lone negotiator with Kinder Morgan -- was eager to sell because he wanted Kinder Morgan's help with a post-deal management buyout of El Paso's exploration and pipeline business. At oral argument before Strine on Feb. 9, defense counsel from Wachtell Lipton Rosen & Katz (for El Paso) and Weil, Gotshal & Manges (for Kinder Morgan) downplayed the plaintiffs' evidence on the supposed management buyout, which consisted of a couple emails and brief conversations between Foshee and Kinder Morgan CEO Richard Kinder. Strine said in Wednesday's ruling that at this preliminary stage in the case, he has to credit the allegations against Foshee.

The chancellor was relentlessly snarky about the El Paso CEO (who, remember, hasn't yet appeared live in Strine's courtroom.) "It may turn out after trial that Foshee is the type of person who entertains and then dismisses multibillion dollar transactions at whim," the chancellor wrote. "Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinder over canapés and forgotten about the next day. It could be. Or it could be that Foshee is a very smart man, and very financially savvy. He did not tell anyone but his management confreres that he was contemplating an MBO because he knew that would have posed all kinds of questions about the negotiations with Kinder Morgan and how they were to be conducted. Thus, he decided to keep quiet about it and approach his negotiating counterpart Rich Kinder late in the process -- after the basic deal terms were set -- to maximize the chance that Kinder would be receptive."

Let's recap: Strine unleashed his stingingly robust vocabulary to describe the alleged wrongs of Goldman and Foshee, concluding that the El Paso/Kinder Morgan deal was likely tainted as a result of their conflicts. Yet he said there was nothing he could do to fix things right now, and added that there's a good chance shareholders won't be able to recover anything later against Goldman. If you're keeping score, that leaves only the El Paso board and Kinder Morgan unscathed by a ruling that essentially maintains the status quo.

The chancellor seems to be hoping that Goldman and El Paso will cough up some money for shareholders just to avoid the embarrassment of a full-blown trial and another nasty ruling from him. He said as much at the end of the opinion: "Although an after-the-fact monetary damages claim against the defendants is not a perfect tool, it has some value as a remedial instrument, and the likely prospect of a damages trial is no doubt unpleasant to Foshee, other El Paso managers who might be added as defendants, and to Goldman," Strine wrote. (I should note that if the deal goes through as expected, Kinder Morgan will likely indemnify El Paso for any payments to shareholders; Foshee is surely covered by D&O insurance, although he could meet resistance from his insurer if he's found to have breached his duty.)

Plaintiffs' lawyer Mark Lebovitch of Bernstein Litowitz, who argued for shareholders at the Feb. 9 hearing, told me he'll take what the chancellor is giving. "We think the court recognized that Goldman Sachs had no business being in this deal," he said. "Our clients are going to press full steam ahead to hold the defendants accountable."

But is this really how we want the court system to work? Strine said he was afraid to enjoin the shareholder vote because Kinder Morgan could then walk away from the proposed acquisition, costing El Paso stockholders billions in lost equity. Does that mean the Delaware courts are unwilling to act against any single-bidder deal, no matter how tainted the process that produced it? At the Feb. 9 hearing, Strine himself mused about the consequences of excusing conflicts in the name of shareholder interests. "So you don't do the injunction," he said. "And time after time, you don't do the injunction. And so ... the marginal potential for corruption and diversion just grows into being part of the M&A process, because the remedial tools of later on trying to deal with monetary damages is just not a very precise one."

Wednesday's ruling is Strine's surrender. He goes out shooting, but he goes out.

I sent an email request for comment to El Paso counsel Paul Rowe of Wachtell but didn't hear back.

(This blog post was updated to include comment from a Goldman Sachs spokesman.)

(Reporting By Alison Frankel)

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