Issues for Company Counsel in M&A Transactions

1. Issues for Company Counsel in M&A Transactions Presented by: Ariel J. Deckelbaum Eric S. Goldstein Udi Grofman June 20, 2012

2. Role of General Counsel in M&A Transactions • Gatekeeper • Protect board and management (sometimes from themselves) • Understand conflicts and motivations • Navigate the regulatory environment • Keep your eye on the ball: • Price • Certainty CONFIDENTIAL

3. Introduction • Agreement to acquire the oil and natural gas exploration and production business of El Paso Corporation (NYSE: EP) • So-called “upstream” segment • $7.15 billion purchase price • Effectively buying leases and real property interests (U.S., Brazil and Egypt) • Paul, Weiss represented an investor group led by Apollo and Riverstone • Signed February 24; Closed May 25, 2012

4. Kinder Morgan/El Paso Deal • El Paso is predominantly a transportation and storage company • So-called “midstream” segment • El Paso initially sought to spin-off its upstream business • Kinder Morgan agreed on October 16, 2011 to purchase all of El Paso for $23.8 billion • Kinder Morgan is the second-largest U.S. pipeline company • Divesture of the upstream business • Partially fund the Kinder acquisition • Favorable net operating loss tax attributes retained if entire upstream business sold as one • Substantive antitrust issues and overlap

5. El Paso Stockholder Litigation • Several El Paso stockholders file class action in Delaware Court of Chancery seeking to block the transaction • Delaware Court of Chancery is among the most respected courts in the United State for business disputes • Case assigned to the Chancellor, Leo Strine

6. El Paso Stockholder Litigation • Plaintiffs claim numerous breaches of fiduciary duty, including: • El Paso CEO was solely responsible for negotiating the sale to Kinder Morgan, but did not disclose his interest in buying upstream business from Kinder Morgan • Goldman Sachs was financial advisor to El Paso on “spin-off” option, but • Owned 19% of Kinder Morgan ($4 billion investment) • Controlled 2 Kinder Morgan Board seats • Conflict was disclosed, but “inadequate efforts to cabin” because Morgan Stanley –brought in to advise El Paso on the merger – paid only if the merger occurred • Lead Goldman Sachs banker did not disclose $340,000 personal investment in Kinder Morgan

7. El Paso Stockholder Litigation • The Relevant Facts: • El Paso announces intention to spin-off upstream business • To prevent competition once spin-off occurs, Kinder Morgan privately approaches El Paso to acquire entire business • El Paso CEO negotiates privately with Kinder Morgan CEO, Rich Kinder, and quickly agrees to terms • Days later, Kinder claims he made a “mistake” relying on overly bullish set of projections, and asks to renegotiate the deal • “Instead of telling Kinder where to put his drilling equipment,” El Paso CEO backs down and negotiates new (less good) deal for El Paso • Merger agreement has “no shop” provision; El Paso could accept “Superior Proposal,” but then must pay $650 million break-up fee to Kinder Morgan

8. El Paso Stockholder Litigation • “Questionable Judgments”: • El Paso never publicly shopped company as a whole or its 2 key divisions separately, despite knowing that Kinder Morgan was trying to preempt competition with its private bid; • El Paso CEO was solely responsible for negotiations with Kinder Morgan, without any presence or close supervision by independent director or legal advisor; • Allowing Kinder Morgan to renege on its original deal based on “arguably ludicrous assertion” that initial bid derived from estimates of most bullish analyst; • Deal structured in way that effectively precluded higher bid from third party; • Ultimate deal provided El Paso shareholders with far less stock and cash than initially agreed to by Kinder Morgan ($27.55 v. $25.91)

9. El Paso Stockholder Litigation • Court Analysis: • “While reasonable people might debate choices made by El Paso Board,” those choices – standing alone – “would provide little basis” for enjoining third-party merger. • However, “when there is a reason to conclude that debatable tactical decisions were motivated … by fiduciary’s consideration of his own financial self-interest,” appropriate to scrutinize the transaction. • Goldman Sachs set up “Chinese wall” between its El Paso advisors and those responsible for Goldman’s investment in Kinder Morgan –

10. El Paso Stockholder Litigation BUT • Goldman Sachs only walled off from direct decisions about responding to Kinder Morgan offer, and continued role as primary financial advisor to El Paso on spin-off – and, therefore, still in position to exert influence about the Kinder Morgan deal. • Morgan Stanley fee structure created powerful incentive for Morgan Stanley to favor Kinder Morgan deal: if deal closes, Morgan Stanley receives $35 million fee; if not, Morgan Stanley gets zero. • On CEO conflict: “At a time when the CEO’s duty was to squeeze the last drop of the lemon out for El Paso’s stockholders, the CEO had a motive to keep juice in the lemon that he would use to make a financial Collins for himself.”

11. El Paso Stockholder Litigation • The Court’s Ruling: • Price offered by Kinder Morgan is one that “reasonable El Paso stockholders might find very attractive.” • Nevertheless, “a likelihood of irreparable injury if merger is not enjoined.” • Still, Court reluctant to grant injunction because: • No competing bid on the table; • Unfair to Kinder Morgan to allow El Paso to shop deal, undo $650 million break-up fee, but then require Kinder Morgan to close if no superior bid emerges. • The Court “shares plaintiffs’ frustration that the traditional tools of equity may not provide the kind of fine instruments that enables optimal protection of shareholders in this context.”

12. El Paso Stockholder Litigation • Therefore, the Court “reluctantly” denies the motion for preliminary injunction, and concludes that El Paso stockholders “should not be deprived of the chance to decide for themselves about the merger, despite the disturbing nature of some of the behavior leading to its terms.” • El Paso stockholders approve the deal; however, class action lawsuit for damages still pending.

13. El Paso Stockholder Litigation • Lessons Learned: • Critical role of GC to seek out potential conflicts – management, outside board and advisors. • Negotiations should be closely supervised. • Financial incentives for advisors should be neutral; new distrust of Wall Street. • GC must have appropriate controls in place well in advance to prevent pitfalls.

14. Deal Dynamics: Parties and Timing to Signing • Who are we dealing with, El Paso or Kinder? • Impact of stockholder litigation on timing of signing

15. Deal Dynamics: Conditionality and Fees • Initial attempt to de-link closings was unsuccessful • Sellers have a unilateral right to waive the Kinder Morgan closing condition • Instead, addressed through termination fee negotiation • $400 million (~5.6%) fee payable if Kinder Morgan / El Paso deal terminated and condition not waived • Last-minute attempt by Kinder Morgan to avoid payment of fees ahead of stockholder vote was repelled • Purchaser termination fees • $200 million reverse break fee for financing failure • Rough parity to $400 million Kinder Morgan fee due to escrow pre-funding • $300 million limitation of liability if equity fails to fund • $3 billion cap for willful breaches ($200 million initial payment) • Concern over Sellers’ incentives in event of increase in oil price

16. Notable Terms of the Agreement: Treatment of MAE • Public company style qualifications • Sellers’ initial position: no MAE if no breach of a representation or warranty • MAE/materiality scrape • Sellers’ initial position was that MAE/materiality qualifiers would never be scraped for purposes of determining breach of a representation or warranty • Ultimately agreed that only two representations would be subject to full scrape • No Undisclosed Liabilities and Compliance with Laws • Specific quantification agreed for MAE in breach determination • $62.5 million for labor matters, employee benefits, litigation, environmental and ownership of the E&P assets • $25 million for representation about oil and gas reserves

17. Equity Investors: Pre-Closing Control of Purchaser • Apollo-Controlled • Remedies • Jurisdiction

18. Debt Financing: Bonds Escrow Arrangement • Bond Escrow Arrangement • Uncertain closing timing • Critical to control cost of financing • Favorable HY bonds market conditions • Assistance unique to a carve-out acquisition • Providing financial and other information of a carve-out business that is not public • Post-closing assistance in respect of financials, etc., if reasonably requested in connection with a bond offering or SEC compliance

19. Funds, Alternative Investment Vehicles and Co-Investors • Mega deals are often funded through existing funds, AIVs and co-investment vehicles.

20. Funding the Equity: Considerations • Navigating conflicts requires rigorous exploration of facts and laws and insight into the future (e.g., plans for the future). • Money managers (a/k/a investment advisors) owe fiduciary duties not only to their equity owners but also to their customers – their investors. • Different investors have different needs and are positioned differently from one another. • The advisor itself has interests that may conflict with those of certain of its investors. • Tools: • Structural accommodations • Conflict resolution mechanisms (e.g., recusal and advisory boards) • Acknowledgement of conflicts and agreement on standard of care • Disclosure, disclosure, disclosure

21. Questions