Opinion

Opinion issued June 4, 2009

In The

Court of Appeals

For The

First District of Texas

NO. 01-08-00308-CV

____________

CITY OF INKSTER POLICEMAN AND FIREMAN RETIREMENT

SYSTEM, DERIVATIVELY ON BEHALF OF KINDER MORGAN, INC.,

Appellants

V.

RICHARD D. KINDER, MICHAEL C. MORGAN, WILLIAM V. MORGAN,

FAYEZ SAROFIM, EDWARD H. AUSTIN, JR., WILLIAM J. HYBL, TED

A. GARDNER, CHARLES W. BATTEY, H.A. TRUE, III, JAMES M.

STANFORD, STEWART A. BLISS, EDWARD RANDALL, III, DOUGLAS

W.G. WHITEHEAD, GOLDMAN SACHS CAPITAL PARTNERS,

AMERICAN INTERNATIONAL GROUP, INC., THE CARLYLE GROUP,

RIVERSTONE HOLDINGS LLC, C. PARK SHAPER, STEVEN J. KEAN,

SCOTT E. PARKER, R. TIM BRADLEY, AND NOMINAL DEFENDANT

KINDER MORGAN, INC., A KANSAS CORPORATION, Appellees

On Appeal from the 270th District Court

Harris County, Texas

Trial Court Cause No. 2006-52653

MEMORANDUM OPINION

Appellants, City of Inkster Policeman and Fireman Retirement System,

derivately on behalf of Kinder Morgan, Inc. (hereinafter "the City"), appeal from a

summary judgment in favor of appellees, Richard D. Kinder, Michael C. Morgan,

William V. Morgan, Fayez Sarofim, Edward H. Austin, Jr., William J. Hybl, Ted A.

Gardner, Charles W. Battey, H.A. True, III, James M. Stanford, Stewart A. Bliss,

Edward Randall, III, Douglas W.G. Whitehead, Goldman Sachs Capital Partners,

American International Group, Inc., The Carlyle Group, Riverstone Holdings LLC, C.

Park Shaper, Steven J. Kean, Scott E. Parker, R. Tim Bradley, and nominal defendant

Kinder Morgan, Inc., a Kansas corporation. In its sole issue, the City asserts the trial

court abused its discretion by granting appellees' motion for summary judgment

without granting the City a continuance to conduct "targeted discovery on the issue

of standing." We conclude the appeal was timely filed and the trial court did not err

by granting summary judgment without granting the City's motion for continuance.

We affirm the judgment of the trial court.

Background

When the City initiated this lawsuit, it was a stockholder in KMI, a Kansas

corporation with its corporate headquarters located in Houston, Texas. KMI, now

known as Knight Inc., is a large mid-stream energy transportation and storage

company.

On May 28, 2006, a buyout group delivered a letter to KMI's board of directors

containing an offer to purchase all of KMI's common stock at $100 per share. The

buyout group included certain Goldman Sach-afilliated funds; affiliates of American

International Group, Inc.; funds managed by AIG Global Investment Group, Carlyle

Partners IV, L.P. and Carlyle/Riverstone Global Energy and Power Fund III, L.P.;

Kinder; Michael and William Morgan; and Sarofim. KMI established a special

committee to consider the offer, negotiate with the buyout group, and communicate

with potential third-party acquirers. The special committee negotiated the merger

consideration to $107.50 per share.

On August 24, 2006, the City initiated its derivative suit, asserting that each

appellee was "directly violating or aiding and abetting the other defendants' violations

of the fiduciary duties owed to KMI by directing the sale" of KMI at $100 per share,

a "grossly inadequate consideration" from which the City asserted appellees would

unfairly gain. Four days later, the special committee unanimously voted to

recommend that KMI accept the offer at a negotiated price of $107.50 per share. The

nine members of KMI's board of directors who were not members of the buyout group

also voted to approve the offer. KMI shareholders approved the merger on December

19, 2006. The merger closed on May 30, 2007, when Knight Acquisition merged into

KMI. All outstanding KMI shares automatically cancelled and were converted into

the right to receive $107.50 per share. On June 14, 2007, KMI's name was officially

changed to Knight Inc.

On November 20, 2007, appellees filed "Defendant's Joint Motion to Dismiss

for Lack of Jurisdiction, or in the Alternative, Motion for Final Summary Judgment."

The motion asserted that the City lost standing when it lost its shareholder status on

May 30, 2007. In its opposition to the motion, the City requested a continuance to

"conduct tailored discovery necessary to properly oppose" the motion. After a

hearing, the trial court granted summary judgment without stating the basis for its

ruling.

The trial court rendered final judgment in favor of appellees on February 21,

2008. On February 26, 2008, the City received notice of the judgment in a postcard,

which referred to the ruling as "partial dismissal." The clerk circulated a revised

notice on March 27, 2008, noting that the February 21 ruling was a not a partial

dismissal but a final judgment. The City received the revised notice on March 31,

2008. The City then filed its Motion to Extend Post-Judgment Deadlines, asserting

that it did not receive actual notice of the final judgment until March 31, 2008. The

trial court granted the City's motion. Motion for Continuance

In its sole issue, the City contends the trial court abused its discretion by

granting appellees' motion for summary judgment without granting the City a

continuance to conduct "targeted discovery on the issue of standing."

A. Law

We apply Texas procedural law in addressing the issue raised in this appeal.

Nexen Inc. v. Gulf Interstate Eng'g Co. , 224 S.W.3d 412, 417 (Tex. App.--Houston

[1st Dist.] 2006, no pet.). Because this lawsuit concerns a Kansas corporation, the

parties agree that Kansas substantive law controls.

1. Procedural Law

The trial court may order a continuance of a summary judgment hearing if it

appears "from the affidavits of a party opposing the motion that he cannot for reasons

stated present by affidavit facts essential to justify his opposition." Tex. R. Civ. P.

166a(g). We review the grant or denial of a motion for continuance for an abuse of

discretion. BMC Software Belg., N.V. v. Marchand , 83 S.W.3d 789, 800 (Tex. 2002).

"We have considered the following nonexclusive factors when deciding whether a trial

court abused its discretion in denying a motion for continuance seeking additional

time to conduct discovery: the length of time the case has been on file, the materiality

and purpose of the discovery sought, and whether the party seeking the continuance

has exercised due diligence to obtain the discovery sought." Joe v. Two Thirty Nine

Joint Venture , 145 S.W.3d 150, 161 (Tex. 2004).

2. Substantive Law

Kansas courts often look to Delaware law on substantive corporate law issues.

See Arnaud v. Stockgrowers State Bank , 992 P.2d 216, 218 (Kan. 1999). Under

Delaware law, "[a] plaintiff who ceases to be a shareholder, whether by reason of a

merger or for any other reason, loses standing to continue a derivative suit." Lewis v.

Anderson , 477 A.2d 1040, 1049 (Del. 1988). "[A] derivative shareholder must not

only be a stockholder at the time of the alleged wrong and at the time of

commencement of suit but . . . he must also maintain shareholder status throughout the

litigation." Id. at 1046 ; see also Elloway v. Pate , 238 S.W.3d 882, 900 (Tex.

App.--Houston [14th Dist.] 2007, no pet.) (acknowledging same). However, a merger

does not terminate a derivative shareholder's standing if the shareholder can

demonstrate that the merger is a fraud "being perpetrated merely to deprive

shareholders of the standing to bring a derivative action." Kramer v. W. Pac. Indus.,

Inc ., 546 A.2d 348, 354 (Del. 1988); see also Lewis v. Ward , 852 A.2d 896, 905 (Del.

2004) ("[A] complaint seeking to invoke the fraud exception must demonstrate that

the merger was fraudulent and done merely to eliminate derivative claims."). This is

known as the "fraud exception." See Ward , 852 A.2d at 904-05 .

B. Analysis

In this case, the City filed its petition 18 months prior to the trial court's

rendering final judgment, so the City had 18 months during which to conduct

discovery. The City asserts that it was diligent in attempting to obtain discovery on

the issue of standing because "[u]ntil Appellees actually filed the Summary Judgment

Motion, [the City] was not in a position to analyze the purported reasons for the

merger and craft the narrow discovery necessary to fully explore KMI's Special

Committee's reasons for approving the merger." However, the City was in a position

to foresee the need for this "targeted discovery" because the City filed this derivative

suit in response to the proposed merger, and the City knew it would no longer have

standing once the merger took place.

More importantly, the discovery sought by the City was immaterial to the City's

response to appellees' summary judgment motion. In its brief, the City asserts that it

"should have been allowed to conduct targeted discovery to determine whether the

Merger was consummated for fraudulent or other improper purposes (thereby

preserving [the City's] standing)." However, the fraud exception applies to preserve

standing only when the merger was consummated for the purpose of depriving the

shareholder of standing to pursue a pre-existing derivative claim. See Anderson , 477

A.2d at 1046 n.10 ("Plaintiff has not asserted that the merger was perpetrated to

deprive Old Conoco of its claims against the individual defendants . . . ."). The merger

itself must be the subject of a claim of fraud. See Ward , 852 A.2d at 902 . In this case,

the merger could not have been consummated for the purpose of destroying the City's

standing to bring its derivative suit because the merger proposition pre-existed the suit

and was in fact the subject of the suit. The merger was never the subject of a claim of

fraud. Therefore, the discovery sought by the City was immaterial to the motion for

summary judgment.

We hold that the trial court did not abuse its discretion by denying the City's

request for a continuance to conduct additional discovery. We overrule the sole issue

on appeal.

Conclusion

We affirm the judgment of the trial court.

Elsa Alcala

Justice

Panel consists of Justices Jennings, Alcala, and Higley.