Hedge fund Mason Capital Management has accused law firm Kirkland & Ellis of providing conflicted legal advice in a high-profile dispute involving the Abu Dhabi Investment Council (ADIC) and private equity firm Energy & Minerals Group (EMG), according to a report by the Wall Street Journal.
The allegations relate to a proposed continuation fund transaction for US natural gas producer Ascent Resources, which is controlled by EMG. In December, ADIC accused EMG of seeking to benefit at the expense of its investors through the structure of the continuation vehicle, prompting legal action in Delaware’s Chancery Court.
New York-based Mason Capital, a minority investor in Ascent, has aligned itself with ADIC in the dispute. In a letter sent to Ascent’s board, Mason argued that Kirkland is conflicted because it advises the company’s directors while also representing EMG, Ascent’s private equity sponsor. Mason called on the law firm to withdraw from advising the board.
Kenneth Garschina, a managing member at Mason Capital, said in the letter that the board’s reliance on advice from counsel with an apparent conflict of interest was fundamentally inappropriate.
The challenge to Kirkland’s role adds another layer of complexity to what is already an unusual case for the private equity industry. The dispute is widely seen as one of the first legal confrontations between major private equity players over a continuation vehicle, a structure that allows managers to extend their ownership of portfolio companies but has drawn increasing scrutiny from investors.
In its lawsuit, ADIC, one of the world’s largest sovereign wealth funds, alleged that EMG breached its fiduciary duties by attempting to extract significant value for itself through the proposed transaction. EMG manages around $12 billion in assets.
While ADIC and EMG have agreed to arbitration, the continuation fund transaction remains on hold. Mason’s letter also stated that it had submitted a bid for Ascent at a higher valuation than that implied by the continuation vehicle, and that alternative asset manager Kimmeridge Energy Management separately offered $6bn for the company. According to Mason, Ascent’s board did not respond to either proposal.
