?Facts
Decision
On May 14 2013 the Delaware Chancery Court granted an injunction requiring that Morgans Hotel Group Co reinstate its annual meeting and shareholder voting record dates and refrain from moving forward with a strategic transaction with Yucaipa - a private equity firm controlled by billionaire Ron Burkle, one of Morgans' largest creditors and a member of Morgans' board - until the board had approved the transaction pursuant to a proper process.
The litigation arose from a proxy contest initiated by Morgans' largest shareholder, OTK, in March 2013. After the proxy contest was announced, the Morgans board attempted to postpone the annual meeting and record dates and to consummate a transaction with Yucaipa. OTK and a Morgans director affiliated with OTK, Jason Kalisman, filed suit, alleging that the board's actions amounted to an improper attempt to manipulate the shareholder base and place stock into hands friendly to the incumbent directors in order to defeat OTK's proxy contest.
As part of the proposed transaction, Morgans planned to transfer The Light Group and the Delano Hotel to Yucaipa for its notes, warrants and preferred stock. As a condition to the transaction, Yucaipa agreed to backstop a $100 million rights offering of Morgan stock. To accomplish the transaction, Morgans' poison pill was amended to allow Yucaipa to acquire up to 32% of Morgans' common stock.
In granting the preliminary injunction, Vice Chancellor Laster concluded that Yucaipa and Burkle held significant influence over Morgans through Yucaipa's contractual veto rights over sale transactions, contractual right to appoint or elect directors and Burkle's personal influence over the board. The court also found that OTK and Kalisman had a reasonable likelihood of establishing at trial that at least six of the eight directors were interested in the transaction, due to post-closing board and executive positions and their respective relationships with Yucaipa and Burkle, and that the directors had breached their fiduciary duty of loyalty.
With respect to the board process relating to approval of the proposed transaction, the Morgans bylaws required reasonable notice of board meetings, but Kalisman was given only one day's prior notice of the meeting, with over 350 pages of information provided for such meeting. The court determined that the board did not give Kalisman sufficient notice, particularly in light of the company's past practice of providing directors with over a week to evaluate similar materials. The vice chancellor noted that Delaware's board-centric governance model expects that directors will debate and deliberate, holding that even if the board of directors has notched up the requisite number of votes to approve the deal, a board cannot simply ram through the approval. By not providing Kalisman with sufficient notice, the board deprived him of his rights as a director, deprived all of the directors of the benefit of an open debate on the issues and deprived the shareholders of the informed judgement of their board.
A month after the injunction was issued, the annual meeting of Morgans' shareholders was held as directed by the court. At that meeting, and after an intense and highly publicised proxy contest, Morgans' shareholders voted overwhelmingly in favour of OTK's slate and removed the board members that had supported the deal with Yucaipa.
For further information on this topic please contact James Lidbury at Ropes & Gray LLP's Chicago office by telephone (+1 312 845 1200), fax (+1 312 845 5500) or email ([email protected]). Alternatively, contact Jane D Goldstein at Ropes & Gray's Boston office by telephone (+1 415 315 6300), fax (+1 415 315 6350) or email ([email protected]). The Ropes & Gray website can be accessed at www.ropesgray.com.
Endnotes
(1) Kalisman v Friedman, No 8447-VCL, 2013 WL 1668205 (Del Ch April 17 2013).
