In this memorandum opinion, Chancellor Chandler held that a merger was entirely fair and the controlling stockholder did not breach his fiduciary duties to minority stockholders where the controlling stockholder did not participate in the approval of the merger or in the special committee process, was not on both sides of the transaction, did not do anything that would adversely affect the merger consideration obtained by the minority stockholders, and received less consideration per share than the minority stockholders.
In September of 2005, John Q. Hammons Hotels, Inc. (the “Company”) merged into an acquisition vehicle owned by Jonathan Eilian (the “Merger”). John Hammons was the Company’s controlling stockholder, controlling approximately 76% of the voting power. Pursuant to the Merger, Hammons received a 2% interest in the surviving limited partnership along with various contractual rights and interests, and the Class A stockholders received $24 per share in cash. In its October 2, 2009 opinion on cross-motions for summary judgment, the Court held that entire fairness was the applicable standard and that material issues of fact remained as to whether Hammons had engaged in self-dealing and whether disclosure violations had occurred regarding the special committee’s legal and financial advisors.
After the trial, plaintiffs dismissed all claims against the Company’s directors, except Hammons, because the undisputed factual record showed that the merger was negotiated and approved by a special committee of independent and disinterested directors and thus the burden shifted to plaintiffs to show the Merger was not entirely fair. In order to meet their burden under entire fairness, plaintiffs had to show that the Merger was either not the result of fair dealing or did not pay the minority stockholders a fair price. The Court found that the Merger was the result of a fair process because the special committee members had extensive experience in the hotel industry, rejected an offer of $13-per-share and negotiated up to the final $24-per-share offer over a nine-month period during which the special committee retained independent legal and financial advisors and held over thirty meetings. The Court rejected plaintiffs’ claim that the special committee was coerced into the Merger because the only threat the minority stockholders faced was maintaining the status quo, which cannot be the basis for a claim of coercion.
As to price, the Court found that it was fair based mainly upon the defendants’ valuation expert, whose analysis the Court found to be more thorough and persuasive than that of plaintiffs’ expert. Although both experts used a discounted cash flow analysis, which the Court stated was the appropriate method, only defendants’ expert valued the various types of consideration that Hammons received in the Merger, concluding that he received more than $8 less per share than did the minority stockholders. In addition, the Court found plaintiffs’ expert’s analysis to be unreliable because it relied upon unrealistically optimistic management projections and incorrectly calculated the Company’s terminal value. The Court also rejected plaintiffs’ expert’s comparable companies analysis because it found the plaintiffs’ expert had used inappropriate companies as comparables. As further support for the fairness of the price, the Court noted that over 89% of the Class A shares that voted on the Merger voted in favor of it, and cited Cinerama, Inc. v. Technicolor, Inc. for the proposition that “tender by an overwhelming majority of . . . stockholders [is] tacit approval and, therefore, constitute[s] substantial evidence of fairness.”
Regarding plaintiffs’ claim that Hammons had breached his fiduciary duties to the minority stockholders, the Court found no factual or legal basis for such a claim. The Court found that Hammons did not participate in the approval of the merger in his directorial capacity or in the special committee process. Additionally, Hammons was not on both sides of the Merger, did not engage in any conduct that adversely affected the Merger consideration obtained by the minority stockholders, and received significantly less per share than the minority stockholders. Because the Court found there had been no breach of fiduciary duty, it also found that Eilian could not be liable for aiding and abetting a breach of fiduciary duty.
Lastly, the Court addressed plaintiffs’ disclosure claims. Plaintiffs argued that the proxy statement should have disclosed: (1) that an employee of the special committee’s financial advisor contacted Eilian about underwriting a portion of the financing in the Merger; (2) the special committee’s legal advisor also represented an entity providing financing for Eilian with respect to a line of credit being received by Hammons as part of the Merger consideration; and (3) a November 2004 presentation given to the special committee by Eilian estimating that the Company was worth $35 to $43 per share. As to the first claim, the financial advisor’s employee never submitted a written bid or term sheet, did not receive any business from Eilian, and there was no evidence that the special committee knew or should have known about the alleged contact. The Court held that “directors do not owe a duty to disclose facts that they are not aware of,” and therefore the alleged contact was not required to be disclosed under Delaware law. The Court also ruled that the second disclosure claim was immaterial because plaintiffs did not present any evidence that the legal advisor’s advice to the special committee was in any way affected by its representation of Eilian’s financier. Finally, the Court found the 2004 presentation to be immaterial because it was based on a hypothetical transaction structure that the special committee knew was not available.
Because the process and price in the Merger were fair, Hammons had not breached any duty to the minority stockholders and none of the disclosure claims were material, the Court found in favor of defendants on all claims.
The full opinion is available here.