On October 24, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted a motion to dismiss a putative class action by former stockholders of Morgans Hotel Group Co. (“Morgans”), challenging its $794 million merger with an affiliate of SBEEG Holdings LLC. In re Morgans Hotel Group Co. Stockholder Litig., C.A. No. 12433 (Del. Ch. Oct. 24, 2017). Plaintiffs asserted claims for breach of fiduciary duty and unjust enrichment against an alleged controlling stockholder, Ron Burkle, and his affiliated entities, The Yucaipa Companies LLC and affiliates (collectively, “Yucaipa”). Plaintiffs claimed that Yucaipa (i) owed fiduciary duties—even though it only owned a minority stake in Morgans—because it had contractual blocking rights that gave it effective control; and (ii) breached those duties by causing Morgans to enter into the merger, which allegedly “enriched” Yucaipa. The Court rejected these arguments and held that the exercise of contractual blocking rights—without more—is insufficient to impose fiduciary duties on a minority stockholder.
Plaintiffs alleged that Yucaipa exercised control over Morgans because the securities purchase agreement through which it invested in Morgans gave it consent rights, including with respect to any acquisition of Morgans or any conversion of preferred stock held by Yucaipa. Plaintiffs also alleged “historical events” from years past, including rulings by the Court in a previous litigation, demonstrated that Yucaipa had held rights with respect to Morgans that conferred control. Plaintiffs claimed that Yucaipa breached its alleged fiduciary duties because Morgans was in financial distress and Yucaipa withheld consent for possible alternative transactions to force Morgans into the merger. Plaintiffs also asserted an unjust enrichment claim based on the same allegations. Additionally, plaintiffs claimed that Bradford Nugent, a Morgans director appointed by the Yucaipa companies, breached his fiduciary duties by expressing support for the merger, even though he recused himself from the board deliberations and vote on the merger.
Dismissing the complaint, the Court held that Yucaipa’s exercise of its contractual rights to exert leverage over the Morgans board did not rise to the level of control required to impose fiduciary duties on a minority stockholder. The Court discounted allegations “relat[ing] to a different point in the Company’s history when . . . Yucaipa . . . possessed a different package of rights.” The Court concluded for the same reason that plaintiffs alleged no culpable conduct that could support an unjust enrichment claim, finding that, even though Yucaipa was enriched by the merger, the complaint did not support a “reasonably conceivable inference that the enrichment was unjust.” Finally, the Court dismissed the claim against Nugent because Delaware law precludes a fiduciary duty claim against a director that “plays no role in the process of deciding whether to approve a challenged transaction.”
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