Morgans Hotel Group Co. (MHGC) can’t sell billionaire Ron Burkle two of its businesses and begin a $100 million recapitalization plan because directors didn’t properly approve the actions, a judge ruled.
Delaware Chancery Court Judge Travis Laster today barred Morgans from going forward with the deal, which would allow Burkle’s Yucaipa Cos. to swap $230 million in notes and preferred stock for ownership of Morgans’s Delano South Beach Hotel in Miami and a restaurant company. Laster found Morgans directors’ process for approving the transactions was flawed.
“These were transactions that had major consequences for the company and involved the sale of its crown jewel,” Laster said in a conference call with attorneys for the company, Burkle and a dissident Morgans director who sued to challenge the deal.
Jason Taubman Kalisman, the company director and a founding member of its largest shareholder, OTK Associates, sued his fellow board members last month over their decision to back the Yucaipa deal and the $100 million rights offering to current investors. OTK owns about 14 percent of New York-based Morgans’s shares, according to court filings.
OTK opened a proxy fight this year, saying it’s seeking to overhaul Morgans’s board and return the company to profitability. The chain, which includes 13 boutique hotels, has lost money in every quarter since 2007, according to data compiled by Bloomberg.
June Meeting
OTK and Kalisman accused Morgans’s current directors of rushing to complete the offering and the Burkle swap before the company’s annual shareholder meeting, originally scheduled for May 15, to avoid losing their seats in the proxy vote. The board had pushed the vote back to July 10.
Laster ordered Morgans officials to hold the annual meeting tomorrow as originally planned. Still, the judge said directors can open the meeting as a procedural matter and then vote to postpone it. That would give company executives time to provide proper notice about the meeting and the proxy vote, the judge said. Only investors who held Morgans stock as of March 22 can cast ballots, he noted.
Morgans officials have rescheduled the company’s annual meeting for June 14 in the wake of Laster’s ruling, Lex Suvanto, a spokesman for Morgans Hotel at Abernathy McGregor in New York, said in an e-mailed statement. Frank Quintero, a spokesman for Los Angeles-based Yucaipa, didn’t immediately return calls for comment.
‘Record Date’
OTK officials said they were pleased Laster ordered Morgans executives to limit voting to investors who owned shares as of March 22. They accused the company and Burkle of seeking to change the so-called record date for who could cast ballots in the proxy vote to help block the push to oust the board.
Laster’s ruling “also allows for a trial on the recapitalization plan, which OTK believes is not in the best interests of shareholders,” Nathaniel Garnick, a spokesman for OTK at Sard Verbinnen & Co. in New York, said in a e-mailed statement.
Morgans closed unchanged at $6.14 in Nasdaq trading today. The hotel chain’s stock rose more than 1.2 percent after Laster announced his ruling. The shares have climbed 29 percent over the past 12 months.
Kalisman complained that Burkle, who serves on Morgans’s board, improperly swayed his colleagues to support his acquisition bid and backing for the rights offering so that he could exert control over the hotel chain.
‘Various Threats’
The billionaire “liked to use various threats to try to intimidate” his colleagues on the board, Kalisman’s lawyers said in court filings. For example, Burkle threatened to scuttle deals aimed at having Morgans executives operate hotels in Moscow and Las Vegas, Kalisman’s lawyers said.
Burkle’s warnings and inducements to fellow directors, which included rides on his private jet, provided incentives for the board to dismiss competing bids for the hotel and food-and-beverage company, Kalisman contended.
He said that because of his opposition to the Burkle deal his fellow directors withheld information and kept him in the dark about the recapitalization plan’s details until the board met to give it final approval in March.
After hearing arguments in the case, Laster found Burkle and other Morgans board members pushed to complete the recapitalization effort in March as part of the board’s response to OTK’s proxy challenge.
Rights Offering
The judge also found Kalisman’s colleagues misled him about the progress of the rights offering transaction and didn’t provide proper notice about a meeting to give the plan final approval.
Morgans’ board is expected to reconsider the recapitalization plan and the Burke acquisitions “in the coming days,” Morgans spokesman Suvanto said in his statement.
The Morgans chain features boutique hotels such as the Mondrian SoHo in New York, the Clift Hotel in San Francisco and the Delano Marrakech in Morocco.
The case is Kalisman v. Friedman, 8447, Delaware Chancery Court (Wilmington).
