Delaware Chancery Court's Decision in Hammons Case

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN RE JOHN Q. HAMMONS HOTELS INC. SHAREHOLDER LITIGATION ) ) Civil Action No. 758-CC

MEMORANDUM OPINION Date Submitted: July 2, 2009 Date Decided: October 2, 2009

Norman M. Monhait, of ROSENTHAL MONHAIT & GODDESS, P.A., Wilmington, Delaware; OF COUNSEL: Joel H. Bernstein, Ethan D. Wohl, and Matthew C. Moehlman, of LABATON SUCHAROW LLP, New York, New York; Richard B. Brualdi and Gaitri Boodhoo, of THE BRUALDI LAW FIRM, PC, New York, New York, Attorneys for Plaintiffs. Thomas A. Beck and Blake Rohrbacher, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Michael Thompson and Lori Sellers, of HUSCH BLACKWELL SANDERS LLP, Kansas City, Missouri, Attorneys for Defendant John Q. Hammons. David J. Teklits, Kevin M. Coen, and Justin B. Shane, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Alan J. Stone, of MILBANK TWEED HADLEY & MCCLOY, New York, New York, Attorneys for Defendants John Q. Hammons Hotels, Inc., JQH Acquisition LLC, JQH Merger Corporation, John E. Lopez-Ona, Jacqueline Anne Dowdy, Daniel L. Earley, William J. Hart, Donald H. Dempsey, David C. Sullivan, and James F. Moore.

CHANDLER, Chancellor

This case arises out of the merger in September of 2005 of John Q. Hammons Hotels, Inc. (“JQH” or the “Company”) with and into an acquisition vehicle indirectly owned by Jonathan Eilian, pursuant to which the holders of JQH Class A common stock received $24 per share in cash (the “Merger”). Plaintiffs in this purported class action seek damages for the allegedly inadequate price paid for the publicly held Class A shares. Plaintiffs contend that John Q. Hammons, JQH’s controlling stockholder, used his control position to negotiate an array of private benefits for himself that were not shared with the minority stockholders. Eilian, a third party with no prior relationship with Hammons or JQH, negotiated with Hammons and the special committee, which was formed to represent and negotiate on behalf of the minority stockholders. The result of these negotiations was that the Class A stockholders received cash for their shares, and Hammons, in exchange for his Class B stock and interest in a limited partnership controlled by JQH, received a small equity interest in the surviving limited partnership, a preferred interest with a large liquidation preference, and various other contractual rights and obligations. Plaintiffs contend that Hammons breached his fiduciary duties as a controlling stockholder by negotiating benefits for himself that were not shared with the minority stockholders. Plaintiffs also contend that the JQH directors breached their fiduciary duties by allowing the Merger to be negotiated through an

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allegedly deficient process, and by voting to approve the Merger. Plaintiffs also assert claims against the Merger acquisition vehicles for aiding and abetting the breaches of fiduciary duty. Finally, plaintiffs assert four disclosure claims based on alleged misstatements and omissions in the Company’s proxy statement. Before the Court are cross-motions for summary judgment, and the threshold issue is whether the Court should apply the entire fairness or business judgment standard of review. Defendants argue that business judgment is the appropriate standard of review because (1) Hammons was not involved in the process of negotiation for the purchase of the minority shares, (2) the minority stockholders were adequately represented by the disinterested and independent special committee, and (3) a majority of the minority stockholders approved the Merger in a fully informed vote. Plaintiffs, of course, disagree, and contend that entire fairness is the appropriate standard of review because (1) the special committee was ineffective, (2) the majority of the minority vote was “illusory,” and (3) Hammons was subject to a conflict of interest because he negotiated benefits for himself that were not shared with the minority stockholders. Plaintiffs assert that the minority stockholders were “coerced” into accepting the Merger because the price of the Class A stock did not reflect the Company’s true value. Moreover, according to plaintiffs, Hammons’s ability to block any transaction limited the

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special committee’s ability to negotiate at arm’s length and relegated it to the subservient role of negotiating only with bidders acceptable to Hammons.