Plaintiffs cite evidence and quote from Hammons’s biography

Plaintiffs cite evidence and quote from Hammons’s biography for the proposition that Hammons only reluctantly sold shares in JQH to the public, that he disliked the procedural requirements associated with public stockholders and a board of directors, and that there was tension between Hammons and the Board. Indeed, Hammons and the Board had disagreements over the Board’s use of stock options as compensation and over the pace of hotel development. The latter disagreement resulted in the Board’s call for a moratorium on the development of hotels by the Company. This moratorium led the Board and Hammons to negotiate an arrangement where Hammons was permitted to use Company resources for his private development activities, in exchange for giving the Company the opportunity to manage such hotels and acquire them if they were offered for sale. Hammons and the Board also disagreed over Hammons’s decision to offer Lou Weckstein, who Hammons hired as JQH’s President in 2001 without consulting the Board, a salary that the Board believed was excessive. This conflict led to deterioration of the relationship between Hammons and Hart, who was then Hammons’s personal attorney, and led the Board to retain Katten Muchin Rosenman, LLP (“Katten Muchin”) to advise the non-employee members of the Board on how to react to Hammons’s hiring of Weckstein. Plaintiffs point to Eilian’s description in a March 7, 2005 email sent during the negotiations that Hammons practiced a “‘liberal’ mixing of private and
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personal expenses and competitive interests.” In its 2004 10-K the Company disclosed that: Mr. Hammons also (1) owns hotels that we manage; (2) owns an interest in a hotel management company that provides accounting and other administrative services for all of our hotels; (3) owns a 50% interest in the entity from which we lease our corporate headquarters; (4) has an agreement whereby we pay up to 1.5% of his internal development costs for new hotels in exchange for the opportunity to manage the hotels and the right of first refusal to purchase the hotels in the event they are offered for sale; (5) leases space to us in two trade centers owned by him that connect with two of our hotels; (6) has the right to require the redemption of his LP Units; (7) utilizes our administration and other services for his outside business interests, for which he reimburses us; (8) utilizes the services of certain of our employees in his personal enterprises and personally subsidizes those employees’ compensation; and (9) owns the real estate underlying one of our hotels, which we lease from him. 3 Plaintiffs also point to a conflict surrounding rent the Company paid to Hammons for meeting space adjacent to one of the Company’s hotels in Portland, Oregon. Plaintiffs cite evidence that, according to Weckstein and Paul Muellner, JQH’s chief financial officer, Hammons insisted on a rent well in excess of market rates and opposed the lower rental offer they proposed. Around early 2004, Hammons and the Board also had conflicts over the plan to dispose of certain Holiday Inn hotels that the Board and management (other than Hammons) deemed were no longer “core assets” of the Company. Hammons,
who Muellner described as having an “emotional attachment” to the Holiday Inn
3
JQH’s 2004 Form 10-K at 4.
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brand, opposed the sale of some of the hotels and even threatened to take legal action to stop the Board from selling one of the properties. On a separate occasion, without disclosure to the Board, Hammons entered into a private agreement with a listing broker that gave Hammons a right of first refusal, which would have allowed Hammons to match an offer in the event a third-party offer was approved by the Board. The arrangement was later discovered and disclosed to the Board by the Company’s general counsel. C. The Barceló Offer and the Creation of the Special Committee In early 2004, Hammons informed the Board that he had begun discussions with third parties regarding a potential sale of JQH or his interest in JQH. On October 15, 2004, one of these third parties, Barceló Crestline Corporation (“Barceló”), informed the Board that it had entered into an agreement with Hammons and that it was offering $13 per share for all outstanding shares of JQH Class A common stock. The agreement Barceló reached with Hammons reflected Hammons’s tax and other personal objectives. Hammons’s tax situation made it essential to him that any transaction be structured to avoid the large tax liability that would result from a transaction that was deemed to be a disposition event for Hammons. To accomplish this goal, Hammons had to retain some ownership in the surviving limited partnership and continue to have capital at risk. Hammons also desired,
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among other things, a line of credit that would allow him to continue to develop hotels. Thus, the deal announced by Barceló was structured such that in exchange for his interests in JQH and JQHLP, Hammons would receive a small ownership percentage in Barceló’s acquisition vehicle and a preferred interest with a large liquidation preference.