On November 16, 2004, the Board (with Hammons abstaining) expanded the authority of the special committee to review, evaluate, and negotiate on behalf of the unaffiliated stockholders the terms of the revised Barceló proposal. The Board also gave the special committee the authority to respond to, and act on behalf of the board with respect to, any requests from interested parties. On December 5, 2004, following a November 18, 2004 meeting with the special committee, Eilian submitted a proposal to the special committee whereby his group would acquire the interests of Hammons in the Company and make a tender offer for the unaffiliated stockholders at a price to be determined. 5 In November, the special committee met with various shareholder groups, including representatives of plaintiffs.
5
Although the special committee had indicated that it would seek to provide “a level playing field” in terms of access to information, the special committee determined at a November 30, 2004 meeting that it would not place JQH management in a “tenuous position” by overriding Hammons’s instruction to JQH’s general counsel not to send due diligence materials to Eilian at that time. Hammons had expressed that he would not do a deal with Eilian under any circumstances. Nevertheless, the special committee attempted to encourage Eilian and his advisors to not let Hammons’s instruction dissuade them from continuing to evaluate a possible transaction and maintaining an open dialogue with the Company’s financial advisor.
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On December 6, 2004, the special committee reviewed the outstanding proposals of Barceló and Eilian. After receiving a preliminary evaluation from Lehman that Barceló’s $13 per share offer was inadequate, from a financial point of view, to the minority stockholders, the special committee unanimously agreed to recommend to the Board that it reject Barceló’s revised agreement with Hammons. The next day, the special committee advised the Board that Barceló’s offer was not acceptable, and the Company issued a press release stating that the Company would not accept the Barceló proposal. At a December 23, 2004 meeting, two special committee members reported that A.G. Edwards had contacted them on behalf of Eagle Hospitality Properties Trust, Inc. (“Eagle”). The committee, after observing that Eagle would need to raise significant capital, that a transaction with Eagle would involve a significant amount of strategic and financial risks, and that there was no basis to believe that Hammons would have any interest in pursuing a transaction with Eagle, concluded that the inquiry from Eagle was not worth pursuing at that point in time. By December 28, 2004, Barceló was willing to pay $21 per share of Class A common stock if the transaction was subject to approval by a simple majority of shares, including those owned by Hammons. Barceló was willing to pay only $20 per share if a separate majority of the minority vote was required. Eilian’s
proposed transaction with a tender offer for the Class A shares of at least $20.50
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per share had been outlined to the special committee on December 23, 2004. At the December 28 meeting, the special committee discussed both proposals and concluded that the Barceló proposal was more fully negotiated and stood a far greater chance of being consummated. At a December 29, 2004 meeting, the special committee was informed that Barceló was willing to increase its offer to acquire the Class A stock to $21 per share and agree that any merger be conditioned on a majority vote of the unaffiliated stockholders. Lehman advised the special committee that the $21 per share offer was fair to the minority stockholders from a financial point of view and that the allocation of consideration between the minority stockholders and Hammons was reasonable. At a Board meeting later that day, the special committee advised the Board of Barceló’s revised proposal as well as the proposal from Eilian’s group that would offer $20.50 per share for all Class A shares. Hammons indicated that he was no longer interested in a transaction with Eilian. Based on the special
committee’s recommendation, the Board resolved to provide Barceló with exclusivity until January 31, 2005. Negotiations proceeded between Barceló and Hammons, but Hammons was ultimately not comfortable with the proposal, particularly because he believed that the three-year commitment on the line of credit was not sufficient. An agreement
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was not reached by January 31, and Hammons indicated that he was unwilling to extend exclusivity with Barceló. The special committee then recommended to the Board that the Company not renew exclusivity with Barceló, and the Board followed this recommendation. D. The Eilian Offer On January 31, 2005, the special committee received an offer from Eilian’s group by which Acquisition would acquire all outstanding Class A common stock for $24 per share. Eilian’s letter to the special committee indicated that the offer was not contingent on third-party financing and that certain Class A stockholders unaffiliated with Hammons had entered into agreements pursuant to which those stockholders agreed to support Eilian’s proposal. 6 The committee informed the Board of this offer, and the Board voted to continue the existence and authorization of the special committee. At a February 3, 2005 Board meeting, Hammons informed the Board that he would like to negotiate a transaction with Eilian. At the same meeting, the Board was informed that the Company had received an expression of interest from Eagle and from Corporex Companies. The Board concluded that because Eagle and Corporex did not come forward sooner after the expiration of the exclusivity period with Barceló and because of many other factors discussed at the meeting,
6
According to defendants, these unaffiliated stockholders represented approximately 23% of the public Class A common stockholders.
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the Board would not pursue a transaction with that group and would instead proceed expeditiously to negotiate a transaction with Eilian. Based upon a
recommendation from the special committee, the Board granted Eilian exclusivity until February 28, 2005. Over the next several months, representatives of Eilian, Hammons, and the special committee continued to negotiate the terms of a potential deal, during which time the exclusivity agreement with Elian was renewed several times. On June 3, 2005, Hammons and Acquisition (Eilian’s acquisition vehicle) informed the special committee that they had reached certain agreements and requested the special committee’s approval of them. Acquisition also reaffirmed its offer to purchase all the outstanding shares of Class A common stock held by unaffiliated stockholders for $24 per share. On June 14, 2005, the special committee met with its advisors. Katten Muchin reviewed the process the special committee used over the previous nine months and provided an overview of the various agreements between Hammons and Acquisition. Lehman provided a presentation of its analysis and methodology in issuing its fairness opinion that the $24 per share price was fair to the minority stockholders from a financial point of view. Lehman also advised the special committee of its opinion that the allocation of the consideration between Hammons and the unaffiliated stockholders was reasonable. Lehman calculated that the
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value received by Hammons and his affiliates was between $11.95 and $14.74 per share. The special committee then approved the merger agreement (the “Merger Agreement”) and the related agreements between Hammons and Eilian (collectively with the Merger Agreement, the “Transaction Agreements”). The Board met immediately following the June 14 special committee meeting. Hammons advised the Board that he supported the proposed transactions and then recused himself from the meeting. After presentations from Katten
Muchin on the Transaction Agreements and the Board’s fiduciary duties, and from Lehman on its fairness opinion, the Board voted to approve the Merger and the Transaction Agreements. E. The Merger and the Transaction Agreements The Merger Agreement provided that each share of Class A common stock would be converted into the right to receive $24 per share in cash upon consummation of the Merger. The Merger was contingent on approval by a
majority of the unaffiliated Class A stockholders, unless that requirement was waived by the special committee. 7 The Merger Agreement included a termination fee of up to $20 million and a “no shop” provision that placed limitations on the Company’s ability to solicit offers from other parties. Moreover, Hammons agreed
7
As explained below, plaintiffs discount the majority of the minority vote because it only required approval of a majority of the minority shares voting, as opposed to a majority of all the minority shares.
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to vote his interests in favor of the Merger and against any competing proposal or other action that would prevent or hinder the completion of the Merger. In addition to the Merger Agreement, Hammons and Acquisition entered into a series of other agreements, which provided for a complex, multi-step transaction designed to provide Hammons financing to continue his hotel development activities without triggering the tax liability associated with an equity or asset sale. Although each Class B share initially remained a share of common stock of the surviving corporation, those shares were eventually converted into a preferred interest in the surviving limited partnership (the “surviving LP”). In order to achieve his tax goals, Hammons had to have an ownership interest in the surviving LP and continue to have capital at risk. Accordingly, Hammons was allocated a 2% interest in the cash flow distributions and preferred equity of the surviving LP. Atrium GP, LLC, an Eilian company, became general partner of the surviving LP and received a 98% ownership interest. Hammons’s preexisting limited partner interest in JQHLP was converted into a capital account associated with his preferred interest in the surviving LP, which had a liquidation preference of $328 million. When combined with the preferred interest from the conversion of his Class B shares, Hammons’s capital account totaled a liquidation preference of $335 million. The partnership agreement provided for events in which the capital account could be distributed during Hammons’s lifetime, but because of
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certain tax consequences, it was anticipated that distribution of the capital account was to occur at Hammons’s death. The terms of the Transaction Agreements also provided Hammons other rights and obligations.
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