The Morgans Hotel Group Fight: Part Two

We recently discussed an important decision by the Delaware Chancery Court arising out of a proxy fight over the future of the Morgans Hotel Group (NASDAQ: MHGC), an international hospitality concern headquartered in New York and incorporated in Delaware. One of MHGC’s core properties is the Delano South Beach, in Miami, Florida, portrayed.

To review: that decision, in mid-April of this year, allowed a plaintiff/dissident director to proceed with sweeping discovery, on the grounds that a director’s access to information is “essentially unfettered.”

Although that finding is itself important, it was only part of an ongoing dispute between two alpha seekers, Yucaipa and OTK Associate over the future of the hotel group. OTK Associates, an investment vehicle for the Olshan and Taubman real estate families, owns nearly 14% of Morgans. Yucaipa owns all of Morgans’ preferred stock, over half of its convertible notes and has warrants for 12.5 million shares of common stock. Its principal, Ron Burkle, also has (common) stockholdings in Morgans personally. So this is a struggle between the largest financial “stakeholder” in an expanded sense - and the largest stockholder.

The Story Continues
In May, the court gave OTK another victory. Vice Chancellor J. Travis Lasker granted an injunction that accepted the plaintiffs’ assertions that the deliberative process had been skewed in Yucaipa’s favor. Lasker prohibited Morgans from proceeding with a deal it had made with Burkle until it underwent the approval process once more, doing things right the second time, properly noticed meeting, due deliberations, etc. In effect, though, the injunction punted a final decision of the restructuring until after the outcome of the next shareholder meeting.

In mid-June, OTK – which is headquartered in Bloomfield Hills, Michigan – won the proxy fight which culminated with that meeting, and installed six new board nominees of its choice (and re-elected that formerly-solitary dissident). OTK had publicly taken a position opposed to the transactions contemplated in a March 30, 2013 exchange agreement between Morgans and Yucaipa, so it is unsurprising that Yucaipa immediately sent MHGC a letter asking whether it still planned to consummate the transactions to which it had said it was committed back in March, when all the other directors were keeping lonely Kalisman in the dark.

There was no immediate response, and on June 27, the Yucaipa parties sent another letter saying the deal was cancelled and it would pursue remedies.

On that same day, June 27, came the lawsuit in New York state court, in which Yucaipa demands a $9 million termination fee, and another $1 million or related costs. Four days later came the suit (with Burkle himself as named plaintiff) in the U.S. district court for the southern district of New York.

Here’s the Twist
This federal lawsuit accuses OTK of deceiving the shareholders by misrepresenting the recommendations of two shareholder advisory services. Why is that extraordinary? Because it takes aim at such a ubiquitous target. The two firms involved, ISS and Glass Lewis, seem to be cited in all proxy fights above a certain threshold of visibility. Further, their opinions often have an element of ambiguity to them, and each side in the proxy fight issues a statement playing up the elements of the ISS/Glass Lewis report that suits them. None of this is new.

The spin doctoring arose from an ambivalent stance. Both agencies advocated a somewhat qualified support for OTK by the other stockholders, neither had expected or advocated the sweeping victory that OTK in fact received.

The true facts of the matter were widely reported. Indeed, OTK’s own press release and SEC filing states the facts accurately. There was also some peripheral spinning in its language, but it is difficult to believe that it affected the outcome of the vote.

ISS and Glass Lewis each backed three of the seven OTK nominees. Both backed Jason Kalisman for re-election to the board. Both also backed Mahmood Khimji. ISS backed Jonathan Langer, although here they parted ways. Glass Lewis didn’t support Langer. The third OTK nominee to receive its endorsement was John Dougherty.

Anyway: the two agencies did give a boost to the OTK campaign: they were hardly a vote of confidence in the not-Kalisman incumbents.

Burkle’s legal argument is surprising, unless one takes it in the spirit of “throw it against a wall and hope it sticks”!