B Korenvaes Investments, L.P. v. Marriot Corporation case brief

 B Korenvaes Investments, L.P. v. Marriot Corporation (DE Ch. Ct., 1993)

1. 1. Marriot wants to reorganize by transferring the cash generating services business from Big Marriot to a new wholly owned subsidiary, Marriot International (MI). Big M changes name to Host Marriot and keeps the debt laden real estate business.
   2. Effect of spin off:
      1. Common SH no effect, will get MI common stock and same dividends will be paid by MI as were paid by Big M
      2. Preferred SH if stay with host as PSH get no dividends; or convert before split, receive common stock of Big M and get common stock of MI along with other common stockholders.
   3. Plaintiffs’ Claim Want injunction to stop special dividend. After the distribution of the dividend the PSHs will be in a position to convert and control a majority of Host’s common stock. The Marriot family wants to maintain control so Marriot is going to stop paying dividends after transaction to coerce PSHs into converting.
   4. Court: While the suspension of dividends may influence PSH to convert, there was no violation of any implied right to good faith that every commercial contractor is entitled to.
      1. First, plaintiffs wrongly construed the case as a breach of fiduciary duty. This is essentially a contract action, as the case involves the construction of the rights and duties set forth in the charter.
         1. The PSH’s protections against suspension of dividends lie in the charter, and are several:
            1. Cumulative dividends
            2. Liquidation preference
            3. Redemption price adjusted to reflect accrued unpaid dividends
            4. If prolonged suspension of dividends get right to elect 2 directors
            5. Conversion right
            6. Restriction on the proportion of net worth that may be distributed
               1. This restriction is inherent in the formula used to revise the conversion ratio: formula doesn’t work if you give so much away that new net worth is less than PS’s share of net worth before the dividend
         2. These provisions are a recognition of the risk that dividends might not be paid.
      2. Second, the discontinuation of dividends can be seen as a prudent, good faith, business-driven decision.
   5. Court: More important claim is based on Charter Section 5(e)(iv) when the assets of the firm are depleted through a special dist to SH’s, the preferred will be protected by the triggering of a conversion price adjustment formula.
      1. The # of shares into which the preferred can convert will be proportionately increased in order to maintain the value of the preferred’s conversion feature.
      2. In a narrow range of extreme cases, the provision will not work to preserve the pre-dividend value of the preferred’s conversion right. (see examples on p. 24-25)
      3. If this case fell within that narrow range, Marriot could be prevented from declaring dividends of a proportion that would deprive the PSH of the protection this section was intended to afford, but this is not one of those cases.

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