Friday, November 16, 2012

Hilton Hotels Corp. v. ITT Corp. case brief


Hilton Hotels Corp. v. ITT Corp. case brief summary
978 F.Supp. 1342 (D. Nev. 1997)

FACTS
-The P simultaneously put in a tender offer of $55 per share for Defendant’s stock while announcing a proxy contest at the next shareholders meeting.
-Defendant responded by refusing the offer, selling assets, and opposed the takeover in front of state gaming regulatory bodies.
-Defendant also announced a “Comprehensive Plan” that split Defendant into three entities, with 94% of the assets in the ITT Destinations entity.
-Defendant’s board also voted in a staggered board with three classes, wherein each class would be elected every three years, and an 80% majority would be required to remove a director without cause. -An 80% majority would also be required to remove the 80% majority requirement.
-Another part of the plan was a poison pill that would force Plaintiff to pay 90% of a $1.4 billion tax liability. This was all done prior to the shareholder’s meeting, and therefore shareholders did not vote on these changes.
-Plaintiffs increased their offer to $70 per share and moved to enjoin the plan, and the lower court granted the motion.

ISSUE
-Whether Defendant, under a hostile takeover bid, can entrench itself by defensive measures that are not voted in by shareholders.

HOLDING

-The United States District Court for the District of Nevada, in the absence of relevant Nevada law, applied Delaware state law and held that the Comprehensive Plan violates the shareholders’ rights to vote on the board of directors, regardless of good faith on the directors’ part, unless the Unocal standard of higher scrutiny is met.
-The Unocal standard would require that Defendant demonstrate that the acquiring company will pursue a different corporate policy (Defendant did not demonstrate this here) and requires a good faith reasonable investigation into any perceived threat (Defendant did not even meet with Plaintiff and simply asserted that the offer was too low despite contrary evidence).
-The court found that the classified board structure and subsequent voting precluded shareholders and intentionally disenfranchise shareholders prior to a proxy contest.
-Although the court looked favorable at the fact that a majority of directors were outside directors, the plan further entrenched their positions

RULE

-A plan by a target corporation’s directors that purposefully disenfranchises the shareholders’ voting of the directors in lieu of a takeover is invalid.

b. Choice of Law – NV law is silent on the subject. Court looks to DE case law as persuasive authority in this case.

c. Heightened Review for Shareholder Disenfranchisement – “A board’s unilateral decision to adopt a defensive measure touching upon issues of control that purposefully disenfranchises its shareholders is strongly suspect under the Unocal test, and cannot be sustained without a compelling justification.”

d. Two Types of Cases:
i. Power over the assets of the corporation.  Use BJR analysis.
ii. Power relationship between the board (management) and the shareholders.  Analyze under Blasius.

e. Unocal Analysis Here – “The Unocal Test requires the court to consider the following two questions:
1) Does the board have reasonable grounds for believing a danger to corporate policy and effectiveness exists?
2) Is the response reasonable in relation to the threat? If it is a defensive measure touching on issues of control, the court must examine whether the board purposefully disenfranchised its shareholders, an action that cannot be sustained without a compelling justification.”

f. Blasius Rule – “Even if an action is normally permissible, and the board adopts it in good faith and with proper care, a board cannot undertake such action if the primary purpose is to disenfranchise the shareholders in light of a proxy contest.”


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