A Delaware court ruled in favor of Springfield-based hotelier John Q. Hammons on Jan. 14 in a $93 million minority-stockholder challenge to the 2005 privatization of the company that bears Hammons’ name.
In September 2005, John Q. Hammons Hotels Inc. was purchased by Jonathan Eilian and partners of his Atrium Group. As part of the acquisition, minority stockholders received $24 per share in cash. Hammons received a 2 percent interest in the preferred equity of the surviving limited partnership, as well as other contractual rights and interests.
A group of minority stockholders – led by hedge-fund operators Jolly Roger Fund LP, Jolly Roger Off Shore Ltd. and Lemon Bay Partners – initiated the class-action suit, claiming Hammons facilitated an inadequate share price in order to undermine the minority interest and secure his benefits through the transaction.
Delaware Chancellor William B. Chandler III ruled that Hammons’ structuring of the deal and agreed-upon share price were fair.
“We were very pleased with the outcome. Frequently, as a course of doing business with a public company going private, people will come forward and try to squeeze a few extra bucks out of the deal, ” said Justin Harris, general counsel for John Q. Hammons Hotels. “The plaintiffs in this case alleged that public shareholders were treated unfairly and coerced into selling their shares, and none of this was true.”
In 2005, Hammons owned roughly 75 percent of his company’s stock. Before Hammons could sell to Eilian and the Atrium Group, a special committee formed by John Q. Hammons Inc.’s board of directors approved the sale and negotiated the price offered to minority stockholders. The total transaction, including the assumption of debt, was worth $1.4 billion, according to court records.
At issue in the case were two primary considerations, according to the opinion written by Chandler: fair process and fair price.
Mike Thompson, attorney and partner at Kansas City-based Husch Blackwell LLP, which represented the defendants, said the original transaction agreement and subsequent lawsuit were uniquely complex – evidenced by the 14 defendant and plaintiff attorneys who worked on the case.
Thompson said Hammons separately negotiated the terms for his shares, which were valued by the defense’s expert at less than $15.80 per share. Thompson said the buyer pursued Hammons’ interests first, as the majority shareholder.
“And Mr. Hammons didn’t want to just get cash, so the transaction he negotiated was fairly complicated,” Thompson said.
As part of the deal, Hammons negotiated for a line of credit to continue developing hotels and for continued management of the acquired company, as well as ownership of a couple of developed properties including Chateau on the Lake in Branson.
The plaintiffs in the case sought damages based on their claims that the company was undervalued at the time of the sale.
Their expert, Samuel Kursh, valued the stock at $49 per share at the time of the sale, more than twice what the minority stockholders received. According to the court opinion, however, Kursh’s estimate was “based on numerous overly optimistic assumptions.”
Springfield Business Journal’s calls to New York-based law firms Brualdi Law Firm PC and Labaton Sucharow LLP, which represented the plaintiffs, were not returned by press time.
The chancellor in the case ruled the special committee selected by Hammons Hotels’ board of directors operated independently of the board, and it was not coerced into accepting the deal based on the possibility of worse outcomes.
The case was found to be significant legally, according to Thompson, because the defendants were required to prove they acted fairly in the transaction as a result of an earlier summary judgment, a standard typically only required for owners that are on both ends of the transaction.
“Last year, it got a lot of play because when the chancellor ruled that the defendants were going to have to prove that this was a totally fair transaction, it kind of made new law,” Thompson said.
In the January opinion, however, the chancellor stated that, “the use of sufficient procedural protections for the minority stockholders could have resulted in application of the business judgment standard of review in this case,” which Thompson said would have put the burden of proof on the plaintiffs.
David Agee, an attorney and partner with Husch Blackwell’s Springfield office, worked on the original transaction.
“People may think, ‘Well, (Hammons) owned 75 percent of the company, he should be able to do what he wants,’ but when you own a public company, it imposes a greater duty on Mr. Hammons to set up a process that is fair and independent,” Agee said, adding that he thought the way in which Hammons set up the special committee with its own financial advisers and counsel was critical to the success of the case.
Eilian, a private investor who helped start Starwood Hotel and Resorts Worldwide, could not be reached by press time.
Due to declining health, Hammons stepped down from his management post in late 2010 and 38-year company veteran Jacquie Dowdy is now CEO.[[In-content Ad]]
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