Morgans Hotel Group Co. (MHGC:US) directors’ vote to approve a recapitalization plan with billionaire Ron Burkle’s Yucaipa Cos. was invalid, a dissident director contends in a lawsuit over control of the hotelier’s board.
Inadequate notice was given of a March 30 directors’ committee meeting, in violation of Delaware corporation law, Jason Taubman Kalisman, a Morgans director and a founding member of its largest shareholder, OTK Associates, said in a complaint unsealed today in Delaware Chancery Court in Wilmington seeking an injunction.
“The Yucaipa transaction will entrench the director defendants at the company’s expense” because Burkle’s company “will acquire a large block of the company’s stock” in a $6-a- share rights offering, and Burkle “is likely to be replaced” as a director at a May 15 shareholders’ meeting if the deal isn’t finished beforehand, according to the complaint. That meeting has been reset for July 10, a new filing says.
Yucaipa, based in Los Angeles, would acquire the Delano South Beach hotel in Miami Beach, Florida, in exchange for interests in Morgans convertible notes and preferred stock. Yucaipa holds 51 percent, or $88 million, in company notes, and “Mr. Burkle has cemented his day-to-day control over the company’s operations,” according to the complaint.
In a motion today in opposition to expedited handling of the case, Morgans said the transaction “is critical to the company’s survival” and that Kalisman “has not pled adequately the irreparable harm necessary to warrant proceeding on the schedule he seeks.”
The company said the effort “to delever” the balance sheet came about in part due to “significant debt maturities” due in 2014, and that “Yucaipa proposed to purchase the Delano Hotel” last July.
OTK Associates has said it wants to overhaul New York-based Morgans’s board and return the company to profitability.
After learning of OTK’s bid for a new slate of directors, current directors convened and “rammed the transaction through” to “put a substantial block of stock in friendly hands prior to the annual meeting,” plaintiff’s lawyer A. Thompson Bayliss, said in a filing.
“Yucaipa is not guaranteed to obtain a large block of stock as a result of the rights offering,” Michael Pittenger, a lawyer for Morgans, countered in its brief.
Kalisman asked Judge J. Travis Laster for an injunction barring the recapitalization plan, invalidation of the March 30 vote, a declaration that Yucaipa abetted directors’ violations of their duties, and unspecified damages on behalf of the company.
Frank Quintero, a Yucaipa spokesman, didn’t immediately return calls and e-mails seeking comment on the court filing.
Morgans fell 17 cents, or 2.7 percent, to $6.23 today in Nasdaq Stock Market trading. The shares have climbed 12 percent this year.
The case is Kalisman v. Friedman, CA 8447, Delaware Chancery Court (Wilmington).
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