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MONTH-IN-BRIEF (Nov 2017)

Mergers & Acquisitions Law

Delaware Court of Chancery Dismisses Morgans Hotel Lawsuit against Alleged Controller          

By Elizabeth M. Hanus, Husch Blackwell

 On October 24, 2017, the Delaware Court of Chancery granted a motion to dismiss a lawsuit challenging SBE Entertainment Group’s (SBE) $805 million acquisition of Morgans Hotel Group Co. (Morgans), clarifying in what circumstances a minority stockholder will be treated as a “controller” that owes fiduciary duties to other stockholders. Former Morgans director Ron Burkle and the Yucaipa entities affiliated with Burkle (collectively, defendants), which owned 0.00064% of Morgans’ outstanding shares, held consent rights as a preferred stockholder and warrant-holder, giving defendants the ability to block an acquisition of Morgans. Plaintiffs argued that these contractual rights made defendants a controller with fiduciary duties, and that defendants had breached these duties by withholding consent for alterative transactions in order to force the SBE-Morgans merger. In attempting to distinguish the current case from precedent holding that contractual blocking rights alone are insufficient to make a minority stockholder a controller, plaintiffs pointed to historical events demonstrating defendants’ control. Vice Chancellor Laster, however, rejected plaintiffs’ argument, emphasizing that the analysis should focus on whether the minority stockholder exercised control over the transaction at issue, not historical events. The court concluded, “[t]he Complaint does not support a reasonable inference that [defendants] were fiduciaries during the period leading up to the Merger” and dismissed the breach of fiduciary duty claim.

Demand Required Where Majority of Directors Do Not Face Liability for Non-exculpated Claims

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