Corporate Governance

John Q. Hammons Hotel and the Fairness of the Merger

By Ali Kaiser

In  John Q. Hammons Hotels Inc. S'holder Litig., No. 758-CC, 2011 WL 227634 (Del. Ch. Jan. 14, 2011), the plaintiffs made several allegations in connection with the merger of John Q. Hammons Hotels, Inc. ('JQH') into an acquisition vehicle owned by Jonathan Eilian (the 'Merger').  The Merger resulted in the plaintiffs selling their Class A common stock for $24 per share. 

The plaintiffs initially made four allegations:  (1) the controlling stockholder, John Q. Hammons, breached his fiduciary duty 'by negotiating benefits for himself that were not shared with the minority shareholders'; (2) the JQH directors breached their fiduciary duties by using a deficient process to approve the Merger; (3) JQH Acquisition, LLC and JQH Merger Corp. aided and abetted such breach of fiduciary duty; and (4) the proxy statement contained misstatements and omissions. 

Following trial, the plaintiffs dismissed all of the claims against the JQH directors and allowed only the claim for breach of fiduciary duty and aiding and abetting against the controlling shareholder go forward.  As a result, the court reviewed the transaction under the standard of entire fairness.  Entire fairness involved a two prong analysis of fair dealing and fair price. 

With respect to fair dealing, the court found that the process was fair.  A Special Committee consisting of independent and disinterested members with experience in the hotel industry negotiated the terms of the merger, including the price.  The Committee was thorough and deliberate and the members 'understood their authority and duty to reject any offer that was not fair.'  Although the plaintiffs argued that the Special Committee was forced to accept the Merger offer, the court found no evidence to substantiate such claim. 

In considering the price, the court weighed the persuasiveness and valuation methods employed by experts on both sides and concluded that the $24 per share merger price was entirely fair.  The court ultimately relied on the expert testimony from the defendant who determined the value of the Class A shares ranged between $14.97 and $18.71.  The defendant's expert arrived at this figure using a discounted cash flow ('DCF') analysis, a valuation method commonly used within the financial community and accepted by the courts.  The court discounted the plaintiffs' expert, concluding that he based his analysis on unreliable figures from management and unrealistic projections. 

In addition, the court found that because Hammons did not participate in the approval, did not participate in the Special Committee process, and did not himself make an offer, he breached no duty to the minority stockholders.  Furthermore, not only did Hammons' conduct have no adverse effect on the consideration received by the minority stockholders, he received less per share than the minority shareholders. 

Finally, the court dismissed the plaintiff's allegations of aiding and abetting because neither Hammons nor the JQH board breached a fiduciary duty, and the plaintiffs provided no evidence to the contrary and dismissed several claims based upon inadequate disclosure. 

The primary material for this case may be found on the DU Corporate Governance website. 

Full post as published by The Race to the Bottom on March 19, 2011 (boomark / email).