Puma v. Marriott
| Decision Date | 17 August 1973 |
| Docket Number | Civ. A. No. 3275. |
| Citation | 363 F. Supp. 750 |
| Parties | John PUMA, Plaintiff, v. J. Willard MARRIOTT et al., Defendants. |
| Court | U.S. District Court — District of Delaware |
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Ernest S. Wilson, Jr., of Wilson & Russell, Wilmington, Del., and Stanley L. Kaufman and Allan K. Peckel, of Kaufman, Taylor, Kimmel & Miller, New York City, for plaintiff.
R. Franklin Balotti, of Richards, Layton & Finger, Wilmington, Del., and Frank H. Strickler, of Whiteford, Hart, Carmody & Wilson, Washington, D. C., for defendants, Marriott Corp. and Don G. Mitchell.
David F. Anderson, of Potter, Anderson & Corroon, Wilmington, Del., and Burton A. Schwalb, of Arent, Fox, Kintner, Plotkin & Kahn, Washington, D. C., for various individual defendants.
This is a derivative stockholders' suit brought on behalf of Marriott-Hot Shoppes, Inc. (MHS) alleging violations of Sections 10(b) and 14(a) of the Securities and Exchange Act of 1934, 15 U. S.C. §§ 78j(b) and 78n(a) and Rules 14a-9 and 10b-5 promulgated thereunder. The plaintiff argues that the defendants utilized a false and misleading proxy statement to solicit shareholder approval for and effectuate MHS's purchase of six real estate companies from various members of the Marriott family and other corporate insiders. (Sellers).
The defendants fall into three categories: (1) directors and officers of MHS who were also owners of the real estate companies being acquired ; (2) members of the Marriott family who were owners of the real estate companies, and (3) Don G. Mitchell (Mitchell) one of the outside directors charged with negotiating the acquisition.
The case was submitted to the Court on the question of liability on the pleadings in this case and the trial transcript and exhibits from a companion case tried in the Delaware Chancery Court on a claim of a breach of common law fiduciary duties arising out of the same transaction.1 The record is substantially similar to the record on which the Court denied the plaintiff's motion for summary judgment.2
In essence, the plaintiff contends that the defendants controlled MHS and manipulated the corporation and the proxy mechanism to require MHS to procure the six real estate corporations at an inflated price with a substantial profit to themselves at a time when the companies were no longer attractive investments for the sellers. In addition to failing to disclose their ulterior motives and domination of the transaction, the proxy statement is allegedly materially defective in the following basic respects: 1) It fails to adequately and accurately describe the factors pertinent to the determination of the price, and 2) it fails to sufficiently illuminate the significance and magnitude in the overall transaction of one of the properties, Monument Properties, Inc. (Monument), a motor hotel in Philadelphia.
In late 1964 and early 1965, in response to an increasing desire among MHS directors, particularly certain outside directors,4 to obtain listing on the New York Stock Exchange, to eliminate various conflict of interest contractual relationships between MHS and certain Marriott family members and other insiders, and to prevent the sale of the properties to outside interests, certain officers of MHS and the Board of Directors (Board) commenced an investigation into the possibility of purchasing the real estate companies involved in the allegedly unfair acquisition. (Tr. 37-38, 254, 465-466, 469, 706, 708). On March 30, 1965, two outside directors, Mitchell and Louis W. Prentiss, were designated by the Board to negotiate the purchase of the six real estate companies.5 The companies were all real estate companies owning land and buildings leased by MHS for utilization in its business, and were owned by members of the Marriott family and other corporate insiders. Upon inquiring into the prospect of listing on the NYSE, MHS officers were informed that plans for severing these affiliated leasehold relationships would be a prerequisite to listing and clearance from the Securities Exchange Commission (SEC).
The first phase of the investigation into the acquisition was obtaining appraisals on the several corporations. Commencing in January of 1965 and continuing into the fall of 1965, the appraisal procedure was a complicated and on-going effort involving the provision of pertinent corporate records to the appraisers and, in certain instances, discussion and revising of appraisal figures subsequent to an initial submission. Frank C. Kimball (Kimball), MHS Vice President and General Counsel, in charge of acquisition and administration of real estate, was responsible for obtaining the appraisals. Appraisals were sought from a Mr. Carl H. Hink, Koones and Montgomery, and Jackson-Cross. In certain instances, three appraisals were obtained; in others, two; and in others, appraisals of portions of the owners' interests were sought and the remaining interests valued using either actual construction costs or by capitalizing rental income streams using the same discount rate and methodology employed by the appraisers. Although appraisals made pursuant to several methods were initially obtained, appraisals made under the income method were eventually utilized as more indicative of the market value of these types of properties.
Throughout the period during which the appraisals were being sought, Kimball, upon receiving a specific appraisal or set of appraisals, would make them available to Robert Koehler (Koehler), Vice President and Treasurer of MHS, Barlow and Marriott, Sr. In addition, Koehler compiled and up-dated a schedule of the appraisals and a corresponding schedule of the remaining assets and liabilities of the property corporations. These schedules were made available to the Board's representatives on a periodic basis.
Marriott, Sr. expressed considerable concern that the initial appraisals were too low and not a reflection of the fair value of the six companies. He suggested that Kimball and Koehler notify the appraisers and request re-appraisals in light of certain calculations and assumptions of replacement costs and rental income made by the appraisers which Marriott, Sr. felt were inaccurate. In addition, he requested that appraisals be obtained on the properties assuming that leases presently on the properties were renewed at their competitive rentals. Marriott, Sr. felt that such appraisals would be more reflective of the actual market value of the properties. Such suggestions, as well as various corrections sought by Koehler and Kimball, were given to the appraisers, and amended appraisals were obtained.
On August 10, 1965, the outside directors of the Board voted to acquire the six property companies in a tax-free transaction "on the basis of appraised value of the real estate plus or minus assets and liabilities at July 25, 1965, in exchange for shares of Marriott-Hot Shoppes, Inc. common stock, said common stock to be valued at the price to be determined and approved by the outside directors . . . on September 10, 1965 . . . ." PX-6.6 The transaction would involve the tax free stock-for-stock exchange between MHS and the owners of Parkview, Potomac and Sellers (a "B" reorganization under § 368(a)(1)(B) Internal Revenue Code of 1954) and a statutory merger into MHS of Brentwood, Kirkwood and Woodmar (Section 368(a)(1)(A) Internal Revenue Code of 1954). In addition, the Board decided to retain outside counsel to review the transaction and advise the outside directors regarding the legality and appropriateness of the transaction.
On August 13, 1965, Ansel Luxford, an attorney and partner of the firm of Pehle, Mann, Riemer and Luxford, was employed as counsel for the outside directors. An expert on most of the economic and legal aspects of acquisitions and mergers of this nature, Luxford was to review and examine all pertinent data and render an opinion on the economic and legal propriety of the transaction. Luxford specifically disclaimed any expertise on the question of the valuation of the MHS stock and the magnitude of a blockage discount, and recommended the employment of an expert in that field. After thoroughly examining and analyzing the appraisals in light of methodology and existing market conditions, Luxford concluded that a price between 300,000 and 400,000 shares would be reasonable. He prepared a written report for the outside directors and discussed his conclusions with them at the September 10, 1965 directors meeting. In essence, Luxford felt that the appraisals were most conservative and significant only as a starting point in any determination of fair market value. In his opinion, the appraisers had failed to consider numerous factors pertinent to a realistic determination of a fair price between a willing seller and a willing buyer.7
In response to Luxford's request, Merrill, Lynch, Pierce, Fenner and Smith, Inc., (Merrill-Lynch) was retained to ascertain the fair market value of a block of 350,000 shares of MHS common stock. Merrill-Lynch concluded that although the stock was currently trading at 25¾ bid — 26¼ asked, a block of that size could only be successfully offered through a secondary offering by an underwriting group with a net compensation to the corporation of $20.65 per share at an approximate 20% blockage discount.8
On September 10, 1965, the outside directors met separately to consider the acquisition and merger. After a discussion with Luxford, they voted unanimously to acquire the assets of the six corporations with a net appraised value of $7,760,006 in exchange for 375,000 shares of stock valued at $20.69 per share9. In the subsequent week, it was discovered that there had been an erroneous deletion of a liability of approximately $223,000 for deferred tax obligations...
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