=====================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
SCHEDULE 14D-9
(Amendment No. 48)
SOLICITATION/RECOMMENDATION STATEMENT
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
------------------
ITT CORPORATION
(Name of Subject Company)
------------------
ITT CORPORATION
(Name of Person(s) Filing Statement)
------------------
Common Stock, no par value
(including the associated Series A Participating
Cumulative Preferred Stock Purchase Rights)
(Title of Class of Securities)
450912 10 0
(CUSIP Number of Class of Securities)
------------------
RICHARD S. WARD, Esq.
Executive Vice President,
General Counsel and Corporate Secretary
ITT Corporation
1330 Avenue of the Americas
New York, NY 10019-5490
(212) 258-1000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person(s) Filing Statement)
With a copy to:
PHILIP A. GELSTON, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
(212) 474-1000
<PAGE>
INTRODUCTION
The Solicitation/Recommendation Statement on
Schedule 14D-9 (the "Schedule 14D-9") originally filed on
February 12, 1997, by ITT Corporation, a Nevada corporation
(the "Company"), relates to an offer by HLT Corporation, a
Delaware corporation ("HLT") and a wholly owned subsidiary of
Hilton Hotels Corporation, a Delaware corporation ("Hilton"),
to purchase 65,000,000 shares of the common stock, no par
value (including the associated Series A Participating
Cumulative Preferred Stock Purchase Rights), of the Company.
All capitalized terms used herein without definition have the
respective meanings set forth in the Schedule 14D-9.
Item 8. Additional Information to Be Furnished.
The response to Item 8 is hereby amended by adding
the following after the final paragraph of Item 8:
On November 3, 1997, a complaint (the "Hilton
November 3 Complaint") captioned Hilton Hotels Corporation,
et al. v. Anderson, et al. was filed in the Nevada Federal
Court against the Company, certain members of the Board of
Directors of the Company, Starwood, Starwood Lodging and
Chess Acquisition Corp. A copy of the Hilton November 3
Complaint is filed as Exhibit 124 hereto and is incorporated
herein by reference.
Item 9. Exhibits.
The response to Item 9 is hereby amended by adding
the following new Exhibit:
124. Complaint in Hilton Hotels Corporation, et al. v.
Anderson, et al. dated November 3, 1997.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge
and belief, I certify that the information set forth in this
Statement is true, complete and correct.
ITT CORPORATION
By /s/ RICHARD S. WARD
-------------------------
Name: Richard S. Ward
Title: Executive Vice President,
General Counsel and
Corporate Secretary
Dated as of November 4, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
(124) Complaint in Hilton Hotels Corporation, et
al. v. Anderson, et al. dated November 3,
1997...................................
[Exhibit 124]
SCHRECK MORRIS
STEVE MORRIS
KRISTINA PICKERING
MATTHEW McCAUGHEY
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
(702) 474-9400
WACHTELL, LIPTON, ROSEN & KATZ
BERNARD W. NUSSBAUM
ERICK M. ROTH
MARC WOLINSKY
SCOTT L. BLACK
51 West 52nd Street
New York, New York, 10019
(212) 403-1000
Attorneys for Plaintiffs
HILTON HOTELS CORPORAITON and HLT CORPORATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
- ----------------------------------------
:
HILTON HOTELS CORPORATION and HLT :
CORPORATION, :
:
Plaintiffs, :
:
: CV _____________
-against- :
: VERIFIED COMPLAINT
: FOR DAMAGES,
BETTE B. ANDERSON, RAND V. ARASKOG, : RESCISSION AND
NOLAN D. ARCHIBALD, ROBERT A. : INJUNCTIVE AND
BOWMAN, ROBERT A. BURNETT, PAUL G. : DECLARATORY RELIEF
KIRK, JR., EDWARD C. MEYER, :
BENJAMIN F. PAYTON, VIN WEBER, :
MARGITA E. WHITE, ITT CORPORATION, :
STARWOOD LODGING CORPORATION, :
STARWOOD LODGING TRUST, and CHESS :
ACQUISITION CORP., :
:
Defendants. :
:
- ----------------------------------------:
Plaintiffs Hilton Hotels Corporation ("Hilton") and HLT
Corporation ("HLT"), for their complaint against defendants Bette B.
Anderson, Rand V. Araskog, Nolan D. Archibald, Robert A. Bowman,
Robert A. Burnett, Paul G.
<PAGE>
Kirk, Jr., Edward C. Meyer, Benjamin F. Payton, Vin Weber, Margita E.
White (collectively, the "Director Defendants"); ITT Corporation
("ITT"); and Starwood Lodging Corporation ("Starwood Corp."), Starwood
Lodging Trust ("Starwood Trust") and Chess Acquisition Corp.
(collectively, the "Starwood Defendants"), allege upon knowledge with
respect to their own acts and upon information and belief as to all
other matters, as follows:
NATURE OF THE ACTION
1. Plaintiffs Hilton and HLT bring this action directly and
derivatively to redress the illegal conduct of the Director Defendants
and ITT designed to frustrate any Hilton offer to acquire ITT. As this
Court has already ruled, the Director Defendants have, in order to
entrench themselves in office, sought to impede the voting rights of
ITT shareholders. Since this Court's decision, the Director Defendants
have continued their wrongful conduct and violated their duties of
loyalty and care to the ITT shareholders by agreeing to sell ITT after
a sales "process" that unlawfully excluded Hilton and by agreeing to
pay the victors in that process, the Starwood Defendants, an
unnecessary, excessive and unreasonable "break-up" fee of up to $225
million plus other "expenses." That break-up fee would be payable if,
among other circumstances, Hilton's slate of nominees is elected to
the ITT board at the 1997 annual meeting and goes forward with the
Hilton acquisition of ITT rather than the Starwood transaction. The
unlawful
<PAGE>
break-up fee constitutes a gross waste of corporate assets of ITT as
well as a "poll tax" upon ITT shareholders should they choose to vote
the incumbent directors out of office. As further alleged herein,
since Hilton first announced its bid in January 1997, the Director
Defendants, in breach of their fiduciary duties, have engaged in a
number of acts of corporate waste for the primary purpose of
entrenching themselves and others in positions at ITT and must account
to ITT for the damages caused by this misconduct.
2. This action also seeks injunctive and declaratory relief
by virtue of violations by ITT and the Director Defendants of
disclosure obligations under the federal securities laws. Among other
things, while trumpeting the supposed benefits of the Starwood
transaction, ITT and the Director Defendants have deliberately
obscured significant tax and economic ramifications and risks of that
transaction. These include: (i) tax considerations relating to a $1.5
billion "dividend" that will be paid to the Starwood shareholders
prior to the merger; (ii) the exaggerated emphasis on the purported
tax advantages of the Starwood "grandfathered" paired share structure,
which in fact offers little benefit on the facts of this transaction;
and (iii) the significant risk that Starwood's "grandfathered" tax
structure will be eroded or eliminated by legislative, administrative,
or judicial action as the result of the proposed transaction. ITT has
also failed to disclose that members of ITT management
<PAGE>
holding stock options, including defendants Araskog and Bowman, are
receiving preferential treatment over other ITT shareholders by virtue
of the way in which such options are being treated in the Starwood
transaction.
3. In addition to the damages and declaratory and injunctive
relief sought herein, plaintiffs seek an order rescinding ITT's merger
agreement with the Starwood Defendants, particularly including the
unlawful break-up fee and expense reimbursement provisions contained
therein. Plaintiffs further seek an order declaring that the Director
Defendants may not be indemnified by ITT for any judgments,
settlements, or attorneys' fees in this action and cannot avail
themselves of the exculpatory provision in Article Seventh of the ITT
Restated Articles of Incorporation.
JURISDICTION AND VENUE
4. This Court has jurisdiction over this action pursuant to
28 U.S.C. Sections 1331, 1332(a) and 1337 and 15 U.S.C. Section 78aa.
The amount in controversy is in excess of $75,000, exclusive of
interest and costs.
5. Venue is proper in the unofficial Southern Division of
this District pursuant to 28 U.S.C. Section 1331, 15 U.S.C. Section
78aa and LR IA 8-1.
6. Acts and transactions complained of herein have taken
place and/or are threatened to occur in this District. The wrongful
conduct alleged herein was committed
<PAGE>
through the use of the means and instrumentalities of interstate
commerce and of the mails.
THE PARTIES
7. Hilton is a Delaware corporation with its principal place
of business in Beverly Hills, California. Hilton is a leading owner
and operator of full-service hotels and gaming properties located in
gateway cities, urban and suburban centers and resort areas throughout
the United States and in selected international cities. Hilton is and
at the time of the transactions complained of was the beneficial owner
of over 315,000 ITT shares.
8. HLT is a Delaware corporation with its principal place of
business in Beverly Hills, California. HLT, a wholly-owned subsidiary
of Hilton organized in connection with Hilton's tender offer and the
proposed merger, is and at the time of the transactions complained of
was, the record and beneficial owner of 100 shares of ITT stock.
9. Defendants Bette B. Anderson, Rand V. Araskog, Nolan D.
Archibald, Robert A. Bowman, Robert A. Burnett, Paul G. Kirk, Jr.,
Edward C. Meyer, Benjamin F. Payton, Vin Weber and Margita E. White,
are directors of ITT. Defendants Araskog and Bowman are also officers
of ITT; Araskog is the Chairman of the Board and Chief Executive
Officer of ITT and Bowman is ITT's President and Chief
<PAGE>
Operating Officer. None of the Director Defendants is a
citizen of the State of Delaware or the State of California.
10. Defendant ITT is a Nevada corporation with its principal
place of business in New York, New York. ITT is engaged, through
subsidiaries, in the hospitality, gaming, telephone directories
publishing and post-secondary technical education businesses.
11. Defendant Starwood Corp. is a Maryland corporation with
its principal place of business in Phoenix, Arizona. Starwood Corp.
indirectly operates and manages hotels. Defendant Starwood Trust is a
Maryland real estate investment trust with its principal place of
business in Phoenix, Arizona. Shares of Starwood Corp. and Starwood
Trust are paired and trade together on the New York Stock Exchange.
12. Defendant Chess Acquisition Corp. ("Chess") is a Nevada
corporation with its principal place of business in Phoenix, Arizona.
Defendant Chess is a controlled subsidiary of Starwood Corp. formed
for the purpose of effecting the acquisition of ITT.
DERIVATIVE ACTION ALLEGATIONS
13. Plaintiffs fairly and adequately represent the interests
of the shareholders of ITT in enforcing the right of the corporation.
14. This Court in Hilton Hotels Corp. v. ITT Corp.,
CV-5-97-095-PMP (RLH) ("Hilton I") (order entered
<PAGE>
September 10, 1997) found that Hilton was not required to
make a demand upon the ITT board to cause ITT to bring suit
against the Director Defendants for breach of fiduciary duty
because any such demand would be futile. Demand would be
futile and should be excused in this action because:
(a) The Director Defendants have already been adjudicated
as having acted for the primary purpose of entrenching
themselves in office and are, therefore,
self-interested directors and cannot exercise the
requisite independence to decide to commence an action
to redress the corporate waste and breaches of duty
alleged herein. The Director Defendants expected to
derive a personal financial benefit from transactions
challenged herein, including transactions that were
adopted in furtherance of a scheme to extend their
terms in office without a shareholder vote.
(b) Both the nature of the transactions approved by the
Director Defendants, and the process by which the
directors approved them, make clear that the Director
Defendants' actions are not the product of a valid
exercise of business judgment. For example, the
Director Defendants authorized a sale of ITT to the
Starwood Defendants and an unnecessary,
<PAGE>
excessive and unreasonable break-up fee without even
contacting Hilton, the most logical buyer who had
already pursued ITT for over eight months, to determine
if Hilton would increase or amend its offer. Nor did
the Director Defendants offer during the sales process
to provide Hilton access to nonpublic information that
might justify such an increase or amendment. The
Director Defendants acted in this manner because--as
has been consistently demonstrated--they and the senior
members of ITT management are adamantly opposed to any
Hilton takeover of ITT, regardless of the price and
regardless of the desires or interests of ITT
shareholders. No director exercising reasonable
business judgment in the circumstances presented here
would conduct a sales process that excluded Hilton or
would agree to pay a break-up fee and expense
reimbursements of $250 million to the chosen merger
partner. Moreover, as alleged herein, the Director
Defendants' agreement to the break-up fee impedes the
exercise of ITT shareholders' voting rights at the 1997
ITT annual meeting.
<PAGE>
(c) The Director Defendants have engaged in acts of
corporate waste. For example, the Director Defendants
authorized ITT to sell $550 million in junk bonds at
exorbitant interest rates to finance ITT's now-defunct
Comprehensive Plan, which sale was held on September
19, 1997, just 10 days before this Court was scheduled
to hear argument as to the legality of that Plan. No
director exercising reasonable business judgment would
have caused the corporation to incur this expense with
an adjudication on the Plan only days away. No director
exercising reasonable business judgment would cause an
investment grade company to issue massive amounts of
junk debt or agree, as the Director Defendants have, to
change-in-control provisions that allow valuable
management contracts and franchise agreements to be
terminated in the event the incumbent ITT directors are
replaced without their approval. Nor would any
reasonable board, in the face of an acquisition
proposal, award massive "golden parachutes" as have
been awarded at ITT. The Director Defendants have, in
essence, given away ITT's assets for no consideration.
<PAGE>
(d) The Director Defendants have knowledge of and
participated in and/or approved the wrongs alleged
herein, did so in violation of their duties to ITT and
its shareholders, and failed to take action to protect
ITT or recover amounts due to ITT by virtue of the
misconduct alleged herein.
(e) The Director Defendants have irreconcilable conflicts
of interests regarding the prosecution of this action
as against themselves and cannot exercise the requisite
independence to make a good faith business judgment
whether to prosecute the claims herein in the name of
ITT.
15. This action is not a collusive one to confer
jurisdiction on a court of the United States which it would not
otherwise have.
HILTON'S TENDER OFFER AND PROXY CONTEST
16. On January 27, 1997, Hilton announced its intention to
commence a tender offer pursuant to which Hilton sought to acquire
50.1% of the outstanding shares of ITT stock at $55 per share. Hilton
formally commenced its tender offer on January 31. Hilton also stated
its intention, upon consummation of the tender offer, to acquire the
remaining shares of ITT in a second-step merger in which
<PAGE>
ITT shareholders would receive $55 in Hilton stock for each
ITT share that they own.
17. The Hilton tender offer and second-step merger cannot be
consummated unless the ITT board removes or makes inapplicable ITT's
various anti-takeover devices, including its "poison pill" and the
provisions of the Nevada Control Share Acquisition Statute and
Business Combination Statute. Accordingly, Hilton conditioned its
tender offer upon these takeover defenses being removed or otherwise
rendered inapplicable to the Hilton offer by the ITT board.
18. Because the ITT board of directors has the power to
remove these impediments and permit ITT's shareholders to decide for
themselves whether they want to accept Hilton's tender offer, Hilton
coupled its tender offer with a proxy contest to replace ITT's
incumbent board. On February 11, 1997, in accordance with the
requirements of Section 2.2 of ITT's by-laws, Hilton gave notice to
ITT of its intention to nominate a slate of candidates for election as
directors to the ITT board at the 1997 annual meeting and its
intention to present a resolution urging the Board to arrange a sale
of the company to Hilton or any higher bidder. On March 21, 1997,
Hilton cleared its proxy materials with the SEC and began soliciting
proxies from ITT's shareholders. The Hilton slate is committed,
subject to its fiduciary duties, to remove the obstacles to
consummation of Hilton's tender offer and proposed merger.
<PAGE>
19. On August 6, 1997, Hilton announced an increase in its
offering price to $70 per share. Hilton offered ITT shareholders $70
per share in cash for 50.1% of their shares to be followed by a
second-step merger in which ITT shareholders would receive $70 in
Hilton common stock for each share of ITT stock. On November 3, 1997,
Hilton is announcing a further increase in its bid for ITT. Hilton
will now offer $80 cash per ITT share for 65,000,000 shares, or
approximately 55% of the currently outstanding shares, of ITT common
stock. In the second-step merger, Hilton will offer two Hilton shares
for each remaining ITT share. In addition, in the merger, each ITT
shareholder will receive two shares of Contingent Value Preferred
Stock ("CVPS") designed to guarantee that the Hilton stock being
received by ITT shareholders will be worth at least $40 per share (or
$80 total per ITT share) within one year after the merger. If Hilton
common stock does not reach $40 per share within one year after the
merger, the holders of the CVPS will receive the difference, in cash
or Hilton stock, between $40 and the Hilton stock trading price, up to
a $12 maximum per share of CVPS.
UNLAWFUL CONDUCT IN RESPONSE TO HILTON'S BID
20. The Director Defendants have responded to the Hilton
offer by fiercely opposing the offer; refusing to meet with Hilton
representatives; attempting to deprive shareholders of the ability to
exercise voting rights to
<PAGE>
elect Hilton's slate of nominees to the ITT board; engaging
in gross corporate waste; and causing ITT to make materially
false and misleading public statements.
21. Among other things, the Director Defendants sought to
implement a "Comprehensive Plan"--involving a three-way break up of
the company and imposition of a "staggered board"--before shareholders
would have the opportunity to elect directors at the 1997 Annual
Meeting. In Hilton I, this Court enjoined ITT and its directors from
proceeding with that Plan prior to the Annual Meeting. In so ruling,
the Court stated:
This Court concludes that the structure and timing of ITT's
Comprehensive Plan with its classified board provision for ITT
Destinations, is preclusive and leaves no doubt that the primary
purpose for ITT's proposed implementation of the Comprehensive
Plan before the 1997 annual meeting is to impermissibly impede
the exercise of the shareholder franchise by depriving
shareholders of the opportunity to vote to re-elect or to oust
all or as many of the incumbent ITT directors as they may choose
at the upcoming annual meeting. It has as its primary purpose the
entrenchment of the incumbent ITT board. As a result, the Court
concludes that Hilton has prevailed on the merits of its claim
for permanent injunctive relief. (Emphasis added.)
22. As alleged in detail below, in opposing Hilton's offer,
the Director Defendants have authorized the improper expenditure of
hundreds of millions of dollars of corporate funds and have committed
ITT to enter into disadvantageous contractual arrangements with third
parties. These actions have had the purpose and effect of frustrating
any Hilton bid for ITT and impairing the ability of ITT shareholders
to vote their shares against the re-election of
<PAGE>
the Director Defendants. These actions were taken in
furtherance of the Director Defendants' plan to defeat
Hilton at all costs and were not motivated by any legitimate
corporate business purpose.
Unlawful Conduct Concerning The
Proposed Starwood Transaction
23. Despite the entry of this Court's injunction in Hilton
I, the Director Defendants made it clear that they were still
determined to oppose an acquisition of ITT by Hilton, regardless of
the merits of any offer that Hilton might make. In response to
Hilton's statement following the ruling that it wanted to engage in
merger discussions with ITT, ITT representatives stated that it would
"be a cold day in hell" before the Hilton and ITT chief executives
would meet to discuss a merger and that ITT had "nothing to discuss"
with Hilton. ITT's official press spokesman referred to ITT's ongoing
efforts to defeat Hilton as a "war" and stated, "we have no intention
of losing this war." The Director Defendants and ITT senior management
were not motivated by any good faith business judgment or by the best
interests of ITT or its shareholders, but rather by a desire to assure
that the company that had initiated a hostile takeover would not
succeed.
24. Consistent with this bad faith desire to assure that
Hilton would not prevail, ITT initiated an effort to find a suitor to
acquire ITT. Upon initiating this effort, the Director Defendants had
a duty to proceed
<PAGE>
in a manner genuinely designed to obtain the maximum value
for ITT shareholders. In breach of this duty, the Director
Defendants excluded Hilton from their process even though
they knew that Hilton was and is a highly logical, indeed the
most logical, bidder for ITT and had already pursued ITT for
over eight months. In connection with this effort, ITT
selectively initiated negotiations with certain potential
acquirers and offered to provide and, in fact, provided
non-public information to one or more bidders.
25. In an interview given to USA Today published on October
16, defendant Araskog hinted that such negotiations were underway. In
response, Hilton wrote to the Director Defendants on October 16 to
urge them to cause ITT to engage in merger discussions with Hilton and
not to take any action that would interfere with the upcoming election
of directors. This request was repeated in an October 17 letter to
defendant Araskog. ITT and the Director Defendants did not respond to
either letter.
26. Instead, ITT proceeded to negotiate and execute a merger
agreement with the Starwood Defendants (the "Starwood Agreement"). The
Starwood Agreement is dated as of and was approved by the Director
Defendants on October 19, 1997, and was announced on October 20, 1997.
The Agreement provides for Starwood Corp. to acquire ITT for $15 in
cash per ITT share and newly issued paired shares in Starwood Corp.
and Starwood Trust with a purported value of $67 per ITT share, for a
purported total value to ITT
<PAGE>
shareholders of $82 per share. Because the consideration to
be paid in the acquisition consists overwhelmingly of
Starwood securities whose value is uncertain, among other
reasons, the marketplace has substantially discounted the
claim that the value of the transaction to ITT shareholders
is $82 per ITT share. For the week prior to the announcement
of Hilton's increased $80 per share offer, the average
closing market price of ITT shares was $73.29 per share. The
Starwood transaction is taxable and is subject to
shareholder, gaming, and antitrust approvals.
27. As part of the Starwood Agreement, the Director
Defendants agreed that ITT would pay the Starwood Defendants a
break-up fee of up to $225 million under certain circumstances.
Moreover, in the event of any termination of the Agreement (other than
by a Starwood breach), ITT would be required to pay the Starwood
Defendants' expenses of up to $25 million, plus unlimited financing
and litigation expenses. The payment of the break-up fee would be
required if, for example, the Director Defendants determined to
recommend or accept a superior acquisition proposal from another
acquiror or if (under most circumstances) the ITT shareholders do not
vote to approve the acquisition of ITT by the Starwood Defendants. In
addition, the Starwood Agreement provides that if "nominees of Hilton
Hotels Corporation are elected as a majority of the members of the
Board of Directors of the Company at the Company's 1997 annual meeting
of stockholders" then, should
<PAGE>
such new directors determine to terminate the agreement with
Starwood, the fee of up to $225,000,000 must first be paid.
The effect of this provision is to impose a massive "poll
tax" on ITT shareholders should they decide to elect the
slate committed to the Hilton (rather than the Starwood)
transaction. The imposition of this poll tax is at odds with
this Court's ruling in Hilton I, enjoining ITT and the
Director Defendants from impeding the exercise of the
shareholder franchise at the 1997 annual meeting.
28. There is no valid business purpose for these
unreasonable break-up fees and expenses. As reported in the October
21, 1997 Wall Street Journal, Starwood was the aggressor in pursuing
the acquisition of ITT and Starwood's CEO, Barry S. Sternlicht, was
"dogged" in that pursuit. A Starwood board member was quoted as saying
that Sternlicht "did everything to try to get to [ITT] and convince
them of the merits of working together." Under these circumstances,
the break-up fee and expense provisions were entirely unnecessary and
did not serve as an "inducement" to obtain a bid from a third-party.
Indeed, that third-party, Starwood, was aggressively seeking to bid.
The real reasons for these excessive and unreasonable break-up fee and
expense provisions were to create a significant financial impediment
to any Hilton bid, to penalize ITT shareholders for voting in favor of
a Hilton-nominated slate and to coerce ITT shareholders to vote in
favor of an acquisition of ITT by the Starwood Defendants. The
break-up fee and expense
<PAGE>
provisions were intended to and in fact will impede the ITT
shareholders' exercise of their voting franchise at the 1997
annual meeting at which the contested election of directors
between ITT's slate and Hilton's slate will be held.
29. ITT and the Director Defendants have made false and
misleading public statements seeking to portray the Starwood Agreement
as beneficial to ITT shareholders and superior to Hilton's proposal.
One reason for such statements is to attempt to defeat Hilton's slate
of nominees at the upcoming ITT annual meeting. An example of such a
statement was made by defendant Araskog as part of a joint press
release issued by the Starwood Defendants and ITT on October 20, 1997.
In that press release, defendant Araskog was quoted as stating that
"[t]his is a superb transaction for ITT shareholders, combining the
benefits of Starwood's paired share REIT structure, the extraordinary
fit between Sheraton and Westin [which Starwood has also agreed to
acquire], Starwood Lodging's substantial quarterly cash dividends, and
enormous growth potential under Star wood's leadership." ITT's
statement--particularly its emphasis on the supposed benefits of
Starwood's "paired share REIT structure"--was materially false and
misleading, and failed to disclose material adverse facts concerning
the proposed transaction, as more fully described below.
30. The Starwood Agreement provides for a $1.5 billion
dividend of non-cash property by Starwood Trust to Starwood's
shareholders before consummation of the
<PAGE>
merger. Starwood Corp. will then have the right--which it
intends to exercise--to acquire that $1.5 billion of property
from the shareholders in exchange for stock. The net effect
of these transactions is the transfer of the $1.5 billion in
property from Starwood Trust to Starwood Corp., a transaction
that would normally result in capital gains tax. This
scheme--as ITT's own tax counsel has conceded--is designed to
transfer the $1.5 billion in assets from Starwood Trust to
Starwood Corp. without incurring "hefty" capital gains taxes.
31. Under well-known tax law doctrine pertaining to
so-called "step transactions," if this proposed tax avoidance scheme
is implemented, the IRS could assert that the Starwood Defendants
cannot evade capital gains taxes through this indirect transfer of
$1.5 billion of assets from Starwood Trust to Starwood Corp. The IRS
would have a substantial argument that such taxes should be imposed.
ITT and the Director Defendants have failed to disclose the
substantial contingent liability that the combined company will have
should the planned tax avoidance scheme be implemented.
32. ITT's public statements about the advantages of
Starwood's paired share REIT structure are also misleading because the
tax advantages that normally accrue to such a structure would be
largely inapplicable to Starwood/ITT. Thus, ITT's takeover tax counsel
has stated that the bulk of ITT's assets will be held by Starwood
<PAGE>
Corp., a taxable entity, rather than Starwood Trust, a
tax-advantaged real estate investment trust. Accordingly, as
ITT has failed to disclose, significant tax benefits will not
arise from the transaction unless devices are implemented to
shift taxable income from Starwood Corp. to Starwood Trust.
33. The IRS has ample authority to challenge tax-motivated
value shifting and income shifting devices. Any IRS attack could
substantially reduce, or even eliminate, the tax benefits of
Starwood's "grandfathered" parent-share structure. Indeed, given the
high profile of the proposed transaction and its tax manipulations, it
can be anticipated that the IRS or Congress could take the position
that Starwood has so altered its historic character, and has so abused
its grandfathered tax status, that such status should be considered
abrogated. This risk and the dire economic consequences of any of
these developments for Starwood and its current and future
shareholders have not been disclosed by ITT.
34. ITT's public statements also fail to disclose that
members of ITT management (including directors Araskog and Bowman)
holding stock options would receive consideration in excess of the
consideration being paid to ITT's public shareholders in the Starwood
merger. The Starwood Agreement (P. 5.8) sets forth a formula to be
used, upon the merger, in converting outstanding ITT stock options
into options to purchase Starwood stock. By operation of
<PAGE>
that formula, holders of options to buy ITT shares would
receive options to buy a corresponding number of Starwood
shares as determined by the exchange ratio applicable in the
merger. In determining the exercise price for the options in
Starwood, however, the formula operates to give members of
ITT management holding ITT stock options a benefit beyond the
$15 in cash per ITT share being received by the public
shareholders of ITT. In effect, these option holders will
receive $15 for every Starwood share they will be entitled to
buy by virtue of the conversion of their options, whereas the
public shareholders will receive $15 per share only for the
(smaller) number of ITT shares being exchanged in the merger.
Nowhere does ITT disclose that, by operation of the formula
in the merger agreement, holders of options are receiving
this benefit which (depending upon the ultimate exchange
ratio) would equal $1.40 to $3.87 per ITT share or $12.2
million to $33.7 million in the aggregate.
35. By virtue of this inequitable benefit being received by
defendants Araskog and Bowman as holders of ITT stock options, such
Director Defendants have an additional self-interest in the proposed
Starwood Transactions, and they have violated fiduciary obligations of
loyalty to the public shareholders in agreeing to the Starwood
Agreement. The $12.2 million to $33.7 million of additional
consideration to ITT insiders constitutes another instance of
corporate waste authorized by all the Director Defendants in their
ongoing effort to defeat Hilton's offer.
<PAGE>
Golden Parachutes
36. The Director Defendants have also granted grossly
excessive "golden parachute" agreements to ITT executives. Prior to
February 1997, ITT had a policy of not authorizing "golden parachute"
contracts without a shareholder vote. On February 11, 1997, however,
in violation of this policy, the Director Defendants approved an
amendment to the employment contract of defendant Araskog to provide
for payments upon a change of control (the "Araskog Parachute") as
well as new change in control severance agreements for nine senior
executives and other employees (the "Other Parachutes"). By approving
these amendments, the Director Defendants committed ITT, following a
change of control, to make severance payments to ITT employees of up
to three times their annual compensation and, if the ITT stock price
equals or exceeds $70.93 per share for five consecutive trading days
prior to the change of control, to make "gross-up" payments
reimbursing the ITT employees for the federal excise tax that they
would owe on the amounts received as severance.
37. As approved on February 11, the cost of the Araskog
Parachute to ITT upon a change of control would be approximately $19.8
million, and if the ITT stock price were to reach the $70.93 trigger,
the cost (inclusive of the gross-up payment) would exceed $35 million.
This severance payment, coupled with other payments already due
Araskog upon a change of control, would compensate him in the amount
<PAGE>
of $54.9 million. The cost of the Other Parachutes would
approximate $110 million.
38. On August 14, 1997, the Director Defendants sweetened
the terms of the "golden parachute" contracts they had adopted in
February by, among other things, providing that the excise tax
gross-up payments contained in such contracts would be made in all
events following a change of control (i.e., even if ITT's stock did
not trade at $70.93 for five trading days following a change of
control). Also on August 14, the Director Defendants approved
amendment of the "golden parachute" contracts to provide that, if
disputes regarding ITT's obligation to pay any amounts thereunder go
to arbitration or litigation: the tribunal must presume that the
employee is entitled to the disputed benefits; ITT may overcome this
presumption only upon a showing of "clear and convincing" evidence;
ITT is precluded from asserting that rights and benefits are not
valid, binding or enforceable, and must stipulate that it is bound by
the "golden parachute" provisions; and the tribunal has discretion to
award punitive damages. Finally, on August 14, the Director Defendants
agreed to fund those golden parachute payments through various ITT
employment plans (in order to seek to assure that if Hilton acquires
ITT, it could not prevent ITT from making severance payments to
employees following a change of control).
Change In Control Penalty Provisions
<PAGE>
39. Another series of improper actions constituting
corporate waste by the Director Defendants was their authorization of
the grant by ITT of change-in-control penalty provisions in management
contracts and franchise agreements. According to a September 24, 1997
filing by ITT with the Securities and Exchange Commission, as of that
date, ITT and its subsidiaries had entered into 37 new hotel
management and franchise agreements that contain provisions permitting
the other party to terminate such agreement upon a change of control
resulting from an unsolicited acquisition proposal that was not
approved by the Director Defendants. ITT estimated in the filing that
it would generate aggregate EBITDA of approximately $30 million in
1998 under these 37 agreements.
40. The Director Defendants approved these provisions to
entrench themselves in office and any management and/or licensing fees
lost by virtue of such provisions constitute a gross waste of ITT's
corporate assets.
The CD&R Transaction
41. At a board of directors meeting held July 15, 1997, the
Director Defendants voted to approve ITT's "Comprehensive Plan." That
Plan involved, among other things, the break-up of ITT into three
separate corporations and the spin-off to ITT shareholders of ITT's
hotel and gaming business and its technical school business, leaving
ITT's European telephone directories operation as the sole
<PAGE>
business of the corporate "stub" ("ISI"). As part of ITT's
Plan, the Director Defendants approved an agreement under
which an affiliate of Clayton, Dubilier & Rice ("CD&R")
agreed to purchase approximately 32.9% of the outstanding
common stock of ISI plus warrants to purchase an additional
13.7% of ISI's stock for aggregate consideration of $225
million (the "CD&R Agreement").
42. The CD&R Agreement provides for the payment by ITT to
CD&R of grossly excessive termination fees and expenses upon
termination of the CD&R Agreement. Now that the Comprehensive Plan has
indeed been enjoined and abandoned and ITT has agreed to a merger with
the Starwood Defendants, CD&R can be expected to contend that it is
entitled to a $25 million termination fee plus $4 million in expense
reimbursements to CD&R, equaling a total of 12.9% of CD&R's aggregate
purchase price (had the transaction been effectuated) of $225 million.
The $550 Million Junk Bond Sale
43. One element of the Comprehensive Plan was an ITT
self-tender offer for 25.7% of the company's outstanding shares at $70
cash per share. To finance that transaction, the Director Defendants
approved the incurrence of $4.2 billion of debt at the hotel and
gaming subsidiary to be spun off as part of the Plan and over $1
billion of debt at the European phone book business that would serve
as the "stub" company. By virtue of that debt, upon consummation of
the Comprehensive Plan, ITT would no longer be an
<PAGE>
investment grade credit, but would instead be a "junk bond"
credit.
44. On September 19, 1997, ITT took steps toward
consummation of the Comprehensive Plan by selling $550 million of debt
securities in Europe and the United States. As a subsidiary of ITT,
ITT Promedia, issued $325 million of high-yield notes--the largest
European junk bond offering in history--at an interest rate of 9-1/8%.
Another subsidiary, ITT Publimedia, sold $225 million of junk bonds at
9.375%. While ITT today remains (and was at the time of the issuance)
an investment grade credit, it sold this debt to finance the
Comprehensive Plan at junk bond interest rates well in excess of the
rates available to an investment grade company.
45. At the time of the sale, this Court had scheduled for
September 29, 1997 its hearing on Hilton's motion for injunctive and
declaratory relief in which Hilton sought to have the Comprehensive
Plan, as structured, enjoined. The Director Defendants knew of that
Court hearing date and of the possibility that the Plan might then be
enjoined. Yet, just 10 days before the hearing, ITT proceeded with the
junk bond sale and sold the $550 million of high-yield debt to the
public.
46. Had the Director Defendants waited for the Court
hearing--at which an injunction against the Plan was granted--they
would have known that the Plan could not proceed as planned. Rather
than doing so, the Director
<PAGE>
Defendants saddled ITT, an investment grade issuer, with
massive high-yield debt to finance an entrenchment scheme
that has now been enjoined and abandoned.
47. In addition to their junk-bond interest rates, the $550
million of junk bonds (including both the Promedia and Publimedia
Offerings) have other terms that are highly favorable to the
purchasers (and detrimental to ITT). Among other things, the bonds
contain change-in-control provisions that give the bondholders a
"put," enabling the bondholders to require ITT to redeem the bonds, at
a premium to the bonds' face value, if ITT is acquired. Similarly, ITT
has as a "special redemption option" to redeem all the bonds within 90
days following their issuance, but again at a premium price. These
highly favorable terms were granted to ensure the success of the junk
bond offerings which were to be used to finance the Director
Defendants' Comprehensive Plan entrenchment scheme.
48. The terms of the junk bonds would cause ITT to expend
over $100 million dollars more in interest payments over the life of
the bonds than ITT would normally be required to pay on $550 million
of debt at investment grade rates. By virtue of the terms of the
bonds, ITT will have to pay a premium over face value should the
change in control "puts" or "special redemption option" be exercised.
These expenditures have been authorized by the Director Defendants in
furtherance of a plan, now enjoined and abandoned, to entrench
themselves in office, and constitutes
<PAGE>
a gross waste of corporate assets for which the Director
Defendants should be held liable.
49. In connection with all of the foregoing acts of
corporate waste and breaches of fiduciary duty as alleged herein, the
Director Defendants engaged in acts involving intentional misconduct,
fraud or knowing violations of law and have, further, not acted in
good faith or in a manner reasonably believed to be in or not opposed
to the best interests of the corporation.
FIRST CLAIM FOR RELIEF
(Derivative Claim for Breach of Fiduciary Duty)
50. Plaintiffs repeat and reallege each of the allegations
set forth in paragraphs 1 through 49 hereof.
51. As hereinabove alleged, the Director Defendants have
caused ITT to: (a) agree to sell ITT after a sales process that
unfairly and without justification excluded the single most logical
bidder for the company; (b) agree to pay an unnecessary, excessive and
unreasonable break-up fee to the Starwood Defendants of up to $225
million, plus expenses of up to $25 million and unlimited financing
and litigation expenses; (c) agree to a merger with the Starwood
Defendants that provides inequitable, additional consideration to
holders of ITT stock options over and above the consideration offered
to ITT's public shareholders; (d) award excessive "golden parachute"
contracts to ITT officers and employees, including ITT's CEO Rand V.
Araskog; (e) agree to change-of-
<PAGE>
control penalty provisions in hotel management contracts and franchise
agreements, allowing such ITT management contracts and franchise
agreements to be terminated upon a change of control of ITT not
approved by the Director Defendants; (f) sell in September 1997 $550
million, of high-yield "junk" bonds, including the largest junk bond
sale in the history of the European market, and incur excess interest
and other costs potentially in excess of $100 million, to help finance
ITT's now enjoined and abandoned Comprehensive Plan entrenchment
scheme; and (g) agree to pay CD&R grossly excessive termination fees
and expense reimbursements in connection with the Comprehensive Plan,
amounting to $29 million.
52. These actions were not taken for any legitimate
corporate purposes of ITT, but rather were taken for the primary
purpose of defeating a Hilton offer at all costs, interfering with the
shareholders' electoral franchise, and/or entrenching the Director
Defendants and others in their positions at ITT. A number of these
actions were taken even after this Court issued an injunction against
the Director Defendants' efforts, through their Comprehensive Plan, to
entrench themselves in office by impeding shareholder voting rights.
Accordingly, the Director Defendants have breached, and are continuing
to breach, their fiduciary duties to ITT shareholders.
<PAGE>
53. By virtue of such wrongful conduct, ITT and its
shareholders, including plaintiffs, have suffered damages in an amount
in excess of $500,000,000.
SECOND CLAIM FOR RELIEF
(Derivative Claim for Corporate Waste)
54. Plaintiffs repeat and reallege each of the allegations
set forth in paragraphs 1 through 49 and 51 through 52 hereof.
55. By causing ITT to enter into the transactions referred
to in paragraph 51 above, the Director Defendants have caused the
gross waste of corporate assets of ITT.
56. By virtue of such wrongful conduct, ITT and its
shareholders, including plaintiffs, have suffered damages in an amount
in excess of $500,000,000.
THIRD CLAIM FOR RELIEF
(Rescission, Declaratory Judgment and Injunction)
57. Plaintiffs repeat and reallege each of the allegations
set forth in paragraphs 1 through 49, 51 through 52 and 55 hereof.
58. As hereinabove alleged, the Director Defendants
deliberately conducted a bad faith and biased sales process for ITT
that excluded Hilton. This bad faith "auction" resulted in ITT
entering into a merger agreement with the Starwood Defendants that
includes unnecessary, excessive and unreasonable break-up fee and
expense reimbursement provisions that have the purpose and effect of
creating a substantial impediment to any Hilton acquisition
<PAGE>
of ITT and interfering with the right of ITT shareholders to
vote the Director Defendants out of office at ITT's 1997
annual meeting.
59. The above alleged actions of the Director Defendants
were illegal and ultra vires.
60. By virtue of the foregoing, plaintiffs are entitled to a
judgment rescinding ITT's merger agreement with the Starwood
Defendants and, in particular, the breakup fee provisions in Section
5.7 thereof. Plaintiffs are further entitled to a declaration that the
Starwood Agreement is illegal and ultra vires, and to an injunction
against defendants taking any action in furtherance of such agreement.
61. Plaintiffs have no adequate remedy at law.
FOURTH CLAIM FOR RELIEF
(Injunction and Declaratory Judgment
under Federal Securities Laws)
62. Plaintiffs repeat and reallege each of the allegations
set forth in paragraphs 1 through 49 hereof.
63. As hereinabove alleged, ITT and the Director Defendants
have knowingly and intentionally made false and misleading public
statements concerning the Starwood Agreement designed to misleadingly
portray that Agreement as Beneficial to ITT shareholders and superior
to the Hilton
<PAGE>
proposal for ITT. Among other things, ITT's public
statements:
(a) emphasize the "benefits of Starwood's paired share REIT
structure," but fail to disclose that (i) the $1.5
billion dividend in the transaction is part of a tax
avoidance scheme that is subject to potential challenge
by the IRS and may well result in substantial capital
gain taxes payable by Starwood/ITT; (ii) since Starwood
Corp., rather than Starwood Trust, will hold most of
the assets of the combined enterprise, the tax benefits
of the paired share REIT structure are largely
unavailable here; and (iii) by virtue of this potential
acquisition and the $1.5 billion tax avoidance scheme,
there is a real risk that Starwood's grandfathered tax
status would be challenged by the IRS or Congress; and
(b) fail to disclose the preferential treatment that
members of ITT management owning ITT stock options are
receiving in the merger, resulting in aggregate
additional consideration to those insiders of $12.2
million to $33.7 million.
64. These materially misleading statements were made in
connection with Hilton's tender offer for ITT shares
<PAGE>
and ITT's solicitation of proxies for the election of directors at
ITT's 1997 annual meeting. ITT and the Director Defendants made these
material misstatements and omissions with the deliberate intent to
mislead its shareholders and the investing public generally about the
nature and impact of the Starwood Agreement.
65. By reason of the foregoing, ITT has violated Sections
10(b), 14(a) and 14(e) of the Securities Exchange Act of 1934 and the
rules and regulations thereunder. The members of ITT's board of
directors are controlling persons of ITT under Section 20(a) of the
Securities Exchange Act and are liable for ITT's violations thereof.
66. Plaintiffs are entitled to injunctive relief and a
declaration that ITT and the Director Defendants have violated the
Securities Exchange Act of 1934 and the rules and regulations
thereunder.
67. Plaintiffs have no adequate remedy at law.
FIFTH CLAIM FOR RELIEF
(Declaratory Judgment)
68. Plaintiffs repeat and reallege each of the allegations
set forth in paragraphs 1 through 49, 51 through 53, 55 through 56, 58
through 59 and 63 through 65 hereof.
69. Under Nevada law and the ITT By-Laws, ITT is permitted
to indemnify a director or officer of ITT against certain expenses
incurred in an action, but only on the condition that such individual
acted in good faith and in a manner which he reasonably believed to be
in or not opposed
<PAGE>
to the best interests of the corporation. Further, should
such individual be adjudged by a court of competent
jurisdiction to be liable to the corporation, he or she may
only be indemnified to the extent a court of competent
jurisdiction determines that, in view of all the
circumstances of the case, he or she is fairly and reasonably
entitled to indemnification.
70. The Director Defendants' actions alleged herein were not
made in good faith or in a manner reasonably believed to be in or not
opposed to the best interests of the corporation and, in view of all
the circumstances of the case, the defendants are not fairly and
reasonably entitled to indemnification. Accordingly, plaintiffs are
entitled to a declaration that the defendants may not be indemnified
by ITT for any judgments, settlements, or attorneys' fees, costs or
expenses they incur in this action.
SIXTH CLAIM FOR RELIEF
(Declaratory Judgment)
71. Plaintiffs repeat and reallege each of the allegations
set forth in paragraphs 1 through 49, 51 through 53, 55 through 56, 58
through 59, 63 through 65 and 69 through 70 hereof.
72. Article Seventh of ITT's Restated Articles of
Incorporation, provides, in pertinent part, that "[t]o the fullest
extent permitted by applicable law as then in effect, no director or
officer shall be personally liable to the Corporation or any of its
stockholders for damages for
<PAGE>
breach of fiduciary duty as a director or officer, except for
liability . . . for acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law.
. . ."
73. The Director Defendants' actions alleged herein involve
intentional misconduct, fraud or a knowing violation of law.
Accordingly, plaintiffs are entitled to a declaration that the
Director Defendants cannot avail themselves of the exculpatory
provision in Article Seventh of the ITT Restated Articles of
Incorporation.
WHEREFORE, plaintiffs Hilton and HLT seek judgment against
defendants:
(a) Requiring the Director Defendants to pay compensatory
damages to ITT Corporation in an amount not less than
$500,000,000, plus interest and costs;
(b) Rescinding the merger agreement between ITT and the
Starwood Defendants, including the break-up fee and
expense reimbursement provisions thereof;
(c) Declaring that the Starwood Agreement, including its
break-up fee and expense reimbursement provisions, is
illegal and ultra vires and enjoining the defendants or
any of them or their representatives from taking any
steps in furtherance of or to implement that Agreement;
<PAGE>
(d) Declaring that ITT and the Director Defendants have
violated the Securities Exchange Act of 1934 and the
rules and regulations thereunder, ordering them to make
corrective disclosure and enjoining them from making or
disseminating further false and misleading public
statements;
(e) Invalidating any proxies obtained by or voted in favor
of the Director Defendants;
(f) Declaring that the Director Defendants are not entitled
to be indemnified by ITT Corporation or any affiliate
or subsidiary thereof for any judgments, settlements,
attorneys' fees, costs or expenses incurred in this
action;
(g) Declaring that the Director Defendants are not entitled
to exculpation under Article Seventh of ITT's Restated
Articles of Incorporation or any other provision;
(h) Awarding plaintiffs their reasonable costs and expenses
in prosecuting this action, including attorneys' fees;
and
<PAGE>
(i) For such other relief as may be just and proper.
Dated: November 3, 1997
WACHTELL, LIPTON, ROSEN & KATZ,
By: /s/ Bernard W. Nussbaum
-------------------------------
BERNARD W. NUSSBAUM
ERIC M. ROTH
MARC WOLINSKY
SCOTT L. BLACK
51 West 52nd Street
New York, NY 10019
(212) 403-1000
SCHRECK MORRIS
STEVE MORRIS
KRISTINA PICKERING
MATTHEW McCAUGHEY
1200 Bank of America Plaza 300
South Fourth Street Las Vegas, NV 89101
(702) 474-9400
Attorneys for Plaintiffs
HILTON HOTELS CORPORATION and
HLT CORPORATION
<PAGE>
VERIFICATION
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
STEPHEN BOLLENBACH, being duly sworn, states that he is the
President and Chief Executive Officer of plaintiff Hilton Hotels
Corporation and that the allegations of the foregoing Verified
Complaint for Damages, Rescission and Injunctive and Declaratory
Relief are true as to his own knowledge, except as to matters therein
alleged on information and belief and that as to those matters he
believes such allegation to be true.
/s/ Stephen Bollenbach
------------------------
STEPHEN BOLLENBACH
Sworn to before me this
day of November, 1997
/s/ Marva Richard
-------------------
Notary Public
MARVA RICHARD
Notary Public, State of New York
No. 4692107
Qualified in New York County
Commission Expires February 28, 1998
