SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
(Amendment No. 26)
SOLICITATION/RECOMMENDATION STATEMENT
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
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ITT CORPORATION
(Name of Subject Company)
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ITT CORPORATION
(Name of Person(s) Filing Statement)
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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 61,145,475 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.
On August 5, 1997, Hilton filed answers and counterclaims
(the "Hilton Answer and Counterclaims") in the Nevada Federal Court in
respect of the complaint (the "Company Complaint") filed by the
Company concurrent with the announcement of the Comprehensive Plan. In
addition, on August 5, 1997, the Company filed in the Nevada Federal
Court a reply memorandum of points and authorities (the "ITT Reply
Memorandum") in support of its motion to dismiss counts III-VII of the
Amended Hilton Complaint. A copy of the Hilton Answer and
Counterclaims and the ITT Reply Memorandum are filed as Exhibits 82
and 83 hereto, respectively, and are incorporated herein by reference.
Item 9. Exhibits.
The response to Item 9 is hereby amended by adding the
following new exhibit:
82. Hilton Answer and Counterclaims dated
August 5, 1997.
83. ITT's Reply Memorandum of Points and
Authorities in Support of its Motion to
Dismiss Counts III-VII of the First
Supplemental Complaint, or in the
Alternative, for Partial Summary Judgment
dated August 5, 1997. (Confidential
information redacted for public
disclosure.)
<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 August 8, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
(82) Hilton Answer and Counterclaims dated
August 5, 1997.........................
(83) ITT's Reply Memorandum of Points and
Authorities in Support of its Motion to
Dismiss Counts III-VII of the First
Supplemental Complaint, or in the
Alternative, for Partial Summary Judgment
dated August 5, 1997. (Confidential
information redacted for public
disclosure.)...........................
[Exhibit 82]
SCHRECK MORRIS
STEVE MORRIS
M. KRISTINA PICKERING
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
(702) 474-9400
WACHTELL, LIPTON, ROSEN & KATZ
BERNARD W. NUSSBAUM
KENNETH B. FORREST
ERIC M. ROTH
MARC WOLINSKY
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
HILTON HOTELS CORPORATION and HLT CORPORATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, ) CV-S-97-00893-DWH (RLH)
)
-vs- )
)
HILTON HOTELS CORPORATION ) ANSWER AND COUNTERCLAIMS
and HLT CORPORATION, )
)
Defendants. )
)
- --------------------------------)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Counterclaimants, )
)
-vs- )
)
ITT CORPORATION, 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, )
)
Counterclaim Defendants. )
)
<PAGE>
Defendants Hilton Hotels Corporation ("Hilton") and HLT
Corporation (collectively, "defendants"), by their undersigned
attorneys, make the following responses to the allegations of the
Complaint for Declaratory Relief (the "Complaint") filed on July 16,
1997:
1. Defendants deny the allegations of Paragraph 1 of the
Complaint, except admit that the ITT Board of Directors has approved a
so-called Comprehensive Plan involving the spinoff of ITT businesses
and the repurchase of equity and debt.
2. Defendants deny the allegations of Paragraph 2 of the
Complaint, except admit that Hilton is likely to challenge and, by its
Counterclaims, is challenging ITT's implementation of its
Comprehensive Plan, and that ITT is seeking declaratory relief.
3. Defendants admit the allegations of Paragraph 3 of the
Complaint.
4. Defendants admit the allegations of Paragraph 4 of the
Complaint.
5. Defendants admit the allegations of Paragraph 5 of the
Complaint.
6. Defendants admit the allegations of Paragraph 6 of the
Complaint.
7. Defendants admit the allegations of Paragraph 7 of the
Complaint.
8. Defendants admit the allegations of Paragraph 8 of the
Complaint.
9. Defendants admit the allegations of Paragraph 9 of the
Complaint.
<PAGE>
10. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations of Paragraph 10 of
the Complaint.
11. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations of the first sentence
of Paragraph 11 of the Complaint, admit that ITT's stock has traded
above the offer price every day since Hilton's announcement and that,
as of June 27, 1997, approximately 1.3 mill-ion ITT shares had been
tendered to Hilton, and deny the remaining allegations of the
paragraph.
12. Defendants deny the allegations of Paragraph 12 of the
Complaint.
13. Defendants deny the allegations of Paragraph 13 of the
Complaint, except admit that Hilton has stated that, if its proposed
merger with ITT is completed, it may sell or license the Sheraton
brand name to HFS Incorporated ("HFS"), and deny knowledge or
information sufficient to form a belief as to the truth of the
allegations of the last sentence of the paragraph.
14. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations of Paragraph 14 of
the Complaint.
15. Defendants deny the allegations of Paragraph 15 of the
Complaint.
16. Defendants admit the allegations of the first and
second sentences of Paragraph 16 of the Complaint and deny knowledge
or information sufficient to form a belief as to the truth of the
remaining allegations of the paragraph.
<PAGE>
17. Defendants deny the allegations of Paragraph 17 of the
Complaint.
18. Defendants deny the allegations of the first sentence
of Paragraph 18 of the Complaint, and deny knowledge or information
sufficient to form a belief as to the truth of the remaining
allegations of the paragraph.
19. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations of Paragraph 19 of
the Complaint.
20. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations of Paragraph 20 of
the Complaint, except to admit that FelCor acquired five of ITT's
hotels and ITT entered into contracts to manage such hotels.
21. Defendants deny the allegations of Paragraph 21 of the
Complaint, except admit that ITT has adopted portions of Hilton's plan
for ITT.
22. Defendants deny the allegations of Paragraph 22 of the
Complaint, except admit that the elements of the Comprehensive Plan
include the matters alleged in the second sentence of that paragraph.
23. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations of Paragraph 23 of
the Complaint, except admit that 9 of the 11 members of the ITT Board
are not officers of the corporation.
24. Defendants deny the allegations of Paragraph 24 of the
Complaint and aver that the ITT Board has acted on an uninformed basis
and in bad faith.
<PAGE>
25. Defendants deny the allegations of Paragraph 25 of the
Complaint and aver that the ITT Board has acted on an uninformed basis
and in bad faith.
26. Defendants deny the allegations of Paragraph 26 of the
Complaint, except deny knowledge or information as to whether any
Sheraton owners and franchisees have expressed concern that Hilton may
reflag Sheraton properties under the Hilton name or that HFS will take
over Sheraton's management contracts, and aver that the ITT Board has
acted on an uninformed basis and in bad faith.
27. Defendants deny knowledge or information as to what the
Board "believes" regarding the Equity Repurchase and deny the
remaining allegations of Paragraph 27 of the Complaint.
28. Defendants deny knowledge or information as to what the
Board "believes" regarding the Debt Repurchase and deny the remaining
allegations of Paragraph 28 of the Complaint.
29. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations of Paragraph 29 of
the Complaint and aver that the corporate "governance mechanisms" that
the ITT Board reportedly has approved, including the provision for a
classified board of directors, represent an unreasonable response to
the Hilton offer and are designed and intended to entrench the current
directors and officers of ITT and frustrate the shareholders' exercise
of their corporate franchise, and that the "governance mechanisms"
were adopted in bad faith and on an uninformed basis.
30. Defendants state that no response is required to the
first sentence of Paragraph 30 of the Complaint since said sentence
states a legal conclusion; and deny knowledge or information
<PAGE>
sufficient to form a belief as to the truth of the allegations of the
second, third, fourth, fifth, sixth, seventh and eighth sentences of
that paragraph, except admit that Hilton's charter has a classified
board provision (which was adopted by shareholder vote) and that when
Old ITT's forestry products subsidiary was spun off in 1994, the
charter of the new company included a classified board provision
(which was adopted by shareholder vote).
31. Defendants deny the allegations of Paragraph 31 of the
Complaint and aver that the "classified board" reportedly adopted by
ITT for Destinations represents an unreasonable response to the Hilton
offer and is designed and intended to entrench the current directors
and officers of ITT and frustrate the shareholders' exercise of their
corporate franchise and that the "classified board" provision was
adopted in bad faith and on an uninformed basis.
32. Defendants deny the allegations of Paragraph 32 of the
Complaint.
33. Defendants admit the allegation in Paragraph 33 of the
Complaint that there is an immediate controversy between Hilton and
ITT concerning the legality of plaintiffs' actions and deny the
allegation concerning the "merits of the Plan".
34. Defendants deny the allegations of the first sentence
of Paragraph 34 of the Complaint, except admit that defendants have
moved for injunctive relief on three separate occasions in the action
entitled Hilton Hotels Corp. v. ITT Corp., CV-S-97-00095-PMP (RLH),
and have amended and supplemented their complaint in that action, and
refer the Court to the pleadings defendants have filed in that action
for the contents thereof.
<PAGE>
35. Defendants admit the allegations of Paragraph 35 of the
Complaint.
COUNT ONE
(Declaratory Relief)
36. Defendants repeat and reallege their responses to each
of the allegations of Paragraphs 1 through 35 of the Complaint.
37. Defendants admit that they allege that the Plan
violates the Board's fiduciary duties and deny the remaining
allegations of Paragraph 37 of the Complaint.
38. Defendants deny the allegations of Paragraph 38 of the
Complaint.
39. Defendants deny the allegations of Paragraph 39 of the
Complaint.
40. Defendants deny the allegations of Paragraph 40 of the
Complaint.
41. Defendants deny the allegations of Paragraph 41 of the
Complaint.
42. Defendants deny the allegations of Paragraph 42 of the
Complaint.
43. Defendants admit the allegation of Paragraph 43 of the
Complaint that an actual controversy exists between ITT and Hilton.
44. Defendants admit the allegation of Paragraph 44 of the
Complaint that plaintiffs seek declaratory relief and aver that the
ITT Board has acted outside its powers, has breached its fiduciary
duty to ITT shareholders, has unlawfully impeded the
<PAGE>
shareholders' exercise of their corporate franchise, and has acted on
an uninformed basis and in bad faith.
COUNT TWO
(Declaratory Relief)
45. Defendants repeat and reallege their answers to each of
the allegations of Paragraphs 1 through 44 of the Complaint.
46. Defendants deny the allegations of Paragraph 46 of the
Complaint.
47. Defendants deny the allegations of Paragraph 47 of the
Complaint.
48. Defendants admit the allegation of Paragraph 48 of the
Complaint that an actual controversy exists between ITT and Hilton.
49. Defendants admit the allegations of Paragraph 49 of the
Complaint that plaintiffs seek declaratory relief and aver that Hilton
has standing to challenge the unlawful actions of ITT and its
incumbent directors.
FIRST AFFIRMATIVE DEFENSE
50. The Complaint fails to state a claim upon which relief
can be granted.
SECOND AFFIRMATIVE DEFENSE
51. Plaintiffs' claims for relief are barred by the
doctrine of unclean hands.
THIRD AFFIRMATIVE DEFENSE
52. Plaintiffs' claims for relief are barred by the
doctrine of estoppel.
<PAGE>
COUNTERCLAIMS
Defendants and counterclaimants Hilton Hotels Corporation
("Hilton") and HLT Corporation ("HLT"), for their counterclaims
against plaintiffs ITT Corporation ("ITT"), 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, allege upon knowledge with respect to their own acts
and upon information and belief as to all other matters, as follows:
NATURE OF THE COUNTERCLAIMS
1. On January 31, 1997, Hilton commenced a tender offer
for the stock of plaintiff ITT Corporation ("ITT") at $5 per share.
Hilton also announced its intention to conduct a proxy contest at
ITT's 1997 Annual Meeting so as to give ITT shareholders the
opportunity to decide for themselves whether they want ITT to pursue a
transaction with Hilton or remain independent. These counterclaims
are brought for injunctive and declaratory relief to redress a
wrongful course of conduct by the ITT Board of Directors. That course
of conduct is designed to deprive ITT shareholders of the opportunity
to receive the benefits of Hilton's tender offer and proposed second-
step merger. It is also designed to eliminate the ability of ITT's
shareholders to meaningfully exercise their corporate franchise -- to
prevent them from exercising their basic right to turn incumbent
directors out of office if they so desire.
2. The ITT Board's wrongful course of conduct culminated
in a July 16, 1997 announcement of the Board's adoption of a
"Comprehensive Plan." Under the Plan, ITT intends to split itself
into three separate, publicly owned companies through spin-
<PAGE>
offs of its "core" hotel and gaming business as well as its technical
school business. After the spin-offs are complete, the sole remaining
business of the present ITT Corporation will be telephone directory
publishing, and effective control of that corporation will be sold to
a leveraged buy-out firm.
3. ITT has publicly denied that the Board's adoption of
the Comprehensive Plan was prompted by Hilton's tender offer and has,
instead, touted the Plan as a means to "sharpen ITT's strategic focus
and enhance shareholder value." These statements are false. Were it
not for Hilton's tender offer, the ITT Board would not have adopted
the Comprehensive Plan, and the Plan was not adopted to "enhance
shareholder value." Rather, the Plan is an elaborate entrenchment
scheme designed to (i) deprive ITT shareholders of their fundamental
right to decide for themselves who shall govern their corporation and
what its future should be; (ii) prevent Hilton at all costs from
acquiring control of ITT; and (iii) maximize the job security of ITT's
senior management. Thus:
(a) The Comprehensive Plan will not be put to a vote of the
ITT shareholders, unlike the 1995 spin-off that
resulted in the creation of the current ITT. Instead,
having already delayed its Annual Meeting for six
months until November 1997, ITT is racing to consummate
the Plan by late September 1997. The incumbent ITT
directors are thus manipulating the voting machinery to
deprive their shareholders of any meaningful
opportunity, before the Plan is consummated, to choose
between the two competing
<PAGE>
proposals and the states of nominees supporting them.
(b) The Comprehensive Plan is structured to prevent ITT's
shareholders from voting to transfer control of ITT's
"core" hotel and gaming assets to Hilton even after the
Plan's consummation. ITT Destinations, Inc.
("Destinations"), the new company formed to hold ITT's
hotel and gaming assets, will be armed with every
conceivable takeover defense. Most significantly,
unlike ITT's articles of incorporation, Destinations'
articles of incorporation will include a "staggered
board" provision whereby only one-third of the
directors will stand for election each year. If the
spin-off of Destinations is accomplished, ITT will have
effected a de facto amendment of its articles of
incorporation without a shareholder vote, and
Destinations' shareholders will not have the ability to
replace a majority of the Destinations directors with
Hilton's nominees at the new company's next annual
meeting.
(c) The Comprehensive Plan also threatens to saddle ITT and
its shareholders with a massive tax liability. While
ITT claims that the spin-offs will be tax-free
transactions, it has decided not to obtain an IRS
ruling because such a ruling cannot be obtained before
the November 1997 deadline for holding ITT's Annual
Meeting. ITT plans instead to rely solely
<PAGE>
upon a tax opinion letter from the same law firm that
has been providing it with advice in defending against
the Hilton takeover. If this opinion turns out to be
wrong, ITT will be exposed to a $1.4 billion tax
liability and ITT's shareholders will be exposed to an
additional $1.4 billion tax liability. Even if that
opinion turns out to be correct, the Comprehensive Plan
deliberately imposes a potentially massive tax-related
barrier to Hilton's acquisition of Destinations. Under
existing federal tax laws and recently passed tax
legislation, even if the spin-off of Destinations is
tax-free, Hilton's acquisition of Destinations after
the spin-off could make the spin-off taxable, resulting
in the incurrence of billions of dollars in tax
liability. By virtue of these factors, among others,
the Plan is an unlawfully preclusive response to
Hilton's offer.
For these and other reasons detailed below, the Comprehensive Plan
constitutes (i) an unlawful manipulation of the corporate electoral
machinery, (ii) an illegal attempt to amend ITT's articles of
incorporation without a shareholder vote, and (iii) an unreasonable
response to any "threat" allegedly posed by Hilton's tender offer.
4. The adoption of the Comprehensive Plan also constitutes
an impermissible attempt to deprive ITT shareholders of the maximum
value attainable for their shares. Before authorizing a break-up of
ITT and the sale of a controlling interest in the company, it was
incumbent upon the ITT Board of Directors to seek
<PAGE>
to obtain the highest value reasonably obtainable for shareholders.
In pursuing this objective, the ITT Board was obligated to obtain all
material information reasonably available to them. The ITT Board of
Directors has failed to perform these duties. Hilton has repeatedly
stated that it would consider raising its bid if given access to non-
public information. It has requested the opportunity to meet with ITT
to discuss the terms of its bid. The ITT Board has never responded to
Hilton and never sought to ascertain what Hilton's highest price was.
The ITT Board has tried to justify its rejection of the Hilton bid and
its support for the Comprehensive Plan by pointing to certain "issues"
purportedly raised by Hilton's bid. But the Board has never requested
any information from Hilton pertaining to any of these supposed
"issues". Rather, the ITT Board has acted to entrench ITT's current
management, even if it means trampling on the shareholders' right to
control the destiny of their company by voting the incumbent directors
out of office.
JURISDICTION AND VENUE
5. This Court has jurisdiction over these Counterclaims
pursuant to 28 U.S.C. ss.ss. 1331, 1332(a) and 1337 and 15 U.S.C. ss. 78aa.
The amount in controversy is in excess of $75,000, exclusive of
interest and costs.
6. Venue is proper in the unofficial Southern Division of
this District pursuant to 28 U.S.C. ss. 1391, 15 U.S.C. ss. 78aa and LR IA
8-1.
THE PARTIES
7. Hilton is a Delaware corporation with its principal
executive offices in Beverly Hills, California. Hilton is a leading
owner and operator of full-service hotels and gaming
<PAGE>
properties located in gateway cities, urban and suburban centers and
resort areas throughout the United States and in selected
international cities. Hilton is 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 the record and beneficial owner of
100 shares of ITT stock.
9. ITT is a Nevada corporation with its principal
executive offices in New York, New York. ITT is engaged, through
subsidiaries, in the hospitality, gaming, telephone directories
publishing and post-secondary technical education businesses.
10. Rand V. Araskog is Chairman of the Board and Chief
Executive Officer of ITT and a citizen of the State of New York.
11. Robert A. Bowman is ITT's President and Chief Operating
Officer and a member of the ITT Board of Directors. Bowman is a
citizen of the State of New York.
12. Bette B. Anderson, Nolan D. Archibald, Robert A.
Burnett, Paul G. Kirk, Jr., Edward C. Meyer, Benjamin F. Payton, Vin
Weber, and Margita E. White, are directors of ITT. None of these
directors is a citizen of the State of Delaware or the State of
California.
Hilton's Tender Offer
13. In the last quarter of 1996, Hilton contacted one of
ITT's principal financial advisers to determine whether ITT would be
interested in pursuing a business combination with Hilton. The
<PAGE>
ITT adviser reported back that ITT had no interest in pursuing such a
combination.
14. On January 27, 1997, Hilton announced its intention to
commence a tender offer pursuant to which Hilton is seeking to acquire
50.1% of the outstanding shares of ITT stock at $55 per share.
Hilton's announcement stated that its offer was based solely on public
information and that a review of ITT's non-public information could
result in an even higher bid. Hilton formally commenced its tender
offer on January 31. Upon consummation of the tender offer, Hilton
intends to acquire the remaining shares of ITT in a second-step merger
in which ITT shareholders will receive $55 in Hilton stock for each
ITT share that they own.
15. Hilton's January 27 announcement made clear that, while
ITT is a diversified conglomerate, Hilton's interest in ITT focused on
its hotel and gaming assets. Thus, in the January 27 announcement,
Hilton stated that it believed that the "combination of ITT and Hilton
would bring together two of the world's leading lodging companies as
well as two premier gaming businesses" and that "ITT's owned full-
service hotel portfolio, along with its major gaming presence in Las
Vegas, Atlantic City and other jurisdictions, fits perfectly with
[Hilton's] stated growth objectives." Hilton's announcement added
that, if it acquired control of ITT, it would "carefully review" ITT's
remaining businesses and that "the monetization of [those]
nonstrategic assets, and a focus on the company's core business lines"
would "create even more value for the shareholders of the combined
companies."
<PAGE>
16. ITT has a number of anti-takeover provisions in place,
including its Shareholder Rights Plan, better known as a "poison
pill." In the event that a third-party like Hilton acquires 15% or
more of ITT's shares, the "poison pill" enables all ITT shareholders
other than the third-party to purchase ITT preferred shares at a 50%
discount from market value. ITT's former corporate parent has
publicly acknowledged that the "poison pill" "may render an
unsolicited takeover of [ITT] more difficult or less likely to occur
or might prevent such a takeover, even though such takeover may offer
[ITT's] shareholders the opportunity to sell their stock at a price
above the prevailing market rate and may be favored by a majority of
the shareholders of [ITT]."
17. ITT also has the anti-takeover protections of Nevada
Rev. Statutes ss.ss. 78.378 et seq. (the "Control Share Acquisition
Statute") and Nevada Rev. Statutes ss.ss. 78.411 et seq. (the "Business
Combination Statute"). ITT's former corporate parent has publicly
acknowledged that the Control Share Acquisition and Business
Combination Statutes "may delay or make more difficult acquisitions or
changes of control of [ITT]", "may have the effect of preventing
changes in the management of [ITT]" and "could make it more difficult
to accomplish transactions which [ITT] shareholders may otherwise deem
to be in their best interests."
18. 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 Control Share Acquisition Statute and the
Business Combination Statute. Accordingly, Hilton has conditioned its
tender offer upon these takeover defenses being
<PAGE>
removed or otherwise rendered inapplicable to the Hilton offer by the
ITT Board.
19. 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
has 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 proposed tender offer and merger.
The ITT Board Rejects the
Hilton Bid and Begins the
Liquidation of ITT
20. The ITT Board of Directors formally rejected Hilton's
offer on February 11, 1997. Despite the superior value offered by
Hilton -- reflected in the 29% premium to the market value of ITT
stock immediately prior to the announcement of the offer -- the ITT
Board determined that the tender offer was "inadequate and not in the
best interests of [ITT]." The Board's rejection of the Hilton offer
was hasty and ill-informed. While the Board attempted to justify its
rejection of the offer by citing "uncertainties as to the actual
value" of the Hilton securities to
<PAGE>
be offered in the proposed second-step merger and the "lack of
sufficient disclosure in Hilton's tender offer," the ITT Board did not
ask Hilton to provide any additional information. Moreover, although
Hilton had stated that a review of ITT's non-public information could
result in an even higher offer, the ITT Board did not give Hilton the
opportunity to review any such information. Since February 11, the
ITT Board has rejected Hilton's repeated requests to meet with ITT to
negotiate its bid and has actively sought to place obstacles in front
of the bid.
21. Rather than removing the impediments to Hilton's bid or
accepting Hilton's invitation to negotiate, the ITT Board of Directors
authorized management to engage in a series of transactions which
collectively amount to an abandonment of ITT's long-term strategy and
a break-up of the company. Commencing on February 14, 1997, ITT
embarked on a number of transactions designed to dispose of assets
outside of its "core" hotel and casino businesses. These transactions
included the sale of ITT's 7.5 million shares of Alcatel Alsthom for
approximately $830 million, the sale of ITT's 50% interest in Madison
Square Garden arena cable network and related sports franchises for
approximately $650 million, and the sale of its interest in WBIS+, a
New York television station, for $128.8 million.
22. On or about April 11, 1997, ITT filed its 1996 Annual
Report with the SEC. The cover of ITT's Annual Report, stated in
large, bold print -- "Fellow Shareholders: The issue is creating
shareholder value." Inside the Annual Report, plaintiff Araskog's
letter to shareholders stated that the ITT Board had "recognized the
need to monetize or otherwise realize the value of
<PAGE>
[ITT's] non-core assets in a more accelerated fashion than management
had originally planned," but that the company would be "focusing on
lodging and gaming, and creating value for [its] shareholders."
Shortly after the Annual Report was filed, however, the Senior Vice
President of ITT in charge of its hotel business was quoted in a hotel
trade journal as follows: "The battle with Hilton, currently 'at the
bottom of the first inning . . . is not a question of higher price.
Losing this thing is not an option. . . . We're going to win this. I
intend to retire from ITT Sheraton eight years from now at age 65. We
are committed to that.'" Recent actions by ITT confirm that
defendants are not focused on "creating shareholder value" and that it
is "not a question of price"; indeed, defendants have now embarked on
a scheme to make ITT takeover-proof even at the cost of destroying
shareholder value and violating shareholder democracy.
ITT's Disposition of "Core" Assets
23. Seeking to drive Hilton away, in the spring of 1997,
ITT embarked upon a scheme to dispose of ITT's "core" hotel assets in
a fashion that threatens to preclude Hilton or any other potential
bidder from acquiring control of ITT without the consent of the
incumbent ITT board. On May 19, 1997, ITT and FelCor Suites Hotels,
Inc. ("FelCor"), a Dallas-based real estate investment trust,
announced the creation of a "long term strategic alliance" beginning
with an agreement in principle for FelCor to purchase five hotels from
ITT for $200 million. The proposed transaction called for ITT to
receive additional consideration in the form of a management contract
which allows ITT to manage the hotels for a period of 20 years. The
proposed management agreement would
<PAGE>
include a change of control penalty provision entitling FelCor to
terminate ITT's right to manage the hotels -- and terminate its
obligation to pay management fees to ITT -- in the event of a change
of control of ITT that is not approved by the incumbent directors.
The existence of this provision was concealed by ITT when it announced
the agreement in principle with FelCor.
24. On June 3, 1997, The Wall Street Journal reported that,
according to "people familiar with decisions," ITT is entertaining
bids for several of its "crown jewel" hotels, while "demanding that
purchasers of the marquee properties sign management contracts with
ITT" including change of control penalty provisions. The Journal
article quoted ITT sources as saying that the company is now willing
to sell any of its hotels for "the right price and if they can retain
a management contract." The article also quoted an ITT spokesman to
the effect that an "overwhelming majority" of the 58 hotels that ITT
has added to its roster of managed hotels this year could legally
switch their contracts to other companies if ITT were taken over. A
noted hotel consultant characterized the change of control penalty
provisions as an "esoteric and kind of powerful" anti-takeover
provision. A follow-up article in the June 4, 1997 issue of The Wall
Street Journal reported that ITT's strategy was to sell "its most
prized hotels" and thereby transform itself into "primarily a hotel-
management company."
25. In two separate letters to the ITT Board of Directors
dated June 2 and June 9, Hilton's President and Chief Executive
Officer, Stephen F. Bollenbach, objected to ITT's placement of change
of control provisions in the FelCor and other
<PAGE>
management contracts, as well as its threatened sale of "crown jewel"
properties on similar terms. Mr. Bollenbach advised the ITT Board
that Hilton was a "ready, willing and able buyer for ITT's core
assets," that Hilton could offer more for those assets than any other
qualified purchaser, and that Hilton would not require any change of
control penalty provisions in any management contract with ITT.
26. Without responding to either of Mr. Bollenbach's
letters, ITT entered into definitive agreements with FelCor and
proceeded to close the transaction. Under its management agreement
with ITT, FelCor's affiliate has the option to terminate the
management contract 30 days after a "Change of Control" -- defined as
(i) the acquisition of more than 35% of ITT's voting stock within
two years after a tender offer or proxy solicitation by the acquiror
if the tender offer or proxy solicitation was not approved by a
majority of the ITT directors in office at the time it was commenced,
or (ii) the election of a majority of the ITT Board of Directors
pursuant to a solicitation of proxies from ITT shareholders if the
solicitation was not approved by a majority of the ITT directors in
office at the time it was commenced.
27. The change of control penalty provisions do not serve
any legitimate purpose of FelCor or other potential purchasers of ITT
assets. Indeed, FelCor's right of termination arises only if the
incumbent ITT Board permits it to arise. It arises only if control of
ITT is transferred without approval by a majority of the incumbent
directors; in such instance, FelCor has a right to terminate its
management contract even if the acquiror is a world-class operator of
hotels, such as Hilton. But if ITT's
<PAGE>
incumbent Board decides to sell control of the company to a wholly
incompetent hotel operator, FelCor has no right to terminate as a
result.
28. The change of control penalty provisions in ITT's
proposed management agreements are a "poison pill" designed to destroy
the value of ITT to Hilton or any other unwanted acquiror of ITT.
They are an entrenchment device that would operate to destroy the
value of key ITT assets in the hands of anyone other than the
incumbent management and Board or an acquiror who meets their
approval. The change of control penalty provisions are also designed
to serve the illegitimate purpose of deterring Hilton and other ITT
shareholders from freely exercising their right to vote out the
incumbent directors in a proxy contest. Victory in any such proxy
fight (i.e., replacement of a majority of ITT's directors) would carry
a potentially enormous cost to ITT and its shareholders -- the
termination of the management contracts by the hotel owners and the
resultant loss of millions of dollars in management fees by ITT.
29. ITT continues to dispose of "core" assets and to enter
into change of control penalty provisions designed to deter Hilton and
entrench ITT's management. On August 3, 1997, ITT announced that it
was disposing of 50 percent of both the Desert Inn Resort and Casino
in Las Vegas and 34 acres of adjacent property (the "Desert Inn
transaction"). ITT has thus entered into an agreement in principle
with Davis Gaming, L.L.C., a company owned by Marvin Davis, providing
that ownership of the Desert Inn and adjacent property will be sold to
a joint venture owned 50 percent by Davis Gaming and 50 percent by ITT
(the "Desert Inn
<PAGE>
Agreement"). According to the announcement, ITT will receive
$250 million for the 50 percent interest being acquired by Davis
Gaming.
30. As part of the Desert Inn transaction, ITT will manage
the Desert Inn for ten years with an option to extend the management
agreement for another ten years and, should the joint venture build a
new hotel and casino on the adjacent parcel, ITT will manage that as
well. The announcement makes clear that the management agreement will
include a change of control penalty provision "similar" to that
entered into with "other parties," i.e., FelCor.
31. In its August 3, 1997 announcement, ITT stated that the
Desert Inn Agreement contemplates completion of the transaction by
November 1, 1997. This timing is no accident. It is intended to
enable ITT to consummate the Desert Inn transaction, including
implementation of the change in control penalty provision, prior to
the ITT Annual Meeting and election of directors. This effort to
deprive the ITT shareholders of free choice -- to penalize them if
they should vote to oust the incumbent directors -- is another
manipulation of shareholder voting rights in line with the course of
conduct of ITT and it directors since Hilton announced its offer.
The ITT Board Fails to
Schedule the Annual Meeting
32. ITT held last year's annual meeting on May 14, 1996.
This was in keeping with a practice -- begun by ITT's corporate
predecessor at least 20 years ago -- of holding its annual meetings in
May. When ITT's Board of Directors failed to take steps to hold this
year's annual meeting in May, Hilton moved for a preliminary
<PAGE>
injunction requiring the Board to do so. In opposing Hilton's motion,
ITT told this Court that the Board's purpose in delaying the Annual
Meeting was to give ITT shareholders the time to make "a more informed
decision as to the real value of both ITT and the Hilton Transaction."
33. At the oral argument on Hilton's motion for a
preliminary injunction, counsel for ITT asserted that under NRS 78.345
ITT "can in effect have until November 14th, 1997 to have an annual
meeting." In its April 21, 1997 order denying Hilton's motion for a
preliminary injunction, this Court concluded that "subject to the
right of a board of directors to specify a shorter period, annual
meetings for Nevada corporations are contemplated to occur no later
than eighteen months after the last such meeting." While ITT has
recently stated that it "expect[s] to hold [its] 1997 annual
shareholder meeting[] in November," and that all of its incumbent
directors "will stand for election in November", the Board has yet to
fix the meeting date.
The ITT Board Adopts
the Comprehensive Plan
34. On July 16, 1997, ITT announced that at a meeting held
the previous day, its Board of Directors reassessed Hilton's tender
offer in light of developments since February 11 and "unanimously
reaffirmed its conclusion" that Hilton's offer was "inadequate and not
in the best interests of [ITT]." At the same time, ITT announced that
its Board had unanimously approved the adoption of the Comprehensive
Plan.
35. The Comprehensive Plan consists of several major
elements. The first major element, involves the spin-off of two of
ITT's three remaining businesses (the "Spin-offs"). All of ITT's
<PAGE>
"core" hotel and gaming assets will be placed in a newly formed Nevada
subsidiary, Destinations. Subject to the satisfaction of various
conditions, including the approval of gaming authorities in several
states, ITT intends to distribute as a stock dividend to its
shareholders all of Destinations common stock and all of ITT's shares
in its 83.3%-owned technical school subsidiary, ITT Educational
Services, Inc. ("ESI"). Following the Spin-offs, ITT's sole remaining
business will be telephone directories publishing, and ITT will seek
to change its name to ITT Information Services, Inc. ("ISI").
36. A second major element of the Comprehensive Plan
involves ITT's repurchase through a cash tender offer of up to
30 million shares of its common stock (approximately 25.7% of its
outstanding shares) at a price of $70 per share, or a total of
$2.1 billion (the "Equity Tender Offer"). ITT commenced the Equity
Tender Offer on July 17, 1997. ITT has conditioned the Equity Tender
Offer on, among other things, obtaining the requisite regulatory
approvals and financing.
37. A third major element of the Comprehensive Plan is the
allocation of ITT's indebtedness between Destinations and ISI. (ITT
claims that, for regulatory reasons, ESI cannot incur significant
indebtedness.) To facilitate this allocation, ITT intends to commence
a tender offer for all $2.0 billion of its publicly held debt
securities and to repay certain other indebtedness (the "Debt Tender
Offer").
38. ITT has stated that it intends, subject to receipt of
necessary approvals, to consummate the Spin-offs, the Equity Tender
Offer and the Debt Tender Offer substantially concurrently
<PAGE>
in late September 1997. In order to finance these transactions, ISI
and Destinations will be required to incur massive amounts of new
debt. According to ITT's own public filings, Destinations will be
responsible for at least $4.2 billion in indebtedness (representing
approximately 63% of its total capitalization on a pro forma basis as
of June 30, 1997), and ISI will be responsible for approximately
$1.265 billion in indebtedness. ITT has acknowledged in its public
filings that if the Comprehensive Plan is consummated, both
Destinations and ISI will be "significantly leveraged." ITT has also
stated that the "high degree of leverage" at Destinations and ISI
"could have important consequences for stockholders," including
(i) impairing each company's ability to obtain additional financing on
favorable terms in the future, (ii) reducing funds available for
purposes other than debt service, (iii) subjecting each company to
restrictive covenants with respect to a number of corporate
activities, (iv) placing each company at a competitive disadvantage,
and (v) hindering each company's ability to adjust to market
conditions and making it more vulnerable in the event of a downturn in
general economic conditions or in its business.
39. A fourth major element of the Comprehensive Plan is the
sale of effective control of post Spin-off ITT to an entity affiliated
with the leveraged buy-out firm of Clayton, Dubilier & Rice, Inc.
("CDR") pursuant to a definitive agreement approved by the ITT Board
at its July 15, 1997 Board meeting (the "CDR Sale Agreement").
Following the Spin-offs, a CDR affiliate will purchase approximately
32.9% of the outstanding common stock of ITT and warrants to purchase
shares representing an additional 13.7% of
<PAGE>
its shares for aggregate consideration of $225 million. The warrants
will have a ten-year term and permit CDR to buy ITT common stock
directly from ITT at a 50% premium to CDR's initial purchase price.
The CDR Sale Agreement, if consummated, would give CDR effective
control of ITT in that, among other things: (a) CDR would be the
single largest shareholder of the company whether or not it exercises
its warrants; (b) CDR would have the contractual right to designate
five members of ITT's 11-member Board of Directors; and (c) by virtue
of special super-majority voting provisions in the CDR Sale Agreement,
CDR's designees on the ITT Board would have the power to block (i) any
issuance by ITT of equity securities (other than certain issuances
pursuant to employee option or incentive plans); (ii) any merger,
consolidation, recapitalization, liquidation or similar extraordinary
corporate transaction by ITT; or (iii) any amendment or modification
of ITT's charter or by-laws.
40. While ITT has reserved the contractual right to
terminate the CDR Sale Agreement in the event that the ITT Board
determines not to go forward with the Spin-offs, that right of
termination carries a hefty price tag -- the payment of a $25 million
"termination fee" (reduced to $15 million if ITT enters into a merger
agreement with Hilton) as well as CDR's "reasonable expenses" up to a
maximum of $4 million. These termination fee provisions were
designed, among other things, to make ITT less attractive to other
bidders, including Hilton, by increasing the cost of making a
competing bid.
<PAGE>
The Comprehensive Plan is an
Unlawful Entrenchment Device
41. In its press release announcing the Comprehensive Plan,
in presentations to stock analysts and in interviews with the
financial media, ITT and its agents have endeavored to portray the
Comprehensive Plan as a "plan to create shareholder value." As is
evident from the timing, structure and terms of the Plan, it is better
understood as a plan to entrench ITT's incumbent management.
A. ITT Will Not Let Its Shareholders
Vote on the Comprehensive Plan
42. ITT intends to consummate the Comprehensive Plan
without putting it to a shareholder vote. Subject to its receipt of
regulatory approval for the Comprehensive Plan, ITT intends to
consummate the Spin-offs, the Equity Tender Offer and the Debt Tender
Offer in late September 1997. Because ITT has deliberately delayed
its 1997 Annual Meeting of Shareholders until November, ITT's intent
is to deprive its shareholders the opportunity to express their
collective view of these transactions before they occur.
43. This intended timetable for the implementation of the
Comprehensive Plan is entirely of ITT's making. On April 21, 1997,
this Court denied Hilton's motion for a preliminary injunction
requiring ITT to hold its 1997 Annual Meeting in May 1997 and, in that
context, preliminarily ruled that ITT is not required under Nevada law
to hold its 1997 Annual Meeting until November 1997. Based on ITT's
representations that "with additional time the stockholders will be
able to make a more informed decision as to the real value of both ITT
and the Hilton Transaction", the Court also concluded that Hilton had
failed to
<PAGE>
demonstrate that ITT's directors had breached any fiduciary duty to
shareholders by failing to schedule the Annual Meeting in May. ITT is
now using this Court's ruling as a vehicle for avoiding any
shareholder vote on the Comprehensive Plan or on the election of ITT's
Board before the Plan is consummated. ITT will not let its share-
holders vote on the Plan, or on the election of directors before the
Plan is implemented, for fear that the ITT shareholders would reject
the Plan, and the incumbent directors who have adopted it, in favor of
nominees who support a negotiated merger with Hilton.
44. ITT's refusal to submit the Comprehensive Plan to a
vote of its shareholders is in stark contrast to ITT's past practice.
The current ITT is itself the product of a massive spin-off. In 1995,
the company formerly known as ITT Corporation split itself into three
public companies -- the current ITT, the company now known as ITT
Industries, Inc. (an industrial manufacturer) and the company now
known as Hartford Financial Services Group (an insurance company).
The former ITT (led by the same management team as the current ITT)
submitted the 1995 spin-off plan to a shareholder vote because, as it
acknowledged at the time, of its "importance to . . . shareholders."
The Comprehensive Plan is no less important to ITT's current
shareholders -- not only because of its dramatic effect on the
financial structure of the company, but also because of its impact on
Hilton's bid. But rather than risk defeat in a shareholder vote, the
ITT Board has decided to "cram down" the Comprehensive Plan before the
shareholders can decide who they want to run their company.
<PAGE>
B. The ITT Board Inserts a "Staggered Board"
Provision in the Destinations Charter
45. Despite the fact that hotels and gaming are ITT's "core
business," the Comprehensive Plan calls for the spin-off of that
business and the retention of its telephone directories publishing
business, and not vice versa. ITT's primary purpose for structuring
the Spin-offs in this fashion is to entrench the management team that
will run the hotel and gaming business -- the business that Hilton has
stated it is interested in acquiring -- by placing it in a new company
(Destinations) that is bristling with takeover defenses.
46. If the Spin-off of Destinations is consummated, the
Comprehensive Plan envisions that plaintiff Araskog, ITT's Chairman
and Chief Executive Officer, and plaintiff Bowman, ITT's President and
Chief Operating Officer, will hold the same positions at Destinations.
It is also contemplated that the other senior members of the ITT hotel
and casino management team, including Daniel P. Weadock, Senior Vice
President-Hotels, and Peter G. Boynton, Senior Vice President-Gaming,
will have the same roles at Destinations. Moreover, Destinations'
Board of Directors will be comprised of the existing ITT directors.
In recognition that the "real ITT" is wherever Mr. Araskog and his
hotel and casino management team are at the helm, following the Spin-
offs, Destinations intends to change its name to "ITT Corporation."
Indeed, for accounting purposes, ITT treats the transaction as a spin-
off of the telephone directories business, not a spin-off of
Destinations.
47. Several features of the Comprehensive Plan are designed
to ensure that neither Hilton nor any other potential
<PAGE>
bidder will ever threaten the incumbency of Mr. Araskog and his
management team again. Like ITT, Destinations will have the takeover
protections of the Control Share Acquisition Statute, the Business
Combination Statute and a Shareholder Rights Plan. In its SEC filing
pertaining to the Spin-off, Destinations acknowledges that these
defenses may have the effect of preventing a change of control at
Destinations even if it is favored by a majority of the company's
shareholders. The ITT Board will also give Destinations a
particularly potent defense that ITT itself does not have -- a
"staggered board."
48. Destinations' Articles of Incorporation will provide
that its 11-member Board of Directors will be divided into three
classes as nearly equal in number as possible, each of which will
serve for three years with one class being elected each year.
Moreover, the Articles of Incorporation will contain provisions
prohibiting stockholders from calling a special meeting or acting by
written consent. As a result, at least two annual meetings of
stockholders would be required for the stockholders to change a
majority of the members of the Destinations Board.
49. The import of the "staggered board" provisions in the
Destinations charter is that, once the Spin-offs are consummated, ITT
shareholders (i.e., the new Destinations shareholders) will be unable
to decide for themselves whether to facilitate the sale of the company
to Hilton by replacing a majority of the Destinations directors with
Hilton's nominees at the company's next annual meeting. Thus, even if
Hilton successfully waged a proxy contest at Destinations' first
annual meeting, the Hilton nominees would be in the minority on the
Board
<PAGE>
and could not themselves redeem the "poison pill" or remove the other
barriers to a Hilton acquisition. Should the incumbents decide not to
hold Destinations' second annual meeting until 18 months have passed
(in accordance with this Court's interpretation of NRS 78.345), Hilton
and ITT's other shareholders would not be able to change a majority of
the members of the Destinations Board until May 1999. And plaintiff
Araskog, who was last elected to the Board in May 1996, would not have
to stand for re-election by the shareholders until the year 2000.
50. ITT has sought to justify its inclusion of "staggered
board" provisions in the Destinations charter on the grounds that many
other companies, including several hotel and gaming companies, have
"staggered boards." Under applicable law, however, companies amending
their charter to provide for a "staggered board" -- which represents
an important limitation on the shareholders' ability to exercise their
franchise -- do so through a shareholder vote. By contrast, ITT is
attempting to amend its charter not through a shareholder vote, but
through the vote of the very directors who would be the direct
beneficiaries of the proposed amendment.
C. The Comprehensive Plan Contains
a "Tax Poison Pill"
51. The Comprehensive Plan further serves to entrench ITT's
management because any acquiror of ITT or Destinations after the Spin-
offs would be forced to swallow a "tax poison pill."
52. In an SEC filing pertaining to the Comprehensive Plan,
the ITT Board has sought to justify its support for the Plan on the
grounds that the Spin-off will be tax-free to ITT and its
shareholders. Thus, ITT's Board has stated that "[o]nly [ITT] as
<PAGE>
an independent entity can consummate such a [tax-free] transaction
immediately", whereas an acquiror of ITT in a transaction that is
taxable in whole or in part "would be unable to undertake a tax-free
spin-off of [ITT] assets for a period of five years."
53. When companies undertake a spin-off of the nature and
magnitude contemplated by ITT, they typically seek a ruling in advance
from the IRS in an effort to obtain some assurance prior to
consummation that the requirements for tax-free treatment have been
met. As a former IRS commissioner, Donald R. Alexander, recently told
the Bloomberg news service: "People don't normally do a spin-off
without the assurance of an IRS ruling. Probably they are doing it
here simply because they have to rush the transaction." Indeed, the
former ITT Corporation (now ITT Industries, Inc.) conditioned its 1995
spin-off of the current ITT on the receipt of a formal IRS ruling that
the distribution would be tax free.
54. ITT has stated that it has not sought an IRS ruling in
connection with the Spin-offs and that it will not do so. ITT will
not seek an IRS ruling because it typically takes four to six months
to obtain one, and ITT management is desperate to consummate the Spin-
offs before the Annual Meeting, which must be held in November 1997.
55. In lieu of an IRS ruling, the ITT Board has stated that
it will rely on a legal opinion from its takeover defense counsel to
the effect that the Spin-offs will qualify as tax-free transactions
under Section 355 of the Internal Revenue Code. Given the magnitude
of the Spin-offs, it is virtually certain that these transactions will
be audited by the IRS after they are completed. In an SEC filing,
Destinations acknowledges that if the Spin-offs
<PAGE>
are consummated and the IRS ultimately disagrees with the legal
opinion of ITT's counsel, ITT, ESI and Destinations would incur
aggregate tax liability (which under law is the several liability of
all three corporations) of $1.4 billion. Approximately 90%, or
$1.25 billion, of this liability will be allocated to Destinations
under contractual "tax sharing" arrangements. Destinations concedes
that this huge tax liability "would have a material adverse effect on
the financial position, results of operations and cash flows of each
of ITT and [Destinations]." This is an understatement -- the
corporate tax liability would render Destinations virtually insolvent.
The risk that ITT or Destinations would incur liability of this
magnitude serves as a powerful deterrent to any acquisition of these
companies once the Spin-offs are effected. Moreover, if the IRS
concludes that the Spin-offs are not entitled to tax-free treatment,
ITT's shareholders would be subject to an additional tax liability of
$1.4 billion. The risk that ITT's shareholders might incur this
gargantuan liability if the Spin-offs are consummated makes the
Board's decision not to follow the prudent course of seeking an IRS
ruling and submitting the Comprehensive Plan to a shareholder vote
particularly unreasonable.
56. Even if the IRS were ultimately to conclude that the
Spin-offs qualify for tax-free treatment under Section 355 of the
Internal Revenue Code, the Comprehensive Plan imposes yet another
potentially massive tax-related deterrent to Hilton's acquisition of
Destinations. ITT's own public filings with respect to the Spin-offs
state that: (i) under current tax law, if the IRS were to integrate
the Spin-off of Destinations and Hilton's acquisition
<PAGE>
of the stock of either ITT or Destinations, the Spin-off of
Destinations would result in taxable gain for ITT and its
shareholders; and (ii) under proposed legislation recently passed by
Congress, ITT would recognize taxable gain in connection with the
Spin-off of Destinations if 50% or more of Destinations stock were
acquired and such acquisition and the Destinations Spin-off were
deemed part of a plan. Since Destinations has agreed to pay 90% of
the tax liability ITT incurs as a result of the Spin-offs, Hilton's
acquisition of Destinations after the Spin-offs could result in
Destinations' incurrence of billions of dollars in tax liability --
another major deterrent to Hilton's acquisition of Destinations.
The ITT Board Lacks a Good
Faith Basis for Adopting
the Comprehensive Plan
57. ITT launched the Comprehensive Plan with a barrage of
publicity in which it trumpeted a number of ostensible rationales for
adopting the Plan. These rationales are window dressing, created to
obscure the Board's real purpose -- entrenching ITT management. Thus:
(a) ITT has stated that it adopted the Comprehensive Plan
as "another step in [ITT's] refinement of its strategic
plan to focus on hotels and gaming and explore and
exploit opportunities to enhance the value of [ITT)
within that focus." In fact, not once before the
Hilton offer was commenced did ITT tell its sharehold-
ers that its strategy was to (i) sell assets purchased
only a year or two after they were acquired (i.e., sale
of Madison Square
<PAGE>
Garden and WBIS+ television station); (ii) shift from
being an owner/operator of hotels to being a hotel man-
agement company with management contracts terminable
upon a change of control; (iii) spin off its hotel and
casino assets and leverage the spun-off company to turn
it into a "junk bond" rated company; or (iv) break up
into three more pieces only two years after its last
spin-off.
(b) ITT claims that the Comprehensive Plan is "intended to
enhance the value of the ongoing investment of
stockholders." But, as noted above, the Comprehensive
Plan creates a risk that ITT and its stockholders will
be saddled with enormous tax liability in the event
that the IRS determines that it is not entitled to tax-
free treatment, a risk that could be avoided entirely
if ITT followed the ordinary and prudent course of
seeking an IRS ruling.
(c) ITT asserts that the Comprehensive Plan will further
the interests of its employees because the
"displacement to employees of [ITT] that would be
expected to occur following consummation of a hostile
acquisition such as the Hilton Transaction is expected
to be significantly greater than any disruption caused
by the Distributions." ITT conveniently ignores the
fact that it has already fired 65% of its headquarters
staff in response to Hilton's bid and that, after the
Spin-offs are
<PAGE>
complete, ITT and Destinations intend to "continue to
search for additional opportunities to rationalize the
organization and administration of [their] businesses"
-- a euphemism for firing more employees.
(d) ITT contends that the Comprehensive Plan will further
the interests of its creditors. As noted above,
however, in order to finance the Equity Tender Offer
and the Debt Tender Offer, Destinations and ISI will be
required to trash their balance sheets by incurring
billions of dollars in new debt. Holders of ITT's pub-
lic debt securities who fail to tender into the Debt
Tender Offer will find that their investment grade
paper has been transformed into risky junk bonds.
(e) ITT maintains that the Comprehensive Plan "will allow
[ITT] to eliminate at least one tier of corporate-level
administration" -- the implication being that the Plan
will result in greater efficiencies. This is nonsense.
As a result of the Spin-offs, where there is today one
company, there will soon be three. Corporate functions
that used to be performed by ITT for each of its
subsidiaries will have to be replicated at each of Des-
tinations, ESI and ISI, resulting in more, not less,
overhead.
<PAGE>
ITT's Misleading Disclosures
Regarding the Comprehensive Plan
58. In its desperation to portray the Comprehensive Plan as
beneficial to ITT's shareholders, ITT has made selective disclosure of
wildly unrealistic projections regarding the future performance of its
gaming business. ITT has deliberately disseminated these extremely
aggressive projections in the hope that the stock market would assign
a greater value to the stock of Destinations (and the Comprehensive
Plan generally) than ITT's actual performance warrants.
59. The performance of ITT's gaming operations during 1997
has been disappointing. On July 16, 1997, ITT reported second quarter
1997 earnings before interest, taxes, depreciation and amortization
("EBITDA") for its gaming operations of only $67 million, as compared
with $78 million in the second quarter 1996. ITT attributed this
decline to significant construction activity at its Caesars casinos in
Las Vegas and Atlantic City. That construction is continuing and is
not expected to be completed until at least year end 1997.
60. The construction at the Caesars properties in Las Vegas
and Atlantic City is not the only factor negatively impacting ITT's
casino business. The Las Vegas and Atlantic City markets are
intensely competitive; many industry observers believe that the Las
Vegas market is already overbuilt; and several of ITT's principal
competitors are expanding existing facilities or are soon to open
mammoth new facilities (such as the 3000-room, $1.45 billion Bellagio
casino scheduled to open in September 1998, and Hilton's $760 million,
3,200-room Paris casino scheduled to open in late 1998).
<PAGE>
61. Notwithstanding this difficult environment for ITT's
gaming operations, at a July 16, 1997 presentation to stock analysts
on the Comprehensive Plan, ITT forecast that, in comparison to
expected gaming EBITDA for full year 1997 of $270 million, in 1998 it
would achieve gaming EBITDA of $440 million -- a $170 million, or 63
percent, improvement in one year. ITT's forecasts were both oral and
written, and its written forecasts were not accompanied by any
cautionary statements identifying important factors that could cause
ITT's actual results to differ materially from the projected results
and which have not been made generally available to ITT shareholders.
ITT's forecasts lacked any reasonable basis in fact and were
materially false and misleading. Thus:
(a) ITT told the analysts that at Caesars Palace in Las
Vegas, it expects EBITDA to increase from $115 million
in 1997 to $180 million in 1998 -- a 56 percent jump.
Most of the projected improvement ($50 million of the
$65 million) was attributed to an increase in the
number of overnight guests as ITT is currently con-
structing a new tower at the Caesars Palace property.
This portion of the projection is predicated on the
assumption that Caesars' operating margins will improve
over current levels. This is an unreasonable
assumption. Among other factors, when Bellagio and
Paris open their facilities in 1998, Caesars' operating
margins are likely to decline significantly as its
marketing costs will increase in a more competitive
environment. The
<PAGE>
remaining $15 million improvement is attributed to
"incremental foot traffic" from the Bellagio and the
Forum Two shops -- a retail arcade adjacent to the
Caesars Palace property that will open to the public in
September 1998. A more realistic assumption is that
the opening of the new Bellagio (in close proximity to
the older Caesars property) will draw business from
Caesars, not bring business to it. The projection is
also unreasonable because it assumes that current
levels of foot traffic from the existing Forum One
shopping arcade will remain unchanged; a more
reasonable assumption is that the opening of Forum Two
will "cannibalize" some of the retail activity at Forum
One and that the foot traffic from Forum One into the
Caesar's Palace casino will decrease.
(b) ITT told the analysts that at Caesars Atlantic City,
EBITDA would increase from $118 million in 1997 to
$165 million in 1998 -- a 39.8 percent leap -- because
of an ongoing expansion project at that property.
This, too, is an unrealistic assumption. Among other
things, the Atlantic City construction project will not
be completed until mid-1998, thus undercutting the
notion that an additional $47 million in EBITDA will be
realized that year.
(c) ITT also told the analysts that a new riverboat casino
in Harrison County, Indiana would generate $70 million
in 1998 EBITDA (of which ITT's ownership
<PAGE>
share would be some $50 million). This projection is
unrealistic; indeed, only a handful of the riverboat
casinos in the United States generate annual EBITDA of
$70 million. Moreover, the timetable for the potential
opening of the casino makes it extremely unlikely that
ITT can achieve this level of EBITDA during 1998. ITT
has not yet obtained a permit from the Army Corps of
Engineers to build the facilities that would let it
dock the riverboat on the Ohio River. Even if the
permit is obtained, the docking facilities will not be
completed until the summer of 1998. Parking facilities
and food outlets -- which are critical to the success
of any riverboat casino -- will not be completed until
June 1998 and September 1998 respectively. And the
hotel adjacent to the riverboat will not be completed
until December 1998.
FIRST COUNTERCLAIM
62. Hilton repeats and realleges each of the allegations
set forth in paragraphs 1 through 61 hereof as if fully set forth at
length herein.
63. In April 1997, ITT represented to this Court that the
Board's purpose in delaying the Annual Meeting was to give ITT
shareholders the time to make "a more informed decision as to the real
value of both ITT and the Hilton Transaction." That representation
has been proven to be false. Instead, ITT and the incumbent directors
have used, and are threatening to use, the delay in ITT's annual
meeting to develop a plan to disenfranchise
<PAGE>
shareholders and assure that the incumbent directors and current
management of ITT retain their positions, regardless of the will of
the shareholders.
64. As hereinabove alleged, ITT: (a) has entered into
management contracts, and has threatened to enter into additional
management contracts, containing change of control penalty provisions
that are triggered by the replacement of a majority of the incumbent
ITT directors; (b) attempted to impose the Comprehensive Plan without
a shareholder vote; (c) refused to hold the Annual Meeting until after
the Comprehensive Plan has been implemented; (d) threatened to
classify its Board of Directors without a shareholder vote so as to
prevent the immediate removal of the entire Board; and (e) threatened
to saddle ITT, Destinations and ITT shareholders with a $2.8 billion
"tax poison pill." These actions have been taken for the primary
purpose of impeding the effective exercise of the stockholder
franchise in connection with the election of directors.
65. Hilton is being, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
SECOND COUNTERCLAIM
66. Hilton repeats and realleges each of the allegations
set forth in paragraphs 1 through 61 hereof as if fully set forth
herein.
67. The pursuit of the Comprehensive Plan, the FelCor
transaction, the Desert Inn transaction, the threatened disposition of
"crown jewel" hotels and other core assets subject to management
contracts containing change of control penalty provisions, and the
insertion of such provisions in ITT's management contracts for
<PAGE>
hotels that ITT currently manages but does not own, constitute
unreasonable responses by the ITT Board of Directors to Hilton's
tender offer. The cost of these responses to ITT, and the impact on
the ability of ITT shareholders to determine the future of their
company through the election of directors, is disproportionately large
in relation to any "threat" allegedly posed to ITT by Hilton's tender
offer. The ITT directors have thereby breached, and are threatening
to continue to breach, their fiduciary duties to ITT shareholders.
68. The change of control penalty provisions are a
draconian response to Hilton's bid because they are designed to make
ITT takeover-proof. If Hilton or any other non-approved bidder
acquires control of ITT, and the change of control penalty is
triggered, ITT and its shareholders stand to lose millions of dollars
of value and receive nothing in return.
69. The change of control penalty provisions are a
preclusive and coercive response to Hilton's bid, particularly in view
of the ITT Board's delay in calling the Annual Meeting. Because the
ITT Board has refused to call a meeting, ITT shareholders cannot
assert their right to vote out the incumbent directors before the
change of control provisions are put into place. And once such
provisions are in place, the ability of ITT shareholders to vote the
incumbents out will be severely impeded because the provisions impose
a potentially enormous cost to ITT if the ITT shareholders vote to
replace a majority of the incumbent directors.
70. The Comprehensive Plan is a draconian response to
Hilton's bid. The "tax poison pill" provisions of the Plan
<PAGE>
threaten to create billions of dollars in tax liability to ITT and its
shareholders, and the leverage that ITT will be required to incur to
finance the Plan will seriously impair the ability of ITT and
Destinations to compete. Certain of these risks could be reduced by
delaying the Spin-offs until an IRS ruling is obtained or by
structuring the Spin-offs such that the hotel and casino assets are
retained by ITT and the telephone directories business is spun off.
Neither of those alternatives was adopted by the ITT Board because
doing so would have given the ITT shareholders a meaningful
opportunity to vote a majority of the incumbent directors out of
office -- an unacceptable result to directors bent on entrenchment.
71. The Comprehensive Plan is a preclusive and coercive
response to Hilton's bid as well. ITT has refused to permit its
shareholders to vote on the Comprehensive Plan and intends to
implement the Comprehensive Plan before the Annual Meeting is held.
And once the Plan is in place, by virtue of the "tax poison pill"
provisions, ITT will have succeeded in imposing potentially massive
tax barriers to an acquisition of Destinations or ISI by Hilton.
Moreover, by virtue of the "staggered board" provisions of the Plan,
ITT shareholders will be precluded from removing a majority of the
Destinations directors at the next annual meeting. By precluding ITT
shareholders from choosing to sell the company and remove the incum-
bent directors -- and by keeping in place the ITT poison pill which
effectively prevents Hilton from accepting shares tendered by ITT
shareholders in advance of any annual meeting -- the ITT Board is
coercing the shareholders into accepting the alternative course it has
chosen for them.
<PAGE>
72. Hilton is being, or will be, irreparably harmed by
plaintiffs' conduct and has no adequate remedy at law.
THIRD COUNTERCLAIM
73. Plaintiffs repeat and reallege each of the allegations
set forth in paragraphs 1 through 61 hereof as if fully set forth at
length herein.
74. The Comprehensive Plan, the FelCor transactions, the
Desert Inn transaction, and the threatened crown jewel dispositions
and other asset dispositions announced or pursued by ITT in response
to Hilton's tender offer reflect the ITT Board's abandonment of the
company's long-term strategy and constitute a break-up of ITT. In
this context, the Board's fiduciary duty is to seek to obtain the best
available terms for ITT's shareholders and not to favor one potential
acquiror over another or one type of financial alternative over
another. In pursuing this objective, the ITT directors have a duty to
inform themselves, prior to making business decisions, of all material
information reasonably available to them. The ITT directors have not
sought to obtain the best available terms for ITT shareholders and
have not properly informed themselves. They have thereby breached,
and are continuing to breach, their fiduciary duties to ITT
shareholders.
75. Hilton is being, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
FOURTH COUNTERCLAIM
76. Hilton repeats and realleges each of the allegations
set forth in paragraphs 1 through 61 hereof as if fully set forth at
length herein.
<PAGE>
77. The members of the ITT Board of Directors have acted in
bad faith and in breach of their duty of loyalty to the shareholders
of ITT by placing their own personal interests and the interests of
ITT management ahead of the interests of ITT stockholders.
78. Hilton is, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
FIFTH COUNTERCLAIM
79. Hilton repeats and realleges each of the allegations
set forth in paragraphs 1 through 61 hereof as if fully set forth
herein.
80. Under Nevada law, once a corporation has issued stock,
it may not amend its articles of incorporation without the approval of
its shareholders.
81. ITT is threatening to violate this requirement by
spinning off its "core" assets into a subsidiary -- to be run by the
same senior management team and Board of Directors and under the same
corporate name -- and, without a shareholder vote, adopting articles
of incorporation for the subsidiary that contains a "staggered board"
provision.
82. Hilton is, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
SIXTH COUNTERCLAIM
83. Hilton repeats and realleges each of the allegations
set forth in paragraphs 1 through 61 hereof as if fully set forth
herein.
84. Under Nevada law, ITT may not engage in a sale of all
or substantially all of its property and assets without the
<PAGE>
approval of the holders of a majority of its voting stock at a meeting
of the shareholders called for that purpose.
85. ITT is threatening to sell all or substantially all of
its property and assets without the required shareholder vote.
86. Hilton is being, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
SEVENTH COUNTERCLAIM
87. Hilton repeats and realleges each of the allegations
set forth in paragraphs 1 through 61 hereof as if fully set forth
herein.
88. In connection with a tender offer for its own shares
and the ITT shareholders' purchases and sales of ITT shares, ITT has
made material misstatements of material fact and has made material
omissions of fact necessary in order to make the statements made, in
the light of the circumstances under which they were made, not
misleading, in that, among other things:
(a) ITT has disseminated unrealistic projections, made
without any reasonable basis in fact, to the investment
community;
(b) ITT has failed to include realistic projections in its
Equity Tender Offer and other SEC filings relating to
the Comprehensive Plan;
(c) ITT has misrepresented its purposes for adopting the
Comprehensive Plan.
89. ITT has made these material misstatements and omissions
with the deliberate intent to mislead its stockholders and the
investing public generally about the value and true purposes of the
Comprehensive Plan.
<PAGE>
90. By reason of the foregoing, ITT has violated
Sections 10(b) and 13(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.
91. Hilton is, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
WHEREFORE, Hilton seeks judgment:
(a) Dismissing the Complaint with prejudice;
(b) Declaring that the ITT Board has unlawfully interfered
with the ITT shareholders, exercise of their corporate franchise;
(c) Enjoining counterclaim defendants from taking any steps
to implement the Comprehensive Plan before ITT's 1997 Annual Meeting
is held;
(d) Requiring counterclaim defendants to put the
Comprehensive Plan to a vote of the ITT shareholders;
(e) Enjoining counterclaim defendants from taking any steps
to implement the Comprehensive Plan;
(f) Declaring that the ITT Board has acted on an uninformed
basis and outside its powers and has exercised its powers in bad faith
and with a view to advancing its own interests and the interests of
ITT management rather than the interests of the corporation and its
shareholders;
(g) Declaring that the Comprehensive Plan constitutes an
unreasonable response to the Hilton offer;
<PAGE>
(h) Declaring that the Comprehensive Plan, together with
the other actions taken by ITT in response to the Hilton offer,
constitute an abandonment of ITT's long-term strategy and a break-up
of ITT and that, accordingly, the ITT Board's fiduciary duty is to
seek to obtain the best available terms for ITT's shareholders and not
favor one potential acquiror over another or one type of financial
alternative over another;
(i) Declaring that Hilton has standing to claim that the
Comprehensive Plan violates the Board's fiduciary duties and that
Hilton has standing to pursue an injunction against the Plan;
(j) Enjoining counterclaim defendants from inserting in the
Destinations articles of incorporation any provision designed to
impede a takeover bid by Hilton, including a provision for a
"staggered board", and enjoining Destinations from adopting a
Shareholder Rights Plan;
(k) Enjoining counterclaim defendants from refusing to
redeem the rights issued to ITT's shareholders under the Shareholder
Rights Plan and refusing to make the provisions of the Nevada Control
Share Acquisition and Business Combination Statutes inapplicable to
Hilton's tender offer for ITT stock;
(l) Requiring counterclaim defendants to conduct a fair and
open auction of ITT;
(m) Enjoining counterclaim defendants from entering into
any further disposition of ITT's assets unless they conduct a fair and
open auction for such assets in which Hilton can participate on an
equal basis with all other potential purchasers;
<PAGE>
(n) Enjoining counterclaim defendants from selling any
further assets of ITT without the approval of ITT shareholders, as
required by Nevada law;
(o) Rescinding the FelCor transaction or any other
disposition of hotel or casino assets by ITT;
(p) Invalidating the change of control penalty provisions
in ITT's management agreement with FelCor;
(q) Rescinding the Desert Inn Agreement and enjoining
counterclaim defendants from taking any further steps in furtherance
of the Desert Inn transaction;
(r) Enjoining counterclaim defendants from entering into
any agreements containing change of control penalty provisions with
purchasers of ITT's assets or with the owners of hotels managed by
ITT;
(s) Enjoining the individual counterclaim defendants from
engaging in any further actions aimed at entrenching themselves in
office in violation of the fiduciary duties owed by counterclaim
defendants to the ITT shareholders;
(t) Awarding Hilton damages against counterclaim defendants
in an amount to be determined at trial, as well as counterclaim
defendants' costs of suit, including reasonable attorneys' fees; and
<PAGE>
(u) Granting Hilton such other and further relief as the
Court may deem just and proper.
Dated: August 5, 1997
Las Vegas, Nevada
SCHRECK MORRIS
By: /s/ Steve 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
KENNETH B. FORREST
ERIC M. ROTH
MARC WOLINSKY
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants
and Counterclaimants
HILTON HOTELS CORPORATION
and HLT CORPORATION
<PAGE>
CERTIFICATE OF SERVICE
Pursuant to Fed. R. Civ. P. 5(b), I certify that I am an
employee of SCHRECK MORRIS and that on this day I deposited for
mailing in the U.S. Mail at Las Vegas, Nevada, a true copy of the
following enclosed in a sealed envelope upon which first class postage
was prepaid: ANSWER AND COUNTERCLAIM and also:
HAND DELIVERED TO:
Thomas F. Kummer, Esq.
Kummer Kaempfer Bonner & Renshaw
7th Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
VIA FACSIMILE AND OVERNIGHT MAIL:
Rory Millson - Fax: 212-474-3700
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
VIA FACSIMILE AND REGULAR MAIL:
Bernard W. Nussbaum - Fax: 212-403-2000
Eric M. Roth
Marc Wolinsky
Meir Feder
Scott L. Black
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Dated this 5th day of August, 1997.
/s/ Dana K. Provost
Dana K. Provost
[Exhibit 83]
THOMAS F. KUMMER
VON S. HEINZ CONTAINS CONFIDENTIAL
KUMMER KAEMPFER BONNER & RENSHAW DISCOVERY MATERIALS--
Seventh Floor SUBJECT TO COURT ORDER
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109 CONFIDENTIAL INFORMATION
(702) 792-7000 REDACTED FOR PUBLIC
DISCLOSURE
Attorneys for Defendant/Counterclaimant
ITT CORPORATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Plaintiffs, )
vs. )
) Case No. CV-S-97-95-PMP (RLH)
ITT CORPORATION, RAND V. )
ARASKOG, ROBERT A. BOWMAN, )
BETTE B. ANDERSON, NOLAN D. )
ARCHIBALD, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, VIN )
WEBER, and MARGITA E. WHITE, )
)
Defendants. )
)
)
ITT CORPORATION, )
) ITT'S REPLY MEMORANDUM OF
Defendant and ) POINTS AND AUTHORITIES IN
Counterclaimant, ) SUPPORT OF ITS MOTION TO
) DISMISS COUNTS III-VII OF
vs. ) THE FIRST AMENDED AND
) SUPPLEMENTAL COMPLAINT
) OR, IN THE ALTERNATIVE,
HILTON HOTELS CORPORATION and ) FOR PARTIAL SUMMARY
HLT CORPORATION, ) JUDGMENT
)
Plaintiffs and ) ORIGINAL FILED UNDER SEAL
Counterdefendants. )
)
<PAGE>
TABLE OF CONTENTS
PAGE
PRELIMINARY STATEMENT................................. 1
FACTUAL BACKGROUND.................................... 2
A. Hilton's FelCor Claim....................... 2
B. Hilton's Speculative Claims................. 6
C. ITT's Comprehensive Plan.................... 7
ARGUMENT.............................................. 8
I. HILTON'S UNRIPE CLAIMS SHOULD BE DISMISSED....... 8
II. HILTON'S BREACH OF FIDUCIARY DUTY CLAIMS
SHOULD BE DISMISSED.............................. 9
A. Hilton's Claims Are Derivative.............. 9
B. These Derivative Claims Should Be Dismissed. 11
III. COUNTS III-V SHOULD BE DISMISSED FOR FAILURE
TO STATE A CLAIM UNDER NEVADA LAW................ 12
A. Hilton's Unocal Count Fails To State A Claim. 12
B. Hilton's Revlon Count Fails To State A Claim. 13
C. Count V Fails To State A Claim............... 15
IV. HILTON'S NEW COUNTS SHOULD BE DISMISSED FOR
FAILURE TO JOIN INDISPENSABLE PARTIES............. 16
V. IN THE ALTERNATIVE, PARTIAL SUMMARY JUDGMENT
SHOULD BE GRANTED................................. 17
CONCLUSION............................................. 19
<PAGE>
TABLE OF AUTHORITIES
CASES PAGE
Abrams v. Koether, 766 F. Supp. 237 (D.N.J. 1991)..... 12
Arizona v. Atchison, Topeka & Santa Fe R.R. Co.,
656 F.2d 398 (9th Cir 1981)...................... 9
Baron & Strawbridge & Clothier, 646 F. Supp. 690
(E.D. Pa. 1986).................................. 11
Buchanan v. Henderson, 131 B.R. 859 (D. Nev. 1990),
revd. on other grounds, 985 F.2d 1021
(9th Cir. 1993).................................. 13
CRTF Corp. v. Federated Dep't Stores, Inc.,
683 F. Supp. 422 (S.D.N.Y. 1988)................. 10
Duval Ranching Co. v. Glickman, CV-N-95-38-ECR,
1997 U.S. Dist. LEXIS 7251 (D. Nev. March 13,
1997)............................................ 8
Eagle v. AT&T, 769 F.2d 541 (9th Cir. 1985)........... 10
Fidelity & Deposit Co. v. City of Sheboygan Falls,
713 F.2d 1261 (7th Cir. 1983).................... 16
Fleming v. Lind-Waldock & Co., 922 F.2d 20 (1st Cir.
1990)................................................ 11
Foster v. Arata, 325 P.2d 759 (Nev. 1958)............. 15
Friedman v. Mohasco Corp., 929 F.2d 77 (2d Cir. 1991). 10
Greenspun v. Del E. Webb Corp., 634 F.2d 1204
(9th Cir. 1980).................................. 12
Hilton Hotels Corp. v. ITT Corp., 962 F. Supp. 1309
(D. Nev.), aff'd, 116 F.3d 1485 (9th Cir. 1997).. 9
Holliday v. McMullen, 756 P.2d 1179 (Nev. 1988)....... 15
In re Santa Fe Pacific Corp. Shareholder Litig.,
669 A.2d 59 (Del. 1995).......................... 15
Kahn v. Sprouse, 842 F. Supp. 423 (D. Or. 1993)....... 10
Klaus v. Hi-Shear Corp., 528 F.2d 225 (9th Cir. 1975). 10
Leavitt v. Leisure Sports, Inc., 734 P.2d 1221
(Nev. 1987)...................................... 13
Lipton v. News Int'l, 514 A.2d 1075 (Del. 1986)....... 11
Lomayaktewa v. Hathaway, 520 F.2d 1324
(9th Cir. 1975), cert. denied sub nom.
Susenkewa v. Kleppe, 425 U.S. 903 (1976)......... 16
Milgard Tempering, Inc. v. Selas Corp. of America,
902 F.2d 703 (9th Cir. 1990)..................... 12
<PAGE>
National Auto. & Cas. Ins. Co. v. Payne, 67 Cal.
Rptr. 784 (Cal. Ct. App. 1968)................... 13
Newell Co. v. Vermont Am. Corp., 725 F. Supp. 351
(N.D. Ill. 1989)................................. 10,11
O'Neill v. Church's Fried Chicken, Inc., 910 F.2d
263 (5th Cir. 1990).............................. 10
Pacific Gas & Elec. Co. v. State Energy Resources
Conservation & Dev. Comm'n, 461 U.S. 190 (1983).. 8,9
Packer v. Yampol, C.A. No. 8432, 1986 WL 2582
(Del. Ch. Apr. 18, 1986)......................... 11
Paramount Communications Inc. v. QVC Network Inc.,
637 A.2d 34 (Del. 1994).......................... 18
Revlon Inc. v. MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173 (Del. 1986)......................... 13, 14
18
Richman v. W. L. Gore & Assoc., Inc., 881 F. Supp.
895 (S.D.N.Y. 1995).............................. 11
Spillyards v. Abboud, 662 N.E.2d 1358
(Ill. App. Ct.), reh'g denied, C.A.
Nos. 1-93-3866, 1-94-0075 (Apr. 3, 1996).......... 11
Stahl v. Apple Bancorp, Inc., 579 A.2d lll5
(Del. Ch. 1990)................................... 14
Stepak v. Schey, 553 N.E.2d 1072 (Ohio 1990)........... 14
Thomas v. Bible, 983 F.2d 152 (9th Cir. 1993).......... 12
Thomas v. Union Carbide Agric. Prod. Co., 473 U.S.
568 (1985)........................................ 9
Tomczak v. Morton Thiokol, Inc., Civ. No. 786,
1990 WL 42607 (Del. Ch. Apr. 5, 1990)............. 14
Umbriac v. Kaiser, 467 F. Supp. 548 (D. Nev. 1979)..... 15
United States ex rel. Gulbronson v. D&J Enterprises,
No. 93-C-233-C, 1993 U.S. Dist. LEXIS 19843
(W.D. Wis. Dec. 23, 1993)......................... 16
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946
(Del. 1985)....................................... 12,13
WLR Foods, Inc. v. Tyson Foods, Inc., 65 F.3d 1172
(4th Cir. 1995), cert. denied, 116 S. Ct. 921
(1996)............................................ 13
STATUTES AND OTHER AUTHORITIES
Fed. R. Civ. P. Rule 19................................ 17
Fed. R. Civ. P. Rule 23.1.............................. 12
Fed. R. Civ. P. Rule 56................................ 2,18
Cal. Corp. Code ss. 820................................ 13
<PAGE>
Del. Code Ann. tit. 8 ss. 271........................... 15
Fla. Stat. Ann. ss. 607.0830............................ 13
Ind. Code Ann. ss. 23-1-35-1............................ 13
Mich. Stat. Ann. ss. 21.200(541a)....................... 13
NRS ss. 78.138.......................................... 10,12
13,14
18
NRS ss. 78.140.......................................... 13
NRS ss. 78.565.......................................... 15,16
Ohio Rev. Code Ann. ss. 1701.59(E)...................... 14
Or. Rev. Stat. ss. 60.357............................... 13
Tenn. Code Ann. ss. 48-35-204........................... 15
Keith P. Bishop, Nevada Corporation Law & Practice,
ss. 7.15 (1993).................................... 14
<PAGE>
PRELIMINARY STATEMENT
Hilton started this lawsuit, purportedly about the FelCor
transaction, even though Hilton knew that its factual assertions about
FelCor were false and even though Hilton's chief executive stated that
Hilton did not care about the FelCor transaction. In fact, the lawsuit
was designed to deter ITT from making other asset sales.
Hilton does not dispute this. Instead, Hilton tries to distract
attention from the lack of merit of its FelCor claim by asserting that
ITT has entered into 58 management and franchise agreements since the
Hilton bid was announced. This allegation is as lacking as the FelCor
claim. ITT has indeed entered into a record number of new agreements
and, in connection with some of the agreements, has been required to
give hotel owners and franchisees change-of-control "outs" because of
the special risks created by Hilton's hostile tender offer, including
Hilton's plan to license the Sheraton brand to HFS Incorporated
("HFS"). The owners and franchisees do not want to run the risk that
HFS (or some other party selected by Hilton) could mismanage their
properties, any more than FelCor would run this risk. [REDACTED]
Hilton's FelCor claims (and its claims in relation to the
management and franchise agreements) are thus plainly without merit.
What Hilton is left with is some unripe claims relating to purely
speculative "transactions" based on rumor. After a discussion of the
facts relating to FelCor and Hilton's speculative claims, we show
that:
(a) Hilton's unripe claims should be dismissed (see Point I,
infra);
(b) Hilton's claims are derivative and Hilton has no standing to
bring them (see Point II, infra);
<PAGE>
(c) Hilton's Delaware law claims should be dismissed (see Point
III, infra);
(d) Hilton's claims should be dismissed for failure to join
FelCor and others as indispensable parties (see Point IV,
infra); and
(e) Partial summary judgment is appropriate with respect to
Hilton's FelCor claim and its claims with respect to the
management and franchise contracts (see Point V, infra).
FACTUAL BACKGROUND
A. Hilton's FelCor Claim.<F1>
Hilton's opposition papers ("Opp.") do not contain any response
by Hilton's chief executive, Mr. Bollenbach, to the testimony of
FelCor's chairman, Mr. Feldman, that:
-- the change-of-control provision in the FelCor agreement "was
FelCor's idea" and "FelCor had insisted that such a
provision be included" (Feldman Aff. P. 4);
-- FelCor insisted on this provision "because of the
uncertainty about what would happen to the Sheraton brand in
the event of a Hilton acquisition" (id. P. 5);
-- if Hilton could assure Mr. Feldman that the Sheraton brand
would not be passed on to HFS in the event that Hilton
acquired ITT, Mr. Feldman "would talk with him about
agreeing not to exercise the option [to terminate]" (id.);
-- when Mr. Bollenbach declined to provide such an assurance,
Mr. Feldman "told Mr. Bollenbach that in that case [he] had
no choice but to continue FelCor's insistence on including
the change-of- control option in [Felcor's] deal with ITT"
(id. P. 9); and
-- Mr. Bollenbach told Mr. Feldman that "he was not worried
about the FelCor deal itself", and that the real object of
this litigation was to "stop ITT from selling any more
hotels" (id. P. P. 6, 8).
Hilton has chosen not to submit a responsive affidavit from Mr.
Bollenbach. Given the requirements of Fed. R. Civ. P. Rule 56(e) and
(f), that failure to challenge Mr. Feldman's testimony is dispositive.
Moreover, Hilton's further arguments designed to distract attention
1from its failure to controvert Mr. Feldman fare no better.
- --------
<F1> Obviously, ITT does not challenge the ripeness of Hilton's claims
relating to already executed transactions, such as the FelCor contract.
<PAGE>
[REDACTED] And it is irrelevant because FelCor insisted that the
clause be inserted, a fact not changed by the identity of the
draftsman. [REDACTED] <F2>
- --------
<F2> [REDACTED]
<PAGE>
We repeat, the change-of-control provision was included at
FelCor's insistence and for FelCor's own business reasons, and Hilton
knew this when it filed its amended complaint. Thus, Hilton knew when
it filed its amended complaint that each of the following allegations
was false:
-- that the FelCor change-of-control provision is "an attempt
to deter Hilton . . . from acquiring control of ITT" (P.
25);
-- that this provision is "a pure entrenchment device" and "a
'poison pill' designed to destroy the value of ITT" (P. 33)
and "to make ITT takeover-proof" (P. 45); and
-- that this provision "[does] not serve any legitimate purpose
of FelCor" (P. 32).
As Hilton well knew, ITT was compelled to agree to the
change-of-control provision because of FelCor's concerns about
Hilton's plan, if successful in acquiring ITT, to sell or license the
Sheraton brand to HFS, a low-end hotel and motel franchisor. Feldman
Aff. P. 5; [REDACTED]. The legitimacy of this concern cannot be
seriously questioned. Indeed, many of Sheraton's other hotel owners
and franchisees have expressed similar concerns and have demanded the
inclusion in their contracts with ITT of provisions, like FelCor's,
permitting them to terminate their contracts in the event of a Hilton
acquisition. Heinz Aff., Ex. G at 3-4.<F3>
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<F3> The Sheraton partners' concerns are illustrated by a letter to
Sheraton from Eugene Cenci, President of the Association of Sheraton
Franchisees of North America (the "Association"). The Association was
established independently of Sheraton and ITT and directly in response
to Hilton's bid in order to evaluate the
<PAGE>
Hilton does not contest this. [REDACTED] <F4> [REDACTED] <F5>
- --------
impact of a bid on Sheraton franchisees. Mr. Cenci reported
that a survey conducted by the Association showed that:
-- 88.2% of the survey's respondents believe that their
business would be adversely affected if Hilton's takeover
succeeded and if Hilton sold off a significant number of
Sheraton's flagship properties;
-- 91.4% of the survey's respondents believe that if HFS became
their franchisor, the value of their properties would be
diminished; and
-- 92.4% would consider reflagging their properties if HFS
became their franchisor. Heinz Aff., Ex. G at 1.
<F4> [REDACTED]
<F5> [REDACTED]
<PAGE>
This evidence disposes not only of Hilton's FelCor claim but also
of Hilton's efforts to breathe life back into its amended complaint by
diverting attention from the FelCor transaction to the management and
franchise agreements that ITT has entered into since the announcement
of Hilton's tender offer, some of which also contain change-of-control
provisions. Opp. at 1. Change-of- control provisions were included in
some of these agreements--like the FelCor agreement [REDACTED] --at
the insistence of hotel owners and franchisees concerned about the
possibility that Hilton may license the Sheraton brand to HFS or
another inappropriate party, or even mismanage the brand itself. Heinz
Aff., Ex. G. ITT had no choice but to accept these provisions--like
the FelCor provision--in order to continue building its business and
to continue enhancing stockholder value despite the uncertainties
created by Hilton's bid. Id.<F6>
B. Hilton's Speculative Claims.
Hilton seeks to bolster its amended complaint and to distract
attention from its moribund FelCor claim by asserting entirely
speculative claims that seek relief from various rumored prospective
transactions, including rumored transactions involving the sale of
ITT's "crown jewel" hotels. Am. Cpt. P. P. 69(i), (k). Hilton asserts
that "people familiar with the discussions" "have told the media" that
ITT is entertaining bids for several of its "crown jewel" hotels and
is seeking management contracts for these hotels containing
change-of-control provisions. Opp. at 1. ITT has not yet announced any
such sales, much less
- --------
<F6>Hilton's further assertion (Opp. at 2, 18) that these
management and franchise agreements amount to the sale or "break-up"
of the corporation is obviously false. These are either new
contracts--which are purely accretive--or renewal agreements, and they
do not involve the sale by ITT of any assets.
<PAGE>
consummated them. Indeed, Hilton does not even allege that any such sales are
imminent.<F7>
C. ITT's Comprehensive Plan.<F8>
Hilton also seeks to bolster its amended complaint by referring
to ITT's recently announced Comprehensive Plan (the "Plan"). Opp. at
2. Hilton disingenuously mischaracterizes the Plan, as it
mischaracterizes the FelCor transaction and ITT's recent management
and franchise contracts, as a sale or "break-up" of the corporation.
The Plan does not involve a sale or "break-up" of ITT. It involves the
widely applauded separation of ITT's gaming and lodging business, its
educational services business and its telephone directories business
into distinct, publicly-traded entities, in each of which ITT's
stockholders will hold shares. Thus, after implementation of the Plan,
with the exception of a value-enhancing sale of a minority interest in
ITT's telephone directories business (to Clayton, Dubilier & Rice,
Inc. after stockholder approval), all of ITT's businesses will
continue to be owned, as now, by ITT's stockholders.
Moreover, both Hilton's public statements and statements of ITT
stockholders since ITT announced the Plan belie Hilton's allegations
that the ITT Board is seeking "to deprive ITT shareholders of the
opportunity to receive the benefits of Hilton's tender offer" (Am.
Cpt. P. 1); that the Board's rejection of the Hilton bid as inadequate
was "hasty and ill-informed" (id. P. 21); and that the Board adopted
the Plan "without any effort to ascertain whether Hilton is willing to
provide
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<F7>On August 3, 1997, ITT announced that it had entered into an
agreement in principle with Davis Gaming, L.L.C. ("Davis Gaming")
pursuant to which (i) the parties will form a 50/50 joint venture to
own The Desert Inn Resort and Casino (the "Desert Inn") -- which is
not a so-called "crown jewel" -- and a 34 acre parcel of land adjacent
to the Desert Inn; (ii) ITT will manage the Desert Inn for 10 years
with an option to extend the management contract for an additional 10
years; and (iii) ITT will also manage a new hotel and casino to be
developed on the 34 acre parcel. See Heinz Aff., Ex. O. At the
insistence of Davis Gaming, the management contracts will include
change-of-control provisions similar to the FelCor transaction. Id. at
2.
<F8>The Plan is addressed in ITT's action for a declaratory
judgment, filed on July 16, 1997, Civ. No. CV-5-97-00893-DWH (RLH).
<PAGE>
greater value to ITT stockholders" than the Plan can deliver (Opp. at
2). Mr. Bollenbach has publicly acknowledged that, as a result of the
Plan, ITT's stock "moved to a price level that doesn't make any sense
to me and to our board" (Heinz Aff., Ex. M); that Hilton does not
intend to raise its price or otherwise revise the terms of its bid
(Heinz Aff., Ex. N); and that "at this point as far as I'm concerned
it's largely a lawyers problem" (id.). And the ITT Shareholder
Plaintiffs have informed this Court that they "consider that when the
Hilton offer (in its current form) is compared to the Comprehensive
Plan, the Comprehensive Plan better serves the interests of ITT's
shareholders".<F9> Thus, not only is Hilton's bid concededly inferior
to ITT's Plan, but Hilton does not intend to make any further effort
to demonstrate the asserted merits of its bid to the market--rather,
Hilton is asking this Court to replace ITT's Board as the party
responsible for managing ITT and to replace the market as the arbiter
of ITT's business and financial performance, and Hilton's bid.
ARGUMENT
I. HILTON'S UNRIPE CLAIMS SHOULD BE DISMISSED.
In determining whether claims are ripe, a court must consider
"the fitness of the issues for judicial decision" and "the hardship to
the parties of withholding court consideration". Pacific Gas & Elec.
Co. v. State Energy Resources Conservation & Dev. Comm'n, 461 U.S.
190, 201 (1983) (quoting Abbott Labs. v. Gardner, 387 U.S. 136, 149
(1967)); see also Duval Ranching Co. v. Glickman, CV-N-95-38-ECR, 1997
U.S. Dist. LEXIS 7251, at *34 (D. Nev. March 13, 1997). Hilton has
ignored both of these requirements.
First, Hilton's speculative claims are not fit for judicial
decision. Hilton would have this Court issue an advisory opinion
concerning transactions that have
- --------
<F9>See ITT Shareholder Plaintiffs' Opening Memorandum Of Points And
Authorities In Response To ITT Corporation's Request For Declaratory
Relief (filed on July 31, 1997 in CV-S-97-00893-DWH (RLH)) at 2-3.
<PAGE>
not--and indeed may not--ever occur. Hilton seeks to confuse the
consummation of a transaction with its announcement. Opp. at 7.
Although claims may certainly be ripe before they have been
consummated, it is a very different matter when they have not even
been signed or announced, and are purely the stuff of rumor and
speculation. Requiring this Court to adjudicate claims involving
transactions that may never occur is a waste of judicial resources.
See Arizona v. Atchison, Topeka & Santa Fe R.R. Co., 656 F.2d 398, 402
(9th Cir. 1981).
Moreover, as this Court has recognized, "'inquiries concerning
fiduciary duties are inherently particularized and contextual'".
Hilton Hotels Corp. v. ITT Corp., 962 F. Supp. 1309, 1311 (D. Nev.),
aff'd, 116 F.3d 1485 (9th Cir. 1997). Hilton makes no attempt to show
how the Court could properly address claims regarding the
particularized circumstances of transactions that have not yet
occurred, and the terms of which do not exist.<F10> Not even Hilton
can seriously suggest that this Court should prevent any transaction
by ITT, regardless of its terms.
Second, Hilton has failed to demonstrate "the hardship to the
parties of withholding court consideration" of its claims. See Pacific
Gas, 461 U.S. at 201. Clearly, Hilton will suffer no hardship should
this Court refrain from ruling on the validity of any future ITT
transactions before those transactions are even signed and announced,
and Hilton has made no attempt to argue that it would.
II. HILTON'S BREACH OF FIDUCIARY DUTY CLAIMS SHOULD BE DISMISSED.
A. Hilton's Claims Are Derivative.
NRS 78.138(1) provides that "directors and officers shall
exercise their powers in good faith and with a view to the interests
of the corporation". That
- --------
<F10>Indeed, Hilton's own authority recognizes the dangers of
pushing for court action where resolution of the issues depends on
further factual developments. See Thomas v. Union Carbide Agric. Prod.
Co., 473 U.S. 568, 581 (1985) (threatened future action is not deemed
to be "certainly impending" if resolution of the issues depends on
future factual developments).
<PAGE>
statutory language makes clear that a Nevada corporation's director's
duties run to the corporation, not directly to the stockholders, and
thus that a claim for breach of those duties must be asserted
derivatively. Indeed, even absent such a statute, numerous courts have
held that breach of fiduciary duty claims are derivative.<F11> In
particular, courts have recognized that "[a]ny misconduct on the part
of the directors in reacting to a tender [offer] for all the
corporation's stock will harm all stockholders", and thus that claims
in relation to such conduct are derivative. O'Neill v. Church's Fried
Chicken, Inc., 910 F.2d 263, 267 (5th Cir. 1990); see also Kahn v.
Sprouse, 842 F. Supp. 423, 427 (D. Or. 1993) ("Unocal is not grounds
on which to assert a direct action").
Hilton simply ignores this authority and asserts that tender
offerors have standing to bring breach of fiduciary claims. Opp. at
10. Apart from the fact that the authority Hilton relies on is
inapposite,<F12> Hilton makes no effort to reconcile its assertion
either with the plain language of NRS 78.138(1) or with any of the
other authorities cited by ITT.<F13>
Hilton's further assertion that claims alleging interference with
the stockholder franchise may be asserted directly (Opp. at 10-11) is
irrelevant. ITT's hotel sales and related change-of-control provisions
cannot plausibly be
- --------
<F11>See, e.g., Friedman v. Mohasco Corp., 929 F.2d 77, 79 (2d Cir.
1991) (breach of fiduciary duties "could only be asserted derivatively
on behalf of the corporation"); Eagle v. AT&T, 769 F.2d 541, 546-47
(9th Cir. 1985) ("Because shareholders do not own the corporation's
assets, the wrongful depletion of corporate assets is an injury to the
corporation and only an indirect injury to the stockholders.").
<F12>None of the cases cited by Hilton involved a statutory
provision equivalent to NRS 78.138(1). Moreover, both Klaus v.
Hi-Shear Corp., 528 F.2d 225, 232 (9th Cir. 1975), and CRTF Corp. v.
Federated Dep't Stores, Inc., 683 F. Supp. 422, 428-32 (S.D.N.Y. 1988)
considered standing under the Securities Exchange Act of 1934, not
standing for a breach of fiduciary duty claim.
<F13> Indeed, one of Hilton's own authorities contradicts Hilton,
holding that a tender offeror does not have an individual claim "in
its capacity as tender offeror for the Board's breach of fiduciary
duties", since the "[e]stablished precedent is that a board owes no
duty to a tender offeror". See Newell Co. v. Vermont Am. Corp., 725 F.
Supp. 351, 368 (N.D. Ill. 1989).
<PAGE>
regarded as interfering with the stockholder franchise, and Hilton
makes no serious attempt to argue that they do.<F14>
B. These Derivative Claims Should Be Dismissed.
Hilton's interests--as the Shareholder Plaintiffs highlighted on
July 31 (see note 9, supra)--are plainly adverse to the interests of
ITT and the other ITT stockholders, on whose behalf a derivative claim
must be brought.<F15> Not only is Hilton seeking to appropriate value
from the other stockholders by stampeding them into accepting its
inadequate and coercive bid, but Hilton has acknowledged that it does
not even care about the FelCor transaction, which, at least
originally, was the focus of this lawsuit. Feldman Aff. P. P. 6, 8.
Thus, Hilton is not the proper party to bring these derivative
claims.<F16>
- --------
<F14>A mere conclusory assertion that they do is not enough--facts
sufficient to support this allegation must be pleaded. Fleming v.
Lind- Waldock & Co., 922 F.2d 20, 23 (1st Cir. 1990); Richman v. W.L.
Gore & Assoc., Inc., 881 F. Supp. 895, 905 (S.D.N.Y. 1995). By
contrast, in each of the authorities Hilton relies on, the plaintiffs
claimed that their vote had been severely diluted or rendered useless
by the alleged conduct. See Packer v. Yampol, C.A. No. 8432, 1986 WL
2582, at *9 (Del. Ch. Apr. 18, 1986) (claim that newly issued
supervoting preferred stock effectively preordained the outcome of
election for directors); Spillyards v. Abboud, 662 N.E.2d 1358,
1364-65 (Ill. App. Ct.), reh'g denied, C.A. Nos. 1-93-3866, 1-94-0075
(Apr. 3, 1996) (claim that voting agreement for director nominees
diluted voting power of remaining non-director shareholders); Lipton
v. News Int'l, 514 A.2d 1075, 1079 (Del. 1986) (claim that exchange
share agreement secured defendant's veto power over all shareholder
actions subject to a supermajority voting requirement).
<F15> Indeed, Hilton concedes that "[t]he adversity of interests
between Hilton as offeror and ITT as target is self- evident". Opp. at
7.
<F16>Contrary to Hilton's assertion (Opp. at 11), the court in
Newell did not reject an "identical" argument. In Newell, the
plaintiff sought to increase his ownership of the target company from
11% to 20% so that he could utilize equity accounting to maximize his
investment, and the plaintiff offered to accept a standstill agreement
at 25%. Newell, 725 F. Supp. at 356. Thus, the court noted that there
was no economic antagonism between the plaintiff and the other
shareholders, as all were concerned with maximizing their investment.
Id. at 369. Hilton, on the other hand, seeks to maximize its
investment at the expense of the other stockholders. Hilton's attempt
to distinguish Baron v. Strawbridge & Clothier, 646 F. Supp. 690 (E.D.
Pa. 1986) (Opp. at 12) also fails. First, under the terms of Hilton's
two-tiered offer, the first 50% of ITT stockholders to tender would
not only receive less than market value for their shares, but since
they would have cashed out their shares, they would not be able to
"participate in any proceeds from sale of the
<PAGE>
Moreover, Hilton has failed to comply with the procedural requirements
for a derivative claim. Hilton concedes that its amended complaint has
not been verified, as required by Fed. R. Civ. P. Rule 23.1. Opp. at
13.<F17> Thus, Counts III, IV, VI and VII should be dismissed.<F18>
III. COUNTS III-V SHOULD BE DISMISSED FOR FAILURE TO STATE A CLAIM
UNDER NEVADA LAW.
A. Hilton's Unocal Count Fails To State A Claim.
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), is
not the law of Nevada. Under Nevada law, otherwise lawful responses to
hostile bids are protected so long as they are undertaken "in good
faith and with a view to the interests of the corporation". NRS
78.138(1), (4). As Mr. Sader testified:
"In considering A.B. 644, the Legislature reviewed, but by
enacting NRS 78.138(1) did not adopt, the approach taken by some
other jurisdictions in applying a heightened standard of scrutiny
to the actions taken by directors in certain circumstances, such
as in response to a proposed acquisition of control of the
corporation". Sader Aff. P. 10; see also Keith P. Bishop, Nevada
Corporation Law & Practice, ss. 7.15 at 173-74 (1993).<F19>
- --------
company's assets of any future benefits". Id. at 695-96. Second,
stockholders on the back-end of the Hilton offer would receive Hilton
stock subject to unspecified collars which make the value of such
stock highly uncertain. Thus, Hilton's interests are "manifestly
antagonistic" to those of other stockholders. Id. at 695.
<F17>In addition, Hilton's assertion that the demand requirement
under Rule 23.1 is inapplicable because demand would have been futile
(Opp. at 13) rests solely on Hilton's unsupported assertion that ITT's
Board had an entrenchment motive in the transactions at issue. That
conclusory assertion is not sufficient--as Hilton acknowledges, it is
necessary to "plead facts tending to show that the directors had an
entrenchment motive". Opp. at 13; see also note 14, supra. This Hilton
has not done.
<F18>See Abrams v. Koether, 766 F. Supp. 237, 258 (D.N.J. 1991)
(dismissing complaint in part because plaintiffs failed to verify
complaint, and instead offered to cure it by dropping a footnote in
opposition brief); Greenspun v. Del E. Webb Corp., 634 F.2d 1204,
1208-10 (9th Cir. 1980) (affirming dismissal for failure to comply
with Rule 23.1).
<F19>Contrary to Hilton's argument that the Sader affidavit is not
admissible (Opp. at 15), this Court has already held that it is. That
holding is the law of the case. Thomas v. Bible, 983 F.2d 152, 154
(9th Cir. 1993); Milgard Tempering, Inc. v. Selas Corp. of Am., 902
F.2d 703, 715 (9th Cir. 1990).
<PAGE>
Contrary to Hilton's assertion (Opp. at 15), Mr. Sader's affidavit is
perfectly consistent with the legislative history of NRS
78.138(1).<F20> Moreover, in every other state with a statute similar
to Nevada's, where the statute has been interpreted, the courts have
concluded that this form of statute eliminates the "reasonably prudent
director" standard that underpins Unocal. See, e.g., WLR Foods, Inc.
v. Tyson Foods, Inc., 65 F.3d 1172, 1184-85 (4th Cir. 1995), cert.
denied, 116 S. Ct. 921 (1996).<F21>
Thus, Hilton's Unocal count should be dismissed.
B. Hilton's Revlon Count Fails To State A Claim.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173
(Del. 1986), is not the law of Nevada. In addition to the fact that
NRS 78.138(1) makes "good faith" the measure of a board's performance
of its duties to the corporation, the Revlon doctrine is inconsistent
with the Board's authority to consider a variety of interests other
than the short-term interests of stockholders in
- -------------------
<F20>Hilton's argument that the "good faith" standard in NRS
78.138(1) was contained in predecessor statutes (Opp. at 15 n.*) is
misleading. This language was formerly contained in a provision
dealing solely with directors' duties regarding interested
transactions, not with directors' duties generally. See former NRS
78.140(1); former Cal. Corp. Code ss. 820. And Hilton's further
argument that this "good faith" language was previously construed to
impose an objective test is simply wrong. None of the authorities
relied on by Hilton so held. Leavitt v. Leisure Sports, Inc., 734 P.2d
1221, 1224 (Nev. 1987), merely held that, under NRS 78.140, directors
owed "a duty of good faith, honesty and full disclosure", and that
contracts between directors and the corporation were valid if they
were "fair to the corporation". National Auto. & Cas. Ins. Co. v.
Payne, 67 Cal. Rptr. 784, 790 (Cal. Ct. App. 1968), and Buchanan v.
Henderson, 131 B.R. 859, 868 (D. Nev. 1990), rev'd on other grounds,
985 F.2d 1021 (9th Cir. 1993), merely noted that Cal. Corp. Code ss.
820 and NRS 78.140 required "good faith" with respect to interested
director transactions and, separately, that directors were bound to
exercise reasonable care in connection with such transactions; neither
court held that the latter proposition followed from the former.
<F21>By contrast, the authorities relied on by Hilton from other
jurisdictions (Opp. at 14 n.*) are all inapposite since none of them
involved a statutory provision similar to NRS 78.138(1). Missouri and
Wisconsin do not have comparable provisions, and Florida, Indiana,
Michigan and Oregon's statutes all contain an express "ordinarily
prudent person" standard. Fla. Stat. Ann. ss. 607.0830; Ind. Code Ann.
ss. 23-1-35-1; Mich. Stat. Ann. ss. 21.200 (541a); Or. Rev. Stat. ss.
60.357.
<PAGE>
exercising its powers, including in response to a hostile tender
offer. NRS 78.138(3), (4).
Contrary to Hilton's assertion (Opp. at 17), Delaware law does
not, like Nevada law, permit broad consideration of the interests of
other constituencies in responding to a hostile takeover attempt. The
Revlon court held that such interests could only be considered
"provided there are rationally related benefits accruing to the
stockholders". Revlon, 506 A.2d at 182.<F22> Moreover, Revlon's
mandate that, after the Board has decided to sell the corporation, it
may no longer take these interests into account and may only consider
the short- term interests of stockholders in securing the best price
(id.),<F23> is flatly inconsistent with Nevada law. NRS 78.138(3)
makes clear that the Board may consider the interests of other
constituencies in exercising its powers at any time; this authority
does not end if and when the corporation is put up for sale.<F24>
Thus, Hilton's Revlon count should be dismissed.<F25>
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<F22>See also Stahl v. Apple Bancorp, Inc., 579 A.2d 1115, 1124 n.9
(Del. Ch. 1990) (noting that the traditional Delaware model of the
nature of the corporation, which sees shareholders as "owners", limits
consideration of other constituencies' interests).
<F23>The Revlon court held that the target's board breached its
duty of loyalty to stockholders by seeking to protect the interests of
noteholders. Revlon, 506 A.2d at 182.
<F24> See Stepak v. Schey, 553 N.E.2d 1072, 1078 (Ohio 1990)
("[T]he directors are not held to a duty to the shareholders to
obtain, like an auctioneer, the highest price possible for their
shares of the corporation. The law of the State of Delaware to that
effect as pronounced in Revlon is not applicable in Ohio."). The Ohio
statutory provision relied on in Stepak is similar to the Nevada
statute. Ohio Rev. Code Ann. ss. 1701.59(E). By contrast, all of the
authorities that Hilton relies on from other jurisdictions (Opp. at 16
n.**) are inapposite, since none of them involved such a statute.
Virginia and Michigan do not have "multiple constituency" statutes,
and Tennessee's statute only provides that directors may consider the
interests of multiple constituencies if their charter so provides.
Tenn. Code Ann. ss. 48-35-204.
<F25> In any event, even under Delaware law, ITT's actions would
not trigger Revlon duties. The assets that ITT has allegedly sold
constitute only a small proportion of ITT's total assets--clearly not
sufficient for the sale or break-up of the company that is required by
Revlon. See Tomczak v. Morton Thiokol, Inc., Civ. No. 786, 1990 WL
42607, at *15 (Del. Ch. Apr. 5, 1990) (sale of one of four corporate
divisions does not trigger Revlon duties). And Hilton's attempt (Opp.
at 17) to
<PAGE>
C. Count V Fails To State A Claim.
NRS 78.565 requires a stockholder vote where a corporation
"sell[s], lease[s] or exchange[s] all of its property and assets". The
sale by ITT of a small proportion of its assets to FelCor does not
constitute a sale of "all" of ITT, and thus the provisions of NRS
78.565 are not implicated.
Hilton argues that "all" does not mean "all", but rather
"substantially all". Opp. at 18. This flies in the face of the
statute's plain language.<F26> Moreover, the authority Hilton relies
on is inapposite. Although Hilton cites Umbriac v. Kaiser, 467 F.
Supp. 548, 553 n.4 (D. Nev. 1979), for the proposition that NRS 78.565
"parallels" a Delaware statute, Del. Code. Ann. tit. 8 ss. 271, which
expressly provides for a shareholder vote where "all or substantially
all" of a company's assets or property are sold (Opp. at 18), Umbriac
itself states that "NRS 78.565 governs stockholder approval of a
disposition of all corporate assets". Umbriac, 467 F. Supp. at 553
(emphasis added). Umbriac involved the complete liquidation of a
company--involving "all" of its assets--and thus never addressed
whether the term "all" under Nevada law was analogous to "all or
substantially all" under Delaware law.<F27>
- --------
parlay ITT's recently announced Plan into a sale or break-up also
fails. As explained above (see pp. 7-8, supra), the Plan does not
involve a sale or break-up of ITT; it involves the spinoff of some of
ITT's businesses to companies owned by ITT's stockholders and a sale
of a minority interest in ITT's telephone directories business. See In
re Santa Fe Pacific Corp. Shareholder Litig., 669 A.2d 59, 71 (Del.
1995) (requiring sale or break- up of corporation to trigger Revlon
duties).
<F26> See Holliday v. McMullen, 756 P.2d 1179, 1180 (Nev. 1988)
(words within statutes should be given their common sense meaning). If
the Nevada legislature had intended "all" to mean "substantially all",
it would have said so. Indeed, NRS 78.565 was amended in 1989 and 1993
without any change to the "all" provision.
<F27> Hilton's reliance (Opp. at 19) on the Model Business
Corporation Act is also misplaced. The reference in the Model Business
Corporation Act-- which itself uses the term "all or substantially
all"--does not refer to a discussion of Nevada's "all" provision, but
rather mistakenly--and without explanation--groups Nevada as one of
several states that require shareholder approval for a sale of all or
substantially all of a corporation's assets. Hilton's other authority,
Foster v. Arata, 325 P.2d 759, 767 (Nev. 1958), is simply
irrelevant--it dealt with a completely different statute.
<PAGE>
Moreover, the FelCor transaction obviously does not constitute a
sale of anything remotely close to "substantially all" of ITT's
assets. See note 6, supra. Thus, even under Delaware law, there would
be no requirement of a stockholder vote.
IV. HILTON'S NEW COUNTS SHOULD BE DISMISSED FOR FAILURE TO JOIN
INDISPENSABLE PARTIES.
Hilton seeks to challenge the FelCor transaction, concededly
without joining FelCor. Now, Hilton also seeks to challenge some
number of ITT's recent management and franchise agreements without
joining any of the counterparties to those transactions, or even
identifying who they are. That is plainly improper. It is the law of
this Circuit that "in an action to set aside a lease or a contract,
all parties who may be affected by the determination of the action are
indispensable". Lomayaktewa v. Hathaway, 520 F.2d 1324, 1325 (9th Cir.
1975), cert. denied sub nom. Susenkewa v. Kleppe, 425 U.S. 903 (1976).
Hilton has cited no authority to the contrary.<F28>
Hilton's assertion that the general rule should not apply here is
unfounded. Opp. at 20. As an adverse party to a contract, FelCor's
interests are plainly not identical to ITT's, and--as Hilton's recent
motion to compel ITT to unseal FelCor's confidential documents
highlights--ITT cannot adequately represent those interests.<F29>
Since FelCor will certainly be "affected" by a rescission of the
contract, it is an indispensable party. The same is true for the
counterparties to
- --------
<F28> Indeed, in one of Hilton's authorities (Opp. at 20), United
States ex rel. Gulbronson v. D&J Enterprises, No. 93-C-233-C, 1993
U.S. Dist. LEXIS 19843, at *13 (W.D. Wis. Dec. 23, 1993), the court
expressly confirmed that "[a]s a general rule, an action to set aside
a contract should not proceed without the presence of all parties to
the contract".
<F29> Hilton's authorities (Opp. at 20) are inapposite. Neither
involved a two-party contract where one of the parties was absent from
the litigation. In Gulbronson, a Native American tribe was held not to
be a necessary party to a lawsuit in which members of the tribe were
already parties and were representing the tribe's interests. See
Gulbronson, 1993 U.S. Dist. LEXIS 19843, at *12-14. And in Fidelity &
Deposit Co. v. City of Sheboygan Falls, 713 F.2d 1261, 1268 (7th Cir.
1983), a contractor was held not to be an indispensable party where
his interests would be represented by the company that posted his
performance bond on the contract at issue.
<PAGE>
each of the management and franchise agreements that Hilton seeks to
challenge. In their absence, Hilton's claims must be dismissed.<F30>
V. IN THE ALTERNATIVE, PARTIAL SUMMARY JUDGMENT SHOULD BE GRANTED.
Hilton's conclusory assertions about the FelCor transaction are
false, as Hilton knew when it filed its amended complaint. See pp.
2-6, supra. Moreover, Hilton's assertions about the other management
and franchise agreements are also demonstrably unfounded. Id. As Mr.
Feldman's affidavit and the other evidence submitted by ITT shows--
[REDACTED]--(a) change-of-control provisions were demanded both by
FelCor and by other hotel owners and franchisees because of their
concerns about Hilton's intentions, including its alliance with HFS;
(b) these hotel owners and franchisees insisted upon such provisions
for their own legitimate business reasons; (c) ITT was compelled to
agree to these provisions in order to continue developing its business
and to continue enhancing stockholder value; (d) Hilton itself does
not view the sale of hotels to FelCor as material or threatening; and
(e) the 58 management and franchise agreements that Hilton seeks to
challenge are all either purely accretive, new contracts or renewal
agreements and do not involve the sale of any assets by ITT. Id.
Hilton has not submitted any evidence that contradicts any of Mr.
Feldman's testimony or any of the other evidence submitted by ITT, or
that raises a genuine
- --------
<F30> Hilton argues that joinder of FelCor rather than dismissal of
the action is appropriate. Opp. at 20-21. However, Hilton has made no
effort to demonstrate, as it must, that the Court has personal
jurisdiction over FelCor--which is a partnership owned by a Maryland
corporation and a California corporation and has its principal place
of business in Texas-- nor that venue in this Court would be preserved
if FelCor were joined. Moreover, Hilton has not attempted to explain
how the Court could have diversity jurisdiction over its claims if
FelCor were joined, given that Hilton has its principal place of
business in California and one of FelCor's partners is incorporated
there. And Hilton has made no effort to demonstrate that jurisdiction
and venue could be preserved if the counterparties to the management
and franchise agreements were joined. Indeed Hilton has not even
identified who these counterparties are. Accordingly, under Fed. R.
Civ. P. Rule 19(b), dismissal is appropriate.
<PAGE>
issue for trial with respect to any of these matters. Most notably,
Hilton has not submitted a responsive affidavit from Mr. Bollenbach,
despite its obligation to do so pursuant to Fed. R. Civ. P. Rule
56(e):
"When a motion for summary judgment is made and supported as
provided in this rule, an adverse party may not rest upon the
mere allegations or denials of the adverse party's response, but
the adverse party's response, by affidavits or as otherwise
provided in this rule, must set forth specific facts showing that
there is a genuine issue for trial".<F31>
Instead, Hilton argues that, even if third parties did demand the
change- of-control provisions, it was a breach of fiduciary duty for
ITT's Board to agree to them. Opp. at 21. Hilton offers no explanation
for this assertion. Moreover, Hilton's assertion ignores the fact
that, because of the Sheraton partners' concerns about Hilton's
intentions, including the alliance with HFS, ITT was compelled to
agree to these provisions in order to continue developing its business
and to continue enhancing stockholder value. See pp. 2-6, supra.
[REDACTED] Under these circumstances, the change-of-control provisions
were plainly entered into "in good faith and with a view to the
interests of the corporation", as required by NRS 78.138(1).<F32>
Thus, summary judgment is appropriate on Hilton's claims with
respect to the FelCor transaction and the management and franchise
agreements.
- --------
<F31> Hilton has also failed to submit an affidavit explaining its
failure to respond to ITT's evidence, as required by Fed. R. Civ. P.
Rule 56(f).
<F32> Thus, Hilton's authorities (Opp. at 21) are inapposite. In
neither Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34
(Del. 1994), nor Revlon was the board required to agree to the
provision at issue in order to continue developing its business and
enhancing stockholder value. Moreover, Paramount and Revlon were both
Delaware cases, and thus NRS 78.138(1) was not applicable.
<PAGE>
CONCLUSION
For the foregoing reasons, the Court should dismiss Counts
III-VII of Hilton's First Amended and Supplemental Complaint or, in
the alternative, grant partial summary judgment.
DATED this 5th day of August, 1997.
KUMMER KAEMPFER BONNER & RENSHAW
By /s/ Von S. Heinz
THOMAS F. KUMMER
VON S. HEINZ
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
Attorneys for Defendant/Counterclaimant
ITT CORPORATION
<PAGE>
CERTIFICATE OF SERVICE
Pursuant to Fed. R. Civ. P. 5(b), I hereby certify that service
of the foregoing ITT'S REPLY MEMORANDUM OF POINTS AND AUTHORITIES IN
SUPPORT OF ITS MOTION TO DISMISS COUNTS III-VII OF THE FIRST AMENDED
AND SUPPLEMENTAL COMPLAINT OR, IN THE ALTERNATIVE, FOR PARTIAL SUMMARY
JUDGMENT was made this date by delivering by hand a true copy of the
same to the following:
Steve Morris
Kristina Pickering
Schreck Morris
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
and by delivering by facsimile and by overnight mail a true copy of
the same to the following:
Bernard W. Nussbaum
Eric M. Roth
Marc Wolinsky
Scott L. Black
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
DATED this 5th day of August, 1997.
/s/ Judith A. Viennau
An Employee of Kummer Kaempfer Bonner &
Renshaw
