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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(Amendment No. 35)
SOLICITATION/RECOMMENDATION STATEMENT
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
ITT CORPORATION
(Name of Subject Company)
ITT CORPORATION
(Name of Person(s) Filing Statement)
Common Stock, no par value
(including the associated Series A Participating
Cumulative Preferred Stock Purchase Rights)
(Title of Class of Securities)
450912 10 0
(CUSIP Number of Class of Securities)
RICHARD S. WARD, Esq.
Executive Vice President,
General Counsel and Corporate Secretary
ITT Corporation
1330 Avenue of the Americas
New York, NY 10019-5490
(212) 258-1000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person(s) Filing Statement)
With a copy to:
PHILIP A. GELSTON, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
(212) 474-1000
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<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.
The response to Item 8 is hereby amended by adding the
following after the final paragraph of Item 8:
On September 22, 1997, Hilton filed a Reply Memorandum of
Points and Authorities in Support of Motion for Injunctive Relief and
in Opposition to ITT's Request for Declaratory Relief (the "September
22 Hilton Reply Memorandum"). A copy of the September 22 Hilton Reply
Memorandum is filed as Exhibit 102 hereto and is incorporated herein
by reference.
On September 29, 1997, the Company announced the extension
of its previously announced Equity Tender Offer. The Equity Tender
Offer is now scheduled to expire at 5:00 p.m., New York City time, on
Monday, October 6, 1997, unless extended. A copy of a press release
announcing the extension of the Equity Tender Offer is filed as
Exhibit 103 hereto and is incorporated herein by reference.
<PAGE>
Item 9. Exhibits.
The response to Item 9 is hereby amended by adding the
following new Exhibits:
102. Hilton Reply Memorandum of Points and Authorities in Support
of Motion for Injunctive Relief and in Opposition to ITT's
Request for Declaratory Relief dated September 22, 1997.
103. Text of Press Release issued by the Company dated
September 29, 1997.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this Statement is
true, complete and correct.
ITT CORPORATION
By /s/ RICHARD S. WARD
-------------------
Name: Richard S. Ward
Title: Executive Vice President,
General Counsel and
Corporate Secretary
Dated as of September 30, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
(102) Hilton Reply Memorandum of Points and Authorities
in Support of Motion for Injunctive Relief and in
Opposition to ITT's Request for Declaratory Relief
dated September 22, 1997..........................
(103) Text of Press Release issued by the Company dated
September 29, 1997................................
[Exhibit 102]
CONTAINS CONFIDENTIAL
DISCOVERY MATERIALS --
SUBJECT TO COURT ORDER
SCHRECK MORRIS
STEVE MORRIS
KRISTINA PICKERING
MATTHEW MCCAUGHEY
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
(702) 474-9400
WACHTELL, LIPTON, ROSEN & KATZ
BERNARD W. NUSSBAUM
KENNETH B. FORREST
ERIC M. ROTH
MARC WOLINSKY
STEPHEN R. BLACKLOCKS
SCOTT L. BLACK
51 West 52nd Street
New York, New York 10019
(38(212) 403-1000
Attorneys for Hilton Hotels Corporation
and HLT Corporation
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
- ------------------------------)
HILTON HOTELS CORPORATION and ) CV-S-97-00095-PMP (RLH)
HLT CORPORATION, )
) CV-S-97-00893-PMP (RLH)
Plaintiffs, )
) REPLY MEMORANDUM OF POINTS
-vs- ) AND AUTHORITIES IN SUPPORT OF
) MOTION FOR INJUNCTIVE AND
ITT CORPORATION, et al., ) DECLARATORY RELIEF AND IN
) OPPOSITION TO ITT'S REQUEST FOR
Defendants. ) DECLARATORY RELIEF
)
- ------------------------------) REPLY DECLARATIONS OF DANIEL
ITT CORPORATION, et al., ) H. BURCH AND PROFESSOR
) BERNARD WOLFMAN, REPLY
Plaintiffs, ) AFFIDAVITS OF PROFESSOR DANIEL
) FISCHEL, JEFFREY R. GREENE AND
-vs- ) MARC WOLINSKY AND EXHIBITS
) THERETO
HILTON HOTELS CORPORATION and )
HLT CORPORATION, ) ORAL ARGUMENT SCHEDULED FOR
) SEPTEMBER 29, 1997
Defendants. )
- ------------------------------)
<PAGE>
TABLE OF CONTENTS
Page
I. INTRODUCTION.................................................. 1
II. REPLY STATEMENT OF FACTS...................................... 5
A. ITT Discovers its Vulnerability.................. 5
B. ITT's First Response: "Golden Parachutes"....... 6
C. The Genesis of the Plan.......................... 7
D. The Motivation for the Upside-Down Structure of
the Plan......................................... 8
E. The Development of the "Comprehensive Plan"...... 10
F. The CD&R Transaction............................. 11
G. The ITT Board Consideration of the Plan.......... 12
1. The decision not to seek a vote on the
plan or the staggered board.............. 13
2. The decision not to seek a tax ruling.... 14
3. The "tax pill"........................... 17
4. The "value" of the World Directories
"stub" and the CD&R transaction.......... 18
H. The August 14 Board Meeting...................... 20
ARGUMENT........................................................... 21
III. ITT'S COMPREHENSIVE PLAN UNLAWFULLY INTERFERES
WITH SHAREHOLDER VOTING................................. 21
A. The ITT Directors' Alleged "Good Faith" Does Not
Justify Interference With The Stockholder Franchise 21
B. Shoen Does Not Require "Complete Stockholder
Disenfranchisement".............................. 23
C. The Board's Primary Purpose Is To Interfere With
Shareholder Rights............................... 26
D. The ITT Board Lacks a "Compelling Justification"
for Interfering with the Shareholder Franchise... 28
IV. NRS 78.390 REQUIRES A SHAREHOLDER VOTE ON THE
PLAN.................................................... 30
V. THE ITT DIRECTORS HAVE FAILED TO CARRY THEIR
BURDEN OF SHOWING THAT THEIR PLAN IS FAIR AND
DID NOT EXERCISE THE GOOD FAITH REQUIRED BY
NRS 78.138.............................................. 33
<PAGE>
A. The Plan Is Tainted By Self-Interest and Is Not Fair
To ITT Or Its Shareholders........................ 33
B. The ITT Directors Did Not Act in Good Faith and Did
Not Exercise Due Care............................. 34
1. The ITT board has not acted in good
faith..................................... 35
2. The ITT board has not acted with due
care...................................... 37
VI. THE ITT DIRECTORS HAVE FAILED TO SHOW THAT THE
COMPREHENSIVE PLAN IS A REASONABLE RESPONSE TO
THE HILTON BID........................................... 39
A. Hilton's Offer Does Not Pose a Threat............. 39
B. The Comprehensive Plan is Coercive, Preclusive and
Unreasonable...................................... 41
VII. THE ITT DIRECTORS HAVE FAILED TO SATISFY THEIR
REVLON DUTIES............................................ 44
VIII. HILTON AND THE ITT SHAREHOLDERS WILL SUFFER
IRREPARABLE INJURY IN THE ABSENCE OF INJUNCTIVE
RELIEF. ITT WILL SUFFER NONE............................ 46
IX. CONCLUSION............................................... 49
<PAGE>
TABLE OF AUTHORITIES
Cases Page
Aprahamian v. HBO & Co., 531 A.2d 1204 (Del. Ch. 1987)........... 48
Blasius Indus. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988)...... passim
Buchanan v. Henderson, 131 B.R. 859 (D. Nev. 1990), rev'd on
other grounds, 985 F.2d 1021 (9th Cir. 1993)................ 22n*,34
Chalk v. United States Dist. Court, 840 F.2d 701 (9th Cir. 1988). 47
Commonwealth Assocs. v. Providence Health Care, Inc., No. Civ. A.
13135, 1993 WL 432779 (Del. Ch. Oct. 22, 1993).............. 26n*
Drobbin v. Nicolet Instrument Corp., 631 F. Supp. 860 (S.D.N.Y.
1986)....................................................... 38
Essex Universal Corp. v. Yates, 305 F.2d 572 (2d Cir. 1962)...... 45
Grand Metropolitan plc v. Pillsbury Co., 558 A.2d 1049 (Del. Ch.
1988)...................................................... 47
Hilton Hotels Corp. v. ITT Corp., 962 F. Supp. 1309 (D. Nev.),
aff'd, 116 F.3d 1485 (9th Cir. 1997)........................ 23
Horwitz v. Southwest Forest Indus., Inc., 604 F. Supp. 1130 (D.
Nev. 1985).................................................. 33, 34
IBS Fin. Corp. v. Seidman & Assoc., 954 F. Supp. 980 (D.N.J. 1997) 24, 26n*,
29, 47
International Banknote Co. v. Muller, 713 F. Supp. 612 (S.D.N.Y.
1989)........................................................ 47n*
Kansas City Power & Light Co. v. Western Resources, Inc., 939 F.
Supp. 688 (W.D. Mo. 1996).................................... 31-32
Katz v. Bregman, 431 A.2d 1274 (Del. Ch. 1981)................... 46
Leavitt v. Leisure Sports Inc., 103 Nev. 81, 734 P.2d 1221 (1987) 22n*
Lerman v. Diagnostic Data, Inc., 421 A.2d 906 (Del. Ch. 1980).... 24, 27
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S.
353 (1982)................................................... 22n*
National Auto & Cas. Ins. Co. v. Payne, 67 Cal. Rptr. 784 (Cal.
Ct. App. 1968).............................................. 22n*
NCR Corp. v. AT&T, 761 F. Supp. 475 (S.D. Ohio 1991)............. 47
Norfolk Southern Corp. v. Conrail Inc., C.A. Nos. 96-7167, 96-7350
(E.D. Pa. Nov. 19, 1996)..................................... 41
Packer v. Yampol, No. Civ. A. 8432, 1986 WL 4748 (Del. Ch. Apr. 18,
1986)........................................................ 27, 29n*
<PAGE>
Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34
(Del. 1994).................................................. 44, 45
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 34,
(Del. 1985).................................................. 44-46, 48
Shamrock Holdings Inc. v. Polaroid Corp., 559 A.2d 278 (Del. Ch.
1989)....................................................... 41
Shoen v. Amerco, 885 F. Supp. 1332 (D. Nev. 1994), vacated by
stipulation, (D. Nev. Feb. 9, 1995)......................... passim
Stahl v. Apple Bancorp, Inc., 579 A.2d 1115 (Del. Ch. 1990)...... 25
Stroud v. Grace, 606 A.2d 75 (Del. 1992)......................... 24n*
Thorpe v. CERBCO, Inc., 676 A.2d 436 (Del. 1996)................. 46
Tomczak v. Morton Thiokol, Inc., Civ. A. No. 7861, 1990 WL 42607
(Del. Ch. Apr. 5, 1990)...................................... 45n*
Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361 (Del. 1995).. 24n*,27n*,
42, 43
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)..... 27n*, 34,
39, 41-42,
44
Williams v. Geier, 671 A.2d 1368 (Del. 1996)..................... 28
Other Authorities
K.P. Bishop, Nevada Corporation Law and Practicess. 7.15 (1993).. 22n*
Cal. Corp. Code ss. 820.......................................... 22n*
I.R.S. ss. 355(e)................................................ 16
Jonathan R. Macey, Administrative Agency Obsolescence & Interest
Group Formation: A Case Study of the SEC at Sixty, 15 Cardozo
L. Rev. 909 (1994).......................................... 41
NRS 78.138....................................................... passim
Former NRS 78.140(1)............................................. 22n*
NRS 78.215....................................................... 31, 32
NRS 78.390....................................................... 31, 32
NRS 78.565....................................................... 46n*
N.Y.S.E. Listed Co. Manual R. 312.03(c).......................... 12
<PAGE>
I. INTRODUCTION
When ITT appeared before this Court in April it said that if it
were allowed to delay its annual meeting for six months, it would use the
time to enable shareholders to make a "more informed decision." Discovery
shows ITT misled this Court when it made that promise. When ITT was
representing that delay would "benefit the stockholder's decision making
process," it had already formulated the plan to frustrate the shareholders'
voting rights by putting ITT's hotel and gaming business into a "new"
corporation with a staggered board and a tax poison pill. When ITT was
telling this Court that delay would "enable the ITT Board to provide the
shareholders with more information" before they voted, ITT's management and
advisors were working to make sure that no meaningful vote would take
place.
ITT's statements to this Court in April -- statements that ITT
ignores in its answering papers on this motion -- cannot be dismissed as
empty, harmless rhetoric. For by making those representations, ITT"s
directors and management bought the time to hatch a scheme which, if they
can get away with it, ensures that ITT shareholders will never have a
chance to vote for the Hilton slate and bid. This type of deception infects
the representations now being made by ITT. ITT states categorically: "The
'tax poison pill' argument is a litigation makeweight . . . there is no
such 'poison pill.'" ITT Br. at 3. Yet the documentary evidence --
including the minutes of ITT's July and August board meetings -- show ITT
counsel telling the board that there is "no binding precedent" to support
the view that there is no tax poison pill and that the issue is "not free
from doubt." Some litigation makeweight.
The sole piece of evidence ITT presents to this Court to show
that there is no $1.4 billion tax poison pill is an affidavit of its own
anti-takeover counsel. ITT -- which has spent millions of shareholder
dollars on its takeover defense -- has not produced a single, independent
expert to support its view that Hilton does not face a huge tax risk if it
acquires ITT's hotel and gaming assets after the spin-off. The only
independent expert presented to the Court on this issue is Professor
Wolfman. And he states that "Hilton would be faced with the prospect of
massive corporate tax liability if it were to acquire Destinations;" that
ITT's plan "serves as a tax 'poison pill' against an acquisition of
Destinations by Hilton." Wolfman 8/21 Aff. P. P. 11, 20. No responsible
company in Hilton's position could take the $1.4 billion risk of acquiring
ITT
<PAGE>
Destinations after the spin-off. Hilton's executives have so testified. ITT
knows that; it is counting on it to drive Hilton away.
ITT's representations to this Court concerning the staggered
board also cannot be taken seriously. ITT says that the staggered board is
only an incidental element of a plan that itself is not a response to
Hilton's offer; that the decision to structure its plan as a spin-off of
93% of the company's assets was made solely for tax reasons; and that the
ITT board was "obliged" to include a staggered board because it is a highly
desirable instrument of corporate governance. ITT Br. at 8-9. ITT"s
contention is incredible on its face. It is obvious that ITT was desperate
for a staggered board to prevent the ITT shareholders from supporting the
Hilton bid by voting all the ITT directors out of office. Discovery
confirms that the desire to superimpose a staggered board -- without a
shareholder vote -- over the hotel and gaming assets was not incidental to
the plan. It was the reason for the plan. It drove the decision to spin out
the hotel and gaming business. ITT"s Chairman and Chief Executive Officer,
Rand Araskog, acknowledged as much:
Q: Have you ever asked any of your advisors whether there is a way to
skin that cat without leaving World Directories as the stub?
A: No, there wasn't any reason to, I like them as a stub.
Q: One of the reasons you like them as a stub is because now you have the
opportunity to dividend out the hotels and gaming with a staggered
board, right? . .
A: You said it.
Araskog Tr. 340-41 (emphasis added).
ITT's blatant attempt to frustrate the shareholder franchise in
the midst of a proxy contest is prohibited by Nevada law. "[I]nterference
with shareholder voting is an especially serious matter," and a board that
attempts to "interfer[e] with the effectiveness of a stockholder vote . . .
bears 'the heavy burden of demonstrating a compelling justification for
such action.'" Shoen v. Amerco, 885 F. Supp. 1332, 1340-41 (D. Nev. 1994),
vacated by stipulation (D. Nev. Feb. 9, 1995), quoting Blasius Indus., Inc.
v. Atlas Corp., 564 A.2d 651, 659, 661 (Del. Ch. 1988). ITT responds by
saying that the law is violated only when there is "complete stockholder
disenfranchisement." That is not so. The test under Shoen and Blasius is
not whether the board's action will prevent any shareholder vote; it is
whether it threatens to "'thwart a shareholder group from effectively
mounting an election campaign.'" Shoen, 885 F. Supp. at 1341, quoting
Blasius,
<PAGE>
564 A.2d at 659 n.2. In both Shoen and Blasius, the Court enjoined board
action that deprived the shareholders of their ability to replace a
majority of the directors at the next election. That is precisely what ITT
and the incumbent directors are seeking to do here with their staggered
board and with their tax poison pill -- to prevent control from shifting at
the next annual meeting. See Point III, infra.
The balance of ITT's response fares no better. It rests on the
claim that NRS 78.138 repealed the common law in its entirety, that
"subjective good faith" is the beginning and ending point of Nevada
corporate fiduciary law. This Court's September 8 Order denying ITT's
motion to dismiss Hilton's amended complaint in the original action
rejected that claim. Basic principles of fiduciary duty law apply here,
principles set out in Shoen, Southwest Forest, Unocal and Revlon. Under
those principles, the plan that ITT and its directors, managers and
advisors have put together to defeat Hilton cannot be sustained. It is
tainted by self-interest, unfair to the corporation and its shareholders,
an unreasonable and preclusive response to Hilton's bid, and an attempt to
break up the company without maximizing value to shareholders. It also
violates Nevada statutory provisions requiring a shareholder vote to amend
a corporate charter or dispose of substantially all of a corporation's
assets. See Points IV, VI and VII, infra.
While Shoen and Blasius make clear that a finding of bad faith or
lack of due care is not necessary to enjoin interference by directors with
the shareholder franchise, discovery has proven that the ITT board has not
acted in good faith and has not exercised the level of independence or care
required of fiduciaries faced with an acquisition proposal. See Point V,
infra. They rubber-stamped management's proposals; they were unaware of key
issues and facts. One ITT director -- who voted to reject Hilton's offer as
inadequate -- testified that, while she knew the Hilton offer was half cash
and half stock, she did not know how much cash Hilton was offering per
share. Several ITT directors approved the plan without understanding the
amount of the liability that would result -- some $1.4 billion of corporate
tax and $1.4 billion of shareholder tax -- if the IRS (which is not being
asked for an advance ruling) determines that the spin-offs were not tax
free. The evidence shows ITT directors were told that an IRS ruling was not
being sought because "there is not sufficient time to do so." The only time
constraint they were under
<PAGE>
arose from ITT's overwhelming desire to avoid a shareholder vote on the
Hilton slate at the annual meeting.
ITT argues that "the Board is seeking to implement the Plan
promptly, not in order to avoid a stockholder vote on the Plan" but "to
avoid market risks and other business problems that may result from any
delay." ITT Br. at 10-11 (emphasis added). That statement is demonstrably
false. The plan was announced on July 16. Because it was subject to
regulatory approval by the SEC and three gaming authorities, the plan was
never scheduled to be implemented until late September 1997 at the
earliest. At a minimum there was a 2 1/2 month window period between
announcement and implementation of the plan. There is absolutely no reason
why ITT, if it is so desired, could not have put its plan to a stockholder
vote during this window period. When ITT's 1995 spin-off was put to a
stockholder vote, a special meeting was held only three weeks after a proxy
statement was mailed to shareholders. ITT could have done the same thing
here. Even allowing several weeks for SEC review of proxy materials, ITT
could have mailed proxy materials in August and had a shareholder meeting
in September. ITT did not do so for the most obvious of reasons -- it knew
the plan could be defeated by a huge margin and did not want to take that
chance.
ITT's attempt to block Hilton and frustrate the will of its
shareholders is unlawful. The plan should be enjoined, and ITT's
shareholders permitted at the next annual meeting, six weeks from now, to
decide the future of their company.
II. REPLY STATEMENT OF FACTS
A. ITT Discovers its Vulnerability
ITT pretends that its plan is the product of the logical
evolution of the company's long-standing strategic plan; that its
components and structure were not tailored to and have no relationship with
Hilton's offer. Nothing could be further from the truth. Prior to Hilton's
offer, ITT had no plans to amend its charter to include a staggered board.
White Tr. 76. Prior to Hilton's offer, ITT had no plan to transform itself
from an investment grade credit into an issuer of junk bonds; its corporate
policy was to maintain an investment grading rating. Araskog Tr. 47, 50;
Bowman Tr. 49; Tuttle Tr. 7. Prior to Hilton's offer, ITT had no plans to
sell Madison Square Garden or WBIS+. Araskog Tr. 25, 43; Wilson Tr. 31-32.
The plan was to grow the company's
<PAGE>
entertainment businesses. Bowman Tr. 28-29. Prior to Hilton's offer, ITT
also had no plan to spin off the hotel and gaming business. Wilson Tr.
28-30; Araskog Tr. 56-57. ITT had announced plans to invest billions in
capital projects related to a new Planet Hollywood casino and the expansion
of Caesars Palace in Las Vegas. And while ITT executives claim that they
hoped one day to "monetize" ITT's interest in its telephone directories
business, known as "ITT World Directories," before Hilton announced its
offer no plan had been made to do so. Bowman Tr. 42- 43; Araskog Tr. 62-63,
68-70.
All this changed when Hilton announced its combined tender
offer/proxy contest on January 27. From day one, Mr. Araskog made it clear
to all concerned that he thought ITT should remain independent. Araskog Tr.
103-04. ITT and its financial advisors, Goldman, Sachs & Co. ("Goldman")
and Lazard Freres & Co., L.L.C. ("Lazard"), also immediately recognized
that the absence of a staggered board made ITT vulnerable to a takeover.*
Rosenfeld Tr. 65-66; Araskog Tr. 216-27. This assessment was shared with
the ITT directors. Wilson Tr. 68 ("it was the obvious fact that without a
staggered board, you are vulnerable"). The board was also advised that the
likelihood of Hilton winning the proxy contest was a function of price.
Rosenfeld Tr. 106. As director Wilson testified, it "was clear to everyone"
that "unless the board came up with a financial alternative, there was a
risk that the shareholders would vote in favor of a Hilton slate." Wilson
Tr. 67. See also Rosenfeld Tr. 98-101; Wolinsky Aff. Ex. A ("the side
[that] shareholders believe offers the most value will win"). And though
Hilton had stated that a review of ITT's non-public information could
result in a higher bid, ITT's management and advisors decided that
negotiating was "pointless" because management "wanted to stay
independent." Araskog Tr. 105-06.
B. ITT's First Response: "Golden Parachutes"
While the advisors were busy formulating a strategy to keep ITT
independent, Araskog and his management team took the opportunity to
feather their own nests. In February, management sought and obtained
"golden parachute" contracts from the board. Mr. Araskog's
- --------
* Mr. Araskog had decided in 1995 that ITT would not have a staggered
board because he did not believe that ITT, a large company in a regulated
industry that had not had any significant takeover activity, would be
vulnerable to a takeover without one. Araskog Tr. 43-45.
<PAGE>
parachute would pay him a minimum of $19.8 million upon a change of
control. Coupled with other payments due him from ITT, Araskog stands to
receive at least $54.9 million from ITT if it is taken over. Araskog Tr.
153; Wolinsky Aff. Ex. B.** The remaining ITT parachute recipients would
get payments of approximately $110 million, a figure even Araskog
acknowledged to be "a lot of money." Araskog Tr. 149.
Although the company sought to justify these astronomical sums as
necessary to "minimize employee disruption" and "retain employee loyalty
and dedication," Mr. Araskog conceded that he never told the board that he
needed a $19.8 million "golden parachute" to remain loyal and dedicated to
the company. Nevertheless, the new parachute was "fine with [him]" because
he didn't except that Hilton "would continue [him] on as chairman and chief
executive officer of the combined company." Araskog Tr. 141, 157, 159.***
Although ITT has had a policy since 1991 of not adopting "golden
parachutes" without a shareholder vote, as Mr. Araskog observed, "obviously
circumstances change." ITT has no intention of submitting the new "golden
parachutes" to the shareholders for approval. Araskog Tr. 163-66.
C. The Genesis of the Plan
By the time ITT's board had rejected Hilton's bid on February 11,
ITT's management and directors had resolved to "monetize" ITT's non-core
assets and explore other alternatives, including a split-up of the company.
Araskog Tr. 171-72; Wilson Tr. 98; Wolinsky Aff. Exs. D at 4, E at 10. As
early as February 14, ITT began to explore a spin-off of its hotels and
gaming business as part of a transaction with a third party. Durst Tr.
65-68.
A Goldman document reveals that full blown consideration of what
has now become the "Comprehensive Plan" -- including the plan to structure
the break-up of ITT as a spin-off of the hotel and gaming business -- took
place by no later than March 7, i.e., over one month before ITT appeared in
Court to argue that it intended to use the delay of its annual meeting
- -------- ** This figure does not include Mr. Araskog's stock options,
currently valued in excess of $20 million. Wolinsky Aff. Ex. C.
*** In his 1989 book, The ITT Wars, Araskog decried "golden parachute"
employment contracts as "a dubious practice that skirts the edge of
propriety, if not legality" and recommended that Congress outlaw golden
parachutes so as to "preclude payments by crony boards of directors."
Araskog Tr. 160, 163.
<PAGE>
to educate the shareholder electorate. Wolinsky Aff. Ex. F. Another Goldman
document shows that there was consideration of whether to seek a tax ruling
on the transaction. That same document also shows why the decision was made
not to seek a ruling: if a ruling were sought, the spin-off of hotels and
gaming could not be consummated before a shareholder vote would have to be
held. Id. Ex. G.
From the outset, the cornerstone of the plan was the distribution
of the hotel and gaming business -- representing the lion's share of ITT's
assets and revenue -- to ITT's shareholders and the retention of one of the
smaller businesses as the "stub." The company's financial advisor told ITT
management "that the inclusion of a staggered board in the charter of a new
hotel and gaming company would assist in defeating Hilton in its takeover
attempt." Rosenfelt Tr. 137. Upon hearing this strategy from his Lazard
colleague sometime in March or April, director Wilson was "highly in favor
of it" and recognized the "takeover defense benefits to putting hotels and
gaming in a [company with a] staggered board." Wilson Tr. 153-56. And from
management's perspective, it was "obvious" that spinning off the hotel and
gaming operations as a new subsidiary with a staggered board would impede
Hilton's ability to take over ITT. Araskog Tr. 216-19.
ITT's advisors understood that embedded in the spin-off strategy
was another potent defense -- a tax poison pill -- that would result in
over a billion dollars of liability to Hilton if it acquired the hotel and
gaming subsidiary following a tax-free spin-off. Goldman had assisted
another client, Commercial Intertech, in successfully deploying a
spin-off/tax poison pill defense during 1996. Kaplan Tr. 133-36. Commercial
Intertech's SEC filing had disclosed that, if the hostile suitor were to
acquire that company or the company being spun-off, "there is a significant
risk" that the spin-off would not be tax free. The hostile suitor for
Commercial Intertech withdrew due to this risk. Wolinsky Aff. Exs. H, I.
D. The Motivation For the Upside-Down Structure of the Plan
ITT claims that the upside-down structure of distributing hotels
and gaming was selected for tax reasons. ITT Br. at 11. This claim cannot
withstand scrutiny. Entrenchment, not taxes, drove the structure of the
plan.
<PAGE>
ITT and its advisors studied numerous spin-off scenarios between
February and June 1997. The various structures included, among others: (a)
a so-called "Morris Trust" transaction, whereby ITT would spin off the
hotels and gaming business and the technical school business (ITT
Educational Services) to shareholders and then merge what remained (World
Directories) with another company in a stock-for-stock exchange; (b) a
taxable sale of World Directories to be followed by a spin-off of hotel and
gaming from ITT Educational; and (c) the structure that was ultimately
adopted. Reese Tr. 33, 48-49; Wolinsky Aff. Exs. F, J. K, AAA. There is one
common thread to each of the permutations ITT studied: putting the hotel
and gaming business in a "new" company with a staggered board and a tax
poison pill.
ITT claims that spinning off hotels and gaming, and keeping World
Directoriess as the "stub" was necessitated by tax concerns. Specifically,
ITT contends that, under prevailing tax law, if it spun off World
Directories, it could not allocate debt to World Directories in excess of
the low tax basis ITT has in World Directories' stock without creating a
taxable event. Steinberg Aff. P. P. 34-38. Discovery shows that this is a
rationalization, not a justification. ITT's Chief Financial Officer, Ann
Reese, testified that if World Directories had not been available to serve
as the "stub" company, ITT would still have spun out hotels and gaming and
would have left ITT Educational behind as the "stub" asset of the "old" ITT
Corp. -- again ensuring the ability to spin out hotel and gaming with a
staggered board. Reese Tr. 100, 119-20.*
As Professor Wolfman explains, ITT could have adopted various
alternative structures that would have enabled ITT to spin off World
Directories and retain the hotel and gaming business without recognizing
taxable gain. Indeed, as Professor Wolfman explains, adopting these
structures would have had a significant advantage -- if the IRS were later
to determine that the spin-offs did not qualify for tax-free treatment,
leaving hotels and gaming as the "stub" would dramatically reduce the
company's tax exposure. Wolfman Reply Dec. P. P. 6-8. ITT never gave
serious consideration to the more conventional structure of keeping the far
larger
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* Reese claims that this decision -- to use Educational as the stub --
would have been justified by an "argument" based on regulatory concerns.
Reese Tr. 100, 119-20. That claim does not make sense; a spin-off of hotels
and gaming implicates regulatory issues as well. And today, as part of its
plan, ITT is spinning out ITT Educational to ITT shareholders and is
claiming that there are no regulatory impediments to that transaction.
Wolinsky Aff. Ex. L at 6.
<PAGE>
hotels and gaming businesses and spinning off the World Directories
business. Reese Tr. 87 (this structure was only "briefly looked at"). The
reason is clear: from the standpoint of takeover defense -- the critical
standpoint from the perspective of ITT's management -- this structure was a
"non-starter." As Mr. Araskog candidly conceded, he never asked his
advisors whether there was another way to address the allocation-of-debt
issue because he "like[d] [World Directories] as a stub." It allowed him to
impose a staggered board. Araskog Tr. 340-41.
E. The Development of the "Comprehensive Plan"
With the critical objective of spinning out hotels and gaming in
place, ITT and its management and advisors continued through the Spring of
1997 to develop their plan to defeat Hilton's offer. The initial focus was
on a so-called Morris Trust transaction involving World Directories.
Problems developed along the way. ITT did not own 100% of the subsidiary;
BellSouth owned a 20% interest. On April 2, BellSouth complained to ITT
that "the Morris Trust transaction which ITT is now contemplating (entirely
for its own benefit) could potentially trigger significant tax liability
for which [World Directories] could be responsible ... which would result
in [World Directories] being rendered insolvent and [BellSouth's] interest
worthless.... [T]he potential exposure created by the proposed Morris Trust
transaction threaten[s] the profitability and competitiveness of [World
Directories] and, more fundamentally, the long-term viability of the
company." Wolinsky Af. Ex. M. The response of ITT's General Counsel totally
undercuts ITT's claim that the structure that ITT chose was unrelated to
Hilton's bid. He wrote that "[t]he structuring of a tax free transaction
has direct relevance to an unsolicited tender we are presently resisting,"
and claimed that BellSouth's accusations could "lead to a direct or
indirect consequence with respect to the unsolicited tender." Id. Ex. N.
(emphasis added).
There was also focus on the alternative of a taxable sale of
World Directories. In late April, ITT began receiving indications of
interest from potential buyers of World Directories. One interested party
was VNU, a Dutch-based telephone directories publisher. On April 23, VNU
submitted a letter indicating a willingness to purchase World Directories
for $2 to $2.2 billion in cash, and stating that an additional $100 to $200
million might be available and that, with due diligence, it might pay still
more. Wolinsky Aff. Ex. O. ITT's advisors gave "preliminary advice ... that
a deal in the range proposed by VNU probably makes sense." Id. Ex. P.
<PAGE>
Ultimately, ITT management was unwilling to accede to all of
VNU's requests for due diligence, citing fears that VNU would misuse that
process to gather corporate intelligence. Araskog Tr. 188; Tuttle Tr. 107,
109; Reese Tr. 68-78; Bowman Tr. 201-02. A May 29 Lazard document suggests
a different reason. It states that while an advantage of a sale was that it
"[i]n theory, should maximize value of [World Directories]," a disadvantage
was that if World Directories were sold it would "not [be] available to
serve as the 'surviving' company in a spin-off of Sheraton." Wolinsky Aff.
Ex. K at 1110186.
F. The CD&R Transaction
ITT management then focussed more heavily on recapitalizing World
Directories to raise cash for its stock self-tender and keeping World
Directories as the "stub" company. Araskog Tr. 191. ITT approached the
Chase Manhattan Bank to obtain financing. As to one potential structure (a
loan followed by a $1 billion dividend), Chase wrote that "[w]e believe
that the (approx.) $1 bn dividend to ITT plus the stub value of WD (in
progress) should be sufficient to answer [ITT's Chief Financial Officer's]
question about whether she can put off [VNU's] due diligence request."
Wolinsky Aff. Ex. Q (emphasis added). Chase also wrote that "[t]he purpose
of the transaction is to dividend $1.0 billion to ITT Corporation as part
of their defense strategy against a hostile takeover by Hilton" and that
"[i]n order to gain control of the company, ITT will also tender for 30% of
their outstanding shares." Id. Ex. R. See also id. Ex. S.
Because the financing structure proposed by Chase would result in
the incurrence of substantial non-deductible interest, ITT sought an equity
investor willing to buy $200 to $250 million of stock in the "stub"
company. Tuttle Tr. 130-32; Reese Tr. 146-48. Clayton, Dubilier & Rice
("CD&R"), a leveraged buyout firm, agreed to invest $225 million. For that
amount, it will get 32.9% of the common stock of "ITT Corp.," warrants to
buy an additional 13.7% of the stock, 5 out of 11 board seats, and a veto
over extraordinary transactions. Araskog Tr. 278-81. In short, CD&R will
get control; in Mr. Bowman's words "my view is that they are running it."
Bowman Tr. 209.*
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* CD&R will also avoid any tax risk associated with an IRS challenge to
the tax free nature of the comprehensive plan. CD&R insisted that the new
hotel and gaming company bear 100% of any tax bill if the spin-off is
challenged. Durst Tr. 170.
<PAGE>
Under New York Stock Exchange rules, the sale of 20% or more of
the stock of a listed company requires shareholder approval. NYSE Listed
Co. Manual R. 312.03(c). Thus, to avoid delisting by the Exchange, the CD&R
transaction must be put to a shareholder vote. ITT has structured the plan
so that the vote -- and the infusion of $225 million by CD&R -- will not
take place until after the spin-offs are consummated. So desperate was ITT
to avoid any advance vote that would be a referendum on the plan, it asked
Chase for a bridge loan of $225 million to be repaid some 30 to 60 days
after the spin-offs were consummated. Wolinsky Aff. Exs. U, V. ITT
estimates in its SEC filing that ITT will pay $7.9 million in fees plus 13%
interest on the bridge loan. Id. Exs. W, X at 48(A-5); Tuttle Tr. 179-80.
There is not a single business reason why the CD&R transaction
could not be put to a vote and consummated at the same time as the rest of
the comprehensive plan. Tuttle Tr. 171-79; Reese Tr. 158-63. The only
reason why a time lag was built into the plan and why these fees and
interest will be paid is because ITT wants to have the shareholder vote on
CD&R's investment take place after the rest of the comprehensive plan is
consummated. This is shareholders' money being spent to strip those very
shareholders of a timely vote.
G. The ITT Board Consideration of the Plan
ITT's board considered management's proposed plan preliminarily
on June 10 and finally on July 15. The testimony of Messrs. Araskog and
Wilson shows that the directors understood what Mr. Wilson described as
"self-evident": that the purpose, structure and timing of the plan were all
intended to defeat Hilton's bid. Araskog Tr. 263, 306-08; Wilson Tr.
161-62. That conclusion also flows from the fact that the directors did not
even consider whether the plan should be put to a shareholder vote. Wilson
Tr. 177-78, 208-09; Meyer Tr. 70; White Tr. 111-13.
Discovery also reveals that the information presented to the
board was skewed to support the desired result, and that directors failed
to exercise their responsibility to understand and evaluate the information
presented to them. These defects undermine the integrity of the directors'
consideration of the four key issues that faced them: (1) whether the plan
and staggered board charter provision should be put to a stockholder vote;
(2) whether ITT should seek a tax ruling with respect to the spin-off; (3)
whether the plan would create a $1.4 billion tax impediment
<PAGE>
for Hilton; and (4) whether the structure that management was recommending
was justified by the economics.
1. The decision not to seek a vote on the
plan or the staggered board
ITT's December 1995 "trivestiture" was put to a vote "because of
the importance of the Distribution to ITT and its shareholders." Wolinsky
Aff. Ex. Y at 17. While conceding that the 1997 plan is equally important
(Anderson Tr. 139; Araskog Tr. 298-99; Burnett Tr. 303; Payton Tr. 225),
there was no discussion at the June and July board meetings of submitting
it to a vote. Wilson Tr. 177-78, 208-09; Meyer Tr. 70; White Tr. 111-13. No
director even raised the questions whether the plan should be put to a
vote. Wilson Tr. 177-78, 208-09. Although directors testified that
"waiting" for a shareholder vote was disadvantageous, they did not know how
long it would take for a vote to be held. Burnett Tr. 304, 307; White Tr.
151; Anderson Tr. 145-47. The directors never considered and were never
advised as to how soon a vote could be held. Anderson Tr. 145; Burnett Tr.
307. When it was pointed out to director Anderson at deposition that a vote
on the 1995 spin-off was held only three weeks after proxy materials were
disseminated, she conceded that in 1997 "we didn't explore that, because we
didn't consider it." Anderson Tr. 146.
As for the "staggered board" provision, it was simply presented
to the directors by management or its advisors as part and parcel of the
plan. Meyer Tr. 92 ("it was clear to me that however we ended up
afterwards, we were going to have a staggered board based on the submission
we had"), 109 ("instigator" of issue was management or advisors). According
to one director, the staggered board was a "good idea" because it would
make a takeover of ITT by Hilton or anyone else "more difficult." Wilson
Tr. 174-75. The directors assumed that they could implement this
fundamental change in governance without a vote. No director asked if this
was so. Wilson Tr. 175-76; Meyer Tr. 98. The directors adopted the
staggered board provision with little or no discussion. Payton Tr. 57
("there was no big discussion of it"), 188-93; Anderson Tr. 112-13
(staggered board was "almost, oh by the way"); Burnett Tr. 285.*
- --------
* In his affidavit replying to the affidavit of Professor Macey,
Professor Fischel observes that public corporations "almost invariably
obtain shareholder approval" for the adoption of a staggered board and that,
given the fact that ITT is spinning off over 90% of its assets into a "new"
corporation, its spin-off is an unprecedented "end run" around
<PAGE>
2. The decision not to seek a tax ruling
The decision not to seek a tax ruling is equally suspect. That
decision was made "fairly early on" by the company's in-house and outside
counsel. Araskog Tr. 275. While ITT contends before the Court that there
was no reason to seek a ruling because the tax-free nature of the spin-offs
is beyond question, they have not been so absolute in regulatory hearings.
In testimony before the New Jersey Casino Control Commission, Mr. Bowman
justified the decision by referring to a concern that IRS personnel:
at times interpret things differently than we might like. Again,
one can get into extensive and sometimes derivative conversations
with the service; and given the high degree of confidence that we
have as board and business people and the highest degree of
confidence in Cravath, Swaine & Moore had, it does not seem to
make sense this time to seek a ruling. Wolinsky Aff. Ex. Z at 59
(emphasis added).
Cravath tax lawyer Lewis Steinberg made the same point in his testimony
before the Nevada State Gaming Control Board. He said that he did not see
the "wisdom of seeking a ruling" given his firm's opinion and "given the
possible costs of going forward ... in terms of time, loss of control, and
just things that might be asked." Id. Ex. AA at 73 (emphasis added). And in
a recent SEC filing, ITT states that "it will not seek a ruling from the
IRS with respect to the Federal income tax consequences of the
Distributions, and the IRS could take a position contrary to Cravath,
Swaine & Moore's opinion." Id. Ex. BB at 32.
The directors were not told that the IRS might "interpret things
differently than we might like." The record shows that they were told that
"the reason we are not obtaining the ruling is solely because of the
timeframe involved as it takes approximately six months to obtain a ruling
and that there is no reason to believe that if we submitted a ruling
request we would not get one." Wolinsky Aff. Ex. DD (emphasis added). It
also shows that they were told little else. Perhaps most notably, the
directors were not told of the staggering consequences of an IRS
determination that the transactions are taxable -- $1.4 billion in
corporate tax liability and $1.4 billion in shareholder tax. Meyer Tr.
161-63; Wilson Tr. 200-201, 227-28; Payton Tr. 237. Nor
- ---------
obtaining a shareholder vote. Fischel 9/19 Aff. P. P. 7-8. The reply
declaration of Daniel H. Burch, which responds to ITT's proxy solicitor
Robert H. Johansen, shows that Mr. Johansen's data do not reveal any other
situation in which a board "by spinning off the vast majority of its
assets, [adopted] a staggered board without a shareholder vote in the midst
of a proxy contest." Burch Reply Dec. P. 1.
<PAGE>
were the directors made aware of the high comfort level that an IRS ruling
would bring. Anderson Tr. 178-79; Burnett Tr. 275-77. And they were not
informed that retaining the hotel and gaming business as the "stub" would
result in a dramatic reduction of the amount of tax if there were
liability. White Tr. 148. See also Wolfman Reply Dec. P. P. 6, 8.
The directors cannot explain why ITT sought an IRS ruling in 1995
but are not seeking one today. Director Wilson testified that the 1997 plan
was somehow "less complex" than the 1995 spin-offs. Wilson Tr. 199.
Director Payton said it was because in 1997, as opposed to 1995, there was
a "context laden with intrusive, hostile, coercive elements." Payton Tr.
238. Director Meyer simply had no idea. Meyer Tr. 161.*
The record thus shows that the directors simply accepted
management's recommendation, and that ITT's management and advisors did not
share with the board their concern that the IRS might "interpret things
differently than we might like" and that there were "things that might be
asked." One particular tax concern of ITT was revealed in the deposition of
its tax director, Allan Durst. His testimony disclosed that Cravath itself
had raised as an issue the possibility that CD&R partners -- who include
large institutional investors in the business of buying and selling
securities -- might individually purchase stock of "old ITT," i.e., World
Directories, on the open market, thus arguably causing CD&R to exceed
limitations under new Section 355(e) of the Internal Revenue Code. The
result would be that the tax-free nature of the spin-off would be
destroyed. Durst Tr. 193-95, 197. This risk is not disclosed in ITT's SEC
filings, and Cravath's opinion on that particular issue has been withheld
on a claim of "privilege." Durst Tr. 192-194, 196. Professor Wolfman opines
that this is a genuine problem -- the very kind of issue that should have
caused ITT to seek a ruling. Wolfman Reply Dec. P. 21.
Professor Wolfman also opines that ITT is proceeding in a "most
unusual and risky manner" by not seeking a ruling and that Mr. Steinberg's
explanations for not seeking a
- --------
* Mr. Steinberg's affidavit acknowledges that in 1995, "old" ITT decided
to obtain a tax ruling, but attributes that decision to "particular
circumstances ... that are no longer at issue." Steinberg Aff. P. 11. Since
Mr. Steinberg and his firm were not tax counsel to ITT on the 1995
spin-off, Durst Tr. 30-32, he has no first-hand knowledge of the
motivations for ITT's decision to obtain an IRS ruling in 1995.
<PAGE>
ruling are unpersuasive. Wolfman Reply Dec. P. P. 2(a), 18-24.* And, of
course, from a tax perspective, there is simply no reason for ITT not to
seek a ruling. That decision has nothing to do with taxes: the real
explanation is found in Mr. Araskog's testimony that it would be "very
dumb" to have the 1997 annual meeting at an "inopportune time." Araskog Tr.
125-26. Seeking a tax ruling -- and not closing the spin-offs before the
November 14 statutory deadline for holding the annual meeting -- would be
more "inopportune" for the ITT management and board.
3. The "tax pill"
The only portion of the July 15 ITT board minutes addressing the
tax poison pill issue states:
[Mr. Steinberg] confirmed Cravath's opinion that if Hilton were
to buy Destinations, he believed that under current law and the
provisions of pending Federal tax legislation there should be no
adverse tax effects to the Corporation or its stockholders. Mr.
Steinberg explained the basis for this opinion and pointed out
that it is based on an interpretation of current tax laws and the
current provisions of pending legislation rather than on binding
precedent, and accordingly is not free from doubt and is subject
to revision if pending tax legislation changes. Wolinsky Aff. Ex.
EE at 13 (emphasis added).
There is a serious question as to whether this advice was given.
Director Wilson testified that the minutes appeared to be "watered down"
from what he recalled Mr. Steinberg as having said. Wilson Tr. 233-36. See
also Anderson Tr. 181 (Steinberg "did not qualify his opinion in any
respect"); White Tr. 118-19. Assuming that the advice was given as
reflected in the minutes, it is plain that no reasonable director hearing
this hedged and qualified opinion could have received great comfort,
especially given the magnitude of the potential liability.** Their lawyer
had no "binding precedent" on which to rely with respect to an issue that
was the subject of "pending tax legislation" and that "accordingly" was
"not free from doubt."
- --------
* One of the leading credit rating agencies, Standard & Poor's, is
unconvinced as well. In a September 12 release downgrading ITT's debt
ratings to "junk" status, Standard & Poor's stated that "ITT could
potentially be faced with a material future tax liability related to its
planned distribution, which is not factored into the rating. Despite a
favorable opinion from its attorneys that this is a tax-free transaction,
the spin-off is proceeding without an IRS ruling." Wolinsky Aff. Ex. DD.
** By contrast, the minutes reflect the Mr. Steinberg was far less
equivocal on the issue of the tax-free nature of the spin-offs themselves:
"Mr. Steinberg stated that Cravath is prepared to render an opinion that
the spin-offs will be considered tax-free events under current law."
Wolinsky Aff. Ex. EE at 13.
<PAGE>
Despite the qualified nature of the Cravath opinion, the ITT
board did nothing to verify whether the plan did contain a tax poison pill.
No director asked Cravath to put its opinion in writing.* No director
sought a second opinion, even though the outside directors had their own
"independent counsel" in the room.** And no director inquired as to the
magnitude of the tax poison pill if Cravath's advice turned out to be
incorrect; indeed, no questions were asked on this subject at all. Meyer
Tr. 162-163, 170-74; Wilson Tr. 224, 287-88; Bowman Tr. 317; Burnett Tr.
280-81. Had the ITT board been more inquisitive, it might have learned that
a Goldman Sachs client, Commercial Intertech, had successfully used the
spin-off/tax poison pill defense just last year. Kaplan Tr. 133-36. They
might also have learned what Professor Wolfman has now reiterated in his
Reply Declaration: that if Hilton were to acquire the new hotel and gaming
company after the spin-off, it would be subjected to "the very substantial
risk of $1.4 billion of tax." Wolfman Reply Dec. P. 10.
4. The "value" of the World Directories "stub" and the CD&R
transaction
The board also was presented with an incomplete and skewed
presentation on the effort to maximize the value of World Directories and
on the value of the CD&R transaction. While the directors were given a
chart reflecting what the net proceeds would be to ITT on a taxable sale at
prices ranging from $1.325 to $2.525 billion, Wolinsky Aff. Ex. P at
01350721, they were not told about VNU's April 23 letter or that a sale at
the $2.2 billion price proposed by VNU would net ITT $1.2 billion. The only
veiled reference to VNU was Mr. Araskog's statement at the June 10 board
meeting that the "indications of interest" that had been received "were
viewed as well below the range of acceptability." Wolinsky Aff. Ex. FF. No
investment banker
- --------
* Cravath did not furnish a written opinion until September 8 -- some 55
days after the board adopted the plan -- only after Hilton had challenged
the board's reliance on oral advice. Wolinsky Aff. Ex. VV.
** While ITT makes a point of claiming that the outside directors were
represented by separate counsel, namely a partner in the LeBoeuf Lamb firm,
the separate counsel was not asked to provide a second tax opinion.
Moreover, the independence of the LeBeouf firm is open to serious question
since that firm also serves as Mr. Araskog's personal counsel with respect
to ITT compensation matters. Indeed, the LeBoeuf firm represented Mr.
Araskog in negotiating the terms of his "golden parachute" with ITT. The
"other side" in negotiation were the members of the Compensation Committee
of the board -- outside directors who were also represented by LeBoeuf.
Burnett Tr. 41; Araskog Tr. 139-40.
<PAGE>
commented on the point. The board was not told that management had deferred
VNU's due diligence requests or that VNU had indicated that it would be
willing to pay more than $2.2 billion if due diligence warranted it.
Araskog Tr. 321; Bowman Tr. 179; Anderson Tr. 150; Reese Tr. 185-87; Meyer
Tr. 135.
Further, the board was presented with an analysis of the CD&R
transaction that represented that the "implied value" of the transaction
was $1.359 billion. That figure has two components: a $900 million cash
dividend from World Directories to ITT and an "implied value" of $459
million for the public's continuing 67.1% stake in the "stub" company.
Wolinsky Af. Ex. GG at 12. As discussed in the accompanying affidavit of
Jeffrey R. Greene, National Director of Ernst & Young Valuation Advisors,
this "implied value" of $459 million for the public equity is fundamentally
flawed. Goldman's analysis rests on the assumption that the per share value
of stock held by the public stockholders of ITT will be the same as the
price per share to be paid by CD&R -- an unreasonable assumption because
CD&R is buying effective control of the company. Greene Aff. P. P. 9-11;
Moelis Dec. P. 4. Mr. Bowman acknowledged that CD&R paid a higher price
than the price at which ITT's financial advisors believe the stock will
initially trade. Bowman Tr. 214, 281. Even if one assumes that the amount
CD&R will pay for its control stake is the appropriate benchmark, Goldman's
analysis is incorrect because it assumes that the entire $225 million to be
paid by CD&R is allocable to the 32.9% stock interest it will receive at
closing. CD&R is also receiving warrants that are worth between $30 million
and $40 million. Deducting for the value of these warrants results in a far
lower "implied value" for the public equity. Greene Aff. P. 11.
These errors slanted Goldman's presentation. A more balanced
presentation would have shown that the equity value to the public in the
"stub" company would be on the order of $154 to $315 million, and that the
total value of the World Directories transaction to ITT and its
shareholders would be $1.054 to $1.215 billion. Greene Aff. P. P. 12-15. At
those values, the directors might have questioned whether it made economic
sense to go forward with CD&R and might have questioned management's
decision to deny VNU the due diligence it had requested. Id. P. 17. The
directors, however, were not provided with the information to ask the
question
<PAGE>
because it would have undercut the "economic rationale" for leaving World
Directories as the "stub."
H. The August 14 Board Meeting
Shortly after ITT announced its plan, questions were raised in
the press about the board's decision not to seek an IRS ruling. Donald R.
Alexander, a former IRS Commissioner, was quoted as stating: "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."
Wolinsky Aff. Ex. HH. Hilton raised this same question in its counterclaims
in ITT's declaratory judgment suit. Hilton's Answer & Counterclaims P. P.
51-56. Hilton publicly asserted that ITT had erected a $1.4 billion tax
poison pill; a noted Wall Street tax expert concurred in that view. Araskog
Tr. 347-48; Wolinsky Aff. Ex. II. ITT also received communications from the
owners of approximately 8 to 10 million shares of the company's stock,
including letters from Leon Cooperman, a former senior partner at Goldman,
and several mutual fund advisors expressing their displeasure with the plan
and/or requesting the opportunity to vote. Id. Ex. JJ; Bowman Tr. 251.
It was against this backdrop that the ITT board met on August 14
to consider Hilton's increased offer at $70 per share. The board was told
by Goldman Sachs and Lazard that Hilton's offer was "inadequate" and
accepted that view -- even though Goldman and Lazard also told the board
that the market valued ITT's plan at only $62 to $64 per share. Rosenfeld
Tr. 243. The board took no real interest in the sentiments that had been
expressed by the large shareholders. Director Meyer testified that the
board spent "three, four minutes" out of a "five or six hour[]" meeting
discussing the shareholders' letters. Meyer Tr. 122-24. Indeed, in the
almost nine months since Hilton initiated its proxy contest, the ITT
directors have never met with their proxy solicitors and never sought to
ascertain what the majority of the shareholders want. Bowman Tr. 249-51;
Reese Tr. 201-10. The only information that they received was a report from
Ms. Reese based on her conversations with shareholders. Ms. Reese "made it
very clear" to the directors that her report "was not the basis on which
they could infer anything." Reese Tr. 214.
The directors again ignored the question of whether ITT should
seek a tax ruling and whether there was a tax poison pill. No second
opinion was sought on either subject.
<PAGE>
Anderson Tr. 179-80; Bowman Tr. 317-18; Burnett Tr. 280. The advice that
they did receive was from a Cravath attorney (not a tax lawyer) who said
that "while companies often obtain a tax ruling, if there is sufficient
time to do so, it is not unusual to proceed on the basis of a tax opinion
without a ruling" and that there was "no IRS ruling or case law this is
dispositive" of the tax poison pill question. Wolinsky Aff. Ex. KK.
Although Hilton had materially raised its offer, the testimony is
clear that no "serious consideration" was given to withdrawing the
comprehensive plan in light of the new $70 bid. Meyer Tr. 75. The ITT board
decided not to meet with Hilton because it was advised that "there was
serious doubt as to whether or not we would have gained anything from a
discussion." Meyer Tr. 202. No director challenged that conclusion or
expressed a view that there was additional information about the Hilton
offer that could be learned from sitting down with Hilton. Meyer Tr. 203.
Argument
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III. ITT'S COMPREHENSIVE PLAN UNLAWFULLY
INTERFERES WITH SHAREHOLDER VOTING
----------------------------------
As Hilton demonstrated in its opening brief, ITT's plan
represents a deliberate assault upon fundamental principles of corporate
democracy. ITT and its directors attempt to justify their conduct by
claiming that Nevada law requires only that directors act "in good faith
and with a view to the interests of the corporation," that Shoen does not
apply "unless there is complete stockholder disenfranchisement," and that
there is "no evidence that the Board adopted the classified board with the
purpose of disenfranchising shareholders, nor any basis to infer such a
motive." ITT Br. at 19-23. ITT is wrong on all three points.
A. The ITT Directors' Alleged "Good Faith" Does Not Justify
Interference with the Stockholder Franchise.
As it has several times before in this litigation, ITT claims
that NRS 78.138(1) sets forth the sole limitation on the exercise of
directorial power in Nevada, and that the only issue is whether ITT's
directors approved the plan in "good faith." ITT Br. at 19-20 & 21 n.37.
This argument rests on a fundamental misunderstanding of Nevada law. Shoen
squarely holds that board "'action designed for the primary purpose of
interfering with the effectiveness of a stockholder vote'" will not be
sustained unless "the board bears 'the heavy burden of
<PAGE>
demonstrating a compelling justification for such action.'" 885 F. Supp. at
1341, quoting Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659, 661
(Del. Ch. 1988) (emphasis in original). Shoen makes clear that "[t]his is
so even where the board acts, not out of self-interest, but rather with
'subjective good faith'" because the board holds "'a good faith belief that
... shareholders need[] to be protected from their own judgment.'" 885 F.
Supp. at 1341 n.21, quoting Blasius, 564 A.2d at 658 (emphasis added). As
Judge Reed stated in Shoen, the "good faith" standard of NRS 78.138(1)
"will not insulate from more searching review directors' actions taken to
defeat a threat from insurgent stockholders by interfering with their
voting rights." 885 F. Supp. at 1341 n.22.*
Just last April, this Court stated that it "fully embraces the
foregoing principles expressed in Shoen." Hilton Hotels Corp. v. ITT Corp.,
962 F. Supp. 1309, 1310 (D. Nev.), aff'd, 116 F.3d 1485 (9th Cir. 1997).
ITT has not demonstrated any reason for this Court to depart from these
principles.
- ---------
* The language and legislative history of NRS 78.138(1) amply supports
Judge Reed's analysis. NRS 78.138(1) states that Nevada directors "shall
exercise their powers in good faith and with a view to the interests of the
corporation." It does not provide that the standard by which directors'
"good faith" is to be evaluated is a "subjective" one. Indeed, the language
of NRS 78.138(1), enacted in 1991, is identical to the language of former
NRS 78.140(1), 1951 Nev. Stats. 328, which in turn, was drawn from Cal.
Corp. Code ss. 820, enacted in 1947. NRS 78.138(1) and its statutory
predecessors have been interpreted to require that directors act
reasonably, i.e., in accordance with a standard of objective good faith.
See, e.g., Buchanan v. Henderson, 131 B.R. 859, 868 (D. Nev. 1990), rev'd
on other grounds, 985 F.2d 1021 (9th Cir. 1993); Leavitt v. Leisure Sports
Inc., 103 Nev. 81, 86, 734 P.2d 1221, 1224 (1987); National Auto. & Cas.
Ins. Co. v. Payne, 67 Cal. Rptr. 784, 790 (Cal. Ct. App. 1968). The Nevada
Legislature's 1991 re-enactment of the same "good faith" language is prima
facie evidence of its acquiescence in that well-settled judicial
construction. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456
U.S. 353, 382 n.66 (1982). See also Bishop, Nevada Corporation Law &
Practice ss. 7.15 at 176 (1993) ("it is likely that the courts will [read
NRS 78.138 to] require more of directors than that they act in good faith
and with a view to the interests of the corporation").
The legislative history of NRS 78.138 also confirms the importance
that the Nevada Legislature attaches to the shareholder franchise as the
only effective check on a target board that seeks to block a takeover bid
the shareholders wish to accept. See Minutes of the Nevada State
Legislature Assembly Committee on Judiciary at 14 (May 21, 1991) (1991
amendments, including NRS 78.138, do not give Nevada boards of diectors
excessive leeway in resisting takeovers because shareholders retain "the
power to vote out management") (statement of John Fowler).
<PAGE>
B. Shoen Does Not Require "Complete Stockholder
Disenfranchisement"
ITT and its directors also try to sidestep Shoen and the line of
Delaware cases upon which it relies by claiming that these cases do not
apply "unless there is complete stockholder disenfranchisement." ITT Br. at
21-22 (emphasis in original). ITT asserts that there will be no such
"complete disenfranchisement" here because "ITT plans to have its annual
meeting in November and [the hotel and gaming subsidiary] will have its
first annual meeting as soon as practicable after it is spun off" at which
time Hilton or anyone else "will be able to run a slate of directors." ITT
Br. at 21.
Shoen itself rejected this very argument. The incumbent directors
in Shoen sought to hold an annual meeting before an arbitration decision
was expected to be issued; the decision might have rendered the directors
unable to control the voting of a dissident's shares. The directors argued
that no harm had been done because "while the [meeting] date was set prior
to its historical date, no shareholder ha[d] lost any right to vote." 885
F. supp. at 1342. Judge Reed saw right through this formalistic position:
[W]hile shareholders still can vote their shares freely, the
range of choices available to them has been narrowed by the
advancement of the meeting date and [the dissident's] consequent
inability to campaign. "[T]he unadorned right to cast a ballot in
a contest for office," after all, "is meaningless without the
right to participate in selecting the contestants." Id.
(citations omitted).
The test under Shoen is not whether the board's action results in "complete
shareholder disenfranchisement," but whether it "'thwart[s] a shareholder
group from effectively mounting an election campaign.'" 885 F. Supp. at
1341, quoting Blasius, 564 A.2d at 659 n.2.
Similarly, in Blasius, an insurgent shareholder initiated a
consent solicitation to amend the Atlas by-laws to expand the size of the
board from seven to fifteen members and to elect eight nominees to fill the
new directorships. In response, the Atlas board increased its size by two
directors -- from seven to nine -- and instantly filled the newly created
positions; thus, even if the eight insurgent nominees were elected to the
board, they would be a minority. 564 A.2d at 655. As in Shoen, there was no
"complete shareholder disenfranchisement" since there was nothing to
prevent the insurgent from continuing its consent solicitation to elect a
minority, rather than a majority, of the board. The Chancery Court
nevertheless struck down the board's action because it was designed to
"interfere with the effectiveness of a vote." 564 F.2d at 660.
<PAGE>
Blasius is particularly noteworthy because the invalidated board
action in that case -- changing the board structure and composition to
prevent an effort to elect a majority of the board -- is functionally
equivalent to ITT's efforts to impose a "staggered board" without a
shareholder vote. Here, as in Blasius, the incumbent directors are
attempting to thwart the will of the shareholders by ensuring that a
majority of the incumbent directors will remain in office no matter what
happens in the next election. See also IBS Fin. Corp. v. Seidman & Assocs.,
L.L.C., 954 F. Supp. 980, 994 (D.N.J. 1997) (invalidating directors'
reduction of the size of the board by one and the number of seats up for
election by one because it "effectively minimized the potential success of
the [dissident's] impending proxy solicitation"); Lerman v. Diagnostic
Data, Inc., 421 A.2d 906, 912 (Del. Ch. 1980) (inequitable action "did not
put the challengers out of business" but "unfairly hindered their ability
to present their position to the shareholders within the allotted time").*
There can be no doubt that, as a result of the tax poison bill
and staggered board features of the plan, Hilton will be prevented from
"effectively mounting an election campaign" and the "range of choices
available to [ITT shareholders will be] narrowed." Shoen, 885 F. Supp. at
1341, 1342. While "old" ITT and its "new" hotel and gaming company will
conduct annual meetings in November, the tax poison pill feature will make
it economically irrational for Hilton to continue to wage a proxy fight
once the spin-off is complete because it could no longer acquire ITT
without incurring massive tax liability. And the staggered board provision
will make it impossible for Hilton to replace a majority of the "new" hotel
and gaming company's directors even if it were willing to swallow the pill.
All that ITT shareholders will have left is an "'unadorned right to cast a
ballot'" for management's slate at an annual meeting. The 1997 annual
- --------
* ITT (Br. at 21) cites two cases for the proposition that "complete
stockholder disenfranchisement" is required, but those cases do not support
that proposition. Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1379
(Del. 1995) (Blasius triggered by board action that "frustrate[s] or
completely disenfranchise[s] a shareholder vote") (emphasis added); Stroud
v. Grace, 606 A.2d 75, 92 (Del. 1992) (Blasius triggered by board action to
"interfere with or impede exercise of the shareholder franchise"). In each
case, the Delaware Supreme Court upheld the board action at issue precisely
because there was no frustration of the shareholder franchise. Unitrin, 651
A.2d at 1383 (upholding shareholder rights plan and stock repurchase
program because "a proxy contest apparently remained a viable alternative
for [the bidder] to pursue"); Stroud, 606 A.2d at 92 (shareholders
themselves approved by-law amendment in question).
<PAGE>
meetings of ITT and the "new" hotel and gaming company will be rendered
"'meaningless.'" 885 F. Supp. at 1342.
Citing this Court's April 21 order and Stahl v. Apple Bancorp,
Inc., 579 A.2d 1115, 1123 (Del. Ch. 1990), ITT also argues that Shoen is
inapplicable here because the ITT board had not yet scheduled the 1997
annual meeting when it adopted the plan. ITT Br. at 22. But Stahl holds
only that "the action of deferring [an] annual meeting where no meeting
date has yet been set and no proxies even solicited does not impair or
impede the effective exercise of the franchise." 579 A.2d at 1123. It does
not hold that a board can engage in other types of inequitable interference
with the shareholder's right to vote through the simple expedient of
failing to schedule a meeting. Cf. Shoen, 885 F. Supp. at 1341 n.23
("manipulation of meeting dates is not the only method at the Board's
disposal should it wish to interfere with the 'free and effective exercise
of voting rights'") (citation omitted).*
C. The Board's Primary Purpose Is To Interfere With Shareholder
Rights.
ITT and its directors deny that the "primary purpose" of the plan
is to disenfranchise ITT shareholders and claim instead that the plan was
adopted for "compelling business reasons." ITT Br. at 22-23. That assertion
cannot withstand scrutiny. The objective facts are that: (1) the directors
have voted to change their own terms of office in the middle of a proxy
contest to unseat them; (2) there is nothing about the economics or
structure of the plan that required the directors to include a staggered
board in the charter of the "new" hotel and gaming company; (3) the plan
could have been put to a vote consistent with ITT's own timetable for
closing if the directors had chosen to do so; (4) the claim that the board
is seeking to implement
- --------
* Moreover, under the circumstances of this case, the ITT board has
failed to "schedule" an annual meeting only in a hyper-technical sense.
At oral argument on April 17, 1997, ITT conceded that the meeting must be
held no later than November 14 and that ITT would have to begin the process
of calling a meeting by the first week of September. 4/17/97 Tr. at 47. ITT
has told the world that it intends to hold its annual meeting in November
and has disseminated "broker search cards" stating that the record date for
the annual meeting is October 1. Burch Reply Dec. P. 9. And both sides have
filed proxy statements with the SEC and are engaged in the solicitation of
shareholders. The electoral process has been engaged. See IBS Fin. Corp.,
954 F. Supp. at 993 n.6 (Blasius triggered, even though meeting date not
fixed, where board was "'faced with a proxy contest or an expected proxy
contest when it [acted]'"), quoting Commonwealth Assocs. v. Providence
Health Care, Inc., No. Civ. A. 13135, 1993 WL 432779, at *8 (Del. Ch. Oct.
22, 1993).
<PAGE>
the plan promptly "not in order to avoid a stockholder vote" but "to avoid
market risks ... that may result from any delay" is false; (5) the
directors concede that one element of the plan, the CD&R transaction, must
be put to a shareholder vote; and (6) the directors authorized the
expenditure of $7.9 million of ITT's money so that the vote on the CD&R
transaction could be delayed until after the comprehensive plan is
consummated. These objective facts speak far more loudly than the
directors' self-serving statements about their "primary purpose."
The discovery record further confirms that the "primary purpose"
of the elements of the plan is to impair the shareholder vote:
(a) From the outset, ITT and its advisors recognized that the
company was vulnerable to a proxy fight because it had no
"staggered board." Araskog Tr. 103-04; Rosenfeld Tr. 65-66;
Wilson Tr. 67-68.
(b) The cornerstone of ITT's strategy from the moment it was
first devised was to spin-off the hotel and gaming
businesses and retain one of the smaller businesses as the
"stub." It was "obvious" to all concerned that this strategy
would redress ITT's vulnerability to a proxy fight by
erecting a "staggered board" barrier to Hilton's bid.
Araskog Tr. 219; Rosenfeld Tr. 131-37; Wilson Tr. 153-54.
Indeed, this is why Mr. Araskog "like[s] [World Directories]
as a stub." Araskog Tr. 340-41.
(c) It was "self-evident" to the directors that adopting a
staggered board would thwart Hilton from replacing a
majority of the hotel and gaming company's board. Wilson Tr.
161-62. The board consensus was that this was a "good idea."
Wilson Tr. 173-75.
(d) Mr. Araskog acknowledged that the board was manipulating the
timing of ITT's annual meeting to maximize the incumbents'
chances for success. Araskog Tr. 125.
In light of this record, the "only reasonable inference is that the [ITT]
board acted for the purpose of interfering with other shareholders' voting
rights." Shoen, 885 F. Supp. at 1342. See also Packer v. Yampol, No. Civ.
A. 8432, 1986 WL 4748, at 16 (Del. Ch. Apr. 18, 1986) ("inequitable purpose
can be inferred where the directors' conduct has the effect of being
unnecessary under the
<PAGE>
circumstances, of thwarting shareholder opposition, and of perpetuating
management in office"); Lerman, 421 A.2d at 912, 914 (same).*
D. The ITT Board Lacks a "Compelling Justification" for
Interfering with the Shareholder Franchise.
Board interference with the shareholders' right to vote is
permissible only if the board has a "compelling justification." Shoen, 885
F. Supp. at 1342. In view of the "transcending significance of the
franchise to the claims to legitimacy of our scheme of corporate
governance", Blasius, 564 A.2d at 662, this "quite onerous" standard is
rarely met. Williams v. Geier, 671 A.2d 1368, 1376 (Del. 1996). It
certainly hasn't been met here.
ITT's board asserts that "successful implementation by the three
new entities created by the Spinoff of their respective long-term strategic
plans, will produce greater value than Hilton's inadequate offer." The
directors also claim that their plan will cause less "disruption" to
employees and will better "protect the interests of Sheraton hotel owners
and Sheraton franchisees" than Hilton's bid. ITT Br. at 9. These claimed
benefits simply do not constitute "compelling justification" for
interfering with the shareholders' right to vote for Hilton's slate.
It does not matter for purposes of Shoen and Blasius whether the
ITT board genuinely believes that the plan is in the best interests of the
corporation or is preferable to the Hilton offer. In Blasius, Chancellor
Allen rejected the notion that a board's good faith belief that the
insurgent's restructuring proposal would harm the corporation could justify
the board's efforts to thwart a shareholder vote:
It may be that the Blasius restructuring proposal was or is
unrealistic and would lead to injury to the corporation and its
shareholders if pursued. Having heard the evidence, I am inclined
to think it was not a sound proposal. The board certainly viewed
it that way, and that view, held in good faith, entitled the
board to take certain steps to evade the risk it perceived. It
could, for example, expend corporate funds to inform shareholders
and seek to bring them to a similar point of view. But there is a
vast difference between expending corporate funds to inform the
electorate and exercising power for the primary purpose of
foreclosing effective shareholder action. A majority of the
shareholders, who were not
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* While it denies that the primary purpose of the plan is to impede
Hilton, ITT also argues that "[e]ven if the Board's primary purpose had
been to respond to Hilton's hostile bid, under Delaware law Unocal, not
Blasius, would apply." ITT Br. at 23 n.41. This is incorrect. The Delaware
Supreme Court has squarely held that when a board of directors interferes
with the exercise of shareholder voting in response to an acquiror's having
launched both a proxy fight and a tender offer, both Blasius and Unocal
apply. Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1379 (Del.
1995).
<PAGE>
dominated in any respect, could view the matter differently than
did the board. If they do, or did, they are entitled to employ
the mechanisms provided by the corporation law and the Atlas
certificate of incorporation to advance that view. 564 A.2d at
563 (citations omitted) (emphasis added).
See also IBS Fin., 954 F. Supp. at 994 (incumbent board asserted good faith
belief that insurgent's proposal to put the company up for sale was "bad
for the company and bad for the shareholders;" "this decision, when
manifested as who should comprise the ... board, is one for the
shareholders, not to be usurped by a board of directors, however
good-intentioned").
Even if one accepts in its entirety ITT's view that the plan is
economically superior to Hilton's offer, ITT can point to no "compelling"
economic necessity that requires it to include a staggered board in the
charter of the "new" hotel and gaming company at all, and no "compelling"
economic necessity for implementing the plan before the 1997 annual meeting
is held. There is no risk that the allegedly "economically inferior" Hilton
offer will be consummated before the 1997 annual meeting. Because ITT has
in place a "rights plan" that makes any acquisition of ITT not approved by
the board impossible, Hilton cannot consummate its offer (without the
cooperation of the incumbent directors) until after ITT's 1997 annual
meeting is held. There is no "compelling" reason why implementation of the
plan could not await the outcome of the 1997 annual meeting.*
The ITT board also cannot find "compelling justification" in its
desire to protect constituencies other than the shareholders from Hilton's
offer. ITT Br. at 23. Just as Shoen and Blasius do not allow a board to
interfere with the corporate franchise in order to protect the shareholders
from what the board perceives to be a "bad" acquisition proposal, these
authorities do not allow a board to interfere with corporate franchise in
order to protect employees, creditors and other corporate constituencies
from such a proposal. The decision as to who should comprise the board
belongs to the shareholders -- not the board or the employees or
creditors.**
- --------
* Cf. Packer v. Yampol, 1986 WL 4748 at *16 (even if incumbent
directors "had no economic choice" but to issue super-voting preferred
stock to friendly shareholders in midst of proxy fight, Blasius violated
since transaction could have been made conditional upon stock not being
voted until after annual meeting).
** The directors claim that Hilton's offer poses a threat to ITT's
franchisees, employees, creditors, and the local and national economies.
Hilton's offer poses no such threat. As to franchisees, Hilton will not
enter into a transaction with HFS that would diminish the value of assets
that it has offered to buy for $8.4 billion. Hart Tr. 129-30.
<PAGE>
Nor can ITT credibly argue that the prospect of delay provide the
"compelling justification" for the implementation of the plan before a
shareholder meeting. As noted, if ITT had chosen, it could already have
conducted a shareholder vote by now. If the plan is so "compelling," then
the shareholders would have readily approved it. The prospect of "damage"
from delay is in any event non-existent. ITT's Treasurer admitted that the
financing for the plan is locked in until December 31, and that movements
in interest and currency exchange rates will not adversely affect the
company if consummation of the plan is delayed until November 14. Tuttle
Tr. 159-61, 182-84. The fact that ITT is trying to rush through
implementation of the plan before the statutory deadline for holding a
meeting reflects no "compelling justification" for the board's interference
with the shareholder franchise, only a naked desire to do so.
IV. NRS 78.390 REQUIRES A SHAREHOLDER VOTE ON THE PLAN
ITT concedes that NRS 78.390 requires a shareholder vote to amend
a company's articles of incorporation to include a staggered board
provision. But ITT asserts that it can effectively amend its charter
without a shareholder vote by spinning off 93% of its assets in a "new"
subsidiary whose charter will provide for a staggered board. Relying on NRS
78.215, which allows a board to declare dividends without shareholder
approval, ITT argues that NRS 78.390 is not even implicated here because
ITT is technically not amending its own charter. ITT Br. at 24.
- ---------
As to employees, the claim that Hilton would engage in wholesale firings is
unsupported in the record. Bollenbach Tr. 301-03 (only a "small number of
very expensive" ITT positions will be eliminated). It also rings hollow
coming from an incumbent board which has itself presided over the
termination of over 65% of ITT's headquarters employees, while
simultaneously granting the CEO a "golden parachute" worth at least $19.8
million. Araskog Tr. 147-48, 153. As to creditors, Hilton expects that it
will retain its investment grade rating if its offer succeeds. Bollenbach
Tr. 137-42; Hart Tr. 131, 162. By contrast, ITT is threatening the
interests of creditors by transforming itself from an investment grade
credit into an issuer of junk bonds. While ITT is tendering for its public
debt, its general creditors (e.g., vendors and suppliers) will not get the
benefit of the debt tender offer and will be forced to deal with a
financially weakened ITT. As to the local economy, the only impact on
Nevada that Mr. Bowman could identify is his speculation that Hilton would
not develop the 34-acre parcel adjoining the Desert Inn. He admitted,
however, that ITT has no immediate plans to do so either. Bowman Tr.
266-68. And as far as the national economy is concerned, ITT acknowledges
in its SEC filings that competition in hotels and gaming is "vigorous" and
"intense." Wolinsky Aff. Ex. LL at 42. A Hilton acquisition of ITT will
create a stronger company and will enhance competition.
<PAGE>
As Hilton explained in its opening brief, the court in Kansas
City Power & Light Co. v. Western Resources, Inc., 939 F. Supp. 688, 692
(W.D. Mo. 1996), rejected a very similar effort to evade the shareholder
vote requirements of a state corporation statute. In that case, KCPL and
UtiliCorp entered into a merger agreement that required the approval of the
holders of two-thirds of KCPL shares under the Missouri corporation law.
When a competing bidder for KCPL emerged and it proved difficult to obtain
the necessary two-thirds vote, the parties agreed upon a new two-step
merger transaction. In the first step, UtiliCorp proposed to merge into a
subsidiary of KCPL. In the second step, UtiliCorp -- now a wholly-owned
subsidiary of KCPL -- proposed to merge into KCPL. Neither step required a
KCPL shareholder vote under the Missouri statute.
Citing the "doctrine of independent legal significance," KCPL and
UtiliCorp contended that they should be permitted to consummate their
two-step merger plan without a shareholder vote in reliance upon the two
statutory provisions that authorized the two steps to their plan without a
vote. The Court rejected that contention, reasoning that it could not
"ignore [that] the outcome of the whole revised transaction" would be the
"destruction of the KCPL shareholders' right to vote." 939 F. Supp. at 693.
Missouri law required the Court to "consider an entire legislative act
together and to harmonize all provisions," and the only way to do so was to
read the statute to require a shareholder vote. 939 F. Supp. at 693-94. The
Court found additional support for its conclusion in the Missouri
Legislature's expressed intention to protect minority shareholder rights by
requiring a vote in a traditionally structured merger. 939 F. Supp. at
694.*
Here, as in Kansas City Power, ITT is attempting to circumvent
the traditional shareholder vote requirement of NRS 78.390 for charter
amendments by going through the two-step process of forming a new
subsidiary that will hold substantially all of ITT's assets and spinning
that subsidiary off to ITT shareholders. ITT is attempting to do indirectly
what NRS
- --------
* ITT claims that, unlike the parties in Kansas City Power, it is not
relying on the doctrine of independent legal significance. ITT Br. at 25.
Whatever label ITT uses, however, its position boils down to the
"proposition that actions taken pursuant to the authority of various
sections of the law [e.g., NRS 78.215] constitute acts of independent legal
significance and their validity is not dependent on other sections of the
act [e.g., NRS 78.390]". Kansas City Power, 939 F. Supp. at 692. That is
precisely the proposition rejected by the Court in Kansas City Power.
<PAGE>
78.390 prohibits it from doing directly. In view of the Nevada courts' long
tradition of construing statutes so as to harmonize all provisions and
elevate substance over form, see Hilton Br. at 21, this Court should read
NRS 78.390 and 78.215 together to require a shareholder vote where, as
here, a board of directors threatens to use its power to declare dividends
to effect a de facto amendment of the company's charter.
ITT tries to distinguish Kansas City Power by claiming that under
its interpretation of the Nevada statute, NRS 78.390 and NRS 78.215 "are
perfectly harmonious." ITT Br. at 24. That is obviously not so. If ITT's
reading of the statute is correct, a Nevada corporation could evade the
requirement of NRS 78.390 that shareholders approve all charter amendments
by spinning off a subsidiary containing substantially all of the parent
company's assets and giving the subsidiary a new "board-amended" corporate
charter. This is an absurd result.
ITT's contention (Br. at 25) that a Nevada court would not follow
Kansas City Power -- and would instead adopt Delaware's approach to the
independent legal significance doctrine -- is also incorrect. Nevada courts
look to Delaware law only "[w]here there is no Nevada precedent on point."
Shoen, 885 F. Supp. at 1341 n.20. Here, there is Nevada precedent on point,
and that precedent makes clear that the doctrine of independent legal
significance would not be followed in Nevada. Hilton Br. at 21 & cases
cited.*
- --------
* ITT's further assertion in a footnote that classification of a board of
directors without a shareholder vote is consistent with Nevada's statutory
scheme because the statute expressly authorizes the classification of
directors pursuant to a by-law and a board is authorized to make and amend
by-laws without stockholder approval is similarly off-base. ITT Br. at 25
n.42. ITT is seeking to stagger its board through a de facto amendment of
its charter, not through the amendment of its by-laws. There is a
significant difference. The "new" ITT charter will provide that an 80%
shareholder vote is necessary to amend the staggered board provision,
making it almost impossible for the shareholders of the "new" ITT to undo
the staggered board provision once it is put in place. Wolinsky Aff. Ex.
MM, Article Fifth (e).
By contrast, if the ITT board inserted a "staggered board"
provision in ITT's current by-laws, that provision could be repealed by a
vote of a majority of the shareholders. Wolinsky Aff. Ex. NN, Section 13.
If ITT's board were now to adopt a "staggered board" by-law, ITT's
shareholders would have the opportunity to repeal it at the 1997 annual
meeting: Hilton is currently soliciting shareholder support for a
resolution repealing any by-law amendment that has been unilaterally
adopted by the ITT board since Hilton's offer was announced. Wolinsky Aff.
Ex. OO at 10-11. In any event, an attempt by ITT's board to amend the
company's by-laws to provide for a "staggered board" would constitute an
inequitable manipulation of the shareholder franchise under Shoen and
Blasius. See Point III, supra.
<PAGE>
V. THE ITT DIRECTORS HAVE FAILED TO CARRY THEIR BURDEN OF SHOWING THAT
THEIR PLAN IS FAIR AND DID NOT EXERCISE THE GOOD FAITH REQUIRED BY
NRS 78.138
A. The Plan Is Tainted By Self-Interest and Is Not Fair To ITT Or
Its Shareholders.
The ITT board indisputably has a self-interest in the plan
because they have voted themselves en masse onto the board of the "new"
ITT. In these circumstances, the burden is on the ITT directors to
demonstrate that their plan is fair and serves the best interests of the
corporation and its shareholders. Horwitz v. Southwest Forest Indus., Inc.,
604 F. Supp. 1130, 1134 (D. Nev. 1985).
ITT claims that this rigorous standard does not apply because a
"'desire to maintain control of the corporation does not indicate that the
directors acted in self-interest,'" and that its directors were not
"self-interested" in adopting the comprehensive plan because they did not
"'derive a personal financial benefit'" from its adoption. ITT Br. at 20
n.36, quoting Horwitz, 604 F. Supp. at 1134. That is simply not true. This
is not merely a case about directors who have taken defensive actions that
may have the effect of prolonging their tenure. This is a case where
directors faced with the prospect of being voted out of office have
purposefully taken actions that directly extend their own terms. These
actions -- actions that Professor Fischel labels "unprecedented" -- taint
the directors' plan with self-interest and subject the directors' actions
to a heightened level of scrutiny.
The directors have not satisfied their burden. Their plan strips
the shareholders of their right to elect a majority of the directors at the
upcoming annual meeting, deprives shareholders of the ability to receive
the benefits of Hilton's $70 offer, and dramatically transforms present ITT
into two junk bond credits. It is not fair to ITT or its shareholders.
B. The ITT Directors Did Not Act in Good Faith and Did Not Exercise
Due Care.
Recognizing that they cannot prevail under the standard mandated
by Southwest Forest, ITT and its directors devote the bulk of their
response to contend that "subjective good
<PAGE>
faith" is the only applicable test here. That is simply not the case. As
discussed below, Unocal and Revlon both apply. But even if ITT's position
were accepted, the result would be the same.
The requirement that directors act in good faith does not mean
that any action they take is immune from review so long as the directors
have a pure motive. The requirement of good faith goes to the actions of
the directors as well; bad acts no matter how well motivated, do not
satisfy the demands of Nevada law. A director's obligation to act in good
faith has two additional prongs "generally characterized as the duty of
care and the duty of loyalty." Buchanan v. Henderson, 131 B.R. 859, 867,
868 (D. Nev. 1990), rev'd on other grounds, 985 F.2d 1021 (9th Cir. 1993).
As Judge McKibben summarized in Buchanan:
A manager/director may be protected by the "Business Judgment
Rule." This rule bars judicial inquiry into actions of corporate directors
which are taken in good faith and in the exercise of honest judgment. The
Business Judgment Rule, however, does not apply in cases in which the
corporate decision lacks a business purpose, is tainted by conflict of
interest or is so egregious as to amount to a no-win situation or results
from obvious and prolonged failure to exercise oversight or supervision. .
. . [The degree of care required] "is that which ordinarily prudent and
diligent men would exercise under similar circumstances." (Citations
omitted; emphasis added).
1. The ITT board has not acted in good faith.
The ITT directors have engaged in acts that are incompatible with
the concept of good faith. Initially, and most damning, they have misled
the Court: ITT and its directors told this Court that they were the
protectors of the corporate franchise and that this Court should not compel
them to face the ITT shareholders in May because they would do so in
November. While making this promise, ITT was planning to make the promise a
nullity. The claim in ITT's brief (at 2) that the directors did follow
through on the promises that they made to the Court because their plan
"enhances shareholder value" is just another deception. The directors did
not promise that they would use the delay to "enhance shareholder value."
They also promised that they would use the delay to "benefit the
stockholders' decisionmaking process."
This act of bad faith does not stand alone:
1. The incumbent directors did not act in good faith when they
decided to take a $2.8 billion risk by not seeking a tax ruling, even
though they did not seek a ruling in 1995. Whether the reason was simply
that "there is insufficient time to do so" as reflected in the August 14
minutes, or a fear that the IRS might question aspects of the plan during
the ruling process, as
<PAGE>
Messrs. Bowman and Steinberg told the regulators, the fact is that the
directors are taking a multi-billion dollar risk with other people's money
- -- a risk that an ordinarily prudent person would not take. They are taking
this risk not for any business purpose, but to avoid a shareholder
referendum on their plan.
2. The incumbent directors did not act in good faith in deciding
to implement the plan without a shareholder vote and in representing to
this Court that the reason was to avoid delay of its implementation. The
ITT directors sought and obtained shareholder approval of ITT's 1995
split-up in the space of three weeks. They could have done the same in
1997.
3. The incumbent directors did not act in good faith when they
voted Mr. Araskog a $19.8 million "golden parachute" and brought the total
value of Mr. Araskog's severance package up to at least $54.9 million.
Although the directors have sought to justify these astronomical sums as
necessary to "retain employee loyalty and dedication," Mr. Araskog never
told the directors that he needed these astronomical sums to remain loyal
and dedicated to ITT. Rather, as Mr. Araskog described in his 1989 book The
ITT Wars, the "golden parachute" award was a "payment[] by [a] crony board
of directors" that "skirts the edge of propriety." Araskog Tr. 160, 163.
4. The incumbent directors did not act in good faith when they
gave "3 or 4 minutes" of consideration to the sentiments of large ITT
shareholders that the plan not be imposed without a vote. The directors
were presented with the results of a poll of Sheraton franchisees and
employee surveys that claimed to reflect concern over a Hilton
acquisition.* Yet they never polled the owners of the corporation, and
never met with their proxy solicitors. Instead, they chose to rely on the
anecdotal reports from ITT's CFO, Ms. Reese, reports that Ms. Reese herself
made clear did not provide a "basis on which they could infer anything."
Reese Tr. 214.
5. The incumbent directors did not act in good faith when they
voted to reject the Hilton offer on the grounds that Hilton's financing was
"uncertain," that there were antitrust "concerns," and that there were
"gaming issues." As for financing, Goldman Sachs told
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* Management asked the employees to give their "perceptions of Hilton"
in order to create a record for the board's rejection of the offer.
Araskog Tr. 287.
<PAGE>
the board that Hilton could finance its $55 offer; Chase advised that
Hilton could finance its $70 offer. Kaplan Tr. 63-64; Wilson Tr. 106-07. As
for antitrust, the Department of Justice cleared the Hilton offer without
even a request for additional information, and ITT does not believe that
the federal government will sue to block the Hilton acquisition now.
Araskog Tr. 176-77. ITT's own SEC filing on the comprehensive plan states
that "[o]ur gaming operations face intense competition . . . [and] are
likely to experience increased competition" and that competition in the
hotel business is "vigorous." Wolinsky Aff. Ex. LL at 42. And as for
"gaming issues," ITT thinks highly enough of Hilton for it to partner with
Hilton in operating a casino in Windsor, Ontario. Nor was it good faith for
the directors to contend that Hilton's $70 offer was "coercive" and
inadequate when ITT itself has made a self-tender at the same price and
will pay cash for fewer shares, thus making its own offer more "coercive."
6. The incumbent directors did not act in good faith when they
voted to spend almost $8 million of the shareholders' money on a bridge
loan so that they could avoid having to hold a shareholder meeting to
approve the CD&R investment before consummation of the rest of the
comprehensive plan. The directors claim that they wanted to implement their
plan as quickly as possible so as to avoid "market risk." Yet they decided
to delay implementation of CD&R's investment -- and take the "market risk"
that CD&R would exercise its contractual right to terminate its investment
agreement due to a material adverse change in market conditions -- for the
sole reason of avoiding an early shareholder meeting that would turn into a
referendum on the comprehensive plan.
7. The incumbent directors did not act in any good faith by
stating in a joint declaration that they sought independent counsel from
LeBoeuf Lamb without revealing that they sought no such counsel on any of
the critical issues before them or that LeBoeuf also serves as Mr.
Araskog's lawyer on compensation issues.
2. The ITT board has not acted with due care.
The ITT directors' claim of good faith also must fail because the
directors did not exercise due care in adopting the plan. Given the
magnitude of the transaction they approved and its profound effect on ITT
shareholders, the directors' ignorance and passivity is truly remarkable.
<PAGE>
-- The directors put the 1995 trivestiture to a shareholder
vote because of its "importance" to ITT and its shareholders
and concede that the 1997 plan is just as important. Yet
they failed even to discuss putting the 1997 plan to a vote.
-- The directors were presented by management with the
staggered board aspect of the plan. No director asked
whether it should be put to a shareholder vote. There was
"no extended discussion" of this fundamental change in the
governance of ITT.
-- The directors approved the decision not to seek an IRS tax
ruling without understanding the magnitude of tax dollars at
issue or the level of protection a ruling would afford.
-- The directors accepted Cravath's highly qualified, "not free
from doubt" opinion on the tax poison pill without
requesting a second opinion or even a written opinion, and
without questioning Cravath on the subject.
The directors at deposition demonstrated a shocking lack of
familiarity with the terms of Hilton's offer. Director Anderson did not
know Hilton's current cash tender offer price. Anderson Tr. 21. Several
directors did not know that Hilton's proposed second-step merger is
intended to be worth $70 per share. Anderson Tr. 73-75; Burnett Tr. 201;
Meyer Tr. 211. While Hilton has said it will agree to a "collar" provision
to help protect the value of the back-end merger, a number of the directors
were either unaware of this or didn't know what a "collar" is. Anderson Tr.
75-76; Burnett Tr. 251-52; Meyer Tr. 179. And, as discussed above, the
directors also failed to inform themselves about the wishes and concerns of
their most important constituency: the owners of the company.
In sum, the record reveals a board -- led by a Chairman who has
resolved to stay independent at any cost -- that uncritically
rubber-stamped management's risky and preclusive takeover defense. It
reveals a board that has sat idly by and permitted ITT to prevaricate in
statements made before this Court. This is the antithesis of good faith.
And in the absence of good faith, "the burden shifts to the directors to
'prove that the transaction [is] fair and reasonable
<PAGE>
to the corporation'" and its shareholders. Drobbin v. Nicolet Instrument
Corp., 631 F. Supp. 860, 880 (S.D.N.Y. 1986) (applying Nevada law). ITT's
directors have not sustained this burden.
VI. THE ITT DIRECTORS HAVE FAILED TO SHOW THAT THE COMPREHENSIVE PLAN IS A
REASONABLE RESPONSE TO THE HILTON BID
ITT's response to Hilton's Unocal claim is twofold. First, ITT
claims that Unocal is not the law of Nevada. ITT Br. at 25-26. Second, ITT
contends that the plan satisfies the Unocal test. ITT Br. at 27-31. ITT's
first contention has already been rejected. On September 8, this Court
denied ITT's motion to dismiss the Unocal claim in Hilton's First Amended
and Supplemental Complaint. ITT's second contention should be rejected as
well.
In order to satisfy Unocal, a target board of directors must show
that it had "reasonable grounds for believing that a danger to corporate
policy and effectiveness existed" and that the directors' defensive
response was "reasonable in relation to the threat posed." Unocal Corp. v.
Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985). The ITT directors cannot
satisfy either prong of the Unocal standard.
A. Hilton's Offer Does Not Pose a Threat ITT asserts that the Hilton
offer poses a threat of "substantive coercion" because
the $70 per share offered by Hilton is "inadequate." ITT Br. at 28. There
is no such threat. The price of Hilton's cash tender offer for 50.1% of ITT
stock is the same as ITT's for 26% of its stock: $70 per share.* And ITT's
claim that the overall value of the consideration shareholders would
receive under the plan exceeds the overall value of Hilton's bid is without
support in the record. ITT's bankers advised the board that the "trading
value of the comprehensive plan" is only $62- $64 -- well below Hilton's
$70 bid. Rosenfeld Tr. 243.**
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* ITT misleadingly contends that its $70 per share price should not be
compared to Hilton's $70 per share price because the ITT plan "is only for
part of the outstanding ITT shares and will leave ITT stockholders enjoying
the benefits of ownership with the prospect of still receiving a control
premium for their remaining shares." Kaplan Aff. P. 7. Since Hilton intends
to offer its common stock in a second-step merger, Hilton's offer will
leave stockholders "enjoying the benefits of ownership" of the stock of the
combined company with the prospect of receiving still another control
premium in the future if the combined entity is ever sold. And the
comprehensive plan itself is a change- in-control transaction, with CD&R
buying effective control of present ITT. Moelis Dec. P. 4.
** ITT's bankers presented financial analyses to the board suggesting
that if management's rosy projections one day come to pass, the value of
the consideration to be
<PAGE>
ITT asserts that Hilton is taking advantage of ITT's "temporarily
depressed stock price." ITT Br. at 4. Who was running the company when this
"depression" hit? The "depression" was the result of an inability on the
part of ITT management to create shareholder value with the company's
assets. Moelis Tr. 70, 114-15, 118. And the "depression" was not
"temporary." In the three months leading up to Hilton's offer, ITT stock
never traded above $48; in the six months leading up to Hilton's offer, ITT
never traded above $60; and in the twenty-one months since the 1995
spin-off, ITT's stock has never traded at or above $70 per share. Wolinsky
Aff. Ex. PP.
ITT also claims that Hilton's offer poses a risk of "structural
coercion" because the value of Hilton's proposed second-step merger is
"uncertain," and that ITT shareholders may feel compelled to tender for
fear of receiving less consideration in the merger. ITT Br. at 28. This
argument is specious: any "uncertainty" in the value of the second-step of
the merger is a function of ITT's refusal to negotiate the customary
"collar" provisions designed to eliminate uncertainty in the value of the
second-step merger consideration. Wilson Tr. 103-04. See also Moelis Tr.
58. Moreover, any possibility of "structural coercion" is eliminated by the
fact that Hilton's offer is effectively conditioned on a shareholder vote:
if shareholders do not like the Hilton offer, they can simply vote "no" and
neither the tender offer nor the second-step merger will occur.* See
Norfolk Southern Corp. v. Conrail Inc., C.A. Nos. 96-7167, 96-7350, slip
op. at 15-16 (E.D. Pa.
- --------
offered under the plan might one day exceed $70. Wilson Tr. 290-92. The
bankers' analyses are suspect in two critical respects. First, the
management projections on which the bankers' opinions were based are unduly
optimistic -- particularly the projection that cash flow from ITT's gaming
operations will increase by $170 million or 63 percent in a single year.
Moelis Dec. P. P. 17-18. ITT's bankers did no independent investigation of
management's projections and advised the board that they had no view as to
whether the projections would in fact be realized. Kaplan Tr. 83-84,
316-17. Moreover, while the bankers assumed for purposes of their analysis
that the securities to be issued under the plan might increase in value
over time if management's projections were achieved, they assumed that
Hilton's offer would have a static value of $70. Kaplan Tr. 317-18. This is
an inherently unreasonable assumption. ITT's bankers did not obtain
Hilton's internal projections and were unable to make an appropriate
apples-to-apples comparison. Wilson Tr. 279-81.
* Because ITT has adopted a "shareholder rights plan," it is not
feasible for Hilton to consummate its offer unless the shareholders elect
Hilton's slate of nominees to the ITT board and the new directors redeem
the rights. Hilton has to win its proxy fight for its tender offer
to succeed.
<PAGE>
Nov. 19, 1996) (rejecting claim that cash tender offer with second-step
stock merger was coercive since shareholders had right to vote with respect
to transaction) (Wolinsky Aff. Ex. QQ).
Finally, ITT asserts that because it will "take some time for
ITT's stock price to reflect the increased value resulting from the actions
taken by the Board," the shareholders face a "risk of opportunity loss" if
Hilton is allowed to proceed with its merger now. ITT Br. at 28. There is
no such "risk." ITT has engaged in an extensive effort to communicate the
merits of its plan, including the assumptions underlying its projections,
to ITT shareholders and the investment community. Araskog Tr. 344-45;
Wolinsky Aff. Exs. RR, SS, TT. This is not a case where shareholders might
tender out of "ignorance or mistaken belief" regarding the board's
assessment of the long-term value of ITT stock. See Shamrock Holdings Inc.
v. Polaroid Corp., 559 A.2d 278, 290 (Del. Ch. 1989). ITT's current stock
price of $62 per share reflects the market's assessment that management's
projections are not likely to come to pass. See Jonathan R. Macey,
"Administrative Agency Obsolescence & Interest Group Formation: A Case
Study of the SEC at Sixty," 15 Cardozo L. Rev. 909, 927 (1994) ("securities
markets have become increasingly more efficient;" "[i]n an efficient
capital market, the current price of a security will be the best estimate
of the future price, because the current price will 'fully reflect all
available information' about the future cash flows to the investors who own
the security").
B. The Comprehensive Plan is Coercive, Preclusive and Unreasonable
Even if the ITT board could show that Hilton's tender offer
represented a "threat" to ITT, the plan must fall. Under Unocal, the target
may not adopt defenses that are "preclusive" because they prevent the
offeror from successfully completing its offer or "coercive" because they
involve "cramming down" on its shareholders a management-sponsored
alternative. 493 A.2d at 955; Unitrin, Inc. v. American Gen. Corp., 651
A.2d 1361, 1387 (Del. 1995). The target board must also show that its
response is within the "range of reasonableness," i.e., that it is "limited
and correspond[s] in degree or magnitude to the degree or magnitude of the
threat." 651 A.2d at 1389.*
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* Where, as here, the target board has adopted an array of "inextricably
related" defensive actions, those actions must be "scrutinized collectively
as a unitary response to the perceived threat." Unitrin, 651 A.2d at 1387.
<PAGE>
The ITT plan flunks this test. In his 1989 book The ITT Wars, Mr.
Araskog prided himself on the fact that, in fighting off "corporate
raiders" in the mid-80's, the former ITT board adopted a strategy of
"holding the company together, defending the company, not being willing to
spin off desirable assets, and not being willing to auction off pieces that
were basic to the core strategies of the company." Wolinsky Aff. Ex. UU at
149. Mr. Araskog contrasted ITT's experience with that of other takeover
targets that "fight off the unwanted suitor by selling off assets and/or
taking on substantial debt . . that not only weakens its finances but also
jeopardizes it during a business downturn." Id. at 150. ITT has not only
adopted the anti-takeover tactics that Mr. Araskog derided in his book, it
has taken them one step further.
The tax poison pill makes the plan preclusive. Wolfman Aff. P.
11, 12; Wolfman Reply Dec. P. P. 2(b), 10-17. Mr. Steinberg's carefully
worded advice confirms this fact. No rational business person could proceed
with an acquisition of ITT in the face of a potential $1.4 billion tax
liability. Moelis Tr. 97-98. As Hilton's CFO explained:
You know, it's the kind of thing when the experts in the field,
the guys you hire, say that look, if you do this, you got a real
good chance that you're going to incur a $1.4 billion tax
liability when this thing gets audited. It will get audited, and
you are probably going to lose. As a business guy you say, well
then I'm not going to play in this game. Simple as that. Hart Tr.
98.
The ITT plan is also "coercive" in two significant respects.
First, ITT is making a $70 tender offer for only 26% of its stock. The
record is uncontradicted that the trading value of the remaining ITT shares
following the effectuation of the self-tender will be materially less than
$70 per share. Rosenfeld Tr. 243 (trading value of the plan, including $70
self-tender, is only $62 to $64 per share). The only way that a shareholder
can avoid immediate financial loss is to tender. Second, the spin-offs have
been structured as a dividend that will be declared by the board and not
put to a shareholder vote. Like it or not, if the plan is consummated,
every ITT shareholder will find that its untendered ITT shares have been
transformed into the stock of three separate companies -- the largest of
which will have in place a "staggered board" and a $1.4 billion tax poison
pill preventing Hilton from consummating its $70 offer.
The only justification offered by the ITT directors for the
coercive structure of the plan is that they are supposedly "seeking to
implement the Plan promptly, not in order to avoid a stockholder vote on
the plan, but . . . to avoid market risks and other business problems that
may
<PAGE>
result from any delay in implementation." ITT Br. at 10-11. This assertion
is laughable. Consummation of the spin-off was never scheduled to occur
until late September. Wolinsky Aff. Ex. RR at 7. There is simply no doubt
that a shareholder vote could have been held during that 2 1/2 month
window.*
Finally, even if the ITT plan were somehow found not to be
"preclusive" or "coercive," it is certainly not proportional to the
"threat" allegedly posed by Hilton's offer. Unitrin, 651 A.2d at 1388.
Though the ITT board claims that the plan is in the best interests of the
company and all of its constituencies, the plan in fact will (i) convert
ITT and its "sound balance sheet" into two junk bond issuers; (ii) subject
new ITT and its shareholders to massive potential tax liability; (iii) make
it impossible for shareholders to change control of the board at a single
meeting; (iv) extend unilaterally the terms of ITT's incumbent directors;
and (v) deprive shareholders of choice on the Hilton offer. The ITT plan is
simply outside the "range of reasonableness." Unitrin, 651 A.2d at 1388.
VII. THE ITT DIRECTORS HAVE FAILED TO SATISFY THEIR REVLON DUTIES
This Court's September 8 order denying ITT's motion to dismiss
the Revlon claim in Hilton's First Amended and Supplemental Complaint
disposes of ITT's argument that Revlon is not the law of Nevada. In light
of this ruling, ITT's only remaining argument is that Revlon is not
applicable here because "neither the Plan or any of the other transactions
ITT has entered into recently involves a sale or 'break-up' of ITT." ITT
Br. at 32. ITT contends that it is not engaged in a "break-up" because (1)
under Delaware law, "a sale or change of control is a predicate for such a
break-up" under Revlon, and (2) it is not selling or changing control. ITT
is wrong on both counts.
In Paramount Communications Inc. v. QVC Network Inc., 637 A.2d
34, 47 (Del. 1994), the Delaware Supreme Court expressly rejected the
position that a transaction must involve both a change of control and a
break-up for Revlon to apply:
- --------
* The directors also argue that they are not allowing the shareholders
to vote because they have no statutory obligation to do so. ITT Br. at 24.
Hilton disputes that contention. See Point IV, supra. Even if it were true,
however, "'inequitable action does not become permissible simply because it
is legally possible.'" Shoen, 885 F. Supp. at 1342.
<PAGE>
Such a holding would unduly restrict the application of Revlon,
is inconsistent with this Court's decisions in Barkan and
Macmillan, and has no basis in policy. There are few events that
have a more significant impact on the stockholders than a sale of
control or a corporate breakup. Each event represents a
fundamental (and perhaps irrevocable) change in the nature of the
corporate enterprise from a practical standpoint. It is the
significance of each of these events that justifies: (a) focusing
on the directors' obligation to seek the best value reasonably
available to the stockholders; and (b) requiring a close scrutiny
of board action which could be contrary to the stockholders'
interests. 637 A.2d at 47-48 (emphasis added).
ITT's activity here constitutes both a break-up of the company
and a sale of control. From February to June of this year, ITT announced
over $1.8 billion in asset sales. Bollenbach Dec. P. 11-12. The
comprehensive plan -- dividing the company in three and spinning off 93% of
the assets and 87% of the revenues (Moelis Dec. P. 6) -- continues the
"break-up" of the company. And after announcing the board's adoption of the
plan, ITT agreed to sell half the Desert Inn to Marvin Davis. Id. P. 17. If
this isn't a "break-up" of the company, what is?*
Notwithstanding ITT's protestations to the contrary, this
break-up also represents an abandonment of the company's long-term strategy
within the meaning of QVC. Prior to Hilton's tender offer, ITT had no
intention of spinning off its hotel and gaming businesses or selling
Madison Square Garden and the WBIS+ television station. Arsakog Tr. 43-44.
And while ITT management claims to have given some thought to the
possibility of eventually disposing of its directories and education
businesses, they reached no determination to sell, spin off or otherwise
dispose of either of those businesses prior to Hilton's offer. Araskog Tr.
68, 69-70. As Mr. Araskog conceded at deposition, Hilton's offer -- and
ITT's perceived need to get its stock price up in response to that offer --
was the "catalyst" for all that followed. Araskog Tr. 100.
The ITT plan also involves a sale of control to CD&R. While ITT
characterizes this transaction as the sale of a "minority interest," ITT
Br. at 32, the reality is that CD&R, with 32.9% of the stock and warrants
to go to 46.6%, with five directors on the board, and veto power over major
transactions, will have effective control of the company. Bowman Tr. 209
("my view is that they are running it"); Moelis Dec. P. 4. See also Essex
Universal Corp. v. Yates, 305 F.2d
- --------
* ITT cites Tomczak v. Morton Thiokol, Inc., Civ. A. No. 781, 1990 WL
42607, at *15 (Del. Ch. Apr. 5, 1990), for the proposition that its
activities do not constitute a "break-up." In Tomczak, the corporation sold
only one of four corporate divisions. That is not this case.
<PAGE>
572, 575-76 (2d Cir. 1962) (owner of 28.3% of a publicly held company
typically has voting control).
ITT nowhere asserts that its board has complied with its Revlon
duties. The reason is obvious. Revlon imposes a duty to maximize
shareholder value. The ITT board has not even tried to satisfy that duty.
The revised Hilton offer of $70 per share exceeds the trading value of the
ITT plan by $6 to $8 per share --a $680 million to $900 million disparity
in value. Rosenfeld Tr. 243. Yet the ITT board has not only persisted in
its refusal to remove the company's structural takeover defenses, it has
threatened to put a $1.4 billion tax roadblock in Hilton's path. It would
be hard to find a more blatant breach of a board's Revlon duties.
ITT's break-up is also being carried out in violation of NRS
78.565 which requires a Nevada corporation to obtain the approval of a
majority of the outstanding shares entitled to vote before entering into a
sale, lease or exchange of "all of its property or assets."* ITT's
disposition of some $2 billion in assets to date -- coupled with its
threatened spin-off of 93% of its remaining assets -- makes clear that a
sale of substantially all of ITT's assets is under way. ITT may not take
this drastic step without a shareholder vote. See Thorpe v. CERBCO, Inc.,
676 A.2d 436, 444 (Del. 1996) (parent's sale of subsidiary's stock
representing 68% of parent's assets and its primary income-generating asset
constitutes "radical transformation" in parent's business and sale of
"substantially all" of its assets); Katz v. Bregman, 431 A.2d 1274, 1276
(Del. Ch. 1981) (proposed sale of 51% of corporation's assets generating
45% of net sales constitutes a sale of "substantially all" assets).
VIII. HILTON AND THE ITT SHAREHOLDERS WILL SUFFER IRREPARABLE INJURY IN
THE ABSENCE OF INJUNCTIVE RELIEF; ITT WILL SUFFER NONE.
If ITT is permitted to consummate its comprehensive plan, Hilton
stands to suffer irreparable harm on two distinct fronts: first, Hilton and
the other ITT shareholders will lose the right to exercise their corporate
franchise unimpeded by board interference; and second, Hilton will be
deprived of the opportunity to obtain control of ITT.
- --------
* For the reasons set forth in Hilton's Memorandum of Points &
Authorities in Opposition to ITT's Motion to Dismiss Counts III-VII of the
First Amended and Supplemental Complaint (at 18-19), NRS 78.565 applies to
a sale of all or substantially all of its assets. This Court's September 8
order denied ITT's motion to dismiss Hilton's claim for relief under
NRS 78.565.
<PAGE>
"'[T]he denial or frustration of the right of shareholders to
vote their shares or obtain representation on the board of directors
amounts to an irreparable injury.'" Shoen, 885 F. Supp. at 1352 (citations
omitted). A spin-off of ITT's hotels and gaming business along with the
implementation of a staggered board will eliminate the ITT shareholders'
ability to elect a majority of the board at the 1997 annual meeting. This
"power grab" by the directors impairs the shareholder franchise and
entitles Hilton to relief. See, e.g., IBS Fin. Corp. v. Seidman & Assocs.
L.L.C., 954 F. Supp. 980, 994 (D.N.J. 1997) (voiding board action which
reduced shareholders' voting power from the ability to elect two-sevenths
of the board to the ability to elect one- seventh); Blasius, 564 A.2d 651
(voiding board action which would have deprived shareholders of
previously-held ability to elect a new board majority).*
Further, "[t]he basic function of a preliminary injunction is to
preserve the status quo pending a determination of the action on the
merits." Chalk v. United States Dist. Court, 840 F.2d 701, 704 (9th Cir.
1988). Since Nevada law requires that ITT's shareholders vote on
consummation of the plan, the issuance of a preliminary injunction is
necessary to preserve the shareholders' rights. See, e.g., Grand Metro, plc
v. Pillsbury Co., 558 A.2d 1049, 1061 (Del. Ch. 1988) (enjoining defensive
spin-off where failure to grant an injunction would "invite chaos for
[target company] and its shareholders" and target company's "capital
structure would be permanently changed").
Hilton's loss of "a realistic and probably unique opportunity" to
gain control of ITT also constitutes irreparable injury. NCR, 761 F. Supp.
at 489, 501. ITT's contention that Hilton will not be harmed if its
acquisition is "delayed" for another 20 months (Br. at 33) is to no avail.
See Araskog Tr. 339 (agreeing with the Wall Street adage that "delay kills
tender offers").
- --------
* See also Shoen, 885 F. Supp. at 1342 (finding irreparable harm because
"while shareholders still can vote their shares freely, the range of
choices available to them has been narrowed"); NCR Corp. v. AT&T, 761 F.
Supp. 475, 501 (S.D. Ohio 1991) (finding irreparable harm where
shareholders were deprived of "exercising their right to meaningful
participation in the selection of corporate directors"); International
Banknote Co. v. Muller, 713 F. Supp. 612, 623 (S.D.N.Y. 1989) (finding
irreparable harm where board enacted 45-day nominee notice provision 58
days before the scheduled annual meeting). ITT's attempt to distinguish
these cases on the grounds that the "enjoined Board action violated either
the applicable law, the bylaws or the Board's fiduciary duties" (ITT Br. at
33 n. 59) is futile. The ITT board's adoption of the comprehensive plan
also violates applicable law and the board's fiduciary duties.
<PAGE>
"The fact that [Hilton] will have some speculative chance to gain control
of [ITT] at some indeterminate point in the future does not serve to make
[Hilton's] loss here less than irreparable." 761 F. Supp. at 489.*
Moreover, as discussed above, the tax poison pill created by the plan
precludes Hilton from acquiring ITT; this lost opportunity constitutes
irreparable harm. See, e.g., Revlon, 506 A.2d at 184-85.**
ITT will not suffer any injury if Hilton is granted relief. ITT's
Treasurer could not have been clearer that delay will not adversely affect
ITT's financing for the plan. Tuttle Tr. 160, 182-84. The only real "harm"
facing the ITT directors is that they will be voted out by their
shareholders--that is to say, no real "harm" at all. "The incumbent
directors have no vested right to continue to serve as directors and
therefore will suffer no harm if they are defeated." Aprahamian v. HBO &
Co., 531 A.2d 1204, 1208 (Del. Ch. 1987).
- --------
* ITT's further argument that any delay that the implementation of a
staggered board may have on Hilton's acquisition cannot constitute
irreparable harm because Nevada law provides for such boards, ITT Br. at
33, is absurd. Nevada law does not provide for directors to adopt staggered
board charter provisions in the middle of a proxy fight. Nor does ITT's
recurring argument that certain conditions necessary to consummation of
Hilton's offer have yet to be met provide grounds for denying this motion.
The offer is very real, as ITT well knows.
** ITT's contention that Hilton engaged in unnecessary delay in moving
for injunctive relief, Br. at 34, is without substance. Hilton moved for
relief just 11 days after the ITT board rejected Hilton's tender offer at
its revised $70 per share price.
<PAGE>
IX. CONCLUSION
The conduct of ITT and its directors cannot stand up to the
requirements of Nevada law. Hilton's motion for injunctive and declaratory
relief should be granted in all respects and ITT's request for declaratory
relief should be denied.
DATED this 22nd day of September, 1997.
WACHTELL, LIPTON, ROSEN & KATZ,
By /S/ BERNARD W. NUSSBAUM
BERNARD W. NUSSBAUM
KENNETH B. FORREST
ERIC M. ROTH
MARC WOLINSKY
STEPHEN R. BLACKLOCKS
SCOTT L. BLACK
51 West 52nd Street
New York, New York 10019
STEVE MORRIS
KRISTINA PICKERING
MATTHEW MCCAUGHEY
SCHRECK MORRIS
1200 Bank of America Plaza
300 S. Fourth Street, #1200
Las Vegas, Nevada 89101
Attorneys for 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 Wachtell, Lipton, Rosen & Katz, and that on this day I served a true
copy of the foregoing enclosed in a sealed envelope.
VIA OVERNIGHT DELIVERY:
Thomas F. Kummer
Kummer Kaempfer Bonner & Renshaw
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
VIA HAND DELIVERY:
Rory Millson
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Dated this 22nd day of September, 1997.
By /S/ SCOTT L. BLACK
-------------------
Scott L. Black
[Exhibit 103]
[ITT Letterhead]
DATE: September 29, 1997
CONTACT: Jim Gallagher
TELEPHONE: 212-258-1261
FOR IMMEDIATE RELEASE
ITT EXTENDS STOCK TENDER OFFER
NEW YORK, NY, September 29, 1997 -- ITT Corporation (NYSE: ITT)
announced today that it has extended the expiration date of its offer
to purchase up to 30 million shares of its common stock (including the
associated preferred stock purchase rights) at $70.00 per share, net
to the seller in cash. The offer is now scheduled to expire at 5:00
p.m., New York City time, on Monday, October 6, 1997, unless extended.
As of the close of business yesterday, approximately 84 million shares
of ITT's common stock have been tendered in the offer. The terms and
conditions of the offer are set forth in ITT's Offer to Purchase dated
July 17, 1997, as supplemented by the Supplement to the Offer to
Purchase dated August 27, 1997, and the related Letter of Transmittal.
Goldman, Sachs & Co. and Lazard Freres & Co. LLC are acting as Dealer
Managers for the offer and Georgeson & Company Inc. is acting as
Information Agent.
- ITT -
