=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(Amendment No. 38)
SOLICITATION/RECOMMENDATION STATEMENT
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
ITT CORPORATION
(Name of Subject Company)
ITT CORPORATION
(Name of Person(s) Filing Statement)
Common Stock, no par value
(including the associated Series A Participating Cumulative
Preferred Stock Purchase Rights)
(Title of Class of Securities)
450912 10 0
(CUSIP Number of Class of Securities)
RICHARD S. WARD, Esq.
Executive Vice President,
General Counsel and Corporate Secretary
ITT Corporation
1330 Avenue of the Americas
New York, NY 10019-5490
(212) 258-1000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person(s) Filing Statement)
With a copy to:
PHILIP A. GELSTON, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
(212) 474-1000
=============================================================================
<PAGE>
INTRODUCTION
The Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") originally filed on February 12, 1997, by ITT
Corporation, a Nevada corporation (the "Company"), relates to an offer by
HLT Corporation, a Delaware corporation ("HLT") and a wholly owned
subsidiary of Hilton Hotels Corporation, a Delaware corporation ("Hilton"),
to purchase 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 4. The Solicitation or Recommendation.
The response to Item 4 is hereby amended by adding the following
after the final paragraph of Item 4:
Reference is made to the Company's soliciting materials which are
filed as Exhibit 109 hereto and are incorporated herein by reference.
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 October 2, 1997, the Nevada Federal Court issued an order (the
"October 2 Order") in respect of the Company Complaint and the Hilton
Answer and Counterclaims. A copy of the October 2 Order is filed as Exhibit
110 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:
109. Text of advertisement published by the Company on October 5, 1997 and
October 6, 1997.
110. Order of the Honorable Philip M. Pro dated October 2, 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 October 6, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
(109) Text of advertisement published by the
Company on October 5, 1997 and October 6,
1997..........................................
(110) Order of the Honorable Philip M. Pro dated
October 2, 1997................................
[Exhibit 109]
Attention ITT Shareholders:
The Issue is Shareholder Value
Fact: ITT Shareholders Will Decide On November 12 Whether They Want
Directors Committed To ITT's Plan Or Hilton's Hand-Picked Nominees
Who Support Their Hostile Offer.
Shareholders of Record October 1 are eligible to vote at ITT's
November 12 meeting for Directors committed to ITT's Plan--split
tax-free into three focused companies and buy back 30 million ITT
shares for $70 per share--or for nominees who support Hilton's
hostile offer. There is no longer a staggered Board in ITT's Plan.
You can make a clear-cut choice based purely on economics.
Fact: ITT Believes Our Plan Will Deliver More Value To Shareholders Than
Hilton's Low-Ball Hostile Offer.
Hilton tried to steal ITT at $55 per share and only raised to $70
in response to ITT's Plan. Yet, Hilton's own CFO told its Board
that ITT is "conservatively" worth more than $70.
Fact: Had You Tendered When Hilton First Asked You To, You Would Have
Left Almost $2 Billion On The Table.
If you vote for Hilton, we believe you'll still be leaving money on
the table. Hilton is trying to steal ITT for the benefit of its own
shareholders. ITT is offering you, tax-free, participation in the
upside of owning three public companies: ITT Destinations, a
worldwide leader in hotels and gaming; ITT Educational Services, a
premier operator of technical schools; and ITT World Directories,
the #1 publisher of overseas telephone directories and classified
information. This is the same valuecreating approach we
successfully used two years ago.
Fact: ITT Actions Have Caused Hilton To Increase Its Hostile Offer From
$55 Per Share To $70 Per Share.
ITT will continue to enhance shareholder value.
ITT Is Working For You
<PAGE>
We thank the many ITT shareholders who support our plan. To those of you
who haven't made up your mind, we're eager to make our case to you. We are
convinced we can generate superior value to Hilton's inadequate hostile
offer.
You will soon receive a blue proxy card and voting instructions from ITT.
We urge our shareholders not to take any action before reviewing ITT's
proxy materials. Be certain you review proxy cards carefully and know who
you are voting for. If you have questions, or need additional information,
please call our proxy firm, GEORGESON & COMPANY INC toll-free at (800)
223-2064.
[ITT Logo]
===========================================================================
CERTAIN INFORMATION CONCERNING PARTICIPANTS
The participants in this solicitation include ITT Corporation
(the "Company") and the following individuals, each of whom is a director
of the Company: Bette B. Anderson, Rand V. Araskog, Nolan D. Archibald,
Robert A. Bowman, Robert A. Burnett, Paul G. Kirk, Jr., Edward C. Meyer,
Benjamin F. Payton, Vin Weber, Margita E. White and Kendrick R. Wilson III.
Ms. Anderson is the direct owner of 2,811 shares of common stock of the
Company ("Common Stock") and may be deemed to beneficially own 83
additional shares. Mr. Araskog is the beneficial owner of 1,748,398 shares
of Common Stock. Mr. Archibald is the direct owner of 1,811 shares of
Common Stock. Mr. Bowman is the beneficial owner of 550,046 shares of
Common Stock. Mr. Burnett is the direct owner of 2,981 shares of Common
Stock. Mr. Kirk is the direct owner of 1,821 shares of Common Stock. Gen.
Meyer is the direct owner of 3,311 shares of Common Stock. Dr. Payton is
the direct owner of 1,303 shares of Common Stock. Mr. Weber is the direct
owner of 844 shares of Common Stock. Ms. White is the direct owner of 2,811
shares of Common Stock. Mr. Wilson is the direct owner of 3,000 shares of
Common Stock. The foregoing share ownership figures are as of August 31,
1997.
The Company has retained Goldman, Sachs & Co. ("Goldman Sachs")
and Lazard Freres & Co. LLC ("Lazard Freres") to act as financial advisors
to the Company in connection with the Hilton offer and other matters
arising in connection therewith, including assisting the Company in
exploring possible strategic alternatives in light of the Hilton offer.
Pursuant to an engagement letter with Goldman Sachs and Lazard Freres, the
Company has agreed to pay each of Goldman Sachs and Lazard Freres for their
services 50% of
<PAGE>
(a) an initial fee equal to $1,000,000 and (b) an additional advisory fee
equal to $19,000,000. The Company has also agreed to reimburse Goldman
Sachs and Lazard Freres for their reasonable out-of-pocket expenses,
including fees of counsel and any sales, use or similar taxes, and to
indemnify Goldman Sachs and Lazard Freres against certain liabilities in
connection with their engagement, including certain liabilities arising
under the Federal securities laws. In addition, Goldman Sachs and Lazard
Freres are involved in arranging certain financings to be incurred by ITT
Destinations, Inc., a new corporation formed to hold the Company's hotel
and gaming assets, in connection with the Comprehensive Plan and Goldman
Sachs Credit Partners L.P., an affiliate of Goldman Sachs, is providing
certain portions of such financings. Although Goldman Sachs and Lazard
Freres do not admit that they or any of their directors, officers,
employees or affiliates are a "participant," as defined in Schedule 14A
promulgated under the Securities Exchange Act of 1934, as amended, by the
Securities and Exchange Commission, or that Schedule 14A requires the
disclosure of certain information concerning them, Robert Kaplan (Managing
Director), Cody Smith (Managing Director), William Crowley (Managing
Director), Eduardo Cruz (Vice President) and Marc Nachmann (Associate), in
each case of Goldman Sachs, and Gerald Rosenfeld (Managing Director),
Robert Hougie (Vice President) and Antonio Weiss (Vice President), in each
case of Lazard Freres (collectively, the "Financial Advisor Participants"),
may assist the Company in the solicitation of proxies for the annual
meeting.
Goldman Sachs and Lazard Freres have provided financial advisory
and investment banking services to the Company from time to time for which
they have received customary compensation. Kendrick R. Wilson III is a
Managing Director of Lazard Freres. In the ordinary course of their
business, Goldman Sachs and Lazard Freres may actively trade securities of
the Company for their own account and the account of their customers and,
accordingly, may at any time hold a long or short position in such
securities. Goldman Sachs has advised the Company that as of September 29,
1997, Goldman Sachs held a net long position of approximately 12,221 shares
of Common Stock. Lazard Freres has advised the Company that as of September
29, 1997, Lazard Freres held a net long position of approximately 12,785
shares of Common Stock over which Lazard Freres exercised investment
discretion. Except as set forth above, to the Company's knowledge, none of
Goldman Sachs, Lazard Freres or any of the Financial Advisor Participants
has any interest, direct or indirect, by security holdings or otherwise, in
the Company.
[Exhibit 110]
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
* * *
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
) CV-S-97-095-PMP (RLH)
Plaintiffs, ) BASE FILE
)
v. )
)
ITT CORPORATION, )
)
Defendant. )
) CV-S-97-893-PMP (RLH)
- ----------------------------------------
)
ITT CORPORATION, )
)
Defendant and )
Counterclaimant, )
)
v. )
)
HILTON HOTELS CORPORATION and ) ORDER RE: INJUNCTIVE
HLT CORPORATION, ) AND DECLARATORY RELIEF
)
Plaintiffs and )
Counterdefendants.)
)
- ----------------------------------------
Before the Court for consideration is the Complaint for
Declaratory Relief (#1), filed on behalf of ITT Corporation ("ITT") on July
16, 1997, and the Motion for Injunctive and Declaratory Relief (#29), filed
August 26, 1997, on behalf of Hilton Hotels Corporation and HLT Corporation
(collectively "Hilton").[1]
- --------
[1] ITT's Complaint for Declaratory Relief was originally assigned to
the Honorable David W. Hagen, United States District Judge, Case No.
CV-S-97-893-DWH. On August 21, 1997, that action was reassigned (#24) and
on August 26,
<PAGE>
The parties have completed discovery and all issues have been
extensively briefed. At the close of the hearing conducted September 29,
1997, the Court orally entered its ruling granting Hilton's Motion for
Permanent Injunctive Relief. This Order constitutes the Court's written
Findings of Fact and Conclusions of Law regarding ITT's Request for
Declaratory Relief and Hilton's Motion for Injunctive and Declaratory
Relief.
I. FACTS
On January 27, 1997, Hilton announced a $55.00 per share tender
offer for the stock of ITT, and announced plans for a proxy contest at
ITT's 1997 annual meeting. This litigation commenced on the same date with
the filing of Hilton's Complaint for Injunctive and Declaratory Relief
seeking to enjoin ITT from impeding the shareholder franchise regarding the
election of directors at ITT's annual meeting, and from taking other
defensive measures in response to Hilton's announced tender offer and proxy
contest.
On February 11, 1997, ITT formally rejected Hilton's tender
offer. ITT proceeded to sell several of its non-core assets and opposed
Hilton's takeover attempt before
- ---------------
1997, was consolidated with the previously filed action, Hilton Hotels
Corp. and HLT Corp. v. ITT Corp., CV-S-97-95-PMP (RLH) (#28).
<PAGE>
gaming regulatory bodies in Nevada, New Jersey and Mississippi.
When it became apparent that ITT would not conduct its annual
meeting in May 1997, as it had customarily done in preceding years, Hilton
filed a motion for a mandatory injunction to compel ITT to conduct the
annual meeting in May. On April 21, 1997, this Court denied Hilton's Motion
finding that Nevada law and ITT's by-laws did not require that ITT conduct
its annual meeting within twelve months of the prior meeting, but rather
that ITT had eighteen months within which to do so. Hilton Hotels Corp. and
HLT v. ITT Corp., 962 F. Supp. 1309 (D. Nev. 1997), aff'd, 116 F.3d 1483
(9th Cir. 1997).
On July 15, 1997, ITT announced a Comprehensive Plan which, among
other things, proposed to split ITT into three new entities, the largest of
which would become ITT Destinations. ITT Destinations would be comprised of
the current ITT's hotel and gaming business which account for approximately
93% of ITT's current assets. A second entity, ITT Educational Services,
would consist of the current ITT's technical schools, and ITT's European
Yellow Pages Division would remain with the current ITT as ITT World
Directories.
Most significantly, under the Comprehensive Plan, the board of
directors of the new ITT Destinations would be comprised of the members of
ITT's current board with one important distinction. The new board would be
a
<PAGE>
"classified" or "staggered" board divided into three classes with each
class of directors serving for a term of three years, and with one class to
be elected each year. Moreover, a shareholder vote of 80% would be required
to remove directors without cause, and 80% shareholder vote would also be
required to repeal the classified board provision or the 80% requirement to
remove directors without cause.
Additionally, the record fairly supports Hilton's contention that
the Comprehensive Plan contains a "poison pill" resulting in a $1.4 billion
tax liability which would be triggered if Hilton successfully acquired more
than 50% of ITT Destinations and that Hilton would be liable for 90% of the
tax bill.
Finally, and critical to this Court's analysis, ITT seeks to
implement the Comprehensive Plan prior to ITT's 1997 annual meeting and
without obtaining shareholder approval.
II. THE PARTIES' CONTENTIONS AND APPLICABLE LEGAL STANDARDS
On July 16, 1997, ITT filed the Complaint for Declaratory Relief
(#1) now before the Court, seeking two declarations:
1. That Hilton cannot show that ITT's board acted outside its
powers or failed to exercise its powers in good faith and with a view
to the interests of the corporation and its shareholders in adopting
the Comprehensive Plan; and
<PAGE>
2. That Hilton, as a would-be acquiror, is antagonistic to other
ITT shareholders and thus lacks standing as a proper derivative
plaintiff to pursue an injunction against the Comprehensive Plan based
on alleged breach of fiduciary duty by ITT's board.
Shortly after ITT's announcement of its Comprehensive Plan,
Hilton announced an amended tender offer of $70.00 per share which was
rejected by ITT. On August 26, 1997, Hilton filed its Motion for Injunctive
and Declaratory Relief (#29) seeking:
1. A preliminary and permanent injunction enjoining ITT from
proceeding with its Comprehensive Plan;
2. Declaring that by adopting the Comprehensive Plan, ITT's
directors had breached their fiduciary duties to ITT and its
shareholders;
3. Declaring that ITT may not implement its Comprehensive Plan
without obtaining a shareholder vote; and
4. Requiring ITT to conduct its 1997 annual meeting for the
election of directors not later than November 14, 1997.
The legal standard applicable to a request for preliminary
injunctive relief is well settled. The party requesting such relief must
show: (1) probable success on the merits and irreparable injury; or (2)
sufficiently serious questions going to the merits to make the case a fair
ground for litigation and a balance of hardships tipping decidedly in favor
of the party requesting relief. Topanga Press, Inc. v. City of Los Angeles,
989 F.2d 1524, 1528 (9th Cir. 1993). These are not two separate test, but
<PAGE>
"merely extremes of a single continuum." Id. (citation omitted).
Where, as here, Hilton's Motion seeks mandatory injunctive relief
in the sense that a trial on the merits could not practically reverse a
preliminary decision enjoining implementation of ITT's Comprehensive Plan
until after the 1997 annual meeting, the Motion is subject to heightened
scrutiny and the injunction requested should not issue unless the facts and
the law clearly favor the party requesting such relief. Hilton, 962 F.
Supp. at 1309 (citations omitted). Therefore, this Court will apply the
standard for permanent injunctive relief with regard to Hilton's Motion.
"The standards for issuing a permanent injunction are
substantially similar to those applied to requests for preliminary
injunctive relief; however, in order to obtain a permanent injunction
plaintiffs must actually succeed on the merits of their claims." Coleman v.
Wilson, 912 F. Supp. 1282, 1311 (E.D. CA. 1995) (citing Sierra Club v.
Penfold, 857 F.2d 1307, 1318 (9th Cir. 1988)).
The requests for declaratory relief advanced by ITT and Hilton
are governed by Rule 57 of the Federal Rules of Civil Procedure and 28
U.S.C. ss. 2201.
<PAGE>
III. DISCUSSION
This case involves consideration of the powers and duties of the
board of directors of a Nevada corporation in responding to a hostile
takeover attempt, and the importance of protecting the franchise of the
shareholders of the corporation in the process.
Many courts have grappled with legal issues presented by the
strategies employed by hostile bidders, such as Hilton, and the concomitant
anti-takeover defensive measures utilized by target companies, such as ITT.
Coupling an unsolicited tender offer with a proxy contest to replace the
incumbent board is a favored strategy of wouldbe acquirors. A variety of
sophisticated defensive measures, including "poison pill" plans have also
evolved to frustrate a host of takeover attempts. As a result, "replacing
the incumbent directors of the target corporation is viewed as an efficient
way to eliminate the target company's ability to utilize these
anti-takeover defenses." Kidsco v. Dinsmore III, 674 A.2d 483, 490 (Del.
Ch. 1995). See also Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361,
1379 (Del. 1995).
Nevada state case law is virtually silent on the subject.
However, provisions of Chapter 78 of the Nevada Revised Statutes ("N.R.S.")
speak to the respective rights and duties of directors and officers of
corporations, and the rights of corporate stockholders. Nevada's statutory
<PAGE>
scheme does not, however, provide clear guidance in this case. While N.R.S.
ss. 78.138 addresses several powers of a corporate board in undertaking
defensive measures to resist a hostile takeover, nothing in the Nevada
statutes, or elsewhere in the law of Nevada, authorizes the incumbent board
of a corporation to entrench itself by effectively removing the right of
the corporation's shareholders to vote on who may serve on the board of the
corporation in which they own a share. Whether a target corporation such as
ITT can do so in the face of a hostile takeover attempt by Hilton is the
dispositive issue presented in this case.
Where, as here, there is no Nevada statutory or case law on point
for an issue of corporate law, this Court finds persuasive authority in
Delaware case law. Shoen v. AMERCO, 885 F. Supp. 1332, 1341 n.20 (D. Nev.
1994).
A. Legal Framework for Board Action in Response to a Proxy
Contest and Tender Offer.
As this case involves both a tender offer and a proxy contest by
Hilton, the proper legal standard is a Unocal/Blasius analysis as
articulated in Stroud v. Grace, 606 A.2d 75, 92 n.3 (Del. 1992), and
Unitrin, 651 A.2d at 1379.
In assessing a challenge to defensive actions by a target
corporation's board of directors in a takeover context, this
Court has held that the Court of Chancery should evaluate the
board's overall response, including the justification for each
contested defensive measure, and the results achieved thereby.
Where all of the target board's defensive actions are
inextricably related, the
<PAGE>
principles of Unocal require that such actions be scrutinized
collectively as a unitary response to the perceived threat.
Unitrin, 651 A.2d at 1386-87 (emphasis supplied).
Where an acquiror launches both a proxy fight and a tender offer,
it
"necessarily invoke[s] both Unocal and Blasius" because "both
[tests] recognize the inherent conflicts of interest that arise
when shareholders are not permitted free exercise of their
franchise. . . . [I]n certain circumstances, [the judiciary] must
recognize the special import of protecting the shareholders'
franchise within Unocal's requirement that any defensive measure
be proportionate and 'reasonable in relation to the threat
posed.'"
Unitrin, 651 A.2d at 1379 (quoting Stroud, 606 A.2d at 92 n.3).
A board's unilateral decision to adopt a defensive measure
touching "upon issues of control" that purposefully
disenfranchises its shareholders is strongly suspect under
Unocal, and cannot be sustained without a "compelling
justification."
Stroud, 606 A.2d at 92 n.3.
These cases have drawn a distinction between the exercise of two
types of corporate power: 1) power over the assets of the corporation and
2) the power relationship between the board (management) and the
shareholders. Actions involving the first type of power invoke the business
judgment rule, or Unocal if an action is in response to a reasonably
perceived threat to the corporation. Actions involving the second power
invoke a Blasius analysis. The issues raised in this case require
<PAGE>
the Court to focus on the power relationship between ITT's board and ITT
shareholders, not on the ITT board's actions relating to corporate assets.
Several amicus briefs have been filed on behalf of ITT
shareholders, urging that they be allowed to vote on the Comprehensive Plan
and the board of directors at the 1997 annual meeting. This Court has found
no legal basis mandating a shareholder vote on the adoption of ITT's
Comprehensive Plan in its entirety. However, as the Court finds that the
Comprehensive Plan would violate the power relationship between ITT's board
and ITT's shareholders by impermissibly infringing on the shareholders'
right to vote on members of the board of directors, it must be enjoined.
ITT argues that Nevada does not follow Delaware case law since
N.R.S. ss. 78.138 provides that a board, exercising its powers in good
faith and with an view to the interests of the corporation can resist
potential changes in control of a corporation based on the effect to
constituencies other than the shareholders. However, the corporate rights
provided under N.R.S. ss. 78.138 are not incompatible with the duties
articulated in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.
1985), Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173
(Del. 1986) and Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch.
1988).
<PAGE>
Delaware case law merely clarifies the basic duties established
by the Nevada statutes. Shoen recognized this, and explicitly found that a
good faith breach of duty was actionable under Nevada corporate law.
Neither the Nevada Legislature in two successive sessions nor the Nevada
Supreme Court has disagreed. ITT would have this Court establish that the
only duty a board has under Nevada law is a duty of good faith. This Court
will not eliminate the principles articulated in Unocal, Blasius and Revlon
and the common law duties of care and loyalty without any indication from
the Nevada Legislature or the Nevada Supreme Court that that is the
legislative intent.
Thus, Delaware precedent establishes that a board has power over
the management and assets of a corporation, but that power is not
unbridled. The power is limited by the right of shareholders to vote for
the members of the board. As articulated in Shoen, this right underlies the
concept of corporate democracy. This Court fully endorses the reasoning in
Shoen and Blasius regarding the importance of the shareholder franchise to
the entire scheme of corporate governance. This Court will, therefore,
examine ITT's Comprehensive Plan under the Unocal/Blasius analysis.
Unocal requires the Court to consider the following two
questions: 1) Does ITT have reasonable grounds for believing a danger to
corporate policy and effectiveness exists? 2) Is the response reasonable in
<PAGE>
relation to the threat? If it is a defensive measure touching on issues of
control, the court must examine whether the board purposefully
disenfranchised its shareholders, an action that cannot be sustained
without a compelling justification. Stroud, 606 A.2d at 92 n.3.
1. The Classified Board for ITT Destinations
The first defensive action this Court will analyze under the
Unocal standard is the provision in the Comprehensive Plan for a classified
board for ITT Destinations.
a. Reasonable grounds for believing a threat to corporate
policy and effectiveness exists.
Nine of ITT's eleven directors are outside directors. Under
Unocal, such a majority materially enhances evidence that a hostile offer
presents a threat warranting a defensive response. Unitrin, 651 A.2d at
1375.
ITT argues strenuously that the Comprehensive Plan is better than
Hilton's offer. This is not for the Court to decide, and it is not
determinative under its analysis. Under Unocal, a court must first
determine if there is a threat to corporate policy and effectiveness. ITT
has failed to demonstrate such a threat.
ITT has made no showing that Hilton will pursue a different
corporate policy than ITT seeks to implement through its Comprehensive
Plan. In fact, over the past few months, ITT has to a large extent adopted
Hilton's proposed
<PAGE>
strategy of how it says it will govern ITT if its slate of directors is
elected. There has also been no showing of Hilton's inability or
ineffectiveness to run ITT if it does succeed in its takeover attempt. ITT
cites to the fact that some Sheraton franchise owners will be unhappy if
Hilton enters into certain management contracts, but this is not
fundamental or pervasive enough to constitute a "threat" to ITT's corporate
policy or effectiveness.
The ITT board has also failed to meet its burden of showing "good
faith and reasonable investigation" of a threat to corporate policy or
effectiveness which would meet the burden placed on the board under the
first prong of the Unocal test. Since Hilton's tender offer was announced,
the ITT board has not met with Hilton to discuss the offer. Moreover, the
overwhelming majority of ITT's evidence of good faith relates to its
approval of the Comprehensive Plan, not to the inadequacy of Hilton's
offer.
The sole "threat" ITT points to is that Hilton's offer of $70 a
share is inadequate, primarily because this price does not contain a
control premium. However, at the August 14, 1997, ITT board meeting,
Goldman Sachs told the ITT board that the market valued ITT's plan at $62
to $64 dollars a share. This contradicts ITT's argument that there is no
control premium over market price contained in Hilton's offer. That ITT
itself was offering to buy back
<PAGE>
roughly 26% of its stock at $70 a share does not nullify this fact.
The only attempt ITT has made to satisfy the first prong of the
Unocal analysis is to argue that Hilton's price is inadequate. However,
while inadequacy of an offer is a legally cognizable threat, Paramount
Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1153 (Del. 1990), ITT
has shown no real harm to corporate policy or effectiveness. The facts in
Unocal illustrate this point well. Unocal involved a tender offer with a
back-end offer of junk bonds. 493 A.2d at 949-950. Junk bond financing
could reasonably harm the future policy and effectiveness of a company. As
ITT itself is offering only $70 a share, and the Comprehensive Plan
involves greatly increasing the leveraging of ITT, its claim that Hilton's
offer of $70 a share is a threat to policy or effectiveness is
unpersuasive. In light of these facts, the alleged inadequacy of Hilton's
offer is not a severe threat to ITT. Under the proportionality requirement,
the nature of Hilton's threat will set the parameters for the range of
permissible defensive tactics under the second prong of the Unocal test.
Unitrin, 651 A.2d at 1384.
b. ITT's Response was Preclusive
Assuming Hilton's offer constitutes a cognizable threat under
Unocal, ITT's response cannot be preclusive or coercive, and it must be
within the range of reasonableness.
<PAGE>
As articulated in Unitrin, a board cannot "cramm down" on shareholders a
management sponsored alternative. Unitrin, 651 A.2d at 1387. The
installation of a classified board for ITT Destinations, a company which
will encompass 93% of the current ITT's assets and 87% of its revenues, is
clearly preclusive and coercive under Unitrin. The classified board
provision for ITT Destinations will preclude current ITT shareholders from
exercising a right they currently possess - to determine the membership of
the board of ITT. At the very minimum, ITT shareholders will have no choice
but to accept the Comprehensive Plan and a majority of ITT's incumbent
board members for another year. Therefore, the Comprehensive Plan is
preclusive.
c. The Primary Purpose of the Comprehensive Plan is to
Interfere with Shareholder Franchise
ITT's response to Hilton's tender offer touches upon issues of
control, and this Court must determine whether the response purposefully
disenfranchises ITT's shareholders. If so, under the analysis of Stroud and
Unitrin, it is not a reasonable response unless a "compelling
justification" exists. It is important to note that in Blasius, the board
did something that normally would be entirely permissible under Delaware
law and its own by-laws: it expanded the board from seven to nine
individuals. It did this in the face of a hostile takeover by a company
financed through "junk bonds" and two individuals who sought
<PAGE>
to substantially "cash out" many of the target corporation's assets.
Blasius, 564 A.2d at 653-54. Still, while the board in Blasius had a good
faith reason to act as it did, and it acted with appropriate care, the
board could not lawfully prevent the shareholders from electing a majority
of new directors.
Blasius' factual scenario is strikingly similar to the
circumstances surrounding ITT's actions. Normally, a corporation is free to
adopt a classified board structure. In fact many companies, including
Hilton, have classified boards. As long as the classified board is adopted
in the proper manner, whether through charter amendment, changes in the
by-laws of a company or through shareholder vote, it is permissible.
However, Blasius illustrates that even if an action is normally
permissible, and the board adopts it in good faith and with proper care, a
board cannot undertake such action if the primary purpose is to
disenfranchise the shareholders in light of a proxy contest. Blasius. 564
A.2d at 652. Thus, while ITT could normally adopt a classified board or
issue a dividend of shares creating ITT Destinations, it cannot undertake
these actions if the primary purpose is to disenfranchise ITT shareholders
in light of Hilton's tender offer and proxy contest.
As a board would likely never concede that its primary purpose
was to entrench itself, this Court must look to circumstantial evidence to
determine the primary purpose
<PAGE>
of ITT's action touching upon issues of control. While none of the
following factors are dispositive, collectively they eliminate all
questions of material fact, and demonstrate that the primary purpose of
ITT's Comprehensive Plan was to disenfranchise its shareholders.
i. Timing
The intent evidenced by the timing of the Comprehensive Plan is
transparent. Although ITT claims that a spin-off or sale was contemplated
before Hilton's tender offer, it makes no mention of when the board
determined to move from an annually elected board to a classified board.
Moreover, all aspects of ITT's Comprehensive Plan were formulated against
the backdrop of Hilton's tender offer and proxy contest, and the Plan was
not announced until well after Hilton's initial tender offer. Finally, this
major restructuring of ITT was announced and to be implemented in a little
over two months, and designed to take effect less than two months before
the annual meeting was to be held at which shareholders would have the
opportunity to vote on an annually elected rather than a classified board.
ii. Entrenchment
The ITT directors who are approving the Comprehensive Plan are
the same directors who will fill the classified board positions of ITT
Destinations. ITT and its advisors recognized from the outset that they
were vulnerable because they did not have a staggered board of
<PAGE>
directors. The members of ITT's board are appointing themselves to new,
more insulated positions, and at least seven of the eleven directors are
avoiding the shareholder vote that would otherwise occur at ITT's 1997
annual meeting. While companies may convert from annual to classified
boards, as Blasius illustrates, the rub is in the details. It is the manner
of adopting the Comprehensive Plan with its provision for a new certified
board comprised of incumbent ITT directors which supports the conclusion
that ITT's Plan is primarily designed to entrench the incumbent board.
iii. ITT's Stated Purpose
ITT has offered no credible justification for not seeking
shareholder approval of the Comprehensive Plan. ITT simply claims that it
wants to "avoid market risks and other business problems." (pp. 10-11 of
ITT's Opposition). Such vague generalizations do not approach the required
showing of a reasonable justification other than entrenchment for the
board's action. Simply stating that its "advisors" suggested a rapid
implementation of the Comprehensive Plan, without point to a specific risk
or problem, is insufficient to meet ITT's burden.
iv. Benefits of Comprehensive Plan
ITT argues that there are economic benefits to the Comprehensive
Plan, and general benefits of the classified board provision for ITT
Destinations. That may be true, but
<PAGE>
the additional benefits of a plan infringing on shareholder voting rights
do not remedy the fundamental flaw of board entrenchment.
v. Effect of Classified Board
The classified board provision for ITT Destinations under ITT's
Comprehensive Plan ensures that ITT shareholders will be absolutely
precluded from electing a majority of the directors nominated under
Hilton's proxy contest at the 1997 annual meeting. Such a Plan, coupled
with ITT's vehement opposition to Hilton's tender offer, is inconsistent
with ITT's earlier argument that a delay of the 1997 annual meeting from
May to November would afford shareholders additional time to inform
themselves and more fully consider the implications of their vote for
directors at the 1997 annual meeting.
ITT's position is particularly anomalous given the fact that when
ITT previously split the company in 1995, it sought shareholder approval.
While shareholder approval may not be absolutely required to split ITT now
anymore than it was in 1995, the fact that the ITT board decided to subject
the 1995 split of the company to a shareholder vote is strong evidence that
the primary purpose of its attempts to implement the Comprehensive Plan
prior to the 1997 annual meeting is to entrench the incumbent ITT board.
<PAGE>
vi. Failure to Obtain an IRS Opinion as to Effects of the
Comprehensive Plan
ITT is not seeking an Internal Revenue Service opinion regarding
the tax consequences of the three-way split of ITT under the Comprehensive
Plan. It is doubtful that an Internal Revenue Service opinion on the matter
could be obtained before ITT's 1997 annual meeting. Furthermore, there are
serious questions as to the extent to which implementation of the
Comprehensive Plan will constitute a taxable event to ITT and its
shareholders, or the extent to which Hilton would incur adverse tax
consequences if it attempted to takeover ITT Destinations once the
Comprehensive Plan is implemented. ITT dismisses these concerns by arguing
that its attorneys advise that there are no adverse tax consequences under
the Comprehensive Plan. However, the record demonstrates otherwise. ITT's
counsel conceded that there is no binding precedent on point and that the
issue was not free from doubt. While obtaining a tax opinion from the
Internal Revenue Service may not be mandatory, ITT's failure to seriously
consider obtaining such an opinion provides additional evidence that ITT's
primary intention in implementing the Comprehensive Plan at this time was
to impede the shareholder franchise.
2. Other Provisions of the Comprehensive Plan
This Court's analysis regarding the threat to ITT under the first
prong of Unocal is equally applicable to the
<PAGE>
remaining elements of the Comprehensive Plan. Whether the other aspects of
ITT's Comprehensive Plan violate the second step of the Unocal analysis,
that is whether they are preclusive or coercive, is problematic. Certainly
the record before the Court supports Hilton's contention that the "tax
poison pill" relating to its potential purchase of ITT Destinations is
preclusive and coercive. Hilton also argues that ITT's Plan is coercive
because ITT is offering $70.00 a share for only 26% of the stock. Since the
trading value of the stock is $62.00 to $64.00 per share, shareholders will
have to tender their shares immediately to avoid a financial loss. These
arguments create serious questions as to whether the other elements of the
Comprehensive Plan are preclusive and coercive.
The Unocal test is also referred to as a "proportionality test."
see, e.g., Unitrin, 651 A.2d at 1384. Serious questions remain as to
whether the Comprehensive Plan is reasonable in relation to the threat
posed by Hilton's offer. The Comprehensive Plan entails a split-up of ITT
and spin-off of 93% of the company's assets without a shareholder vote.
There are important tax considerations, both the "tax poison pill"
discussed above and the relative tax burdens of spinning off World
Directories as opposed to one of the smaller entities. Additionally, other
aspects of the financial restructuring involved in the Comprehensive Plan
illustrate that the Plan
<PAGE>
is extremely complex, and that the three ITTs emerging from the Plan will
be fundamentally different companies.
Serious questions exist as to whether the remaining provisions of
the Comprehensive Plan are preclusive or coercive, or reasonable responses
under Unocal. This Court finds it unnecessary, however, to undertake an
exhaustive analysis of the laundry list of issues presented by both
parties. The different provisions of the Comprehensive Plan are
inextricably related, and this Court has already concluded that the
staggered board provision is preclusive and was enacted for the primary
purpose of entrenching the current board. Therefore, the entire
Comprehensive Plan must be enjoined.
3. Duty to Maximize Value to Shareholders Under Revlon
Hilton further argues that injunctive relief is warranted based
on an analysis of the Comprehensive Plan under the Revlon standard. The
Court finds that Hilton has not extinguished all material facts as to
whether the Comprehensive Plan involves: 1) an abandonment of the long-term
strategy of ITT involving a breakup of the company or 2) a sale of control
is contemplated in Revlon and Paramount v. OVC, 637 A.2d 34 (Del. 1994).
Therefore, permanent injunctive relief on this basis is not warranted.
<PAGE>
IV. CONCLUSION
Earlier in this litigation, the Court fully embraced pertinent
language in Shoen and Blasius regarding the importance of the shareholder
franchise. Hilton, 962 F. Supp. at 1310. Those principles encompass
fundamental concepts of corporate governance and bear repetition.
Shareholders do not exercise day-to-day business judgments
regarding the operation of a corporation -- those are matters left to the
reasonable discretion of directors, officers and the corporation's
management team. Corporate boards have great latitude in exercising their
business judgments as they should. As a result, shareholders generally have
only two protections against perceived inadequate business performance.
They may sell their stock or vote to replace incumbent board members. For
this reason, interference with the shareholder franchise is especially
serious. It is not to be left to the board's business judgment, precisely
because it undercuts a primary justification for allowing directors to rely
on their business judgment in almost every other context. Indeed, as the
court in Shoen noted, "one of the justifications for the business judgment
rule's insulation of directors from liability for almost all of their
decisions is that unhappy shareholders can always vote the directors out of
office." Shoen, 885 F. Supp. at 1340.
<PAGE>
As this Court has noted previously, "'inquiries
concerning fiduciary duties are inherently particularized and contextual.
It is probably not possible to work out rules that will be perfectly
predictive of future cases involving claimed impediments to the shareholder
vote. It is sufficient to express a reasoned judgment on the facts
presented.'" Hilton, 962 F. Supp. at 1311 (quoting Stahl, 579 A.2d at
1125).
ITT strongly argues that its Comprehensive Plan is superior to
Hilton's alternative tender offer. This argument should be directed to
ITT's shareholders, not this Court.
ITT also claims that it has properly considered other
constituencies in responding to Hilton's offer, as it is expressly allowed
to do under N.R.S. ss. 78.138. ITT is correct. Other constituencies may be
considered under that provision, but nothing in that statute suggests that
the interests of third parties are as important as the right of shareholder
franchise. While the two interests are not exclusive, neither are they
equal. The right of shareholders to vote on directors at an annual meeting
is a fundamental principle of corporate law, and it is not outweighed by
the interests listed in N.R.S. ss. 78.138.
Likewise, the good faith of the ITT board in implementing the
Comprehensive Plan does not change this Court's analysis. Shoen, relying on
Blasius, recognized a
<PAGE>
good faith breach of duty under Nevada law. Simply put, there is no
compelling justification for infringement of the shareholder franchise as
proposed by the implementation of ITT's Comprehensive Plan before the 1997
annual meeting.
The ultimate outcome of the election of directors at ITT's 1997
annual meeting is not a relevant inquiry for this Court. That is something
for the shareholders who own ITT to decide when they select the board who
will lead the corporation. If a majority of the incumbent ITT board is
re-elected after a fully-informed and fair shareholder vote, that board
will be free to implement any business plan it chooses so long as that plan
is consistent with ITT's charter and by-laws, and governing law.
This Court concludes that the structure and timing of ITT's
Comprehensive Plan with its classified board provision for ITT
Destinations, is preclusive and leaves no doubt that the primary purpose
for ITT's proposed implementation of the Comprehensive Plan before the 1997
annual meeting is to impermissibly impede the exercise of the shareholder
franchise by depriving shareholders of the opportunity to vote to re-elect
or to oust all or as many of the incumbent ITT directors as they may choose
at the upcoming annual meeting. It has as its primary purpose the
entrenchment of the incumbent ITT board. As a result, the Court concludes
that Hilton has prevailed on the merits of its claim for permanent
injunctive relief.
<PAGE>
IT IS THEREFORE ORDERED that Hilton's Motion for Permanent
Injunctive Relief (#29) is granted to the extent that ITT is hereby
enjoined from implementing its Comprehensive Plan announced July 15, 1997.
IT IS FURTHER ORDERED that ITT's annual meeting shall be held no
later than November 14, 1997.
IT IS FURTHER ORDERED that Hilton's Motion for Declaratory and
Injunctive Relief (#29) and ITT's Complaint for Declaratory Relief (#1) are
denied in all other respects.
DATED: October 2, 1997
/s/ Philip M. Pro
-----------------
PHILIP M. PRO
United States District Judge
