SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
Schedule 14D-1
Tender Offer Statement
(Amendment No. 24)
Pursuant to
Section 14(d)(1) of the Securities Exchange Act of 1934
_______________________
ITT CORPORATION
(Name of Subject Company)
HILTON HOTELS CORPORATION
HLT CORPORATION
(Bidders)
COMMON STOCK, NO PAR VALUE
(Title of Class of Securities)
450912100
(CUSIP Number of Class of Securities)
MATTHEW J. HART
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
HILTON HOTELS CORPORATION
9336 CIVIC CENTER DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 278-4321
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications on Behalf of Bidders)
WITH A COPY TO:
STEVEN A. ROSENBLUM
WACHTELL, LIPTON, ROSEN & KATZ
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019
TELEPHONE: (212) 403-1000<PAGE>
This Statement amends and supplements the Tender Of-
fer Statement on Schedule 14D-1 filed with the Securities and
Exchange Commission on January 31, 1997, as previously amended
(the "Schedule 14D-1"), relating to the offer by HLT Corpora-
tion, a Delaware corporation (the "Purchaser") and a wholly
owned subsidiary of Hilton Hotels Corporation, a Delaware cor-
poration ("Parent"), to purchase (i) 61,145,475 shares of Com-
mon Stock, no par value (the "Common Stock"), of ITT Corpora-
tion, a Nevada corporation (the "Company"), or such greater
number of shares of Common Stock which, when added to the num-
ber of shares of Common Stock owned by the Purchaser and its
affiliates, constitutes a majority of the total number of
shares of Common Stock outstanding on a fully diluted basis as
of the expiration of the Offer, and (ii) unless and until val-
idly redeemed by the Board of Directors of the Company, the
Series A Participating Cumulative Preferred Stock Purchase
Rights (the "Rights") associated therewith, upon the terms and
subject to the conditions set forth in the Offer to Purchase,
dated January 31, 1997 (the "Offer to Purchase"), and in the
related Letter of Transmittal, at a purchase price of $55 per
share (and associated Right), net to the tendering stockholder
in cash, without interest thereon. Capitalized terms used and
not defined herein shall have the meanings assigned such terms
in the Offer to Purchase and the Schedule 14D-1.
ITEM 10. ADDITIONAL INFORMATION.
On August 25, 1997, Parent and the Purchaser filed a
motion in the U.S. District Court for the District of Nevada
seeking (i) to preliminarily and permanently enjoin the Company
and its directors from proceeding with their Comprehensive
Plan, (ii) declaratory relief that by adopting the Comprehen-
sive Plan, the Company's directors breached their fiduciary
duties to the Company and its stockholders, (iii) declaratory
relief that the Company may not implement its Comprehensive
Plan without obtaining a stockholder vote, and (iv) to require
the Company to conduct its 1997 annual meeting for the election
of directors by no later than November 14, 1997. A copy of the
motion, the supporting memorandum of points and authorities, a
supporting declaration and supporting affidavits (together, the
"Plan Motion") are filed herewith, without exhibits, as Exhibit
(g)(24) and are incorporated herein by reference. At the same time,
Parent and the Purchaser filed a Motion for Prompt Hearing on the
Plan Motion, which is filed herewith as Exhibit (g)(25) and is
incorporated herein by reference.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
(g)(24) Plan Motion
(g)(25) Motion for Prompt Hearing, dated August 25, 1997<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and be-
lief, I certify that the information set forth in this state-
ment is true, complete and correct.
Dated: August 25, 1997
HILTON HOTELS CORPORATION
By: /s/ Matthew J. Hart
Name: Matthew J. Hart
Title: Executive Vice President
and Chief Financial Officer
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SIGNATURE
After due inquiry and to the best of my knowledge and be-
lief, I certify that the information set forth in this state-
ment is true, complete and correct.
Dated: August 25, 1997
HLT CORPORATION
By: /s/ Arthur M. Goldberg
Name: Arthur M. Goldberg
Title: President
-3-<PAGE>
EXHIBIT INDEX
Exhibit Description
(g)(24) Plan Motion
(g)(25) Motion for Prompt Hearing, dated August 25, 1997<PAGE>
EXHIBIT (g)(24)
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
MEIR FEDER
SCOTT L. BLACK
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
) CV-S-97-00893-PMP (RLH)
-vs- )
) HILTON'S MOTION FOR INJUNC-
HILTON HOTELS CORPORATION and ) TIVE AND DECLARATORY RELIEF
HLT CORPORATION, )
)
Defendants. ) MEMORANDUM OF POINTS AND
) AUTHORITIES IN SUPPORT OF
HILTON HOTELS CORPORATION and ) MOTION FOR INJUNCTIVE AND
HLT CORPORATION, ) DECLARATORY RELIEF AND IN
) OPPOSITION TO ITT'S REQUEST
Counterclaimants, ) FOR DECLARATORY RELIEF
)
-vs- ) DECLARATIONS OF STEPHEN F.
) BOLLENBACH, PROFESSOR
ITT CORPORATION, BETTE B. ) DANIEL FISCHEL AND KENNETH
ANDERSON, RAND V. ARASKOG, ) MOELIS, AFFIDAVITS OF DANIEL
NOLAN D. ARCHIBALD, ROBERT A. ) H. BURCH, PROFESSOR BERNARD
BOWMAN, ROBERT A. BURNETT, ) WOLFMAN AND BERNARD W.
PAUL G. KIRK, JR., EDWARD C. ) NUSSBAUM AND EXHIBITS
MEYER, BENJAMIN F. PAYTON, ) THERETO
VIN WEBER and MARGITA E. WHITE, )
) ORAL ARGUMENT REQUESTED
)
Counterclaim Defendants. )
<PAGE>
MOTION FOR INJUNCTIVE AND DECLARATORY RELIEF
Pursuant to Rules 57 and 65 of the Federal Rules of
Civil Procedure, defendants-counterclaim plaintiffs Hilton
Hotels Corporation ("Hilton") and HLT Corporation ("HLT")
hereby move this Court for an order: (a) preliminarily and
permanently enjoining plaintiffs from proceeding with their
Comprehensive Plan with respect to ITT Corporation ("ITT");
(b) declaring that by adopting the Comprehensive Plan, the ITT
directors breached their fiduciary duties to ITT and its
shareholders; (c) declaring that ITT may not implement its
Comprehensive Plan without obtaining a shareholder vote; and
(d) requiring ITT to conduct its 1997 annual meeting for the
election of directors by no later than November 14, 1997.
This motion is based upon the accompanying Memorandum
of Points and Authorities, the declarations of Hilton's
President and Chief Executive Officer, Stephen F. Bollenbach
("Bollenbach Dec."), University of Chicago Law School
Professor, Daniel Fischel ("Fischel Dec."), and Donaldson,
Lufkin & Jenrette Securities Corporation Managing Director,
Kenneth Moelis ("Moelis Dec."), and the affidavits of Mackenzie
Partners, Inc. President, Daniel H. Burch ("Burch Aff."),
Harvard University Law School Professor, Bernard Wolfman
("Wolfman Aff.") and Bernard W. Nussbaum ("Nussbaum Aff."),
matters of which the Court may take judicial notice, including
the Court's own file in this matter and the file in Hilton
Hotels Corp. v. ITT Corporation, CV-S-97-00095-PMP (RLH), and
arguments and other evidence that may be presented prior to the
decision on this Motion.<PAGE>
RESPECTFULLY SUBMITTED this 25th day of August, 1997.
WACHTELL, LIPTON, ROSEN & KATZ
By: /s/ Eric M. Roth
BERNARD W. NUSSBAUM
KENNETH FORREST
ERIC M. ROTH
MARC WOLINSKY
MEIR FEDER
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 South Fourth Street
Las Vegas, Nevada 89101
Attorneys for Defendants-
Counterclaim Plaintiffs
HILTON HOTELS CORPORATION
and HLT CORPORATION
-2-<PAGE>
TABLE OF CONTENTS
Page
I. INTRODUCTION..................................... 1
II. STATEMENT OF FACTS............................... 5
A. ITT......................................... 5
B. Hilton's Offer and ITT's Response........... 5
C. ITT's Entrenchment Tactics.................. 7
D. The Meeting Motion.......................... 8
E. ITT's "Comprehensive Plan" to Disenfranchise
Its Shareholders............................ 9
F. The Entrenchment Devices Embedded in the
Comprehensive Plan.......................... 12
F. Hilton's $70 Offer.......................... 14
ARGUMENT................................................ 16
III. ITT'S COMPREHENSIVE PLAN UNLAWFULLY INTERFERES
WITH SHAREHOLDER VOTING.......................... 16
IV. NEVADA LAW REQUIRES A SHAREHOLDER VOTE ON
THE PLAN......................................... 20
V. THE COMPREHENSIVE PLAN IS A SELF-INTERESTED
TRANSACTION AND THE ITT DIRECTORS CANNOT
SHOW THAT THEIR PLAN IS FAIR TO ITT
AND ITS SHAREHOLDERS............................. 22
VI. THE ITT DIRECTORS CANNOT SHOW THAT THE
COMPRENEHSIVE PLAN IS A REASONABLE RESPONSE
TO THE HILTON BID............................... 24
VII. THE ITT DIRECTORS HAVE BREACHED THEIR FIDUCIARY
DUTIES UNDER REVLON.............................. 27
VIII. HILTON AND THE ITT SHAREHOLDERS WILL SUFFER
IRREPARABLE INJURY IN THE ABSENCE OF INJUNCTIVE
RELIEF........................................... 29
IX. CONCLUSION....................................... 32
-i-<PAGE>
TABLE OF AUTHORITIES
Cases Page
A. Copeland Enter. Inc. v. Guste,
706 F. Supp. 1283 (W.D. Tex. 1989).................. 24
AC Acquisitions Corp. v. Anderson, Clayton & Co.,
519 A.2d 103 (Del. Ch. 1986)........................ 27
AHI Metnall, L.P. v. J.C. Nichols Co., 891 F.
Supp. 1352 (W.D. Mo. 1995).......................... 25, 30
Amanda Acquisition Corp. v. Universal Foods Corp.,
708 F. Supp. 984 (E.D. Wis.), aff'd, 877 F.2d 496
(7th Cir. 1989)..................................... 25
Bayberry Assocs. v. Jones, 783 S.W.2d 553
(Tenn. 1990)........................................ 28
Beztak Co. v. Bank One Columbus, N.A., 811 F.
Supp. 274 (E.D. Mich. 1992)......................... 30
Black & Decker Corp. v. American Standard, Inc.,
682 F. Supp. 772 (D. Del. 1988)..................... 31
Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651
(Del. Ch. 1988)..................................... 18, 20n*,
24
Brooks v. Dewar, 106 P.2d 755 (Nev. 1940),
rev'd on other grounds, 313 U.S. 354 (1941)......... 21
Cede & Co. v. Technicolor, Inc., 634 A.2d 345
(Del. 1993)......................................... 23
Cottle v. Storer Communications, Inc., 849 F.2d
570 (11th Cir. 1988)................................ 28
Dan River, Inc. v. Icahn, 701 F.2d 278 (4th
Cir. 1983).......................................... 30
Drobbin v. Nicolet Instrument Corp., 631 F. Supp.
860 (S.D.N.Y. 1986)................................. 23
Dynamics Corp. v. CTS Corp., 794 F.2d 250
(7th Cir. 1986), rev'd on other grounds,
481 U.S. 69 (1987).................................. 25
Edelman v. Freuhauf Corp., 798 F.2d 882
(6th Cir. 1986)..................................... 28
Electronic Specialty Co. v. International Controls
Corp., 409 F.2d 937 (2d Cir. 1969).................. 31
-ii-<PAGE>
ER Holdings, Inc. v. Norton Co., 735 F. Supp.
1094 (D. Mass. 1990)................................ 30
Ferro v. Bargo Min. & Mill Co.,
140 P. 527 (Nev. 1914).............................. 21
Foster v. Arata, 325 P.2d 759 (1958).................. 22
Grand Metropolitan Public Ltd. v. Pillsbury Co.,
558 A.2d 1049 (Del. Ch. 1988)....................... 27, 31
Hanson Trust v. ML SCM Acquisition, Inc., 781 F.2d 264
(2d Cir. 1986)...................................... 31
Hilton Hotels Corp. v. ITT Corp., 962 F. Supp.
1309 (D. Nev.), aff'd, 1997 WL 345963 (9th Cir.
June 19, 1997)...................................... 2, 16
Horwitz v. Southwest Forest Indus., Inc.,
604 F. Supp. 1130 (D. Nev. 1985) ................... 22, 23, 24
Hyde Park Partners, L.P. v. Connolly, 839 F.2d
837 (1st Cir. 1988) ................................ 30
IBS Financial Corp. v. Seidman & Associates,
954 F. Supp. 980 (D.N.J. 1997) ..................... 20n*
In re C-T of Virginia, Inc., 958 F.2d 606
(4th Cir. 1992) .................................... 28
International Banknote Co. v. Muller,
713 F. Supp. 612 (S.D.N.Y. 1989) ................... 24, 30
International Ins. Co. v. Johns, 874 F.2d 1447
(11th Cir. 1989).................................... 25
Kahn v. Sprouse, 842 F. Supp. 423 (D. Or. 1993)....... 25
Kansas City Power & Light Co. v. Western
Resources, Inc., 939 F. Supp. 688 (W.D. Mo. 1996)... 20-21
Koppers Co. v. American Express Co.,
689 F. Supp. 1371 (W.D. Pa. 1988)................... 31
Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261
(Del. 1989)......................................... 27n*, 31
Norfolk Southern Corp. v. Conrail, Inc.,
C.A. No. 96-7167 (D. Pa. Nov. 19, 1996)............. 28n*
NCR Corp. v. AT&T, 761 F. Supp. 475 (S.D. Ohio 1991).. 4, 17,
20n*, 27,
30, 31
-iii-<PAGE>
Paramount Communications Inc. v. QVC Network Inc.,
637 A.2d 34, (Del. 1994)............................ 28, 31
Plaza Sec. Co. v. Fruehauf Corp., 643 F. Supp. 1535
(E.D. Mich. 1986)................................... 25
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173 (Del. 1985)............................ 4, 27, 28,
29
Shoen v. Amerco, 885 F. Supp. 1332 (D. Nev. 1994),
vacated by stipulation, (D. Nev. Feb. 9, 1995)...... 2, 3, 4,
16,
17-18, 30
Shoen v. Shoen, 167 Ariz. 58, 804 P.2d 787
(Ariz. Ct. App. 1990)............................... 23
Unitrin, Inc. v. American General Corp.,
651 A.2d 1361 (Del. 1995) .......................... 25, 26-27
Unocal Corp. v. Mesa Petroleum Co.,
493 A.2d 946 (Del. 1985) ........................... 4, 25
Welfare Div. v. Washoe County Welfare Dep't,
88 Nev. 635, 503 P.2d 457 (Nev. 1972) .............. 21
Other Authorities
15 Pa. Com. Stat. Ann. SectionSection 1715 et seq. (1995)
28n*
K.P. Bishop, Nevada Corporation Law and Practice,
Section 10.2 (1993) ................................ 21
Model Business Corp. Act Section 10.02 (1996) ........ 21
NRS 78.138............................................ 25n*, 28n*
NRS 78.215............................................ 20
NRS 78.330............................................ 32
NRS 78.390............................................ 19, 20, 21
-iv-<PAGE>
MEMORANDUM OF POINTS AND AUTHORITIES
I. INTRODUCTION
In a March 13 memorandum, ITT told this Court that
the reason it was delaying its annual meeting to November was
to give ITT shareholders time to make "a more informed decision
as to the real value of both ITT and the Hilton transaction";
that the delay would "enable the ITT Board to provide the
stockholders with more information than they would otherwise
receive if the meeting were held in May." William Crane, ITT's
proxy solicitor, echoed this. He swore that "holding the
annual meeting later than May would . . . benefit the stock-
holders' decision making process." These homilies to share-
holder democracy have proven to be deceptive. ITT and its
directors have not used the six months between May and November
to put the shareholders in a better position to make an in-
formed decision between Hilton's slate of nominees and ITT's
incumbent directors. They have instead used that time to make
sure that the shareholders never get a chance to make that
choice.
The centerpiece of ITT's defensive strategy is a plan
to put ITT's hotels and gaming operations -- representing 93%
of the assets and 87% of the revenues of the company -- into a
new Nevada subsidiary and spin that subsidiary off to ITT
shareholders. ITT intends to effect this spin-off without a
shareholder vote and to consummate it before November 14, i.e.,
before ITT is required to hold its annual meeting. The "new"
company will have the same senior management as the current
ITT, the same board of directors as the current ITT, and the
same name as the current ITT. Unlike the current ITT, however,
this "new" ITT will have a "staggered board" -- only one-third
of the directors will stand for election at each annual
meeting. And unlike the current ITT, if Hilton seeks to
acquire the "new" ITT, Hilton will subject itself to a
potential $1.26 billion tax liability -- a "tax poison pill"
that makes it impossible for Hilton to proceed with its bid.
The result is that if the plan is consummated, ITT's current
management and board will be insulated from<PAGE>
Hilton's challenge to their continued dominion. ITT
shareholders will never have a chance to vote for the Hilton
slate and bid.
This egregious attempt by the ITT incumbents to
undermine corporate democracy and entrench themselves should be
stopped dead in its tracks. As this Court recognized in its
April 21 decision, "'interference with shareholder voting is an
especially serious matter, not to be left to the directors'
business judgment, precisely because it undercuts a primary
justification for allowing directors to rely on their judgment
in almost every other context.'" Hilton Hotels Corp. v. ITT
Corp., 962 F. Supp. 1309, 1310 (D. Nev.), aff'd, 1997 WL 345963
(9th Cir. June 19, 1997), quoting Shoen v. Amerco, 885 F. Supp.
1332, 1340 (D. Nev. 1994), vacated by stipulation, (D. Nev.
Feb. 9, 1995). There can be no doubt that the ITT board's
actions here would interfere with shareholder voting. The ITT
shareholders today have the right to turn the incumbent direc-
tors out of office at the company's 1997 annual meeting and
elect a slate that supports Hilton's bid. They also have the
right to vote on whether to adopt a charter amendment to
stagger the election of ITT's directors. These rights are be-
ing taken away from them by incumbents who have broken faith
with this Court. The incumbents are attempting to sidestep the
electoral process by voting themselves into multi-year terms of
office. They have created a plan to assure that the ITT
shareholders -- who last voted for directors in May 1996 --
cannot replace a majority of the incumbents until May 1999.
And, incredibly, the incumbents are seeking to impose a
$1.26 billion "poll tax" on the shareholders' right to replace
them with Hilton's nominees -- in order to make sure that the
shareholders never get the opportunity to replace the incum-
bents with Hilton's slate.
As this Court's prior opinion makes clear, a board
that seeks to interfere with the shareholder franchise must
demonstrate a compelling justification for its actions. The
incumbents cannot carry this burden. There was no need to
structure the transaction as a spin-off of hotels and gaming,
which creates the $1.26 billion "tax poison pill." As for the
creation of a "staggered board," ITT says that this device
"will assure continuity and stability of" the new company's
management, "will assure that a majority of directors at any
-2-<PAGE>
given time will have experience," and will "prevent an abrupt
change in the composition of the board." The directors no
doubt believe that it would be a good idea if they did not all
have to face the shareholders every year in accordance with the
requirements of ITT's existing charter and by-laws. That
belief is not a justification for their actions. It is an
excuse for a naked attempt by the directors to usurp powers
that belong to the ITT shareholders. See Point III, infra.
ITT's argument that its directors' conduct is
technically authorized by Nevada law -- which gives directors
the power to declare dividends -- cannot carry the day.
"'[I]nequitable action does not become permissible simply
because it is legally possible.'" Shoen, 885 F. Supp. at 1342.
The argument is, in any event, deeply flawed. Nevada law
requires a shareholder vote to amend a company's articles of
incorporation to include a staggered board provision. ITT is
amending its articles without obtaining the requisite
shareholder vote through the artifice of placing over 90% of
the assets of ITT into a new subsidiary and distributing the
stock of that company to ITT shareholders, leaving behind a
European Yellow Pages publishing company with a market
capitalization of only 8% of the market capitalization of the
"current" ITT. This sleight-of-hand tactic cannot be used to
evade the Nevada statutory scheme. See Point IV, infra.
ITT's plan should also be enjoined under basic prin-
ciples of fiduciary law. Because the directors have voted
themselves onto the board of the "new" ITT and thereby extended
their own terms of office, the plan is tainted by director
self-interest. In these circumstances, the burden shifts to
the directors to demonstrate that their plan is fair to ITT and
its shareholders. They cannot satisfy this burden. The plan
strips the shareholders of their right to replace the incumbent
directors, subjects ITT and its shareholders to the risk of a
massive tax liability, transforms ITT into a junk-bond credit
and impairs ITT's ability to compete in the marketplace. The
plan is an entrenchment scheme, designed to assure that the
agents can retain their position of control regardless of the
wishes of their principals. See Point V, infra.
-3-<PAGE>
By coupling the staggered board provision with a
$1.26 billion "tax poison pill" that makes it impossible for
Hilton to proceed with its bid, ITT's plan represents a draco-
nian, preclusive response to that bid. There is no threat to
the corporation or its shareholders that justifies this sort of
unprecedented defense. The plan is thus illegal under the
"heightened scrutiny" test that must be applied under Unocal.
See Point VI, infra.
The directors' conduct runs afoul of the Revlon
doctrine as well. ITT has abandoned its previous corporate
strategy of combining diverse hotel and gaming, education,
entertainment and information businesses in favor of a break-up
of the company and the sale of effective control of the entity
now known as "ITT Corporation" to a leveraged buyout firm. In
these circumstances, the board's fiduciary obligation is to
obtain the best available terms for ITT shareholders. The ITT
board has not even made a pretense of living up to this fidu-
ciary obligation. It has, instead, refused to have any
discussions with Hilton and has decided to pursue a plan that
the market values at about $63 per share in the face of a $70
Hilton bid -- an aggregate shortfall of some $860 million. See
Point VII, infra.
The propriety of injunctive relief in these
circumstances is manifest. "'[T]he denial or frustration of
the right of shareholders to vote their shares or obtain repre-
sentation on the board of directors amounts to an irreparable
injury.'" Shoen, 885 F. Supp. at 1352. ITT is also
interfering with Hilton's right to convince its fellow
shareholders that Hilton's management and board should run the
combined companies. ITT's argument that Hilton can simply drop
its seven-month old proxy contest to unseat the incumbents and
pursue a new, two-year campaign should not be countenanced.
The insurgents in Shoen could have been required to renew their
proxy contest the following year. This Court ruled they did
not have to. The argument also ignores the massive tax
impediment erected by ITT. And it "ignores the realities of
the marketplace. . . . The fact that [Hilton] can still
attempt to replace the Board over a period of time does not
serve to make up for the loss of a realistic chance for immedi-
ate success." NCR Corp. v. AT&T, 761 F. Supp. 475, 501 (S.D.
Ohio 1991). No harm will flow to ITT from an injunction. The
only result would be that the
-4-<PAGE>
directors will have to face the ITT shareholders, who can
decide the future of their company for themselves. ITT's plan
should be enjoined and ITT should be ordered to hold the annual
meeting that it promised this Court it would hold. See Point
VIII, infra.
II. STATEMENT OF FACTS
A. ITT
Up until 1995, "ITT" was a Delaware corporation that
owned a host of disparate businesses. In 1995, ITT split
itself into three companies. The "new" ITT migrated from
Delaware to Nevada and adopted a new charter and by-laws with
no "staggered board" provision; each director was to be up for
election every year. Although ITT told its shareholders that
Delaware law did not require a shareholder vote for this split-
up, it sought and conditioned the split-up on the receipt of
shareholder approval. The ITT board made this decision
"because of the importance of the [split-up] to ITT and its
shareholders." The ITT board also sought an IRS ruling to
establish that the 1995 split-up would be tax free to ITT
shareholders, and conditioned consummation of the split-up on
the receipt of a tax ruling. Nussbaum Aff. Ex. A at 17, 26-28.
The split-up was completed on December 19, 1995 and
the "new" ITT -- headed by the old senior management of Rand
Araskog and Bob Bowman -- was born. The "new" ITT portrayed
itself as "a globally competitive leader in hotels, gaming,
entertainment, and information services" and as a "company
[that] possesses some of the most valuable internationally
recognized brand names and superior assets, supported by a
sound balance sheet and a highly motivated management team."
Id. Ex. B at 1. There was no mention in any ITT filing at that
time of a plan to shed any of these businesses or otherwise
restructure the company. To the contrary, ITT stated that it
was "investing in our businesses to generate growth and
profitability" and trumpeted the growth and prospects of each
of its business segments. Id. at 2.
B. Hilton's Offer and ITT's Response
Hilton announced its $55 per share tender offer for
ITT on January 27, 1997. At the same time, Hilton announced
that it would conduct a proxy contest at ITT's 1997
-5-<PAGE>
annual meeting. This was necessary because only ITT's board
can remove ITT's "poison pill" and other impediments to
Hilton's bid. Hilton also stated that it might be willing to
increase its bid. And Hilton made clear that it had a
different vision for ITT; Hilton stated that its focus was on
ITT's hotels and gaming businesses, and that if it acquired
control of ITT, it would combine those operations with Hilton's
own hotel and gaming interests and explore the sale of non-
strategic assets. Bollenbach Dec. ParagraphParagraph 5-6, Ex.
B.; Burch Aff. Paragraph 2.
ITT rejected Hilton's offer on February 11, the same
day that Hilton formally notified ITT of its intention to
nominate a slate of directors to the ITT board and to introduce
a resolution at the meeting calling on ITT to arrange a sale of
the company to Hilton or a higher bidder. Bollenbach Dec.
ParagraphParagraph 2, 10. In announcing its rejection of the
Hilton offer, ITT stated that while it would examine a host of
alternatives to enhance the value of the company, it would not
pursue a sale of the company. Nussbaum Aff. Ex. C. at 7. ITT
then began an effort to sell a number of its "non-core" assets,
including its 7.5 million shares of Alcatel stock, its 50%
interest in Madison Square Garden, and its interest in WBIS+, a
New York television station. These asset sales are expected to
raise approximately $1.6 billion. ITT also began an effort to
put regulatory hurdles in front of Hilton's bid, opposing
Hilton's applications before the Nevada, New Jersey and Missis-
sippi gaming authorities and before the Federal Communications
Commission. Bollenbach Dec. Paragraph 11; Moelis Dec.
Paragraph 14.
The one thing that ITT and its directors did not do
was make any inquiry of Hilton as to how much it would be
willing to pay, what the precise terms of its second-step
merger would be, or what the source of Hilton's financing was.
Bollenbach Dec. Paragraph 10. The directors preferred to
remain in the dark and rest on their "conviction . . . that ITT
management is best equipped to accomplish the task of creating
shareholder value -- both short and long term." Dan Weadock,
the number three executive at ITT, was more candid. He
explained that the "battle with Hilton . . . 'is not a question
of higher price. Losing this thing is not an option. . . . I
intend to retire from ITT Sheraton eight years from now at
-6-<PAGE>
age 65. We are committed to that.'" Nussbaum Aff. Ex. D at 3,
Ex. E at 2; Bollenbach Dec. Paragraph 12.
C. ITT's Entrenchment Tactics
Even though ITT originally told its shareholders that
it would be focusing on its "core" hotel and casino businesses
in response to Hilton's bid, in the Spring of 1997 ITT embarked
on a plan to dispose of core assets and shore up its takeover
defenses. To this end, on May 19, ITT announced a letter of
intent to sell five Sheraton hotels to FelCor Suites Hotels,
Inc. for $200 million. The transaction as originally portrayed
to the public seemed straightforward: FelCor would pay ITT
$200 million for the properties and would enter into a multi-
year contract for ITT to manage the properties. ITT's press
release and SEC filing concealed the "catch" -- in the event of
a change of control of ITT that was not approved by the
incumbent directors, FelCor could terminate the management
contracts. When this term of the FelCor deal became public,
ITT fessed up to the fact that the "overwhelming majority" of
the 58 hotels that ITT has added to its roster of management
hotels contained similar change of control provisions.
Nussbaum Aff. Exs. F-G.
In briefs to this Court and in statements to ITT
shareholders, ITT has argued that these change of control
penalty provisions were "demanded" by ITT's counterparties to
protect their interests and that ITT was "compelled" to grant
these concessions. Discovery with respect to the FelCor
transaction has shown this to be false.* The change in control
penalty provision is designed to help the incumbent directors
retain their positions: FelCor's right to terminate arises
only if the incumbent board does not approve the change of
control. If the ITT board chooses to sell the company to an
acquiror FelCor disfavors, FelCor has no right to terminate and
no right to determine who manages its properties. The
provision is also triggered if the incumbent directors lose a
proxy contest, thereby imposing a penalty on ITT shareholders
who vote against the incumbent board. The provision does
_____________________
* SEE Hilton's Memorandum of Points and Authorities in
Opposition to ITT's Motion to Dismiss and For Partial Summary
Judgment at 21-22, HILTON HOTELS CORP. v. ITT CORP.,
CV-S-97-00095-PMP (RLH).
-7-<PAGE>
not protect FelCor; it protects the ITT incumbents. Id. Ex. H
at 2, 22; Bollenbach Dec. ParagraphParagraph 14-16.
This same device was used in connection with ITT's
joint venture with Marvin Davis at the Desert Inn. When this
transaction was announced on August 3, ITT represented that
Davis was paying $150 million to enter into a 50/50 joint
venture. The next day, ITT admitted that it had guaranteed
Davis a 10% rate of return on his investment, and that if it
were not realized, Davis could "put" his interest back to ITT
and require ITT to pay him his principal plus the guaranteed
rate of return. The Wall Street Journal headline stated "ITT
Accord to Sell Half of Desert Inn Is Far Less Favorable Than
Indicated" and ITT President Robert Bowman "acknowledged that
details of the agreement with Mr. Davis should have been
disclosed initially." Unlike the FelCor deal, ITT did disclose
the existence of a change of control penalty provision in the
contract. ITT pretended once again, however, that Mr. Davis --
a savvy takeover veteran -- had insisted on the provision, even
though the provision is identical to the provision in the
FelCor transaction and serves to protect ITT's board, not Mr.
Davis. Nussbaum Aff. Exs. H, J, K at 12.
D. The Meeting Motion
In light of ITT's staunch opposition to a Hilton
takeover at any price, Hilton pushed forward with its proxy
contest so that the owners of the company could have the final
say. When it became apparent that ITT would not hold its
traditional May annual meeting, Hilton filed a motion to compel
ITT to hold the meeting. In opposing Hilton's motion, ITT
represented to this Court that a delay of the meeting would
enhance the shareholders' ability to make an informed voting
decision. ITT represented to this Court:
-- that delaying the meeting would "enable the ITT
Board to provide the stockholders with more
information than they would otherwise receive if
the meeting were held in May" (id. Ex. L at 31);
-- that "[a]dditional time allows the stockholders
to receive and digest information concerning the
[Hilton] Offer, Hilton's plans for ITT, and
ITT's plans" (id. at 10);
-- that "with additional time the stockholders will
be able to make a more informed decision as to
the real value of both ITT and the Hilton
Transaction" (id.); and
-8-<PAGE>
-- that "[s]imply put, holding the annual meeting
later than May will benefit the stockholders'
decision" (id.).
ITT's proxy solicitor, investment banker and academic
expert all made these same representations -- swearing that
delaying ITT's annual meeting would result in a better informed
electorate and, hence, a more meaningful election contest. Id.
Exs. M, N, O. Each of the witnesses swore that delay was
warranted because ITT was in the process of developing a plan
to focus the company on its "core" hotel and gaming businesses.
None of them suggested that ITT could or would use the delay to
develop a plan that would effectively render the election
contest moot. The essence of ITT's position was that delay
would make the election more meaningful, not that delay would
be used by ITT to make certain that there never would be a
shareholder vote on whether to elect directors who support a
Hilton takeover. Indeed, Professor Coffee -- who emphasized
that "stockholder voting . . . is the bedrock on which American
corporate governance rests" -- assured this Court that "within
[the] timeframes allowed" by Nevada law, "little abuse seems
possible." Id. Ex. O at ParagraphParagraph 22, 25. That
assurance turned out to be worthless.
E. ITT's "Comprehensive Plan" to Disenfranchise Its
Shareholders
On July 16, ITT announced that its board had approved
what ITT calls its "Comprehensive Plan." The structure and
timing of the plan are designed to assure that ITT shareholders
are deprived of their right to vote the incumbent directors out
of their position of control over ITT at the upcoming annual
meeting. As noted, the centerpiece of the plan is a spin-off
of ITT's hotel and gaming properties to ITT shareholders. ITT
will also spin-off the stock of its 83.3%-owned technical
school subsidiary, ITT Educational Services, Inc., to ITT
shareholders. Id. Ex. P at 26; Bollenbach Dec.
ParagraphParagraph 18-19; Fischel Dec. ParagraphParagraph 10-
11.
The "new" hotel and gaming company will be called
"ITT." It will be managed by the same senior management as the
current ITT, will have the same board of directors as the
current ITT, will be incorporated in Nevada like the current
ITT, and will have the same core business as the current ITT.
As discussed in the Moelis Declaration, the
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"new" ITT will hold approximately 93% of the assets of the
"current" ITT, assets that generate approximately 87% of the
"current" ITT's revenues. The "new" ITT will have total assets
of approximately $8.7 billion and annual revenues of
approximately $5.7 billion. The ITT that the world now knows
will be left holding a European Yellow Pages business with
negative stockholders equity of $808 million, assets of
$510 million, revenues of $647 million, and a total market
capitalization of approximately $600 million. By way of
comparison, ITT before the split-up had assets of over
$9 billion, revenues of $6.6 billion and a $7.4 billion market
capitalization. Moelis Dec. ParagraphParagraph 5-7; Bollenbach
Dec. Paragraph 28; Nussbaum Aff. Exs. Q at 24, R.
At the same time that ITT is shuffling its corporate
structure, it will sell effective control of the vestiges of
ITT to a leveraged buyout firm, Clayton, Dubilier & Rice
("CD&R"). ITT will also drastically restructure its balance
sheet through two tender offers. The first tender offer is for
30 million shares of ITT's common stock (representing 25.7% of
the outstanding shares) at $70 per share, for a total
consideration of $2.1 billion. The second tender offer is for
the $2 billion of public debt that ITT has outstanding. ITT
concedes that the debt tender offer is necessary because once
the spin-offs are effected, the obligor on the bonds, the
telephone book publisher, will not have the wherewithal to sup-
port $2 billion in bonds. Accordingly, ITT has to retire the
$2 billion in bonds so that it can reallocate debt "to the
hotels and gaming business in order for the telephone
directories publishing business to remain viable" after the
plan is consummated. Moelis Dec. Paragraph 4; Bollenbach Dec.
Paragraph 23; Nussbaum Aff. Exs. S at 5, T.
The lion's share of the debt incurred as part of the
plan will go to the hotel and gaming business. The "current"
ITT has about $3 billion of total debt; after the plan is
implemented, the "new" ITT alone will have $4.2 billion of
debt. Moelis Dec. Paragraph 15; Nussbaum Aff. Ex. T at 29. As
a result, the "sound balance sheet" that the ITT board boasted
-10-<PAGE>
of in March 1996 will be trashed; ITT will be transformed from
an investment grade credit into a "junk credit" and its ability
to compete in the marketplace will be compromised. Id.*
ITT proposes to rush all of these transactions
through in September, i.e., in advance of the November annual
meeting that Nevada law requires. Even though ITT sought
shareholder approval for its 1995 split-up "because of the
importance of [that split-up] to ITT and its shareholders," no
shareholder approval will be sought here. Indeed, the
incumbent directors are so intent on avoiding a shareholder
vote, that they have decided not to seek an advance ruling from
the IRS that the transaction will be tax-free to ITT and its
shareholders. The directors have instead decided to rely on
the opinion of their anti-takeover counsel. What was prudent
in 1995 is now unnecessary. If counsel is wrong and the
transaction is ultimately held not to be tax-free, $2.8 billion
in taxes would be owed -- ITT and its affiliates would be
liable for a corporate tax of approximately $1.4 billion, and
ITT's shareholders would be subject to an additional tax of
approximately $1.4 billion. Moreover, ITT has structured the
plan to maximize the tax bill if its counsel's opinion turns
out to be wrong. If ITT were to spin off its Yellow Pages
business instead of hotels and gaming, the corporate tax expo-
sure would be reduced from $1.4 billion to $500 million.
Wolfman Aff. ParagraphParagraph 10, 15.
The only conceivable reasons for maximizing the tax
exposure are to put a staggered board in the charter of the
"new" ITT and to increase the deterrent against any effort by
Hilton to acquire it. And the only reason for forgoing an IRS
ruling is that it
_____________________
* ITT's own filings acknowledge this, stating that this
"high degree of leverage" "could have
important consequences for stockholders," including (i)
impairing the company's ability to obtain additional financing
on favorable terms in the future, (ii) reducing funds available
for purposes other than debt service, (iii) subjecting the
company to restrictive covenants with respect to a number of
corporate activities, (iv) placing the company at a competitive
disadvantage, and (v) hindering the company's ability to adjust
to market conditions and making it more vulnerable in the event
of a downturn in general economic conditions or in its business.
Nussbaum Aff. Ex. Q at 18; Bollenbach Dec. Paragraph 22.
-11-<PAGE>
would take at least four months to obtain one, putting ITT
uncomfortably close to the November 14 deadline for holding its
1997 annual meeting. Bollenbach Dec. ParagraphParagraph 25-27;
Wolfman Aff. ParagraphParagraph 10, 15.
F. The Entrenchment Devices Embedded in the
Comprehensive Plan
Apart from the damage that ITT is doing to its own
balance sheet, two additional potent entrenchment devices are
embedded in this plan. The first is the inclusion of a
staggered board in the charter of the "new" ITT. The staggered
board eliminates the "threat" that the ITT shareholders will
throw the incumbents out of office in 1997 and elect Hilton's
nominees at the annual meeting that ITT is obligated to hold by
November 14. It extends the terms of office of a majority of
the directors. Assuming that "new" ITT holds its first annual
meeting this November, the plan ensures that a majority of the
"new" ITT directors cannot be replaced until May 1999. And
Rand Araskog, who was elected in 1996, will not have to face
re-election until 2000. Bollenbach Dec. ParagraphParagraph 30-
31; Fischel Dec. Paragraph 9.
ITT contends that it is able to accomplish this feat
because it is spinning off the hotels and gaming businesses
from the telephone directories business instead of spinning
directories off from hotels and gaming. The principal
justification that ITT offers for spinning the "dog" from the
"tail" is that "[u]tilizing the Company's telephone directories
publishing business as the 'stub' company . . . permits [the
directories company] to sell up to 49.9% of the telephone
directories publishing business to new investors, such as CD&R,
without jeopardizing the tax-free status of the [split-up]. In
contrast, a limit of 20% would apply if that business were spun
off as opposed to serving as the 'stub' company for the split-
up." ITT also states that by spinning off the hotel and gaming
business and leaving old "ITT" with $2 billion in debt, it
would "encourage" -- i.e., coerce -- "bondholders to par-
ticipate in the debt tender offer . . . because bondholders who
fail to do so will retain obligations of the stub company,
which will be more highly leveraged than" the hotel and gaming
company. And ITT claims that this structure will enable it to
allocate debt to the
-12-<PAGE>
foreign subsidiaries of the telephone directories company
without incurring adverse tax consequences. Nussbaum Aff. Ex.
P at 5.
These justifications are patently phony. If the
directors truly acted on these beliefs, they were either
deliberately misinformed, woefully negligent in the exercise of
their duty of care, or both. While the statement of the tax
limits applicable to the sale of an interest in the directories
business was true under the old tax law, it is not true under
the new tax bill that had been passed by the House at the time
that the ITT board was considering the plan and that became law
on August 5. Wolfman Aff. ParagraphParagraph 16-17; H.R. 2014,
The Taxpayer Relief Act of 1997. ITT's filings indicate that
ITT and its advisors considered the impact of the new tax law
in connection with other aspects of the plan. Nussbaum Aff.
Ex. Q at 20. The only conceivable reason why they did not
consider it here is that it would have deprived them of a
"justification" for spinning out hotels and gaming with a new
charter.
The claim that using directories as the "stub
company" is justified because it will "encourage" bondholders
to tender is even more specious. According to ITT, the debt
tender offer is necessitated by the fact that ITT needs to
reallocate debt to the "new" hotel and gaming company.* If
hotels and gaming remained with ITT, there would be no need for
a debt tender offer and hence no need to "encourage"
bondholders to do anything. See Moelis Dec. Paragraph 11.
The second entrenchment device embedded in this
scheme is a $1.26 billion "tax poison pill." The "pill" would
be triggered if Hilton sought to pursue its offer for the "new"
ITT hotel and gaming company. In its filings, ITT acknowledges
that under the new tax law, ITT would recognize taxable gain in
connection with the spin-off if 50% or more
_________________
* This proposition is itself doubtful. ITT says only that the
debt tender offer is ITT's "preferred means of making this
allocation." Nussbaum Aff. Ex. P at 3. ITT could have
effected the reallocation by leaving its debt outstanding and
having "new" ITT guarantee the debt of the "stub company." A
more likely explanation for ITT's decision to refinance its
indebtedness completely is that "certain terms of the Credit
Facilities for ["new" ITT] may make more expensive, and may
impede, consummation of Hilton's offer." Nussbaum Aff. Ex. Q
at 5.
-13-<PAGE>
of the stock of "new" ITT were acquired by Hilton and if that
acquisition were deemed to be a part of the plan. If this tax
were triggered, the constituent parts of the old ITT would be
hit with a $1.4 billion tax bill; the acquiror of the hotel and
gaming company would have to pay 90% of this amount, or $1.26
billion. If ITT were to spin off its telephone directories
business rather than its hotel and gaming business, any
potential tax liabilities to ITT and Hilton would be $726
million less in the event of a Hilton takeover. By structuring
the transaction as a spin-off of hotels and gaming rather than
directories, ITT maximized the potential tax liability of ITT
and Hilton. Nussbaum Aff. Ex. Q at 20; Bollenbach Dec.
ParagraphParagraph 35-36; Wolfman Aff. ParagraphParagraph 10-
15.
In its attempt to downplay the significance of this
huge potential liability, ITT cites to an opinion that its
anti-takeover counsel provided to the ITT board that
"[a]lthough there is no Internal Revenue Service ruling or case
law that is dispositive of the issue . . . under existing U.S.
Federal tax laws and the current provisions of recently intro-
duced U.S. Federal tax legislation, the [spin-offs] should not
create a tax-related impediment to an unsolicited offer by
Hilton to acquire [the "new" ITT] after the [spin-offs]." As
Professor Wolfman states, however, given the language and
legislative history of the 1997 Act, "it is hard to understand
how [ITT's] counsel could reach that conclusion and how ITT
could pass it on to its shareholders." Wolfman Aff.
Paragraph 14. In Professor Wolfman's expert view, if Hilton
sought to acquire new "ITT" after the spin-off, the IRS "would
certainly appear to have a strong case" for treating the spin-
off as a taxable transaction, which would result in a $1.4
billion corporate tax liability. Id. ParagraphParagraph 12-14.
Even ITT's counsel hedged its advice, stating that its "opinion
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."
Nussbaum Aff. Ex. P at 3.
G. Hilton's $70 Offer
When ITT announced its offer, it also engaged in an
extensive effort to hype the value of its plan by, among other
things, providing analysts with unrealistic financial
projections that were not included in ITT's SEC filings. As
part of those projections, ITT
-14-<PAGE>
forecast a 63% increase in its earnings before interest, taxes
and depreciation in its gaming business for 1998, from $270 to
$440 million.* The release of these forecasts initially had
its intended effect, pushing ITT stock to trade above $68 per
share shortly after the announcement. Over time, however, as
analysts got behind ITT's numbers, the credibility of the
projections faded and, with it, ITT's stock price. By August
5, the stock was trading at $62-15/16 per share, a price buoyed
by market anticipation that Hilton would raise its offer.
Nussbaum Aff. Exs. W at 17, X; Moelis Dec.
ParagraphParagraph 17-18; Bollenbach Dec. Paragraph 37(b).
Hilton did so on August 6, increasing its offer from
$55 to $70 per share. Nussbaum Aff. Ex. Y. The $70 offer
represents a 64% premium over the price at which ITT stock was
trading before Hilton first made its bid. The $70 Hilton offer
is economically superior to ITT's plan. Moelis Dec.
ParagraphParagraph 9-10; Bollenbach Dec. ParagraphParagraph 2,
39.
After the $70 offer was announced, several major ITT
shareholders wrote to the board urging them to negotiate with
Hilton. Shareholders also provided Hilton with written
indications of support. Burch Aff. Paragraph 5, Exs. B, C.
All of this fell on deaf ears. On August 13, an ITT spokesman
dismissed the shareholder sentiments as "absolutely
meaningless." And on August 14, the ITT board rejected the $70
Hilton offer and stated that it was committed to pursuing its
break up plan rather than a deal with Hilton.** Nussbaum Aff.
Exs. Z-AA; Bollenbach Dec. Paragraph 40. This motion followed.
_____________________
* Over one-third of this increase is attibutable to ITT's
expansion in Las Vegas. ITT is projecting this increase even
though Mr. Araskog acknowledged in an August 4 interview that the
Las Vegas market "has not been as attractive as it has been" due
to the thousands of new rooms that are under construction.
Moelis Dec. Paragraph 18, Ex. A.
** The board also announced that it had sweetened the
"golden parachute" agreements of ITT's senior managers, including
Mr. Araskog. Federal law requires that any executive who
receives severance payments more than three times his or her
average annual compensation pay a 20 percent excise tax. Prior
to August 14, ITT had agreed to pay these taxes only if the
company's stock price reached approximately $71 per share. As a
result of the changes approved on August 14, ITT has now agreed
to pay the excise taxes without regard to the trading price of
ITT stock. In the case of Mr. Araskog, this could mean a tax
savings of $2.8 million on a "golden parachute" package of $14
million. Bollenbach Dec. Paragraph 41.
-15-<PAGE>
ARGUMENT
III. ITT'S COMPREHENSIVE PLAN UNLAWFULLY
INTERFERES WITH SHAREHOLDER VOTING
This Court's prior opinion holds that "'interference
with shareholder voting is an especially serious matter, not to
be left to the directors' business judgment, precisely because
it undercuts a primary justification for allowing directors to
rely on their judgment in almost every other context.'" Hilton
Hotels Corp. v. ITT Corp., 962 F. Supp. 1309, 1310 (D. Nev.),
aff'd, 1997 WL 345963 (9th Cir. June 19, 1997), quoting Shoen,
885 F. Supp. at 1310. As this Court observed, the "[c]ourts
have consistently prevented actions by an incumbent board of
directors which were primarily designed to impair or impede the
shareholder franchise," and a board that does impair or impede
the shareholder franchise must demonstrate a "compelling
justification for its actions." 962 F. Supp. at 1310, 1311.
These fundamental principles of fiduciary law require
the entry of an injunction. It simply cannot be disputed that
implementation of ITT's plan will "impair or impede the
shareholder franchise." Hilton is currently waging a proxy
fight to elect a slate of nominees who have pledged, consistent
with their fiduciary duties, to dismantle ITT's takeover
defenses and negotiate a merger with Hilton. Because ITT does
not have a "staggered board," the incumbent directors are
obviously vulnerable to losing their seats -- particularly
since Hilton's $70 offer represents a 64% premium to ITT's pre-
takeover stock price and is some 10% higher than ITT's current
stock price. Burch Aff. Paragraph 6. In the absence of the
ITT plan, ITT shareholders would have a clear opportunity at
the November 1997 annual meeting to determine the future of
their company by electing Hilton's slate and turning out the
incumbents.
ITT's plan aims to eliminate the directors'
vulnerability by making it impossible for ITT shareholders to
cast an effective vote for Hilton's slate at the 1997 annual
meeting or any time thereafter in three critical respects:
First, ITT will not let its shareholders vote on the
plan. The plan will be adopted through unilateral board
action. Moreover, the board will implement the plan in
-16-<PAGE>
September, some two months before the statutory deadline for
holding the long-delayed 1997 annual meeting. This timetable
-- which is entirely of ITT's own making -- is designed to
ensure that by the time the annual meeting is held, the plan is
a fait accompli.
Second, under the plan, the "core" assets Hilton
seeks to acquire will be spun off as "new" ITT. The "tax
poison pill" feature of the plan effectively precludes ITT's
shareholders' ability to support a Hilton slate of nominees.
Once the plan is consummated, Hilton's proxy fight will be
rendered moot as the prospect of a potential $1.26 billion tax
"hit" would make it economically impossible for Hilton to
proceed.
Third, even if Hilton were not deterred by this
monumental contingent liability, the ITT board would still be
insulated from a successful proxy challenge. Without
shareholder approval, the incumbent directors have written
"new" ITT's charter to provide for a "staggered board." As a
result, even if Hilton dared to swallow the "tax pill" and
successfully waged a proxy contest at the first annual meeting
of the new company, Hilton could not elect a majority of the
"new" ITT board and ensure the removal of "new" ITT's other
takeover defenses. Indeed, if the incumbents decide not to
hold the second annual meeting of the "new" ITT until another
18 months have passed, ITT shareholders will not be able to
change a majority of the "new" ITT board until May 1999.
In short, if the ITT plan is permitted to be
consummated, it will "serve to make a mockery" of the 1997
annual meeting. NCR Corp. v. AT&T, 761 F. Supp. 475, 501 (S.D.
Ohio 1991). ITT's shareholders will lose the opportunity to
cast a vote for new directors supportive of Hilton's bid. And
ITT's shareholders will lose their right to determine for
themselves whether the ITT charter should be amended to include
a staggered board provision.
In Shoen, the incumbent directors were enjoined from
moving up the date of an annual meeting two months in an
attempt to hold onto control for an extra year. Here, as in
Shoen, while current "ITT" says that it intends for "new" ITT
and "old" ITT to hold annual meetings in November at which
"shareholders still can vote their shares freely, the range of
choices available to them [will have] been narrowed" by the
plan and Hilton's
-17-<PAGE>
"consequent inability to campaign." 885 F. Supp. at 1342.
Indeed, the conduct that this Court enjoined in Shoen -- the
advantage obtained by moving up a single year's annual meeting
date -- pales in comparison to the permanent reallocation of
power between the board and the shareholders that the ITT
directors are attempting to effect. ITT can cite no case
blessing board action of the type involved here because there
is none.
The conclusion that the "primary purpose" of the
incumbent directors in pursuing this plan is to "impede or
impair" the shareholders' voting rights is inescapable. The
ITT directors are facing a November 1997 annual meeting and are
running on a platform that $63 is better than $70. The only
way to make sure that they do not all get thrown out in No-
vember is to make sure that they do not all come up for
election in November. There is nothing about the economic
aspects of ITT's plan that requires the ITT board to vote them-
selves multi-year terms of office; ITT could effect its split-
up without inserting a staggered board provision in the charter
of the new company.
Indeed, ITT could effect its split-up without spin-
ning off the hotel and gaming business at all. The only reason
for structuring the transaction in this manner is to attempt to
maximize the potential tax liability to Hilton if it proceeds
and thereby deprive the shareholders of the opportunity to vote
for the Hilton slate. And ITT has refused to put the plan to a
shareholder vote even though it allowed its shareholders to
vote on its 1995 split-up "because of the importance of the
[split-up] to ITT and its shareholders." Here, as in Shoen,
"the only reasonable inference is that the [ITT] board acted
for the purpose of interfering with other shareholders' voting
rights." 885 F. Supp. at 1342.
ITT cannot offer a "compelling justification" for its
interference with the shareholders' right to vote. Even if the
incumbent directors have a "good faith" view that Hilton's $70
bid is contrary to the best interests of the corporation, they
cannot paternalistically deprive the shareholders of the
opportunity to vote for a new board of directors who believe to
the contrary. See Shoen, 885 F. Supp. at 1341 n.21; Blasius
Indus., Inc. v. Atlas Corp., 564 A.2d 651, 658, 663 (Del. Ch.
1988). There is absolutely no justification,
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much less a "compelling" one, for imposing a $1.26 billion
"poll tax" on the ITT shareholders' right to replace the ITT
board with nominees supporting Hilton's bid.
The directors' claim that a "classified board will
assure continuity" and "will also prevent an abrupt change in
the composition of the board" hurts, not helps, the directors'
position. It is a stark admission that the purpose of the
staggered board is to deprive the ITT shareholders of their
right to effect an "abrupt change" if they choose to. The
directors cannot justify their interference with the share-
holders' right to replace all the incumbents in a single elec-
tion by arguing that it would be better if ITT had a different
charter. Under Nevada law, the shareholders have the right to
make that decision; the directors cannot act alone. NRS
78.390. See Point IV, infra.
The fact that a Nevada statute authorizes staggered
boards and that a large number of companies -- including Hilton
-- have them is also irrelevant. At Hilton and many other
companies, the staggered board provisions were adopted by a
shareholder vote.* By contrast, ITT's charter and by-laws do
not provide for a staggered board and ITT's directors have not
asked the shareholders to amend them to include one, presumably
because the directors know that the shareholders would not do
so. Equally irrelevant is ITT's claim that a staggered board
will not "preclude successful completion of a hostile acquisi-
tion" because Hilton could always conduct another proxy contest
next year. The insurgents in Shoen could have renewed their
proxy contest the following year. This Court ruled they did
not have to. The test is not whether the board's action
"precludes" the shareholders from exercising their franchise --
although in the instant case the $1.26 billion "tax pill" will
effectively preclude the ITT shareholders from voting for
Hilton's slate. The test
_________________
* Companies that have included staggered boards in spun-off
entities have set up the new entities as free-standing companies
with new boards of directors and separate management teams.
Fischel Dec. Paragraph 7. As Professor Fischel observes, in this
case, "the board's decision to create 'new' ITT with a staggered
board is indistinguishable from a decision to change CURRENT ITT
into a staggered-board company." ID.
-19-<PAGE>
is whether it "impairs" the exercise of their franchise.*
ITT's plan surely does that. It is illegal and should be
enjoined.
IV. NEVADA LAW REQUIRES A SHAREHOLDER VOTE ON THE PLAN
ITT's plan to insert a staggered board provision in
its charter should also be enjoined because it cannot be
effected without a shareholder vote. NRS 78.390 requires a
shareholder vote on charter amendments. ITT is attempting to
evade this statutory requirement by proceeding under NRS
78.215, which authorizes boards to declare dividends without a
shareholder vote. If the ITT directors are permitted to act in
this manner, there is no reason why they could not dividend 95%
of the company year after year and forever avoid a shareholder
vote replacing a majority of the board. The requirement of NRS
78.390 that shareholders must approve charter amendments would
become a dead letter.
ITT's claim that it can evade the requirement of NRS
78.390 rests on the "doctrine of independent legal
significance." Under the doctrine, action taken under one
provision of a state corporation statute need not meet the
requirements of other provisions of that statute. See
generally Kansas City Power & Light Co. v. Western Resources,
Inc., 939 F. Supp. 688, 692 (W.D. Mo. 1996).
ITT can cite no authority for the proposition that
Nevada courts follow this doctrine. In deciding whether the
Nevada courts would do so, this Court should look to the rules
of statutory construction applied by Nevada courts, and deter-
mine whether these rules are consistent with the doctrine.
Applying this analysis, the Court in Kansas City Power & Light
concluded that the doctrine of independent legal significance
would not be followed in
_____________________
* SEE NCR CORP. v. AT&T, 761 F. Supp. at 501 ("the issue
is not whether" NCR's defense "totally and permanently precludes
AT&T from ever making a successful bid for control" but
"whether the existence of the [defense] prevents AT&T from having
a fair chance of replacing a majority or all of the incumbent
directors"); BLASIUS INDUS., INC. v. ATLAS CORP., 564 A.2d 651
(Del. Ch. 1988) (directors enjoined from increasing size of board
to prevent dissident group from electing a majority at upcoming
annual meeting); IBS FINANCIAL CORP. v. SEIDMAN & ASSOCIATES,
954 F. Supp. 980, 992-94 (D.N.J. 1997) (elimination of one of
two board seats that would have been up for election "constitutes
the type of inequitable interference . . . which BLASIUS, its
predecessors and progeny, were designed to rectify.")
-20-<PAGE>
Missouri in view of that state's adherence to the general rule
of statutory construction that courts should "consider an
entire legislative act together" and where possible, "harmonize
all provisions." 939 F. Supp. at 693 (citations omitted). The
Court also declined to apply the doctrine where doing so would
thwart the Missouri Legislature's clear intent to protect
shareholder rights. Id. at 694.
Nevada and Missouri's approaches to statutory
construction are identical. In "seeking the legislative
intent, [Nevada courts] must look at the whole act, giving
effect, if possible, to all its parts and endeavoring to
harmonize them." Brooks v. Dewar, 106 P.2d 755, 763 (Nev.
1940), rev'd on other grounds, 313 U.S. 354 (1941). Thus, in
"construing or applying the provisions of any statute, the pur-
pose or object of the statute should ever be kept in mind, and
a construction or application should be avoided which
sacrifices substance to a mere matter of form." Ferro v. Bargo
Min. & Mill. Co., 140 P. 527, 528 (Nev. 1914). This principle
demands examination of the context, the spirit and "'[t]he
entire subject matter and policy of the law.'" Welfare Div. v.
Washoe County Welfare Dep't, 88 Nev. 635, 638, 503 P.2d 457,
459 (Nev. 1972). Moreover, Nevada courts attempt to "ascertain
the intention of the legislature in enacting the statute, and
the intent, when ascertained, will prevail over the literal
sense." Washoe County, 503 P.2d at 458. Individual statutory
provisions are read as parts of a greater whole, using the
other provisions of the act as a source of illumination in an
effort to avoid "absurd results." Id.
The Nevada Legislature, like the Missouri
Legislature, has also sought to protect shareholder rights.
Nevada law requires a shareholder vote for all charter amend-
ments, and thus imposes a more stringent requirement than the
Model Business Corporation Act. Compare NRS 78.390 with Model
Business Corp. Act Section 10.02 (1996) (listing amendments
that may be adopted by the board alone). See generally K.P.
Bishop, Nevada Corporation Law and Practice, Section 10.2 at
247 (1993). The legislative history of the 1991 amendments to
the Nevada corporation law confirms that the Legislature
intended to protect the right of the shareholders to control
the actions of their elected representatives in the takeover
context through the ballot box. It also shows that the Legis-
lature was concerned about
-21-<PAGE>
highly leveraged, bust-up transactions, i.e., transactions like
the one that the ITT directors are pursuing.*
In light of these authorities, there can be no doubt
that the Nevada courts would not follow the doctrine of
independent legal significance, and that the Nevada Legislature
has not authorized Nevada corporations to evade the specific,
statutory requirement of a shareholder vote for charter
amendments through the device of dividending over 90% of the
value of the company to the shareholders. The doctrine of
independent legal significance puts form over substance.
Nevada law does not. The substance of what ITT is attempting
to do is to amend its charter without a shareholder vote. The
Nevada statute dealing with charter amendments controls here.
It requires a shareholder vote.
VI. THE COMPREHENSIVE PLAN IS A SELF-INTERESTED
TRANSACTION AND THE ITT DIRECTORS CANNOT SHOW
THAT THEIR PLAN IS FAIR TO ITT AND ITS SHAREHOLDERS
The ITT directors are corporate fiduciaries who owe
the company's shareholders duties of care and loyalty. Horwitz
v. Southwest Forest Indus., Inc., 604 F. Supp. 1130, 1134 (D.
Nev. 1985); Foster v. Arata, 325 P.2d 759, 765 (1958). In
Horwitz, Judge Reed explained that under Nevada law the "duty
of care requires the director to exercise the care that a
reasonably prudent person in a similar position would use under
similar circumstances," while:
the duty of loyalty requires the director
to act in good faith and, where he is
shown to have a self-interest in a trans-
action, the burden shifts to him to dem-
onstrate that the transaction is fair and
serves the best interests of the corpora-
tion and its shareholders. 604 F. Supp.
at 1134 (emphasis added).
The ITT board has a "self-interest" in the plan: the
directors have voted themselves en masse onto the board of the
"new" ITT, effectively extending their terms of office by up to
three years. This taint is exacerbated by the fact that the
staggered board
_____________________
* SEE Minutes of the Nevada State Legislature, May 21, 1991
at 14 (Nussbaum Aff. Ex. BB); Prepared Testimony of John P.
Fowler In Support of AB 655, The Corporate Law Bill, May 7, 1991
at 3 (Nussbaum Aff. Ex. CC).
-22-<PAGE>
and $1.26 billion "tax pill" renders the directors' positions
in the "new" ITT impregnable. The ITT directors are thus
"appearing on both sides of a transaction" and are "receiving a
personal benefit from a transaction not received by the
shareholders generally." Cede & Co. v. Technicolor, Inc., 634
A.2d 345, 362 (Del. 1993). Under universally accepted prin-
ciples recognized by Judge Reed in Horwitz, the burden is on
the directors to show that their actions are fair and in the
best interests of the company and its shareholders. See
Drobbin v. Nicolet Instrument Corp., 631 F. Supp. 860, 880
(S.D.N.Y. 1986) (applying Nevada law); Shoen v. Shoen, 167
Ariz. 58, 65, 804 P.2d 787, 794 (Ariz. Ct. App. 1990) (applying
Nevada law). The ITT directors cannot sustain this burden.
ITT's directors told this Court that they would use
the time between May and November to enhance the shareholders'
ability to make an informed voting decision. They have instead
used the time to try to turn ITT from an investment-grade
company into a junk-bond credit and to create preclusive
impediments to a Hilton takeover. ITT admits that this debt
load that it is incurring to defeat Hilton's offer will hinder
the company's ability to compete. That is not in the best
interests of the corporation.
While the directors will no doubt claim that their
primary motive is to deliver value to the shareholders, the
manner in which they have chosen to do so belies that claim.
-- In 1995, the directors sought a shareholder vote
before they split up "old" ITT "because of the
importance of the [split-up] to ITT and its
shareholders." The only reason for not seeking a
vote in 1997 is that there is a likelihood that the
current split-up would be defeated and the incumbents
voted out of office. That is not fair to the
shareholders.
-- The directors are subjecting ITT and its shareholders
to the risk of a $2.8 billion tax liability.
Directors concerned with the welfare of the company
and its shareholders would seek to minimize potential
tax liabilities. By spinning off hotels and gaming
instead of telephone directories, the directors have
maximized this potential tax liability. The only
reason for pursuing this structure is to enable the
directors to put a staggered board in place without a
-23-<PAGE>
shareholder vote and to erect a tax barrier that will
deprive the shareholders of having the opportunity to
consider Hilton's bid. That is not fair to the
shareholders.
-- Even though the directors sought an IRS ruling in
connection with the ITT's 1995 split-up, they have
decided to forgo obtaining a ruling that would elimi-
nate the risk of this liability. The only reason not
to seek a ruling is that it would push consummation
of their plan past November 14, i.e., past the time
that the shareholders would have to be given the
opportunity to take control of the future of their
company. That is not fair to the shareholders.
All of these factors point to the conclusion that the
directors' actions are not only unfair, but that they are the
product of a board and management that is intent on entrenching
itself. The economic aspects of the plan could have been put
to a shareholder vote and could have been achieved without
putting a staggered board in "new" ITT, without creating a
$1.26 billion tax pill and without taking the risk that the IRS
would later challenge the transaction. All of these aspects of
the plan reflect deliberate decisions by the ITT board to
insure that they would remain in control and that Hilton would
be precluded from proceeding with its offer. This too renders
the board's actions illegal. See Horwitz, 604 F. Supp. at 1135
(defensive tactics undertaken for the primary purpose of
entrenchment are illegitimate). See also A. Copeland Enter.
Inc. v. Guste, 706 F. Supp. 1283, 1290-91 (W.D. Tex. 1989)
(actions taken for purposes of entrenchment constitute breach
of directors' fiduciary duties); International Banknote Co. v.
Muller, 713 F. Supp. 612, 625-26 (S.D.N.Y. 1989); Blasius
Indus., Inc. v. Atlas Corp., 564 A.2d 651, 662-63 (Del. Ch.
1988).
VI. THE ITT DIRECTORS CANNOT SHOW THAT THE COMPREHEN-
SIVE PLAN IS A REASONABLE RESPONSE TO THE HILTON BID
Courts have also recognized that in change of control
situations -- like the present one -- the self-interest of
corporate managers and directors is implicated since the
takeover would result in their losing their positions. As the
Delaware Supreme Court stated
-24-<PAGE>
in Unocal, "[b]ecause of the omnipresent specter that a board
may be acting primarily in its own interests, rather than those
of the corporation and its shareholders, there is an enhanced
duty which calls for judicial examination at the threshold
before the protections of the business judgment rule may be
conferred." 493 A.2d at 954.
Accordingly, the courts have subjected directors to
"heightened scrutiny" when they take defensive measures in re-
sponse to a tender offer. See Unocal Corp. v. Mesa Petroleum
Co., 493 A.2d 946, 955 (Del. 1985); Unitrin, Inc. v. American
General Corp., 651 A.2d 1361, 1373 n.12 (Del. 1995). See also
International Ins. Co. v. Johns, 874 F.2d 1447, 1459 (11th Cir.
1989) (Florida law); Dynamics Corp. v. CTS Corp., 794 F.2d 250,
253, 256 (7th Cir. 1986) (Illinois law), rev'd on other
grounds, 481 U.S. 69 (1987); AHI Metnall, L.P. v. J.C. Nichols
Co., 891 F. Supp. 1352, 1356 (W.D. Mo. 1995) (Missouri law);
Kahn v. Sprouse, 842 F. Supp. 423, 426 (D. Or. 1993) (Oregon
law); Amanda Acquisition Corp. v. Universal Foods Corp., 708
F. Supp. 984, 1009 (E.D. Wis.) (Wisconsin law), aff'd, 877 F.2d
496 (7th Cir. 1989); Plaza Sec. Co. v. Fruehauf Corp., 643
F. Supp. 1535, 1535 n.6 (E.D. Mich. 1986) (Michigan law).*
Under the Unocal test, the ITT directors must show
that the Hilton offer presents a "threat" that warrants a
defensive response and that their response is "proportional" to
that threat. Unitrin, Inc. v. American General Corp., 651 A.2d
1361, 1375, 1376 (Del. 1995). The ITT directors cannot satisfy
either prong of this test.
There is no "threat" here. Hilton's cash offering
price is the same as ITT's: $70 per share. The value of
Hilton's "back end" is both greater and more certain than
_____________________
* ITT claims that UNOCAL is not the law of Nevada and that no
heightened scrutiny should apply here. ITT is wrong. As
discussed more fully in Hilton's opposition to ITT's motion to
dismiss in HILTON v. ITT, CV-S-97-00095-PMP (RLH) (pp. 13-16),
NRS 78.138 does not undermine the applicability of the
heightened scrutiny standard. The Nevada statute codifies a
board's control over corporate affairs, requires them to act in
good faith, and allows boards to "resist a change or potential
change in control" upon a determination that it is "not in the
best interest of the corporation," including the "interests of
the corporation's stockholders" and other corporate
constituencies. These same principles apply in Delaware, as
UNOCAL itself makes clear. 493 A.2d at 953, 955-57. The
Nevada statute codifies UNOCAL and in no way reflects an intention
to reject that standard.
-25-<PAGE>
ITT's. If Hilton's half cash, half stock bid is "coercive" as
ITT claims, then ITT's cash self-tender offer for 25.7% of the
company's stock is far more "coercive." There is no reason to
credit ITT's speculation that Hilton will not be able to manage
Sheraton's foreign properties or that Hilton will enter into a
transaction with HFS that would diminish the value of assets
that it has offered to buy for $8.4 billion. Hilton is an
experienced hotel operator with a respected management team and
operations around the world. Hilton shareholders will have a
major stake in the combined entity, and will be investing side-
by-side with ITT shareholders who receive stock in the combined
company. The combined company will be an investment grade
credit and will be able to compete vigorously. The only real
"threat" posed by a Hilton takeover is to the continued
employment of members of ITT senior management and Mr.
Weadock's desire to "retire from ITT Sheraton eight years from
now at age 65."
ITT's defensive actions are also grossly
disproportionate to the "threat" that ITT's directors claim
they perceive. Their contention that Hilton's $70 bid is
"inadequate" is no justification here, where ITT represented
to this Court that by delaying its annual meeting, it would
enable shareholders "to make a more informed decision as to the
real value of both ITT and the Hilton Transaction." Nussbaum
Aff. Ex. L at 10. In light of this representation, ITT and its
directors cannot be heard to argue that it is necessary to take
away the shareholders' right to vote the incumbent board out of
office at this year's annual meeting because the shareholders
might act out of "'ignorance or mistaken belief' regarding the
Board's assessment of the long-term value of [ITT] stock."
Unitrin, 651 A.2d at 1385. Nor can ITT argue that it is
appropriate for the directors to erect a $1.26 billion "tax
pill"
-26-<PAGE>
that has the effect of precluding Hilton's bid.* A "board
'does not have unbridled discretion to defeat any perceived
threat by any Draconian means available.'" Unitrin, 651 A.2d
at 1387.
ITT's plan is draconian. It is designed to preclude
the shareholders from ever considering a Hilton bid. In
circumstances like these, courts have not hesitated to enjoin
board action designed to defeat an unsolicited bid. E.g., AC
Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103,
113 (Del. Ch. 1986) ("not reasonable" for target company to
structure defensive transaction "so as to preclude as a
practical matter shareholders from accepting" a hostile bid);
Grand Metropolitan Public Ltd. v. Pillsbury Co., 558 A.2d 1049,
1058 (Del. Ch. 1988) (enjoining Pillsbury's proposed spin off
of its Burger King subsidiary); NCR Corp. v. AT&T, 761 F. Supp.
475, 500 (S.D. Ohio 1991) (enjoining implementation of employee
stock plan whose primary purpose was to "impede corporate
democracy" and "perpetuate [management's] control of the
company").
VII. THE ITT DIRECTORS HAVE BREACHED
THEIR FIDUCIARY DUTIES UNDER REVLON
In Revlon, Inc. v. MacAndrews & Forbes Holdings,
Inc., 506 A.2d 173 (Del. 1985), the Supreme Court of Delaware
stated "when . . . dissolution of the company becomes
inevitable, the directors cannot fulfill their enhanced Unocal
duties by playing favorites with the contending factions. Mar-
ket forces must be allowed to operate freely to
_____________________
* The highly conditional opinion of ITT's counsel -- I.E.,
that while the spin-offs "should not create a tax-related
impediment" to Hilton, the "issue is not free from doubt"--
cannot justify the directors' actions. The opinion on its face
indicates that the directors should have appreciated that
uncertainty over a $1.4 billion tax liability alone would
create a massive impediment to Hilton's bid. Moreover,
Professor Wolfman's affidavit establishes that the $1.4 billion
tax impediment is real and that there was no reasonable basis
for ITT's counsel to conclude that the spin-offs "should not"
create a tax impediment for Hilton. Even if the directors'
reliance on the opinion would save them from personal liability
for damages, it cannot save them from the entry of an injunction
for accpeting an opinion that on its face waved a "red flag" and
that is wrong. SEE NCR CORP. v. AT&T, 761 F. Supp. at 495
(business judgment rule does not apply where management "failed
to make the Board aware of key information" and where the
directors failed "to examine the plan with a critical eye");
MILLS ACQUISITION CO. v. MACMILLAN, INC., 559 A.2d 1261, 1279
(Del. 1989) ("judicial reluctance to assess the merits of a
business decision ends in the face of illicit manipulation of
a board's deliberative processes").
-27-<PAGE>
bring the target's shareholders the best price available for
their equity." 506 A.2d at 184. This principle was affirmed
in Paramount Communications Inc. v. QVC Network Inc., 637 A.2d
34, 43 (Del. 1994), where the Court held that "where, in
response to a bidder's offer, a target abandons its long-term
strategy and seeks an alternative transaction involving the
breakup of the company," the directors must "act[] reasonably
to seek the transaction offering the best value."
The ITT directors have not even pretended to fulfill
these duties. The ITT board has not met or negotiated with
Hilton; has declined to give Hilton corporate information; has
sought to impede Hilton's bid in regulatory fora; and has
sought to consummate a plan that is economically inferior to
Hilton's bid and that, if consummated, that would preclude
acceptance of the Hilton bid. Thus, if Revlon duties apply,
ITT's directors have undeniably violated them.
ITT's argument is that its directors have no Revlon
duties. First, it contends that Revlon is not the law in
Nevada. But Revlon is simply an extension of the basic prin-
ciples of the fiduciary law that requires directors to act in
the best interest of the corporation, its shareholders and
other constituencies and that is recognized in Nevada as in all
jurisdictions. That is why Revlon's articulation of the common
law fiduciary duties of corporate directors has been followed
by every court outside of Delaware that has considered the
question. In re C-T of Virginia, Inc., 958 F.2d 606, 612 (4th
Cir. 1992); Cottle v. Storer Communications, Inc., 849 F.2d
570, 576 (11th Cir. 1988); Edelman v. Freuhauf Corp., 798 F.2d
882, 886-87 (6th Cir. 1986); Bayberry Assocs. v. Jones, 783
S.W.2d 553, 560-61 (Tenn. 1990).*
_____________________
* The only court that has rejected REVLON did so on the basis
of a statute that expressly superseded the common law. NORFOLK
SOUTHERN CORP. v. CONRAIL, INC., C.A. No. 96-7167
(D. Pa. Nov. 19, 1996) (construing 15 Pa. Con. Stat. Ann.
Sections 1715 ET SEQ. (1995)). ITT argues that NRS 78.138 is
such a statute. It is not. As explained in more detail in
Hilton's memorandum in opposition to that motion (pp. 16-17),
NRS 78.138 does not overturn the common law, it codifies it.
REVLON itself recognizes that other constituencies may be
considered in RESISTING a takeover, but that when directors
decide to break up a company the "whole question fo defensive
measures [becomes] moot" and the directors' job is to get "the
best price for the stockholders." ID. Nothing in NRS 78.138
relieves Nevada directors of this duty.
-28-<PAGE>
Second, ITT argues that Revlon does not apply because
it has not abandoned its long term strategy and is not pursuing
a break-up or sale of the company. The claim is sheer
hypocrisy. If one credits ITT's claim that the "new" ITT
really is new and is not just a continuation of the current ITT
with an unauthorized charter amendment, then the directors are
transforming "ITT Corporation" from a "globally competitive
leader in hotels, gaming, entertainment, and information
services" into a highly leveraged, European-based publisher of
Yellow Pages. On top of this, they are selling effective
control of "ITT Corporation" to CD&R. These facts alone
implicate Revlon.
The same conclusion must be reached if one looks
through the form to the substance of ITT's plan. In the face
of the Hilton offer, ITT has (1) abandoned its long term
strategy of growing all of its businesses; (2) determined to
divide itself into three parts and spin off its hotel and
gaming and technical school assets; (3) sold $1.7 billion of
so-called "non-core assets" (Alcatel, Madison Square Garden and
WBIS+); (4) agreed to sell $200 million of "core" hotel assets
to FelCor; (5) agreed to sell half of the Desert Inn and
adjacent property to Marvin Davis; (6) threatened to sell other
"core" assets as well; and (7) determined to spend $2.1 billion
cash in a self-tender offer plus $2 billion in a separate ten-
der offer for the company's outstanding debt.
The result is a dramatic transformation of ITT and a
break-up of ITT as it existed on the day that Hilton announced
its offer. In these circumstances, Revlon requires the ITT
board to pursue a transaction with Hilton if that would result
in the highest price. ITT's Board has not done so. Its plan
should be enjoined.
VII. HILTON AND THE ITT SHAREHOLDERS WILL SUFFER
IRREPARABLE INJURY IN THE ABSENCE OF INJUNCTIVE RELIEF
Hilton and its fellow ITT shareholders will suffer
irreparable harm in the absence of injunctive relief. If ITT's
plan is effected, ITT shareholders will lose their right
-29-<PAGE>
to exercise their corporate franchise unimpeded by board
interference. "'[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). Accord AHI
Metnall, L.P. v. J.C. Nichols Co., 891 F. Supp. 1352, 1359
(W.D. Mo. 1995) ("'Courts have consistently found that
corporate management subjects shareholders to irreparable harm
by denying them the right to vote their shares or unnecessarily
frustrating them in their attempt to obtain representation on
the board of directors.'") (quoting International Banknote Co.
v. Muller, 713 F. Supp. 612, 623 (S.D.N.Y. 1989)); Beztak Co.
v. Bank One Columbus, N.A., 811 F. Supp. 274, 284 (E.D. Mich.
1992) (loss of stock voting rights constitutes irreparable
harm); ER Holdings, Inc. v. Norton Co., 735 F. Supp. 1094, 1101
(D. Mass. 1990).
ITT cannot legitimately claim that Hilton can simply
drop its proxy contest for the current ITT and pursue a new,
two-year plus campaign to take over the "new" ITT. The
insurgents in Shoen could have been required to renew their
proxy contest the following year. This Court held that the
insurgents would suffer irreparable injury if they were forced
to pursue that route and granted an injunction. The argument
that Hilton can continue also ignores the massive tax
impediment created by ITT -- the $1.26 billion tax pill. And
it "ignores the realities of the marketplace. . . . The fact
that [Hilton] can still attempt to replace the Board over a
period of time does not serve to make up for the loss of a
realistic chance for immediate success." NCR Corp. v. AT&T,
761 F. Supp. 475, 501 (S.D. Ohio 1991). See also Moelis Dec.
Paragraph 14; Hyde Park Partners, L.P. v. Connolly, 839 F.2d
837, 853 (1st Cir. 1988) ("It is obvious that timing is
everything with tender offers"); Dan River, Inc. v. Icahn, 701
F.2d 278, 284 (4th Cir. 1983) (delay in tender offer gives man-
agement "time to regroup and consolidate" during which its
"chances are enhanced. The potential harm to [the acquiror],
then, is loss of its best opportunity to seize control of [the
target].").
Consummation of ITT's split-up will also cause Hilton
irreparable injury because once ITT effects its spin-offs, the
$1.26 billion "tax pill" will be in place and the
-30-<PAGE>
structure of the company will be drastically altered. These
factors led the Court in Grand Metropolitan Public Ltd. v.
Pillsbury Co., 558 A.2d 1049, 1061 (Del. Ch. 1988), to enjoin
Pillsbury from spinning-off its Burger King subsidiary in the
face of Grand Met's hostile bid. In so doing, the Court
rejected Pillsbury's argument that "its Board is in control of
the Corporation" and that the directors should be permitted to
"go about its business of creating value for its shareholders,"
holding that the absence of an injunction would "invite chaos
for Pillsbury and its shareholders, and possibly for third
parties. . . . Given the uncertainties which now shroud
corporate affairs . . . the planned Burger King spin-off should
not be made, at least at this time." The same conclusion holds
here.
This Court should have no hesitancy in issuing an
injunction. As Judge Friendly wrote almost 30 years ago, in
the tender offer context, "the application for a preliminary
injunction is the time when relief can best be given."
Electronic Specialty Co. v. International Controls Corp., 409
F.2d 937, 947 (2d Cir. 1969). Judge Friendly's observation
remains true today. See Paramount Communications Inc. v. QVC
Network Inc., 637 A.2d 34 (Del. 1994) (enjoining $5 billion
tender offer); Hanson Trust PLC v. ML SCM Acquisition, Inc.,
781 F.2d 264 (2d Cir. 1986) (enjoining $1 billion leveraged
buyout); NCR Corp. v. AT&T, 761 F. Supp. 475 (S.D. Ohio 1991)
(enjoining $500 million defensive stock issuance); Mills Ac-
quisition Co. v. Macmillan, 559 A.2d 1261 (Del. 1989)
(enjoining $2.5 billion defensive recapitalization); Black &
Decker Corp. v. American Standard, Inc., 682 F. Supp. 772 (D.
Del. 1988) (enjoining $1.7 billion defensive recapitalization);
Koppers Co. v. American Express Co., 689 F. Supp. 1371 (W.D.
Pa. 1988) (enjoining $1.7 billion tender offer).
Any injunction that this Court issues should also
include an order requiring ITT to proceed with its annual
meeting for the election of directors by no later than November
14. As noted in the accompanying Burch Affidavit, there is no
indication that ITT has yet taken steps to hold that meeting on
a timely basis. Not content to thumb their noses at the
shareholders, ITT and its directors also appear to be prepared
to thumb their noses at
-31-<PAGE>
the statutory requirements imposed by NRS 78.330 and at this
Court's decision interpreting that provision. They should not
be permitted to do so.
Finally, ITT will not suffer any harm if an
injunction is issued. The only consequence would be that ITT
would have to proceed with its annual meeting. There is no
harm in requiring ITT and its directors to face the owners of
the company.
IX. CONCLUSION
ITT's plan is an illegal entrenchment device that was
deliberately structured to deprive the shareholders from
exercising their voting rights and to preclude Hilton from
proceeding with its bid. The directors' plan should be
enjoined. ITT should be ordered to proceed with its annual
meeting by no later than November 14.
DATED this 25th day of August, 1997.
WACHTELL, LIPTON, ROSEN & KATZ
By /s/ Bernard W. Nussbaum
BERNARD W. NUSSBAUM
KENNETH B. FORREST
ERIC M. ROTH
MARC WOLINSKY
MEIR FEDER
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 Defendants-
Counterclaimants
HILTON HOTELS CORPORATION
and HLT CORPORATION
-32-<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
7th 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 25th day of August, 1997.
By /s/ Scott M. Black
Scott M. Black
-33-<PAGE>
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
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
) CV-S-97-00893-PMP (RLH)
-vs- )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Defendants. ) DECLARATION OF
) STEPHEN F. BOLLENBACH
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Counterclaimants, )
)
-vs- )
)
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
Counterclaim Defendants. )
)
DECLARATION OF STEPHEN F. BOLLENBACH
STEPHEN F. BOLLENBACH declares as follows:
1. I am the President and Chief Executive Officer
of defendant and counterclaimant Hilton Hotels Corporation
("Hilton"). I respectfully submit this declaration in support
of the motion by Hilton and HLT Corporation for injunctive and
declaratory relief restraining plaintiffs ITT Corporation and
the ITT Board of Directors from implementing their so-called
"Comprehensive Plan."
2. Hilton commenced its tender offer for ITT in
January 1997 in the belief that the combination of Hilton and
ITT would bring together two of the world's most respected
lodging and gaming companies. Seven months later, Hilton con-
tinues to believe that a combination between Hilton and ITT
would be of enormous benefit to each company and its respective
shareholders. On August 6, 1997, Hilton announced an increase
in its offer, $70 per share, which represents a 64% premium
over ITT's trading price prior to the commencement of Hilton's
original offer in January.
3. Hilton's revised offer represents a full and
attractive price for ITT stock, which has recently traded at
prices well below $70 per share. Nevertheless, ITT's Board of
Directors -- who have refused to engage in any negotiation with
Hilton since the announcement of its initial bid -- are appar-
ently intent upon depriving ITT shareholders of the opportunity
to decide for themselves whether to accept Hilton's bid. The
ITT Board instead adopted what it calls a "Comprehensive Plan".<PAGE>
The centerpiece of the Plan is the placement of ITT's "core"
hotel and gaming operations into a new Nevada subsidiary that
will be spun off to ITT shareholders. The "new" ITT, unlike
the current ITT, will have a "staggered board", which means
that it will require at least two annual meetings -- until,
perhaps, May 1999 -- for Hilton to replace a majority of the
directors. Even more significant, the spinoff of the "new" ITT
will make it impossible for Hilton to acquire over 50% of that
company in a cash and stock bid without subjecting itself to
the risk of a $1.26 billion tax liability -- a risk so great
that Hilton could not proceed with its current bid. The ITT
Board is determined to implement this preclusive defense in
September 1997, without a shareholder vote and some two months
before the November date by which this Court has held that ITT
must hold its next annual meeting. If the ITT Board has its
way, by November 1997, ITT as it now exists will no longer ex-
ist.
4. Unless ITT is enjoined by this Court, ITT share-
holders will lose the opportunity to choose between Hilton's
$70 bid and the Comprehensive Plan. Hilton strongly believes
that ITT's shareholders, as the owners of the company, should
be allowed to decide the future of their company for them-
selves, and this Court should prevent ITT's directors from de-
priving ITT's shareholders of a meaningful opportunity to de-
cide whether they prefer Hilton's $70 offer to ITT's Comprehen-
sive Plan.
-2-<PAGE>
Hilton's Initial Tender Offer
5. On January 27, 1997, I sent a letter to Mr. Rand
V. Araskog, ITT's Chairman and Chief Executive Officer, advis-
ing him of Hilton's intention to commence a tender offer for
50.1% of the outstanding shares of ITT stock at $55 per share
to be followed by a second-step merger in which ITT sharehold-
ers would receive $55 in Hilton stock for each ITT share that
they own. See Exhibit A. My letter stated that a review of
ITT's non-public information could result in an even higher
bid. I added that Hilton preferred to work with ITT's Board
and management toward the prompt consummation of a negotiated
transaction and, to that end, we were "ready at a moment's no-
tice to commence discussions about the details of a combina-
tion." Hilton formally commenced its tender offer on January
31.
6. Both my January 27 letter and Hilton's press
release announcing our tender offer made clear that, while ITT
is a diversified conglomerate, Hilton's interest in ITT focused
on its hotel and gaming assets. Thus, in the January 27 an-
nouncement, Hilton stated that it believed that the "combina-
tion of ITT and Hilton would bring together two of the world's
leading lodging companies as well as two premier gaming busi-
nesses" and that "ITT's owned full-service hotel portfolio,
along with its major gaming presence in Las Vegas, Atlantic
City and other jurisdictions, fits perfectly with [Hilton's]
stated growth objectives." Hilton's announcement added that,
if it acquired control of ITT, it would "carefully review"
ITT's remaining businesses and that "the monetization of
-3-<PAGE>
[those] nonstrategic assets, and a focus on the company's core
business lines" would "create even more value for the share-
holders of the combined companies." See Exhibit B.
7. ITT has a number of anti-takeover provisions in
place, including its Shareholder Rights Plan. The Hilton ten-
der offer and second-step merger cannot be consummated unless
the ITT Board removes or makes ITT's various anti-takeover de-
vices inapplicable to Hilton's bid.
8. Because the ITT Board of Directors has the power
to remove these impediments and permit ITT's shareholders to
decide for themselves whether they want to accept Hilton's ten-
der offer, Hilton coupled its tender offer with a proxy contest
to replace ITT's incumbent Board. On February 11, 1997, in
accordance with the requirements of Section 2.2 of ITT's by-
laws, Hilton gave notice to ITT of its intention to nominate a
slate of candidates for election as directors to the ITT board
at the 1997 annual meeting and its intention to present a reso-
lution urging the Board to arrange a sale of the company to
Hilton or any higher bidder. Hilton has cleared its proxy ma-
terials with the SEC and has been soliciting proxies from ITT's
shareholders. The Hilton slate is committed, subject to its
fiduciary duties, to remove the obstacles to consummation of
Hilton's proposed tender offer and merger.
9. By letters to Mr. Araskog dated January 31, 1997
and February 11, 1997, I reiterated Hilton's desire to meet
with ITT to discuss our proposed combination. See Exhibits C,
D. My February 11 letter advised Mr. Araskog that "[w]e stand
-4-<PAGE>
ready to meet with you at any time and to answer any questions
you or your directors may have." Mr. Araskog never responded.
The ITT Board Rejects the
Hilton Bid and Begins the
Break-Up of ITT
10. The ITT Board of Directors formally rejected
Hilton's offer on February 11, 1997. Though the ITT Board at-
tempted to justify its rejection of Hilton's offer by citing
"uncertainties as to the actual value" of the Hilton securities
to be offered in the proposed second-step merger and the "lack
of sufficient disclosure in Hilton's tender offer", the ITT
Board did not ask Hilton to provide any additional information
about its offer or the merger consideration. Moreover, while
Hilton had stated that a review of ITT's non-public information
could result in an even higher offer, the ITT Board did not
give Hilton the opportunity to review any such information.
11. While it rejected Hilton's offer and ignored
Hilton's invitation to negotiate, the ITT Board adopted a por-
tion of Hilton's strategy for ITT by announcing on February 11
that it would now focus on ITT's "core" hotel and gaming busi-
nesses and seek to create shareholder value through the "mon-
etization" of the company's non-core assets. The ITT Board has
since authorized management to engage in a series of transac-
tions which collectively amount to an abandonment of ITT's
long-term strategy and a break-up of the company. The initial
group of transactions involved the disposition of ITT assets
outside of its "core" hotel and casino businesses. These
transactions included the sale of ITT's 7.5 million shares of
Alcatel Alsthom for approximately $830 million, the sale of
-5-<PAGE>
ITT's 50% interest in Madison Square Garden arena cable network
and related sports franchises for approximately $650 million,
and the sale of its interest in WBIS+, a New York television
station, for $128.8 million.
12. In an apparent effort to drive Hilton away, ITT
also embarked upon a scheme to dispose of ITT's "core" hotel
assets in a fashion that threatens to impede, if not preclude,
Hilton or any other potential bidder from acquiring control of
ITT without the consent of the incumbent ITT board. On May 19,
1997, ITT and FelCor Suite Hotels, Inc. ("FelCor"), a Dallas-
based real estate investment trust, announced the creation of a
"long term strategic alliance" beginning with an agreement in
principle for FelCor to purchase five hotels from ITT for $200
million. The proposed transaction called for ITT to receive
additional consideration in the form of a management contract
which allows ITT to manage the hotels for a period of 20 years.
The proposed management agreement would include a change of
control penalty provision entitling FelCor to terminate ITT's
right to manage the hotels -- and terminate its obligation to
pay management fees to ITT -- in the event of a change of con-
trol of ITT that is not approved by the incumbent directors.
The existence of this provision was concealed by ITT when it
announced the agreement in principle with FelCor. The FelCor
transaction was apparently part of a larger effort for in early
June 1997, The Wall Street Journal reported that ITT was enter-
taining bids for several of its "crown jewel" hotels, while
-6-<PAGE>
"demanding that purchasers of the marquee properties sign man-
agement contracts with ITT" including change of control penalty
provisions.
13. In two separate letters to the ITT Board of Di-
rectors dated June 2 and June 9, I objected to ITT's placement
of change of control provisions in the FelCor management con-
tract, as well as its threatened sale of "crown jewel" prop-
erties on similar terms. See Exhibits E, F. I advised the ITT
Board that Hilton was a "ready, willing and able buyer for
ITT's core assets," that Hilton could offer more for those as-
sets than any other qualified purchaser, and that Hilton would
not require any change of control penalty provisions in any
management contract with ITT. My letters of June 2 and June 9
reiterated Hilton's requests to meet with ITT's representatives
to negotiate a transaction. As before, these requests were
ignored.
14. Without responding to either of my letters, ITT
entered into definitive agreements with FelCor and proceeded to
close the transaction. Under its management agreement with
ITT, FelCor's affiliate has the option to terminate the manage-
ment contract 30 days after a "Change of Control" -- defined as
(i) the acquisition of more than 35% of ITT's voting stock
within two years after a tender offer or proxy solicitation by
the acquiror if the tender offer or proxy solicitation was not
approved by a majority of the ITT directors in office at the
time it was commenced, or (ii) the election of a majority of
the ITT Board of Directors pursuant to a solicitation of prox-
ies from ITT shareholders if the solicitation was not approved
-7-<PAGE>
by a majority of the ITT directors in office at the time it was
commenced.
15. Though ITT claims that FelCor requested the
change of control penalty provision, that provision does not
serve any legitimate purpose of FelCor because FelCor's right
to terminate arises only if the incumbent ITT Board permits it
to arise. FelCor may terminate only if control of ITT is
transferred in a transaction that is not approved by a majority
of the incumbent directors; in that instance, FelCor has a
right to terminate its management contract even if the acquiror
is a world-class operator of hotels, such as Hilton. But if
ITT's incumbent Board decides to sell control of the company to
a wholly incompetent hotel operator, FelCor has no right to
terminate as a result.
16. The change of control penalty provision in the
FelCor management agreement also serves to deter ITT sharehold-
ers from freely exercising their right to vote out the incum-
bent directors in a proxy fight whether or not such proxy fight
arises out of an attempt to acquire ITT shares. Victory in any
such proxy fight (i.e., replacement of a majority of ITT's di-
rectors) could result in the termination of the management con-
tracts by the hotel owners and the resultant loss of millions
of dollars in management fees by ITT.
17. ITT continues to dispose of "core" assets and to
enter into change of control penalty provisions designed to
deter Hilton and entrench ITT's management. On August 3, 1997,
ITT announced that it was disposing of 50 percent of both the
-8-<PAGE>
Desert Inn Resort and Casino in Las Vegas and 34 acres of adja-
cent property (the "Desert Inn transaction"). ITT has entered
into an agreement in principle with Davis Gaming, L.L.C., a
company owned by Marvin Davis, providing that ownership of the
Desert Inn and adjacent property will be sold to a joint ven-
ture owned 50 percent by Davis Gaming and 50 percent by ITT
(the "Desert Inn Agreement"). According to the announcement,
ITT will receive $250 million for the 50 percent interest being
acquired by Davis Gaming. As part of the Desert Inn transac-
tion, ITT will manage the Desert Inn for ten years with an op-
tion to extend the management agreement for another ten years
and, should the joint venture build a new hotel and casino on
the adjacent parcel, ITT will manage that as well. The agree-
ment in principle provides that the management agreement will
include a change of control provision substantially identical
to the provision in the agreement with FelCor.
The ITT Board Adopts
the Comprehensive Plan
18. On July 16, 1997, ITT announced that at a meet-
ing held the previous day, its Board of Directors reassessed
Hilton's tender offer in light of developments since February
11 and "unanimously reaffirmed its conclusion" that Hilton's
offer was "inadequate and not in the best interests of [ITT]."
At the same time, ITT announced that its Board has unanimously
approved the adoption of the Comprehensive Plan.
19. The Comprehensive Plan consists of several major
elements. The first major element involves the spin-off of two
of ITT's three remaining businesses (the "Spin-offs"). All of
-9-<PAGE>
ITT's "core" hotel and gaming assets will be placed in a newly
formed Nevada subsidiary that will be renamed "ITT". Subject
to the satisfaction of various conditions, including the ap-
proval of gaming authorities in several states, ITT intends to
distribute as a stock dividend to its shareholders all of the
common stock of "new" ITT and all of ITT's shares in its 83.3%-
owned technical school subsidiary, ITT Educational Services,
Inc. ("ESI"). Following the Spin-offs, the current ITT's sole
remaining business will be telephone directories publishing.
That company will be renamed ITT Information Services, Inc.
("ISI").
20. A second major element of the Comprehensive Plan
involves ITT's repurchase through a cash tender offer of up to
30 million shares of its common stock (approximately 25.7% of
its outstanding shares) at a price of $70 per share, or a total
of $2.1 billion (the "Equity Tender Offer"). ITT commenced the
Equity Tender Offer on July 17, 1997.
21. A third major element of the Comprehensive Plan
is the allocation of ITT's indebtedness between "new" ITT and
ISI. (ITT claims that, for regulatory reasons, ESI cannot in-
cur significant indebtedness.) To facilitate this allocation,
on August 11, 1997, ITT commenced a tender offer for all $2.0
billion of its publicly held debt securities and to repay cer-
tain other indebtedness (the "Debt Tender Offer").
22. ITT has stated that it intends to consummate the
Spin-offs, the Equity Tender Offer and the Debt Tender Offer
substantially concurrently in late September 1997. In order to
finance these transactions, ISI and "new" ITT will be required
-10-<PAGE>
to incur massive amounts of new debt. According to ITT's pub-
lic filings, "new" ITT will be responsible for at least $4.2
billion in indebtedness (representing approximately 63% of its
total capitalization on a pro forma basis as of June 30, 1997),
and ISI will be responsible for approximately $1.265 billion in
indebtedness. The "new" ITT will be a "junk" (i.e., non-
investment grade) credit. ITT has also stated that the "high
degree of leverage" at "new" ITT and ISI "could have important
consequences for stockholders," including (i) impairing each
company's ability to obtain additional financing on favorable
terms in the future, (ii) reducing funds available for purposes
other than debt service, (iii) subjecting each company to re-
strictive covenants with respect to a number of corporate ac-
tivities, (iv) placing each company at a competitive disadvan-
tage, and (v) hindering each company's ability to adjust to
market conditions and making it more vulnerable in the event of
a downturn in general economic conditions or in its business.
23. A fourth major element of the Comprehensive Plan
is the sale of effective control of ISI to an entity affiliated
with the leveraged buy-out firm of Clayton, Dubilier & Rice,
Inc. ("CDR"). Following the Spin-offs, a CDR affiliate will
purchase approximately 32.9% of the outstanding common stock of
ISI and warrants to purchase shares representing an additional
13.7% of its shares for aggregate consideration of $225 mil-
lion.
-11-<PAGE>
The Comprehensive Plan
is an Entrenchment Device
24. In its press release announcing the Comprehen-
sive Plan, in presentations to stock analysts and in interviews
with the financial media, ITT and its agents have endeavored to
portray the Comprehensive Plan as a "plan to create shareholder
value." As is evident from the timing, structure and terms of
the Plan, it is better understood as a plan to entrench ITT's
incumbent management.
A. ITT Will Not Let Its Shareholders
Vote on the Comprehensive Plan
25. ITT intends to consummate the Comprehensive Plan
without putting it to a shareholder vote. Subject to its re-
ceipt of regulatory approval for the Comprehensive Plan, ITT
intends to consummate the Spin-offs, the Equity Tender Offer
and the Debt Tender Offer in late September 1997. Because ITT
has deliberately delayed its 1997 Annual Meeting of Sharehold-
ers until November, ITT will not give its shareholders the op-
portunity to express their collective view of these transac-
tions before they occur.
26. This timetable for the implementation of the
Comprehensive Plan is entirely of ITT's making. On April 21,
1997, this Court denied Hilton's motion for a preliminary in-
junction requiring ITT to hold its 1997 Annual Meeting in May
1997 and, in that context, preliminarily ruled that ITT is not
required under Nevada law to hold its 1997 Annual Meeting until
November 1997. Based on ITT's representations that "with ad-
ditional time the stockholders will be able to make a more in-
formed decision as to the real value of both ITT and the Hilton
-12-<PAGE>
Transaction", the Court also concluded that Hilton had failed
to demonstrate that ITT's directors had breached any fiduciary
duty to shareholders by failing to schedule the Annual Meeting
in May. In my view, ITT is now using this Court's ruling as a
vehicle for avoiding any shareholder vote on the Comprehensive
Plan or the composition of ITT's Board before the Plan is con-
summated. The only conceivable reason for this is that ITT
management fears that its shareholders would reject the Plan
and the incumbent directors who have adopted it in favor of
nominees who support a negotiated merger with Hilton.
27. ITT's refusal to submit the Comprehensive Plan
to a vote of its shareholders is in stark contrast to ITT's
past practice. The current ITT is itself the product of a mas-
sive spin-off. In 1995, the company formerly known as ITT Cor-
poration split itself into three public companies -- the cur-
rent ITT, the company now known as ITT Industries, Inc. (an
industrial manufacturer) and the company now known as Hartford
Financial Services Group (an insurance company). The former
ITT (led by the same management team as the current ITT) sub-
mitted the 1995 spin-off plan to a shareholder vote because, as
its public filings stated at the time of that spin-off's "im-
portance to . . . shareholders." The Comprehensive Plan is no
less important to ITT's current shareholders -- not only be-
cause of its dramatic effect on the financial structure of the
company, but also because of its impact on Hilton's bid.
Rather than risk defeat in a shareholder vote, the ITT Board
-13-<PAGE>
has decided to cram the Comprehensive Plan down on their share-
holders before the shareholders can decide whether they want
the incumbents to continue to run their company.
B. The ITT Board Inserts a "Staggered Board"
Provision in the Charter of the "New" ITT
28. Despite the fact that hotels and gaming are
ITT's "core" businesses, the Comprehensive Plan calls for the
spin-off of those businesses and the retention of its telephone
directories publishing business, and not vice versa. The only
apparent reason for structuring the Spin-offs in this fashion
is to entrench the management team that will run the hotel and
gaming businesses -- the businesses that Hilton has stated it
is interested in acquiring -- by placing them in a "new" com-
pany with the same core businesses, same name, same board of
directors and same senior management. Indeed, ITT's public
filings make clear that, for accounting purposes, ITT treats
the transaction as a spin-off of the telephone directories
business, not a spin-off of hotels and gaming.
29. Several features of the Comprehensive Plan are
designed to ensure that neither Hilton nor any other potential
bidder will ever threaten the incumbency of Mr. Araskog and his
management team again. Like the current ITT, the "new" ITT
will have the takeover protections of Nevada's Control Share
Acquisition and Business Combination Statutes and a Shareholder
Rights Plan. In its SEC filing pertaining to the Spin-off, the
"new" ITT acknowledges that these defenses may have the effect
of preventing a change of control at the "new" ITT even if it
is favored by a majority of the company's shareholders. The
-14-<PAGE>
ITT Board will also give the "new" ITT a particularly potent
defense that the current ITT does not have -- a "staggered
board."
30. The "new" ITT's Articles of Incorporation will
provide that its 11-member Board of Directors will be divided
into three classes, each of which will serve for three years
with one class being elected each year. Moreover, the Articles
of Incorporation will contain provisions prohibiting stockhold-
ers from calling a special meeting or acting by written con-
sent. As a result, at least two annual meetings of stockhold-
ers would be required for the stockholders to change a majority
of the members of the "new" ITT Board.
31. The import of the "staggered board" provisions
in the "new" ITT charter is that, once the Spin-offs are con-
summated, shareholders will be unable to decide for themselves
whether to facilitate the sale of the company to Hilton by re-
placing a majority of the "new" ITT directors with Hilton's
nominees at the company's next annual meeting. Thus, even if
Hilton successfully waged a proxy contest at the first annual
meeting of the "new" ITT, the Hilton nominees would be in the
minority on the Board and could not themselves redeem the "poi-
son pill" or remove the other barriers to a Hilton acquisition.
Assuming that the "new" ITT really does hold its first annual
meeting on November (as ITT has said it will), if the incum-
bents decide not to hold the second annual meeting of the "new"
ITT until another 18 months have passed (in accordance with
this Court's interpretation of NRS 78.345), Hilton would not be
able to change a majority of the members of the "new" ITT Board
-15-<PAGE>
until May 1999. And Mr. Araskog, who was last elected to the
Board in May 1996, would not have to stand for re-election by
the shareholders until the year 2000.
32. ITT has sought to justify its inclusion of
"staggered board" provisions in the "new" ITT charter on the
grounds that many other companies, including Hilton, have
"staggered boards." But Hilton's "staggered board" was adopted
pursuant to a shareholder-approved charter amendment. By con-
trast, ITT is attempting to amend its charter not through a
shareholder vote, but through the vote of the very directors
who would be the direct beneficiaries of the proposed amend-
ment.
C. The Comprehensive Plan Contains
a "Tax Poison Pill"
33. The Comprehensive Plan further serves to en-
trench ITT's management because any acquiror of the "new" ITT
would be forced to swallow a lethal "tax poison pill." In an
SEC filing pertaining to the Comprehensive Plan, the ITT Board
has sought to justify its support for the Plan on the grounds
that the Spin-Off will be tax-free to ITT and its shareholders.
Thus, ITT's Board has stated that "[o]nly [ITT] as an indepen-
dent entity can consummate such a [tax-free] transaction imme-
diately", whereas an acquiror of ITT in a transaction that is
taxable in whole or in part "would be unable to undertake a
tax-free spin-off of [ITT] assets for a period of five years."
34. It is my understanding that when companies un-
dertake a spin-off of the nature and magnitude contemplated by
ITT, they typically seek a ruling in advance from the IRS in an
-16-<PAGE>
effort to obtain some assurance prior to consummation that the
requirements for tax-free treatment have been met. ITT has
stated that it has not sought an IRS ruling in connection with
the Spin-offs and that it will not do so. One can readily in-
fer that ITT will not seek an IRS ruling because it typically
takes four to six months to obtain one, and ITT management is
desperate to consummate the Spin-offs before the Annual Meet-
ing, which must be held in November 1997.
35. In lieu of an IRS ruling, the ITT Board has
stated that it will rely on a legal opinion from its takeover
defense counsel to the effect that the Spin-offs will qualify
as tax-free transactions under Section 355 of the Internal Rev-
enue Code. In an SEC filing, the "new" ITT acknowledges that
if the Spin-offs are consummated and the IRS ultimately dis-
agrees with the legal opinion of ITT's counsel, the "new" ITT,
ESI and ISI would incur aggregate tax liability (which under
law is the several liability of all three corporations) of $1.4
billion. ITT's public filings suggest that approximately 90%,
or $1.26 billion, of this liability will be allocated to the
"new" ITT under contractual "tax sharing" arrangements. The
"new" ITT concedes that this huge tax liability "would have a
material adverse effect on the financial position, results of
operations and cash flows" of both the "new" ITT and ISI. This
is a vast understatement. The risk that the "new" ITT would
incur liability of this magnitude serves as a powerful deter-
rent to any acquisition of these companies once the Spin-offs
are effected. Moreover, the "new" ITT's SEC filing concedes
that if the IRS concludes that the Spin-offs are not entitled
-17-<PAGE>
to tax-free treatment, ITT's shareholders would be subject to
an additional tax liability of $1.4 billion. The risk that
ITT's own shareholders might incur this gargantuan liability if
the Spin-offs are consummated makes the Board's decision not to
follow the prudent course of seeking an IRS ruling and submit-
ting the Comprehensive Plan to a shareholder vote particularly
unreasonable.
36. Even if the IRS were ultimately to conclude that
the Spin-offs qualify for tax-free treatment under Section 355
of the Internal Revenue Code, the Comprehensive Plan imposes
yet another potentially massive tax-related barrier to Hilton's
acquisition of the "new" ITT. ITT's own public filings with
respect to the Spin-offs state that: (i) under the tax law in
effect at the time the Board adopted the Comprehensive Plan, if
the IRS were to integrate the Spin-off of the "new" ITT and
Hilton's acquisition of the stock of either ITT or the "new"
ITT, the Spin-off of the "new" ITT would result in taxable gain
for ITT and its shareholders; and (ii) under then-proposed tax
legislation which was later passed by Congress, ITT would rec-
ognize taxable gain in connection with the Spin-off of the
"new" ITT if 50% or more of the stock of "new" ITT stock were
acquired and such acquisition and the Spin-off of the "new" ITT
were deemed part of a "plan" or "series of related transac-
tions" that included the Spin-Off. As explained in the af-
fidavit of Harvard Law School Professor Bernard Wolfman, since
Hilton commenced its acquisition attempt prior to the Spin-Off,
it would be difficult for Hilton to overcome the statutory pre-
sumption that any tender offer for "new" ITT stock consummated
-18-<PAGE>
before the second anniversary of the Spin-Off is part of such a
"plan" or "series of related transactions". Because "new" ITT
has agreed to pay 90% of the tax liability ITT incurs as a re-
sult of the Spin-offs, Hilton's acquisition of "new" ITT after
the Spin-offs could thus result in "new" ITT's incurrence of
$1.26 billion in tax liability. The existence and magnitude of
this risk would make it impossible for Hilton to proceed with
its current bid.
The ITT Board's "Rationales" for
Adopting the Comprehensive Plan
37. ITT launched the Comprehensive Plan with a bar-
rage of publicity in which it trumpeted a number of ostensible
rationales for adopting the Plan. These rationales are window
dressing, created to obscure the Board's real purpose -- en-
trenching ITT management. Thus:
(a) ITT has stated that it adopted the Com-
prehensive Plan as "another step in
[ITT's] refinement of its strategic plan
to focus on hotels and gaming and explore
and exploit opportunities to enhance the
value of [ITT] within that focus." In
fact, not once before the Hilton offer
was commenced did ITT tell its sharehold-
ers that its strategy was to (i) sell
assets purchased only a year or two after
they were acquired (i.e., sale of Madison
Square Garden and WBIS+ television sta-
tion); (ii) shift from being an owner/
-19-<PAGE>
operator of hotels to being a hotel man-
agement company; (iii) spin off its hotel
and casino assets and leverage the spun-
off company to turn it into an issuer of
junk bonds; or (iv) break up into three
more pieces only two years after its last
spin-off.
(b) ITT claims that the Comprehensive Plan is
"intended to enhance the value of the
ongoing investment of stockholders." As
Morgan Stanley's analyst was recently
quoted in The Wall Street Journal, how-
ever: "Shuffling the entities around --
and even buying back $2.1 billion of
stock -- doesn't fundamentally change the
underlying value of the entity." More-
over, according to ITT's public state-
ments, the Board's conclusion that the
Comprehensive Plan will enhance share-
holder value rests largely upon the as-
sumption that the cash flow from its gam-
ing operations will improve by some $170
million, or 63 percent, from 1997 to
1998. As explained in the affidavit of
Kenneth Moelis of Donaldson Lufkin & Jen-
rette, Hilton's financial advisor, that
assumption is highly unrealistic. A
Salomon Brothers analyst was recently
-20-<PAGE>
quoted in The Wall Street Journal: "Buy
into [ITT's] management forecasts at your
own risk and recognize that they are the
required condition necessary to support
materially higher stock prices. We think
it's a shaky foundation." Indeed the
Salomon Brothers analyst reportedly said
that "the downside on ITT could be as low
as $50 to $55 a share."
(c) ITT also asserts that the Comprehensive
Plan will further the interests of its
employees because the "displacement to
employees of [ITT] that would be expected
to occur following consummation of a hos-
tile acquisition such as the Hilton
Transaction is expected to be signifi-
cantly greater than any disruption caused
by the Distributions." But ITT states
elsewhere that it has already fired 65%
of its headquarters staff in response to
Hilton's bid and that, after the Spin-
offs are complete, both the "new" ITT and
ISI intend to "continue to search for ad-
ditional opportunities to rationalize the
organization and administration of
[their] businesses" -- a euphemism for
firing more employees.
-21-<PAGE>
(d) ITT contends that the Comprehensive Plan
will further the interests of its credi-
tors. As noted above, however, in order
to finance the Equity Tender Offer and
the Debt Tender Offer, the "new" ITT and
ISI will be required to trash their bal-
ance sheets by incurring billions of dol-
lars in new debt. Holders of ITT's pub-
lic debt securities who fail to tender
into the Debt Tender Offer will find that
their investment grade paper has been
transformed into risky junk bonds.
(e) ITT maintains that the Comprehensive Plan
"will allow [ITT] to eliminate at least
one tier of corporate-level administra-
tion" -- the implication being that the
Plan will result in greater efficiencies.
This is dubious. As a result of the
Spin-offs, where there is today one com-
pany, there will soon be three. Corpo-
rate functions that used to be performed
by ITT for each of its subsidiaries will
have to be replicated at each of "new"
ITT, ESI and ISI, resulting in more, not
less, overhead.
Hilton Raises Its Bid
38. On August 6, 1997, I sent a letter to the mem-
bers of the ITT Board advising them of Hilton's intention to
-22-<PAGE>
increase its cash tender offer for a majority of ITT shares to
$70 per share, and to complete a second-step merger in which
the remaining ITT shares would be converted into shares of Hil-
ton common stock worth $70 per ITT share, subject to appropri-
ate "collar" provisions. See Exhibit G. Hilton amended its
tender offer the following day.
39. In my view, Hilton's revised offer provides
value to ITT's shareholders far in excess of that provided by
the Comprehensive Plan. First, Hilton's bid is superior be-
cause it offers more cash. Hilton is offering to purchase
50.1% of ITT shares for $70 cash per share, whereas under the
Equity Tender Offer ITT intends to purchase only 25.1% of its
shares at that price. Accordingly, Hilton affords those share-
holders who want to cash out at $70 a far greater opportunity
to do so. Second, Hilton is offering ITT shareholders a much
stronger "back-end" security than is offered under the Compre-
hensive Plan because: (a) a merged Hilton/ITT is a far larger
and stronger entity than the three smaller companies that would
result from the break-up of ITT; (b) a merged Hilton/ITT offers
significant opportunities for synergies -- some $100 million by
our estimates -- which cannot be created by breaking ITT up
into three separately trading companies; and (c) Hilton will
offer ITT's shareholders a protective collar designed to ensure
that the Hilton stock ITT shareholders receive in the second-
step merger will have a value of $70 per share upon issuance,
while ITT's Comprehensive Plan offers no equivalent protection
with respect to the shares of "new" ITT, ESI and ISI.
-23-<PAGE>
ITT Rejects the Revised Hilton Bid
40. Notwithstanding the clear superiority of
Hilton's revised bid, on August 14, 1997, ITT announced that
its Board had rejected Hilton's revised offer as "inadequate
and not in the best interests of the Company." The ITT Board
"unanimously recommend[ed] that stockholders of the company
reject the Hilton transaction and not tender their Shares pur-
suant to the Hilton Tender Offer or take any other action to
facilitate the Hilton Tender Offer." This "recommendation" is
purely formalistic: as explained above, the Comprehensive Plan
is structured to deprive ITT shareholders of any meaningful
opportunity to "facilitate the Hilton Tender Offer." Unless
ITT is enjoined by this Court, the ITT Board will force the
company's shareholders to accept the Comprehensive Plan and ITT
shareholders will never have the opportunity to choose between
the Plan and Hilton's superior bid.
41. In conjunction with its rejection of Hilton's
revised bid, the ITT Board announced that it had sweetened the
severance arrangements of several golden parachute agreements
of ITT's managers, including of Mr. Araskog and several other
senior managers of ITT. Federal law requires that any execu-
tive who receives severance payments more than three times his
average annual compensation pay a 20 percent excise tax. Prior
to August 14, ITT had agreed to pay these taxes on behalf of
several of its most senior executives, including Mr. Araskog,
only if the company's stock price had reached approximately $71
per share. As a result of the changes approved by a committee
-24-<PAGE>
of ITT's Board on August 14, ITT has now agreed to pay the ex-
cise taxes without regard to the trading price of ITT stock.
In the case of Mr. Araskog, this could mean a tax savings of
$2.8 million on a severance package of $14 million. As one
expert on executive compensation was quoted at the time: "Rand
Araskog has a history of never missing an opportunity to pursue
his own self-interest."
I declare under penalty of perjury under the laws of
the United States of America that the foregoing is correct.
Executed on August 21, 1997.
/s/ Stephen F. Bollenbach
Stephen F. Bollenbach
-25-<PAGE>
EXHIBITS OMITTED
EXHIBIT A Letter from Bollenbach to Araskog, dated January
27, 1997
EXHIBIT B Hilton Hotels Corporation Corporate News Press
Release, Hilton Offers to Acquire ITT Corporation,
dated January 27, 1997
EXHIBIT C Letter from Bollenbach to Araskog, dated January
31, 1997
EXHIBIT D Letter from Bollenbach to Araskog, dated February
11, 1997
EXHIBIT E Letter from Bollenbach to ITT Corporation Board of
Directors, dated June 2, 1997
EXHIBIT F Letter from Bollenbach to ITT Corporation Board of
Directors, dated June 9, 1997
EXHIBIT G Letter from Bollenbach to ITT Corporation Board of
Directors, dated August 6, 1997
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
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
) CV-S-97-00893-PMP (RLH)
-vs- )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Defendants. ) DECLARATION OF
) DANIEL FISCHEL
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Counterclaimants, )
)
-vs- )
)
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
Counterclaim Defendants. )
)
DECLARATION OF DANIEL FISCHEL
DANIEL FISCHEL declares as follows:
1. I am the Lee and Brena Freeman Professor of Law
and Business at the University of Chicago Law School, and Ex-
ecutive Vice President of Lexecon Inc., a consulting firm that
specializes in the application of economics to a variety of
legal and regulatory issues. I have also served as Director of
the Law and Economics Program at The University of Chicago Law
School and as Professor of Law and Business at The University
of Chicago Graduate School of Business.
2. Much of my research, teaching and consulting has
focused on corporations, mergers and acquisitions, and the
regulation of financial markets. I have published
approximately 45 articles in leading legal and economics jour-
nals, including numerous articles relating to corporate control
contests, and am co-author, with Judge Frank Easterbrook of the
Seventh Circuit Court of Appeals, of the book The Economic
Structure of Corporate Law (Harvard University Press). Courts
of all levels, including the Supreme Court of the United
States, have cited my articles as authoritative. See, e.g.,
Central Bank v. First Interstate Bank, 114 S.Ct. 1439 (1994);
Basic Inc. v. Levinson, 485 U.S. 224, 246 n.24 (1988); and
Edgar v. MITE Corp., 457 U.S. 624, 643 (1982).
3. I am a member of the American Finance Associa-
tion and the American Economics Association. I am also a mem-
ber of the Board of Directors of the Center for the Study of
the Economy and the State at The University of Chicago, and a
former chairman of the American Association of Law Schools'
Section on Law and Economics. I have testified as an expert
witness in a number of federal and state court proceedings,
often in cases involving contests for corporate control.
4. I respectfully submit this affidavit in support
of the motion of Hilton Hotels Corporation and HLT Corporation
for injunctive and declaratory relief and in opposition to the
request of ITT Corporation for declaratory relief. This af-
fidavit primarily addresses the "staggered board" aspects of
what ITT has termed its "Comprehensive Plan,"<PAGE>
and Professor Jonathan R. Macey's July 15, 1997 memorandum to
the ITT board seeking to justify that aspect of its plan. My
conclusion is that the ITT directors' decision to adopt a
staggered board for "new" ITT without a shareholder vote -- and
thereby effectively extend their terms in office -- offends
bedrock principles of shareholder democracy.
5. ITT, and Professor Macey, defend the institution
of a staggered board by arguing, in essence, that staggered
boards are a good idea. Specifically, they argue that such
boards are common; that they they provide benefits such as
"continuity" and "stability" in board membership; and that they
do not unduly hinder takeover attempts. Even assuming for the
sake of argument that staggered boards can be a good idea for
shareholders -- a highly controversial assumption with which I
am, frankly, inclined to disagree -- what ITT and Prof. Macey
ignore is that the decision whether to adopt such a board is a
decision for shareholders, not the board itself.
6. For this reason, ITT's reliance on the fact that
many American companies have staggered boards is highly
misleading. While it is true that many companies have stag-
gered boards, it clearly is not true that the experience of
those companies provides any precedent for what the ITT board
is attempting to do here. Staggered boards are typically put
in through a shareholder vote, not by vote of the very direc-
tors whose terms in office are thereby extended. Thus, far
from being the unremarkable event ITT seeks to portray, the ITT
board's effort to make this fundamental change without share-
holder approval is, to say the least, highly unusual -- as is
its effort to evade the usual protections against such a
reallocation of shareholders' rights to the directors by
spinning the bulk of the company into a "new" corporate shell
whose charter just happens to provide for a staggered board.
And the directors' decision to do all of this precisely when
faced with an impending proxy fight to replace them only adds
to the novelty.
7. To be sure, ITT can undoubtedly cite examples of
spin-offs in which the new company is created with a staggered
board without any shareholder vote. These examples are of no
relevance to the transaction at issue here. Such spun-off
entities typically comprise only a relatively small part of the
original company, and they are typically
-2-<PAGE>
created as free-standing entities with a new board and separate
management. In the present case, in which "new" ITT will have
the same management and board as, and include almost all of the
significant assets of, current ITT, "new" ITT and current ITT
are essentially the same thing. In such circumstances, the
board's decision to create "new" ITT with a staggered board is
indistinguishable from a decision to change current ITT into a
staggered-board company.
8. In addressing such a change from an annually-
elected to a staggered board, it is important to note that
there is good reason for the usual prerequisite of holding a
shareholder vote. The adoption of a staggered board goes to
the heart of the principal-agent relationship between
shareholders and directors that defines the American system of
corporate governance. In that system, directors are delegated
a great deal of authority by shareholders, but that authority
is always subject to the shareholders' right to determine the
ultimate direction of the company by determining the
composition of the board. Indeed, a principal rationale for
the discretion granted to directors as agents is that
shareholders can always reverse their agents' decisions by vot-
ing them out of office. This right is shareholders' primary --
and often their sole -- protection against the possibility that
the corporation's directors and officers may elevate their own
interests over those of their principals, the shareholders.
9. The adoption of a staggered board necessarily
weakens shareholders' control over their agents, because a
staggered board leaves them powerless to replace a majority of
the board until the passage of at least two election cycles.
Indeed, if a board can choose to perpetuate itself in office in
this fashion, there is no apparent reason why the board would
be limited to doing so only once. In theory, the board could
avoid shareholder votes -- and thereby extend its control of
the company -- indefinitely, by repeatedly spinning off the
company's principal assets into a "new" company with, as here,
the same management and board.
10. That is not to say, of course, that shareholders
may not choose to accept restrictions on their control over the
board, either by voting to adopt a staggered
-3-<PAGE>
board or by choosing to purchase shares in a company whose
charter already provides for one. But there can be no doubt
that a shift from an annually elected board to a staggered one
necessarily shifts power from the company's shareholder-owners
to their agents, the directors. In our system of corporate
governance, such a fundamental shift requires the consent of
the shareholders, who are ceding power; it cannot be made
unilaterally by directors adding to their own power.
11. ITT's current plan dramatically illustrates this
dynamic. The current shareholders of ITT chose to purchase the
stock of a company in which shareholders had a relatively high
degree of control over the corporation by virtue of their right
to elect an entirely new board of directors each year. In
practical terms, that meant, among other things, that the ITT
board could not pursue a course contrary to the wishes of the
shareholders, such as resisting an attractive tender offer, for
more than a single election cycle. In the context of Hilton's
tender offer, shareholders retained the power to determine the
course of their corporation no later than November 1997, when
-- if displeased by the current board's course -- they could
replace the current board with a new one. The board's unilat-
eral decision to eliminate this shareholder control by adopting
a staggered board -- effectively extending the terms in office
of two-thirds of the directors and eliminating the
shareholders' right to control their company now -- is nothing
less than an attempt by agents to free themselves of oversight
and reallocate a significant part of their principals' power to
themselves.
12. In short, Professor Macey's generalized defense
of the virtues of staggered boards simply fails to address the
critical question here, which is not whether staggered boards
are a good idea. The question, rather -- which Prof. Macey's
memo does not address -- is whether an annually elected board
can unilaterally turn itself into a staggered board; and the
answer is that such board self-aggrandizement cannot be squared
with any coherent theory of corporate governance or shareholder
democracy.
13. The board's unilateral adoption of the
Comprehensive Plan also interferes with shareholder choice in
another critical way, by making Hilton's tender offer im-
possible to consummate. In March, the ITT board justified its
delay of the annual meeting
-4-<PAGE>
until November primarily on the ground that such delay was
necessary in order to give shareholders sufficient time to make
an educated choice between Hilton's and ITT's competing
approaches. ITT's expert at the time, Prof. Coffee, echoed
this justification, arguing that ITT's delay would serve "the
stockholders' real interest," which "lies in an effective
ability to use [their] voting power to elect directors" and "an
effective ability to exercise their rights." He stressed that
the directors would have to stand for re-election no later than
November 1997, and that "[w]ithin these time frames, little
abuse seems possible."
14. The ITT board's Comprehensive Plan cannot be
justified in the same way. First, given that Hilton's tender
offer was announced in January, the delay of up to 18 months
beyond November created by the staggered board provision cannot
reasonably be said to relate to any need to "educate" ITT
shareholders. Indeed, in their affidavits in March, ITT's
investment banker, its proxy solicitor and its expert all
indicated that a delay until the Fall of 1997 would be
sufficient time to permit an informed vote by shareholders. At
this late date, the principal effect of delay is to entrench
the ITT board and management. It is well known in the merger
and acquisition field that delay is the incumbents' "best
friend," because delay (particularly a lengthy delay of the
sort at issue here) increases the possibility that no trans-
action will ever occur. This can happen as a result of, among
other things, changes in the economic condition of the two com-
panies, the industry, or the economy as a whole. For example,
following the 1987 stock market crash, several previously an-
nounced transactions fell through. It is common knowledge that
when the potential for a takeover disappears, the stock price
of the target typically drops substantially. Delay thus
generally serves the interests of the incumbent management and
board, at the cost of imposing on shareholders the risk of a
substantial drop in the price of their stock.
15. Second, regardless of when shareholders
ultimately get to vote, the Comprehensive Plan would likely
make that vote essentially meaningless by entirely eliminating
their opportunity to choose between Hilton's bid and ITT's
plan. I am informed that the Comprehensive Plan has been
structured such that Hilton cannot acquire "new" ITT (the
hotels and gaming entity) without running a substantial risk of
triggering a $1.26 billion tax
-5-<PAGE>
liability; and I am also informed that Hilton could not proceed
with its bid in the face of such a massive potential liability.
In such circumstances, the ITT board's decision to proceed with
the Comprehensive Plan interferes with what Prof. Coffee termed
the shareholders' "effective ability to exercise their rights"
by precluding them from ever voting to accept Hilton's offer.
16. In sum, even if one accepts that the ITT
directors adopted their Comprehensive Plan in good faith, there
is no escaping that the Plan has the effect of entrenching the
current board and management; that the board has unilaterally
determined that ITT shareholders would be best served if they
had less power to remove directors; that the Plan impedes the
shareholders' current right to exercise control over their
agents and their corporation; and that the Plan effectively
deprives shareholders of any opportunity to vote on Hilton's
premium offer. Unless our traditional system of corporate
governance is to be replaced by one in which ultimate authority
rests with a corporation's directors and not with its
shareholder-owners, these are decisions that directors cannot
legitimately arrogate to themselves.
I declare under penalty of perjury under the laws of
the United States of America that the foregoing is correct.
Executed on August 22, 1997.
/s/ Daniel Fischel
Daniel Fischel
-6-<PAGE>
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
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
) CV-S-97-00893-PMP (RLH)
-vs- )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Defendants. ) DECLARATION OF
) KENNETH MOELIS
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Counterclaimants, )
)
-vs- )
)
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
Counterclaim Defendants. )
)
KENNETH MOELIS declares as follows:
1. I am a Managing Director of Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ"). DLJ is an
investment banking firm that provides a full range of
financial advisory and other investment banking service to
its clients. I respectfully submit this affidavit in support
of the motion of Hilton Hotels Corporation and HLT Corpora-
tion (collectively, "Hilton") for injunctive and declaratory
relief.
2. DLJ is acting as the financial advisor to
Hilton in connection with its attempted acquisition of ITT
Corporation. I am the head of DLJ's Corporate Finance
Department and am the DLJ Managing Director in charge of the
Hilton representation. DLJ is one of the preeminent
investment banking firms in the gaming industry. In the last
five years, our firm has been involved in the issuance of
approximately $12.5 billion of debt and equity securities by
companies involved in the gaming industry. During my career,
I have been personally involved in the issuance of over $15
billion in debt and equity securities by companies involved
in the gaming industry. I have more than 16 years'
experience advising companies in the field of mergers and
acquisitions and, in the course of that experience, have
analyzed hundreds of pro forma financial statements.
ITT's Comprehensive Plan
3. On July 16, 1997, ITT announced its so-called
"Comprehensive Plan." I have reviewed the elements of that
plan as they are described in, among other things, an
Information Statement dated July 17, 1997 and amendments to
ITT's Schedule 14D-9, all filed with the Securities and
Exchange Commission. Under the Comprehensive Plan, ITT
proposes, among other things, to (a) conduct (and is
currently conducting) a cash tender offer for 30 million of
its own shares (approximately 25.7% of the outstanding
shares) at $70 cash per share and a cash tender offer for the
$2 billion in outstanding public ITT debt; (b) dividend to
its shareholders the shares of a new Nevada subsidiary into
which ITT has placed its core hotel and gaming business; and
(c) distribute its 83.3% interest in ITT Educational
Services, Inc. to its shareholders.<PAGE>
4. As a result of these steps, the "ITT
Corporation" that today focuses on hotels and gaming will be
transformed into a company whose only business will be its
European telephone directories publishing business. This
telephone directory company will be renamed "ITT Information
Services, Inc." That entity will be effectively controlled
by Clayton, Dubilier & Rice ("CD&R") which, according to
ITT's Schedule 14D-9 Amendment 20, has agreed to acquire
32.9% of the company's common stock and warrants to purchase
shares representing an additional 13.7%, resulting in a total
equity interest of 46.6% of the company. In my experience,
the holder of a block of that size effectively controls a
widely-held corporation. CD&R's effective control is further
demonstrated by the terms of its agreement with ITT under
which CD&R will have the right to nominate five of the eleven
members of the board and the power to veto major corporate
transactions, including mergers or other business
combinations.
5. The equity market capitalization of the
present ITT Corporation will be dramatically reduced by
virtue of the Plan. ITT today has an equity market
capitalization (at the current trading price on the New York
Stock Exchange of $63-5/16) of some $7.4 billion. Following
implementation of the Plan, that same corporation would have
a total estimated equity market capitalization of
approximately $400 million, without giving effect to the
potential CD&R investment, and approximately $600 million,
giving effect to the CD&R investment. Thus, the total equity
market capitalization of present ITT will have shrunk by 95%
(or 92% if one includes the CD&R investment).
6. By contrast, the "new" Nevada corporation that
would hold ITT's hotel and gaming business upon consummation
of the Plan will, in significant respects, be identical to
the current ITT: it will have the same core assets and
business, the same senior management, the same directors, and
even the same name (it will be named "ITT Corporation"). Yet
it is this corporation that is being spun-off. (Notably, for
financial reporting purposes, ITT is accounting for the
transaction as if it were a spin-off of the telephone
directories business with the hotel and gaming business being
retained.) The
-2-<PAGE>
upside-down structure of the ITT Plan is further illustrated
by the fact that the vast majority of ITT's assets and
revenues will follow the "new" hotel and gaming corporation,
which is being spun off. Based upon financial statements
contained in ITT's Schedule 13E-4 Issuer Tender Offer
Statement, as of December 31, 1996 the three entities into
which ITT is being divided had combined assets of $9.51
billion and revenues of $6.6 billion. The hotel and gaming
company had $8.87 billion or 93% of those assets and $5.72
billion or 87% of those revenues. By contrast, the telephone
directory company had only $510 million, or 5%, of ITT's
assets and $647 million, or 10%, of the revenues.
7. A review of the Schedule 13E-4 also shows
that, as at December 31, 1996, the combined stockholders
equity (book value) of the three companies was $3.07 billion.
The hotel and gaming company had stockholders equity of $3.8
billion. The telephone directories company had negative
stockholders equity of $808 million. The hotel and gaming
company represented 124% of the combined stockholders equity
of the three companies.
8. The foregoing leads me to conclude that ITT
has adopted an unusual structure for the spin-off
transactions. ITT is spinning off an entity representing --
and which will continue to represent -- the vast bulk of
ITT's business, equity and assets, as well as most of its
revenues. It is retaining only a non-"core" business,
dramatically shrinking the present corporation (which will
have negative stockholders equity), and selling effective
control of it to CD&R. As explained below, in my view and
based upon my experience, it is the anti-takeover elements of
the Plan that are driving this structure.
Hilton's $70 Offer
9. On August 6, Hilton increased its offer price
to $70 per ITT share. This represents a 64% premium to the
last reported sales price of ITT shares before Hilton made
its original, $55 per share bid. The Hilton offer consists
of a cash tender offer for 50.1% of the ITT shares at $70 per
share to be followed by a second-step stock
-3-<PAGE>
merger in which ITT shareholders would receive $70 per share
of common stock in the merged company.
10. The $70 per share Hilton offer is economically
superior to ITT's Plan. This is demonstrated by, among other
things, the market's valuation of the Plan. Immediately
before Hilton announced its increased tender offer price, ITT
shares were trading on the NYSE at $62-15/16 per share. This
price was primarily attributable to two factors: (a) the
value that the market assigned to the Comprehensive Plan and
(b) anticipation that Hilton might raise its bid. If, for
the sake of analysis, one were to ignore the latter factor
(thus, assigning the highest possible market valuation to the
Comprehensive Plan), the $70 being offered by Hilton would
still be higher than the market valuation of the
Comprehensive Plan by $7.06 per share ($70 minus $62-15/16)
or some $860 million in the aggregate (on a fully diluted
basis). Hilton's offer is also superior because it offers
more cash -- $70 per share for 50.1% versus 25.7% of the
shares. And the value of Hilton's back end is more certain.
Hilton has made clear that it will include a "collar"
provision in any merger agreement that will provide more
certainty that ITT stockholders will receive Hilton shares
with a $70 per share value. The trading price of the equity
of ITT's parts after the split-up is uncertain.
The Anti-Takeover Aspects of the Plan
11. As noted, ITT has structured its Plan to
include a spin-off of the hotel and gaming business as
opposed to a spin-off of the directories business. In the
SEC Schedule 14D-9 amendment describing the reasons for this
structure, ITT claims that this structure is justified for
certain tax reasons (as to which the Court is referred to the
affidavit of Professor Bernard Wolfman) and because this
structure "may also encourage bondholders to participate in
the debt tender offer . . . because holders who fail to do so
will retain obligations of the stub company, which will be
relatively more highly leveraged than the [hotel and gaming
company]." I find this justification to be circular: ITT
can hardly contend that the Plan structure is justified
because it enhances the debt
-4-<PAGE>
tender offer, when that debt tender is itself the result of
that structure. As the offer to purchase for the debt tender
itself reflects, ITT is pursuing the debt tender offer be-
cause the directories business -- as the sole remaining
business in the current ITT Corporation -- will not have
enough earnings to support the $2 billion debt.
In this connection, had ITT structured the transaction as a
spin-off of the directories company and not the hotel and
gaming company -- and thus avoided the need for the debt
tender offer -- ITT would have saved amounts attributable to
the debt tender, including fees and expenses.
12. The corporate governance mechanisms that ITT
proposes to include in the charter of the "new" hotel and
gaming company indicate that the structure of the
Comprehensive Plan was chosen so that incumbent ITT directors
could avoid the threat of the shareholders voting the entire
board out of office, in favor of Hilton's slate, at ITT's
next annual meeting. Today, all of ITT's directors are up
for election every year. The charter of the "new" ITT (the
hotel and gaming company) will include a staggered board
provision; only one-third of the directors will be up for
election each year. If this change is implemented, Hilton
would have to conduct two proxy contests up to 18 months
apart in order to elect a board majority willing to consider
its acquisition proposal.
13. The inclusion of the staggered board provision
in the charter of the "new" ITT would have a significant
deterrent effect on Hilton. Hilton initiated its tender
offer/proxy context seven months ago. ITT says that it
expects that the annual meeting of the "new" hotel and gaming
company will be held in November 1997. Assuming that it does
take place at that time, Hilton could be forced to wait an
additional 18 months until the "new" company holds its second
meeting. Hilton thus will be forced to go through a campaign
of almost 28 months to acquire control of the company.
14. A delay of this duration, in my experience,
dramatically increases the risk that no transaction will ever
occur. Tender offerors typically condition their offers on
the non-occurrence of any material adverse change in the
business of the target company or in the securities markets
generally. Hilton's tender offer for ITT stock
-5-<PAGE>
contains such conditions. The longer that a target company
can delay consummation, the greater the risk that some change
in the target company or its business will occur or that
market conditions or other circumstances will cause the
offeror to terminate its offer. (ITT obviously recognizes
this fact, having refused to permit shareholders to consider
Hilton's offer for seven months and having sought to impose
regulatory hurdles to the bid in Nevada, New Jersey,
Mississippi and before the Federal Communications Com-
mission.)
15. The structure of the Plan provides ITT and its
management with additional anti-takeover protections as well.
Professor Wolfman's affidavit describes the fact that this
structure creates a $1.4 billion tax risk if Hilton were to
proceed to acquire the hotel and gaming company after the
spin-off. 90% of that risk would be borne by Hilton (as the
new owner of that company). Further, the Plan creates
tremendous leverage for the hotel and gaming company. As of
June 30, 1997, according to its most current Form 10-Q, ITT
had total debt of $3 billion. On a pro forma basis,
according to the Information Statement, following
consummation of the Plan, the "new" hotel and gaming company
alone will be responsible for debt of approximately $4.2
billion. This increase in leverage will transform ITT from
an investment grade to a junk credit. ITT acknowledges in
its SEC filings that the increased leverage could impair its
ability to operate its hotel and gaming business com-
petitively.
16. In my opinion, the combination of these
various anti-takeover elements of the Comprehensive Plan
renders the Plan preclusive to Hilton's bid.
ITT's Projections are Unrealistic
17. At a July 16, 1997 presentation to stock
analysts on the Comprehensive Plan, ITT made oral and written
forecasts concerning its hotel and gaming business and the
company that would own that business. (The transcript of
the oral statements by ITT and the written projections are
annexed to the affidavit of Bernard W. Nussbaum as Exhibits V
and W, respectively.) In these projections, ITT forecast a
$170 million, or 63% increase in earnings before interest,
taxes, depreciation and amortization
-6-<PAGE>
("EBITDA") in its gaming business in 1998. These increases
are forecast largely on the basis of three projects that ITT
has underway: expansions at Caesars in Atlantic City and Las
Vegas and the opening of a casino riverboat in Harrison
County, Indiana. ITT's EBITDA projections are important
because, assuming the Plan is consummated, the hotel and
gaming company will be highly leveraged and its future vi-
ability -- particularly in light of its huge debt -- will
depend on its ability to generate very significant earnings.
18. In my opinion, ITT's projections are
aggressive and unrealistic. The Las Vegas and Atlantic City
markets have become intensely competitive. That competition
is increasing; competitors of ITT are expanding facilities or
opening mammoth new ones (such as the 3005-room, $1.4 billion
Bellagio scheduled to open in the third quarter of 1998, the
approximately $800 million Project Paradise scheduled for
late 1998 or early 1999, and Hilton's $760 million,
3,200-room Paris casino scheduled for 1999). Recent
experience shows that, in this highly competitive
environment, expansions such as ITT's do not result in the
significant increase in EBITDA that ITT projects; indeed,
over the past eighteen months, several major casino-hotel
companies have had such expansions on the Las Vegas Strip and
the Atlantic City boardwalk and have not had increases in
EBITDA such as projected by ITT. Mr. Araskog of ITT himself
was quoted in the August 4, 1997 Wall Street Journal (Exhibit
A hereto) as stating that, in light of all the new
construction, "[t]he situation in Las Vegas is not as
attractive as it has been." ITT's projections suffer from a
number of particular fallacies, including:
(a) ITT told the analysts that at Caesars Palace
in Las Vegas, it expects EBITDA to increase
from $115 million in 1997 to $180 million in
1998 -- a 56.5 percent increase. Most of the
projected improvement ($50 million of the $65
million) was attributed to an increase in the
number of overnight guests by virtue of the
new tower being constructed at the Caesars
Palace property. This is predicated on the
assumption that Caesars' operating margins
will improve over current levels. That
assumption is unreasonable.
-7-<PAGE>
Indeed, with three new significant competitors
either operating or about to begin operations
(as well as the prospect of other expansions
in Las Vegas), marketing and other costs will
increase and operating margins will
undoubtedly decline;
(b) ITT projects that at Caesars Atlantic City,
EBITDA would increase from $118 million in
1997 to $165 million in 1998 -- a 39.8 percent
leap -- because of an ongoing expansion
project at the property. This, too, is
unrealistic. Among other things, the Atlantic
City construction project will not be
completed until mid-1998, thus undercutting
the notion that an additional $47 million in
EBITDA will be realized that year. Further,
the Atlantic City boardwalk is highly
competitive and "promotional;" recent expan-
sions by two major competitors of ITT have not
added substantial amounts to EBITDA;
(c) ITT also told the analysts that a new
riverboat casino in Harrison County, Indiana
would generate $70 million in 1998 EBITDA (of
which ITT's ownership share would be some $50
million). This projection is unrealistic;
indeed, only a handful of the riverboat
casinos in the United States generate annual
EBITDA of $70 million. In this instance, the
timetable for the opening of the casino (for
which a permit had not as yet been obtained
when the projections were announced) and of
related facilities (e.g., parking, docking,
restaurant and hotel facilities projected to
be phased in at
-8-<PAGE>
various times throughout 1998) makes it
extremely unlikely that ITT can achieve this
level of EBITDA during 1998.
I declare under penalty of perjury that the
foregoing is true and correct. Executed on August 23, 1997.
/s/ Kenneth Moelis
Kenneth Moelis
-9-<PAGE>
EXHIBIT OMITTED
EXHIBIT A The Wall Street Journal, "Davis to Buy 50% of
ITT's Desert Inn, Providing Him With Stock in Las
Vegas," dated August 4, 1997
-10-<PAGE>
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
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
) CV-S-97-00893-PMP (RLH)
-vs- )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Defendants. ) AFFIDAVIT OF
) DANIEL H. BURCH
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Counterclaimants, )
)
-vs- )
)
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
Counterclaim Defendants. )
)<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
DANIEL BURCH, being duly sworn, deposes and says:
1. I am President and founder of MacKenzie Partners
Inc., the proxy soliciting firm that has been retained by Hilton
Hotels Corporation and HLT Corporation ("Hilton") to assist them
in connection with their effort to acquire ITT Corporation
("ITT"). I have been involved in various aspects of the proxy
solicitation business for more than 20 years. Over those years,
I have solicited proxies on behalf of incumbent management and
insurgent slates in more than 200 contested proxy contests.
2. Hilton announced its $55 per share tender offer for
ITT on January 27, 1997. At the same time, Hilton announced that
it would couple that offer with a proxy fight to replace the
incumbent ITT directors with a slate committed to facilitating a
sale of ITT to Hilton or a higher bidder. To that end, on
February 11, Hilton gave ITT notice that it would nominate a
slate of candidates to replace the entire board of directors of
ITT. This strategy is typically employed where, as here, the
target company's board of directors has a "poison pill" and other
anti-takeover defenses in place. Replacing the incumbent
directors through a proxy fight is an efficient way to eliminate
the target company's ability to use these anti-takeover defenses
and to provide the shareholders with a choice. ITT is suscep-
tible to such a proxy contest in part because it does not have a
staggered board. The entire board is up for election at the 1997
annual meeting.
3. The failure of ITT to include a staggered board does
not appear to be the result of oversight. ITT's current charter
and by-laws were adopted in 1995 as part of a split-up of the old
ITT into three separate companies. As part of that charter and
by-laws, ITT put in place a number of other anti-takeover
devices. The failure to include a staggered board thus
apparently reflects a decision that the owners of the
corporation, ITT shareholders, will have the right every year to
decide who they want as directors to run their company.
-2-<PAGE>
4. On July 16, ITT announced that its board had adopted
a "comprehensive plan" to split up the company. As part of that
plan, ITT will spin off its core hotel and gaming businesses into
an ostensibly new company that will have a staggered board. ITT
claims that it can accomplish this without a shareholder vote.
Before ITT adopted this plan, Hilton had made clear in its public
statements that it would increase its tender offer price when
ITT's annual meeting grew near. E.g., Exhibit A hereto. My
experience, as well as common sense, indicates that ITT included
a staggered board provision in the charter of the "new" hotel and
gaming company to assure that the entire ITT board would not be
subjected to the threat of being voted out of office at the
company's upcoming annual meeting.
5. As expected, Hilton increased its tender offer price
August 6. The new offer is at $70 per share. This represents a
substantial premium to both ITT's stock price both before Hilton
made its offer and after ITT announced its "comprehensive plan."
After the increased offer was announced, ITT shareholders wrote
to the ITT board to urge it to put its plan to a shareholder vote
or negotiate with Hilton. Exhibit B hereto. Hilton received
written expressions of support from ITT shareholders as well.
Exhibit C hereto. The ITT board was unmoved, however, and
rejected Hilton's increased offer. Just prior to taking this
act, an ITT source was quoted that the "pressure from some
investors is 'absolutely meaningless.'" Exhibit D hereto.
6. In light of the premium represented by Hilton's $70
offer, it is my firm opinion that if ITT proceeded to its annual
meeting before its plan is consummated, ITT shareholders would
either vote the incumbent directors out of office or threaten to
do so in order to induce the directors to negotiate with Hilton
or another bidder to maximize the value of their shares. It is
also my firm opinion that so long as Hilton is pursuing its $70
offer and with the annual meeting to be held by November 14,
1997, ITT's "comprehensive plan" would be voted down by ITT
shareholders if it were put to a vote.
7. ITT's claim that staggered boards are common glosses
over the fact that ITT's strategy here is decidedly uncommon.
Indeed, it is unprecedented in my experience.
-3-<PAGE>
I am not aware of a single instance in which a target company
without a staggered board put its core businesses representing
substantially all of the market value of the company into an
ostensibly "new" company with a staggered board and "dividended"
the stock of that "new" company to its shareholders, all without
seeking a shareholder vote. Taken to its logical extreme, the
board of a target company could avoid a shareholder vote in
perpetuity by dividending out substantially all of the market
value of the company every year.
8. As of the date that I am executing this affidavit, I
am unaware of ITT having taken any steps to go forward with its
annual meeting by November 14. Specifically, there has not been
any publication in the NYSE Bulletin of a meeting, and no broker
inquiries have been sent out in accordance with the requirement
of SEC Rule 14a-13(a)(3).
/s/ Daniel H. Burch
Daniel H. Burch
Sworn to before me this
22nd day of August, 1997
/s/ Sylvia Panarites
Notary Public
-4-<PAGE>
EXHIBITS OMITTED
EXHIBIT A Las Vegas Review Journal, "Hilton Presses ITT Bid,"
by John Gorham, dated March 22, 1977
EXHIBIT B Letter from Tierney to Araskog, dated August 7,
1997
Letter from Wyser-Pratte to Araskog, dated August
8, 1997
Letter from Jacobson to Araskog, dated August 8,
1997
Letter from Rogers to Bowman, dated August 12, 1997
EXHIBIT C Statement of ITT Stockholder, Bonnie L. Smith,
dated August 7, 1997
Statement of ITT Stockholder, Guy P. Wyser-Pratte,
dated August 8, 1997
Statement of ITT Stockholder, Robert Deutsch, dated
August 11, 1997
Statement of ITT Stockholder, Robert H. Lyon, dated
August 11, 1997
Statement of ITT Stockholder, Furman Selz Controls,
dated August 11, 1997
EXHIBIT D New York Post, "ITT Shareholders Itching For Vote,"
by Jon Elsen, dated August 13, 1997
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
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
) CV-S-97-00893-PMP (RLH)
-vs- )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Defendants. )
)
HILTON HOTELS CORPORATION and )AFFIDAVIT OF BERNARD WOLFMAN
HLT CORPORATION, )
)
Counterclaimants, )
)
-vs- )
)
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
Counterclaim Defendants. )
)
COMMONWEALTH OF MASSACHUSETTS )
: ss:
COUNTY OF MIDDLESEX )
BERNARD WOLFMAN, being duly sworn, deposes and
says:
1. I am the Fessenden Professor of Law at Harvard
Law School. My principal teaching and scholarly interests
are in the field of federal income taxation. Before
joining the Harvard faculty, I was Dean of the University
of Pennsylvania Law School and Gemmill Professor of Tax
Law and Tax Policy at that school. I have served as a
consultant on tax policy to the U.S. Treasury Department,
as a member of the Council of the A.B.A. Section of
Taxation, and am a Fellow of the American
College of Tax Counsel and its Regent for the First
Circuit. A copy of my Curriculum Vitae is annexed hereto
as Exhibit A.
2. This affidavit is submitted with regard to
issues underlying the motion of Hilton Hotels Corporation and
HLT Corporation (collectively, "Hilton") for injunctive
relief against ITT Corporation's so-called "Comprehensive
Plan."
This affidavit will discuss certain federal income tax
ramifications
of the Plan. In this connection, I have reviewed, among
other
things, the following ITT public filings describing the Plan:
an Information Statement filed with the SEC on or about
July 17, 1997 (the "Information Statement") and a
Schedule 14D-
9 amendment filed on or about July 16, 1997 (the "14D-9").
3. As described in the Information Statement and
14D-9, the Comprehensive Plan consists of a number of
elements
including:<PAGE>
(a) the incorporation of a new entity ("Destina-
tions") to hold the hotel/casino business;
(b) the distribution to shareholders of ITT of the
common stock of Destinations and a corporation
engaged in the technical education business
("ITT Educational");
(c) after these distributions, the issuance by ITT
(owning principally a telephone
directories bus-
iness, "Directories") of newly-issued stock,
representing approximately 32.9% of the out-
standing stock of Directories, plus
certain war-
rants to purchase additional shares to
Clayton,
Dubilier & Rice, Inc. ("CD&R"), an investment
organization;
(d) a tender offer by ITT for over 25% of its out-
standing shares, to be consummated prior
to the
distributions described above; and
(e) accompanying refinancings.
1. As ITT's own disclosure documents acknowledge,
the Comprehensive Plan raises federal income tax issues under
the Internal Revenue Code of 1986, as amended (the "Code"),
including amendments recently enacted in the Taxpayer Relief
Act of 1997 (H.R. 2014) (the "1997 Act"). These issues in-
clude:
(i) the qualification of the distribution of the
common stock of Destinations as a tax-free
transaction under Section 355 of the Code; and
-2-<PAGE>
(ii) the tax consequences for ITT and its
sharehold-
ers of a possible tender offer by Hilton for
Destinations following the distribution.
5. Having examined those issues, I conclude that
ITT has created serious tax risk for itself and its
sharehold-
ers by proceeding with the distribution without seeking an
ad-
vance tax ruling from the I.R.S. that the distribution quali-
fies as a tax-free spin-off under Section 355 of the
Code. The
tax risks have been increased substantially by the structure
for the Plan adopted by ITT and its Board. Alternative
struc-
tures -- which would have substantially mitigated tax
risks --
could have been adopted by ITT. Further, I conclude that, by
virtue of the manner in which ITT has structured the
Comprehen-
sive Plan, Hilton's acquisition of Destinations (after its
dis-
tribution) would likely generate a corporate tax liability of
approximately $1.4 billion without a corresponding step-up in
asset or share basis, and possible material shareholder taxes
as well.
A. The Risk of Taxation and the
Absence of an I.R.S. Ruling
6. In order for a distribution which is part of
the
Comprehensive Plan to qualify as tax-free to ITT and its
share-
holders, it must qualify as a spin-off under Section 355 of
the
Code. That section includes a number of complex tests
designed
to restrict its benefits to a narrow class of restructurings.
A number of these tests are highly subjective, e.g., that the
transaction be motivated by a corporate business purpose and
that it not represent a "device" for ITT to distribute its
-3-<PAGE>
earnings and profits to its shareholders on a tax-free
or capi-
tal gains basis. A distribution must also avoid the
provisions
of Section 355(d) of the Code and newly-enacted Section
355(e),
which impose tax on the distributing corporation (without a
corresponding step-up in basis) in an otherwise tax-free
spin-off.
7. Absent an I.R.S. ruling, qualification of the
distribution of Destinations stock pursuant to the Comprehen-
sive Plan is open to question. An I.R.S. attack could be
launched, based on one or more of the technical and
subjective
standards under Section 355. For example, the I.R.S. might
argue that ITT's self-tender, coupled with its new debt
incur-
rence (with the debt being allocated disproportionately among
the business units), and the sale of its shares to CD&R,
amounted to a "device" to distribute earnings and profits
with-
out a dividend tax. It is because of such risks, and the at-
tendant grave consequences for the corporation and its share-
holders, that rulings are sought and obtained prior to
consum-
mating spin-off transactions.
8. Section 355 remains essentially the only tech-
nique for removing assets from a corporation without tax.
Ac-
cordingly, the use of this provision has come under increased
scrutiny in recent years. As a result, it is a virtually
uni-
versal practice to obtain an advance I.R.S. ruling before un-
dertaking a spin-off in which substantial corporation and
pub-
lic shareholder tax costs would be incurred in the event of a
disqualification. (The relatively few exceptions generally
in-
volve closely held corporations or, in the case of publicly
-4-<PAGE>
held corporations, a special class of transactions, so-called
"Morris Trust" transactions, which are accorded special
status,
particularly as to "business purpose," under the pertinent
Treasury Regulations.)
9. ITT is taking the most unusual step of
proceed-
ing with its distributions without an I.R.S. ruling. This is
apparently being done by ITT in its haste to complete the
transaction. I would note that ITT itself, in its own 1995
restructuring involving spin-off transactions, did obtain an
advance I.R.S. ruling on the tax-free nature of the transac-
tion. An I.R.S. ruling would normally take at least four
months to obtain.
10. In the event that the distributions in the
Com-
prehensive Plan are ultimately held not to be tax-free, the
result would be quite dramatic and injurious to ITT and its
shareholders. The corporate tax that would be imposed on ITT
and its affiliates would be approximately $1.4 billion. (Ac-
cording to an exhibit to a July 17, 1997 amendment to ITT's
Schedule 14D-9, ITT has agreed to cause Destinations to enter
into a tax allocation agreement pursuant to which
Destinations
would bear 90% (i.e., approximately $1.26 billion) of this
lia-
bility.) Further, according to the Information Statement,
there would be an additional tax on the ITT shareholders of
approximately $1.4 billion. These tremendous tax costs would
not generate any future tax benefit since there would be no
step-up in asset or share basis at the corporate level
despite
the recognition of gain. This $2.8 billion tax risk would be
avoided if ITT were to obtain a favorable advance tax ruling,
-5-<PAGE>
but it has declined to seek one. Also, as described in para-
graph 15 below, the form of transaction selected by ITT (a
distribution of Destinations, its most valuable and most ap-
preciated business) has magnified the adverse corporate and
shareholder tax consequences which would arise from disquali-
fication of the spin-off, as compared with the alternative of
distributing Directories and ITT Educational.
B. Taxation Triggered by a Post-Distribution
Hilton Acquisition of Destinations
11. Should the Comprehensive Plan be consummated,
Hilton would be faced with the prospect of massive corporate
tax liability if it were to acquire Destinations. The ITT
shareholders might also face tax liability if Hilton's
purchase
disqualified the distribution under Section 355 of the Code.
These consequences are the direct result of the manner in
which
ITT has structured its Plan.
12. Pursuant to Section 355(e)(2)(B) of the Code,
part of the 1997 Act, a Hilton acquisition consummated before
the second anniversary of a distribution (such as the distri-
bution of Destinations pursuant to the Plan) would be
presumed
to be part of a "plan" or "series of related transactions"
that
included the distribution. Unless that presumption is
overcome
by proof from the taxpayers, the distribution would be
deemed a
taxable transaction. Hilton would have the difficult
burden of
overcoming this presumption by arguing that its
acquisition was
not part of an earlier "plan" or "series of related transac-
tions" that included the distribution. Since Hilton has al-
ready, prior to the distribution, commenced its acquisition
-6-<PAGE>
attempt, it would be difficult for Hilton or ITT or its
share-
holders to contend that a post-distribution offer was not
part
of a "plan." Moreover, the Act clearly encompasses transac-
tions which are not part of a "plan" but which are part of a
"series of related transactions" including the spin-off. The
I.R.S. would certainly appear to have a strong case that the
hypothesized Hilton acquisition soon after the spin-off was
part of a "plan" or "series of related transactions."
Indeed,
it would be apparent that the distribution by ITT was
effected
in light of, and because of, the presently outstanding tender
offer.
13. Hilton's burden would be particularly
difficult
in light of the history of the 1997 Act. The original Presi-
dential proposal in February 1997, which presaged the Act,
spe-
cifically stated that a "hostile acquisition . . . commencing
after the distribution will be disregarded" in connection
with
determining when the adverse presumption applies; however,
this
"safe harbor" was eliminated from the final Act. Given this
legislative history, the pre-distribution pendency of the
Hil-
ton offer, and Hilton's expressed desire to acquire the Des-
tinations business in particular, there is a likelihood
that a
post-distribution acquisition by Hilton of Destinations would
be deemed part of a "plan" or "series of related
transactions."
14. The result of a finding that the hypothesized
acquisition of Destinations was part of a "plan" or
"series of
related transactions" would be to impose $1.4 billion of
corpo-
rate tax liability. In addition, such an acquisition could
-7-<PAGE>
disqualify the spin-off under the "device" prohibition in
Sec-
tion 355 of Code, resulting in corporate and shareholder tax.
It is noteworthy that in its Information Statement, ITT cites
the opinion of its outside counsel to the effect that "an ac-
quisition of either ITT or the Company [Destinations] by
Hilton
should not adversely affect the tax-free status of the
Destina-
tions Distribution." In light of the presumption created by
the Act and the issues raised under the "device" clause,
it is
hard to understand how such counsel could reach that
conclusion
and how ITT could pass it on to its shareholders.
15. This significant potential liability imposed
upon a Hilton acquisition of Destinations results from the
ITT
Board's decision to distribute Destinations, its largest and
most appreciated asset, rather than retaining
Destinations and
distributing instead its other two, much smaller and less ap-
preciated, businesses. ITT estimates the corporate tax on a
distribution of Destinations at $1.4 billion and the
corporate
tax on a distribution of Directories and ITT Educational at
$500 million. In adopting this structure, ITT increased the
tax risks many-fold. It also greatly increased the size
of the
shareholders' risk in the event the distribution fails to
qual-
ify as a spin-off and instead is treated as a taxable
dividend.
16. Having examined the tax reasons proffered
by ITT
for this upside-down risky structure, I do not believe they
withstand analysis. Mostly notably, ITT states at page 5 in
the 14D-9 that using the structure:
permits ITT ISI to sell up to 49.9% of
the telephone directories publishing
-8-<PAGE>
business to new investors, such as CD&R
[referring to the proposed stock sale to
Clayton, Dubilier & Rice, Inc.], without
jeopardizing the tax-free status of the
Distributions. In contrast, a limit of
20% would apply if that business were
spun off as opposed to serving as the
"stub" company for the Distributions.
This statement refers, rather cryptically and elliptically,
to
the requirement in Section 355 that "control" of a newly cre-
ated spun-off corporation be retained by the shareholders of
the distributing corporation. Under the Code prior to the
1997
Act, this test would require ITT's shareholders to receive at
least 80% of the voting stock (and 80% of each class of non-
voting stock) of the spun-off entity to qualify for tax-free
treatment. ITT implies that this requirement is inconsistent
with the sale of approximately 32.9% of the stock of Directo-
ries to CD&R.
17. However, as ITT undoubtedly knew, a provision
of
the 1997 Act, which was awaiting approval in July when the
Com-
prehensive Plan was adopted, and has since been enacted,
elimi-
nated this technical issue. Under the 1997 Act, ITT's share-
holders need to retain only a 50% interest, with such
test be-
ing applicable equally to both the distributing and
distributed
companies. Thus, under the new rules, ITT could distribute
Directories (and sell up to 50% of its equity to CD&R)
and re-
tain Destinations.
-9-<PAGE>
18. Indeed, even before this change in the law,
there existed several techniques that could have been used to
solve any technical issues in a transaction taking the
form of
a retention of Destinations. For example, ITT could have
dis-
tributed Directories stock to its shareholders, with such
stock
having 80% of the voting power and 67.1% of the economic
inter-
est, allowing CD&R to hold the remaining economic interest
and
voting power. In my opinion, a favorable I.R.S. ruling could
have been obtained for such a transaction.
19. In my view, the Plan has been structured in a
preclusive manner by creating a tax impediment of significant
magnitude to an acquisition of Destinations by Hilton,
and this
impediment could have been avoided by using an alternative
structure for the transaction.
20. Finally, having reviewed the Information
State-
ment, the 14D-9, and other public statements by ITT
concerning
the Comprehensive Plan, I believe ITT has downplayed the
severe
tax risks posed by the proposed transactions; has failed ad-
equately to inform shareholders as to certain pending (now
adopted) changes in the tax law that materially affect the
transaction; has either ignored or disparaged viable alterna-
tive forms of transactions with materially smaller tax risks;
and has understated the tax risks that would result if Hilton
were to proceed with a takeover of Destinations after
consumma-
tion of the Plan. On this last point, in my view, the Plan
-10-<PAGE>
serves as a tax "poison pill" against an acquisition of
Desti-
nations by Hilton.
/s/ Bernard Wolfman
Bernard Wolfman
Sworn to before me this
21st day of August, 1997.
/s/ Marie J. Dualey
Notary Public
-11-<PAGE>
EXHIBIT OMITTED
EXHIBIT A Curriculum Vitae of Bernard Wolfman
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
MEIR FEDER
SCOTT L. BLACK
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
)
-vs- )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Defendants. )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, ) CV-S-97-00893-PMP (RLH)
)
Counterclaimants, )
) AFFIDAVIT OF
-vs- ) BERNARD W. NUSSBAUM
)
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
Counterclaim Defendants. )
)<PAGE>
AFFIDAVIT OF BERNARD W. NUSSBAUM
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
BERNARD W. NUSSBAUM, being first duly sworn, deposes and
says:
1. I am an attorney admitted to practice in the instant
case in the State of Nevada and am a member of the law firm of
Wachtell, Lipton, Rosen & Katz. My law firm represents Hilton
Hotels Corporation and HLT Corporation in the above-captioned
matter. I make this affidavit under penalty of perjury. I
have personal knowledge of the facts and circumstances set
forth in this affidavit and could and would competently testify
thereto in a court of law.
2. Attached hereto as Exhibit A is a true copy of ex-
cerpted pages 17 and 26-28 of the ITT Corporation Notice of
Special Meeting and Proxy Statement, dated August 30, 1995.
3. Attached hereto as Exhibit B is a true copy of a let-
ter from Rand V. Araskog to the ITT Corporation shareholders,
dated March 5, 1996.
4. Attached hereto as Exhibit C is a true copy of the
ITT Corporation Schedule 14D-9, as filed with the Securities
and Exchange Commission on February 12, 1997, excluding the at-
tached exhibits.
5. Attached hereto as Exhibit D is a true copy of a let-
ter from Rand V. Araskog to the ITT Corporation shareholders
dated March 31, 1997, which was included in the ITT
Corporation's 1996 Annual Report to shareholders.
6. Attached hereto as Exhibit E is a true copy of an
article entitled, "Hotelier To Forge Ahead" by David Meyer &
Linda Humphrey, which appeared in the March 17, 1997 issue of
Business Travel News North America.
7. Attached hereto as Exhibit F is a true copy of the
ITT Corporation Schedule 14D-9, Amendment No. 11, as filed with
the Securities and Exchange Commission on May 19, 1997.
-2-<PAGE>
8. Attached hereto as Exhibit G is a true copy of an
article entitled, "ITT Plan May Deal Blow to Hilton Takeover
Bid," by Christina Binkley, which appeared in The Wall Street
Journal on June 3, 1997.
9. Attached hereto as Exhibit H is a true copy of the
management agreement between an affiliate of FelCor Suites
Hotels, Inc. and Sheraton Operating Corporation, as filed by
ITT Corporation with the Securities and Exchange Commission as
an exhibit to Amendment No. 13 to its Schedule 14D-9.
10. Attached hereto as Exhibit I is a true copy of a
press release issued by ITT Corporation dated August 3, 1997,
entitled "ITT and Davis Gaming to Form Joint Venture for Desert
Inn; ITT To Receive $250 Million and Retain 50% Stake," as
filed by ITT Corporation with the Securities and Exchange Com-
mission as an exhibit to Amendment No. 24 to its Schedule
14D-9.
11. Attached hereto as Exhibit J is a true copy of an
article entitled, "ITT Casino Deal Is Less Favorable Than Indi-
cated," by Christina Binkley, which appeared in The Wall Street
Journal on August 5, 1997.
12. Attached hereto as Exhibit K is a true copy of the
agreement in principle between ITT Sheraton Corporation and
Davis Gaming, L.L.C., dated August 1, 1997, as filed by ITT
Corporation with the Securities and Exchange Commission as an
Exhibit to Amendment No. 24 to its Schedule 14D-9.
13. Attached hereto as Exhibit L is a true copy of ITT's
Memorandum In Opposition To Hilton's Motion For A Preliminary
Injunction Requiring ITT To Conduct Its Annual Meeting In May
1997, excluding the affidavits and accompanying exhibits, filed
with this Court on March 13, 1997.
14. Attached hereto as Exhibit M is a true copy of the
Affidavit of William M. Crane and accompanying exhibits, filed
by ITT Corporation with this Court in conjunction with ITT's
Memorandum In Opposition To Hilton's Motion For A Preliminary
Injunction Requiring ITT To Conduct Its Annual Meeting In May
1997.
-3-<PAGE>
15. Attached hereto as Exhibit N is a true copy of the
Affidavit of Cody J. Smith, filed by ITT Corporation with this
Court in conjunction with ITT's Memorandum In Opposition To
Hilton's Motion For A Preliminary Injunction Requiring ITT To
Conduct Its Annual Meeting In May 1997.
16. Attached hereto as Exhibit O is a true copy of the
Affidavit of John C. Coffee, Jr. and accompanying exhibits,
filed by ITT Corporation with this Court in conjunction with
ITT's Memorandum In Opposition To Hilton's Motion For A Pre-
liminary Injunction Requiring ITT To Conduct Its Annual Meeting
In May 1997.
17. Attached hereto as Exhibit P is a true copy of the
ITT Corporation Schedule 14D-9, Amendment No. 20, as filed with
the Securities and Exchange Commission on July 16, 1997.
18. Attached hereto as Exhibit Q is a true copy of the
ITT Destinations, Inc. Form 10, as filed with the Securities
and Exchange Commission on July 17, 1997.
19. Attached hereto as Exhibit R is a true copy of the
investment agreement dated as of July 15, 1997, between ITT
Corporation and CDRV Acquisition, L.L.C., as filed by ITT
Corporation with the Securities and Exchange Commission as an
exhibit to Amendment No. 21 to its Schedule 14D-9.
20. Attached hereto as Exhibit S is a true copy of ITT
Corporation's offer to purchase $2,000,000,000 of its notes and
debentures, dated August 11, 1997.
21. Attached hereto as Exhibit T is a true copy of ITT
Corporation's offer to purchase up to 30,000,000 shares of ITT
common stock at $70 cash per share, as filed by ITT Corporation
with the Securities and Exchange Commission as an exhibit to
the Schedule 13E-4 dated July 17, 1997.
22. Attached hereto as Exhibit U is a true copy of ITT
Corporation's Form 10-Q, as filed with the Securities and Ex-
change Commission on August 14, 1997.
-4-<PAGE>
23. Attached hereto as Exhibit V is a true copy of a
transcript generated by my law firm's support staff of a July
16, 1997 telephonic conference call at which senior managers of
ITT Corporation presented the so-called "Comprehensive Plan" to
the investment community.
24. Attached hereto as Exhibit W is a true copy of
written materials prepared by ITT Corporation entitled, "ITT
Investor Presentation, July 16, 1997."
25. Attached hereto as Exhibit X is a table generated by
Bloomberg, L.P. reflecting the stock prices for ITT Corporation
shares for the period June 23 to August 18, 1997.
26. Attached hereto as Exhibit Y is a true copy of a
supplement to HLT Corporation's offer to purchase shares of ITT
common stock, dated August 7, 1997.
27. Attached hereto as Exhibit Z is a true copy of an
article entitled "ITT Shareholders Itching For Vote," by Jon
Elsen, which appeared in The New York Post on August 13, 1997.
28. Attached hereto as Exhibit AA is a true copy of a
press release entitled "ITT Board Rejects Hilton's Offer As
Inadequate," as issued by ITT Corporation on August 14, 1997.
29. Attached hereto as Exhibit BB is a true copy of ex-
cerpted pages 11 through 19 of the Minutes of the Nevada State
Legislature, Assembly Committee on Judiciary, dated May 21,
1991.
30. Attached hereto as Exhibit CC is a true copy of ex-
cerpted pages 1 through 10 of the Prepared Testimony of John P.
Fowler In Support Of AB 655, the Corporate Law Bill, dated May
7, 1991.
31. Attached hereto as Exhibit DD is a true copy of the
Certificate of Amendment of the Articles of Incorporation of
ITT Destinations, Inc. (now called ITT Corporation), and
Certificates of Restated Articles of Incorporation of ITT
Destinations, Inc., as filed with the Secretary of State of the
State of Nevada.
32. Attached hereto as Exhibit EE is a true copy of the
Amended and Restated
-5-<PAGE>
By-Laws of ITT Corporation, as amended through July 23, 1996.
/s/ Bernard W. Nussbaum
Bernard W. Nussbaum
Sworn to before me
this 24th day of August, 1997.
/s/ Jane Ricca
Notary Public
-6-<PAGE>
EXHIBITS OMITTED
-7-
EXHIBIT (g)(25)
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
MEIR FEDER
SCOTT L. BLACK
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, )
) CV-S-97-00893-PMP (RLH)
-vs- )
) HILTON'S EX PARTE MOTION
HILTON HOTELS CORPORATION and ) FOR PROMPT HEARING ON ITS
HLT CORPORATION, ) MOTION FOR INJUNCTIVE AND
) DECLARATORY RELIEF
Defendants. )
)
HILTON HOTELS CORPORATION and ) MEMORANDUM OF POINTS
HLT CORPORATION, ) AND AUTHORITIES
)
Counterclaimants, )
)
-vs- ) AFFIDAVIT OF BERNARD W.
) NUSSBAUM
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
)
Counterclaim Defendants. )
)<PAGE>
EX PARTE MOTION FOR A PROMPT HEARING
AND MEMORANDUM OF POINTS AND AUTHORITIES
Pursuant to LR 7-5 and Rules 57 and 65 of the Federal
Rules of Civil Procedure, defendants-counterclaim plaintiffs
Hilton Hotels Corporation ("Hilton") and HLT Corporation
("HLT") hereby move this Court for a prompt hearing on its
motion for an order: (a) preliminarily and permanently
enjoining plaintiffs from proceeding with their Comprehensive
Plan with respect to ITT Corporation ("ITT"); (b) declaring
that by adopting the Comprehensive Plan, the ITT directors
breached their fiduciary duties to ITT and its shareholders;
(c) declaring that ITT may not implement its Comprehensive Plan
without obtaining a shareholder vote; and (d) requiring ITT to
conduct its 1997 annual meeting for the election of directors
by no later than November 14, 1997 (the "Hilton Injunction
Motion").
This motion is based upon the accompanying affidavit
of Bernard W. Nussbaum, matters of which the Court may take
judicial notice, including the Court's own file in this matter
and the file in Hilton Hotels Corp. v. ITT Corporation, CV-S-
97-00095-PMP (RLH), this Court's inherent authority to control
its own calendar, and arguments and other evidence that may be
presented prior to the decision on this Motion.
Under Local Rule 7-2, briefing on Hilton's Injunction
Motion will be completed by no later than September 22. For
the reasons discussed in the accompanying affidavit, Hilton
respectfully requests that the hearing on the Hilton Injunction
Motion be held at Court's earliest convenience during the week
of September 22. <PAGE>
RESPECTFULLY SUBMITTED this 25th day of August, 1997.
WACHTELL, LIPTON, ROSEN & KATZ
By:/s/ Bernard W. Nussbaum
BERNARD W. NUSSBAUM
KENNETH FORREST
ERIC M. ROTH
MARC WOLINSKY
MEIR FEDER
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 South Fourth Street
Las Vegas, Nevada 89101
Attorneys for Defendants-
Counterclaim Plaintiffs
HILTON HOTELS CORPORATION
and HLT CORPORATION
-2-<PAGE>
AFFIDAVIT OF BERNARD W. NUSSBAUM
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
BERNARD W. NUSSBAUM, being first duly sworn, deposes
and says:
1. I am an attorney admitted to practice in the
instant case in the State of Nevada and am a member of the law
firm of Wachtell, Lipton, Rosen & Katz. My law firm represents
Hilton Hotels Corporation and HLT Corporation (collectively,
"Hilton") in the above-captioned matter.
2. This affidavit is respectfully submitted in
support of Hilton's ex parte motion for a prompt hearing on its
motion for injunctive and declaratory relief ("Hilton's
Injunction Motion").
3. Hilton's Injunction Motion, which is being filed
simultaneously herewith, seeks an order: (a) preliminarily and
permanently enjoining plaintiffs from proceeding with their
Comprehensive Plan with respect to ITT Corporation ("ITT"), (b)
declaring that by adopting the Comprehensive Plan, the ITT
directors breached their fiduciary duties to ITT and its
shareholders; (c) declaring that ITT may not implement its
Comprehensive Plan without obtaining a shareholder vote; and
(d) requiring ITT to conduct its 1997 annual meeting for the
election of directors by no later than November 14, 1997. As
explained in detail in the papers submitted in support of the
Hilton Injunction Motion, ITT's Comprehensive Plan threatens
Hilton and ITT's shareholders with imminent irreparable harm.
The centerpiece of the Plan is ITT's intention to place its
hotel and gaming operations into a new Nevada subsidiary and
spin that subsidiary off to its shareholders. This new hotel
and gaming company -- which will have the same directors and
senior management as the current ITT -- will be renamed "ITT
Corporation" after the spin-off is consummated. ITT intends to
effect the spin-off without a shareholder vote.
4. As is also explained in the papers submitted in
support of the Hilton Injunction Motion, the Comprehensive Plan
is designed to make it impossible for Hilton to proceed with
its pending proxy fight and takeover bid for ITT. The plan if
implemented<PAGE>
would render the forthcoming 1997 annual meeting of ITT
shareholders meaningless. Two potent entrenchment devices are
embedded in the Plan. The first is the inclusion of a
"staggered board" in the charter of the "new" ITT -- a
provision that the current ITT does not have. The "staggered
board" provision, whereby only one-third of "new" ITT's board
will be up for election in any one year, is designed to prevent
ITT shareholders from replacing the entire ITT board of
directors with Hilton's nominees at a 1997 annual meeting.
Thus, even if Hilton waged a successful proxy fight for the
post-spin-off ITT, the incumbent directors would remain in
control of the board until May 1999 and could prevent the
removal of ITT's various takeover defenses (e.g., its
Shareholder Rights Plan). The second entrenchment device is a
$1.26 billion "tax poison pill," which would be triggered if
Hilton sought to acquire the "new" ITT. This huge potential
tax liability would make it impossible for Hilton to proceed
with its current bid. The reality is that if the Plan is
implemented ITT shareholders will never have a chance to vote
for the Hilton slate and bid.
5. ITT has publicly stated that it intends, subject
to the receipt of necessary regulatory approvals, to effect the
spin-off and other components of the Comprehensive Plan in mid
to late September 1997. Under LR 7-2, ITT's papers in
opposition to the Hilton Injunction Motion are due on Tuesday,
September 9, and Hilton's reply papers, if any, would be due on
Monday, September 22.
6. In view of ITT's announced schedule for
consummation of the Comprehensive Plan, Hilton respectfully
requests that the Hilton Injunction Motion be scheduled for
hearing at the Court's earliest convenience during the week of
September 22. Unless the Hilton Injunction Motion is heard on
this prompt schedule, there is a risk that ITT would consummate
the Plan before this Court has the opportunity to hear and
consider the merits of Hilton's motion.
-2-<PAGE>
7. Though Hilton has titled this motion as an "Ex
Parte Motion for a Prompt Hearing", a copy of this motion has
been served on counsel for ITT.
/s/ Bernard W. Nussbaum
BERNARD W. NUSSBAUM
Sworn to before me this
24th day of August 1997
/s/ Marc Wolinsky
Notary Public
-3-<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
7th 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 25th day of August, 1997.
By /s/ Scott M. Black
Scott M. Black
-4-
