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