Hilton Hotels Corp. v. ITT Corp.
1997 WL 651211, 978 F. Supp. 1342, 1997 U.S. Dist. LEXIS 15707 (1997)
Rule of Law:
A board of directors, when responding to a hostile takeover attempt and proxy contest, cannot implement defensive measures that are preclusive or coercive, or whose primary purpose is to entrench the incumbent board by impermissibly impeding the exercise of the shareholder franchise, without a compelling justification.
Facts:
- Hilton Hotels Corporation announced a $55.00 per share tender offer for ITT Corporation stock and plans for a proxy contest at ITT’s 1997 annual meeting.
- ITT formally rejected Hilton’s tender offer and proceeded to sell several non-core assets while opposing the takeover attempt before gaming regulatory bodies.
- ITT did not conduct its annual meeting in May 1997, as was its customary practice in preceding years.
- On July 15, 1997, ITT announced a 'Comprehensive Plan' to split ITT into three new entities, with ITT Destinations comprising approximately 93% of ITT’s current assets.
- The Comprehensive Plan proposed that the board of directors of the new ITT Destinations would be 'classified' or 'staggered,' with directors serving three-year terms and only one class elected each year, requiring an 80% shareholder vote to remove directors without cause or to repeal the classified board provision.
- The Comprehensive Plan contained a 'poison pill' that would result in a $1.4 billion tax liability if Hilton successfully acquired more than 50% of ITT Destinations.
- ITT sought to implement the Comprehensive Plan prior to its 1997 annual meeting and without obtaining shareholder approval.
- Hilton subsequently announced an amended tender offer of $70.00 per share, which ITT also rejected.
Procedural Posture:
- On January 27, 1997, Hilton Hotels Corporation ("Hilton") filed a complaint for injunctive and declaratory relief against ITT Corporation ("ITT") in the U.S. District Court for the District of Nevada, seeking to enjoin ITT from impeding shareholder franchise.
- Hilton subsequently filed a motion for a mandatory injunction to compel ITT to conduct its annual meeting in May 1997.
- On April 21, 1997, the U.S. District Court for the District of Nevada denied Hilton's motion, finding that Nevada law allowed ITT 18 months, not 12, to hold its annual meeting.
- On July 16, 1997, ITT filed a separate complaint for declaratory relief in the U.S. District Court for the District of Nevada, seeking declarations that its board acted properly and that Hilton lacked standing to challenge its Comprehensive Plan.
- On August 21 and 26, 1997, ITT's declaratory relief action was reassigned and consolidated with Hilton's previously filed action (Hilton Hotels Corp. v. ITT Corp., 962 F.Supp. 1309 (D.Nev.1997)).
- On August 26, 1997, Hilton filed a motion for injunctive and declaratory relief, seeking to enjoin ITT's Comprehensive Plan, declare director breach of fiduciary duties, compel a shareholder vote on the plan, and require the 1997 annual meeting by November 14, 1997.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate board's adoption of a comprehensive restructuring plan, which includes a classified board provision and is implemented without shareholder approval during a hostile takeover attempt and proxy contest, constitute an impermissible infringement on shareholder voting rights in violation of fiduciary duties?
Opinions:
Majority - PRO, District Judge
Yes, a corporate board's adoption of a comprehensive restructuring plan that includes a classified board provision, implemented without shareholder approval during a hostile takeover attempt and proxy contest, constitutes an impermissible infringement on shareholder voting rights because its primary purpose is to entrench the incumbent board. The court found that due to the absence of specific Nevada statutory or case law on point for corporate law issues in this context, Delaware case law, particularly the Unocal/Blasius analysis, served as persuasive authority. Under this framework, defensive measures touching upon issues of control that purposefully disenfranchise shareholders cannot be sustained without a 'compelling justification.' The court determined that ITT failed to demonstrate a reasonable threat to corporate policy or effectiveness from Hilton's offer, finding ITT's assertion of an inadequate offer price unpersuasive given its own financial assessments and plans. Furthermore, ITT's response, specifically the classified board for ITT Destinations (representing 93% of ITT's assets), was deemed preclusive and coercive as it would prevent current shareholders from electing a majority of directors for at least another year. The court concluded, based on circumstantial evidence such as the timing of the plan's announcement relative to Hilton's actions, the self-appointment of incumbent directors to insulated classified board positions, the lack of credible justification for avoiding shareholder approval, and the plan's direct effect on precluding a shareholder majority vote, that the primary purpose of the Comprehensive Plan was to disenfranchise shareholders and entrench the incumbent board. The court emphasized that the shareholder franchise is a fundamental principle of corporate law not outweighed by other constituency interests under Nevada law (N.R.S. § 78.138) or by the board's good faith, thus mandating an injunction against the entire, inextricably related, Comprehensive Plan.
Analysis:
This case reinforces the judicial protection of shareholder franchise as a fundamental aspect of corporate governance, particularly during hostile takeover attempts and proxy contests. It clarifies that even in jurisdictions without direct precedent, courts will look to established frameworks like the Unocal/Blasius analysis to scrutinize board actions that impact shareholder voting rights. The ruling highlights that while boards have broad business judgment, this power does not extend to actions primarily aimed at entrenching incumbent directors by disenfranchising shareholders, thus setting a high bar for any 'compelling justification' for such measures. This decision emphasizes that shareholders retain the ultimate authority to determine corporate leadership, influencing future cases involving defensive tactics that alter corporate control or voting mechanisms.
