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Director sues Morgans over Yucaipa recap

by Michael D. Brown | Published April 5, 2013 at 9:39 AM

Directors at Morgans Hotel Group Co. are being sued by a dissident board member in an attempt to block the company's recently announced recapitalization with Los Angeles private equity firm Yucaipa Cos. LLC, and the boutique hotel operator has moved its annual shareholders meeting back to July 10 as a result.

Jason Kalisman, a Morgans director and founder of its largest shareholder, OTK Associates LLC, said in a Wednesday disclosure filed in the Delaware Court of Chancery that company directors rushed "in secret to implement the recapitalization" before the company's annual meeting, which had been set for May 15 before Morgans delayed it.

Morgans announced Monday that it had reached a deal with Yucaipa to lower its long-term liabilities by $230 million by canceling about $262 million in notes and warrants due to Yucaipa. In return, Morgans agreed to give up its interests in the Delano South Beach hotel in Miami, three restaurants at the Mandalay Bay casino-hotel in Las Vegas, and other assets, including restaurant operator Light Group. It also promised to issue 12.5 million new shares of common stock at $6 per share.

Kalisman actually filed a lawsuit in the Delaware Court of Chancery on the same day that Morgans announced the Yucaipa deal, and the New York hospitality company filed a response with the court on Tuesday, saying the suit "seeks to delay a deleveraging transaction that is critical to the company's survival."

Morgans, which had $728 million in total liabilities on its balance sheet as of Dec. 31, said in the response that "the transaction is the best deleveraging option available to the company and is in the best interests of the company and all of its stockholders."

OTK owns a 13.9% stake in Morgans and is poised to nominate seven candidates for board seats at the upcoming annual meeting, leading Kalisman to claims that the current board left him out of negotiations and rushed the transaction with Yucaipa.

In his lawsuit, Kalisman specifically targets Yucaipa founder and Morgans board member Ron Burkle, as well as directors Michael D. Malone, Thomas L. Harrison and Robert Friedman. The suit also takes aim at Morgans CEO Michael Gross and other top executives who oversaw the company's 15-week strategic review prior to the recapitalization deal.

Kalisman asserted that the negotiations began to intensify shortly after OTK's March 18 13D filing with the Securities and Exchange Commission, in which the firm said it would look to nominate its own slate of seven directors to challenge the incumbent board.

"Immediately recognizing that OTK was likely to succeed in replacing some if not all of the incumbent directors," Morgans' directors and management "began attempting to jump start the recapitalization transaction," court documents said.

The resulting transaction, the lawsuit continued, "put a substantial block of stock in friendly hands prior to the annual meeting," all but ensuring the incumbents would be re-elected. OTK has owned its stake in the company since 2010, according to regulatory filings.

In the lawsuit, Kalisman and his lawyers at Wilmington, Del.-based Abrams & Bayliss LLP describe a series of e-mails and meetings between the board and Morgans' financial advisers, Greenhill & Co., in which Malone, who acted as co-chairman of the special committee that oversaw the review, repeatedly said that no transaction with Yucaipa was imminent.

As recently as a special meeting of shareholders on March 19, Kalisman said in his lawsuit, no director "came close to indicating" that the company was "working to accelerate consideration of the recapitalization."

But Kalisman said he received an e-mail on March 27 that stated that the risk committee for Deutsche Bank AG had approved a loan to Yucaipa to facilitate the recapitalization, providing the first indication Kalisman had seen of a transaction.

Morgans' board and special committee voted in favor of the transaction three days later on March 30.

Kalisman wants Delaware Chancery Judge J. Travis Laster to bar the recapitalization plan by calling the March 30 vote invalid because of a time crunch that didn't allow directors to properly evaluate the Yucaipa proposal.

The Morgans directors mentioned in the suit didn't respond to calls seeking comment on the company's plans going forward. Sard Verbinnen & Co., OTK's public relations firm, declined to comment.

A. Thompson Bayliss, Adam K. Schulman and Sarah E. Hickie, OTK's lawyers at Abrams & Bayliss, didn't respond to phone calls.

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