STERLING et al.
MAYFLOWER HOTEL CORP. et al.
[33 Del.Ch. 22] S. Samuel Arsht and George T. Coulson (of Morris, Steel, Nichols & Arsht), and Stephen S. Bernstein (of McLaughlin & Stern), Wilmington, for plaintiffs.
Aaron Finger (of Richards, Layton & Finger), Wilmington, and William J. Friedman, Chicago, Ill., for defendant Mayflower Hotel Corp.
William S. Potter (of Berl, Potter & Anderson), Wilmington, and Claude A. Roth, Chicago, Ill., for defendant Hilton Hotels Corp.
Plaintiffs seek a preliminary injunction restraining the consummation of an agreement of merger between defendant corporations. They assert that the merger plan was not approved by a quorum of disinterested directors and that the terms of the agreement are both fraudulent and unfair to the so-called minority stockholders of the corporation to be merged.
[33 Del.Ch. 23] Plaintiffs are certain minority stockholders of the defendant Mayflower Hotel Corporation (hereafter called 'Mayflower'). At a directors meeting held March 6, 1952 Mayflower's directors approved a plan whereby Mayflower was to be merged into Hilton Hotels Corporation (hereafter called 'Hilton'). Similar action was taken by Hilton's board of directors. Under the terms of the merger each holder of Mayflower stock is to receive one share of Hilton stock for each share of Mayflower. The Hilton stock presently outstanding is to remain outstanding and is unaffected except by reason of the issuance of shares to the Mayflower stockholders.
On April 14, 1952, pursuant to notice of March 24, 1952, the Mayflower stockholders met and voted to approve the merger. At the time of the meeting Hilton owned 83% of the Mayflower's stock. Thus the vote was 329,106 shares for the merger and 4,645 shares against. Holders of 35,191 shares who objected in writing to the plan did not vote at the meeting. The Hilton stockholders overwhelmingly approved the merger.
Although not a part of the agreement of merger, Hilton has agreed with Mayflower that for a period of thirty days after the consummation of the merger, Hilton will purchase from the Mayflower's stockholders, at $19.10 per share, the shares of Hilton received by them in the merger.
It is necessary to detail the facts at some length in order to present the issues to be decided.
Mayflower and Hilton are both Delaware corporations. The sole business of Mayflower is the ownership and operation of the Mayflower Hotel in Washington, D. C. Hilton's business is the owning, leasing, operating and managing of hotels either directly or through subsidiaries.
Mayflower's capitalization consists of 389,738 shares of common stock issued and outstanding. Hilton has issued and outstanding 6,701 shares of convertible preference stock of a par value of $50, and 1,592,878 shares of common stock with a $5 par.
Hilton acquired more than 50% of Mayflower's outstanding shares on December 18, 1946. Subsequently, it purchased additional shares of Mayflower and has been actively soliciting Mayflower [33 Del.Ch. 24] stockholders to sell their shares to Hilton. As of March 25, 1952 Hilton owned 321,883 shares or 82.51% of Mayflower's outstanding shares. Hilton's recent offering price has been $19.10 per share and it has been able to purchase a substantial number of shares at that price.
There has been much discussion by counsel concerning Mayflower's board, but there can be no doubt that all of its directors are persons who were elected and selected with the approval of the defendant Hilton. Of course, it does not follow therefrom that these men of substantial reputation failed to discharge their legal obligation to all of Mayflower's stockholders. Actually that is one of the questions for decision.
Plaintiffs assert that no quorum was present at the meeting of Mayflower's board at the time the agreement of merger was approved because admittedly there was no quorum of disinterested directors. They contend that Article Thirteenth of Mayflower's Certificate of Incorporation authorizing the counting of interested directors for quorum purposes is illegal. They say such a certificate provision violates Paragraph 8 of Section 5 of the General Corporation Law Rev.Code 1935, § 2037, subd. 8, which provides that no certificate provision may be inserted which is 'contrary to the laws of this State'.
Plaintiffs argue that in any event Hilton, as the controlling stockholder of Mayflower, is a fiduciary for the so-called minority stockholders of Mayflower and that as such it has the burden of affirmatively demonstrating that the proposed merger is just and fair to all of Mayflower's stockholders and that Hilton will derive no unfair advantage. Plaintiffs ...