STERLING et al.
MAYFLOWER HOTEL CORP. et al.
S. Samuel Arsht (of Morris, Steel, Nichols & Arsht), of Wilmington, and Stephen S. Bernstein (of McLaughlin & Stern), of New York City, for plaintiffs below, appellants.
William S. Potter (of Berl, Potter & Anderson), of Wilmington, and Claude A. Roth, of Chicago, for Hilton Hotels Corp., defendant below, appellee.
Aaron Finger (of Richards, Layton & Finger), of Wilmington, and William J. Friedman and Maurice Rosenfield, of Chicago, for Mayflower Hotel Corp., defendant below, appellee.
SOUTHERLAND, C. J., and WOLCOTT and TUNNELL, JJ., sitting.
SOUTHERLAND, Chief Justice.
The principal question presented is whether the terms of a proposed merger of Mayflower Hotel Corporation (herein 'Mayflower') into its parent corporation, Hilton Hotels Corporation (herein 'Hilton'), are fair to the minority stockholders of Mayflower.
[33 Del.Ch. 296] The essential facts are these:
Mayflower and Hilton are both Delaware corporations. Mayflower's sole business is the ownership and operation of the Mayflower Hotel in Washington, D. C. It has outstanding 389,738 shares of common stock of $1 par value. Hilton and its subsidiary corporations are engaged in the business of owning, leasing, operating and managing hotel properties in many of the large centers of population in the country. Hilton has outstanding, in addition to an issue of Convertible Preference stock, 1,592,878 shares of common stock of $5 par value.
On December 18, 1946, Hilton acquired a majority of the outstanding shares of Mayflower. Thereafter it continued to make purchases of Mayflower stock. On or about February 4, 1952, it purchased 21,409 shares at a price of $19.10 a share, and on that date made an offer to all other minority stockholders to buy their shares at the same price. As of March 25, 1952, Hilton owned 321,883 shares, or nearly five-sixths of the outstanding stock.
From the time of the acquisition by Hilton of a majority interest in Mayflower, Hilton's management had contemplated a merger of Mayflower with Hilton. Soon
[33 Del.Ch. 297] In the early part of 1950 Standard Research Consultants, Inc., a subsidiary of Standard & Poor, was retained to make the study, and Mr. John G. Haslam, its Vice President, undertook the work. Later he submitted a study which determined a fair basis of exchange of Hilton stock for Mayflower stock to be three-fourths of a share of Hilton for one share of Mayflower. No action was taken on the basis of this study.
The Washington litigation having been finally terminated, Mr. Haslam on January 7, 1952, was again retained to continue and bring up to date his prior study and to develop a fair plan of exchange. Thereafter he submitted his final study (hereinafter referred to as 'the Haslam report'), which embodies his conclusion that a fair rate of exchange would be share for share. A plan for a merger upon this basis was approved by the boards of directors of both corporations. The directors--at least the Mayflower directors--appear to have relied largely on the Haslam report to justify their action. A formal agreement of merger was entered into on March 14, 1952, providing for the merger of Mayflower (the constituent corporation) into Hilton (the surviving corporation), as authorized by the provisions of Section 59 of the General Corporation Law, Rev.Code of Del.1935, par. 2091, as amended. Each outstanding share of Mayflower is converted into one share of Hilton. A separate agreement between Hilton and Mayflower provides that for a limited period Hilton will pay $19.10 a share for any Mayflower stock tendered to it by any minority stockholder. At stockholders' meetings held in April the requisite approval of the merger was obtained. At the Mayflower meeting 329,106 shares were voted in favor; 4,645 against. Holders of 35,191 shares of Mayflower who objected to the merger did not vote. The Hilton stockholders voted overwhelmingly to approve the merger.
On April 7, 1952, plaintiffs below (herein 'plaintiffs'), holders of 32,295 shares of Mayflower stock, filed their complaint in the court below, seeking injunctive relief against the consummation of the merger, on the ground that the terms of the merger are grossly unfair to the minority stockholders of Mayflower, and that the Mayflower directors entered into the merger agreement in bad faith.
[33 Del.Ch. 298] The Chancellor, having issued a temporary restraining order against the consummation of the merger, heard the case on a motion for a preliminary injunction. A large number of affidavits were filed and voluminous depositions were taken. The Chancellor found no fraud or bad faith in the case and concluded that the plan was fair to the minority. He also determined that a quorum of Mayflower directors was present at the board meeting of March 6 when the merger was approved. See 89 A.2d 862. On June 18 he denied injunctive relief, and plaintiffs thereafter appealed.
Plaintiffs' principal contention here, as in the court below, is that the terms of the merger are unfair to Mayflower's minority stockholders. Plaintiffs invoke the settled rule of law that Hilton as majority stockholder of Mayflower and the Hilton directors as its nominees occupy, in relation to the minority, a fiduciary position in dealing
with Mayflower's property. Since they stand on both sides of the transaction, they bear the burden of establishing its entire fairness, and it must pass the test of careful scrutiny by the courts. Keenan v. Eshleman, 23 Del.Ch. 234
, 2 A.2d 904
, 120 A.L.R. 227; Gottlieb v. Heyden Chemical Corp., Del.Ch., 90 A.2d 660
. Defendants agree that their acts must meet this test. We therefore inquire whether the facts sustain the conversion ratio of share for share which forms the basis of the merger agreement.
As the Chancellor observed, the Haslam report forms the principal justification for the terms of the merger. We accordingly examine it.
The report is an elaborate study of some forty pages (including charts) with a long appendix containing analyses of pertinent financial data. The principles upon which it is based are set forth in the Chancellor's opinion. See 89 A.2d page 867. Implicit in the report is the assumption that the legal principles governing the transaction require a comparison of the value of the stock of Hilton with the stock of Mayflower. Since the report is the basis of the conversion terms of the merger agreement, it is in effect directed to a determination of the question whether, upon the conversion of Mayflower stock into Hilton stock, the Mayflower minority stockholder[33 Del.Ch. 299] will receive the substantial equivalent in value of the shares he held before the merger. Thus a comparison is required of factors entering into the ascertainment of the values of both stocks. In Haslam's opinion the problem reduces to 'a comparison of the operating trends of each of the corporations and of the investment characteristics of the two stock issues.' A summary of some of the more important comparisons developed in the report is set forth in the margin.  On the basis of these comparisons, as well as upon consideration of the past history and future prospects of the two corporations, Haslam concludes that the financial record of Hilton has been substantially superior to that of Mayflower, and that purely upon a statistical basis it could be argued that Hilton should not offer better than three-fourths of a share of Hilton for one share of Mayflower. Nevertheless it is his opinion that, because of the problems incident to Hilton's control of Mayflower and the advantages incident to complete ownership, a share-for-share exchange will be fair and reasonable to all concerned.
An affidavit of J. Sellers Bancroft, Vice President in charge of Trust Department investments of Wilmington Trust Company, [33 Del.Ch. 300] sets forth his conclusion, reached after a review of Mr. Haslam's study and an examination of pertinent financial data, that a share-for-share exchange is unquestionably fair.
The Haslam report contains no finding of net asset value--a factor ...