OTK Associates, LLC v. Friedman
2014 Del. Ch. LEXIS 14
| Del. Ch. | 2014Background
- Morgans Hotel Group proposed a two-part recapitalization with Yucaipa, giving Yucaipa control via a mix of notes, Series A Preferred, warrants, and board rights, while Morgans would transfer Delano Hotel and The Light Group to Yucaipa.
- Yucaipa agreed to backstop a $100 million rights offering at a premium, with Moelis forecasting Yucaipa could hold around 35% of Morgans’ common stock after the backstop.
- A Special Committee, with several Burkle-aligned directors, considered alternatives but was perceived as constrained by Yucaipa’s leverage and internal tipping.
- Hyatt’s bid and other third-party proposals were considered or pursued inconsistently, with management delaying processes that could have heightened competitive tension.
- In March 2013, Morgan’s Board approved the final Yucaipa Transaction documents after expedited, limited notice, while Kalisman was kept uninformed.
- OTK filed suit challenging fiduciary breaches and seeking invalidation of the Transaction Documents; the court held counts addressing mootness and forum issues, and addressed the 102(b)(7) exculpation defense.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are Counts I–VIII moot due to injunctions and abandonment? | OTK contends the claims remain viable despite the injunction. | Yucaipa Defendants argue the claims are moot because the transaction was enjoined/abandoned. | Counts I–VIII not moot; proceed. |
| Should Count IX be dismissed under Rule 23.1 as derivative and/or stay due to forum. | Count IX seeks a merits-based declaration; derivative pleading appropriate. | Count IX should be dismissed or stayed as derivative and/or due to forum provisions. | Rule 23.1 dismissal granted for repudiation theory; other grounds not stayed; forum clause not controlling for fiduciary claims. |
| May 102(b)(7) exculpation shield Malone/Gault at pleadings stage? | Exculpation does not apply to claimed loyalty breaches. | Exculpation should bar care-based claims at pleadings stage where appropriate. | Exculpation not applied at pleadings stage; entire fairness governs against Malone; Gault’s challenge denied. |
| Does the internal affairs forum apply to Count IX and the Delaware/NY conflict? | Counts rely on Delaware fiduciary-law claims; Delaware law governs. | New York forum clause controls, potentially precluding Delaware claims. | Internal affairs doctrine controls; Count IX not barred by New York forum; Delaware law governs fiduciary claims. |
Key Cases Cited
- Parfi Holding AB v. Mirror Image Internet, Inc., 817 A.2d 149 (Del. 2002) (forum/arbitration clause not extending to fiduciary claims absent contract-based fiduciary status)
- Emerald P'rs v. Berlin (Emerald I), 726 A.2d 1215 (Del.1999) (exculpation limitations and duty-of-loyalty considerations at pleadings stage)
- Harris v. Carter, 582 A.2d 222 (Del.Ch.1990) (amendments to derivative complaints bound up with original claims)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del.2004) (determinants of whether a claim is derivative or direct for demand futility)
- Braddock v. Zimmerman, 906 A.2d 776 (Del.2006) (test for excusing demand in amended derivative complaints)
- In re Del Monte Foods Co. S'holders Litig., 25 A.3d 813 (Del.Ch.2011) (preliminary injunctions and aid to third-party contract terms in fiduciary contexts)
- CERBCO, Inc. v. Thorpe, 676 A.2d 436 (Del.1996) (duty of loyalty; disgorgement of benefits in fiduciary breaches; remedy scope)
- McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng'g Co., 263 A.2d 281 (Del.1970) (McWane doctrine factors for staying proceedings when a prior action exists)