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Burkle v. Otk Associates, LLC

United States District Court, S.D. New York

February 24, 2014

RONALD W. BURKLE, Plaintiff,


LOUIS L. STANTON, District Judge.

Defendants, OTK Associates and its seven nominees for the board of directors of Morgans Hotel Group Co. ("Morgans"), move to dismiss this diversity action against them, which claims they issued a false and misleading proxy solicitation that violated Section 14(a) of the Securities Exchange Act and Securities and Exchange Commission Rule 14a-9. The motion is made under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted.

Defendants argue that the challenged misstatements in OTK's press release were so fully reported and discussed by other sources that the inaccuracies in OTK Associates' press release would not have significantly affected the proxy contest's outcome.

Plaintiff Ronald Burkle, a former member of the Morgans' board of directors, lost his seat on the board when all OTK candidates were elected in a June 14, 2013 shareholder election ordered by the Delaware Court of Chancery. He alleges that defendants issued a false and materially misleading proxy solicitation on June 5, 2013, seeking to vote the incumbent board (including Burkle) out of office and replace them.

Specifically, Burkle claims that the press release published by defendants nine days before the election misrepresented the conclusions of Institutional Shareholder Services Inc. ("ISS") and Glass Lewis & Co. ("Glass Lewis"), two leading proxy advisory firms which make voting recommendations to shareholders in proxy contests. Burkle contends that the press release was misleading because it omitted the complete commentary of the ISS and Glass Lewis reports:

Each of the advisory firms had unequivocally concluded that Morgans would best be served by retaining a four-director majority of the Company-nominated directors on the Board, and electing a minority of three of the Defendants to the Board. Defendants' proxy solicitation materials materially misrepresented the advisory firms' conclusions, describing them as if the proxy advisory firms had concluded that shareholders should vote the entire incumbent Board out of office and deliver control to the Defendants.
Compl. ¶ 1.

The headline of OTK's press release asserted: "Leading Proxy Advisory Firms ISS and Glass Lewis Both Reject Entirety of Morgans Hotel Group's Slate of Nominees and Definitively Recommend Vote for Change on OTK's Gold Card." Welsh Decl., Ex. E at 1. The press release's text stated:

OTK Associates, LLC ("OTK"), the largest shareholder of Morgans Hotel Group Co. ("Morgans") (Nasdaq: MHGC) with 13.9% of the outstanding common stock of the company, today announced that two leading proxy advisory services, Institutional Shareholder Services Inc. ("ISS") and Glass Lewis & Co. ("Glass Lewis") have both decisively advised Morgans' stockholders to vote the GOLD proxy card. In separate reports issued on June 4, 2013, ISS recommends stockholders vote "FOR" Jason Kalisman, Mahmood Khimji and Jonathan Langer, while Glass Lewis recommends stockholders vote "FOR" John Dougherty, Jason Kalisman and Mahmood Khimji, for election to Morgans' board of directors at the company's upcoming annual meeting of stockholders on June 14, 2013. ISS and Glass Lewis were equally as decisive in recommending a "Do Not Vote" for each and every member of management's slate.

In fact, ISS's report recommended that three of the seven OTK candidates should be elected to the Morgans board, stating:

• OTK Associates, which holds 13.9% of shares, is seeking to replace all 7 directors on the board of Morgans Hotel Group and elect its 7 nominees in their stead.
• The dissidents have made compelling case [sic] for minority change at the board level. Shareholder support for dissident nominees Kalisman, Langer and Khimji is warranted.
Ex. F. at 1.

Glass Lewis also endorsed the election of three of the OTK nominees in its report. It said:

In this case, we believe the Dissident has identified areas of concern, both operationally and governance related, that have resulted in the destruction of shareholder value and, at times, the disregard of shareholder interests. We are concerned that the current control and stewardship of the Company largely reside with one individual, Mr. Burkle. However, we aren't convinced that turning complete control of the board over to the Dissident's full slate of nominees, another group of inter-connected individuals who may also be conflicted, would ...

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