Gripes Over Morton’s Merger Were Unrealistic

     (CN) – Stockholders hoping that “bone-in ribeyes begin to sell like Big Macs” failed to prove that Morton’s Restaurant Group sold itself too cheaply, a federal judge ruled.
     “When a board of disinterested directors used two qualified investment banks and reaches out to over 100 potential buyers in an extended effort to induce competition and get the best price, it is not conceivable that they were acting in bad faith simply because the bankers’ valuation models do not accord with a plaintiff’s birthday dreams of enormous value,” Chancellor Leo Strine wrote, dismissing the case.
     The high-end stack steakhouse company won out against stockholders’ claims because of a failure “to plead any rational motive for the [board] directors to do anything other than attempt to maximize the sale value of Morton’s,” Chancellor Leo Strine wrote for the Delaware Court of Chancery.
     Investors began filing suit in 2011 after Morton’s and its board entered into a merger agreement with Fertitta Morton’s Restaurants and Fertitta Morton’s Acquisition, two wholly owned subsidiaries of Landry’s Inc.
     Castle Harlan, which had been Morton’s private equity sponsor and held 27.7 percent of its stock, had allegedly suggested the merger.
     During the ensuing nine-month search, Morton’s “contacted 137 potential buyers, executed 52 confidentiality agreements, conducted due diligence with interested parties, and evaluated several nonbinding bids,” according to the ruling.
     In addition to treating all bidders evenhandedly, Morton’s also employed “two qualified investment banks to help test the market,” the court found.
     “The board negotiated terms with multiple bidders; and Fertitta’s offer was ultimately the highest,” Strine added.
     It provided that stockholders would receive $6.90 per share – a 33 percent premium over Morton’s closing market price and a 41.9 percent premium to the “weighted average price of the stock for the three-year period before the announcement of the transaction,” according to the ruling.
     Shareholders nevertheless alleged that Fertitta and the Morton’s two financial advisers, Jeffries & Co. and KeyBanc Capital Markets, conspired with the board and Castle Harlan to sell Morton’s cheaply.
     They said Castle Harlan had a conflict of interest because it had a unique liquidity need that caused it to push for a sale of Morton’s at an inadequate price.
     Though just two individuals on Morton’s 10-person board worked for Castle Harlan, and seven were independent and disinterested, the shareholders alleged that they acquiesced to put the needs of the company’s controller above their fiduciary duties to Morton’s stockholders.
     Strine scoffed, however, at the notion that a 27.7 percent block of shares made Castle Harlan a controlling stockholder.
     “Second, even if Castle Harlan could be considered a controlling stockholder, the plaintiffs have failed to make any well-pled allegations indicating that Castle Harlan had a conflict of interest with the other stockholders of Morton’s,” the chancellor added. “That is, the plaintiffs plead no facts supporting a rational inference that it is conceivable that Castle Harlan’s support for an extended market check involving an approach to over 100 bidders in a nine-month process reflected a crisis need for a fire sale.”
     The 35-page opinion slams the complaint as “devoid of, among other things, well-pled facts compromising the independence of a supermajority of the board, challenging the adequacy of the board’s market check, or suggesting that any bidder received favoritism.”
     Strine also questioned whether the plaintiffs showed that “Castle Harlan, after holding Morton’s stock for over five years, faced some exigent crises that suddenly compelled it to sell its shares in a deal that was not reasonably designed to let it receive top dollar for Morton’s.”
     Moreover, the evidence shows that Castle Harlan “benefited from the transaction pro rata with the other stockholders.
     Fertitta additionally “had no ties to a board member of Morton’s or Castle Harlan,” the ruling states.
     Jeffries, the board’s financial adviser, considered it reasonable to put Morton’s perpetuity growth rate at 2 percent, but the shareholders estimated the rate closer to 9.2 percent, the court found.
     Strine noted, however, that “this sort of sidewalk superintending of the banker’s advice does not sustain a complaint.”
     “Just as a rational mind could question whether a 2% perpetuity growth rate for Morton’s was too low, so too would a rational mind certainly question the 9.2% perpetuity growth rate the plaintiffs advocate, a rate that would suggest that a high-end steakhouse would become the next McDonald’s or even WalMart,” he added.
     Keybanc, an adviser that the board sought out for a second opinion, meanwhile used a perpetuity growth rate of less than 2 percent, according to the ruling/
     “The directors gave rational stockholders the material information necessary for them to make their own decision about whether to accept the premium being offered by Fertitta then and there, or stick in and hope that bone-in ribeyes begin to sell like Big Macs,” Strine wrote. Simply put, the stockholders were told what the bankers did and what the key metrics of their analysis involved. Under our law, that is all that was required.”
     Strine also slammed the unhappy shareholders for “making no sensible arguments as to how, or why, Castle Harlan would not attempt to maximize the return on the older fund that contained its investment in Morton’s.”

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