Tuesday, Sept. 30, 1997 | 9:15 a.m.
Now can we talk?
That's what Hilton Hotels Corp. is asking ITT Corp. -- again -- after U.S. District Judge Philip Pro issued a quick and decisive ruling Monday that confirms shareholder rights in Nevada.
Pro's acerbic assessment of ITT's "comprehensive plan" to split the company into three parts without shareholder approval is that it "has as its primary purpose the entrenchment of the ITT board."
The plan violates "the fundamental concepts of corporate governance," Pro said. He said he was issuing a verbal ruling immediately "to prevent irreparable injury to the franchise of the shareholders who own ITT."
The ruling is a stinging denunciation of the strategy ITT directors adopted in the face of a hostile takeover attempt by Hilton. It bars ITT from implementing the plan before shareholders can vote at an annual meeting, which must be held by Nov. 14.
The ruling resonated through the offices of three Nevada Gaming Commission members -- Chairman Bill Curran, Augie Gurrolla and Art Marshall -- who cast the sole but deciding votes against ITT's bid for regulatory approval of the plan.
Their refusal to rush ITT's licensing bid through two days before Pro had ruled on its legality saved state gaming regulators -- unlike those in New Jersey and Mississippi -- from the embarrassment of having approved an illegal act.
And the decision may be resounding through the boardrooms of other casino companies wondering how to compete with a $20 billion behemoth should ITT shareholders approve a merger with Hilton.
It could speed the pace of industry consolidation, which has been on hold as the Hilton-ITT battle wound its way through the court. Now, competing casino operators may be facing the world's largest hotel-casino company in the race for customers and capital.
If, as expected, ITT shareholders approve a Hilton-ITT merger, the resulting company would own 30 casinos and own or manage nearly 230,000 hotel rooms worldwide.
To match the enterprise value of such a combination, a similar-size company would require that Mirage Resorts, Circus Circus Enterprises, MGM Grand, Sun International, Harrah's Entertainment, Boyd Gaming, Grand Casinos, Showboat, Rio, Harvey's Casino Resorts, Station Casinos and Aztar merge into a single company.
Such a company would wield enormous financial and political clout. It could borrow billions below prime rate, gaining an economic edge over competitors. And it could forge tens of thousands of employees into a potent voting bloc.
ITT Chairman Rand Araskog, who's survived other takeover battles in the past, still has a few weeks to come up with an alternative to Hilton's $11.5 billion offer.
It could take the form of a competing bid from a "white knight" such as Marvin Davis, the Los Angeles billionaire who agreed to buy half the Desert Inn from ITT a few months ago.
Even if he's unsuccessful in avoiding a Hilton takeover, Araskog and his top ITT allies will walk away with bulging wallets. After Hilton announced its hostile offer, ITT directors adopted a $165 million "golden parachute" for key employees should there be a change of control of the company.
Most of it would go to just eight people. According to confidential court documents unsealed late last week, Araskog's share would be $55 million.
Pro's ruling means ITT's owners will be able to decide whether the incumbent directors who approved the "trivestiture" plan should be replaced with a new board of Hilton nominees committed to a Hilton takeover.
The judge acknowledged that "the ruling I make will have a major impact." He added, "I fully appreciate that it will frame the issues that affect the voting."
Noting that "time is of the essence," Pro issued a ruling from the bench immediately after hearing Hilton and ITT arguments, which he said "have frankly been helpful in reinforcing my decision."
"Most significantly," he said, ITT's plan called for spinning off 93 percent of the company's assets -- its valuable hotel and casino properties -- into a new entity with incumbent directors that shareholders couldn't fully replace before voting at three annual meetings.
Such a move, he said, "would violate the balance of power in the relationship" between the owners and management of public companies.
"Shareholders have only two protections" against management overreaching, Pro said. "They can either sell stock or replace the board. Thus, interference with the shareholder voting franchise is an especially serious matter."
Limiting his ruling to the issue of a shareholder vote, Pro said he wouldn't "make a final judgment" on the ITT plan itself. But, he said, "the structure and timing of the comprehensive plan is preclusive" of shareholder rights.
Since Hilton announced its hostile acquisition attempt last January, it has repeatedly asked ITT directors to discuss the offer. They've refused, despite Hilton statements indicating it might increase its bid if negotiations with ITT disclosed a higher price was warranted.
Hilton President Steve Bollenbach said he'd attempt to contact ITT executives today "and see if we can get going on this."
"We'd like to meet with ITT's senior management to work together to create the world's leading lodging-and-gaming company," he said. "A Hilton-ITT combination will bring enormous benefits to the shareholders of both companies."
But a terse first reaction from ITT Vice President Jim Gallagher seemed to signal the company's determination to avoid negotiations with Hilton.
"We respect the judge's decision," Gallagher said. "We look forward to and welcome a shareholder vote. We remain confident that ITT's plan provides greater shareholder value."
"We've said from the beginning we'd like to meet with them," said Hilton Senior Vice President Marc Grossman. "And we've said if we can't do that, we'll put up our own slate of nominees. Those two things still apply."
As expected, Wall Street reacted favorably to the ruling, which was widely applauded by large institutional investors. ITT stock jumped 8.4 percent today to $67.75, up $5.25 a share, in opening trading on the New York Stock Exchange.
ITT bonds, including a new $800 debt offering sold in Europe recently to help finance the comprehensive plan, also rose on investor expectations that a Hilton-ITT merger would avoid turning ITT into a junk-bond credit risk.
Hilton stock rose $1.12 a share, to $33.25, in opening Big Board trading.
Frequently interrupting ITT lawyer Rory Millson's arguments, Pro said where Nevada corporate law doesn't address specific issues, Delaware statutes would prevail.
He asked pointed questions about legal limits to the steps directors can unilaterally take to avoid a hostile takeover, such as appointing a "staggered" board whose members serve terms lasting up to three years.
"Doesn't a staggered board ... mean you've crossed the line ... and entrenched the board (so) that shareholders lose their opportunity to exercise their franchise?" he asked.
"There's no statutory requirement for a vote," Millson responded. "There's nothing in the statutory scheme to prohibit it."
Pro persisted, asking once again whether ITT's comprehensive plan "precludes a shareholder vote and entrenches the current board."
"I would suggest to your honor that it's not preclusive," Millson said. Saying ITT had erred in a 1995 restructuring when it didn't asked shareholders to approve a staggered board, Millson asked:
"Is a corporation powerless to respond simply because there was this mistake? The answer is no."
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