On June 29, 2018, Kessler Topaz filed litigation in Maryland state court on behalf of Erie County Employees’ Retirement System (“Erie County”), challenging the conflicted acquisition of LaSalle Hotel Properties (“LaSalle”) by The Blackstone Group, L.P. (“Blackstone”) for $33.50 per share in cash (the “Blackstone Transaction”). In approving the now-abandoned Blackstone Transaction, the LaSalle Board of Trustees (the “Board”) had rejected a financially superior offer by its rival Pebblebrook Hotel Trust (“Pebblebrook”) for a cash and stock deal valued at $35.89 per share (the “Pebblebrook Offer”). Critically, the Blackstone Transaction benefited LaSalle management who would stay on to operate the post-transaction company.
Kessler Topaz sought and secured expedited discovery in the litigation, and the Court scheduled a hearing on a preliminary injunction application for September 5, 2018. Ultimately, the threat of Kessler Topaz’s litigation coupled with shareholder opposition caused the LaSalle Board to abandon the Blackstone Transaction and declare the Pebblebrook Offer superior on September 5, 2018, just as the Court was preparing to hear argument on Kessler Topaz’s injunction application.
LaSalle stockholders will now have the opportunity to vote on the Pebblebrook transaction on November 27, 2018.
The Background
LaSalle and Pebblebrook are real estate investment trusts that own and operate hotels. Both companies were founded by Jon E. Bortz (“Bortz”), Pebblebrook’s CEO and Chairman. Bortz founded LaSalle in 1998, growing it into a highly successful hotel operator in less than a decade. In 2009, however, Bortz departed LaSalle and founded Pebblebrook within weeks of his purported retirement. In Bortz’s place, LaSalle named Michael D. Barnello (“Barnello”) as CEO and Stuart L. Scott (“Scott”) as Chairman of the Board—positions both men continue to hold. Over the subsequent decade, while Bortz grew Pebblebrook into another highly successful hotel operator, LaSalle stagnated under Barnello’s leadership.
On March 6, 2018, Bortz returned to his former colleagues and submitted a proposal under which Pebblebrook would acquire LaSalle in an all-stock acquisition for $30.00 per share, representing a 17.5% premium to LaSalle’s stock price. The proposal made clear that Pebblebrook management—and not LaSalle management—would lead the combined entity.
The Board rejected Pebblebrook’s proposal on March 22, 2018 without even discussing with Pebblebrook a potential sales process, citing Pebblebrook’s proposal as being “insufficient from both price and mix of consideration perspectives.” Shortly thereafter, Pebblebrook publicly disclosed its offer and the Board’s rejection of it to the market. Around this same time, Blackstone submitted an indication of interest to acquire LaSalle for $28.00 to $30.00 per share in cash, and the Board then decided to initiate a sales process.
Throughout April and May, 2018, in direct response to LaSalle’s Board’s criticisms of its original offer, Pebblebrook continued to submit additional offers to acquire LaSalle which raised the exchange ratio for the stock consideration and ultimately added a cash component of up to 20% of the total consideration. By May 16, 2018, the sales process had devolved into a two-horse race between Pebblebrook and Blackstone, with Pebblebrook’s offer valued at $34.58 per share, while Blackstone had submitted an all-cash offer for $33.00 per share.
Despite Pebblebrook’s facially superior offer, the Board continued to decry the lack of price certainty in Pebblebrook’s offer (even though Pebblebrook had repeatedly increased the cash component of its offer to provide greater price certainty). Then, for the first time on May 19, 2018, LaSalle demanded that Pebblebrook agree to an asymmetrical price collar for its offer, such that if Pebblebrook’s stock price declined Pebblebrook would have to provide a greater exchange ratio, but if Pebblebrook’s stock price rose the exchange ratio would remain the same.
Pebblebrook rejected this unusual term, but agreed to raise the exchange ratio to 0.92 Pebblebrook shares, which valued LaSalle at $35.89 per share, and offered to continue negotiations to address the Board’s purported concerns over price certainty. LaSalle, however, never responded to Pebblebrook’s revised offer. Instead, on May 20, 2018, the Board quickly signed up a deal with Blackstone for $33.50 per share in cash, representing a nearly $2.40 discount to Pebblebrook’s proposal.
On June 11, 2018, Pebblebrook publicly reasserted its offer, which now valued LaSalle at $37.80 per share, and agreed to pay the $112 million termination fee associated with the Blackstone Transaction. Inexplicably, the Board announced on June 18, 2018 that Pebblebrook’s facially superior proposal could not “reasonably be expected to lead to a superior proposal” under the provisions of the Blackstone Transaction merger agreement, and refused to negotiate with Pebblebrook.
The Litigation and Subsequent Events
On June 29, 2018, following a multi-week investigation, Kessler Topaz, on behalf of Erie County, filed a class action complaint against LaSalle and the Board in the Circuit Court for Baltimore City, Maryland (the “Court”). The complaint alleged that the Board breached its fiduciary duties by, inter alia, rejecting Pebblebrook’s proposals in bad faith and issuing false and materially misleading disclosures. Among other things, the complaint focused on the Board’s inexplicable decision to appoint Barnello to lead the sales negotiations when he had an obvious conflict of interest based on his future employment (i.e. he would lose his job in a Pebblebrook transaction, but almost assuredly keep his job if LaSalle was acquired by private equity buyer Blackstone, which did not have its own management team). The complaint sought equitable relief in the form of an injunction as well as monetary damages.
On July 20, 2018, Pebblebrook reaffirmed its acquisition offer, committing to continue to pay $37.80 per share in cash for the cash consideration even though Pebblebrook’s stock price had dipped slightly below that price. Ten days later, on July 30, 2018, the Board again rejected Pebblebrook’s facially superior proposal, contending that it still could not “reasonably be expected to lead to a superior proposal.” Simultaneously, the Board filed its definitive proxy for the Blackstone Transaction, which mooted certain disclosure claims raised in Erie County’s complaint, and scheduled the shareholder vote on the Blackstone Transaction for September 6, 2018.
In light of the now-impending vote, Kessler Topaz sought to maintain pressure on LaSalle by vigorously prosecuting Erie County’s claims. As a result, Kessler Topaz filed, briefed, and argued a motion to expedite proceedings, which the Court granted on August 9, 2018. Thereafter, between August 13 and August 27, 2018, Kessler Topaz obtained and reviewed expedited discovery, filed and briefed a motion to preliminarily enjoin the Blackstone Transaction, and filed an opposition brief to a motion to dismiss filed by LaSalle. From August 27 to August 29, 2018, Kessler Topaz also briefed and successfully petitioned the Court for an order requiring LaSalle to produce additional expedited discovery materials. Finally, on September 4, 2018, Kessler Topaz filed a reply brief in further support of Erie County’s motion to preliminarily enjoin the Blackstone Transaction.
In the interim, on August 22, 2018, Pebblebrook announced a revised acquisition proposal for LaSalle that maintained the exchange ratio but increased the cash component of the proposed consideration from 20% to 30%. The Pebblebrook Offer valued LaSalle at $36.57 per share. On August 27, 2018, the Board announced that the revised Pebblebrook Offer, which provided only a marginal increase in price certainty compared to the prior Pebblebrook proposals that the Board rejected, could now “reasonably be expected to lead to a superior proposal.”
Not until September 5, 2018, however, the day of the preliminary injunction hearing, did the LaSalle Board declare that the Pebblebrook Offer was superior and announce its intent to terminate the Blackstone Transaction. Indeed, in the courthouse on the morning of the preliminary injunction hearing, LaSalle’s counsel informed Kessler Topaz that the Board intended to declare the Pebblebrook proposal superior at a meeting of the Board later that day. While LaSalle sought to avoid the hearing in its entirety, Kessler Topaz maintained that it would not withdraw the motion until the Board’s determination was definitive and there were assurances that the planned shareholder vote on the Blackstone Transaction would not proceed the next day. With the threat of the Court preliminarily enjoining the Blackstone Transaction looming, the Board then officially declared the Pebblebrook Offer superior and LaSalle’s counsel represented to Kessler Topaz that the shareholder vote on the Blackstone Transaction would not proceed.
The following morning, on September 6, 2018, LaSalle announced the termination of the Blackstone Transaction and the execution of a merger agreement with Pebblebrook. LaSalle and Pebblebrook stockholders are now scheduled to vote on the Pebblebrook Offer on November 27, 2018.
The Takeaways
LaSalle exemplifies how fiduciary litigation, even where a court does not enter a determination on the merits or the parties reach a settlement, can maintain critical pressure on directors to ensure that they are protecting shareholders and working to maximize shareholder value. Here, the real possibility of a court-ordered injunction played a significant role in forcing the Board to accede to shareholder demands. Indeed, while the preliminary injunction hearing did not proceed, Kessler Topaz obtained effectively all of the relief sought in the litigation (i.e., the abandonment of the Blackstone Transaction in favor of a transaction with Pebblebrook), and LaSalle shareholders now have the opportunity to vote on a value-maximizing deal.