Morton’s Restaurant Group Inc. directors shortchanged investors by selling the steakhouse chain to billionaire restaurateur Tilman Fertitta for $116.6 million in 2012 instead of holding out for a higher bid, a lawyer argued.
Houston-based Morton’s executives should have taken the company off the market until someone topped Fertitta’s $6.90-a- share bid for the group of 68 high-end steakhouses, said Jonathan Stein, an attorney for Morton’s shareholders suing over the deal.
Morton’s directors “relied on too many faulty processes here,” Stein said as he urged Delaware Chancery Court Judge Leo Strine today to reject the company’s bid to have the cases thrown out. Strine said he would rule later on whether shareholders can proceed with their lawsuits over the deal.
Morton’s investors contend in court filings directors gave preferential treatment to Fertitta’s “inferior” bid to hasten the chain’s sale. Fertitta is chief executive officer of Landry’s Inc., which has a history of acquiring restaurant chains. In 2011, Houston-based Landry’s agreed to buy McCormick & Schmick’s Seafood Restaurants Inc. for about $131.6 million. Landry’s also owns the Rainforest Cafe and Bubba Gump Shrimp Co. chains.
A lawyer for Morton’s directors countered investors couldn’t show the board botched efforts to shop the company for the highest price or stood to improperly gain from the deal.
Morton’s board “put a big, red flag up that said we’re ready to sell this company,” Greg Varallo, one of the company’s attorneys, told Strine at a hearing in Wilmington, Delaware, today. Directors made “the entirely rational decision” to spend nine months entertaining offers before accepting Fertitta’s bid, he added.
Morton’s, which opened its first restaurant in Chicago in 1978, said in 2011 it was exploring a possible sale to boost shareholder value as the U.S.’s economic uncertainties raised questions about future revenue growth.
Morton’s was taken private by New York-based buyout firm Castle Harlan Inc. for $71.2 million in 2002 after a bidding contest with billionaire financier Carl Icahn. The company sold shares to the public four years later. Castle Harlan, which holds more than 27 percent of Morton’s stock, was its largest shareholder, according to court filings.
Fertitta, who closed the deal in February 2012, took the chain private again in the $116.6 million deal after cutting his bid twice, investors contend in court filings. Castle Harlan officials wrongfully pushed Morton’s directors to approve the deal quickly so they could cash out their investment, shareholders allege.
Disgruntled investors also allege Morton’s original financial adviser, Jefferies Group LLC, wound up providing financing to Fertitta as part of the deal and at created a conflict of interest. Fertitta of “aiding and abetting” the Morton’s board breach of their legal duties to shareholders.
The directors’ lawyers dismissed investors’ claims that the sale to Fertitta amounted to a “fire sale” and said the company brought in another financial adviser after Jefferies’ bankers agreed to provide financing to the buyer.
“The challenged transaction was negotiated at arm’s-length by Morton’s independent and disinterested directors, with the assistance of two sets of financial advisers,” the board’s attorneys said in a March 22 court filing.
Fertitta’s lawyers said in their court filings the restaurateur only agreed to accept financing from Jefferies if Morton’s directors agreed to it.
The case is In re Morton’s Restaurant Group Inc. Shareholders Litigation, Consolidated 7122, Delaware Chancery Court (Wilmington).
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