Morton’s Steakhouse Should Face Suits Over Buyout, Lawyer

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.

Morton’s executives should have taken the Houston-based 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 request 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 that 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.

‘Red Flag’

A lawyer for Morton’s directors countered that 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 the hearing in Wilmington, Delaware. 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.

Bid Cut

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 created a conflict of interest. They also accused Fertitta of “aiding and abetting” a breach of legal duties to shareholders by Morton’s board.

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.

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 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.

Judge’s Comments

Morton’s directors contacted more than 130 potential buyers and 52 parties agreed to sign confidentiality pacts so they could study the chain’s books, Varallo said today. The board spent nine months studying offers, he added.

“The sale process went on longer here” than many investors hang on to their stock investments, Strine noted. The judge added investors hadn’t been able to produce much evidence that Castle Harlan officials had improperly pressured Morton’s directors to effect a quick sale.

“I’m not sure I understand the whole theory of your case,” Strine told Stein today.

The case is In re Morton’s Restaurant Group Inc. Shareholders Litigation, Consolidated 7122, Delaware Chancery Court (Wilmington).

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