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In re Prime Hospitality5/4/2005
Submitted: February 1, 2005
This case involves the adequacy and fairness of a proposed settlement to this consolidated class action. The claims giving rise to the lawsuit arise out of the sale of Prime Hospitality Corporation to the Blackstone Group. Two separate lawsuits were originally filed, challenging the sale on a variety of grounds. A settlement was quickly struck, and the consolidated cases were provisionally certified as a class action for purposes of the settlement under Rule 23(e). At the hearing on the merits of the proposed settlement, a member of the class, Sheet Metal National Worker's Pension Fund ("Sheet Metal" or "Objector") objected.
Sheet Metal raises two objections. The first is premised on the procedural requisite that a representative plaintiffs' counsel must at all times adequately and vigorously protect the entire class' interests. Sheet Metal contends that this duty includes accounting for any developments since the signing of the settlement agreement. Pointing to events that occurred after the challenged transaction closed, Sheet Metal insists that Prime's board of directors failed to adequately inform itself of the value of Prime. Upon discovering this, plaintiffs' counsel (Sheet Metal argues) should have revoked its offer to settle, abandoned its perfunctory discovery and dug deeper into the circumstances of the sale.
Sheet Metal's second objection is based on the principle that a settlement agreement that asks the class to sacrifice a facially credible claim for small consideration is unfair and should be rejected. Sheet Metal maintains that if Prime's directors were indeed uninformed, defendants' supplemental disclosures would not be adequate or fair consideration for the release of litigable Revlon/Macmillan claims.
Approximately five months have passed since the filing of the amended consolidated complaint. This limited time frame has produced a paltry record with numerous untested allegations and theories-on both sides. Deciding on the fairness of a settlement (and the strength of the underlying claims) based upon such imperfect knowledge and a record so incomplete is never ideal. For the reasons set forth below, I cannot conclude that the proposed settlement, as structured presently, is fair and adequate. Accordingly, in the exercise of my discretion, I decline to enter an order and final judgment in this matter.
I. BACKGROUND
A. Prime Hospitality Prime Hospitality
Corporation was a publicly traded Delaware corporation that owned, managed, and franchised limited service and full service hotels. Prime operates its hotels throughout North America under three proprietary hotel brands-AmeriSuites, Wellesley Inns & Suites and Prime Hotels & Resorts. Prime's board of directors is comprised of seven members. Of those seven, only two are insiders: A.F. Petrocelli, who serves as Prime's Chairman, President and CEO, and Richard Szymanski, who serves as Senior Vice President and CFO.
In the early 2000s, Prime's financial performance mirrored the overall downturn endemic to a hotel industry plagued by soft market conditions and the economic effects of the September 11th calamity. In fact, despite boasting a 13.7 percent increase in revenue and a 13.8 percent growth in EBITDA in 2000, Prime experienced a decline in revenue of 13 percent and 15.3 percent in years 2001 and 2002, respectively, and a decrease in EBITDA of 33 percent and 32.9 percent for those same periods.
By 2003, however, Prime's financial decline was slowing. In the midst of an economic upturn, Prime recommitted to its long-term strategy of growth and improvement and revamped its brand infra
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