Sterling v. Mayflower Hotel Corp.

The Mayflower Hotel Corporation (Mayflower) (defendant) owned a single hotel in Washington, D.C. The Hilton Hotels Corporation (Hilton), along with its subsidiaries, owned and operated many hotels throughout the country. Over a period of several years, Hilton gradually accumulated a majority stake in Mayflower, eventually owning almost five-sixths of the company. Hilton sought to merge Mayflower into it and engaged an independent third party to determine a fair share-for-share exchange rate. The third party’s report compared the operational and financial performance of the two corporations to determine how many shares of Hilton would equate in value to a share of Mayflower stock. The report did not consider the liquidation value of Mayflower or the net-asset values of the two companies. The report ultimately recommended that each share of Mayflower stock be converted to one share of Hilton stock, and the companies entered into a merger agreement using that exchange rate. A group of dissenting Mayflower shareholders (plaintiffs) sued to enjoin the merger, claiming that the terms were not fair. The dissenting Mayflower shareholders argued that the value of Hilton shares they were to receive was worth approximately half of the liquidation value of their Mayflower shares. The chancery court issued a temporary restraining order but denied a permanent injunction after concluding that the merger was fair. The dissenting Mayflower shareholders appealed.