IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
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HELEN KORSINSKY, :
: C.A. No. 16440NC
Plaintiff, :
: CLASS ACTION
: COMPLAINT
-against- :
:
SUPERTEL HOSPITALITY, INC. :
PAUL J. SCHULTE, STEVE H. BORGMANN, :
LOREN STEELE, JOSEPH CAGGIANO, :
RICHARD HERINK, and PMC COMMERCIAL :
TRUST, LTD., :
:
Defendants. :
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Plaintiff, by her attorneys, alleges upon information and belief, except
with respect to the allegations of paragraph 1 which are alleged upon personal
knowledge, as follows:
1. Plaintiff is, and has been at all relevant times, the owner of shares of
the common stock of Supertel Hospitality, Inc. ("Supertel" or the "Company").
2. Supertel is a corporation duly organized and existing under the laws of
the State of Delaware. The Company is primarily engaged in the development,
acquisition and operation of economy-class motels. As of February 1, 1998, the
Company owned and operated 57 motels franchised from Super 8 Motels, Inc. in
Nebraska, Kansas, Iowa, Missouri, Arkansas, Wisconsin and Texas. Supertel also
owned two Comfort Inn motels, one River Valley Suites motel, and two Wingate
Inns.
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3. Defendant PMC Commercial Trust, Ltd. ("PMC") is a real estate investment
trust with its principal place of business at 17290 Preston Road, Dallas, Texas
75252.
4. Defendant Paul J. Schulte ("Schulte") is the President, Chief Executive
Officer and the Chairman of the Board of Directors (the "Board") of the Company.
As of March 13, 1998, defendant Schulte owned or controlled 702,135 shares of
Supertel common stock, or about 14.3% of the total shares outstanding.
5. Defendant Steve H. Borgmann ("Borgmann") is an Executive Vice President
and Chief Operating Officer of the Company, as well as a member of its Board. As
of March 13, 1998, defendant Borgmann owned or controlled 764,458 shares of
Supertel common stock, or 15.6% of the total shares outstanding.
6. Defendant Richard Herink ("Herink") is an Executive Vice President of
Supertel and a member of its Board. As of March 13, 1998, defendant Herink owned
or controlled 40,000 shares of the Company's common stock.
7. Defendant Loren Steele ("Steele") is a director of Super 8 Motels, Inc.
and a member of the Company's Board.
8. Defendant Joseph Caggiano ("Caggiano") is a member of the Board.
9. Defendants Schulte, Borgmann, Herink, Steele and Caggiano are
collectively referred to herein as the "Individual Defendants" or the "Director
Defendants." All of the Company's executive officers and directors as a group
own or control 31.1% of the Company's common stock shares issued and
outstanding.
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10. The Individual Defendants are in a fiduciary relationship with
plaintiff and other public shareholders of Supertel and owe plaintiff and other
members of the Class the highest obligations of good faith, fair dealing,
loyalty and due care.
CLASS ACTION ALLEGATIONS
11. Plaintiff brings this action on her own behalf and on behalf of all
holders of Supertel common stock (the "Class") and their successors in interest.
Excluded from the Class are defendants herein and any person, firm, trust,
corporation, or other entity related to or affiliated with any of defendants.
12. This action is properly maintainable as a class action because:
a. The class is so numerous that joinder of all members is
impracticable. As of March 13, 1998, Supertel had approximately 4,840,000 shares
of common stock issued and outstanding owned by hundreds of record and
beneficial shareholders.
b. There are questions of law and fact that are common to the
Class including, inter alia, the following:
i) whether the Individual Defendants have breached
their fiduciary and other common law duties owed by them to plaintiff and the
other class members;
ii) whether the Individual Defendants are pursuing a
scheme and course of conduct designed to benefit Supertel's management at the
expense and to the detriment of plaintiff and the other class members;
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iii) whether the Individual Defendants are acting on
both sides of the proposed merger complained of herein; and
iv) whether the class is entitled to injunctive
relief or damages as a result of the wrongful conduct of defendants.
c. Plaintiff is committed to prosecuting this action and has
retained competent counsel experienced in litigation of this nature. The claims
of the plaintiff are typical of the claims of other class members and plaintiff
has the same interests as the other members of the class.
d. Defendants have acted in a manner that affects plaintiff
and all Class members alike, thereby making appropriate injunctive relief and/or
corresponding declaratory relief with respect to the class as a whole.
SUBSTANTIVE ALLEGATIONS
13. Supertel is one of the largest franchisees of Super 8 motels based
on the number of motels owned and total rooms rented. The Company develops,
acquires, constructs and operates economy-class motels principally as a
franchisee of Super 8 Motels, inc.
14. For years, despite a strong brand name, desirable locations and a
booming economy, Supertel was a laggard in the hotel industry -- due principally
to poor operational management and a bloated cost structure. As a result, the
Company's common stock share price traded at a discount to its peer group and to
the market generally. In 1997, Supertel, in order to turn around its dismal
operations, instituted an "open-book" management system.
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Under this plan, the Company's managers were given generous financial bonuses
and intensive training, whereby they were properly incentivized to focus on
expense control and to treat the property that they managed as if they were the
owners.
15. The results of the Company's open-book management system were startling
and began to provide relief to the Company's long-suffering shareholders.
Indeed, on February 5, 1998, the Company announced its 1997 fiscal year and
fourth quarter results. For the year, the Company reported a 22% increase in net
income on a 23% increase in revenues, which rose from $37.8 million to $46.3
million. In announcing these results, defendant Schulte stated that "we are
looking forward to another good year in 1998 . . . we expect to see further
benefits from our open-book management system." Defendant Schulte further
stated: We finished 1997 on a very strong note, continuing the healthy revenue
and income comparisons we have experienced since the second quarter of the year,
. . . The real differences in 1997 were the seasoning of and income contribution
from our Texas properties, as well as the positive impact of our new open-book
management system, which gives all property employees a role and stake in the
performance of the Company.
16. On March 18, 1998, the Company continued its string of reporting
better-than-expected results when it announced that first quarter 1998 earnings
will be "much better" than a year ago and in the range of $0.08 to 0.10 per
share. In addition, the Company announced that it "continues to experience
benefits from open-book management" and that, as a result, "net motel operating
income, as a percentage of revenues, will show substantial improvement compared
to the year-earlier quarter" (emphasis added). That day,
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the Company's common stock skyrocketed from $11.125 to $14.00 per share, an
increase of approximately 21%.
17. On April 27, 1998, the Company confirmed its bullish projections
for first quarter 1998 results by announcing that its income for the quarter
"more than doubled" to a stunning $.012 per share, which exceeded even the most
optimistic forecasts. Further, revenue was $10.9 million, an increase of more
than 20% over the $9.1 million reported in the prior-year period. In announcing
these results, defendant Schulte stated that "we outperformed the economy
lodging sector as a whole due in part to the success of initiatives introduced
in 1997, including an open-book management system." He assured investors that
the Company would "realize ongoing benefits" as a result of the open-book
management system and that Supertel sees "signs of an improving external
environment for economy lodging."
18. On June 4, 1998, Supertel announced that it had entered into an
agreement and plan of merger (the "proposed merger") pursuant to which the
Company will merge with PMC. Under the proposed merger, Supertel shareholders
would receive 0.6 shares of PMC common stock and a preclosing dividend of
certain of Supertel's earnings and profits. If, prior to the consummation of the
proposed merger, PMC's common stock share price traded outside the range of
$17.00 to $24.00 per share, or the preclosing dividend is less than $3.00 per
share, than the terms of the proposed merger can be renegotiated.
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19. The day before the proposed merger was announced, the market price for
PMC stock closed at $20.25 per share. Thus, the merger exchange ratio values
each share of Supertel's stock at $12.125 per share and reflects a discount from
the closing price, $13.00 per Supertel share, on June 1, 1998, absent the
pre-closing, indeterminate dividend.
20. The merger agreement is accompanied by a separate but contemporaneous
deal that Supertel's management has negotiated for their own account with PMC,
whereunder PMC has agreed to lease all of Supertel's hotels to Norfolk
Hospitality Management Co. ("Norfolk"), which is owned by officers of Supertel,
led by defendant Borgmann. Supertel and Norfolk have also entered into an
agreement whereunder Norfolk has agreed to buy certain of Supertel's assets.
21. Thus, at the same time the Individual Defendants, with the necessary
assistance of senior management of Supertel, were negotiating the terms of the
proposed merger with PMC purportedly on behalf of Supertel's public
shareholders, they were also negotiating a deal for Supertel's senior
management, from which Supertel's public shareholders will be excluded. The dual
negotiations necessarily created conflicts between the interests of Supertel's
senior management, including defendants Borgmann and Herink, and Supertel's
public shareholders. The conflicts include, but are not limited to, the desire
of Supertel's management, on behalf of Norfolk, to pay the lowest possible rent
to PMC, contrary to the best interests of Supertel's shareholders, soon to
become
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PMC shareholders. A similar conflict arises from Norfolk's desire to pay the
lowest possible consideration for Supertel's assets which it is buying.
22. Under the present circumstances, the Individual Defendants have the
fiduciary duty to act with undivided loyalty on behalf of Supertel's public
stockholders to assure that the best possible transaction is achieved. Further,
the directors of the Company must ensure that no conflict between the interests
of Supertel's public shareholders and its senior management will preclude the
maximization of shareholder value or, if such conflict exists, ensure that it
will be resolved in the best interests of the Company's public stockholders.
23. By negotiating in an atmosphere of inherent conflict, as described
above, the Individual Defendants are precluding the shareholders' enjoyment of
the full economic value of their investment and failing to evaluate and pursue
in good faith other alliances which would better serve the interests of
Supertel's public shareholders.
24. Plaintiff seeks preliminary and permanent injunctive and declaratory
relief directing the Individual Defendants not to put the interests of senior
management, including members of the Board, ahead of the interests of Supertel's
public stockholders, and to make corporate decisions in good faith.
25. Defendant PMC has knowingly aided and abetted the breaches of fiduciary
duty committed by the other defendants to the detriment of Supertel's public
shareholders. Indeed, the proposed
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merger could not take place without the active participation of PMC.
Furthermore, PMC and its shareholders are the intended beneficiaries of the
wrongs complained of and would be unjustly enriched absent relief in this
action. PMC has agreed to the side-deals described above to assure the agreement
and cooperation of Supertel's senior management in the merger, thereby injecting
personal motives into the merger negotiations and compromising the undivided
loyalty which Supertel's management owes to its public shareholders.
26. Only through the exercise of this Court's equitable powers can
plaintiff be fully protected from the immediate and irreparable injury which the
defendants' actions threaten to inflict.
27. Unless enjoined by the Court, defendants will continue to breach their
fiduciary duties owed to plaintiff and the members of the Class, and/or aid and
abet and participate in such breaches of duty, and will pursue the proposed
merger to the irreparable harm of plaintiff and the other members of the Class.
28. Plaintiff and the Class have no adequate remedy at law.
WHEREFORE, plaintiff demands judgment against defendants jointly and
severally, as follows: A. declaring this action to be a class action and
certifying plaintiff as the class representative and her counsel as class
counsel; B. enjoining, preliminarily and permanently, the merger complained of
herein;
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C. to the extent, if any, that the contemplated transaction or
transactions complained of are consummated prior to the entry of this Court's
final judgment, rescinding such transaction or transactions, or granting, inter
alia, rescissory damages to the Class;
D. directing that defendants pay to class members all damages
sustained by them and directing defendants to account for all profits and any
special benefits obtained as a result of their wrongful conduct;
E. awarding plaintiff the costs and disbursements of this
action, including a reasonable allowance for the fees and expenses of
plaintiff's attorneys and experts; and
F. granting plaintiff and the other class members such other
and further relief as may be just and proper.
ROSENTHAL, MONHAIT, GROSS
& GODDESS, P.A.
By: /s/ J. A. Monhait
Suite 1401, Mellon Bank Center
Post Office Box 1070
Wilmington, Delaware 19899
(302) 656-4433
Attorneys for Plaintiff
OF COUNSEL:
BEATIE & OSBORN
599 Lexington Avenue
New York, New York 10022
(212) 888-9000
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