Steven M Davidoff
Orient-Express Hotels, the Bermuda-based owner of luxury hotels, has received an unsolicited offer to be acquired by the Indian Hotels Company, a subsidiary of the Tata Group. In surveying the potential battle for control, I am certain of only one thing: It’s good to be a director of Orient-Express — and it’s likely to stay that way.
It’s not because Orient-Express’s chairman gets to stay at the hotels for free, or that other directors get a 75% discount. Or that these directors have largely served without consequence despite Orient-Express’s poor performance.
Rather, it is because these directors can elect themselves, a unique characteristic among companies worldwide. Shareholders have no real say in the selection of Orient-Express’s directors.
Orient-Express’s shares are divided into Class A and Class B shares, with the Class B shares controlling 64% of the votes. Who owns the Class B shares? It is actually Orient-Express itself. The shares are owned by a company subsidiary and voted by the four directors of the subsidiary, two of whom are also directors of Orient-Express.
The reason this structure exists is because of a unique Bermuda law. In 2000, Orient-Express was slowly spun out of Sea Containers, a now-defunct shipping company. Sea Containers gradually sold off its shares.
But the executives of the shipping company apparently wanted to ensure that even if Sea Containers’ stake went below 50%, the company would be safe from a hostile bid. They accomplished this by placing majority voting control with this subsidiary. And because two of the four directors on this subsidiary are also directors of Orient-Express, they are necessary for any action with respect to these shares. The other two directors, by the way, are lawyers at Orient-Express’s law firm, Appleby Global.
It’s a structure that wouldn’t be allowed under Delaware law, but one that effectively gives the directors control over the company. This wouldn’t be so bad, except Orient-Express has a history of poor performance.
In 2007, the Jumeirah Group of Dubai made a $60-a-share bid for the company. Indian Hotels also expressed interest.
Both bids were vigorously rebuffed by the chief executive at the time, Paul White, and his board. Orient-Express’s strategy was clear. Because it controlled the shares, it didn’t even need to engage with these bidders. At that time, Taj Hotels, the Tata subsidiary with an interest in Orient-Express, wrote that “the Taj Hotels and Dubai Holdings, the two largest public shareholders of OEH, have been