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: Itís good to be a director of Orient-Express ó and itís likely to stay that way.
Itís not because Orient-Expressís 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-Expressís 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-Expressís directors.
Orient-Expressís 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 Containersí 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-Expressís law firm, Appleby Global.
Itís a structure that wouldnít be allowed under Delaware law, but one that effectively gives the directors control over the company. This wouldnít 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-Expressís strategy was clear. Because it controlled the shares, it didnít even need to engage with these bidders. At that time, Taj Hotels, the Tata subsidiary with an interest in Orient-Express, wrote that ďthe Taj Hotels and Dubai Holdings, the two largest public shareholders of OEH, have been