NH Hotel shareholder drama shines light on where real power lies

(Shareholder activism is part of corporate America)

Shareholder infighting within NH Hotel Group is reaching a crescendo. The strife, played out in the media for everyone to see, is not unique and illustrates where the real power rests within a company.

The event that sparked it all was HNA Group's acquisition of Carlson Rezidor Hotel Group, a move that some shareholders saw as a conflict of interest since HNA owns almost 30 percent of NH Hotels.

Earlier this week, shareholders in Spain's NH Hotel Group voted to oust one of its co-chairman and three other board members appointed by the company's largest stakeholder, China's HNA Group, which owns 29.5 percent of NH Hotel Group, over the potential conflict of interest in HNA owning Carlson, seen as a direct threat to NH Hotel Group.

Also dispatched was NH Hotel Group CEO Federico González Tejera, a move which HNA, in a statement, called "reckless" and "punitive."

What's going on is a full-on proxy fight, involving multiple parties, all of whom think they are right. Here's a look at the evolution.

Conflict Rises

Back in May, London hedge fund Oceanwood Capital Management, which owns a 10-percent stake in NH Hotel Group, called for the chairman NH Hotel Group to temporarily stand down until the company resolved any conflict of interest related to HNA's buy of Carlson Rezidor.

Said chairman is Charles Mobus, who is the managing partner and president of Benedetto, Gartland & Co., an investment bank that specializes in raising institutional capital for alternative investment funds. According to Mobus' LinkedIn page, he's been a NH Hotel Group board member since 2013, and co-chair since December 2015.

“We perceive a strong conflict of interest in the chairman of the board of NH, Charles Mobus, having his own company advise HNA on the takeover of a competitor company,” Oceanwood wrote in the letter. “As shareholders, we feel we cannot trust that the knowledge acquired by Mr. Mobus as chairman of the NH board was not used in an advisory capacity."

Further, Oceanwood noted that the Carlson deal could influence the directors representing HNA when assessing decisions such as hotels to sell from NH’s portfolio or expansion through new hotels, or a potential merger between NH and Carlson.

Mobus wasn't going to take this action laying down. On June 16, he, on behalf of HNA, sent a letter to NH Hotel Group shareholders alleging that Oceanwood Capital along with Hesperia, which owns 9.2 percent of NH Hotels, colluded to disenfranchise NH Hotel’s duly elected independent directors in order to advance a self-serving agenda, putting the value of NH Hotel shareholders’ investment at significant risk.

In it, HNA urged shareholders to reject Oceanwood’s "cynical attempt to seize control of NH Hotels by voting against all of Oceanwood’s proposals, or by giving their proxy to one of NH Hotel’s four independent directors."

According to the Financial Times, Mobus had discussed the possibility of merging NH Hotels and Carlson once the first deal closes. Other minority shareholders, such as Hesperia, reportedly were also not opposed to a potential NH Hotels-Rezidor deal. That's because, as Mobus wrote in his letter: "Jose Antonio Castro has a potential future conflict of his own: He has clearly stated his preference for awarding the Hesperia Hotels management contract to an NH Hotel competitor."

After Oceanwood took effective control of the board, its directors combined their voting power with Hesperia to terminate without cause NH Hotel CEO Federico Gonzalez.

Boiling Over

On June 22, Mobus fired off another letter to NH Hotel shareholders, again calling out Oceanwood. This time, he played the "rescue card."

"Three years ago, HNA Group rescued NH Hotel Group from the brink of failure by providing a necessary capital infusion...We are disappointed to have been disenfranchised of our fundamental rights as a shareholder under the Spanish Good Governance Code, which provides large shareholders with the right to proportional board representation. Despite having to relinquish our representation on the NH Hotel Board to Oceanwood’s slate of dissident nominees during the pendency of any court action to seek restoration of our rights, HNA remains committed long-term investors."

As recent as March, NH Hotel Group and HNA Group were best friends. The two formed a JV aimed at the creation of a joint office and Chinese brand name, Nuo Han.

The joint venture's purpose was to build a portfolio of NH Hotels in the midscale and upscale segments in China owned by HNA or by third parties with a target to develop 120 to 150 hotels by the year 2020.

This now looks muddled.

It is not yet clear what HNA's next step might be, but analysts have suggested a full takeover bid from HNA for NH or new talks on how to split control of NH's European and oversees hotels so that HNA could escape the conflict of interest.

Shareholder Politics

Shareholders are supposed to be disinterested parties: only focused on doing what's best for the company from both a strategic and financial standpoint. There's no doubt, however, that it's all about power.

The Morgans Hotel Group sale saga is a perfect example. It's had turns, twists, activist fury, Ron Burkle. And it's ongoing, even when it was supposed to be over after SBE Group swooped in to buy the company. Just today, shareholder rights law firm Johnson & Weaver launched an investigation into whether the board members of Morgans breached their fiduciary duties in connection with the proposed sale of the company to SBE.

Sometimes, in the case of the Marriott and Starwood merger, everything goes right—in the end, and not before some gamesmanship.

But shareholder activism is woven into the fabric of corporate America. It's here and it's here and this guy is the epitome of it.

Recent shareholder tussling within the hotel industry is a reminder that everyone answers to someone. And that, ultimately, the trajectory of a company is decided by those who you may never thought should.