At Orient-Express, board of directors holds all the cards

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.

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