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March 26, 1996



The Honorable Justice Scariano delivered the opinion of the court: Divito and Burke, JJ., concur.

The opinion of the court was delivered by: Scariano

The Honorable Justice SCARIANO delivered the opinion of the court:

Defendant Playboy Enterprises, Inc., ("Playboy") is a Delaware corporation with headquarters in Chicago, Illinois, which went public in 1971. During the period relevant to the event that forms the issue in this case, defendant Hugh Hefner ("Mr. Hefner") was the "chairman emeritus", founder of Playboy, and the owner of approximately seventy-one percent of Playboy's outstanding common stock. Defendant Christie Hefner ("Ms. Hefner"), Mr. Hefner's daughter, was chairman of Playboy's board of directors ("Board"), its chief executive officer (management director), and a stockholder. Defendant Richard S. Rosensweig was management director and a Playboy executive vice president; and defendants Sol L. Rosenthal, William A. Emerson, and John Purcell were members of the Board. Robert Kamerschen, no longer a defendant in this case, was also a member of the Board. Rosenthal, Emerson, Purcell and Kamerschen were not employees of Playboy and received no compensation from it other than customary director's fees.

Sometime in 1988, Playboy engaged the law firm of Latham & Watkins ("Latham") and the financial firm of Shearson Lehman Hutton ("Shearson") to explore financing alternatives. On November 10, 1988, Playboy's senior management *fn1 informed the Board about its decision to consider stock restructuring alternatives and to retain Shearson. Senior management considered four different restructuring transactions: a leveraged buyout, a sale of stock to a strategic partner, adoption of a leveraged employee stock ownership plan transaction, and a dual class stock recapitalization ("recapitalization plan" or "plan"). Latham and Shearson both recommended a dual class stock recapitalization plan.

Implementation of the plan would mean the adoption also of two charter amendments, which would effect a "one for two reverse stock split" (the recapitalization plan), and would also double the number of shares and establish two classes of stock, one nonvoting, class B, and one voting, class A. The "one for two reverse split and stock dividend" meant that for every share of stock held on the record date, after recapitalization, the shareholder would have one share of class A voting stock, and three shares of class B non-voting stock. The parties agree that the two classes of stock had "substantially identical rights", including dividend rights, with the exception that class A had one vote per share. Thus, for example, a record date holder of 100 shares would own 50 shares of class A voting stock, and 150 shares of class B non-voting stock, a total of 200 shares after recapitalization.

Defendant admits that the recapitalization plan did not provide that a majority of the minority of the shareholders would have been required to adopt the plan. However, the plan, as approved, included a "minority protection" provision which required any shareholder acquiring ten percent or more of class A voting shares to make a tender offer for a proportionate amount of class B non-voting shares equal to the highest price paid for the voting shares.

On February 22, 1990, all of the Board members met to discuss the plan. Prior to the meeting, they received a detailed, thirty-four page memorandum explaining the advantages and disadvantages of the proposed plan. Under a section titled, "Possible Disadvantages", the memorandum stated:

"Mr. Hefner maintains the ultimate right to determine when and whether to sell his controlling interest in the Company, and at what price. If, in the future, Mr. Hefner or his estate or heirs should ever find it necessary or desirable to sell a substantial amount of Existing Stock into the market, such sales could conceivably trigger a control contest for the Company. Because of the Proposal, Mr. Hefner or his estate or heirs would have greater economic flexibility in any future sales of equity, making such a control contest less likely and therefore reducing the possibility that stockholders could, in the event of such a contest, sell their stock at a premium at some future date."

The same section also discussed implementation costs, stockholder transaction costs, and the fact that the stock split would mean that the stock would trade in the range of six to eight dollars per share and that institutional investors "are less likely to consider stocks trading below $10 per share as desirable portfolio investments." According to the minutes of the meeting, Ms. Hefner:

"indicated that the plan would give the company the opportunity, for the first time, to use equity without voting dilution for such purposes as financings, acquisitions and employee benefits, and therefore put 'more arrows in the company's quiver.' Ms. Hefner also noted that the proposal had a number of potential benefits related to maintaining continuity of voting control in the event that Mr. Hefner or his estate might want or need to sell a portion of his equity in the future."

The minutes also indicate that Bob Burgess of Latham, "advised the Board concerning their obligation to consider the proposal and to make a good faith, informed, independent business judgment concerning whether implementation of the proposal was in the best interests of the Company and all of its stockholders." After fielding questions from the Board, Ms. Hefner and Rosensweig were excused from the meeting in order that the non-managing Board could discuss the proposal.

On April 2, 1990, the Board had another meeting to discuss the plan, and authorized Playboy to file a consent solicitation statement with the Securities Exchange Commission ("SEC"). On May 4, 1990, the Board unanimously approved the plan. On May 7, 1990, Playboy announced that the Board had adopted a recapitalization plan, subject to shareholder approval, designed to provide "additional financial flexibility both for the company and Playboy stockholders". A memorandum dated May 7, 1990, was sent to the shareholders along with a "Consent Solicitation Statement". Under a section entitled "Certain Potential Disadvantages of the Proposal" it stated, "implementation of the Proposal will allow Mr. Hefner to (i) continue to exercise control over a majority of the company's voting power even if he chooses to reduce his total equity position significantly".

IEP Consultants, Inc., Playboy's largest shareholder next to Mr. Hefner, sent a letter dated May 31, 1990, addressed to the Board, accusing it of acting secretly to benefit both Mr. and Ms. Hefner, claiming that it was denied "procedural fairness", and accusing the Board members of failing to protect "the interests ...

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