Case 3:16-cv N Document 13 Filed 03/14/16 Page 1 of 30 PageID 326

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1 Case 3:16-cv N Document 13 Filed 03/14/16 Page 1 of 30 PageID 326 UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION ASHFORD HOSPITALITY PRIME, INC., v. Plaintiff, SESSA CAPITAL (MASTER, L.P., SESSA CAPITAL GP, LLC, SESSA CAPITAL IM, L.P., SESSA CAPITAL IM GP, LLC, JOHN E. PETRY, PHILIP B. LIVINGSTON, LAWRENCE A. CUNNINGHAM, DANIEL B. SILVERS and CHRIS D. WHEELER, Defendants; SESSA CAPITAL (MASTER, L.P., v. Counterclaim-Plaintiff; ASHFORD HOSPITALITY PRIME, INC., Counterclaim-Defendant SESSA CAPITAL (MASTER, L.P. v. Third-Party Plaintiff, ASHFORD INC., ASHFORD HOSPITALITY ADVISORS LLC, MONTY J. BENNETT, DOUGLAS A. KESSLER, STEFANI D. CARTER, CURTIS B. MCWILLIAMS, W. MICHAEL MURPHY, MATTHEW D. RINALDI, and ANDREW STRONG, Third-Party Defendants. NO. 3:16-cv N DEFENDANT, COUNTERCLAIM-PLAINTIFF AND THIRD-PARTY PLAINTIFF SESSA S MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION FOR PRELIMINARY INJUNCTION

2 Case 3:16-cv N Document 13 Filed 03/14/16 Page 2 of 30 PageID 327 TABLE OF CONTENTS PRELIMINARY STATEMENT... 1 BACKGROUND AND RELEVANT FACTS... 2 A. The Ashford Entities... 2 B. The Director Defendants Entrench Themselves By Adopting The Proxy Penalty... 3 C. Sessa Announces Its Intended Nominees... 7 D. The Board Uses the Proxy Penalty to Campaign Against the Sessa Candidates... 9 E. The Director Defendants Move to Further Entrench Themselves Using the Penny Preferred Stock F. Sessa Needs Immediate Injunctive Relief LEGAL STANDARD ARGUMENT A. Sessa Is Likely to Succeed on the Merits The Director Defendants owe fiduciary duties to Sessa It is highly likely that Sessa will be able to show the Director Defendants have breached their fiduciary duties to Sessa Sessa is being directly injured by the Director Defendants breach of fiduciary duties The Business Judgment Rule does not shield the Director Defendants The Director Defendants must provide a compelling justification for their actions to defeat Sessa s claim for breach of fiduciary duties The Director Defendants cannot use the Bylaws or the Proxy Penalty to justify their actions The Director Defendants cannot offer a compelling justification for their actions B. There Is Substantial Threat of Irreparable Injury to Sessa i

3 Case 3:16-cv N Document 13 Filed 03/14/16 Page 3 of 30 PageID 328 C. The Threatened Injury to Sessa Outweighs Any Harm to the Director Defendants if they Are Enjoined D. Granting the Injunctive Relief Will Not Disserve the Public Interest CONCLUSION ii

4 Case 3:16-cv N Document 13 Filed 03/14/16 Page 4 of 30 PageID 329 Cases TABLE OF AUTHORITIES Alleco Inc. v. Harry & Jeanette Weinberg Found., Inc., 665 A.2d 1038 (Md Aprahamian v. HBO & Co., 531 A.2d 1204 (Del. Ch , 15, 23 Aronson v. Lewis, 473 A.2d 805 (Del ASARCO LLC v. Americas Min. Corp., 382 B.R. 49 (S.D. Tex. 2007, reconsidered in part on other grounds, 396 B.R. 278 (S.D. Tex Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch , 18 Bluefield Water Ass n, Inc. v. City of Starkville, Miss., 577 F.3d 250 (5th Cir Boland v. Boland, 31 A.3d 529 (Md Byrum v. Landreth, 566 F.3d 442 (5th Cir City of Dallas v. Delta Airlines, Inc., Civil Action No. 3:15-CV-2069-K, 2016 U.S. Dist. LEXIS 2105 (N.D. Tex. Jan. 8, Daniels v. New Ger. Fund, Inc., No. MJG , 2006 U.S. Dist. LEXIS (D. Md. Mar. 26, Dickson v. Morrison, 187 F.3d 629, 1999 WL (4th Cir. July 27, Humana, Inc. v. Jacobson, 804 F.2d 1390 (5th Cir , 21 In re MONY Grp. Inc. S holder Litig., 852 A.2d 9 (Del. Ch Kallick v. SandRidge Energy, Inc., 68 A.3d 242 (Del. Ch passim Kramer v. Liberty Prop. Trust, 968 A.2d 120 (Md iii

5 Case 3:16-cv N Document 13 Filed 03/14/16 Page 5 of 30 PageID 330 Productos Carnic, S.A. v. Cent. Am. Beef & Seafood Trading Co., 621 F.2d 683 (5th Cir Roho, Inc. v. Marquis, 902 F.2d 356 (5th Cir San Antonio Fire & Police Pension Fund v. Amylin Pharms., Inc., 983 A.2d 304 (Del. Ch , 19, 20 Shaker v. Foxby Corp., Case No. 24-C , 2005 Md. Cir. Ct. LEXIS 16 (Mar. 15, passim Shenker v. Laureate Educ., Inc., 983 A.2d 408 (Md , 16 Storetrax.com, Inc. v. Gurland, 915 A.2d 991 (Md Williamson-Dickie Mfg. Co. v. Apparel Ltd., No. 4:15-CV-164-A, 2015 U.S. Dist. LEXIS (N.D. Tex. June 10, Statutes and Codes Md. Code Ann., Corps. & Ass ns 2-404(b( , 15, 23 Md. Code Ann., Corps. & Ass ns 2-504(f iv

6 Case 3:16-cv N Document 13 Filed 03/14/16 Page 6 of 30 PageID 331 Defendant, Counterclaim-Plaintiff and Third-Party Plaintiff Sessa Capital (Master, L.P. ( Sessa submits this Memorandum of Law in support of its motion for preliminary injunction pursuant to Rule 65 of the Federal Rules of Civil Procedure. In its preliminary injunction motion, Sessa seeks an order requiring the members of the incumbent board of directors (the Board of Plaintiff and Counterclaim-Defendant Ashford Hospitality Prime, Inc. ( Ashford Prime to stop violating their fiduciary duties to Sessa, which they have done by wrongfully withholding approval of Sessa s nominees for the Board and by issuing a new class of stock designed to give Ashford Prime s management additional voting power. PRELIMINARY STATEMENT Sessa, a stockholder of Ashford Prime, intends to nominate five new independent directors (the Sessa Candidates to the seven-member Board of Ashford Prime at Ashford Prime s 2016 Annual Meeting. Under applicable Maryland law, the Board, which is currently composed of Monty J. Bennett, Douglas A. Kessler, Stefani D. Carter, Curtis B. McWilliams, W. Michael Murphy, Matthew D. Rinaldi, and Andrew Strong (collectively, the Director Defendants owes a fiduciary duty to the stockholders, including Sessa, to conduct director elections with scrupulous fairness without conferring an advantage to any candidate. The Director Defendants are failing to fulfill this fiduciary duty. Instead, they have taken a series of improper actions, in direct violation of their fiduciary duties, to perpetuate themselves in office. Under the terms of Ashford Prime s advisory agreement with Third-Party Defendants Ashford Inc. and Ashford Hospitality Advisors LLC (collectively the Ashford Advisors, if Ashford Prime stockholders vote to replace a majority of the Director Defendants, the Ashford Advisors can terminate the advisory agreement and force Ashford Prime to pay a termination fee (the Proxy Penalty. However, if the Director Defendants approve the new board members for the limited purposes of the Proxy Penalty, the Ashford Advisors cannot impose the Proxy Penalty. 1

7 Case 3:16-cv N Document 13 Filed 03/14/16 Page 7 of 30 PageID 332 To date, the Director Defendants have wrongfully and in bad faith refused to approve the Sessa Candidates. Instead, they are aggressively using the threat of the Proxy Penalty to discourage stockholders from voting for the Sessa Candidates. Ashford Prime s March 9, 2016 press release, asserts the election of the Sessa Candidates will result in a termination fee that it estimates is in the hundreds of millions of dollars. This poorly disclosed figure, if paid, would cause grave financial harm to Ashford Prime since it could approach Ashford Prime s entire current market capitalization of approximately $300 million. Faced with these numbers, stockholders will be deterred from voting for the Sessa Candidates unless they are approved by the Director Defendants. On February 1, 2016, slightly more than two weeks after the Board learned about the Sessa Candidates, the Director Defendants moved to further entrench themselves by offering approximately 4,375,000 shares of Ashford Prime voting Series C Preferred Stock for a penny per share (the Penny Preferred, primarily to certain of the Director Defendants and company insiders. The Board s action will allow these individuals to acquire 13.3% of Ashford Prime s voting power for a paltry aggregate price of $43,750, further disenfranchising stockholders ahead of director elections. Time is of the essence to put a halt to these improper actions. The Board has taken steps to set the annual meeting for May 18, See App. 2-3, Decl. of Scott Winter. Institutional stockholders and their advisors begin making decisions on proxy solicitation matters weeks in advance of the annual meeting. See id. As a result, it is essential that Sessa s motion for preliminary injunction be decided no later than April 20, BACKGROUND AND RELEVANT FACTS A. The Ashford Entities Ashford Prime is a publicly traded Maryland corporation. See App. 14, Ex. A, excerpts from Ashford Prime K. Its business is investing in the hotel industry. Id. An operating 2

8 Case 3:16-cv N Document 13 Filed 03/14/16 Page 8 of 30 PageID 333 partnership ( Ashford OP that Ashford Prime controls through a general partner holds Ashford Prime s properties and conducts its business. Id. Based on the most recent public disclosure by Ashford Prime, the employees, officers, and directors of Ashford Prime and their families owned more than 75% of the limited partnership units in Ashford OP not owned by Ashford Prime. See App , Ex. B, excerpts showing holders of units of Ashford OP from Ashford Prime s prospectus, July 20, Director Defendant Bennett and his father, Archie Bennett Jr., owned over 50% of such limited partnership units. Id. Ashford Hospitality Trust, Inc. ( Ashford Trust is a Maryland corporation formed in 2003 to invest in hotels, primarily in the United States. See App , Ex. C, excerpts from Ashford Trust K. Ashford Trust spun-off Ashford Prime in November See App. 14, Ex. A. In the lead-up to Ashford Prime s spin-off, Ashford Trust and Director Defendant Bennett repeatedly represented that Ashford Prime would have attractive corporate governance and that Ashford OP limited partners would not vote with Ashford Prime stockholders. See App. 36, 51, 56, Exs. D (Ashford Trust news release, July 17, 2013, E (transcript of Ashford Trust conference call, June 17, 2013, and F (Ashford Trust news release, Jun 17, 2013; App , Ex. G (excerpts from Ashford Prime registration statement, October 23, 2013; and App , Ex. H (Ashford Prime registration statement, Jan. 23, Ashford Inc. is a publicly-traded Delaware corporation that is a hedge fund manager and that also provides advisory services to Ashford Prime through its operating subsidiary, Ashford Hospitality Advisors LLC ( Ashford LLC. See App. 78, Ex. I, excerpts from Ashford Inc K. Ashford Trust spun off Ashford Inc. in November Id. B. The Director Defendants Entrench Themselves By Adopting the Proxy Penalty On or about November 19, 2013, Ashford Prime and Ashford OP entered into the original advisory agreement with Ashford LLC. See App , Ex. J, Advisory Agreement, Ex of 3

9 Case 3:16-cv N Document 13 Filed 03/14/16 Page 9 of 30 PageID 334 Ashford Prime 8-K, dated Nov. 19, Under the terms of the original advisory agreement, if a Company Change of Control event occurred, Ashford LLC could terminate the advisory agreement and impose a termination fee on Ashford Prime. App. 120, Ex. J, 16(c. The election of outside directors was not a Company Change of Control event in the original advisory agreement or in two subsequent amended advisory agreements. App , Ex. J, 16(a. However, in 2014 and 2015, the Director Defendants control over Ashford Prime began to erode. At the May 2014 annual meeting, stockholders recommended that the Board opt out of the Maryland Unsolicited Takeover Act ( MUTA and thereby remove certain barriers to a change of control. See App. 128, Ex. K, Ashford Prime 8-K, May 13, 2014, Item The Board vigorously opposed this measure, arguing that Maintaining the board s ability to utilize some or all protections provided by the Act, if and only if future circumstances warrant, benefits us and our stockholders by enhancing our ability to defend the Company and the interests of our stockholders against an undesired takeover attempt and reducing the possibility that a third party could effect a sudden or surprise change of control of our board through a proxy fight or consent solicitation to remove the board. See App. 166, Ex. L, 2014 Proxy Statement (emphasis added. The Board took a year to implement the stockholders wishes and opt out of MUTA. See App , Ex. M, Ashford Prime Form 8- K, dated May 12, 2015, Item At the May 2015 annual meeting, the Board tried to regain some of the entrenchment it had enjoyed under MUTA by proposing that only stockholders holding 1% or more of Ashford Prime s stock continuously for at least one year could nominate directors. Id., App. 176, Item 5.07, Proposal 5. The stockholders resoundingly voted down this proposal, with over 15,000,000 shares being voted against it while fewer than 3,500,000 shares were voted for it. Id. Unfortunately, the Board did not respect the stockholders desire that the Board not be entrenched. On June 10, 2015, just weeks after opting out of MUTA and losing the stockholder vote on its proposal to limit the stockholders that could nominate candidates, Ashford Prime 4

10 Case 3:16-cv N Document 13 Filed 03/14/16 Page 10 of 30 PageID 335 entered into a Third Amended and Restated Advisory Agreement (the Third Advisory Agreement with the Ashford Advisors. See App , Ex. N, Third Advisory Agreement, (Ex. 10.1, Ashford Prime 8-K, June 10, In the Third Advisory Agreement, the Director Defendants and the Ashford Advisors added a new event constituting a Company Change of Control : (iv during any five-year period, the members of the Board of Directors of the Company change such that the members who constitute the Board of Directors on the Effective Date [June 10, 2015] (the Company Incumbent Board no longer constitute at least a majority of the board of the Company; provided, however, that any individual becoming a director after the Effective Date whose election to the board is approved or recommended to stockholders of the Company by a vote of at least a majority of the Company Incumbent Board shall be considered as though such individual were a member of the Company Incumbent Board. Id. at App (emphasis added. For the first time, if stockholders voted to replace a majority of the Director Defendants with nominees not approved by the Director Defendants, the Ashford Advisors could terminate the advisory agreement and force Ashford Prime to pay a termination fee (the Proxy Penalty. The Director Defendants never sought stockholder approval for the Proxy Penalty; instead, they unilaterally imposed it. 1 Director Defendant Bennett has admitted that the purpose of the Proxy Penalty is to entrench the Director Defendants. Explaining why the Third Advisory Agreement added the Proxy Penalty, Director Defendant Bennett said [o]n the change of control, we did button it up. See App , Ex. P, Tr. of Second Quarter Earnings Call, Aug. 7, The Director Defendants have conceded that the termination fee is enormous. In a March 9, 2016 press release, Ashford Prime stated that it estimates the termination fee to be in the hundreds of millions of dollars. See App. 249, Ex. Q, Ashford Prime Press Release. 1 Ashford Prime has a credit agreement with a poison put provision similar to the Proxy Penalty, but instead of a termination fee, the creditor may demand immediate repayment of loans upon a Board change of control. See App. 234, Ex. O. However, as of December 31, 2015, no loans were outstanding under the credit agreement and the poison put would require no repayments. 5

11 Case 3:16-cv N Document 13 Filed 03/14/16 Page 11 of 30 PageID 336 A termination fee of this magnitude is utterly unconscionable. As of the close of business on March 11, 2016, Ashford Prime s market capitalization was approximately $300 million. The termination fee is also vastly disproportionate to the advisory fees Ashford Prime pays Ashford Advisors. In 2015, the Ashford Advisors were paid $8.65 million in base fees and also accrued $3.82 million in incentive fees to be paid out over time. See App. 232, Ex. O, excerpts from Ashford Prime 2015 earnings release. The Proxy Penalty thus obviously deters Ashford Prime stockholders from voting for any nominees not approved by the Board and thereby entrench the Director Defendants. The Proxy Penalty is also suspect because it is not the product of arms-length negotiations between unrelated parties. The parties to the Third Advisory Agreement are Ashford Prime, Ashford OP and the Ashford Advisors. The Ashford Advisors appoint all of Ashford Prime s officers. See App , Ex. N. Director Defendant Bennett was chairman of the board of Ashford Prime, party to the Third Advisory Agreement that is burdened by the Proxy Penalty, and chairman of the boards of the Ashford Advisors, the parties to the Third Advisory Agreement that benefit from the Proxy Penalty. 2 See App , Ex. R, information listed on websites of Ashford Trust, Ashford Prime, and Ashford, Inc. Director Defendant Kessler is the President of all three companies, David Brooks is Chief Operating Officer and General Counsel of all three companies, and Deric Eubanks is Chief Financial Officer of all three companies. Id. In fact, Defendant 2 As of March 10, 2015, Director Defendant Bennett owned approximately 5% of Ashford Prime s outstanding common stock. See App. 303, Ex. S, Ashford Prime 14A, Apr. 17, 2015; App. 313, Ex. T, Ashford Trust Notice of Annual Meeting of Stockholders, Apr. 17, His ownership of Ashford Inc. is far more substantial. As of January 22, 2016, Bennett owned 11% of Ashford Inc. s outstanding common stock, and stood to receive an additional 8.9% of Ashford Inc. s common stock under a deferred compensation plan. See App. 326, Ex. U, Ashford Inc. 14A, Jan. 27, As of January 22, 2016, Bennett s father owned 4.2% of Ashford Inc. s common stock. Id. Under a merger agreement announced in September 2015, the Bennetts could increase their ownership of Ashford Inc. even further. See App. 337 & 348, Ex. V, Ashford Inc. 14A, Jan. 27,

12 Case 3:16-cv N Document 13 Filed 03/14/16 Page 12 of 30 PageID 337 Director Brooks executed the Third Advisory Agreement on behalf of all three companies. See App. 124, Ex. J, Third Advisory Agreement. C. Sessa Announces Its Intended Nominees On December 21, 2015, Sessa requested the form of questionnaire referred to in the advance notice provisions of Ashford Prime s bylaws (the Bylaws. See App. 376, Ex. W, Letter; App. 384, Ex. X, Ashford Prime Bylaws, Section 11(a(4. The questionnaire is to include all information relating to the Proposed Nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the Proposed Nominee as a director in an election contest. Id. The deadline to submit questionnaires to nominate director candidates was January 18, 2016, although because Ashford Prime s office was closed on that day, the deadline was January 15, After repeated requests, Ashford Prime eventually supplied the questionnaire on January 8, 2016, only a week before the deadline for nominations. See App , Ex. Y. The questionnaire included unusual demands for information, some of which were so overly broad as to make it virtually impossible to answer the questions completely. For instance, certain questions required disclosure of each discussion with any person or entity regarding a laundry list of items, from Ashford Prime s business strategy to the objectives of unrelated Ashford Prime stockholders to thoughts about Ashford Prime s strategic alternatives project (of which none of the Defendants have provided meaningful information, beyond its existence. Id. Furthermore, the questions demanded copies of all related analysis, s, correspondence or documentation. Id. The questions were such a broad fishing expedition as to demand disclosure of attorney-client privileged communications, as well as conversations among employees of Sessa or between the Sessa Candidates and their family members. These highly unusual questions did not address any legitimate purpose of bylaws notice provisions or proxy rules and were a transparent attempt to harass the Sessa Candidates and to entrench the Defendant Directors. 7

13 Case 3:16-cv N Document 13 Filed 03/14/16 Page 13 of 30 PageID 338 On January 15, 2016, Sessa delivered a Notice of Proposed Nominees for Election to the Board of Directors (the Sessa Notice, which enclosed the questionnaires for each Sessa Candidate. See App , Ex. Z, Sessa Notice. The Sessa Notice advised Ashford Prime that Sessa intended to nominate the five Sessa Candidates to the seven member Board of Ashford Prime. Id. The Sessa Notice included a detailed description of the Sessa Nominees backgrounds and qualifications. Id. at App As a group, they have over 45 years of investment management and banking experience and over 35 years in real estate investment and management experience and have served on the boards of 16 public companies. Id. at App Three of them hold MBAs - from Harvard, The Wharton School, and Berkeley. Id. One is a chaired professor at The George Washington University Law School and is a former Director of the Samuel and Ronnie Heyman Center on Corporate Governance at Cardozo School of Law. In sum, each is a highly qualified nominee. Id. Sessa delivered 430 pages of information to the Board, including all information required by applicable securities laws to be disclosed in a proxy contest. 3 In the Sessa Notice, Sessa requested that the Board approve the Sessa Candidates so that the election of the Sessa Candidates, if they were to prevail at the annual meeting and constitute a majority of the Board, would not trigger the Proxy Penalty; Sessa asked that such approval be made by February 1, Id. at App Sessa understood Ashford Prime has always held its annual stockholder meeting in May and Sessa needed approval by February 1, 2016 in order to give the Sessa Candidates a fair opportunity to run for election without the coercive Proxy Penalty interfering with stockholders consideration of the Sessa Candidates. The Board appears to be planning to hold the annual meeting on May 18, See App. 2-3, Decl. of Scott Winter. Despite Sessa s requests and compliance with the notice provisions of the Bylaws, the Board has failed to approve any of the Sessa Candidates. The Board continues to claim that Sessa has not 3 Sessa can supply the complete Sessa Notice package to the Court upon request. 8

14 Case 3:16-cv N Document 13 Filed 03/14/16 Page 14 of 30 PageID 339 complied with the Bylaws and has caused Ashford Prime to file two separate actions against Sessa, first this action and then a second action in the District Court for Dallas County, Texas. 4 D. The Board Uses the Proxy Penalty to Campaign Against the Sessa Candidates The Director Defendants have stated that the Board will delay its decision regarding approval of the Sessa Candidates until Ashford Prime files its definitive proxy statement with the SEC. See App. 467, Ex. AA, excerpts from Ashford Prime S-3, Feb. 4, This delay tactic is designed to give the Director Defendants time to take advantage of the upper hand they have created through the Proxy Penalty. And the Director Defendants are, in fact, taking advantage. In a February 4, 2016 filing with the SEC, the Board warned that Sessa s proxy contest: would allow Ashford LLC to terminate the advisory agreement and require the Company to pay a substantial termination fee to Ashford LLC upon such termination See id. at App Less than two weeks later, on February 17, 2016, the Board continued using the Proxy Penalty in its campaign of coercion against the stockholders, stating in a press release that Sessa s campaign... fails to address... the potential triggering of a significant fee under the management agreement.... See App. 472, Ex. BB, Ashford Prime news release. The Board is escalating its campaign of coercion. On March 9, 2016, the Board stated in a press release that stockholders should not vote for the Sessa Candidates because their election would result in a contractual obligation for the Company to render a significant termination payment to our advisor, which we estimate to be hundreds of millions of dollars.... See App. 475, Ex. CC, Ashford Prime news release (emphasis added. 4 Sessa intends to remove the state court action to Federal Court so that this entire controversy can be resolved efficiently in one proceeding in this Court. Sessa has already dismissed an action it commenced in Maryland in early February for the same reason. 9

15 Case 3:16-cv N Document 13 Filed 03/14/16 Page 15 of 30 PageID 340 Nowhere in Ashford Prime s public statements has the Board disclosed that it can simply approve the Sessa Candidates and avoid the termination fee entirely. Instead, the Board is using the threat of the Proxy Penalty to frighten stockholders into voting for the Director Defendants. These improper tactics by the Director Defendants are having their intended effect. An analyst recently stated that because a change of control of the Board would trigger the Proxy Penalty shareholders would be best served by voting against Sessa s nominees. See App , Ex. DD, Article by Jake Mooney of SNL Financial, Feb. 4, It appears that the Board is setting the annual meeting for May 18. See App. 2-3, Decl. of Scott Winter. Institutional stockholders and their advisors begin making decisions on proxy solicitation matters weeks in advance of the annual meeting. Id. As a result, it is essential that Sessa s motion for preliminary injunction be decided no later than April 20, E. The Director Defendants Move to Further Entrench Themselves Using the Penny Preferred Stock On February 1, 2016, the Director Defendants authorized the sale of the Penny Preferred to owners of Ashford OP limited partnership units. 5 See App. 485, Ex. EE, Ashford Prime 8-K. The Director Defendants, Director Defendant Bennett s father, and other members of senior management of Ashford Prime will be the principal recipients. Id.; App , Ex. B. The Penny Preferred will permit those unit holders to acquire 13.3% of Ashford Prime s voting power for only $43,750. To obtain the same voting power, a stockholder would need to invest over $45 million based on the March 11, 2016 closing price of $10.44 for Ashford Prime common stock. Ashford Prime has stated it expects the Penny Preferred will be purchased, which will undermine Ashford Prime s assurances that the owners of Ashford OP units would not be able to vote along with the holders of common shares of Ashford Prime. App. 493, Ex. FF, Ashford Prime Letter to Sessa, 5 As of March 9, 2016, Ashford Prime represented it had not issued the Penny Preferred. 10

16 Case 3:16-cv N Document 13 Filed 03/14/16 Page 16 of 30 PageID 341 Mar. 10, If not checked, this unwarranted give-away of votes expropriates existing stockholders voting rights for the purpose of entrenching the Director Defendants. F. Sessa Needs Immediate Injunctive Relief It appears that the Director Defendants are planning to set the annual meeting for May 18. See App. 2-3, Decl. of Scott Winter. Institutional shareholders and their advisors begin making decisions on proxy solicitation matters weeks in advance of the annual meeting. Id. Without an order from the Court, the Director Defendants will delay approving the Sessa Candidates for as long as possible in order to impede Sessa s solicitation of proxies, create and foster doubt about the impact of electing the Sessa Candidates, and prevent a fair election process. The Board may even withhold approval entirely in an effort to coerce stockholders to vote for the Director Defendants. Given the publicity to date, the Director Defendants unfair campaign likely has already irreversibly tainted the election. Unless the Court promptly orders the Board to approve the Sessa Candidates and to rescind its authorization of the Penny Preferred, Sessa will lose the opportunity to participate in anything resembling a fair proxy contest. LEGAL STANDARD A preliminary injunction requires a showing of: (1 a substantial likelihood of success on the merits; (2 a substantial threat of irreparable injury; (3 the threatened injury to the movant outweighs the threatened harm to the party sought to be enjoined; and (4 granting the injunctive relief will not disserve the public interest. See Bluefield Water Ass n, Inc. v. City of Starkville, Miss., 577 F.3d 250, (5th Cir In establishing a substantial likelihood of success, the movant is not required to prove his entitlement to summary judgment. City of Dallas v. Delta Airlines, Inc., Civil Action No. 3:15-CV K, 2016 U.S. Dist. LEXIS 2105, *25 (N.D. Tex. Jan. 8, 2016 (citing Byrum v. Landreth, 566 F.3d 442, 446 (5th Cir A substantial threat of irreparable injury exists if there is a significant 11

17 Case 3:16-cv N Document 13 Filed 03/14/16 Page 17 of 30 PageID 342 threat of injury from an impending action, the injury is imminent, and money damages will not fully repair the injury. Humana, Inc. v. Jacobson, 804 F.2d 1390, 1394 (5th Cir As the level of persuasion in relation to the other three factors increases, the degree of persuasion necessary on the substantial likelihood of success factor may decrease. See Productos Carnic, S.A. v. Cent. Am. Beef & Seafood Trading Co., 621 F.2d 683, 686 (5th Cir ( Where the other factors are strong, a showing of some likelihood of success on the merits will justify temporary injunctive relief.. The standards provided by the substantive law are used to determine the likelihood of success on the merits. Roho, Inc. v. Marquis, 902 F.2d 356, 358 (5th Cir Federal courts sitting in Texas apply the law of the state of incorporation when a corporation s internal affairs are implicated. ASARCO LLC v. Americas Min. Corp., 382 B.R. 49 (S.D. Tex. 2007, reconsidered in part on other grounds, 396 B.R. 278 (S.D. Tex Ashford Prime is incorporated in Maryland, so Maryland law applies to Sessa s claim for breach of fiduciary duties. Maryland courts find Delaware decisions highly persuasive on matters of Maryland corporate law. See, e.g., Kramer v. Liberty Prop. Trust, 968 A.2d 120, (Md (where Maryland case law did not clearly address the meaning of the term proceeding in Maryland s corporate statute, court looked to Delaware as highly persuasive authority because of expertise in matters of corporate law; see also Shaker v. Foxby Corp., Case No. 24-C , 2005 Md. Cir. Ct. LEXIS 16, *13 (Mar. 15, 2005 (concluding that Maryland corporate law provides stockholders the same protections as Delaware law in similar factual contexts. ARGUMENT A. Sessa Is Likely to Succeed on the Merits In Maryland, the following elements must be shown to demonstrate a breach of fiduciary duty: (1 the existence of a fiduciary relationship, (2 a breach of duty owed by the fiduciary to the beneficiary, and (3 harm resulting from the breach. Alleco Inc. v. Harry & Jeanette Weinberg Found., 12

18 Case 3:16-cv N Document 13 Filed 03/14/16 Page 18 of 30 PageID 343 Inc., 665 A.2d 1038, 1046 (Md Sessa is likely to prevail on its claim that the Director Defendants have breached their fiduciary duties. 1. The Director Defendants owe fiduciary duties to Sessa The directors of Maryland corporations owe stockholders duties of care, loyalty, and good faith. See Shenker v. Laureate Educ., Inc., 983 A.2d 408, 420 (Md. 2009; see also Storetrax.com, Inc. v. Gurland, 915 A.2d 991, (Md These fiduciary duties require a strict and faithful discharge of duty by directors. Shenker, 983 A.2d at 420. Maryland law gives stockholders the right to elect directors at annual meetings. Md. Code Ann., Corps. & Ass ns 2-404(b(1. Where the rights attendant to stock ownership are adversely affected, shareholders generally are entitled to sue directly. Shenker, 983 A.2d at 424. It follows that the fiduciary duties of directors prohibit them from interfering with this right. The fiduciary duties owed by directors to stockholders also include the duty to maintain the integrity of the corporate election process with scrupulous fairness, without conferring any advantage on any particular candidate. See Shaker, 2005 Md. Cir. Ct. LEXIS at *4, *13 (quoting Aprahamian v. HBO & Co., 531 A.2d 1204, (Del. Ch in the context of the corporation s duties to ensure fair voting procedures and who can challenge those procedures. 2. It is highly likely that Sessa will be able to show the Director Defendants have breached their fiduciary duties to Sessa Because of the Proxy Penalty, Ashford Prime is faced with a termination fee of hundreds of millions of dollars. Its primary purpose and of the Director Defendants refusal to approve the Sessa Candidates is to deter stockholders from voting for the Sessa Candidates. The Proxy Penalty is not the product of an arms-length negotiation. And the Board implemented it even after the stockholders made clear their desire that the Board not be entrenched. Director Defendant Bennett admitted soon thereafter that the purpose of the Proxy Penalty with respect to a change of control was to button it up. See App , Ex. P. Indeed, the implementation of the Proxy Penalty was itself a breach of the Director Defendants fiduciary duties. 13

19 Case 3:16-cv N Document 13 Filed 03/14/16 Page 19 of 30 PageID 344 By not approving the Sessa Candidates, the Director Defendants are wrongfully leveraging the Proxy Penalty to coerce stockholders into not voting for the Sessa Candidates. For instance, Ashford Prime warned in a March 9, 2016 press release that election of the Sessa Candidates would result in a termination payment it estimates to be hundreds of millions of dollars relative to Ashford Prime s market capitalization of approximately $340 million. See App. 249, Ex. Q. See also App. 468, Ex. AA, excerpts from Ashford Prime S-3, Feb. 4, 2016 (the Proxy Penalty could require the Company to pay a substantial termination fee; and App. 472, Ex. BB, Ashford Prime press release, Feb. 17, 2016 (election of Sessa Candidates raises critical risks including the potential triggering of a significant fee under the management agreement.... There is no question that the Proxy Penalty and the Director Defendants refusal to neutralize it by approving the Sessa Candidates, interferes with Sessa s right to elect directors. The Delaware Court of Chancery has addressed the likely effects of proxy puts, which are similar to the Proxy Penalty. See, e.g., Kallick v. SandRidge Energy, Inc., 68 A.3d 242 (Del. Ch. 2013; see also San Antonio Fire & Police Pension Fund v. Amylin Pharms., Inc., 983 A.2d 304 (Del. Ch In a proxy put if the incumbent board is ousted by director nominees that are not approved by the incumbent board, the company faces an early refinancing and replacing existing debt with new debt. SandRidge, 68 A.3d at ; Amylin, 983 A.2d at The Delaware Court of Chancery found that proxy puts had the obvious potential to tilt the electoral playing field toward the incumbent board. SandRidge, 68 A.3d at 258; Amylin, 983 A.2d at 306. The Proxy Penalty is even more egregious. It would subject Ashford Prime to an enormous termination fee of hundreds of millions of dollars. Unlike the proxy put in SandRidge, this would create a liability where none has ever existed. It thus has even more potential to tilt the electoral playing field toward the Director Defendants. As a result, it is highly likely that Sessa will be able to show that the Director Defendants are breaching their fiduciary duties by not approving the Sessa Candidates. 14

20 Case 3:16-cv N Document 13 Filed 03/14/16 Page 20 of 30 PageID 345 As to the Penny Preferred, the Director Defendants authorized the Penny Preferred just over two weeks after learning of the Sessa Candidates. This timing coincides with the Director Defendants use of the Proxy Penalty to coerce the stockholder vote. And it contradicts assurances that Defendant Bennett made when Ashford Prime was spun off from Ashford Trust that the holders of Ashford OP would not be able to vote alongside Ashford Prime stockholders. These facts make it highly likely that Sessa will be able to show that the Director Defendants authorized the Penny Preferred primarily in order to shift the balance of voting power in their own favor. The Director Defendants are thus improperly interfering with Sessa s right to elect directors and to participate in fair elections. See Md. Code Ann., Corps. & Ass ns 2-404(b(1 (Maryland stockholders have the right to elect directors; See Shaker, 2005 Md. Cir. Ct. LEXIS at *4, *13 (quoting Aprahamian v. HBO & Co., 531 A.2d 1204, (Del. Ch (incumbent directors have a duty to ensure fair elections; see, also Dickson v. Morrison, 187 F.3d 629, 1999 WL , *3, *13 (4th Cir. July 27, 1999 (unpublished table decision(upholding a preliminary injunction under Maryland law against the issuance of stock where directors set a deadline to purchase stock so as to deprive plaintiff stockholder of her preemptive rights and thereby deny her and similarly situated stockholders of their proportionate ownership interest and voting power in the company. 3. Sessa is being directly injured by the Director Defendants breach of fiduciary duties The Director Defendants refusal to approve the Sessa Candidates is allowing them to taint the election process by using the Proxy Penalty to scare stockholders into not voting for the Sessa Candidates. By tainting the election process, the harm to Sessa is already occurring. See SandRidge, 68 A.3d at 264 (finding immediate, irreparable harm to plaintiff stockholder when the directors leveraged their proxy put to enhance their chances of procuring stockholder votes. Furthermore, it is highly likely that Sessa will be directly injured by the issuance of Penny Preferred. The cost of the Penny Preferred, a penny per share, makes it highly likely certain 15

21 Case 3:16-cv N Document 13 Filed 03/14/16 Page 21 of 30 PageID 346 Director Defendants and other insiders will purchase the shares. This will result in Sessa and other stockholders suffering a loss of voting power, thereby interfering with their right to elect directors. 4. The Business Judgment Rule does not shield the Director Defendants The Director Defendants are likely to argue that their refusal to approve the Sessa Candidates is shielded by Maryland s business judgment rule, which insulates the business decisions made by the director from judicial review. Shenker, 983 A.2d at 424. A popular formulation of the rule is as follows: It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption. Boland v. Boland, 31 A.3d 529, 548 (Md (citing the Delaware case Aronson v. Lewis, 473 A.2d 805, 812 (Del But in Maryland, the business judgment rule does not apply when stockholders are directly injured by the actions of a board. See Shenker, 983 A.2d at 424 (infringing on a stockholder s right to vote is a direct harm suffered by the stockholder. Since Sessa is being directly harmed by the Director Defendants refusal to approve the Sessa Candidates and will likely be harmed by the issuance of the Penny Preferred, the business judgment rule does not apply. The SandRidge case is instructive. In SandRidge, the court declined to apply the business judgment rule to the board s refusal to approve dissident nominees because it found that the proxy put had the obvious potential to tilt the electoral playing field toward the incumbent board. SandRidge, 68 A.3d at The Proxy Penalty is even more likely to tilt the electoral playing field toward the Director Defendants than the proxy put in SandRidge. If the business judgment rule could not be applied in SandRidge, it should not be applied to the Board s refusal to approve the Sessa Candidates. 16

22 Case 3:16-cv N Document 13 Filed 03/14/16 Page 22 of 30 PageID 347 Maryland courts also refuse to apply the business judgment rule where director action is designed primarily to interfere with stockholder voting rights. See Shaker, 2005 Md. Cir. Ct. LEXIS at *13; see also Daniels v. New Ger. Fund, Inc., No. MJG , 2006 U.S. Dist. LEXIS 96145, *10 (D. Md. Mar. 26, The purpose and effect of the Proxy Penalty and the Director Defendants refusal to nullify it by approving the Sessa Candidates is to deter dissident nominees, suppress stockholder voting for them, and confer an advantage on the incumbent Board in the electoral process. Sessa is likely to be able to show that the Director Defendants authorized the Penny Preferred to partially disenfranchise Sessa and other stockholders ahead of director elections, thereby further entrenching themselves. Thus, there are two independent reasons why the business judgment rule is inapplicable to this case: (1 Sessa has been directly injured by the refusal of the Director Defendants to approve the Sessa Candidates and will be directly injured by the issuance of the Penny Preferred and (2 the primary purpose of the refusal of the Director Defendants to approve the Sessa Candidates and the their authorization of Penny Preferred is to interfere with stockholder voting rights. 5. The Director Defendants must provide a compelling justification for their actions to defeat Sessa s claim for breach of fiduciary duties When directors frustrate stockholder rights to participate in a fair election, the burden is on the directors to demonstrate a compelling justification. See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 655, 661 (Del. Ch (holding that where directors increased the size of the corporation s board in order to prevent stockholders from placing a majority of new directors on the board, the directors had to demonstrate a compelling justification for their actions. Just as in Blasius, the primary motivation of the Director Defendants in refusing to approve the Sessa Candidates and in authorizing the Penny Preferred is to deprive the stockholders of their rights to elect a majority of new directors. Thus, the compelling justification standard applies. This shifts the burden to Director Defendants to justify their actions. And that is an extremely difficult burden 17

23 Case 3:16-cv N Document 13 Filed 03/14/16 Page 23 of 30 PageID 348 to satisfy; even actions taken in good faith, for instance where a board believed a dissident stockholder s plans for the corporation were not in the best interests of the stockholders as a whole, do not constitute a compelling justification. Id. at 658. Since the Board must provide a compelling justification for its actions in order to escape Sessa s breach of fiduciary duties claim, Sessa is even more likely to succeed on its claim. 6. The Director Defendants cannot use the Bylaws or the Proxy Penalty to justify their actions Nothing in the Bylaws, including the advance notice provisions, states that the Board has a right to approve or vet candidates. The Bylaws simply state simply that [n]omination of candidates for election as directors of the Corporation at any annual or special meeting of stockholders may be made... by any stockholder entitled to vote at such annual meeting and has complied with Article I, Section 11. App. 386, Ex. X, Art. II, Section 3. The only director qualification in the bylaws is to be younger than 70, which all of the Sessa Candidates meet. Id., Article II, Section 4 Qualification. Maryland corporation law does not authorize the use of advance notice provisions as a way to approve or vet candidates or to impose overly burdensome and unreasonable information requests. See Md. Code Ann., Corps. & Ass ns 2-504(f ( [t]he charter or bylaws may require a stockholder proposing a nominee for election as a director or any other matter for consideration at a meeting of the stockholders to provide advance notice of the nomination..... In addition, incumbent directors cannot manipulate bylaws in order to create barriers to nominating new directors. See Shaker, 2005 Md. Cir. Ct. LEXIS at *4, *11, *16 (holding that stockholder could maintain an action against the board based on allegations of discriminatory enforcement of a facially inoffensive bylaw notice provision and the enactment of unreasonable qualification provisions to block stockholder s director nominees. The Board is in violation of Maryland law because it is using the Bylaws to obstruct stockholder nominations by claiming non-compliance with their 18

24 Case 3:16-cv N Document 13 Filed 03/14/16 Page 24 of 30 PageID 349 unreasonable and unauthorized demands. If the Board is allowed to continue to use the Bylaws in this manner, it will be allowed to severely limit or even eliminate the stockholders right to elect directors. Nor can the approval provision of the Proxy Penalty be used as an excuse to refuse to approve the Sessa Candidates. The Proxy Penalty is not the product of an arms-length negotiation. The Director Defendants implemented it without stockholder approval even after the stockholders made clear their desire that the Board not be entrenched. Director Defendant Bennett admitted soon thereafter that the purpose of the Proxy Penalty with respect to a change of control was to button it up. See App , Ex. P. And the punitive and unconscionable magnitude of the termination in the hundreds of millions of dollars when Ashford Prime has a market cap of approximately only $300 million shows its purpose is to entrench the Board by deterring stockholders from voting for unapproved candidates. The implementation of the Proxy Penalty was itself a breach of the Director Defendants fiduciary duties. The Board cannot use one breach of fiduciary duty (the implementation of the Proxy Penalty to perpetuate another (the Director Defendants refusal to approve the Sessa Candidates. The Director Defendants may cite the Delaware Court of Chancery s discussion of incumbent boards approval rights in the context of proxy puts in SandRidge and Amylin. The implied duty of good faith and fair dealing in the contracts at issue was key in both cases. In Amylin, the incumbent directors approved dissenting board nominees despite publicly opposing them, a decision challenged by an indenture trustee as a breach of the proxy put. Amylin, 983 A.2d at 306. The Delaware Court of Chancery found that the directors right of approval did not require the directors to approve of or recommend the nominees for election; instead, the directors could approve any nominee as long as such action comported with the company s implied 19

25 Case 3:16-cv N Document 13 Filed 03/14/16 Page 25 of 30 PageID 350 duty of good faith and fair dealing inherent in the indenture, which contained the proxy put, and the board s normal fiduciary duties. See Amylin, 983 A.2d at The court in SandRidge explained that Amylin meant that the board s duty in exercising discretion under a contract like a proxy put was focused on the best interests of the corporation and its stockholders, and that its only duty to the creditors was to honor the implied covenant of good faith and fair dealing. SandRidge, 68 A.3d at 260. An incumbent board may only fail to approve a dissident slate if it determines that passing control to the slate would constitute a breach of the duty of loyalty, in particular, because the proposed slate poses a danger that the company would not honor its legal duty to repay its creditors. Id. This case is fundamentally different because the Third Advisory Agreement does not contain an implied duty of good faith and fair dealing. The Third Advisory Agreement is expressly governed by Texas law (see App. 224, Ex. N, and Texas does not recognize an implied duty of good faith and fair dealing in contracts except in very limited circumstances not applicable here. See Williamson- Dickie Mfg. Co. v. Apparel Ltd., No. 4:15-CV-164-A, 2015 U.S. Dist. LEXIS 75227, *5-*7 (N.D. Tex. June 10, 2015 (citations omitted. So the Director Defendants here can only consider their fiduciary duties to the stockholders and to Ashford Prime. A board acting in good faith must seek to protect the stockholders ability to make an uncoerced choice of directors. SandRidge, 68 A.3d at 260. Like the proxy put in SandRidge, triggering the Proxy Penalty brings only possible pain, and no possible gain to Ashford Prime and its stockholders. Id. at 261. Thus, approval of the Sessa Candidates is the only choice the Director Defendants can make that is consistent with their fiduciary duties to stockholders and Ashford Prime. 20

26 Case 3:16-cv N Document 13 Filed 03/14/16 Page 26 of 30 PageID The Director Defendants cannot offer a compelling justification for their actions Today, nearly two months since Sessa s nomination of the Sessa Candidates, the Director Defendants have not and cannot advance a compelling justification for their failure to approve the Sessa Candidates or their authorization of the Penny Preferred. The Board cannot shield itself with the business judgment rule. Nor can it rely on non-existent approval rights in the Bylaws or Maryland law or the approval provision the Board itself created in violation of its fiduciary duties in the Proxy Penalty. The Board s coercive and improper actions rest on a debatable belief that they know best how to run Ashford Prime. Commenting on the Sessa Notice, the Director Defendants warned stockholders that if individuals are elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders.... See App. 468, Ex. AA. This is not a compelling justification. It is impermissible for the incumbent board to take action affecting who should comprise the board of directors because it thinks it knows better than the stockholders what is in the corporation s best interest. See Shaker, 2005 Md. Cir. Ct. LEXIS at *14-*16 (rejecting directors argument that its actions were necessary to protect the corporation from implementation of a strategy with which they disagreed. This is particularly true here, where in excess of 80% of Ashford Prime s shares are owned by large, sophisticated institutions. For this and for all of the foregoing reasons, Sessa meets its burden of showing a likelihood of success on the merits. B. There Is Substantial Threat of Irreparable Injury to Sessa A substantial threat of irreparable injury exists if there is a significant threat of injury from an impending action, the injury is imminent, and money damages will not fully repair the injury. Humana, Inc. v. Jacobson, 804 F.2d 1390, 1394 (5th Cir Sessa faces just such a situation. 21