SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Schedule 13D

Under the Securities Exchange Act of 1934

(Amendment No. 13)*

Ashford Hospitality Prime, Inc.

(Name of Issuer)

Common Stock, $0.01 par value per share

(Title of Class of Securities)

044102101

(CUSIP Number)

Thomas R. Stephens

Bartlit Beck Herman Palenchar & Scott LLP

1899 Wynkoop Street, Suite 800

Denver, Colorado 80202

(303) 592-3100

(Name, Address and Telephone Number of Person

Authorized to Receive Notices and Communications)

August 31, 2016

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. ¨

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent.

*The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

(Continued on following pages)

Items 4, 5 and 7 of the statement on Schedule 13D relating to the Common Stock, $0.01 par value per share (the “Shares”) of Ashford Hospitality Prime, Inc., a Maryland corporation (“AHP”) previously filed by (i) Sessa Capital (Master), L.P., a Cayman Islands exempted limited partnership (“Sessa Capital”), as a result of its direct ownership of Shares, (ii) Sessa Capital GP, LLC, a Delaware limited liability company (“Sessa Capital GP”), as a result of being the sole general partner of Sessa Capital, (iii) Sessa Capital IM, L.P., a Delaware limited partnership (“Sessa IM”), as a result of being the investment adviser for Sessa Capital, (iv) Sessa Capital IM GP, LLC, a Delaware limited liability company (“Sessa IM GP”), as a result of being the sole general partner of Sessa IM, and (v) John Petry, as a result of being the manager of Sessa Capital GP and Sessa IM GP (Sessa Capital, Sessa Capital GP, Sessa IM, Sessa IM GP and Mr. Petry are collectively referred to as the “Reporting Persons”), are hereby amended as follows:

Item 4. Purpose of Transaction

No change except for the addition of the following:

On August 9, 2016, AHP issued a press release announcing certain corporate governance changes that AHP characterized as “enhancements.” The Reporting Persons believe AHP’s press release is misleading and fails to disclose information necessary for AHP stockholders to understand and assess the purported enhancements.

AHP announced that it would separate the roles of Chairman and CEO. But AHP’s press release failed to reveal that, unlike most public companies, this change will have little, if any, impact at AHP because AHP has a highly unusual arrangement in which Ashford Inc. appoints AHP’s CEO. So while Monty Bennett, AHP’s Chairman, will apparently surrender his CEO title, Ashford Inc., which Mr. Bennett controls as its Chairman and CEO, will appoint AHP’s new CEO. The Reporting Persons believe that separation of AHP’s Chairman and CEO roles is largely illusory in such circumstances and that AHP’s disclosures surrounding the change are, therefore, misleading.

In addition, AHP announced that stockholders will be permitted to have their director nominees included in AHP’s proxy statement, subject to narrow constraints and extensive requirements. Among the requirements are that the stockholders have held at least 3% of the Shares for at least 3 years, which means that no stockholders currently meet the standard because AHP has not even been public for 3 years. The Reporting Persons believe it is troubling that AHP’s proxy access proposal does not designate the stockholder-nominated directors as “continuing directors” under the unusual terms of the Proxy Penalty in AHP’s advisory agreement with Ashford Inc. While appearing to grant a tiny handful of stockholders limited access to AHP’s proxy statement, AHP’s incumbent directors continue to cling to the ability to use the Proxy Penalty to threaten and coerce stockholders into voting for the incumbent directors by treating such stockholder-nominated directors as counting towards triggering the Proxy Penalty. The Reporting Persons believe that AHP’s failure to commit to fair elections of directors means that AHP’s corporate governance will continue to raise serious concerns for stockholders and discourage investors from considering an investment in the Shares.

AHP also announced it would adopt a majority voting standard in uncontested elections. AHP has failed to reveal the amendment to its articles that will implement the change, but has disclosed a related bylaw amendment that the Reporting Persons believe is fatally flawed and, once again, is disclosed in a misleading fashion.

Specifically, buried in the details of AHP’s bylaw amendment is a provision under which “withhold votes” will be ignored when determining if a director has received a majority of the votes. AHP thus takes the position that a withhold vote is not a vote against a nominee. By counting only “for” votes in the director election, the Reporting Persons believe this bylaw officially turns the AHP election process into even more of a farce than it is already. This position is particularly telling because stockholders overwhelmingly voted to withhold votes from each of the incumbent directors at the 2016 annual meeting. AHP’s board apparently is adopting a majority vote provision that will give incumbent directors cover to ignore withhold votes in the future.

In addition, the bylaw amendment includes no requirement that a defeated director resign from the board and be replaced. Under Maryland law, an incumbent director continues to serve until his or her replacement is elected. So a director who fails to be re-elected under AHP’s majority vote proposal will continue to serve. Even if the rejected incumbent resigned, under the bylaw proposal, the AHP board apparently could reject the resignation in the same way the board rejected the resignations of each board member after a majority of the stockholders withheld their votes from the incumbent directors at the 2016 annual meeting. Based on the information about the proposal disclosed to date, the Reporting Persons believe the AHP board is essentially replacing its existing toothless “Corporate Governance Guidelines” with a bylaw of even less substance, while at the same time touting the change in the press release as an “enhancement” in corporate governance. Rather than trying to game its ISS Quickscore, the Reporting Persons believe AHP should provide its stockholders with improvements of substance.

The Reporting Persons believe that AHP is continuing the campaign of misinformation that AHP’s management and board have followed for many months. The Reporting Persons will continue to monitor AHP’s announcements on corporate governance and developments with respect to offers to acquire AHP.

On August 2, 2016, a panel of the Court of Appeals for the Fifth Circuit held a hearing on Sessa Capital’s appeal of the district court’s decisions in the lawsuits between AHP and Sessa Capital. A copy of Sessa Capital’s opening brief dated June 24, 2016 and Sessa Capital’s reply brief dated July 19, 2016 are attached as Exhibits 1 and 2, respectively, and incorporated by reference in this Item 4 in their entirety.

Also on August 2, 2016, Sessa Capital filed a reply in support of its motion to dismiss the amended complaint filed by Ashford Inc. against Sessa Capital. This motion to dismiss asserts in part that the termination fee in AHP’s advisory agreement with Ashford Inc. is an unenforceable penalty. A copy of Sessa Capital’s reply dated August 2, 2016 in support of its motion to dismiss Ashford Inc.’s amended complaint is attached as Exhibit 3 and incorporated by reference in this Item 4 in its entirety.

Sessa Capital reviews its investment in AHP on a continuing basis and, depending upon the price of and other market conditions relating to the Shares; developments affecting AHP, AHP’s business and prospects; Sessa Capital’s investment objectives and the other investment opportunities available to Sessa Capital; general stock market and economic conditions; tax considerations; the matters discussed in the next paragraph; and other factors then deemed relevant, Sessa Capital may decide to increase or decrease the size of its investment in AHP, including: (i) acquiring additional Shares and/or other equity, debt, notes, other securities, or derivative or other instruments that are based upon or relate to the value of the Shares or AHP (collectively, “Securities”) in the open market or otherwise; (ii) disposing of any or all of its Securities in the open market or otherwise; and (iii) engaging in hedging or similar transactions with respect to the Securities.

AHP's articles of incorporation effectively limit beneficial ownership of the Shares by any person or group to 9.8% of the Shares outstanding, without AHP’s consent. Based on communications from AHP representatives, the Reporting Persons do not believe such a waiver would be forthcoming and do not intend to request one prospectively. As a result of AHP’s repurchases of Shares, the Reporting Persons’ beneficial ownership of Shares has increased from 8.2% to 9.1%. According to AHP’s recent disclosures, AHP has continued authority under its repurchase program to repurchase additional shares. The Reporting Persons intend to manage Sessa Capital’s position, which would include the disposition of Shares, to ensure that it remains below the 9.8% ownership threshold set forth in AHP’s articles.

The Reporting Persons intend to continue to monitor actions by AHP’s board, and, depending on the outcome of the pending litigation, among other factors previously reported in this Statement on Schedule 13D, will consider taking further action to protect their interests and the interests of stockholders, which actions may involve plans or proposals of the type described in Item 4(a) through (j) of Schedule 13D.

Item 5. Interest in Securities of AHP

No change except for the addition of the following:

(a) As of the date of this amendment, Sessa Capital directly owns 2,330,726 Shares, representing approximately 9.1% of the 25,644,258 outstanding Shares as of August 5, 2016, as reported in AHP’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2016. Sessa Capital GP, Sessa IM, Sessa IM GP and Mr. Petry, by virtue of the relationships set forth under Item 2 of this statement, may be deemed to indirectly beneficially own the Shares directly owned by Sessa Capital.

Item 7. Exhibits

The following documents are filed as exhibits to this statement:

Signature

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

Exhibit 1

Case No. 16-10671

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

ASHFORD HOSPITALITY PRIME, INCORPORATED,

Plaintiff – Appellee

v.

SESSA CAPITAL (MASTER), L.P.,

Defendant–Third Party Plaintiff – Appellant

SESSA CAPITAL GP, L.L.C.; SESSA CAPITAL IM, L.P.; SESSA CAPITAL IM

GP, L.L.C.; JOHN E. PETRY; PHILIP B. LIVINGSTON; LAWRENCE A.

CUNNINGHAM; DANIEL B. SILVERS; CHRIS D. WHEELER,

Defendants – Appellants

v.

DOUGLAS A. KESSLER; ANDREW STRONG; STEFANI D. CARTER; CURTIS

B. MCWILLIAMS; MONTY J. BENNETT; ASHFORD HOSPITALITY

ADVISORS, L.L.C.; ASHFORD, INCORPORATED; MATTHEW

D. RINALDI; W. MICHAEL MURPHY,

Third Party Defendants – Appellees

Consolidated w/16-10672

ASHFORD HOSPITALITY PRIME, INCORPORATED,

Plaintiff – Appellee

v.

SESSA CAPITAL (MASTER), L.P.; SESSA CAPITAL GP, L.L.C.; SESSA

CAPITAL IM, L.P.; SESSA CAPITAL IM GP, L.L.C.; JOHN E. PETRY; PHILIP B.

LIVINGSTON; LAWRENCE A. CUNNINGHAM;

DANIEL B. SILVERS; CHRIS D. WHEELER,

Defendants – Appellants

On Appeal from the United States District Court

For The Northern District of Texas, Dallas Division

Civ. Nos. 3:16-cv-00527-N and 3:16-cv-00713

APPELLANTS’ OPENING BRIEF

Attorneys for Appellants

Nos. 16-10671 and 16-10672

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Ashford Hospitality Prime, Inc. v. Sessa Capital (Master), L.P.

CERTIFICATE OF INTERESTED PERSONS

The undersigned counsel of record certifies that the following listed persons and entities as described in the fourth sentence of Rule 28.2.1 have an interest in the outcome of this case. These representations are made in order that the judges of this Court may evaluate possible disqualification or recusal.

1.          Sessa Capital (Master), L.P. (“Sessa”), Defendant-Appellant, Counterclaimant and Third-Party Claimant, is a Cayman Islands exempted limited partnership that is not publicly traded;

2.          Sessa Capital GP, LLC, Defendant-Appellant, is a Delaware limited liability company that is not publicly traded;

3.          Sessa Capital IM, L.P., Defendant-Appellant, is a Delaware limited partnership that is not publicly traded;

4.          Sessa Capital IM GP, LLC, Defendant-Appellant, is a Delaware limited liability company that is not publicly traded;

5.          John E. Petry, Defendant-Appellant, is the founder and manager of the Sessa entities and one of the persons nominated by Sessa as a candidate for election to the board of Ashford Hospitality Prime Inc. (“Ashford Prime”);

6.          Philip B. Livingston, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Prime;

7.          Lawrence A. Cunningham, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Prime;

8.          Daniel B. Silvers, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Prime;

9.          Chris D. Wheeler, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Hospitality Prime Inc.;

10.        Ashford Hospitality Prime, Inc., Plaintiff-Counterclaim-Defendant-Appellee, is a publicly traded Maryland corporation. There are no publicly held corporations that own ten percent or more of Ashford Prime;

11.        Ashford Inc., Third-Party Defendant-Appellee, is a publicly-traded Delaware corporation. There are no publicly held corporations that own ten percent or more of Ashford Inc.;

12.        Ashford Hospitality Advisors LLC, Third-Party Defendant-Appellee, is a Delaware limited liability company and a subsidiary of and the operating company of Ashford Inc.;

13.        Monty J. Bennett, Third-Party Defendant-Appellee, is the CEO and Chairman of the Board of Directors of Ashford Hospitality Prime;

14.        Douglas A. Kessler, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

15.        Stefani D. Carter, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

16.        Curtis B. McWilliams, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

17.        W. Michael Murphy, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

18.        Matthew D. Rinaldi, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime; and

19.        Andrew Strong, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime.

Attorneys for Defendants-Appellants:

Attorneys for Plaintiffs-Appellees:

STATEMENT OF ORAL ARGUMENT

The Court has scheduled oral argument for the morning session on August 2, 2016. See 16-10671 Docket Entry filed June 21, 2016. Appellants’ counsel is available and plans to appear for argument at that time. Given the complexity of the legal issues and factual record, Appellants believe that oral argument would be of assistance to the Court.

TABLE OF CONTENTS

TABLE OF AUTHORITIES

Cases

JURISDICTIONAL STATEMENT

Appellants appeal from preliminary injunction orders in two related cases in the United States District Court for the Northern District of Texas, Case No. 3:16-CV-0527 (“Ashford I”), and Case No. 3:16-CV-0713 (“Ashford II”).

The district court had subject matter jurisdiction in Ashford I pursuant to 28 U.S.C. § 1331 and Section 27 of the Securities Exchange Act of 1934, as amended, and 15 U.S.C. § 78aa, as Ashford I involved claims under Sections 13(d) and 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). The district court had subject matter jurisdiction of Appellant’s counterclaims in Ashford I pursuant to 28 U.S.C. §§ 1331, 1367 and 2201. The district court had subject matter jurisdiction in Ashford II pursuant to 28 U.S.C. § 1331, as Ashford II was a virtually identical action to Ashford I and raised the same allegations that Appellants failed to comply with Sections 13(d) and 14(a) of the Exchange Act.

This Court has jurisdiction pursuant to 28 U.S.C. § 1292(a)(1), as this appeal is from an order denying a motion for preliminary injunction in Ashford I and granting a motion for preliminary injunction in Ashford II. (ROA.16-10671.4144-56; ROA.16-10672.4641-53) Appellants timely filed their notice of appeal on Monday, May 23, 2016, three days after the entry of the district court’s Friday, May 20, 2016 preliminary injunction order. (ROA.16-10671.4157-59; ROA.16-10672.4654-56)

ISSUES PRESENTED FOR REVIEW

The principal issues presented in this appeal are:

1.          Whether the district court erred by holding, under Maryland law, that a decision by a corporation’s incumbent board of directors to disqualify every competing candidate nominated by the stockholders to run against the incumbent directors for election to the board is reviewed only under the deferential business judgment rule, when Maryland’s highest court and every other court to address the issue has reached the conclusion that such acts of stockholder disenfranchisement are not protected by the business judgment rule.

2.          Whether the district court erred in applying the business judgment rule by ignoring overwhelming evidence that the incumbent directors acted in bad faith, while laboring under a conflict of interest, and impermissibly applied the bylaws in a discriminatory and inequitable manner to effectively disenfranchise the stockholders.

3.          Whether the district court erred by failing to apply the correct legal definition of “plans” as that term is defined under the federal securities laws and, by reference, in the Company’s bylaws, when it determined that the incumbent directors could rationally have determined that the competing candidates failed to disclose their plans for the Company.

4.          Whether the incumbent directors have a fiduciary duty to approve the competing candidates for purposes of a contractual change-in-control provision, in order to allow stockholders to vote for the competing candidates without fear of triggering a penalty of “hundreds of millions of dollars,” representing more than half of the Company’s entire market capitalization.

INTRODUCTION

This appeal arises out of an unprecedented preliminary injunction order enforcing a decision by the incumbent directors of a public company to wrongfully entrench themselves in office by refusing to allow any competing candidates to run for election against them. In an opinion that stunned the legal community,¹ the district court erroneously held, applying Maryland law, that the incumbent directors’ decision to disqualify every competing candidate is protected by the business judgment rule. The district court’s order was so out of line with established precedent that the Company’s counsel boasted that it is the “first time a court has invalidated an activist shareholder’s slate on the basis of the activist’s failure to comply with the substantive disclosure provisions of a company’s advance notice bylaws.” (http://www.cadwalader.com/news/news-release/cadwalader-successfully-represents-ashford-hospitality-prime-inc-in-battle-with-shareholder-activist-.)

As explained in detail below, the district court’s order inexplicably ignores a decision by Maryland’s highest court, decisions from Maryland trial courts, decisions from federal district courts applying Maryland law, and an extensive body of persuasive Delaware case law all reaching the opposite conclusion that actions taken by an incumbent board that adversely affect stockholder voting rights are not protected by the business judgment rule.

¹ Law360 has described this case as “the proxy contest everyone is watching.” (http://www.law360.com/articles/800692/a-closer-look-at-the-proxy-case-everyone-s-talking-about.)

As a result of the district court’s preliminary injunction, the incumbent directors stood for re-election unopposed at the Company’s annual meeting on June 10, 2016 and were therefore re-elected by default. But in an unprecedented rebuke, the Company’s stockholders sent a loud and clear message by overwhelmingly voting, by margins of almost 2-1, to “withhold” approval for the incumbent directors.

The district court’s decision represents a devastating blow to corporate democracy. In this case, it deprived the Company’s stockholders of the right to vote for any candidates other than the incumbent directors. It also sets a dangerous precedent that gives incumbent boards carte blanche to engage in acts of entrenchment that have heretofore been thought untenable.

This Court should use its broad equitable powers to remedy the injustice caused by the district court’s decision by ordering that the results of the election be set aside and that a new election be held in which the competing candidates are allowed to run.

STATEMENT OF THE CASE

Ashford Hospitality Prime, Inc. (“Ashford Prime” or the “Company”) is a small, publicly-traded real estate investment trust that owns hotels. The Company is incorporated in Maryland and its principal place of business is in Dallas, Texas. Ashford Prime’s current market capitalization is less than $500 million. Ashford Prime has no employees. Instead, its management is delegated to two companies, Ashford Inc. and Ashford Hospitality Advisors LLC (collectively the “Ashford Advisors”), which are controlled by its chairman and CEO, Monty Bennett. (ROA.16-10672.2044, .2056)

Sessa is a hedge fund that owns approximately 8.2% of Ashford Prime’s common stock, making it the Company’s third largest stockholder. (ROA.16-10672.2625) In an effort to address what Sessa believes is the Company’s poor corporate governance problems and related stock underperformance, Sessa seeks to nominate five individuals, John E. Petry, Phillip B. Livingston, Lawrence A. Cunningham, Daniel B. Silver and Chris D. Wheeler (the “Sessa Candidates”) to stand for election to Ashford Prime’s seven-member board of directors.²

The Sessa Candidates are remarkably well-qualified. As a group, they include graduates of Harvard Business School, the Wharton School of Business, the Haas School of Business at U.C. Berkeley, a chaired professor of law who specializes in corporate governance, and former CEOs and CFOs who have served on the boards of at least 16 public companies. (ROA.16-10671.3444-47) Only one of the Sessa Candidates, John Petry, is employed by Sessa; the other four have no affiliation whatsoever with Sessa. (Id.)

² Sessa initially sought to nominate the Sessa Candidates to stand for election at the Company’s 2016 annual meeting, which took place on June 10, 2016. Sessa now seeks to set aside the results of the 2016 annual meeting and to require a new election. Unless Ashford Prime materially improves its corporate governance and addresses its stock performance, Sessa intends to nominate the same, or a substantially similar slate of candidates, for election at the 2017 annual meeting.

The Ashford Prime board of directors is comprised of two insiders and five outside directors. The two insiders are Monty J. Bennett, the Company’s Chairman and CEO, and the son of the founder of the original Ashford entities; and Douglas A. Kessler, the Company’s President. The five outside directors are: Curtis B. McWilliams, the Company’s lead director; Stefani D. Carter, Chair of the Nominating and Governance Committee; Andrew Strong, the other member of the two-person Nominating and Governance Committee; Matthew D. Rinaldi; and W. Michael Murphy.

Three of the five outside directors (Carter, Strong and Rinaldi) are lawyers with no substantial business or hospitality experience and no other experience as board members of public companies. The outside directors are far from independent. Ms. Carter, the Chair of the Nominating and Governance Committee, is financially dependent on the position as she has little or no other income.³ Mr. Murphy is a forty-year friend of Mr. Bennett’s father, who depends on the position for roughly 30% of his annual income. (ROA.16-10672.2164) Mr. Strong has been a personal friend of Mr. Bennett since high school. (ROA.16-10672.2150-51) Mr. Rinaldi is a Texas State Representative whose campaigns have been funded by Mr. Bennett. (ROA.16-10672.2151) Indeed, when the company went public in 2013, Mr. Bennett hand-selected four of the five outside directors. (ROA.16-10672.2150-55)

³ Ms. Carter’s annual income in 2015 was less than $300,000 and perhaps even less than $200,000. (ROA.16-10672.2184) Her compensation as a director of Ashford Prime was $167,380. (ROA.16-10672.2072)

Since the Company went public in 2013, the incumbent directors have consistently failed to act in the best interests of Ashford Prime and its stockholders, approving transactions benefitting only Mr. Bennett and the Ashford Advisors, which he controls. For example, in 2015, Ashford Prime liquidated approximately $50 million in marketable securities and invested the proceeds in a hedge fund managed by Mr. Bennett. (ROA.16-10671.80) Then, on July 31, 2015, Ashford Prime purchased 8.8% of Ashford Inc.’s stock for a 59% premium over the trading price that day, thereby taking out Ashford Inc.’s largest outside stockholder in advance of a controversial merger that Ashford Inc. would announce a few months later. (ROA.16-10671.79) As stockholders increasingly raised concerns about such self-dealing and other issues, the incumbent directors responded by taking a series of improper actions to entrench themselves in office.

In 2014 and 2015, the Company’ public stockholders began to assert their rights and to evidence their displeasure with the incumbent directors. At the May 2014 annual meeting, stockholders overwhelmingly approved a stockholder proposal (over the directors’ vigorous opposition) to opt out of the Maryland Unsolicited Takeover Act and thereby remove certain barriers to a change of control. (ROA.16-10671.515, .553) Then, at the May 2015 annual meeting, the stockholders rejected a management proposal to ban stockholder nominations of director candidates unless the nominating stockholder held at least 1% or more of Ashford Prime’s stock continuously for at least one year to nominate director candidates. (ROA.16-10671.563)

On June 10, 2015, just weeks after losing the stockholder vote on its proposal to ban virtually all stockholders from nominating board candidates, Ashford Prime entered into a Third Amended and Restated Advisory Agreement (the “TAAA”) with the Ashford Advisors. (ROA.16-10671.3270-306) The TAAA fundamentally altered the terms of the Advisory Agreement with the Ashford Advisors in ways that were highly detrimental to the Company. Most importantly, the TAAA gave the Ashford Advisors a right to terminate the TAAA and collect a penalty in the event of a change in the composition of a majority of the Company’s board (the “Proxy Penalty”).⁴ (ROA.16-10671.3294-95; cf. ROA.16-10671.3307-37) Although the exact amount of the Proxy Penalty is not known because it is the product of a calculation with inputs known only to the Ashford Advisors, the Company and the Ashford Advisors have publicly stated that it is in the hundreds of millions of dollars. (ROA.16-10671.862) The Company received nothing of any real value in return for these significant changes to the TAAA.⁵

⁴ Discovery has revealed that the incumbent directors failed to comply with their duty of care in approving the TAAA. The Proxy Penalty was not even discussed by the board when it approved the TAAA. (ROA.16-10671.3546-47, ROA.16-10671.3579-83) The board never even considered the fact that the Proxy Penalty might undermine the stockholder franchise. (ROA.16-10671.3562) Moreover, the incumbent directors did not obtain independent legal advice or financial advice before entering into the TAAA. (ROA.16-10671.3538-39; ROA.16-10671.3551)

⁵ The Company contends that the TAAA provided two benefits: (1) so-called “key money” financing from Ashford, Inc., and (2) shortening the term of the agreement. (ROA.16-10671.1104) However, under the TAAA, Ashford Inc. is “not required to provide any Key Money.” (ROA.16-10671.3565) And the companies have frequently played with the term of the agreement. It was originally five years (ROA.16-10671.3491), then it was lengthened to 20 years (ROA.16-10671.3323), and then it was reduced back to ten years in the TAAA (ROA.16-10671.3289).

In addition to the Proxy Penalty, the Company included a “Proxy Put” in its $150 million credit agreement, which provides back-stop liquidity for the Company. The Proxy Put would allow the Company’s lender to require immediate repayment of any outstanding indebtedness in the event of a change in the composition of a majority of the Company’s board.⁶ (ROA.16-10672.3241-42)

On January 14, 2016, in compliance with Ashford Prime’s bylaws, Sessa timely provided the Company advance notice of its intention to nominate the Sessa Candidates at the 2016 Annual Meeting. Thereafter, the incumbent directors aggressively used the threat of the Proxy Penalty to discourage stockholders from voting for the Sessa Candidates.

⁶ The Company has no outstanding indebtedness under the credit agreement. As a result, the Proxy Put has not been a focal point of the litigation to date.

For example, on March 9, 2016, the Company argued 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.” (ROA.16-10671.862) Given that the Company’s entire market capitalization at the time was less than $350 million, the threat of a penalty in the “hundreds of millions of dollars” was coercive and continues to have an impact going forward. Indeed, the threat caused at least one analyst to recommend that stockholders vote against the Sessa Candidates. (ROA.16-10671.867)

Under the TAAA, however, the incumbent directors can avoid any risk of triggering the Proxy Penalty by simply approving two or more of the Sessa Candidates. (ROA.16-10671.3294-95; see also ROA.16-10671.3523-24, .3550) The TAAA permits the incumbent directors to grant such approval without any conditions, criteria, standards or guidelines. (ROA.16-10671.3294-95) The TAAA also does not require evaluation or vetting of nominees before they can be approved.

On February 2, 2016, just two weeks after Sessa submitted its nomination materials, the incumbent directors took a further step to entrench themselves by approving the issuance of a new class of preferred stock to a group of Ashford corporate insiders for $0.01 per share (the “Penny Preferred”). The issuance of the Penny Preferred would have given Mr. Bennett and other company insiders 13.3 percent of the Company’s voting power for just $43,750. (ROA.16-10672.3480-82, .3487-88) After Sessa challenged the issuance of the Penny Preferred in this lawsuit and in a letter to the New York Stock Exchange, the Company rescinded the issuance under pressure from the NYSE, which had concluded that the issuance violated the NYSE’s rules. (ROA.16-10672.2535-36, ROA.16-10672.2168-69)

In addition to using the Proxy Penalty to coerce stockholders to vote for the incumbent directors, and attempting to alter the balance of voting power with the Penny Preferred, the Company also hatched a plan in December 2015 to disqualify the Sessa Candidates and refuse to count any votes in their favor. Indeed, in a meeting with Sessa on March 24, 2016, a representative of the Ashford Prime board admitted that Ashford Prime had been pursuing a “strategy of declaring [Sessa’s] nominees invalid.”⁷ (ROA.16-10672.2036)

Ashford Prime’ bylaws contain “advance notice provisions,” which are allowed by Maryland law to the extent they require “stockholders to provide advance notice of the nomination or proposal to the corporation before a date or within a period of time specified in the charter or bylaws.” Md. Code Ann., Corps. & Ass’ns § 2-504(f).

⁷ The representative also communicated a threat from Mr. Bennett to “rain down a path of destruction” on Sessa in retaliation for Sessa pursuing the proxy contest.  (ROA.16-10672.2035-36; ROA.16-10671.1559-62)

The advance notice provisions in Ashford Prime’s bylaws require individuals who are to be nominated for election to the board to complete a questionnaire supplied by the Company seeking the “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 . . . pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder.” (ROA.16-10672-2214)

On December 21, 2015, nearly a month before the January 18, 2016 deadline to submit nomination materials pursuant to the bylaws, Sessa requested the questionnaire from the Company. (ROA.16-10671.763) The Company had just provided questionnaires to the incumbent directors only days before, on December 15, which were virtually identical to all the questionnaires previously provided to the incumbent directors, including questionnaires provided before the incumbents were board members. (ROA.16-10672.2227; ROA.16-10672.2371-419, 2014; ROA.16-10672.2421-73, 2015; and ROA.16-10672.2475-522, 2016) However, unbeknownst to Sessa, the Company did not promptly provide the same questionnaire to Sessa. (ROA.16-10671.763) Instead, the Company’s outside lawyers secretly spent weeks cooking up a new and far more onerous questionnaire for the Sessa Candidates. (ROA.16-10671.783-833)

When the Company finally provided Sessa with the questionnaire on January 8, 2016, it contained 27 new questions and expanded the scope of 34 questions. (Compare ROA.16-10672.2277-326 (questionnaire provided to Sessa) to ROA.16-10672.2475-522 (questionnaire provided to incumbent directors).) The new and expanded questions were far broader than contemplated by the Company’s bylaws, which require disclosure only of the information that must be provided pursuant to Regulation 14-A. (ROA.16-10672.2215) Indeed, all references to Regulation 14-A were deleted in the questionnaire and much of the new questionnaire had no connection to the proxy rules. (ROA.16-10672.2277-326)

In what was effectively an attempt to take discovery from the Sessa Candidates and gain an unfair advantage in the proxy contest, the new questionnaire demanded disclosure of virtually every discussion any of the Sessa Candidates had regarding the Company. (ROA.16-10672.2308-13) Furthermore, copies of any “related analysis, emails, correspondence or documentation” were demanded. (ROA.16-10672.2313)

Because of the Company’s three-week delay in providing the questionnaire to Sessa, the Sessa Candidates had only five business days to complete the lengthy and onerous questionnaire before the applicable deadline. (ROA.16-10672.2475) Nonetheless, each of the Sessa Candidates fully completed the questionnaire in the short time given. (ROA.16-10672.3534-824) On January 14, 2016, Sessa overnighted the completed questionnaires and all other information required pursuant to the bylaws. (Id.) In all, Sessa provided approximately 430 pages of information and incorporated more by reference to its publicly-available securities filings. (Id.)

The information provided in the completed questionnaires fully satisfied all the requirements of Regulation 14-A. (Id.) Indeed, Sessa filed its preliminary proxy statement with the SEC on February 12, 2016, and filed its definitive proxy statement on February 26, 2016. The SEC staff apparently saw no issues with the content of Sessa’s disclosures in its proxy statement, as the staff flagged only a single calculation error in Sessa’s preliminary proxy statement. Even if the information Sessa provided the Company on January 14, 2016 was not complete (which it was), the Company was not disadvantaged in any way, as it had all information from Sessa required by the proxy rules when Sessa filed its proxy statement on February 12, 2016, 120 days in advance of the June 10, 2016 annual meeting.

On January 26, Stefani Carter, the Chair of the board’s two-member Nominating and Governance Committee, wrote Sessa asserting that the Sessa Candidates had not given complete answers to all of the questions in the questionnaire. (ROA.16-10672.2540-44) All but two of the 22 issues raised by Ms. Carter involved the new or expanded questions concocted specially for the Sessa Candidates. Id. The two issues on old questions were easily resolved by clarifications and additional information promptly provided by Sessa on February 3, 2016. (ROA.16-10672.2546-54)

On February 4, 2016, Ms. Carter wrote to request more information and meetings with the candidates “in order to further evaluate their candidacies.” (ROA.16-10672.2556) Ms. Carter did not identify what further information she was seeking. Id. Sessa promptly responded to Ms. Carter, expressing a willingness to meet with the incumbent directors, but asked that Ms. Carter clarify what information was sought so that it could be best prepared to answer her questions. (ROA.16-10672.2558-59) Ms. Carter never replied.

In their proxy materials, the incumbent directors warned the stockholders that Sessa had secret, undisclosed plans “to invalidate the Termination Fee [Proxy Penalty] in court and with respect to a potential sale of the company.” (ROA.16-10672.2053) In those communications to the stockholders, the incumbent directors also complained that one of the Sessa Candidates, Mr. Livingston, engaged in “resume padding” by claiming that he was a “CPA” when he had allowed his CPA licenses to expire. They also complained that Mr. Livingston did not immediately inform the Company of a small purchase of Ashford Prime stock made shortly after submitting his completed questionnaire.

In its proxy materials, Sessa fully disclosed its plans, proposals and views regarding the Company and its incumbent management to the Company’s stockholders. For example, in a public Schedule 13-D filing with the SEC on January 8, 2016, Sessa announced that “given the corporate governance and other issues . . ., we now believe that a sale of the Company is the preferred outcome of the strategic alternatives process.” (ROA.16-10671.160) And in a detailed presentation to Ashford Prime stockholders that was also publicly filed with the SEC on March 23, 2016, Sessa expressed its views regarding the Company in great detail, including its intent to consider “any strategic action . . . including asset sales,” to “[e]xplore all options to invalidate or renegotiate the termination fee,” and to implement “‘best-in-class’ corporate governance.”⁸

On April 12, 2016, Ashford Prime filed its preliminary proxy statement. In that filing, almost three months after Sessa nominated the Sessa Candidates, the Company indicated the incumbent directors might attempt to disqualify the Sessa Candidates. (ROA.16-10672.4562-63) On April 25, the Company filed its definitive proxy statement, announcing that a determination had been made that Sessa’s nomination materials were “deficient” for “fail[ure] to disclose . . . plans and proposals for the company and its assets,” and Livingston’s alleged “omi[ssion of] information about [Company] securities holdings” and “resume padding.” (ROA.16-10672.2053) The definitive proxy statement further stated that proxies cast for any Sessa Candidate would be “invalid,” and that the Company did “not intend to count any stockholder votes for Sessa’s proposed nominees.” (ROA.16-10672.2052)

⁸ The Company was well aware of these statements. In fact, a copy of the investor presentation was produced by the Company in discovery on April 29, 2016. (See AHP_00018517-560, ROA.16-10671.3643-86)

PROCEDURAL BACKGROUND

On February 3, 2016, Sessa commenced an action in Maryland seeking to require the incumbent directors to approve the Sessa Candidates in order to negate the Proxy Penalty (the “Maryland Action”). On February 25, 2016, Ashford Prime responded by filing a lawsuit against Sessa and the Sessa Candidates in the United States District Court for the Northern District of Texas (“Ashford I”) alleging that they had violated Sections 13(d) and 14(a) of the Securities Exchange Act of 1934 (the “Act”). (ROA.16-10671.32-34) Two weeks later, Ashford Prime filed a virtually identical lawsuit against Sessa and the Sessa Candidates in the Circuit Court for Dallas County, Texas (“Ashford II”). (ROA.16-10672.1-22)

In order to consolidate the litigation in one court, on March 14, 2016, Sessa dismissed the Maryland Action, filed an answer, counterclaims and third-party claims in Ashford I, and removed Ashford II to federal court. (ROA.16-10671.252-.330; ROA.16-10672.23-34) In its counterclaims and third party claims, Sessa alleged that the incumbent directors breached their fiduciary duties by approving the issuance of the Penny Preferred and refusing to approve the Sessa Candidates for purposes of the Proxy Penalty. (ROA.16-10671.301-03) That same day, Sessa filed a motion for preliminary injunction seeking to require the board to approve the Sessa Candidates in order to neutralize the Proxy Penalty and to invalidate the issuance of the Penny Preferred.

During the pendency of Sessa’s preliminary injunction motion, on April 6, 2016, the incumbent directors voted to rescind the issuance of the Penny Preferred stock under pressure from the NYSE. (ROA.16-10671.1539; ROA.16-10672.2535-36, .2168) On April 8, the Company filed a notice of mootness with regard to the Penny Preferred claim. (ROA.16-10671.1538-42)

On April 13, 2016, Ashford Prime filed a motion for preliminary injunction in Ashford II. In its motion, Ashford Prime requested that the district court disqualify the Sessa Candidates on the ground that they had failed to provide complete responses to the director questionnaires and thereby violated the advance notice provisions of the bylaws.

On May 4, 2016, after Ashford Prime announced in its definitive proxy statement that it did not intend to count any votes in favor of the Sessa Candidates, Sessa filed a motion to expand the scope of relief requested in its pending preliminary injunction motion. (ROA.16-16071.2644-720) In that motion, Sessa requested that the district court prohibit the incumbent directors from purporting to disqualify the Sessa Candidates and require the Company to count votes cast in their favor. (ROA.16-10671.2647-48)

On May 11, 2016, the district court held a brief oral argument on the parties’ respective motions. (ROA.16-10671.30, Dkt. 98; ROA.16-10672.21, Dkt. 78) The district court did not hold an evidentiary hearing. (Id.) Following oral argument on the preliminary injunction motions, at which the district court requested the parties to discuss settlement, the incumbent directors filed an “open letter” in the district court offering to settle the dispute and attempting to portray Sessa as uncompromising. (ROA.16-10671.4137-40; ROA.16-10672.4634-37)

On May 20, 2016, the district court entered an order denying Sessa’s preliminary injunction motion and granting Ashford Prime’s preliminary injunction motion.⁹ (ROA.16-10671.4144-56; ROA.16-10672.4641-53) Quoting a decision of the Maryland Court of Appeals, the district court held that under Maryland law, “the business judgment rule applies to all decisions regarding [a] corporation’s management.” (ROA.16-10671.4148; ROA.16-10672.4645 (quoting Shenker, 983 A.2d at 424.) In its decision, the district court relied exclusively on that language from the Shenker decision, along with a subsection of the Maryland statute codifying the business judgment rule which provides that “[a]n act of a director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director.” (ROA.16-10671.4148-49; ROA.16-10672.4645-46 (quoting Md. Code Ann., Corps. & Ass’ns § 2-405.1))

⁹ The order also dismissed Sessa’s motion to expand the scope of relief sought in its preliminary injunction motion as moot. (ROA.16-10671.4154; ROA.16-10672.4651)

Although the disqualification of the Sessa Candidates did not involve any “management” decision or any “acquisition” of Ashford Prime stock, the district court nonetheless reviewed Ashford Prime’s board’s decision to withhold approval of Sessa’s candidates under Maryland’s business judgment rule. (ROA.16-10671.4152; ROA.16-10672.4649) Applying the highly deferential business judgment rule, the district court deferred to the incumbent directors’ unsupported assertion that Sessa had undisclosed plans and proposals.¹⁰ (ROA.16-10671.4153-54; ROA.16-10672.4650-51 (“the board could rationally believe the Sessa candidates had a plan they refused to disclose in their questionnaires”)) The court noted that it did not “not necessarily endorse this result,” but concluded that Maryland had made that “choice.” (ROA.16-10671.4150 n.2; ROA.16-10672.4647 n.2)

The court then entered a preliminary injunction: (1) declaring the Sessa Candidates to be “invalid and ineligible to stand for election to Ashford Prime’s board at the 2016 annual meeting because of the board’s finding that the candidates failed to comply with the advance notice requirements”; (2) enjoining Sessa “from submitting or purporting to submit Sessa’s candidates to Ashford Prime’s shareholders for election to the board for its 2016 annual meeting”; and (3) enjoining Sessa “from soliciting proxy votes for Sessa’s candidates or distributing any proxy materials regarding Sessa’s candidates.” (ROA.16-10671.4155; ROA.16-10672.4652)

¹⁰ The district court declined to address Mr. Livingston’s alleged “resume padding” and the disclosure of his stock purchase. (ROA.16-10671.4154; ROA.16-10672.4651)

On May 23, 2016, the Sessa parties filed notices of appeal in both cases. (ROA.16-10671.4157-59; ROA.16-10672.4654-56) Sessa promptly moved this Court to stay the district court’s order and postpone the annual meeting, as well as to expedite this appeal. On June 2, this Court entered an order denying Sessa’s motion to stay the district court’s order and postpone the Company’s annual meeting, but granting Sessa’s request that this appeal be expedited.

SUMMARY OF ARGUMENT

In holding that the incumbent directors’ decision to disqualify the Sessa Candidates is protected by Maryland’s business judgment rule, the district court committed a clear error of law.

Under Maryland law, stockholders have the exclusive right to elect a corporation’s directors. Md. Code Ann., Corps. & Ass’ns § 2-404(b)(1). The incumbent directors have no discretion under Maryland law to determine who may or may not run against them.

The business judgment rule “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.” Boland v. Boland, 31 A.3d 529, 548 (Md. 2011) (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)). But the business judgment rule is premised on that power being “limited by the right of shareholders to vote for the members of the board.” Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342, 1347 (D. Nev. 1997). To maintain this balance, courts have distinguished actions relating to the management of a corporation from actions that interfere with the stockholder franchise. Rather than applying the business judgment rule to board actions impacting the stockholder franchise, courts hold incumbent directors to the “highest standards” in “conducting corporate elections.” Aprahamian v. HBO & Co., 531 A.2d 1204, 1206-07 (Del. Ch. 1987).

Maryland’s highest court, the Maryland Court of Appeals, has expressly stated that “[w]here the rights attendant to stock ownership are adversely affected,” including specifically when “a shareholder’s right to vote” is impaired, “the business judgment rule does not apply.” Shenker v. Laureate Educ., Inc., 983 A.2d 408, 424 (Md. 2009) (emphasis added). Every state and federal court to have considered the issue under Maryland law has reached the same conclusion. See Shaker v. Foxby Corp., No. 24-C-04-007613, 2005 WL 914385, at *5 (Md. Cir. Ct. Mar. 15, 2005), http://www.mdcourts.gov/businesstech/opinions_archive2005.html; Daniels v. New Germany Fund, Inc., Civil Action No. MJG-05-1890, 2006 WL 4523622 (D. Md. Mar. 29, 2006); Mountain Manor Realty, Inc. v. Buccheri, 461 A.2d 45, 53 (Md. Ct. Spec. App. 1983); NCR Corp. v. Am. Tel. & Tel. Co., 761 F. Supp. 475, 496 (S.D. Ohio 1991) (applying Maryland law). Moreover, a well-developed body of Delaware cases, which are treated as “highly persuasive” by Maryland courts, Kramer v. Liberty Property Trust, 968 A.2d 120, 133-34 (Md. 2009), have stablished that actions of incumbent boards which interfere with stockholder voting are subject to heightened scrutiny. See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 661 (Del. Ch. 1988) (requiring a “compelling justification” for actions taken with the “primary purpose of impeding the exercise of stockholder voting”); Unocal Corp. v. Mesa Petrol. Co., 493 A.2d 946 (Del. 1985) (applying an intermediate level of heightened scrutiny to legitimate business decisions that have an incidental impact on stockholder voting rights.

In reaching the conclusion that the Maryland Court of Appeals would apply the business judgment rule to the incumbent directors’ decision disqualifying the competing candidates nominated by the stockholders, the district court overlooked these authorities. The district court also fundamentally misread the Maryland statute codifying the business judgment rule, which applies only to the business decisions and transactions involving the “acquisition” of a company’s securities.

The district court also overlooked a significant body of law that advance notice bylaws cannot be used to discriminate against stockholder nominees or to entrench incumbent directors. 8 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Corporations § 4191 (Sept. 2015); Shaker, 2005 WL 914385, at *3-4 (discussing authorities).¹¹ Courts do not hesitate to “invalidate board action constituting an inequitable manipulation of the corporate machinery that affected adversely the shareholders’ right to conduct a contested election of directors.” Hubbard v. Hollywood Park Realty Enters., Inc., No. 11779, 1991 WL 3151, *7 (Del. Ch. Jan. 14, 1991) (collecting cases). Indeed, it is a fundamental tenet of corporate law that stockholders’ right to vote “for the directors who are to manage the corporate affairs is one of the most important rights incident to stock ownership and should not be annulled for purely technical reasons.” 5 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Corporations § 2025 (Sept. 2015).

¹¹ Moreover, advance notice provisions are to be narrowly construed against the Company and in favor of the stockholder franchise. JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 344 (Del. Ch. 2008).

Even if the incumbent directors’ acts of entrenchment are properly reviewed under the business judgment rule, the district court’s judgment should still be reversed because the district court also plainly erred in its application of the business judgment rule. Under Maryland law, the business judgment rule merely creates a presumption that the board acted in good faith on an informed basis. Boland, 31 A.3d at 548; Md. Code Ann., Corps. & Ass’ns § 2-405.1(e). That presumption can be rebutted with evidence that the directors acted in bad faith, that they had a personal interest in the matter, or that they did not act on an informed basis. Boland, 31 A.3d at 549; James L. Hanks, Maryland Corporation Law § 6.8 (Nov. 2015). Here, all of those exceptions have been met.

The evidence of bad faith here is overwhelming. A spokesman for the incumbent directors, speaking from approved talking points, admitted that the incumbent directors were pursuing a “strategy” of invalidating the Sessa Candidates. (ROA.16-10672.2036)

That admission of bad faith is confirmed by the incumbent director’s larger pattern of improper efforts to entrench themselves, their secret misuse of special questionnaires for the Sessa Candidates that flouted the intent of the bylaws, and other acts of misconduct discussed below.

The incumbent directors were also laboring under a conflict of interest, as they were all seeking re-election and thus had a personal interest in the decision to disqualify the candidates who would otherwise have displaced them. See Aprahamian, 531 A.2d at 1206. Maryland and Delaware cases both recognize that directors’ decisions are not protected by the business judgment rule under such circumstances. Werbowsky v. Collomb, 766 A.2d 123, 138 (Md. 2001); Aprahamian, 531 A.2d at 1206.

Furthermore, the incumbent directors effectively admitted in discovery that they did not act on an informed basis in disqualifying every Sessa Candidate. Several of the directors never even reviewed the supposedly deficient questionnaires submitted by the Sessa Candidates. In fact, none of the evidence relied on by the district court in sustaining the board’s action was even available to the board when it decided to disqualify each Sessa Candidate.

This Court has broad equitable power to remedy the injustice created by the district court’s preliminary injunction, including the power to set aside the June 10, 2016 annual meeting and order a new election in which the Sessa Candidates are allowed to participate. See W. Dist. Council of Lumber Prod. & Indus. Workers v. Louisiana Pac. Corp., 892 F.2d 1412, 1416 (9th Cir. 1989) (holding that the Court of Appeals has “the power to undo the election if . . . such relief is in the best interests of the shareholders”); Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1200-01 (2d Cir. 1978). As explained below, the Court should do so here so that the stockholders can have a fair election of directors with a choice of candidates.

ARGUMENT

As a threshold matter, stockholders have the exclusive right to elect a corporation’s directors under Maryland law. Md. Code Ann., Corps. & Ass’ns § 2-404(b)(1). “As a corollary to their exclusive right to elect the board, the shareholders have the right to nominate candidates for directorships.” Melvin Aron Eisenberg, Access to the Corporate Proxy Machinery, 83 Harv. L. Rev. 1489, 1505 (1970). Indeed, it is axiomatic that “when facing an electoral contest, incumbent directors are not entitled to determine the outcome for the stockholders. Stockholders elect directors, not the other way around.” Pell v. Kill, C.A. No. 12251-VCL, 2016 Del. Ch. LEXIS 77, *4 (May 19, 2016).¹² The Ashford Prime bylaws acknowledge these fundamental principles by expressly providing that stockholders may nominate candidates for election to the board. (ROA.16-10672.2213) Nothing in Maryland law or the Company’s bylaws affords the incumbent directors any power to substantively vet and determine who may run against them.

¹² Maryland courts, like the Fifth Circuit, find Delaware decisions to be “highly persuasive” on matters of corporate law. See, e.g., Kramer, 968 A.2d at 134; Hollis v. Hill, 232 F.3d 460, 469 (5th Cir. 2000) (“The opinions of the Delaware courts are often influential in matters of corporate law.”).

Maryland statutes provide that a corporation’s bylaws “may require any 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 or proposal to the corporation before a date or within a period of time specified in the charter or bylaws.” Md. Code Ann., Corps. & Ass’ns § 2-504(f).

But Maryland law does not give the incumbent board any right to evaluate, vet or interrogate candidates the stockholders nominate to run against them. Md. Code Ann., Corps. & Ass’ns § 2-504(f). Moreover, Delaware courts have held that advance notice provisions do not give an incumbent board any power to disapprove or reject stockholder nominations or proposal, except perhaps on the limited and objective grounds that the applicable deadline was not met. See, e.g., Openwave Sys. Inc. v. Harbinger Capital Partners Master Fund I, Ltd., 924 A.2d 228, 240 (Del. Ch. 2007), judgment entered, (Del. Ch. May 31, 2007) (deciding that stockholder nominees were invalid where stockholder “made no attempt to comply with [the advance notice] deadline[s]”).

The district court’s decision was predicated on its incorrect assumption that director actions interfering with stockholder voting rights are matters of corporate management that, under Maryland law, are protected by the business judgment rule.¹³ (ROA.16-10671.4149-50; 16-10672.4646-47) This is not the law in Maryland.

¹³ 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 Mining Corp., 382 B.R. 49, 69 (S.D. Tex. 2007), reconsidered in part on other grounds, 396 B.R. 278 (S.D. Texas 2008). The Company is incorporated in Maryland, so Maryland law applies to Sessa’s claim regarding election of directors.

The district court relied on the Maryland Court of Appeals’ holding in Shenker’s holding that in Maryland, “the business judgment rule applies to all decisions regarding [a] corporation’s management.” (ROA.16-10671.4148; ROA.16-10672.4645, quoting Shenker, 983 A.2d at 424).) But the district court apparently overlooked the further guidance in Shenker that “[w]here the rights attendant to stock ownership are adversely affected,” including specifically when “a shareholder’s right to vote” is impaired, “the business judgment rule does not apply.” Shenker, 983 A.2d at 424. Reconciling these two statements, the Maryland Court of Appeals views director actions regarding stockholder voting rights as not being decisions regarding a corporation’s management that are afforded protection of the business judgment rule.

The district court also ignored the well-reasoned decision of the Maryland circuit court in Shaker. In that case, the Maryland circuit court was faced with virtually the identical issue presented here: the use of advance notice bylaws to prevent nominees from standing for election against incumbent directors. Id. at *1-5. The Shaker court rejected the position that under Maryland law such conduct is reviewed under the business judgment rule. Instead, the court followed Delaware cases holding that the business judgment rule was inapplicable and applying heightened scrutiny to the board’s disenfranchisement of stockholders. Shaker, 2005 WL 914385 at *3-5. Rejecting the notion embraced by the district court here, the Maryland court in Shaker remarked: “This Court believes that Maryland law provides the same protection to shareholder voting rights that obtains in Delaware, in similar factual contexts, such as the present one involving a proxy fight over control of the board.” Id. at *4.

In addition, the Maryland court in Shaker found that the board’s conduct raised “a fundamental issue of corporate governance.” Id. at *5. It also cited Delaware authority that “matters involving the integrity of the shareholder voting process involve considerations not present in any other context in which directors exercise delegated power” and that such matters involve the question “who, as between the principal and the agent, has authority with respect to a matter of internal corporate governance.” Id. at *5-6 (citing Blasius Indus., Inc., 564 A.2d at 659-60). Like the Maryland Court of Appeals in Shenker, the circuit court in Shaker concluded that stockholder voting rights are not matters of corporate management afforded protection of the business judgment rule.

The United States District Court for the District of Maryland in Daniels v. New Germany Fund, Inc., No. MJG-05-1890, 2006 WL 4523622 (D. Md. Mar. 29, 2006), reached the same conclusion. Adopting the reasoning of Shaker, the court held, applying Maryland law, that “actions designed primarily to interfere with stockholder voting rights are not afforded protection of the Business Judgment Rule and there is no presumption of validity.” Id. at *4.

Similarly, in Mountain Manor, the Court of Special Appeals of Maryland expressly held that director actions with “the effect of consolidating or perpetuating management control” must be reviewed under a “balancing test” to decide whether the actions had a “legitimate business purpose” or whether “the primary object was merely to manipulate control.” 461 A.2d at 53 (citing Cummings v. United Artists Theatre Circuit, Inc., 204 A.2d 795 (Md. 1964)). As a federal court applying Mountain Manor has explained, if the “primary purpose” of the directors’ action is to “entrench [ ] management, in contravention of the principals of corporate democracy,” then the court must invalidate the action. NCR Corp., 761 F. Supp. at 496 (adopting and applying Mountain Manor’s balancing test under Maryland law).

Here, there is no doubt that the primary purpose of the incumbent directors’ decision to disqualify all five of the candidates who would run against them was to entrench themselves “in contravention of the principals of corporate democracy.” NCR Corp., 761 F. Supp. at 496. The district court itself observed that the Ashford Prime board had taken actions to “[f]urther entrench[] itself.” (ROA.16-10671.4146; ROA.16-10672.4643) Indeed, the record is replete with evidence that the incumbent directors engaged in a long pattern of conduct to frustrate the stockholder franchise, including their adoption of the Proxy Penalty and the Proxy Put, their attempted issuance of the Penny Preferred, wielding the Proxy Penalty against the Sessa Candidates in the proxy contest, and culminating in the admitted strategy of “declaring the [Sessa] nominees invalid.” (Supra, pp. 11-17; ROA.16-10672.2036.) Unlike in Mountain Manor (where the action at issue was the sale of stock) or NCR Corp. (where the action at issue was the adoption of an employee stock ownership plan), the disqualification of the Sessa Candidates had no legitimate business purpose and was undertaken for the sole purpose of preventing the stockholders from electing directors other than the incumbents.

The incumbent directors cannot argue that their decision to disqualify the Sessa Candidates serves the purpose of enforcing the advance notice provisions. The purpose of advance notice provisions—ensuring that stockholders have a reasonable opportunity to thoughtfully consider nominations—was clearly met here. Sessa provided the incumbent directors with approximately 430 pages of information and incorporated more by reference to its publicly-available securities filings. (ROA.16-16072.3534-824) Sessa also promptly furnished additional information in response to follow-up requests from the incumbent directors. (ROA.16-10672.2546-52) Even if Sessa’s January 14, 2016 notification and subsequent information was somehow deficient, Sessa filed its preliminary proxy statement on February 12, 2016, 120 days in advance of the June 10 annual meeting, and that filing contained all the information required by the proxy rules. Ashford Prime’s stockholders were fully informed of all information about the Sessa Candidates that they needed to make a fully informed election decision.

In addition, in accordance with the proxy rules (which are specifically incorporated by the advance notice provisions of the bylaws), Sessa fully disclosed its plans, proposals and views regarding the Company and its incumbent management to Ashford Prime stockholders through its publicly-available SEC filings. See, e.g., supra n.13. Moreover, based on the Sessa Candidates’ nomination materials, the incumbent directors repeatedly warned the stockholders that Sessa had secret, undisclosed plans “to invalidate the Termination Fee in court and with respect to a potential sale of the company.” (ROA.16-10672.2053) In short, the stockholders had all the information they needed to “thoughtfully consider” the Sessa Candidates and to decide whether to vote for them or the incumbent directors. Hubbard, 1991 WL 3151, at *13. This is all the clearer based on the election results at the annual meeting, where the stockholders overwhelmingly voted to “withhold” proxies for the incumbent directors.

In sum, there is a clear line of cases decided under Maryland law that director decisions adversely impacting stockholder voting rights are subject to heightened scrutiny and are not shielded by the business judgment rule. These cases are consistent with and refer to Delaware law, which Maryland courts find “highly persuasive” on matters of corporate law. Kramer, 968 A.2d at 134. But even if there were not such strong authority, the district court should have followed the well-reasoned approach of the Nevada district court in Hilton Hotels Corp. v. ITT Corp. which concerned similar questions to the ones posed to the district court in this case. 978 F. Supp. 1342 (D. Nev. 1997).

The Hilton court started its analysis by recognizing that, “Nevada case law is virtually silent” on actions taken by the “incumbent board of a corporation to entrench itself by effectively removing the right of a corporation’s shareholder to vote[.]” Id. at 1345-46. The court then noted that Nevada’s corporate law statutes permitted directors to take defensive measures to resist hostile takeovers, but did not affirmatively allow directors to disenfranchise shareholders in a proxy contest. Id. at 1346. To answer whether Nevada courts would apply the business judgment rule to actions that disenfranchised stockholders, the Hilton court, just as Maryland courts would do, looked to Delaware case law. Id. The court recognized that the Delaware authorities have “drawn a distinction between the exercise of two types of corporate power: 1) power over the assets of the corporation and 2) the power relationship between the board (management) and the shareholders.” Id. It observed that “the entire scheme of corporate governance,” is based on the board having “power over the management and assets of a corporation,” with that power being “limited by the right of shareholders to vote for the members of the board.” Id. at 1347. Based on this analysis, the Hilton court concluded that the Nevada Supreme Court would follow Delaware’s lead in rejecting the business judgment rule where the incumbent directors “impermissibly infring[ed] on shareholders’ right to vote on members of the board of directors.” Id. at 1346. The district court in this case should have followed a similar analysis, given that Maryland courts routinely turn to Delaware case law when there is a lack of Maryland authority on point. See, e.g., Kramer, 968 A.2d at 133-34 (Md. 2009); Shenker, 983 A.2d at 427 (recognizing “Delaware’s acknowledged leadership in developing a coherent body of corporate law to which [Maryland] and many other states ordinarily look for guidance”); Poling v. CapLease, Inc., No. 0700 Sept. Term 2015, 2016 WL 1749803, at *3 (Md. Ct. Spec. App. May 3, 2016).

It is well-established that advance notice provisions cannot be used to discriminate against director nominees or to entrench incumbent directors. 8 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Corporations § 4191. Courts do not hesitate to “invalidate board action constituting an inequitable manipulation of the corporate machinery that affected adversely the shareholders’ right to conduct a contested election of directors.” Hubbard, 1991 WL 3151, at *7 (collecting cases). “[W]hen advance notice bylaws unduly restrict the stockholder franchise or are applied inequitably, they will be struck down.” Openwave Sys., 924 A.2d at 239. Maryland courts agree: directors “breach[] their fiduciary duties to the shareholders by enforcing unreasonable or discriminatory by-law provisions against” stockholder nominees. Shaker, 2005 WL 914385, at *4.

¹⁴ Moreover, advance notice provisions are to be narrowly construed against the Company and in favor of the stockholder franchise. JANA Master Fund, 954 A.2d at 344.

The Company demanded that the Sessa Candidates complete a far more onerous questionnaire than the incumbent directors were required to complete. That questionnaire impermissibly went beyond the mandate of the bylaws to elicit the information required by the proxy rules set forth in Regulation 14A. And the Company then purported to disqualify the Sessa Candidates on the basis of alleged omissions and inaccuracies that are immaterial and were viewed as being of no consequence when committed by the incumbent directors. For example, while the incumbent directors complained that Mr. Livingston did not immediately disclose his purchase of a small amount of Ashford Prime stock, Ms. Carter herself failed to disclose her own ownership of Company stock on two separate questionnaires in 2014 and 2015 (ROA.16-10672.2381-85; ROA.16-10672.3258-62) and incorrectly reported that she owned 3,200 shares of Company stock later in 2015 (ROA. 16-10672.3283) when in fact she actually owned 6,400 shares of Company stock.  (ROA.16-10672.3371)  Similarly, Ashford Prime’s Chief Operating Officer and General Counsel, David Brooks held himself out as a “CPA” after his license had expired, just as Mr. Livingston did.  (ROA.16-10672.2889; ROA.16-10672.3025) If anything, the fact that the incumbent directors leveled these trivial arguments against Mr. Livingston proves that the incumbent directors were acting in bad faith as part of a “strategy of declaring [the Sessa] nominees invalid.” (ROA.16-10672.2036)

Although this critical issue was briefed below, it was not addressed in the district court’s order.

The business judgment rule is codified in Maryland in Corporations and Associations Code § 2-405.1 and applies to “directors when acting in their managerial capacities.” Shenker, 983 A.2d at 421. The district court’s decision erroneously relied on § 2-405.1(f) which provides that “[a]n act of a director relating to or affecting an acquisition or a potential acquisition of control” of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director.” (ROA.16-10671.4148-49; ROA.16-10672.4645-46 (citing Md. Code Ann., Corps. & Ass’ns § 2-405.1(f)).) However, § 2-405.1(f) is irrelevant to the current matter because nominating and voting for directors is not related to “an acquisition or potential acquisition of control.”

The Maryland Court of Appeals noted in Shenker that § 2-405.1(f) was enacted in 1999 to reject “in Maryland the ‘heightened scrutiny’ imposed on directors of Delaware corporations in hostile takeover situations.” Shenker, 983 A.2d at 427. The Maryland Court of Appeals elaborated that § 2-405.1(f) was meant to address the standard of care for directors in responding or not responding to “unsolicited takeover bids,” and that a director’s “failure to act solely because of the amount of consideration offered to stockholders would not expose that director to liability.” Id. Thus, when § 2-405.1(f) refers to an “acquisition or a potential acquisition of control,” it refers to a third party making a hostile offer to stockholders to purchase the corporation. This case has nothing to do with a hostile takeover or any other “acquisition.”¹⁵

¹⁵ Indeed, the Maryland legislature in the Maryland Financial Institutions Code defines “acquire” to mean to “obtain legal or beneficial ownership of shares, or voting rights of shares, whether directly or indirectly, though an intermediary or otherwise.” Md. Code Ann., Fin. Inst., § 9-216(a)(2). Sessa’s nomination of the Sessa Candidates is not an attempt to “acquire” legal or beneficial ownership of shares or voting rights of shares. Rather, it is the exercise of voting rights attendant to the shares of stock it already owns.

Sessa merely seeks a fair and free director election in which the stockholders have a meaningful choice of candidates. That is not the “acquisition of control” as contemplated by § 2-405.1(f).¹⁶ Therefore, § 2-405.1(f) is not applicable to this case.

Moreover, no Maryland court has ever applied § 2-405.1(f) to actions of directors that frustrate stockholder voting rights. Given the absence of any authority for application of § 2-405.1(f) and the substantial line of authority to the contrary, the district court below should have followed the Maryland Court of Appeals’ admonitions in Shenker, as well as the Shaker, New Germany, Mountain Manor, and NCR Corp. decisions, that under Maryland law the business judgment rule does not apply to such actions.

¹⁶ The district court perhaps labored under the misapprehension that Sessa sought to acquire control because the Sessa Candidates, if they were all elected, would comprise five of the seven members of the board of directors. However, even this reasoning does not withstand scrutiny. Only one of the five Sessa Candidates is employed by Sessa. (ROA.16-16072.3535, ROA.16-16072.3537-38) The other four have no financial connection to Sessa and would be entirely independent. (ROA.16-16072.3535-37) In fact, all four of the other Sessa Candidates testified or provided sworn declarations affirming their independence, and they all submitted certifications to the Company as part of the nomination materials affirming that they had not made “any agreement, arrangement or understanding with, or any commitment or assurance to, any person as to how [they], if elected as a director of the Company, will act or vote on any issue or question.” (ROA.16-10672.3582; ROA.16-10672.3644; ROA.16-10672.3689; ROA.16-10672.3748; 3806) Thus, even if all of the Sessa Candidates were elected to the board, Sessa would in no sense acquire “control” of the board or the Company.

The district court also noted that the Maryland legislature recently amended § 2-405.1 of the Maryland General Corporation Law to provide that “‘[This section is] the sole source of duties of a director to the corporation or the stockholders of the corporation.’” (ROA.16-10671.4149; ROA.16-10672.4646 (citing 2016 Md. Laws Ch. 170 (“SB 148”) § 2-405.1(i)(1))) The district court acknowledged that this amendment does not take effect until October 1, 2016, and therefore the court could not have relied upon the amendment to reach its decision. Id.

Even if SB 148 applied retroactively, it does not address the principle expressed by Maryland courts in Shenker and Shaker that actions taken by directors that adversely affect stockholder voting rights are not matters of corporate management and are not shielded by the business judgment rule. SB 148 contains no references to elections or stockholder voting. Therefore, under Maryland principles of statutory interpretation, it cannot be presumed to address those matters. See Shenker, 983 A.2d at 421 (it is a “well-established principle that statutes are not presumed to make alterations in the common law other than as may be declared expressly”).

On the contrary, SB 148 amends § 2-405.1 in response to the holding in Shenker that § 2-405.1(f) applies only to hostile takeovers and that director actions regarding voluntary sales of the corporation do not get the protection of the business judgment rule. See Shenker, 983 A.2d at 421-422, 427. To overturn this higher duty imposed on directors in a friendly cash merger transaction, subsection (i) was added to provide that § 2-405.1 “[i]s the sole source of duties of a director to the corporation or the stockholders of the corporation, whether or not a decision has been made to enter into an acquisition or a potential acquisition of control of the corporation or enter into any other transaction involving the corporation.” 2016 Md. Laws Ch. 170 § 2-405.1(i)(1). Additionally, another subsection was amended to provide that a director cannot be subject to a higher standard of care solely because of “the amount or type of consideration that may be offered or paid to stockholders of the corporation in an acquisition or a potential acquisition of control of the corporation.” 2016 Md. Laws Ch. 170 § 2-405.1(f)(5)(i).

The language and history of the 1999 amendment adding § 2-405.1(f) (explained in Shenker, 983 A.2d at 426-27) and the 2016 amendments to § 2-405.1 in SB 148 demonstrate that the Maryland legislature expressly focused on insulating directors from heightened scrutiny when responding to a hostile takeover, or engaging in an extraordinary, but voluntary, transaction like a merger or sale. A director election is not a “transaction” much less a hostile takeover or potential merger or sale.

For more than 150 years, Maryland has recognized that it is the right of the stockholders, and not the board, to choose who will run their corporation. See Mottu v. Primrose, 23 Md. 482, 500 (1865) (striking down incumbent board’s attempt to extend its term of office because it would “overturn the principles upon which, alone, the corporation can be safely carried on, by depriving the stockholders of the right secured to them by law of controlling the management of the company”). Nothing in the amendments to § 2-405.1 establishes a new standard for boards of directors making decisions about stockholders voting for directors. Rather, the recent amendments only clarify a change of the standard to be used in the context of significant corporate transactions. Accordingly, even if effective, the 2016 amendment to § 2-405.1 has no bearing on this case.

The business judgment rule merely creates “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.” Boland, 31 A.3d at 548 (quoting Aronson, 473 A.2d at 812); Md. Code Ann., Corps. & Ass’ns § 2-405.1(e). That presumption can be overcome by showing that the directors (1) “did not act in good faith”; (2) “stood to receive some personal benefit from the transaction” akin to self-dealing; or (3) that the challenged action was “not within the realm of sound business judgment.” Boland, 31 A.3d at 548-49 (citation omitted); Hanks, Maryland Corporation Law § 6.8. “Any decision undertaken on the basis of insufficient knowledge is inherently unreasonable” and thus is not protected by the business judgment rule, NCR Corp., 761 F. Supp. at 491.

In this case, the incumbent directors applied the bylaws in a discriminatory manner and in bad faith to disqualify the Sessa Candidates. It is well-established that advance notice provisions cannot be used to discriminate against director nominees or to entrench incumbent directors. Shaker, 2005 WL 914385 at *4; Hubbard, 1991 WL 3151, at *7; Openwave Sys., 924 A.2d at 239.¹⁷ As discussed above, the incumbent directors deliberately and in bad faith used the advance notice provisions as a weapon against the Sessa Candidates by having the Company’s outside lawyers cook up a rigged questionnaire especially for the Sessa Candidates and then disqualifying every Sessa Candidate for immaterial omissions and inaccuracies that were swept aside when committed by the incumbent directors. (Supra, pp. 35-36) Moreover, in retaliation for Sessa pursuing the proxy contest, the Company made existential threats to Sessa¹⁸ and Mr. Bennett’s long-time associate and college classmate posted to Ashfordfacts.com a video portraying Mr. Petry as Adolf Hitler. ¹⁹ (ROA.16-10671.1567-68)

¹⁷ Moreover, advance notice provisions are to be narrowly construed against the Company and in favor of the stockholder franchise. JANA Master Fund, 954 A.2d at 344.

¹⁸ Supra, n. 7.

¹⁹ After Sessa sought discovery from Ashford Prime concerning the Ashfordfacts.com website, the website became unavailable. The video may still be viewed at https://www.youtube.com/watch?v=CMIHHVJtsH0.

These actions were done in bad faith as the incumbent directors prioritized their own entrenchment as directors over the stockholders’ right to free and fair elections.

Maryland decisions have embraced the well-accepted principle that directors are not protected by the business judgment rule when they have a personal interest in the decision. Werbowsky, 766 A.2d at 138; Hanks, Maryland Corporation Law § 6.8. Incumbent directors “whom are seeking reelection . . . are obviously interested in the outcome of the election.” Aprahamian, 531 A.2d at 1206.²⁰ A candidate for office “is likely to prefer to be elected rather than defeated” and “therefore has a personal interest in the outcome of the election even if the interest is not financial and he seeks to serve from the best of motives.” Id.

²⁰ Maryland’s highest court has found that Delaware’s “‘independence’ inquiry . . . persuasive” when “crafting” Maryland’s standards for independence. Boland, 31 A.3d at 564.

Here, all seven of the incumbent directors sought re-election and were thus inherently interested in the outcome of a decision to disqualify their opponents in the election. See id. The incumbent directors also have a profound financial interest in the outcome of the election. Ashford Prime’s directors are well compensated, receiving between $149,800 and $193,880 per year in cash and stock awards. (ROA.16-10672-2072) Ms. Carter, the Chair of the Nominating and Governance Committee, receives the lion’s share of her annual income from the compensation she receives as a member of the board. Ms. Carter’s annual income in 2015 was less than $300,000 and perhaps even less than $200,000, while her compensation as a director of Ashford Prime was $167,380. (ROA.16-10672.2184; ROA.16-10672.2072) Mr. Murphy depends on his position as director for roughly 30% of his annual income and for certain months his director pay constitutes 100% of his income. (ROA.16-10672.2164) The incumbent directors are not shielded by the business judgment rule for actions taken to affect the electoral process in which they are candidates running for re-election. Again, the district court failed to address this critical issue even though it was briefed below.

At the May 11, 2016 hearing before the district court, Ashford Prime’s counsel stated that the board voted to disqualify the Sessa Candidates “at meetings in early April” before “April 12th.” (ROA.16-10671.4213-14; ROA.16-10672.4693-94) At that time, the incumbent directors had none of the evidence cited by the district court as supporting the directors’ decision.²¹ That leads to the inescapable conclusion that the board predetermined to disqualify the Sessa Candidates without any of the information cited by the district court.

²¹ Sessa did not produce any of the evidence cited by the district court until April 20, 2016.

The record further shows that the incumbent directors disqualified the Sessa Candidates without having sufficient information to do so. For example, Mr. McWilliams and Mr. Murphy testified that they have not even looked at any of the questionnaires submitted by the Sessa Candidates.  (ROA.16-10672.2529; ROA.16-10672.2162) The incumbent directors could not meet their obligation to make informed decisions when failing to review ANY of the questionnaires submitted to them. Their conduct shows they had predetermined to prevent the Sessa Candidates from participating in the election no matter what.

The record also calls into question whether the board ever voted to disqualify the Sessa Candidates on the basis that they failed to comply with the advance notice provisions of the bylaws. Mr. Murphy testified in his April 27th deposition that the board had previously agreed upon a process pursuant to which the Nominating and Governance Committee (Ms. Carter and Mr. Strong) would make a recommendation and the outside directors would then vote, but that the Nominating and Governance Committee never made any formal recommendation. (ROA.16-10672.2174-75) He further testified that the board had decided that Ashford Prime would not count any stockholder votes for the Sessa Candidates at the annual stockholders meeting for the sole reason that the Nomination and Governance Committee had not provided any recommendation. (ROA.16-10672.2173) This is inconsistent with disqualifying the Sessa Candidates because of a conclusion—whether in good or bad faith—that they did not comply with the advance notice provisions of the bylaws.

The record further undermines the assertion by Ashford Prime’s counsel at the May 11 hearing that the board voted to disqualify the Sessa Candidates. Mr. McWilliams agreed with Mr. Murphy that the Nominating and Governance Committee’s findings had not been presented to the board. (ROA.16-10671.3559) But in contrast to Mr. Murphy and Ashford Prime’s counsel, as of the date of his deposition on April 28th, Mr. McWilliams did not think that the board had voted to disqualify the Sessa Candidates. (Id.) Mr. McWilliams is the lead director of Ashford Prime. (ROA.16-10671.3536) The preparation of the rigged director questionnaires by the Company’s outside attorneys and Mr. McWilliams’s inability to recall a recommendation of the Nominating and Governance Committee or a board decision to disqualify the Sessa Candidates suggest that Ashford Prime’s management and outside attorneys ran the process to disqualify the Sessa Candidates without the involvement or informed approval of the board.

To this day, Ashford Prime has not produced any minutes or documentation supporting any of the differing explanations provided by the incumbent directors of why they disqualified the Sessa Candidates, if they even made that decision at all.²²

²² After three motions to compel by Sessa, Ashford Prime produced only five sets of board minutes, two of which reflect meetings in May and June of 2015, which were months before Sessa nominated the Sessa Candidates. None of the other minutes reflect any deliberation or decision by the board or a board committee concerning the Sessa Candidates’ compliance with the advance notice provisions, or the disqualification of the Sessa Candidates.  (ROA.16-10671.3415-16; ROA.16-10672.3029-30; ROA.16-10672.3037-38)

In determining that the Company was likely to succeed on the merits under the business judgment rule, the district court found that “the board could rationally believe the Sessa Candidates had a plan they refused to disclose in their questionnaires and thus were ineligible” based on “evidence supporting the board’s contention that Sessa has plans for Ashford Prime after it assumes control of the board.” (ROA.16-10671.4153-54; ROA.16-10672.4650-51) In reaching that decision, the district court correctly observed that the bylaws merely required that the Sessa Candidates disclose the information that is required to be disclosed “in connection with the solicitation of proxies” under the Exchange Act. (ROA.16-10671.4152; ROA.16-10672.4649) However, the district court erroneously went beyond the proxy rules when it found that the Sessa Candidates must “‘describe any plans or proposals’ that would result in a sale or transfer of material assets.” (Id. (citing Schedule 13D, 17 C.F.R. § 240.13d-101, which is not part of the proxy rules).) It is well-established that advance notice bylaws are to be narrowly construed so as not to interfere with stockholder voting rights. JANA Master Fund, 954 A.2d at 344.

Even if one accepts the district court’s expansion of the bylaws to include Schedule 13D, the documents cited by the district court provide no factual basis for the board to find that the Sessa nominees had undisclosed “plans” as that term is interpreted under the statute and rules adopting Schedule 13D. In the context of Sessa’s proxy contest, these rules require nominees only to “‘describe any plans or proposals’ that would result in a sale or transfer of material assets.” (ROA.16-10671.4152; ROA.16-10672.4649 (citing 17 C.F.R. § 240.13d-101).) There is no requirement to make “predictions of future behavior,” Mo. Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 872 (2d Cir. 1974), or to disclose tentative or “inchoate” plans. Merrit v. Libby, McNeil & Libby, 510 F. Supp. 366, 372 (S.D.N.Y. 1981). Indeed, this Court has cautioned that disclosure of tentative plans can be misleading. Susquehanna Corp. v. Pan Am. Sulphur Co., 423 F.2d 1075, 1084-85 (5th Cir. 1970) (“It would have been misleading to the stockholders and to the public investor for [a] Schedule 13D . . . to indicate that there was a plan or proposal” for a merger where the “idea for such a merger never got off the ground”).

All of the evidence relied upon by the district court reflects merely tentative ideas and discussions. For example, the district court relied on two emails from junior Sessa analysts sent five months before Sessa decided to nominate a slate of directors. Those emails merely suggested that Sessa should develop a general “gameplan” and plans to handle certain issues such as the Proxy Penalty. (ROA.16-10671.4153; ROA.16-10672.4650, citing Exs. O & P, ROA.16-10672.4552-58) Likewise, notes from a December 18, 2015 phone call between Mr. Petry and some of the Sessa Candidates showed that Mr. Petry had not made any definitive plans because he “[didn’t] know what [the environment] looks like in 6 months” when the election would take place. (ROA.16-10672.4540) Mr. Petry observed in one conversation that “in today’s environment” maximizing value would include “a real and fair sale process.” (Id.) But these comments were made in the context of a discussion of a strategic review that the Company’s board was already conducting. Sessa publicly announced its views on the strategic review in a January 8, 2016, Schedule 13D: “given the corporate governance and other issues . . . we now believe that a sale of the Company is the preferred outcome of the strategic alternatives process.” (ROA.16-10671.160) Sessa’s belief did not constitute a definitive plan to sell the Company if the Sessa Candidates were elected, and in any event its views on the subject were fully disclosed to the Company and to stockholders.

The district court’s findings also defy logic. The foregoing documents were not produced by Sessa until April 20, 2016. Yet the Company’s counsel represented at the May 11 hearing that the incumbent directors made the decision to disqualify the Sessa Candidates prior to April 12, 2016. (ROA.16-10671.4213-14; ROA.16-10672.4692-93) The incumbent directors therefore could not have based their decision to disqualify the Sessa Candidates on the basis of these documents.

As Sessa argued below, even if the district court had applied the correct legal definition of “plans,” and even if it was right that the directors had sufficient evidence to rationally believe that Sessa and the one Sessa officer (Mr. Petry) had undisclosed plans for the Company, there is no basis to conclude that the four candidates not associated with Sessa (Cunningham, Silvers, Livingston, and Wheeler) had any undisclosed plans.  (ROA.16-10671.4194; ROA.16-10672.4673; ROA.16-10672.2010-11) Mr. Livingston testified that he did not have any predetermined plans and that he would “need to gather information, be a good board member, [and] hear the different expert inputs” before he could “weigh in.” (ROA.16-10671.3749) Mr. Wheeler testified that his discussions with Mr. Petry were at a “broad high level” as he “wanted to know what he [Mr. Petry] was up to and why.” (ROA.16-10672.3498) Mr. Wheeler further testified that “there weren’t any specific plans or strategies.” (Id.) Messrs. Cunningham and Silvers, who were not deposed, provided sworn declarations that they had “not entered into any agreements or understandings .. . . to vote in any particular way” and that they “would vote independently on all matters put to a vote . . .. based on the circumstances and information available to the Board of Directors at that time.” (ROA.16-10672.2025-28) In addition, each of the four independent Sessa Candidates signed certifications attached to their questionnaires that they had not made any voting commitment to any person if they were elected as a director of the company. See, e.g., (ROA.16-10672.3582; ROA.16-10672.3644; ROA.16-10672.3689; ROA.16-10672.3748; ROA.16-106723806)

The evidence relied upon by the district court exclusively concerned Sessa and Mr. Petry’s views regarding the Company. (ROA.16-10671.4152-53; ROA.16-10672.4649-50) The district court relied on two emails sent by Sessa employees to Mr. Petry in August 2015 (five months before Sessa decided to nominate its slate of directors) regarding the importance of formulating plans at some point in the future. (Id.) The district court also cited notes taken during a phone call in December 2015 between Mr. Petry and some of the Sessa Candidates, where Mr. Petry responded to a question from one of the candidates about his views on the “gameplan after election.” (Id.) None of the evidence cited by the district court provides a basis by which the incumbent directors could have rationally believed that Cunningham, Silvers, Livingston, and Wheeler had any undisclosed plans. The district court thus clearly erred by imputing Sessa’s and Mr. Petry’s purported undisclosed plans to Messrs. Wheeler, Livingston, Cunningham, and Silvers without any factual basis for doing so.

Sessa’s motion for preliminary injunction sought an order requiring the incumbent directors to approve the Sessa Candidate’s for purposes of the Proxy Penalty, which they had wrongfully refused to do in violation of their fiduciary duties to stockholders. (ROA.16-10671.385) The district court also erred by refusing to grant Sessa’s requested relief. The district court’s sole reason for refusing to do so was that “the business judgment rule protects Ashford Prime’s board’s decision to deny approving the Sessa candidates for the proxy contest and election.” (ROA.16-10671.4154; ROA.16-10672.4651) As already discussed, this was a clear error of law.

Under the TAAA, the incumbent directors can avoid any risk of triggering the Proxy Penalty by simply approving two or more of the Sessa Candidates. (ROA.16-10671.3294-95; see also ROA.16-10671.3523-24; ROA.16-10671.3550) The TAAA requires no conditions, criteria, standards or guidelines for such approval. (ROA.16-10671.3294-95) The TAAA does not require any evaluation or vetting of the nominees before they can be approved.²³ (Id.) And under applicable law, the incumbent directors may “approve” the Sessa Candidates for purposes of the TAAA while still “recommending” themselves to the stockholders in their proxy materials. San Antonio Fire & Police Pension Fund v. Amylin Pharm., Inc., 983 A.2d 304, 314 (Del. Ch.), aff’d, 981 A.2d 1173 (Del. 2009) (construing the term “approve” in a Proxy Put provision and holding that the company had the power to “approve” stockholder nominees while simultaneously running and recommending its own incumbent slate).

²³ The operative language of the TAAA reads: “[A]ny individual becoming a director after the Effective Date whose election to the board is approved or recommended to the stockholders of Ashford Inc. by a vote of at least a majority of the Advisor Incumbent Board shall be considered as though such individual were a member of the Advisor Incumbent Board.” (ROA.16-10671.3295)

Under the circumstances presented here, it would unquestionably be a breach of the incumbent directors’ fiduciary duties to the Company and its stockholders to refuse to approve the Sessa Candidates and neutralize the Proxy Penalty. If the Sessa Candidates are not approved, the Company will face what Mr. Bennett describes as “a catastrophic event” – a Proxy Penalty that is in the “hundreds of millions” of dollars. (ROA.16-10671.3517-18; ROA.16-10671.3424 ¶ 1) Such a penalty would wipe out roughly half of Ashford Prime’s market capitalization.²⁴

A situation even less egregious to the one presented in this case was addressed by the Delaware Court of Chancery in Kallick v. SandRidge Energy, Inc., 68 A.3d 242 (Del. Ch. 2013). In SandRidge, a hedge fund that held a 7% stake in the company commenced a proxy contest to replace the incumbent board following years of poor performance. Id. at 244. The company contended that the proposed nominees were “less qualified” than the incumbent board and lacked industry experience. Id. More importantly, “the incumbent board warned the stockholders that the election of [the hedge fund’s] proposed slate would constitute a ‘Change of Control’ for purposes of SandRidge’s credit agreements” which would trigger a ‘Proxy Put’ requiring SandRidge to repurchase its existing debt. Id. With the threat of the Proxy Put hanging over the Company if the stockholders elected the competing slate, the incumbent board then “failed to decide, one way or the other, whether it approved the [hedge fund] slate for purposes of the Proxy Put.” Id. at 246.

²⁴ The Proxy Penalty would produce an epic windfall for Ashford Inc., which has a market capitalization of less than $150 million. As Chairman Bennett has admitted, because he “own[s] a lot” of Ashford Inc. stock, the Proxy Penalty would “enrich [him] immensely.” (ROA.16-10671.3433)

The Delaware Court of Chancery concluded that the incumbent directors were violating their fiduciary duties to the corporation and its stockholders and granted injunctive relief. Id. at 263-64. The court noted the “public policy of stringent policing of the fairness of corporate elections” and held that “a board deciding whether to approve directors for the purposes of a Proxy Put could not act consistently with its fiduciary duties by simply failing to approve any director candidates who ran against the incumbent slate.” Id. at 246 (citing Amylin). The court went on to hold that under an intermediate standard of review requiring an incumbent board to provide a reasonable justification for its actions, an incumbent board may refuse to approve competing candidates for purposes of such a contractual provision only if the incumbent directors have reasonably determined that the rival candidates lack “ethical integrity” or “fell within the category of known looters.”^{25, 26} Id.

²⁵ The court also discussed withholding approval if the rival candidates had “specific plans that would endanger the corporation’s ability to repay its creditors.” SandRidge, 68 A.3d at 246. However, this was premised on the company having a duty of good faith and fair dealing toward its creditors under Delaware law. Id. The TAAA is expressly governed by Texas law (see ROA.16-10671.3302), 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).

²⁶ Because the primary purpose of their actions is to interfere with the stockholder vote, the higher Blasius standard of review applies, which requires the incumbent directors to show a compelling justification for their actions. The hypothetical justifications listed by SandRidge would not satisfy the Blasius standard.

Ashford Prime and the incumbent directors cannot make a showing that the Sessa Candidates lack ethical integrity or are “known looters.” The Sessa Candidates are remarkably well-qualified individuals with excellent credentials. As a group, they include graduates of Harvard Business School, the Wharton School of Business, the Haas School of Business at U.C. Berkeley, a chaired professor of law who specializes in corporate governance, and former CEOs who have served on the boards of at least 16 public companies. (ROA.16-10671.3444-47)

The Company has identified no evidence that the Sessa Candidates lack integrity or have a history of looting companies. Indeed, Mr. McWilliams, Ashford Prime’s lead director, testified that he had “no view” as to whether the Sessa Candidates lack integrity or pose a threat to the company. (ROA.16-16071.3558-59) He admitted that he was “not aware” of any reason to think they would loot Ashford Prime. (ROA.16-10671.3558) Likewise, Mr. Murphy testified that he had “no basis” to think the Sessa Candidates lack integrity or competence or that they have ever stolen anything. (ROA.16-10671.3570-73)

Ashford’s primary argument, the one which the district court found the incumbent directors could “rationally believe” under the business judgment rule, was that the Sessa Candidates failed to disclose their alleged secret plans and proposals. (ROA.16-10671.4153-54; ROA.16-10672.4650-51) But Sessa firmly established that there are no such plans or proposals. (See ROA.16-10672.2010-12.) It was only the district court’s erroneous application of the business judgment rule that led it to disregard Sessa’s position. Without that erroneous application of the business judgment rule, Sessa is likely to succeed on the merits

The district court’s application of the equitable factors relevant to evaluating a preliminary injunction motion was also fundamentally flawed. The district court’s preliminary injunction allowed the incumbent directors to effectively disenfranchise Sessa and the other Ashford Prime stockholders. That action caused Sessa irreparable harm, was entirely inequitable, and contrary to the strong public policy favoring fair and unbiased director elections. Allowing the Sessa Candidates to stand for election would not have created “shareholder confusion” or caused Ashford Prime’s stockholders to “case meaningless votes.” (ROA.16-10671.4154-55; ROA. 16-10672.4651-52)

The equitable factors also support requiring the incumbent directors to approve the Sessa Candidates to neutralize the Proxy Penalty. See SandRidge, 68 A.3d at 264 (concluding that stockholders were irreparably harmed by coercive effect of proxy put). It would result in no hardship to the incumbent directors because it would properly result in an election on a level playing field, as Maryland law contemplates. And it would serve the public interest because Ashford Prime is a publicly traded company and its stockholders have an interest in ensuring that the stockholder right to elect directors of a public company is preserved.

This Court has broad equitable power to remedy the injustice created by the district court’s preliminary injunction, including the power to set aside the June 10, 2016 annual meeting and order a new election in which the Sessa Candidates are allowed to participate. See W. Dist. Council of Lumber Prod., 892 F.2d at 1416 (holding that the Court of Appeals has “the power to undo the election if . . . such relief is in the best interests of the shareholders” despite that plaintiff had “sought only a preliminary injunction enjoining [defendant] from voting any proxies”). “Equity demands” that a corporate election “be voided in whole or in part so as to permit a new election of directors” where, as here, there is a “strong likelihood . . . that the election results were influenced by . . . the district court’s election-eve order.” Kennecott Copper, 584 F.2d at 1200-01.

The stockholders’ overwhelming 2-1 vote to “withhold” support for the incumbent directors at the annual meeting palpably demonstrates that the Sessa Candidates had a “strong likelihood” of winning the election if the district court had not enjoined them from standing for election. This Court should therefore exercise its broad equitable powers to undo the election and allow Ashford Prime’s stockholders to have a meaningful vote for the Company’s directors.

CONCLUSION

For the foregoing reasons, the district court’s decision should be reversed, and the Court should enter an order: (1) setting aside the results of the June 10, 2016 election, (2) requiring the Company and incumbent directors to hold a new election as promptly as reasonably practicable in which the Sessa Candidates are allowed to stand for election and solicit proxies, and (3) ordering the incumbent directors to approve the Sessa Candidates for purposes of the TAAA in order neutralize the Proxy Penalty and ensure a fair election.

CERTIFICATE OF COMPLIANCE

The undersigned certifies that this brief complies with the type-volume limitations required under Fed. R. App. P. 32(a)(7)(B). Exclusive of the portions of the brief exempted under Fed. R. App. P. 32(a)(7)(B)(iii), this brief consists of 13,956 words as measured by Microsoft Word 2013 version 15.0.4823.1001. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because it has been prepared in Garamond, a proportionally spaced typeface using Microsoft Word 2013 in font size 14.

CERTIFICATE OF SERVICE

I certify that on June 24, 2016, the foregoing Brief was filed electronically using the Court’s CM/ECF system, which will give notice of the filing to counsel. In addition, an electronic copy of the Brief was served upon counsel for the Appellee listed below by electronic mail:

Exhibit 2

Case No. 16-10671

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

ASHFORD HOSPITALITY PRIME, INCORPORATED,

Plaintiff – Appellee

v.

SESSA CAPITAL (MASTER), L.P.,

Defendant–Third Party Plaintiff – Appellant

SESSA CAPITAL GP, L.L.C.; SESSA CAPITAL IM, L.P.; SESSA CAPITAL IM GP, L.L.C.; JOHN E. PETRY; PHILIP B. LIVINGSTON; LAWRENCE A. CUNNINGHAM; DANIEL B. SILVERS; CHRIS D. WHEELER,

Defendants – Appellants

v.

DOUGLAS A. KESSLER; ANDREW STRONG; STEFANI D. CARTER; CURTIS B. MCWILLIAMS; MONTY J. BENNETT; ASHFORD HOSPITALITY

ADVISORS, L.L.C.; ASHFORD, INCORPORATED; MATTHEW

D. RINALDI; W. MICHAEL MURPHY,

Third Party Defendants – Appellees

Consolidated w/16-10672

ASHFORD HOSPITALITY PRIME, INCORPORATED,

Plaintiff – Appellee

v.

SESSA CAPITAL (MASTER), L.P.; SESSA CAPITAL GP, L.L.C.; SESSA CAPITAL IM, L.P.; SESSA CAPITAL IM GP, L.L.C.; JOHN E. PETRY; PHILIP B. LIVINGSTON; LAWRENCE A. CUNNINGHAM;

DANIEL B. SILVERS; CHRIS D. WHEELER,

Defendants – Appellants

On Appeal from the United States District Court

For The Northern District of Texas, Dallas Division

Civ. Nos. 3:16-cv-00527-N and 3:16-cv-00713

APPELLANTS’ REPLY BRIEF

Attorneys for Appellants

Nos. 16-10671 and 16-10672

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Ashford Hospitality Prime, Inc. v. Sessa Capital (Master), L.P.

CERTIFICATE OF INTERESTED PERSONS

The undersigned counsel of record certifies that the following listed persons and entities as described in the fourth sentence of Rule 28.2.1 have an interest in the outcome of this case. These representations are made in order that the judges of this Court may evaluate possible disqualification or recusal.

1.            Sessa Capital (Master), L.P. (“Sessa”), Defendant-Appellant, Counterclaimant and Third-Party Claimant, is a Cayman Islands exempted limited partnership that is not publicly traded;

2.            Sessa Capital GP, LLC, Defendant-Appellant, is a Delaware limited liability company that is not publicly traded;

3.            Sessa Capital IM, L.P., Defendant-Appellant, is a Delaware limited partnership that is not publicly traded;

4.            Sessa Capital IM GP, LLC, Defendant-Appellant, is a Delaware limited liability company that is not publicly traded;

5.            John E. Petry, Defendant-Appellant, is the founder and manager of the Sessa entities and one of the persons nominated by Sessa as a candidate for election to the board of Ashford Hospitality Prime Inc. (“Ashford Prime”);

6.            Philip B. Livingston, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Prime;

7.            Lawrence A. Cunningham, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Prime;

8.            Daniel B. Silvers, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Prime;

9.            Chris D. Wheeler, Defendant-Appellant, is one of the persons nominated by Sessa as a candidate for election to the board of Ashford Hospitality Prime Inc.;

10.          Ashford Hospitality Prime, Inc., Plaintiff-Counterclaim-Defendant-Appellee, is a publicly traded Maryland corporation. There are no publicly held corporations that own ten percent or more of Ashford Prime;

11.          Ashford Inc., Third-Party Defendant-Appellee, is a publicly-traded Delaware corporation. There are no publicly held corporations that own ten percent or more of Ashford Inc.;

12.          Ashford Hospitality Advisors LLC, Third-Party Defendant-Appellee, is a Delaware limited liability company and a subsidiary of and the operating company of Ashford Inc.;

13.          Monty J. Bennett, Third-Party Defendant-Appellee, is the CEO and Chairman of the Board of Directors of Ashford Hospitality Prime;

14.          Douglas A. Kessler, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

15.          Stefani D. Carter, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

16.          Curtis B. McWilliams, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

17.          W. Michael Murphy, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime;

18.          Matthew D. Rinaldi, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime; and

19.          Andrew Strong, Third-Party Defendant-Appellee, is a member of the Board of Directors of Ashford Prime.

Attorneys for Defendants-Appellants:

Attorneys for Plaintiffs-Appellees:

TABLE OF CONTENTS

TABLE OF AUTHORITIES

Cases

INTRODUCTION

In their brief, the Ashford Parties go to great lengths to defend the district court’s decision. At times, they appear to test the bounds of zealous advocacy with characterizations of the facts that cannot be squared with the record and descriptions of the law that find little basis in the cases. With respect to at least one significant issue, they seem to deliberately try to confuse the Court. But when the Court cuts through the fog the Ashford Parties have created, it becomes clear that the district court committed at least four legal errors that require reversal:

First, the district court erred by holding that the incumbent directors’ disqualification of the Sessa Candidates is reviewed under Maryland’s business judgment rule. Second, the district court erred by using an incorrect standard in applying Maryland’s business judgment rule. Third, the district court erred by upholding the incumbent directors’ disqualification of the Sessa Candidates on the ground that they violated the bylaws by failing to disclose their “plans” for the Company when there is no such requirement in the bylaws. Fourth, the district court erred by upholding the incumbent director’s disqualification of the Sessa Candidates on the basis of an alleged omission that was purely technical, despite well-established law that advance notice provisions are not to be enforced to defeat stockholder nominations on inequitable or purely technical grounds.

Perhaps recognizing that the district court’s decision cannot withstand scrutiny, the Ashford Parties try to hide behind a spurious waiver argument and a litany of alternative arguments for affirmance that hardly warrant a response. Finally, the Ashford Parties’ arguments that the equities favor them border on absurd in light of the stockholders’ unprecedented, overwhelming vote to “withhold” support from the incumbents. As explained below, the Ashford Parties’ arguments are without merit, the district court’s order should be reversed, and this Court should set aside the results of the June 10, 2016 election and require that a new election be held.

STANDARD OF REVIEW

The Ashford Parties suggest that the district court’s decision is reviewed only for abuse of discretion. They are incorrect. “Application of an incorrect legal standard is, by definition, an abuse of discretion, and is reviewed de novo.” Ackal v. Centennial Beauregard Cellular, L.L.C., 700 F.3d 212, 215 (5th Cir. 2012); see also O'Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 737 (5th Cir. 2003) (legal errors reviewed de novo).

ARGUMENT

In applying the business judgment rule to the incumbent board’s disqualification of the Sessa Candidates, the district court relied almost exclusively on the Maryland Court of Appeals’ statement in Shenker that “the business judgment rule applies to all decisions regarding [a] corporation’s management.” (ROA.16-10671.4148; 16-10672.4645, quoting Shenker v. Laureate Educ., Inc., 983 A.2d 408, 424 (Md. 2009)). But the district court overlooked the next paragraph of Shenker, in which the Court of Appeals made clear that “[w]here the rights attendant to stock ownership are adversely affected,” including specifically when “a shareholder’s right to vote” is impaired, “the business judgment rule does not apply.” Shenker, 983 A.2d at 424. Indeed, the Shenker decision described the business judgment rule as applying to directors only when “acting in their managerial capacity.” See, e.g., id. at 421. The Maryland Court of Appeals has thus established that board decisions relating to stockholder voting rights are not managerial decisions and are not reviewed under Maryland’s business judgment rule.

The district court was not at liberty to ignore these statements from Maryland’s highest court. It is well-established that in applying state law, federal courts are required to follow the decisions of the state’s highest court. Howe ex rel. Howe v. Scottsdale Ins. Co., 204 F.3d 624, 627 (5th Cir. 2000).

The Ashford Parties attempt to dismiss Shenker by quoting a decision of Maryland’s intermediate Court of Special Appeals, Sutton v. FedFirst Fin. Corp., 126 A.3d 765, 787 (Md. Ct. Spec. App. 2015), for the proposition that “the specific holding of Shenker was confined to the facts of the case, ‘a cash-out merger transaction.’” Appellees’ Brief 30. But they misleadingly fail to include the next sentence of Sutton, where the court observed that “the principles set forth were not limited to that specific factual scenario.” Sutton, 126 A.3d at 787. Even if not the “specific holding” of Shenker, the pertinent language is “convincing evidence of the likely result” that must be considered in predicting how the Maryland Court of Appeals would decide the issue. Thomas v. Hoffman-LaRoche, Inc., 949 F.2d 806, 812 (5th Cir. 1992).

Every relevant decision of other courts applying Maryland law confirms that the business judgment rule does not apply in these circumstances. See Shaker v. Foxby Corp., 2005 WL 914385, at *4-5 (Md. Cir. Ct. Mar. 15, 2005) (“Maryland law provides the same protection to shareholder voting rights that obtains in Delaware, in similar factual contexts, such as the present one involving a proxy fight over control of the board.”; Daniels v. New Germany Fund, Inc., 2006 WL 4523622 (D. Md. Mar. 29, 2006) (same); Mountain Manor Realty, Inc. v. Buccheri, 461 A.2d 45, 53 (Md. Ct. Spec. App. 1983) (applying balancing test); see also NCR Corp. v. Am. Tel. & Tel. Co., 761 F. Supp. 475, 496 (S.D. Ohio 1991) (following Mountain Manor).

The Ashford Parties try to ignore these cases. However, decisions from Maryland courts and federal courts sitting in Maryland, which are more familiar with Maryland law, have “persuasive force,” Hill v. U. S. Fid. & Guar. Co., 428 F.2d 112, 114-15 (5th Cir. 1970), and are “entitled to great weight on review,” Avery v. Maremont Corp., 628 F.2d 441, 446 (5th Cir. 1980).

The Ashford Parties attempt to dismiss Shaker as an “unreported Maryland trial court decision without precedential weight.” Appellees’ Brief 32. But the decision, authored by a highly-regarded Maryland judge, is considered a published decision and persuasive authority in Maryland.¹

Unable to cite a single case to support their contention that Maryland’s business judgment rule applies to decisions regarding the eligibility of board candidates (Appellees’ Brief 6-7), the Ashford Parties attempt to rely on Md. Code Ann., Corps. & Ass’ns (“MGCL”) § 2-405.1(f), which provides that “[a]n act of a director relating to or affecting an acquisition or potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director.” Appellees’ Brief 29. But the Maryland Court of Appeals held in Shenker that § 2-405.1(f) is only “meant to reject in Maryland the heightened scrutiny imposed on directors of Delaware corporations in hostile takeover situations by the Delaware Supreme Court in Unocal Corp v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).” Shenker, 983 A.2d at 427.

¹ The Maryland state judiciary maintains an “opinion database” of published decisions from the Circuit Court.  The Shaker decision is published on that database.  http://www.mdcourts.gov/businesstech/opinions_archive2005.html.

By referring to Unocal, the Maryland Court of Appeals indicated what constitutes a “hostile takeover” in Maryland: an unwanted attempt to acquire ownership of a company through a tender offer for the target company’s stock, often furthered by an additional corporate transaction such as a “cash out merger.” See e.g., Unocal Corp., 493 A.2d at 949-50. There is no hostile takeover in this case. Sessa merely sought to exercise its right under the bylaws and Maryland law to nominate and vote for director candidates other than the incumbents. Sessa was making no effort to increase its ownership stake and, indeed, is prohibited from mounting a hostile takeover by Ashford Prime’s Articles of Incorporation, which limit ownership of Ashford Prime’s stock to 9.8% or less. (ROA.16-10672.618) Appellees have not cited any case in which a Maryland court has applied Section 2-405.1(f) to actions of a corporate board that relate to stockholder voting.

Appellees attempt to create a false impression that this case involves some form of hostile takeover by asserting that the case involved “coordinated purchases of the Company’s stock” and a “joint agreement to seize control of the Board.” Appellees’ Brief 14, 48. But the district court made no such finding and no such evidence exists.

The only Sessa Candidate who purchased any Ashford Prime stock was Mr. Livingston. (ROA.16-10672.3511) His purchase of 4,000 shares at a total cost of roughly $40,000 was immaterial, representing less than .000016% of Ashford Prime’s outstanding common stock. (ROA. 16-10672.2014) He made the purchase independently, after Sessa submitted his nomination materials, only because he “think[s] it’s very important for directors to own stock in the company, to align themselves with the shareholders.” (ROA.16-10672.3872)

Furthermore, four of the five Sessa Candidates had no affiliation whatsoever with Sessa. (ROA.16-16072.3535-37) They all provided written certifications that they had not entered into “any agreement, arrangement or understanding” as to how they would vote as directors on “any issue or question.” (ROA.16-10672.3582; .3644; .3689; .3748; .3806)

The Ashford Parties mention Maryland’s pending amendment of MGCL § 2-405.1, but are unable to explain how it has any significance to this case. The Ashford Parties concede that the amendment does not go into effect until October 1, 2016 (Appellees’ Brief 30), and under Maryland law it does not apply retroactively. Langston v. Riffe, 754 A.2d 389, 394 (Md. 2000) (citation omitted) (“In the absence of clear legislative intent to the contrary, a statute is not given retrospective effect.”). As explained in Sessa’s Opening Brief, the amendment does not refer to stockholder voting and would therefore not be construed to apply to matters of stockholder voting rights. The Ashford Parties do not even attempt to refute these arguments.

As explained in Sessa’s Opening Brief, the Delaware Court of Chancery has held that a board must provide a “compelling justification” for actions that have the “primary purpose of impeding the exercise of stockholder voting.” See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 661 (Del. Ch. 1988). The incumbent directors’ decision to disqualify the Sessa Candidates falls squarely within the ambit of the Blasius category, as it plainly had the “primary purpose of impeding the exercise of stockholder voting.”

Citing Tackney v. U.S. Naval Academy Alumni Ass’n, 971 A.2d 309 (Md. 2009), the Ashford Parties assert that the Maryland Court of Appeals “rejected an attempt to apply Blasius to the review of a board action that allegedly interfered with stockholder voting rights.” Appellees’ Brief 31. But the Ashford Parties’ description of the Tackney decision is highly misleading. Tackney had nothing to do with “stockholder voting rights.” It concerned voting rights of members of a private, non-profit, voluntary organization that has no stockholders. Tackney, 971 A.2d at 311. The Court declined to apply Blasius’s compelling justification standard because, “in contrast to Blasius,” the association’s members “were not denied the opportunity to vote for their preferred candidate.” Tackney, 971 A.2d at 320.

Regardless, the incumbent directors’ conduct would not survive scrutiny under either the Blasius or the Unocal standard, which the Ashford Parties appear to tacitly concede by relegating the issue to one conclusory footnote. See Appellees’ Brief 32 n.8.

As explained in Sessa’s Opening Brief, it is well-established that advance notice provisions cannot be used to discriminate against director nominees or to entrench incumbent directors. Indeed, this principal was expressly adopted by the Maryland Circuit Court in Shaker, 2005 WL 914385, at *4, and by the U.S. District Court for the District of Maryland in Daniels, 2006 WL 4523622, at *3.

Incredibly, the Ashford Parties assert that Sessa “has not proffered any evidence of discriminatory enforcement.” Appellees’ Brief 32. But the Ashford Parties concede that the Company required the Sessa Candidates to complete a special, onerous questionnaire. That questionnaire was designed to provoke objections and answers that could be characterized as incomplete, and that improperly went beyond the requirements of the bylaws. Opening Brief 34-35.

Ashford Prime’s bylaws specify what information the board can require from director nominees, and they expressly incorporate the requirements of Regulation 14A. (ROA.16-10672.2214) The questionnaires provided to the incumbent directors were consistent with the bylaws, and even contained citations to Regulation 14A for guidance. (ROA.16-10672.2474-522) The questionnaire provided to the Sessa Candidates, however, deleted the internal references to Regulation 14A and sought disclosure of a vast amount of information not required by Regulation 14A, such as all of the candidate’s “plans” or “proposals” for the Company, all of the candidate’s discussions regarding the Company, and copies of any “related analysis, emails, correspondence or documentation.” (ROA.16-10672.2308-13)

The Ashford Parties claim there is “nothing sinister” in having a special questionnaire for “insurgents – who were previously unknown to the Company.” Appellees’ Brief 47. But this argument is belied by that fact that even when the incumbent directors were first considered for the Ashford Prime board, they did not have to fill out a questionnaire like the one required of the Sessa Candidates. (ROA. 16-10672.2327-69, 2013 Ashford Trust Questionnaire)

The incumbent directors’ complaints about the Sessa Candidates’ completed questionnaires also reflects discriminatory treatment. The incumbent directors complain that Livingston did not immediately disclose a purchase of a small amount of Ashford Prime stock. However, they do not dispute that Stefani Carter, the incumbent Chair of Ashford Prime’s Nominating and Governance Committee (the “Nominating Committee”), failed to disclose her ownership of Company stock on multiple questionnaires without consequence. Opening Brief 35.

Likewise, the incumbent directors complain that Mr. Livingston described himself as a “CPA” in after his CPA licenses had expired. Appellees’ Brief 37-38. But Ashford Prime’s Chief Operating Officer and General Counsel, David Brooks, also described himself as a “CPA” in a filing with the SEC after his license expired, also without consequence. Opening Brief 35.

The district court also failed to apply the correct legal standard in applying Maryland’s business judgment rule.

Section 2-405.1(a) of the Maryland Business and Corporations Code establishes the substantive duties of directors of a Maryland corporation. It provides that a director “shall perform his duties”: (1) “[i]n good faith”; (2) “[i]n a manner he reasonably believes to be in the best interest of the corporation”; and (3) “[w]ith the care that an ordinarily prudent person in a like position would use under the circumstances.” MGCL § 2-405.1(a).

Section 2-405.1(e) codifies the business judgment rule in Maryland, and merely creates a presumption that directors have met their substantive obligations under Subsection (a). MGCL § 2-405.1(e); James J. Hanks, Jr., Maryland Corporation Law § 6.8. That presumption can be overcome by actual evidence of bad faith, personal interest, or lack of informed decision-making. Boland v. Boland, 31 A.3d 529, 548-49 (Md. 2011) (citations omitted); NCR Corp., 761 F. Supp. at 491 (“[a]ny decision undertaken on the basis of insufficient knowledge is inherently unreasonable”). “Once the challenger presents evidence adequate to rebut the presumption, the burden of production shifts back to the corporation or directors, as the case may be, to present evidence that the directors acted in accordance with Section 2-405.1.” Hanks, Maryland Corporation Law § 6.8 (citing NCR Corp., 761 F. Supp. at 491).

Despite Sessa expressly arguing that the incumbent directors’ disqualification of the Sessa Candidates was not protected by the business judgment rule because the directors acted bad faith, were personally interested in the election, and had not acted on an informed basis (ROA.16-10671.3261), the district court never addressed these issues. Instead, it applied something similar to the rational basis test from the field of constitutional law. The district court rested its decision solely on its conclusion that “the board could rationally believe the Sessa candidates had a plan they refused to disclose in their questionnaires.” (ROA.16-10671.4153-54; ROA.16-10672.4650-51)

A.           Sessa Has Overcome the Business Judgment Rule with Evidence the Incumbent Directors Acted in Bad Faith

The evidence of bad faith here is overwhelming. On March 24, 2016, Jonathan Kaye of Moelis & Co., which was retained specifically to assist the Company in defeating Sessa’ proxy contest, met with Sessa. Reading from written talking points, Mr. Kaye attempted to pressure Mr. Petry to abandon the proxy contest. During that conversation, he told Mr. Petry that the incumbent directors were pursuing a “strategy of declaring your nominees invalid.” (ROA.16-10672.2036) Mr. Kaye’s admission clearly suggests that the board’s decision to disqualify the Sessa Candidates was not made in good faith and was instead part of a strategy to entrench the incumbent board.

The Ashford Parties now argue that Mr. Kaye did not actually say those words. Appellees’ Brief 47 n.13. But the statement is reflected in the written talking points Mr. Kaye spoke from at the meeting, which the Company was compelled to produce in discovery. (ROA.16-10672.2035-37)

Perhaps most importantly of all, the incumbent directors have engaged in a litany of other acts of entrenchment, including the adoption of the Proxy Penalty and the Proxy Put, and their attempted issuance of “Penny Preferred.” All of this evidence demonstrates that the incumbent directors disqualified the Sessa Candidates in bad faith to perpetuate themselves in office. Opening Brief 11.

The incumbent directors’ bad faith is also apparent in their creation of a new, highly onerous questionnaire for the Sessa Candidates that exceeded the bylaws, leaving the Sessa Candidates only five business days to complete it before the deadline; in them raising the most trivial issues with Mr. Livingston’s responses; and in their disqualification of all five of the Sessa Candidates, even though only Mr. Petry is affiliated with Sessa. And as discussed below, it can also be seen in the fact that the incumbent directors were already well aware of Sessa’s positions (see Appellees’ Brief 41) – making any omission in Sessa’s nomination materials entirely technical.

B.           Sessa Has Overcome the Business Judgment Rule with Evidence That Ms. Carter and the Other Directors Had a Personal Interest in the Election

The Ashford Parties do not deny that directors’ decisions are not protected by the business judgment rule when they have a personal interest in the decision. Werbowsky v. Collomb, 766 A.2d 123, 138 (Md. 2001); see also Boland, 31 A.3d at 548-49; Hanks, Maryland Corporation Law § 6.8. Incumbent directors “whom are seeking reelection . . . are obviously interested in the outcome of the election” and they are therefore not protected by the business judgment rule to the extent they make decisions involving the conduct of that election. Aprahamian v. HBO & Co., 531 A.2d 1204, 1206 (Del. Ch. 1987).

The Ashford Parties rely on a statement in Werbowsky that “interest or dependence may not be found merely from the fact that directors are paid for their services.” Appellees’ Brief 43. However, that statement was made in the very different context of considering whether the futility exception to the demand requirement applied to a stockholder derivative suit. Werbowsky, 766 A.2d at 139. A director would not necessarily be biased against a stockholder demand merely because the director receives compensation. But the situation is different in the context of an election. As the Aprahamian court explained, a candidate for office “is likely to prefer to be elected rather than defeated” and “therefore has a personal interest in the outcome of the election even if the interest is not financial and he seeks to serve from the best of motives.” 531 A.2d at 1206.

Here, the inherent interest in being elected is compounded by a significant financial interest. All of the directors receive substantial compensation of between $149,800 and $193,880 per year in cash and stock awards for their part-time service. (ROA.16-10672-2072)

Ms. Carter, the Chair of Ashford Prime’s Nominating Committee who played a pivotal role in the disqualification of the Sessa Candidates, is particularly dependent on her compensation as an Ashford Prime director. In her deposition Ms. Carter ultimately conceded that her total annual income from all sources might be less than $200,000. (ROA.16-10672.2184) Given her strong financial interest in retaining her position on the board, her conduct in disqualifying the Sessa Candidates clearly is not protected by the business judgment rule.

C.           Sessa Has Overcome the Business Judgment Rule with Evidence the Board Did Not Act on an Informed Basis

In its Opening Brief, Sessa presented troubling evidence that the incumbent directors never actually made any formal decision to disqualify the Sessa Candidates and that the decision was instead improperly made by Ashford Prime’s management, Ms. Carter and outside lawyers. See Opening Brief 43-46. In addition, despite being served with document requests calling for such information, the Ashford Parties produced no board minutes, resolutions, written consents, or other documents reflecting any decision by the board of directors. See Opening Brief 45-46 & n.22.

The Ashford Parties maintain that the Nominating Committee “determined that the Sessa Candidates had not complied with the Bylaws and, therefore, were ineligible to stand for election” and that the Committee “presented its findings to the full Board, which agreed and declared the Sessa Candidates ineligible.” Appellees’ Brief 15-16. For support, they cite the deposition testimony of Ms. Carter. (ROA.16-10672.4433-35)

But shockingly, Ms. Carter actually testified that she did “not recall if the board made any decision.” (ROA.16-10672.4435) In addition, Mr. McWilliams, Mr. Murphy and Mr. Bennett each testified that the board had not formally voted on whether to disqualify the Sessa Candidates. See Opening Brief 43-45. In sum, three of the four directors who were deposed, including the Lead Director and Chairman of the Board, testified that the board never actually voted to disqualify the Sessa Candidates, while the Chair of the Nominating Committee could “not recall.”

Under the Ashford Prime bylaws, the board can take action only by a majority vote. (ROA.16-10672.2218) The board’s failure to even hold a vote as required by the bylaws should preclude the application of the business judgment rule. See Boland, 31 A.3d at 548 (noting that the business judgment rule applies only “if the majority of the board properly exercises its business judgment”).

Sessa also presented evidence that the Ashford Prime board of directors never even looked at the Sessa Candidates’ questionnaires which were purportedly found to be deficient. Opening Brief 44. The Ashford Parties respond only with a cavalier comment that the directors who admitted they did not look at the questionnaires “were not on the Board’s Nominating and Governance Committee tasked with evaluating the Sessa Candidates’ Nomination Materials.” Appellees’ Brief 45. But that is tantamount to an admission that the full board did not act on an informed basis. See NCR Corp., 761 F. Supp. at 491-92 (board did not act on an informed basis where “information which was readily available” was “not presented to the outside Directors by management, or if it was presented, was apparently not duly considered by the Board”).

In the face of this evidence, the Ashford Parties resort to fabricating factual findings by the district court. The Ashford Parties assert that the district court found that the board acted “with due care in its deliberations.” Appellees’ Brief 44. However, the district court made no such finding.

The district court’s decision was expressly premised on the notion that the Sessa Candidates were required under the bylaws to “‘describe any plans or proposals’ that would result in a sale or transfer of material assets.” (ROA.16-10672.4649, citing Schedule 13D, 17 C.F.R. § 240.13d-101). Schedule 13D, which was cited by the district court, does require stockholders who hold more than 5 percent of a publicly traded company’s securities to make such disclosures. However, the disclosure requirements of Schedule 13D are not incorporated into the bylaws. The bylaws only incorporate the disclosure requirements of Regulation 14A, and there are no requirements to disclose such “plans” in Regulation 14A. (ROA.16-10672-2214)

It was fundamentally improper for the district court to import the disclosure requirements of Schedule 13D to do the opposite. See JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 344 (Del. Ch. 2008) (advance notice bylaws are to be narrowly construed so as not to interfere with stockholder voting rights).

Recognizing the district court’s fundamental error, the Ashford Parties now argue that “Section 11(a)(3)(iv)(B) of the Bylaws requires disclosure of plans, proposals and discussions about the Company.” Appellees’ Brief 46. Section 11(a)(3)(iv)(B) actually requires the nominating stockholder to disclose its “investment strategy or objective” and to provide “a copy of the prospectus, offering memorandum, or similar document, if any, provided to investors or potential investors in such stockholder.” (ROA.16-10672.102) Sessa provided this information by including its confidential offering memorandum in the nomination materials delivered to the Company on January 15, 2016. (ROA.16-10672.3538-39)

In full compliance with the obligations under Regulations 14D and 13D, Sessa made extensive public disclosures of its views regarding Ashford Prime, including its views with regard to the possible sale of the Company or its assets.² For example, Sessa publicly announced in a January 8, 2016 13D filing with the SEC that “given the corporate governance and other issues . . . we now believe that a sale of the Company is the preferred outcome of the strategic alternatives process.” (ROA.16-10671.160) And in a detailed presentation to Ashford Prime stockholders that was filed with the SEC on March 23, 2016, Sessa expressed its views regarding the Company in great detail, including its intent to consider “any strategic action . . . including asset sales,” and to “[e]xplore all options to invalidate or renegotiate the termination fee.” (ROA.16-10671.3643-86)

² Between January 1 and June 14, 2016, Sessa made 11 Schedule 13D filings and 25 Section 14A filings with the SEC.  Sessa’s filings are publicly available on the SEC website, at: https://www.sec.gov/cgi-bin/browse-edgar?CIK=0001618360&action=getcompany.

The Ashford Parties do not dispute that they were well aware of these public disclosures. In fact, the Company attached Sessa’s January 8, 2016 13D filing to its complaint in Ashford I (ROA.16-10671.151-161), and produced a copy of the March 23, 2016 investor presentation in discovery. (ROA.16-10671.3643-86)

Sessa also had extensive oral and written discussions with Ashford Prime’s incumbent board, in which Sessa candidly shared its views that the Company give serious consideration to a sale of the Company, including a meeting with members of the board on January 5, and a letter to them on January 7, 2016. (ROA.16-10672.4415, .4417-20) In fact, the Ashford Parties contend that Mr. Petry “advised them . . . of his plan” in these discussions, and try to use them as evidence that Sessa had plans to sell the Company.³ Appellees’ Brief 41. But what these communications really show is that Sessa’s position on a sale of Ashford Prime was no secret. Indeed, the January 7 letter was publicly filed with the SEC as part of Sessa’s January 8, 2016 13D filing.⁴

The Ashford Parties argue this Court should affirm the district court’s decision on the basis of its finding that “the board could rationally believe the Sessa Candidates had a plan they refused to disclose on their questionnaires and thus were ineligible.” Appellees’ Brief 42 (emphasis added). In other words, their position is that even if Sessa disclosed its putative plans as described, the incumbent directors appropriately disqualified the Sessa Candidates for not including those same communications in the Sessa’s Candidates’ completed questionnaires on January 15, 2016.

³ The Ashford Parties take great liberties in describing the communications in their brief. A review of the materials cited will show that Mr. Petry never said he had a “plan to force a hasty sale of the Company.” Appellees’ Brief 41.

⁴ To be clear, Sessa has never had any definitive plans or proposals to sell the Company or its assets, merely the sort of tentative views that have squarely been held not to require disclosure under Schedule 13D. See Opening Brief 47 (discussing cases). Sessa has nevertheless fully disclosed those views in Schedule 13D filings.

This is precisely the sort of “inequitable” application of advance notice provisions Maryland and Delaware courts have made clear should be struck down. Shaker, 2005 WL 914385, at *4; Openwave Sys. Inc. v. Harbinger Capital Partners Master Fund I, Ltd., 924 A.2d 228, 239 (Del. Ch. 2007) (“[W]hen advance notice bylaws unduly restrict the stockholder franchise or are applied inequitably, they will be struck down.”); Hubbard v. Hollywood Park Realty Enters., Inc., 1991 WL 3151, at *7 (Del. Ch. Jan. 14, 1991) (same); see also 5 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Corporations § 2025 (Sept. 2015) (explaining that the right to elect directors is so fundamental that it should “not be annulled for purely technical reasons”).

The Ashford Parties’ waiver arguments are entirely without merit. Sessa has not raised new issues on appeal. At the outset of the litigation, Sessa sought an order requiring the board to approve the Sessa Candidates for purposes of the Proxy Penalty. Then, when the Company revealed its plan to disqualify the Sessa Candidates, Sessa moved to expand the scope of the injunctive relief sought to include an order that the Sessa Candidates be permitted to stand for election. (ROA.16-10671.2644-49) That motion was denied in the district court’s preliminary injunction decision (ROA.16-10671.4154 n.3; ROA.16-10672.4651 n.3), and all of the other issues raised in this appeal were presented and briefed in connection with that motion and in the briefing on Sessa’s preliminary injunction motion. (ROA.16-10671.351-.880; .2644-720; .3252-634; .3707-.4095)

Sessa has asked for substantially the same relief throughout the course of this litigation – an order requiring Ashford Prime and its incumbent directors to permit the Sessa Candidates to stand in a free and fair election so that the Ashford Prime stockholders can choose the Company’s directors, as they are entitled to do under Maryland law. MGCL § 2-404(b)(1). Sessa’s request for relief has been adjusted only as necessitated by developments over time. Sessa initially sought prospective relief to ensure that the election would be conducted. But after the district court entered its preliminary injunction, that became impossible and it was entirely appropriate to then move this Court to stay the district court’s order and postpone the annual meeting. After that motion was denied and the Company held the meeting, it was necessary to request this Court to undo the tainted election and order a new one. Opening Brief 56-57.

The Ashford Parties’ contention that this amounts to waiver was squarely rejected in W. Dist. Council of Lumber Prod. & Indus. Workers v. La. Pac. Corp., 892 F.2d 1412, 1416 (9th Cir. 1989). In that case, the defendant corporation argued that the shareholder plaintiff’s appeal could not seek a new election because in the district court the plaintiff had “sought only a preliminary injunction enjoining [defendant] from voting any proxies,” not rescission of the election. Id. Here, the election was not held until after the appeal was commenced. Sessa “could hardly be expected to request the rescission of an election that had not occurred when its complaint was filed.” Id.; see also Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1200-01 (2d Cir. 1978) (“Equity demands . . . that the . . . annual meeting be voided in whole or in part so as to permit a new election of directors” where there was a “strong likelihood . . . that the election results were influenced by . . . the district court’s election-eve decision.”).

Given the district court’s preliminary injunction decision, it would be futile to require Sessa to ask the district court for an order setting aside the annual meeting. Doing so would merely delay the resolution of those issues, allowing the incumbent directors to continue to remain in office unjustly. Indeed, this Court has already recognized the urgency of this appeal by granting Sessa’s request that it be expedited.⁵

⁵ To the extent the Ashford Parties are complaining that Sessa did not first seek a stay of the preliminary junction decision from the district court, their position is foreclosed by Rule 8, which expressly provides that a party need not first seek relief in the district court where “moving first in the district court would be impractical.” Fed. R. App. P. 8(a)(2)(A)(i) Fed. R. App. P. 8(a)(2)(A)(i). Because the annual meeting was scheduled for June 10, 2016, Sessa had no time to first seek a stay in the district court. (Fifth Circuit case no. 16-10671, ECF Nos. 513522110 & 513527816)

There is also no merit to the Ashford Parties’ assertion that Sessa declined to ask the district court to stay the annual meeting as a “tactical matter.” Appellees’ Brief 24. In making this argument, the Ashford Parties take the comments of Sessa’s counsel out of context. When the district court asked Sessa’s counsel whether the annual meeting should be postponed, it did so in the context of a proposal to postpone the annual meeting in order to allow for curative disclosures, specifically to have the “current proxies canceled and start over with fresh proxy statements.” (ROA.16-10671.4200)

“Neither of the[ ] aims” of the general waiver rule “would be furthered by invoking waiver here.” Barefoot Architect, Inc. v. Bunge, 632 F.3d 822, 835 (3d Cir. 2011). The waiver rule “serves two purposes: ensuring that the necessary evidentiary development occurs in the trial court, and preventing surprise to the parties when a case is decided on some basis on which they have not presented argument.” Id. (citing Hormel v. Helvering, 312 U.S. 552, 556 (1941)). The parties sought injunctive relief from the outset of this case, thoroughly briefed the issues, and developed an evidentiary record through discovery.⁶

⁶ The cases cited by the Ashford Parties are all inapposite. For example, in Peterson v. Bell Helicopter Textron, Inc., the plaintiff had never requested any form of injunctive relief until after judgment was entered, thus severely prejudicing the defendant. 806 F.3d 335, 338-39 (5th Cir. 2015).

In a move smacking of desperation, the Ashford Parties attempt to confuse the Court on a critical issue. Under Maryland law and the Company’s bylaws, the stockholders have the exclusive right to elect the Company’s directors, along with a corollary right to nominate candidates for election. The incumbent directors have no right to approve or disapprove stockholder-nominated candidates and determine who may stand for election. See Opening Brief 27-35. At pages 35-39 of their brief, the Ashford Parties attempt to create the impression that they have such a right by confusing the issue with the separate approval rights the incumbent directors granted themselves under the Third Amended Advisory Agreement (“TAAA”).

Under the TAAA, the incumbent directors may “approve” candidates for the purposes of avoiding the contractual termination fee. But the TAAA does not purport to allow incumbent directors to determine whether a stockholder-nominated candidate can stand for election, nor could it. (ROA.16-10671.3295) It merely provides for a potential financial penalty (the “Proxy Penalty”) if stockholders elect a majority of directors who have not been “approved” or “recommended” by the incumbent board. (Id.) As such, the TAAA actually confirms that stockholders have the right to nominate and elect whomever they chose as the Company’s directors.

On the issue of the Proxy Penalty, the Delaware Chancery Court’s decision in Kallick v. SandRidge Energy, Inc., 68 A.3d 242 (Del. Ch. 2013) is controlling. The Hills decision cited by the Ashford Parties is not to the contrary, as it involved merely severance packages for key employees and thus did not present the same potential consequences as the massive Proxy Penalty. See Hills Stores Co. v. Bozic, 769 A.2d 88, 91-92 (Del. Ch. 2013); SandRidge, 68 A.3d at 262 (distinguishing Hills). Furthermore, the Hills decision was premised on an implied covenant of good faith and fair dealing for the benefit of the key employees. See Hills Stores Co., 769 A.2d at 108. The TAAA is governed by Texas law, (16-10671.3302), which does not recognize an implied duty of good faith and fair dealing in contracts except in limited circumstances not applicable here. See Williamson-Dickie Mgf. Co. v. Apparel Ltd., 2015 U.S. Dist. LEXIS 75227, *5-*7 (N.D. Tex. 2015). Thus, Ashford Prime owes its advisors no duty to vet, evaluate or pass judgment on candidates before “approving” them for purposes of the TAAA.

The Ashford Parties ask this Court to affirm the district court’s decision on the basis of a litany of alleged violations of the federal securities laws and the bylaws, none of which were addressed by the district court below. The Court should decline to reach issues. See United States v. Jenkins, 974 F.2d 32, 34 (5th Cir. 1992) (declining to “consider all the wide ranging issues” issues raised by a party in connection with an interlocutory appeal). In any event:

Sessa and Livingston did not form an undisclosed group for the purpose of purchasing Ashford Prime stock. Appellees’ Brief 48-49. As explained above, the evidence establishes that Livingston’s nominal purchase of Ashford Prime stock was done independently after he was put forward by Sessa as a board candidate.

Sessa did not violate Schedule 13D by failing to disclose its “plans or proposals regarding the sale of Ashford Prime and its assets.” Appellees’ Brief 49-50. As explained previously, Sessa had no definitive plans or proposals, but nevertheless filed a January 8, 2016, Schedule 13D disclosing that it viewed a sale as the preferred outcome” of the Company’s strategic review.” (ROA16-10671.160)

For the same reasons, Sessa did not violate Item 5(b)(1)(xii) of Schedule 14(a) by failing to “disclose their plans” and any “attendant risks.” Appellees’ Brief 50. Sessa’s SEC’s filings are replete with discussions of the risks associated with the Proxy Penalty. Moreover, Item 5(b)(1)(xii) does not even require the disclosure of “plans” and “attendant risks.” 17 C.F.R. § 240.14a-101, Item 5(b)(1)(xii).

Sessa did not violate the bylaws “by failing to disclose in their Nomination Materials the significant consequences and economic risks” attending the election of the Sessa Candidates. Appellees’ Brief 51. The Company and the incumbent directors were well aware of the Proxy Penalty, which created those risks. Regardless, Sections 11(a)(3)(iv)(B) and 11(a)(4) of the bylaws do not require disclosure of “significant consequences” or “economic risks” if a director candidate is elected. (ROA.16-10672.102-03)

Finally, Sessa and Livingston did not violate by the bylaws by failing to disclose his purchase of the Company’s stock. Appellees’ Brief 51-52. Livingston purchased the stock after his nomination materials were submitted, and the bylaws require updates only in the event of a “material” change. (ROA.16-10672.2214) Livingston’s purchase of less than .000016% of Ashford Prime’s outstanding common stock was hardly material. Moreover, Sessa was uninvolved and unaware of the purchase when it was made on January 19, but disclosed the purchase in an SEC filing on February 4, 2016, after learning of it. (ROA.16-10672.2627)

The equities in this case sharply favor Sessa. Under Maryland law, stockholders have the exclusive right to elect a corporation’s directors. MGCL § 2-404(b)(1). And the incumbent directors have a duty to ensure that elections are conducted with scrupulous fairness. Shaker, 2005 WL 914385, *5-6 (citing Blasius Indus., Inc., 564 A.2d at 659-60). By disqualifying all of the Sessa Candidates, the incumbent directors effectively re-elected themselves and deprived the stockholders of their right to choose the Company’s directors.

Allowing the Sessa Candidates to participate in a fair election would obviously not harm stockholders or Ashford Prime. Rather, it would serve the interests of the stockholders, and, since Ashford Prime is a public company, the public.

The results of the stockholder vote that took place on June 10, 2016 eliminate any doubt that the equities favor Sessa. Foreclosed from voting for the Sessa Candidates by the district court’s order, the stockholders expressed their disapproval of the incumbent director’s actions and desire for change in the boardroom by voting 2-1 to “withhold” their votes from the incumbent directors.

The Ashford Parties argue that but for the district court’s order, stockholders would have been irreparably harmed by casting “meaningless votes for invalid nominees” (Appellees’ Brief 53), and that the public interest was served by reducing “shareholder confusion at the annual meeting” (Appellees’ Brief 55). But in the ultimate irony, the district court’s order precluded the stockholders from having any candidates other that the incumbent directors, effectively making all of the stockholders’ votes meaningless.

In this proxy contest, the incumbent directors lobbied the stockholders vigorously to reject the Sessa Candidates, issuing press releases and making SEC filings raising the same complaints with the Sessa Candidates and their purported plans to sell the Company that they have complained of in this litigation. (See e.g., ROA.16-10671.862) The district court should have merely required the incumbent directors to conduct a free and fair election and allowed the stockholders to decide who to elect.

CONCLUSION

For the foregoing reasons, Sessa respectfully submits that the district court’s decision should be reversed, and that the Court should enter the order requested in its Opening Brief.

CERTIFICATE OF COMPLIANCE

The undersigned certifies that this brief complies with the type-volume limitations required under Fed. R. App. P. 32(a)(7)(B). Exclusive of the portions of the brief exempted under Fed. R. App. P. 32(a)(7)(B)(iii), this brief consists of 6,985 words as measured by Microsoft Word 2013 version 15.0.4823.1001. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because it has been prepared in Garamond, a proportionally spaced typeface using Microsoft Word 2013 in font size 14.

CERTIFICATE OF SERVICE

I certify that on July 19, 2016, the foregoing Brief was filed electronically using the Court’s CM/ECF system, which will give notice of the filing to counsel.

Exhibit 3

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

REPLY IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’
FIRST AMENDED COMPLAINT PURSUANT TO FRCP 12(b)(6)

Defendants Sessa Capital (Master), L.P., Sessa Capital, GP, LLC, Sessa Capital IM, L.P., and Sessa Capital IM GP, LLC (collectively “Sessa”), along with defendants John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers, and Chris D. Wheeler (the “Sessa Candidates”) hereby submit this Reply in Support of their Motion to Dismiss the first amended complaint filed by Plaintiffs Ashford Inc. and Ashford Hospitality Advisors LLC (“Ashford LLC”).

INTRODUCTION

Plaintiffs do not dispute, and have thus effectively conceded, that the Termination Fee is an unenforceable penalty under Texas law. They have consistently hidden the data necessary to calculate the Termination Fee, instead merely alleging that the Termination Fee, “if calculated today, would amount to hundreds of millions of dollars.” (ECF No. 2-20, Am. Compl. ¶ 2) Under the first prong of the Termination Fee formula, the Termination Fee is calculated to be at least Plaintiffs’ yearly Adjusted EBTIDA from providing services to Ashford Prime multiplied by 22. Under the second and third prongs of the formula, the Termination Fee may be much higher. Moreover, Ashford Prime would have to pay the exorbitant fee regardless of whether the Termination Fee is triggered with nine years remaining for the Third Amended Advisory Agreement (“TAAA”) term or a single day. Far from being “a reasonable forecast of just compensation,” the Termination Fee is an illegal penalty, and a blatant one. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). This Court can and should dismiss Plaintiffs’ request for declaratory relief on that basis.

Instead, Plaintiffs argue that their claims survive Defendants’ motion dismiss because they: (1) have not asserted causes of action for violations of Sections 13(d) and 14(a) of the Securities Exchange Act of 1934 (the “Act”), (2) mistakenly asked for a declaratory judgment that the Termination Fee is valid and enforceable, and (3) adequately pleaded claims for tortious interference. (ECF No. 22, Opp’n 11, 12). Each of their arguments is without merit.

ARGUMENT

Plaintiffs do not address Defendants’ arguments that the Termination Fee is an illegal and unenforceable penalty under Texas law. They do not dispute that the harm for which the Termination Fee supposedly compensates is not “incapable or difficult of estimation,” and it is not “a reasonable forecast of just compensation.” (ECF No. 17, Br. 13, quoting Phillips, 820 S.W.2d at 788) Nor do they dispute that Ashford Prime must pay the Termination Fee even if it exceeds actual damages and that the Termination Fee is at least equal to 22 times Plaintiffs’ Adjusted EBITDA from services to Ashford Prime (and perhaps more) regardless of whether the Termination Fee is triggered with nine years remaining in the TAAA’s term or one day. (Br. 14-15) Instead, they argue that “[i]nadvertently, references to a declaratory judgment action and a Termination Fee had been carried over and were mistakenly not removed from the prayer of the Amended Petition” and that Defendants are improperly asserting an affirmative defense in their motion to dismiss. (Opp’n 6-7 n.1) Their arguments are without merit.

Plaintiffs seek specific declaratory relief from this Court, including an order that the Termination Fee Provision is unambiguous, valid, and enforceable; and Ashford Inc. has the right and is entitled to the Termination Fee upon a “Change of Control of the Company.” (Am. Compl., Prayer (d)) Plaintiffs argue that the inclusion of this specific request for relief is “inadvertent” and a “scrivener’s error.” (Opp’n 22 n.6; 7-8 n.3) Yet it remains in their amended complaint and Plaintiffs never made any effort to remove it. Furthermore, their argument is belied by their factual allegations. In support of this prayer for relief, Plaintiffs made multiple allegations concerning alleged actions and statements by Defendants that they say question the validity of the Termination Fee. (See Am. Compl. ¶¶ 4, 7, 45, 52) If Defendants had not challenged the validity of the Termination Fee, Plaintiffs likely would have continued to pursue the declaratory relief.

Plaintiffs also argue that Defendants’ illegality argument is an affirmative defense that cannot be asserted in a motion to dismiss. While illegality of a penalty is an affirmative defense and affirmative defenses are usually not considered on motions to dismiss, a court may still properly dismiss a case on the basis of an affirmative defenses when the Court has all facts necessary to make a decision. See Brownmark Films, LLC v. Comedy Partners, 682 F.3d 687, 690 (7th Cir. 2012). This is such a case. The Termination Fee is set forth in Section 12 of the TAAA, which Plaintiffs attached to their amended complaint as Exhibit 1. The only other factual support that Defendants rely upon in their illegality argument are factual allegations that Plaintiffs made in their amended complaint.

Plaintiffs chose not to dispute Defendants’ substantive arguments. Instead, they asserted meritless non-substantive arguments. This Court can and should declare the Termination Fee an illegal and unenforceable penalty and dismiss Plaintiffs’ claims on that basis.

Plaintiffs argue that they have not asserted causes of action for violations of Sections 13(d) and 14(a), and that they have instead merely made “innocuous” and “loose” references to Sections 13(d) and 14(a), which are “illustrative of the alleged conduct” supporting their state-law claims. (Opp’n 18-19) Plaintiffs also maintain that they can “prevail on each of their claims without proof of any wrongdoing under federal law.” (Opp’n 19) Each of these positions is wrong.

In their response, Plaintiffs argue that their state-law claims “consist of Defendants repeatedly refusing to abide by Ashford Prime’s Bylaws, attempting to insert themselves into the Advisory Agreement and onto Ashford Prime’s Board of Directors, as well as willfully and intentionally omitting, failing to disclose, and providing misleading public and private statements.” (Opp’n 19-20) Tellingly, Plaintiffs provide no citations to their amended complaint for any of these assertions. An examination of the amended complaint reveals that federal securities law violations are the only alleged actions upon which Plaintiffs are basing their purported tortious interference claims. (See Am. Compl. ¶ 67 (“Defendants tortuously interfered with the Advisory Agreement by intentionally and willfully omitting material facts and failing to disclose information. Defendants’ unlawful omissions and failures to disclose in connection with proxy solicitations, violated disclosure requirements under the Security Exchange Act of 1934.”); Am. Compl. ¶ 73 & n.10 (“the following materials omissions/conduct by Sessa and the Purported Nominees were willful and/or intentional and proximately resulted in damages . . . [t]he omissions described in this list of non-disclosures are unlawful when any person solicits proxies in violation of SEC rules/regulations that specifically require disclosure of omitted information.”); Am. Compl. ¶ 74 (Defendants’ “above-independently unlawful, material omissions and failures to disclose”).)

In fact, the only “unlawful means” Plaintiffs allege underlie their civil conspiracy claim is “illegal proxy solicitations and failure to disclose all material information under Sections 13(d) and 14(a) of the Act.” (Am. Compl. ¶ 83) Plaintiffs’ allegations of violations of federal securities laws are not “innocuous” or “loose” references or mere illustrations of alleged conduct supporting state law claims. They are the very heart of Plaintiffs’ tortious interference and civil conspiracy allegations.

In addition, Plaintiffs are incorrect that they “can prevail on each of their claims without proof of any wrongdoing under federal law.” To establish a claim for tortious interference with prospective business relations, a plaintiff must establish that “the defendant’s conduct was independently tortious or wrongful.” Wal-Mart Stores, Inc. v. Sturges, 52 S.W.3d 711, 726 (Tex. 2001).

In paragraph 73 of their amended complaint, Plaintiffs allege that “the following material omissions/conduct by Sessa and the Purported Nominees were willful and/or intentional and proximately resulted in damages” and then provide their list of the seven supposed material omissions upon which they base their tortious interference claims. The only way in which they allege these supposed omissions are “independently tortious or wrongful” is as violations of the federal securities laws, specifically Sections 13(d) and 14(a) of the Act. (Am. Compl. ¶¶ 67, 73) As they admit in footnote 10 to paragraph 73 of their amended complaint, these “omissions” are only unlawful if federal securities laws “specifically require disclosure of omitted information” or if Defendants omitted “any material fact necessary in order to make the other statements therein [in Defendants’ proxy statement] not false or misleading.” Plaintiffs cannot maintain their cause of action for tortious interference with prospective business relations without proving that Defendants violated Sections 13(d) and 14(a) of the Act.

Furthermore, an “actionable civil conspiracy is a combination by ‘two or more persons to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means.’” In re Lipsky, 411 S.W.3d 530, 549 (Tex. App. 2013) (citation omitted). The only “unlawful means” Plaintiffs have alleged are “illegal proxy solicitations and failure to disclose all material information under sections 13(d) and 14(a) of the Act.” (Am. Compl. ¶ 83) They must therefore prove that Defendants actually violated Sections 13(d) and 14(a) in order to sustain their civil conspiracy claim.

None of the cases that Plaintiffs cite in support of their positions are like this case, because none involves the assertion of purported causes of action requiring Defendants to prove violations of federal securities laws. See, e.g., Howery v. Allstate Ins. Co., 243 F.3d 912, 918 (5th Cir. 2001) (“Since no federal right is an element of Howery’s state claim, no federal right needs to be interpreted.”).

Furthermore, Ashford I and Ashford II, which are both pending before this Court, concern substantially identical claims of alleged violations of Sections 13(d) and 14(a) of the Act. Notably, decisions in this case and in Ashford I and Ashford II are made by the same individuals; management of Ashford Prime and Plaintiffs are identical, including general counsel, David Brooks, and chief executive officer, Monty Bennett. (713 ECF No. 72, App. 34, Ashford Inc. 13-D dated Sept. 17, 2015 (Bennett); 1566 ECF No. 2-20 at 82-83, Am. Compl. Ex. 1, signature blocks (Brooks)) This fact and the similarity of the claims in this case and in Ashford I and Ashford II suggest extensive coordination among Ashford Prime and Plaintiffs, creating the unmistakable suggestion that this is an elaborate game of forum shopping, in which Plaintiffs seek to pursue substantially the same federal claims in three separate actions.

An actual contract subject to interference is necessary to maintain a tortious interference with business relations claim. Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931, 939 (Tex. 1991). Plaintiffs do not address any of Defendants’ arguments that they have not alleged the existence of an actual contract subject to interference. (Br. 20-21) They do not dispute that they have no obligations under Section 16 of the TAAA, the portion of the TAAA that underlies their claim. (Br. 21, citing Am. Compl. ¶ 71) They do not dispute that Section 16 merely says that Plaintiffs will consider providing Key Money Investments to Ashford Prime subject to future agreements regarding the form and terms and conditions of the Key Money Investments. (Br. 21, citing Am. Compl., Ex. 1 § 16) And they do not dispute that Section 16 makes no mention of Ashford Inc. acquiring Project Companies, much less any obligation that Ashford Inc. acquire Project Companies. (Id.) The court should dismiss this claim with prejudice.

Plaintiffs must allege that there is a “reasonable probability that [they] would have entered into a business relationship” but that they were prevented from doing so by Defendants’ supposed interference. Anderton v. Cawley, 378 S.W.3d 38, 59 (Tex. App. 2012). Plaintiffs do not address Defendants’ arguments that they have not done so. They do not dispute that they have failed to provide any detail about supposed prospective agreements and they do not allege that those agreements have been discussed, proposed or considered by Ashford Prime. (Br. 24) They do not dispute that their claim is based on the entirely speculative assertion that they “will necessarily and probably enter into” an extension of the TAAA in 2025. (Id., citing Am. Compl. ¶ 76) And they do not dispute that on the contrary, they have alleged that they are “likely to enter” such an agreement despite Defendants’ alleged interference, which is inconsistent with the requirement that Defendants’ supposed interference prevent Plaintiffs from entering into the prospective agreement. (Id.) The court should dismiss this claim with prejudice.

Plaintiffs argue they have sufficiently pleaded interference under the applicable standards of Federal Rule of Civil Procedure 8(a)(2), which requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” (Opp’n 26) But to survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, that “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 570 (2007)).

As Defendants’ explained in their opening brief (Brief 17-20), Plaintiffs have not alleged facts that give rise to a reasonable inference of any interference because the sort of attenuated “interference” they allege is insufficient to support Plaintiffs’ purported tortious interference claims. See Concorde Funds, Inc. v. Value Line Inc., No. 04 Civ. 9932 (NRB), 2006 WL 522466, *7 (S.D.N.Y. Mar. 2, 2006) (applying Texas law); see also COC Servs., Ltd. V. CompUSA, Inc., 150 S.W.3d 654 (Tex. App. 2004) (finding a complicated linkage of inferences insufficient to support a claim of tortious interference). Plaintiffs try to distinguish the Concorde Funds case (but not the COC Services case) by arguing that it did not concern tortious interference claims, but rather fraud claims governed by Rule 9(b) pleading standards, and that the court “expressly held that the plaintiff’s claims were not based upon ‘a cause of action for tortious interference when a defendant hinders its performance of a contract, rendering it impossible or more difficult.’” (Opp’n 26-27, emphasis in original). This is highly misleading. Concorde Funds concerned both fraud and tortious interference claims. See Concorde Funds, Inc., 2006 WL 522466, *1 (“Specifically, plaintiff alleges four causes of action: (1) fraud; (2) tortious interference with existing contracts; (3) promissory estoppel; and (4) civil conspiracy.”). And the court dismissed the plaintiff’s tortious interference claim because “the defendants did not in any way hinder performance of the plaintiff’s contracts with its investors;” it did not hold that the case did not concern a tortious interference claim. Id. at *7. Plaintiffs do not otherwise address this argument beyond repeating the same conclusory and tortured allegations of “hindrance” as contained in their amended complaint. (Opp’n 27-28)

Plaintiffs assert that they have pleaded that Defendants acted with requisite intent by alleging that Defendants’ supposed violations of Sections 13(d) and 14(a) show Defendants “had a conscious desire” to prevent Plaintiffs from obtaining financing in order to provide Key Money Investments. (Opp’n 28, citing Am. Compl. ¶ 78) But they do not address Defendants’ argument that this conclusory allegation does not establish that Defendants intended or believed that their supposed violations of Sections 13(d) and 14(a) would “negatively impact” Plaintiffs’ ability to obtain financing, which is what Plaintiffs must establish in order to plead intent. (Br. 21-22, 24); Southwestern Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W.2d 470, 472 (Tex. 1992) (citing Restatement (Second) of Torts § 8A (1965)). And they do not address Defendants’ argument that it is implausible that Defendants intended or believed that their supposed violations of Sections 13(d) and 14(a) would depress the stock prices of Ashford Prime and Ashford Inc., particularly as Sessa owned 8.2% of the stock of Ashford Prime. (Br. 18-19).

Finally, Plaintiffs assert that they do not have to identify the “dozens” of supposed lenders whom they supposedly approached for loans. (Opp’n 29 n.11) This misses the point of Defendants’ argument, which is that Plaintiffs have failed to allege facts sufficient to draw a reasonable inference of interference, such as the identity of the supposedly “dozens” of lenders or that Defendants knew Plaintiffs were approaching them, that Defendants actually contacted them, or that Defendants even knew that Plaintiffs had an agreement to provide Key Money to Ashford Prime. (Br. 20-24) And each of the cases Plaintiffs cite in support of their argument is distinguishable because plaintiffs alleged that defendants had intentional and directly interfering contact with the third parties. See In re Burzynski, 989 F.3d 733, 739 (5th Cir. 1993) (alleging defendants sent letters to named and unnamed insurers for the purposes of interfering with plaintiffs’ prospective relationships with them); Southwest Airlines Co. v. Farechase, Inc., 318 F. Supp. 2d 435, 442 (N.D. Tex. 2004) (alleging defendant interfered with plaintiff’s relationship with prospective customers when prospective customers used defendant’s ticket purchasing technology to purchase plaintiff’s airline tickets); Star Tobacco, Inc. v. Darilek, 298 F. Supp. 2d 436, 449-450 (E.D. Tex. 2003) (alleging counterclaim defendants interfered with counterclaim plaintiffs’ business by slandering them). If anything, these cases demonstrate that Plaintiffs must allege intentional and direct interference, not a highly attenuated and implausible chain of events, to sustain tortious interference claims.

Plaintiffs argue that Defendants have improperly “proffer[ed] the SEC filings contained in their Appendix and referenced in their Motion to Dismiss . . . for the ‘truth of their contents[.]’” (Opp’n 10) But that argument is an odd one for Plaintiffs to make. To start, all of the SEC filings references in Defendants’ motion to dismiss were filed by Plaintiff Ashford Inc. or its affiliates Ashford Prime and Ashford Hospitality Trust. (Br. 3-9) Surely, Plaintiffs do not mean to call into question the truthfulness of their own SEC filings. Even more fundamentally, the referenced SEC filings concern such non-controversial topics as Ashford Prime and Ashford Inc. having both been spun off by Ashford Hospitality Trust, Inc. (Br. 3, citing Ashford Trust’s 2014 10-K), Monty Bennett’s role as the CEO and Chairman of Ashford Prime, Ashford Inc. and Ashford Trust (Id., citing Ashford Inc.’s 13-D dated Sept. 17, 2015), and Bennett’s ownership stakes in Ashford Prime and Ashford Inc. (Id. at 3-4, citing Ashford Prime’s 14-A dated Apr. 17, 2015). Defendants cited those SEC filings in the factual background section of their motion. Defendants’ substantive arguments regarding Plaintiff’s failure to plead their claims as a matter of law simply do not rely on the truthfulness of the statements contained within Plaintiffs’ own SEC filings.¹ Indeed, Plaintiffs do not point to one of Defendants’ arguments that impermissibly rely on the cited SEC filings.

¹ Defendants’ citation to Ashford Prime’s Feb. 4, 2016, 14-A (Brief 22) for the proposition that Sessa owns 8.2% of Ashford Prime stock was wholly unnecessary given that Plaintiffs themselves have alleged that Sessa owns 8.2% of Ashford Prime. (Am. Compl. ¶ 39) Thus, Defendants point remains unaffected by the citation: it is simply implausible to infer that Sessa would willingly injure itself by depressing the price of Ashford Prime’s shares because Sessa owns nearly 10% of those shares.  

Plaintiffs are also incorrect that the Fifth Circuit has “expressly limited its adoption of a rule regarding the consideration of SEC filings to cases involving securities fraud actions.” (Opp’n 9) In Kopp v. Klein, the Fifth Circuit stated that it “may also consider” SEC filings when during its review of the district court’s dismissal of breach-of-fiduciary, non-securities claims. 722 F.3d 327, 333 (5th Cir. 2013), cert. granted, judgment vacated on other grounds, 134 S. Ct. 2900 (2014) (citing Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir.1996)).

Plaintiffs also repeatedly assert that Defendants’ motion to dismiss is actually a motion for summary judgment. (Opp’n 12, 22 n.7, 25, 29 n.12) Their only support for this assertion is that Defendants referred to materials outside of Plaintiffs’ complaint. While Defendants’ referrals to these materials are proper, for the reasons discussed above, they are unnecessary for Defendants to obtain a dismissal pursuant to Rule 12(b)(6).

CONCLUSION

For the foregoing reasons, Sessa respectfully requests this Court to dismiss Plaintiffs’ amended complaint with prejudice.

CERTIFICATE OF SERVICE

On August 2, 2016, I electronically submitted the foregoing document with the clerk of court for the U.S. District Court, Northern District of Texas, using the electronic case filing system of the court. I hereby certify that I have served all counsel and/or pro se parties of record electronically or by another manner authorized by Federal Rule of Civil Procedure 5(b)(2).