Exhibit 10.2
Execution Copy
REAL ESTATE FUND FORMATION AGREEMENT
This Real Estate Fund Formation Agreement (this “Agreement”), dated as of
October 15, 2009, is entered into by and between Yucaipa American Alliance Fund
II, LLC, a Delaware limited liability company (“Yucaipa”), and Morgans Hotel
Group Co., a Delaware corporation (“MHG”). In consideration of the promises and
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto hereby agree as follows:
1. The Fund. Yucaipa and MHG shall use good faith efforts to endeavor to raise a
private investment fund (the “Fund”) in accordance with subparagraphs (a)
through (g) of this Section 1:
(a) The purpose of the Fund will be to, subject to reasonable exceptions to be
mutually agreed by Yucaipa and MHG, invest in (i) hotel real estate projects
located in North America (including, without limitation, (x) the acquisition,
development or redevelopment of hotel real estate projects and (y) investments
in, or acquisitions, development or redevelopment of, condominiums, bars,
restaurants, retail establishments, entertainment venues and other business
ventures located within or reasonably related to any hotel real estate project
described in the foregoing clause (y)) directly or indirectly undertaken by MHG
or any of its subsidiaries where there is the opportunity to own at least a 20%
equity interest in such project and to make an equity investment of at least
$10,000,000 (each such project, a “Qualified Morgans Project”) (each underlying
hotel of a Qualified Morgans Project in which the Fund invests, a “Fund Morgans
Hotel”) and (ii) such other hotel real estate projects that are related to first
class full-service hotels as determined by the General Partner; provided that no
hotel real estate project located in North America that had been undertaken by a
person without the participation of MHG or any of its subsidiaries shall be
deemed to be a Qualified Morgans Project if (A) such project is subsequently
acquired by MHG or any of its subsidiaries in connection with the acquisition by
MHG or such subsidiary of such project together with (I) assets other than hotel
real estate projects or (II) hotel real estate projects that are located outside
of North America and (B) a majority of the value of the assets being acquired in
such acquisition (as measured based on allocable purchase price at the time of
such acquisition) arises from the portion of such assets that are either (I)
assets other than hotel real estate projects or (II) hotel real estate projects
that are located outside of North America.
(b) The Fund will have the first right to fund up to the entire equity
investment (but excluding any portion reserved for co-investment by MHG pursuant
to the last sentence of this Section 1(b)) in (i) each Qualified Morgans Project
and (ii) other hotel real estate projects to be mutually agreed by Yucaipa and
MHG (such right, the “Investment Rights”). MHG will not, and will cause its
subsidiaries and the Non-Yucaipa Key Professionals (as defined below) to not,
invest in, or cause to be offered to any person, the opportunity to invest or
otherwise participate in any project (including, without limitation, any
Qualified Morgans Project) that is subject to the Investment

 

 

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Rights, in each case, except to the extent the Fund has been offered in
accordance with this Agreement, and the Fund has declined, such opportunity. The
Fund will be deemed to have declined an opportunity if the Fund does not accept
such opportunity within 30 calendar days after being offered such opportunity in
accordance with this Agreement. The General Partner shall use its reasonable
best efforts to complete, and MHG shall use its reasonable best efforts to
provide promptly to the General Partner such information as the General Partner
may reasonably request in order to facilitate the completion of, the General
Partner’s due diligence review of such opportunity within such 30-calendar-day
period. If the Fund has been offered such opportunity in accordance with this
Agreement, and the Fund has declined any portion of such opportunity, then MHG,
its affiliates and the Non-Yucaipa Key Professionals may invest or otherwise
participate in such portion on its own or with one or more third parties;
provided that such investment or participation must be on terms and conditions
no more favorable, taken as a whole, to any such participating party in any
material respect than the terms and conditions that were offered to, and
declined by, the Fund, unless (x) such more favorable terms and conditions are
offered to the Fund in accordance with this Agreement and (y) the Fund does not
elect, within seven calendar days after such offer, to invest in such
opportunity upon such more favorable terms and conditions. If the Fund invests
in any Qualified Morgans Project, MHG may, in MHG’s sole discretion, elect to
co-invest with the Fund, on a pari passu basis with the Fund and upon terms and
conditions no more favorable to MHG than the terms and conditions applicable to
the Fund’s investment in such Qualified Morgans Project, in such amount as MHG
shall determine up to 20% of the aggregate equity investment of the Fund and MHG
in such Qualified Morgans Project.
(c) The Investment Rights will commence as of the closing of the Fund at which
aggregate capital commitments to the Fund equal or exceed $100,000,000 and will
terminate upon the earliest to occur of (i) the expiration of the Fund’s
commitment period, (ii) the date on which the Fund has invested or committed to
invest at least 85% of the aggregate capital commitments to the Fund, and (iii)
the fifth anniversary of the date hereof.
(d) The aggregate capital commitments of the General Partner (as defined below)
and its affiliates to the Fund (the “GP Commitment”) will be equal to 5% of the
aggregate capital commitments to the Fund; provided that in no event will the GP
Commitment be required to exceed $25,000,000.
(e) The targeted size of the Fund will be between $250,000,000 and $500,000,000
in aggregate capital commitments to the Fund.
(f) The Fund will be subject to governance and investor rights satisfactory to
Yucaipa and MHG. The Fund will be entitled to consent rights over certain
actions of MHG with respect to Fund Morgans Hotels and each other Fund hotel
owned by the Fund that is managed by MHG or a subsidiary of MHG. The material
terms and conditions of each Fund Morgans Hotel and each other Fund hotel owned
by the Fund that is managed by MHG or a subsidiary of MHG, including, without
limitation, the acquisition and the corresponding renovation/development scope
and budget, will be mutually decided by the Fund and MHG. Furthermore, if MHG or
any of its subsidiaries

 

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co-invests in a Qualified Morgans Project, major decisions of the applicable
joint venture established with respect to the underlying Fund Morgans Hotel will
be mutually decided upon by the Fund and MHG. Such major decisions will include,
without limitation, capital expenditures in excess of applicable reserves or
budgets, financings, dispositions and approvals of operating and capital
budgets.
(g) Except as contemplated by this Agreement (including, without limitation,
subparagraphs (a) through (g) of this Section 1) or otherwise mutually agreed by
Yucaipa and MHG, the terms and conditions of the Fund, and the rights and
obligations of investors in the Fund, will be commercially reasonable, as
determined by reference to prevailing investor expectations, industry standards
and market practices for private investment funds with similar investment
objectives as the Fund.
2. The General Partner. The Fund, if successfully organized, shall be controlled
by a general partner (or other equivalent control entity in the case the Fund is
not organized as a limited partnership) (the “General Partner”), which shall be
organized as a joint venture between Yucaipa, its affiliates and its related
persons, on the one hand, and MHG, its subsidiaries and its related persons, on
the other hand, in accordance with subparagraphs (a) through (d) of this
Section 2:
(a) 50% of the equity interests in the General Partner will be allocated to
Yucaipa, its affiliates and its investment professionals in such proportions as
Yucaipa may determine. The remaining 50% of the equity interests in the General
Partner will be allocated to key non-Yucaipa professionals who are (i) employed
by, or serve as directors to, MHG, (ii) actively involved with the Fund, and
(iii) reasonably satisfactory to Yucaipa (such non-Yucaipa professionals, the
“Non-Yucaipa Key Professionals”).
(b) In the event the General Partner issues equity interests to persons other
than Yucaipa, MHG, Non-Yucaipa Key Professionals or their respective
subsidiaries, affiliates and related persons, including, without limitation, in
connection with the raising of additional capital or as allocations to other
management and professionals, the equityholders of the General Partner will be
subject to pro rata dilution of their equity interests in the General Partner.
(c) Yucaipa will assist the Non-Yucaipa Key Professionals in funding their pro
rata share of the GP Commitment by making to them, or causing one of Yucaipa’s
affiliates to make to them, an interest-bearing loan on mutually agreeable terms
and conditions to be determined by Yucaipa and such Non-Yucaipa Key
Professionals and secured only by a first priority lien in favor of Yucaipa or
such affiliate, as applicable, on such Non-Yucaipa Key Professionals’ interests
in the General Partner and the Fund. Such loans will be structured such that
Yucaipa or such affiliate, as applicable, will be repaid in full (including,
without limitation, all outstanding principal, accrued and unpaid interest and
other amounts owing under such loans) on a first priority basis before any
distributions are made with respect to the General Partner or the Fund to the
Non-Yucaipa Key Professionals. Such loans shall be made in compliance with the
Sarbanes-Oxley Act.

 

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(d) Except as contemplated by this Agreement (including, without limitation,
subparagraphs (a) through (d) of this Section 2), the terms and conditions of
the General Partner, and the respective rights and obligations of the members
and other owners of equity interests in the General Partner, shall be as
mutually agreed by Yucaipa and MHG in good faith.
3. Fund Hotels. If the Fund is successfully organized, then MHG, whether
directly, through its wholly owned subsidiary Morgans Hotel Group Management LLC
or through one or more other wholly owned subsidiaries of MHG, shall have the
first right, except to the extent declined by MHG and subject to a reasonable
transition period in the case such hotel was managed by a third party at the
time the Fund invested in such hotel, to (x) serve as the manager of each hotel
owned by the Fund (regardless of whether such hotel is a Fund Morgans Hotel) and
provide expertise in the operation, direction and supervision of such hotel, and
(y) require such hotel to use MHG’s global technology platforms, reservations
systems and global marketing programs. Such management and use shall be pursuant
to a management agreement (each, a “Management Agreement”) between such hotel
and MHG, which shall contain such terms and conditions as are then generally
offered by MHG, at the time such Management Agreement is negotiated and
executed, to unaffiliated third parties under comparable management agreements
in the locality where such hotel is situated and shall otherwise be in a form
generally consistent with MHG’s then standard management agreement with
unaffiliated third parties (collectively, the “Morgans Standard Terms”). The
Morgans Standard Terms (subject to local variation) are generally as set forth
in the letter from MHG to Yucaipa, dated the date hereof and referencing this
Section 3. MHG and the Fund shall in good faith agree to modifications to the
Morgans Standard Terms from time to time as may be reasonably necessary to
reflect changes in the marketplace for the hotel management services or
practices of MHG and its affiliates.
4. Conflicts of Interest. In organizing the Fund, Yucaipa and MHG shall use
their reasonable efforts to structure the Fund to minimize the risk of any
conflicts of interests. In addition, the governing documents of the Fund and the
General Partner (collectively, including, without limitation, the limited
partnership agreement or other equivalent or related governing agreements of the
Fund and the operating agreement or other equivalent or related governing
agreements of the General Partner, the “Fund Agreements”) shall contain
reasonable conflicts of interest protections, including, without limitation, a
requirement that Yucaipa shall have sole control over the Fund and the General
Partner with respect to any decision or action in which MHG or any of its
affiliates has a material pecuniary interest or other conflict of interest. If
Yucaipa determines that there is a decision or action with respect to which MHG
or any of its affiliates has a material pecuniary interest or other conflict of
interest sufficient for Yucaipa to be entitled under the Fund Agreements to
exercise sole control over the Fund and the General Partner with respect to such
decision or action, Yucaipa shall inform the Non-Yucaipa Key Professionals of
such determination prior to exercising such sole control over such decision or
action.
5. Issuance of REF Warrants. Concurrently with the execution and delivery of
this Agreement, MHG hereby issues, sells and delivers in certificated form to
Yucaipa, and Yucaipa hereby receives from MHG:

 

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(a) a warrant in the form annexed hereto as Exhibit A to acquire 2,500,000
shares of MHG common stock, par value $0.01 per share (“Common Stock”), subject
to the terms and conditions set forth therein; and
(b) a warrant in the form annexed hereto as Exhibit B to acquire an additional
2,500,000 shares of Common Stock, subject to the terms and conditions set forth
therein.
6. Alternative Structures. If Yucaipa and MHG jointly determine that an
alternative form of pooled investment vehicle, another type of financing vehicle
or another type of financing arrangement (each, an “Alternative Structure”),
including, without limitation, (a) any publicly traded special purpose
acquisition company, (b) any separate investment account, or (c) any contractual
co-investment relationship, should be formed, arranged or used in addition or in
lieu of the Fund for purposes of undertaking in whole or in part the purpose or
functions of the Fund, then the Yucaipa and MHG shall interpret this Agreement
to apply mutatis mutandis to such Alternative Structure and otherwise effectuate
the intent of this Agreement to the fullest extent reasonably practicable as if
references hereunder to the “Fund” also refer to such Alternative Structure and
references hereunder to the capital commitments to the Fund also refer to the
capital of such Alternative Structure; provided that a contractual co-investment
relationship shall only be used in addition to the Fund or another Alternative
Structure and shall invest on a pro rata basis with the Fund or such other
Alternative Structure.
7. Termination. This Agreement and the rights and obligations of the parties
hereto hereunder shall terminate automatically on January 30, 2011 if on or
prior thereto the Fund has not closed on at least $100,000,000 in aggregate
capital commitments.
8. Amendments and Waivers. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. Except as
otherwise provided in this Agreement, any failure of any party to comply with
any obligation, covenant, agreement or condition herein may be waived by the
party entitled to the benefits thereof only by a written instrument signed by
the party granting such waiver, but such waiver shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure. The failure of
any party hereto to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights.
9. Assignment. This Agreement and the rights and obligations hereunder shall not
be assignable or transferable by any party hereto without the prior written
consent of the other party hereto. Any attempted assignment in violation of this
Section 9 shall be void.
10. No Third-Party Beneficiaries. This Agreement is for the sole benefit of the
parties hereto and their permitted assigns, and nothing herein expressed or
implied shall give or be construed to give to any person, other than the parties
hereto and such permitted assigns, any legal or equitable rights hereunder.
11. Notices. All notices or other communications required or permitted to be
given hereunder shall be in writing and shall be delivered by hand or sent by a
nationally recognized overnight courier service (with tracking capability), and
shall be deemed given when received, as follows:

 

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(a) if to Yucaipa, then to:
Yucaipa American Alliance Fund II, LLC
9130 W. Sunset Boulevard
Los Angeles, California 90069
Attention:       Robert P. Bermingham
with a copy (which shall not constitute notice) to:
Munger, Tolles & Olson LLP
355 South Grand Avenue, 35th Floor
Los Angeles, California 90071
Attention:       Judith T. Kitano
Fax:                (213) 683-4052
Email:             judith.kitano@mto.com
(b) if to MHG, then to:
Morgans Hotel Group Co.
475 Tenth Avenue
New York, New York 10018
Attention:       David Smail
with a copy (which shall not constitute notice) to:
Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004
Attention:       Robert W. Downes
Fax:                (212) 558-3588
Email:            downesr@sullcrom.com
12. Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more such counterparts have been signed by each party
hereto and delivered to the other party hereto.
13. Entire Agreement. This Agreement, including the exhibits hereto, contains
the entire agreement and understanding among the parties hereto with respect to
the subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter. None of the parties hereto shall be liable or
bound to any other party in any manner by any representations, warranties or
covenants relating to such subject matter, except (a) as specifically set forth
herein or, (b) in the case of MHG, as set forth in (i) the Securities Purchase
Agreement, dated as of the hereof, by and among MHG, Yucaipa American Alliance
Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (the
“Securities Purchase Agreement”), or (ii) the Ancillary Agreements (as defined
in the Securities Purchase Agreement).

 

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14. Interpretation; Exhibits. The headings contained in this Agreement and in
any exhibit hereto are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. All exhibits annexed hereto
or referred to herein are hereby incorporated in and made a part of this
Agreement as if set forth in full herein. Any capitalized terms used in any
exhibit but not otherwise defined therein shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to a
“Section” or “Exhibit”, such reference shall be to a section of, or an exhibit
to, this Agreement unless otherwise indicated. For purposes of this Agreement,
(a) an “affiliate” of any person means another person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person, and (b) for purposes of the
foregoing clause (a), a person shall be deemed to control another person if such
first person possesses, directly or indirectly, the power to direct, or cause
the direction of, the management and policies of such other person, whether
through the ownership of voting securities, by contract or otherwise; provided
that the existence of a management contract by a person or an affiliate of such
person to manage another person shall not be deemed to be control by such
person; provided further that neither MHG nor any of its subsidiaries shall be
deemed hereunder to be an affiliate of Yucaipa. For purposes of this Agreement,
“person” means any individual, firm, corporation, partnership, limited liability
company, trust, joint venture, governmental entity or other entity.
15. Severability. If any provision of this Agreement (or any portion thereof) or
the application of any such provision (or any portion thereof) to any person or
circumstance shall be held invalid, illegal or unenforceable in any respect by a
court of competent jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provision hereof (or the remaining portion thereof)
or the application of such provision to any other person or circumstances.
16. Consent to Jurisdiction. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined exclusively in any New
York state or federal court sitting in the Borough of Manhattan of The City of
New York. The parties hereto hereby (a) submit to the exclusive jurisdiction of
any state or federal court sitting in the Borough of Manhattan of The City of
New York for the purpose of any action or proceeding arising out of or relating
to this Agreement brought by any party hereto, and (b) irrevocably waive, and
agree not to assert by way of motion, defense, or otherwise, in any such action
or proceeding, any claim that it is not subject personally to the jurisdiction
of the above-named courts, that its property is exempt or immune from attachment
or execution, that the action or proceeding is brought in an inconvenient forum,
that the venue of such action or proceeding is improper, or that this Agreement
or the transactions contemplated by this Agreement may not be enforced in or by
any of the above-named courts.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
18. Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent
permitted by applicable law, any right it may have to a trial by jury in respect
to any litigation directly or indirectly arising out of, under or in connection
with this Agreement or any transaction contemplated hereby. Each party hereto
(a) certifies that no representative, agent or

 

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attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver and (b) acknowledges that it and the other party hereto have been induced
to enter into this Agreement by, among other things, the mutual waivers and
certifications in this Section 18.
19. No Personal Liability of Partners, Directors, Officers, Owners, Etc.
(a) No director, officer, employee, incorporator, stockholder, managing member,
member, general partner, limited partner, principal or other agent of Yucaipa,
or any affiliate of Yucaipa, or any director, officer, employee, incorporator,
stockholder, managing member, member, general partner, limited partner,
principal or other agent of such affiliate, shall have any liability for any
obligations of Yucaipa under this Agreement or for any claim based on, in
respect of, or by reason of, the obligations of Yucaipa hereunder. MHG hereby
waives and releases all such liability. This waiver and release is a material
inducement to Yucaipa’s entry into this Agreement.
(b) No director, officer, employee, incorporator, stockholder, managing member,
member, general partner, limited partner, principal or other agent of MHG, or
any affiliate of MHG, or any director, officer, employee, incorporator,
stockholder, managing member, member, general partner, limited partner,
principal or other agent of such affiliate, shall have any liability for any
obligations of MHG under this Agreement or for any claim based on, in respect
of, or by reason of, the obligations of MHG hereunder. Yucaipa hereby waives and
releases all such liability. This waiver and release is a material inducement to
MHG’s entry into this Agreement.
20. Rights of Holders. Each party hereto shall have the absolute right to
exercise or refrain from exercising any right or rights that such party may have
by reason of this Agreement, including, without limitation, the right to consent
to the waiver or modification of any obligation under this Agreement, and such
party shall not incur any liability to any other party or other holder of any
securities of MHG as a result of exercising or refraining from exercising any
such right or rights.
21. Construction. The parties hereto acknowledge that each such party and its
counsel have participated in the negotiation and preparation of this Agreement.
This Agreement shall be construed without regard to any presumption or other
rule requiring construction against the party causing this Agreement to be
drafted. Every covenant, term and provision of this Agreement shall be construed
according to its fair meaning and not strictly for or against any party hereto.
[Signature page follows.]

 

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In witness whereof, Yucaipa and MHG have executed and delivered this Agreement
as of the date first above written.

            YUCAIPA

Yucaipa American Alliance Fund II, LLC
      By:   /s/ Robert P. Bermingham        Name:   Robert P. Bermingham       
Title:   Vice President        MHG

Morgans Hotel Group Co.
      By:   /s/ Marc Gordon        Name:   Marc Gordon        Title:  
President   

 

 

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Exhibit A
Form of Warrant Issuable under Section 5(a)
[See Attachment.]

 

 

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Exhibit B
Form of Warrant Issuable under Section 5(b)
[See Attachment.]