Exhibit 10.40

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

 

OTK ASSOCIATES, LLC, directly on its own

behalf and derivatively on behalf of MORGANS

HOTEL GROUP CO.,

  

 

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      )    Plaintiff,    )       )    v.    )    C.A. No. 8447-VCL    )   

ROBERT FRIEDMAN; THOMAS L. HARRISON;

MICHAEL D. MALONE; RONALD W. BURKLE;

JEFFREY M. GAULT; ANDREW SASSON,

YUCAIPA AMERICAN ALLIANCE FUND II, L.P., a

Delaware Limited Partnership; YUCAIPA AMERICAN

ALLIANCE (PARALLEL) FUND II, L.P., a Delaware

Limited Partnership; YUCAIPA AGGREGATOR

HOLDINGS, LLC, a Delaware Limited Liability

Company, and THE YUCAIPA COMPANIES LLC, a

Delaware Limited Liability Company,

  

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)

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      )    Defendants,    )       )    and    )       )   

MORGANS HOTEL GROUP CO., a Delaware

Corporation,

  

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      )    Nominal Defendant.    )   

MEMORANDUM OF UNDERSTANDING

This Memorandum of Understanding (“MOU”) is entered into as of February 28,
2014, by and among OTK Associates, LLC (“OTK”); Morgans Hotel Group Co.
(“Morgans”) and Morgans LLC (collectively the “Morgans Parties”); Ronald W.
Burkle (“Burkle”); Yucaipa American Alliance Fund II, L.P., Yucaipa American
Alliance (Parallel) Fund II, L.P., Yucaipa Aggregator Holdings, LLC, The Yucaipa
Companies LLC and Vintage Deco Hospitality LLC (collectively the “Yucaipa
Parties”); Robert Friedman (“Friedman”), Jeffrey Gault (“Gault”) and Andrew
Sasson (“Sasson”) (Friedman, Gault and Sasson being collectively referred to
herein as the “Settling Former Directors”); Jason T. Kalisman (“Kalisman”),
Michael E. Olshan (“M. Olshan”), Andrea Olshan (“A. Olshan”), Mahmood Khimji
(“Khimji”), Jonathan Langer (“Langer”), Parang Vora (“Vora”) and John T.
Dougherty (“Dougherty”) (collectively the “Current Directors”) (All the
foregoing persons and entities collectively being referred to as the “Settling
Parties”).

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I. RECITALS

A. The Delaware Action

WHEREAS, on March 30, 2013, Michael Malone (“Malone”), Thomas L. Harrison
(“Harrison”) and the Settling Former Directors (collectively, the “Former
Directors”) voted in favor of a recapitalization transaction pursuant to which
Morgans would transfer to certain Yucaipa Parties two of its assets in exchange
for the Morgans securities that those Yucaipa Parties then held and a long-term
management agreement for one of those assets, as well as commence a $100 million
rights offering that the Yucaipa Parties would backstop through the potential
purchase of the Morgan securities issued in conjunction with the rights offering
(the “Yucaipa Transaction”), and also agreed to change the record date and the
meeting date for Morgans’ annual meeting;

WHEREAS, the documents relating to the Yucaipa Transaction (the “Transaction
Documents”) included provisions for payment to the Yucaipa Parties of a $9
million break-up fee and damages if the Yucaipa Transaction was not consummated
under certain circumstances set forth therein;

WHEREAS, on April 1, 2013, Kalisman filed in the Delaware Court of Chancery (the
“Court of Chancery”) a direct and derivative suit against the Former Directors,
Burkle and certain Yucaipa Parties, naming Morgans as a nominal defendant, and
moved for expedited proceedings, a temporary restraining order and a preliminary
injunction, and on April 4, 2013, OTK intervened in that proceeding, which is
now styled OTK Associates, LLC v. Friedman, et al., C.A. No. 8447-VCL (Del. Ch.)
(the “Delaware Action”);

 

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WHEREAS, on May 14, 2013, the Court of Chancery enjoined Morgans from (i) taking
any steps to implement the board resolution postponing the annual meeting of
stockholders or changing the record date of the annual meeting, and ordered
Morgans to proceed with its annual meeting on May 15 (the originally noticed
meeting date), but allowed Morgans to immediately adjourn the meeting for thirty
days to facilitate notice to stockholders, and (ii) taking any steps to
consummate the transactions contemplated by the Transaction Documents until the
earlier of (a) a trial on the merits or (b) a decision by Morgans’ Board of
Directors with respect to the Transaction Documents made at a properly noticed
meeting after due deliberation and receiving a favorable recommendation from the
Special Transaction Committee;

WHEREAS, on June 14, 2013, the Current Directors were elected to Morgans’ board
;

WHEREAS, on July 9, 2013, OTK as the sole plaintiff filed a Second Verified
Amended and Supplemental Complaint against the Former Directors, Burkle and
certain Yucaipa Parties and Morgans as a nominal defendant;

WHEREAS, on July 23, 2013, certain defendants filed motions to dismiss the
Second Verified Amended and Supplemental Complaint;

WHEREAS, on February 5, 2014, the Court of Chancery denied in part and granted
in part those motions to dismiss;

WHEREAS, the parties to the Delaware Action are engaged in costly and extensive
discovery;

 

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WHEREAS, one or more defendants in the Delaware Action have stated that they
intend to seek Summary Judgment in their favor, the outcome of which is
uncertain;

WHEREAS, to the extent the Delaware Action is not fully resolved by Summary
Judgment, there may be further motion practice and a trial is scheduled for
June 16 to 20, 2014, the outcome of which is also uncertain; and

B. The Securities Action

WHEREAS, on June 27, 2013, the Yucaipa Parties filed Yucaipa American Alliance
Fund II L.P., et al. v. Morgans Hotel Group Co., et al., Index No. 652294/2013
(NY Sup.) (the “Securities Action”) alleging a breach of the Transaction
Documents and seeking monetary damages as well as the $9 million break-up fee;

WHEREAS, the Yucaipa Parties have informed Morgans that their claimed monetary
damages, over and above the $9 million break-up fee, are more than $6 million;

WHEREAS, on January 29, 2014, the court in that case denied Morgans’ motion to
dismiss or stay pending resolution of the Delaware Action;

WHEREAS, the parties will engage in costly and expensive discovery and trial
practice in the Securities Action, the outcome of which is uncertain; and

C. The Proxy Action

WHEREAS, on July 1, 2013, Burkle commenced Burkle v. OTK Associates, LLC, et
al., Case No. 13-CIV-4557 (S.D.N.Y.) (the “Proxy Action”) claiming that OTK and
the Current Directors violated the federal securities laws by making certain
alleged misstatements in proxy materials;

WHEREAS, in the Proxy Action, Burkle seeks an order scheduling a new board
election;

 

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WHEREAS, on November 13, 2013, the court in the Proxy Action denied Burkle’s
motion for a preliminary injunction seeking, inter alia, a new board election;

WHEREAS, on February 25, 2014, the court in the Proxy Action entered an order
directing the parties to make summary judgment submissions within thirty days,
which submissions the parties believe will require significant effort and
expense; and

D. The Observer Action

WHEREAS, on October 4, 2013, certain Yucaipa Parties commenced Yucaipa American
Alliance Fund II L.P., et al. v. Morgans Hotel Group, Index No. 653455/2013 (NY
Sup.) (the “Observer Action”) claiming that Morgans has breached the terms of a
Securities Purchase Agreement dated October 15, 2009 (the “2009 Agreement”), by
not providing certain alleged “observer” rights to the Yucaipa Parties at
Morgans’ board meetings;

WHEREAS, Morgans has answered the complaint and served discovery requests in the
Observer Action; and

E. The Benefits of Settlement to Morgans

WHEREAS, the Current Directors, in the exercise of their independent business
judgment, have determined that a settlement of the Delaware Action, the
Securities Action, the Proxy Action and the Observer Action (collectively, the
“Actions”) is in the best interests of Morgans and its stockholders based upon
their consideration of, among other things, the following benefits that will
accrue from such a settlement:

 

  1. Avoidance of potential liability of more than $15 million in the Securities
Action;

 

  2. Avoidance of additional counsel fees and expenses estimated to exceed $5
million in connection with the Actions, including Morgans’ fees and expenses and
fees and expenses that Morgans may be required to advance to Former and Current
Directors (excluding those fees and expenses that will be incurred in continuing
litigation against Malone and Harrison);

 

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  3. An end to the disruption that the Actions have caused Morgans by diverting
management’s time and attention; and

 

  4. Removal of the uncertainty created by the Actions that has constrained
Morgans’ ability to enter into new management contracts that are the foundation
of Morgans’ strategic business plan.

NOW, THEREFORE, in consideration of the mutual promises contained herein, the
adequacy of which is acknowledged and agreed to by the undersigned counsel on
behalf of the Settling Parties, the Settling Parties agree as follows:

II. SETTLEMENT TERMS

1. Execution of a Stipulation of Settlement. The Settling Parties to the Actions
will use their best efforts to agree upon and execute within 30 calendar days of
the execution of this MOU a formal stipulation of settlement (the “Stipulation”)
and such other documents as may be necessary and appropriate to obtain (i) the
prompt approval by the Court of Chancery of the settlement contemplated by this
MOU and to be embodied in the Stipulation (the “Settlement”) and (ii) the
dismissal with prejudice of the Actions in the manner contemplated herein and by
the Stipulation. The Settling Parties to the Delaware Action will present the
Stipulation and the Settlement embodied therein to the Court of Chancery for
hearing and approval as soon as reasonably practicable after the execution of
the Stipulation and will use their best efforts to obtain Final Court Approval
of the Settlement and the dismissal of the Actions with prejudice as to all
claims asserted or which could have been asserted against the defendants in the
Actions who are signatories to the Settlement and without costs to any Settling
Party, except as expressly provided herein or as agreed to and reflected in the
Stipulation. As used herein, “Final Court Approval” of the Settlement means that
the Court of Chancery has entered an order approving the Settlement in
accordance with the Stipulation, and that such order is finally affirmed on
appeal or is no longer subject to appeal and the time to petition for
reargument, appeal, or review, by leave, writ of certiorari, or otherwise, has
expired. The first date by which Final Court Approval has been obtained shall be
the “Effective Date.”

 

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2. Funding Terms. The Stipulation shall include the following provisions for
funding of the Settlement, which shall constitute the only payments made in
support of the Settlement:

(a) Burkle. Immediately following the execution of this MOU, Burkle shall, in
cooperation with Morgans, make an appropriate application to Morgans’ Insurers
for payment under the applicable Insurer Policies of all reasonable and
necessary fees and expenses incurred in his defense of the Delaware Action (the
“Burkle Fee Recovery”). Immediately following the Effective Date, Burkle shall
assign to Morgans, pursuant to an assignment agreement approved by Morgans
(which approval shall not be unreasonably withheld), all claims and causes of
action Burkle has against the Insurers relating to the Burkle Fee Recovery,
provided further that, in the event that the aforesaid assignment agreement,
when executed, is determined, in a final court judgment not subject to appeal,
to be ineffective to convey the rights assigned, such determination shall not
affect the effectiveness of Burkle’s compliance with this sub-paragraph 2(a). In
the event any Morgans’ Insurer pays a Burkle Fee Recovery to Burkle (x) at any
time prior to the Effective Date, such payment(s) shall be retained by Burkle
(the “Burkle Retained Insurance Payments”) or (y) upon the Effective Date or any
time thereafter, then Burkle shall, within 15 business days of his receipt of
such Burkle Fee Recovery, transfer said Burkle Fee Recovery to Morgans.

 

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(b) The Yucaipa Payment. On or before March 15, 2014, Morgans shall fund an
escrow account (the “Escrow Account”) in the amount of $3,000,000.00 (the
“Yucaipa Payment”). The Escrow Account shall be maintained by such entity as
shall be mutually agreed upon between Morgans and the plaintiffs in the
Securities Action (the “Yucaipa Plaintiffs”) under such terms as are mutually
agreed upon between Morgans and the Yucaipa Plaintiffs and with Morgans paying
50% of the costs and expenses of such Escrow Account and the Yucaipa Plaintiffs
paying the remaining 50% of said costs and expenses. No interest shall accrue on
any amounts held in the Escrow Account. Upon the Effective Date, the amount of
the Yucaipa Payment shall be recalculated so as to reduce the Yucaipa Payment by
the aggregate amount of the Burkle Retained Insurance Payments, if any (such
aggregate reduction being the “Yucaipa Payment Refund”). On the fifteenth
business day after the Effective Date, (x) the Yucaipa Payment, as recalculated
and reduced by the Yucaipa Payment Refund, if any, shall be distributed to the
Yucaipa Plaintiffs according to such allocation as they determine in their sole
discretion (the “Final Yucaipa Payment”) and (y) the Yucaipa Payment Refund, if
any, shall be distributed to Morgans. In the event the Settlement becomes null
and void by reason of any of the conditions specified in paragraph 5 below, the
Yucaipa Payment shall, within 15 business days thereafter, be distributed in
full to Morgans.

 

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(c) The Settling Former Directors. The Settling Former Directors shall each
receive and make the following payments:

(1) Immediately following the execution of this MOU, the Settling Former
Directors shall, in cooperation with Morgans, each make an appropriate
application to Morgans’ Insurers for payment under the applicable Insurer
Policies of all reasonable and necessary fees and expenses incurred in their
individual defense of the Delaware Action (individually, a “Settling Former
Director Fee Recovery”). In the event that, as of the Effective Date, the
Settling Former Directors have neither received, nor obtained an agreement from
the Insurers to receive, their Settling Former Director Fee Recovery, then
Morgans, within 15 business days following the Effective Date, shall pay to any
such Settling Former Director any shortfall in the Settling Former Director Fee
Recovery, provided that such Settling Former Director assigns to Morgans,
pursuant to an assignment agreement approved by Morgans (which approval shall
not be unreasonably withheld), all claims and causes of action the Settling
Former Director has against the Insurers relating to the Settling Former
Director Fee Recovery. It is further agreed that, in the event that the
aforesaid assignment agreement, when executed, is determined, in a final court
judgment not subject to appeal, to be ineffective to convey the rights assigned,
such determination shall not affect the effectiveness of the Settling Former
Directors’ compliance with this sub-paragraph 2(c)(1).

(2) In the event that the amount of the Final Yucaipa Payment exceeds the amount
of the Burkle Fee Recovery (such difference in amount being hereafter referred
to as the “Remaining Payment”), then the Settling Former Directors shall, within
15 business days following the Effective Date, each reimburse Morgans for 20% of
the amount of any such Remaining Payment (such 20% reimbursement being each
Former Director’s “pro rata share”) provided that no payment of such pro rata
share shall be due to Morgans by a Settling Former Director if (x) Morgans’
Insurers under the applicable Insurer Policies have paid, or entered a binding
agreement to pay, Morgans such Settling Former Director’s pro rata share of the
Remaining Payment within 14 business days after the Effective Date pursuant to
an application made by the Settling Former Director to the Insurer under the
applicable Insurer Policies; or (y) Morgans’ Insurers have failed, within 14
business days after the Effective Date, to pay to Morgans all of the pro rata
share of the Remaining Payment owed to Morgans by the Settling Former Director
as requested by the Settling Former Director pursuant to sub-clause (x) hereof
provided that the Settling Former Director assigns to Morgans, pursuant to an
assignment agreement approved by Morgans (which approval shall not be
unreasonably withheld), all claims and causes of action such Settling Former
Director has against the Insurers relating to his pro rata share of the
Remaining Payment (it being further agreed that, in the event that the aforesaid
assignment agreement, when executed, is determined, in a final court judgment
not subject to appeal, to be ineffective to convey the rights assigned, such
determination shall not affect the effectiveness of the Settling Former
Directors’ compliance with this sub-paragraph 2(c)(2)(y)); or (z) Morgans’
Insurers pay to Morgans the complete Remaining Payment within 14 business days
after the Effective Date.

 

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(d) OTK’s and Kalisman’s attorneys fees and expenses in the Delaware Action.
Counsel for OTK and Kalisman (collectively “Delaware Plaintiffs’ Counsel”)
intend to petition the Court of Chancery for an award of payment from Morgans of
the reasonable and necessary fees and expenses incurred in connection with the
Delaware Action. Subject to the terms and conditions of this MOU, the terms and
conditions of the Stipulation contemplated hereby, and the terms and conditions
of the Settlement, Delaware Plaintiffs’ Counsel will be paid an amount, if any,
that is approved by order of the Court of Chancery in the aggregate for their
fees and expenses in connection with the Delaware Action within 15 business days
after the later of the Court of Chancery’s entry of (i) a final judgment and
order dismissing the Action with prejudice (“Final Judgment”) or (ii) an order
awarding such attorneys’ fees and expenses (“Fee and Expense Order”),
notwithstanding the existence of any timely filed objections thereto, or
potential for appeal therefrom, or collateral attack on the Settlement or any
part thereof, subject to the obligation of Delaware Plaintiffs’ Counsel to
refund up to the full amount of fees and expenses if either the Final Judgment
or the Fee and Expense Order is reversed or modified, but only to the extent
required by such reversal or modification. The approval, if any, by the Court of
Chancery of the Delaware Plaintiffs’ Counsel fees and expenses and the review of
such approval upon appeal, if any, shall not affect the validity of the
Settlement. Except as provided herein or pursuant to Kalisman’s advancement or
indemnification rights against the Morgans Parties, neither OTK nor Kalisman nor
Delaware Plaintiffs’ Counsel shall seek any other fees, expenses or compensation
relating to the Delaware Action or any of the other Actions and no persons or
entities named as defendants in the Delaware Action (excluding Morgans which was
named as a nominal defendant) shall bear any fees or expenses alleged or
incurred by Delaware Plaintiffs’ Counsel or by any of their experts, advisors,
agents, or representatives.

 

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3. Release and Dismissal Terms. The Settlement embodied in the Stipulation to be
entered pursuant to this MOU shall include the following provisions related to
releases and dismissals with prejudice to be effected in the Actions:

(a) The Delaware Action. An acknowledgement of the direct and derivative nature
of the claims asserted in the Delaware Action and a customary release (i) by
OTK, Kalisman and Morgans of the following parties, in connection with any and
all claims related to, or arising out of, the subject matter of the Delaware
Action from the beginning of time through the Effective Date: all defendants in
the Delaware Action (excluding Malone, Harrison and Morgans, which was named as
a nominal defendant), and any and all of their respective employers, parent
entities, controlling persons, principals, affiliates or subsidiaries and each
and all of their respective past or present officers, directors, partners,
stockholders, representatives, employees, attorneys, financial or investment
advisors, consultants, accountants, investment bankers, commercial bankers,
agents, heirs, executors, trustees, personal representatives, estates,
administrators, predecessors, successors and assigns; and (ii) by the defendants
in the Delaware Action (excluding Malone, Harrison and formerly named defendant
Michael J. Gross) of OTK, Kalisman and Morgans and each of their respective
counsel in the Delaware Action in connection with any and all claims related to,
or arising out of, the subject matter of the Delaware Action from the beginning
of time through the Effective Date, including but not limited to claims for
advancement of attorneys’ fees and expenses and indemnification, except (x) for
any claims or causes of action for advancement or indemnification of attorneys’
fees arising out of any litigation related to the assignment of any claims or
causes of action against Morgans’ Insurers by Burkle or the Former Directors or
(y) as specifically provided for herein. Notwithstanding anything contained in
this sub-paragraph 3(a), the release set forth herein explicitly excludes Malone
and Harrison who shall remain defendants in the Delaware Action for all
purposes.

 

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(b) The Securities Action. A customary release (i) by the Yucaipa Plaintiffs in
the Securities Action of the following parties, in connection with any and all
claims related to, or arising out of, the subject matter of the Securities
Action from the beginning of time through the Effective Date: all defendants in
the Securities Action, and any and all of their respective employers, parent
entities, controlling persons, principals, affiliates or subsidiaries and each
and all of their respective past or present officers, directors, partners,
stockholders, representatives, employees, attorneys, financial or investment
advisors, consultants, accountants, investment bankers, commercial bankers,
agents, heirs, executors, trustees, personal representatives, estates,
administrators, predecessors, successors and assigns; and (ii) by the defendants
in the Securities Action of the Yucaipa Plaintiffs in the Securities Action and
each of their respective counsel in the Securities Action in connection with any
claims related to the institution, prosecution, or settlement of the claims
asserted in the Securities Action.

 

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(c) The Proxy Action. A customary release (i) by Burkle of the following
parties, in connection with any and all claims related to, or arising out of,
the subject matter of the Proxy Action from the beginning of time through the
Effective Date: all defendants in the Proxy Action, and any and all of their
respective employers, parent entities, controlling persons, principals,
affiliates or subsidiaries and each and all of their respective past or present
officers, directors, partners, stockholders, representatives, employees,
attorneys, financial or investment advisors, consultants, accountants,
investment bankers, commercial bankers, agents, heirs, executors, trustees,
personal representatives, estates, administrators, predecessors, successors and
assigns; and (ii) by the defendants in the Proxy Action of Burkle and each of
his counsel in the Proxy Action in connection with any claims related to the
institution, prosecution, or settlement of the claims asserted in the Proxy
Action.

(d) The Observer Action. A customary release (i) by the plaintiffs in the
Observer Action of the following parties, in connection with any and all claims
related to, or arising out of, the subject matter of the Observer Action from
the beginning of time through the Effective Date: Morgans and any and all of its
respective employers, parent entities, controlling persons, principals,
affiliates or subsidiaries and each and all of its respective past or present
officers, directors, partners, stockholders, representatives, employees,
attorneys, financial or investment advisors, consultants, accountants,
investment bankers, commercial bankers, agents, heirs, executors, trustees,
personal representatives, estates, administrators, predecessors, successors and
assigns; and (ii) by Morgans of the plaintiffs in the Observer Action and each
of their respective counsel in the Observer Action in connection with any claims
related to the institution, prosecution, or settlement of the claims asserted in
the Observer Action.

 

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(e) With respect to all the releases contemplated by this MOU in sub-paragraphs
(a) thorough (d) hereof (the “Released Claims”), a statement that the
contemplated releases to be given by each of the releasing parties
(collectively, the “Releasing Parties”) extend to claims that the Releasing
Parties did not know or suspect to exist at the time of the release, which if
known, might have affected the decision to enter into this release. The
Releasing Parties shall be deemed to have waived any and all provisions, rights,
and benefits conferred by any law of the United States, any law of any state, or
principle of common law which governs or limits a person’s release of unknown
claims. The Releasing Parties shall be deemed to relinquish, to the full extent
permitted by law, the provisions, rights, and benefits of Section 1542 of the
California Civil Code which provides:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH
IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH
THE DEBTOR.

(f) With respect to all of the Released Claims, a statement that the
contemplated releases to be given by Releasing Parties shall also be deemed to
have waived any and all provisions, rights, and benefits conferred by any law of
any state of the United States or principle of common law, which is similar,
comparable, or equivalent to California Civil Code Section 1542. The Releasing
Parties acknowledge that they may discover facts in addition to or different
from those that they now know or believe to be true with respect to the subject
matter of the contemplated releases, but that it is their intention to fully,
finally, and forever settle and release any and all claims released hereby,
known or unknown, suspected or unsuspected, which now exist or heretofore
existed, from the beginning of time to the Effective Date, without regard to the
subsequent discovery or existence of such additional or different facts.

 

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(g) With respect to all of the Released Claims, a statement that the
contemplated releases are not intended to release and shall not be deemed to
release any right or claim that the Releasing Parties or any of them had, has or
may have against Morgans’ Insurers under the applicable Insurance Policies.

(h) With respect to all of the Released Claims, a statement that the
contemplated releases are not intended to release and shall not be deemed to
release any rights or obligations of the parties under the terms of this MOU and
the Stipulation.

(i) With respect to all of the Released Claims, a statement that the
contemplated releases are not intended to release and shall not be deemed to
release any claim or cause of action between or among the parties to the action
entitled Sasson et al. v. TLG Acquisition LLC, et al. Index No. 652735/2013 (NY
Sup.) that is related to, or arises out of, the subject matter of that action.

(j) With respect to all of the Released Claims, a statement that the
contemplated releases are not intended to release any claim or cause of action
by Morgans against the Former Directors or by the Former Directors against
Morgans, but only to the extent that such claim or cause of action are unrelated
to the Yucaipa Transaction or the facts and circumstances underlying the
Delaware Action or are not otherwise within the scope of the releases described
in this MOU. Notwithstanding anything contained in this sub-paragraph 3(j), the
Released Claims explicitly excludes Malone and Harrison who shall remain
defendants in the Delaware Action for all purposes.

 

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(k) With respect to all of the Released Claims, a statement that the
contemplated releases are not intended to release and shall not be deemed to
release any rights, interests, claims, causes of actions or obligations to
Burkle, the Yucaipa Parties or OTK in any Morgans securities they may own, or to
Morgans with respect to any securities that it issued, as of the Effective Date
or arising from the 2009 Agreement, including but not limited to any contractual
rights or obligations associated with such Morgans securities, that relate to,
or arise out of, events occurring prior to or after the Effective Date,
provided, however, that the foregoing exclusion shall not apply to, and instead
shall specifically exempt, all claims and causes of action contemplated by, and
encompassed in, the Released Claims, including but not limited to claims arising
in or related to the Actions.

(l) A representation by Burkle and the Yucaipa Parties that, as of the date of
the Stipulation, they had no actual knowledge of any facts or circumstances,
apart from those set forth in the Actions and that are the subject of the
Released Claims, that would give rise to or otherwise support any claim or cause
of action against the Morgans Parties, OTK or Kalisman.

(m) A representation by the Morgans Parties, OTK and Kalisman that, as of the
date of the Stipulation, they had no actual knowledge of any facts or
circumstances that would give rise to or otherwise support any claim or cause of
action against Burkle or the Yucaipa Parties.

(n) A requirement that, within five business days following the Effective Date,
the parties to the Securities Action shall execute a stipulation providing for
the discontinuance of that action, with prejudice on the merits and with each
party bearing its own costs, which stipulation shall be filed with the clerk of
the court by the defendants in said action.

 

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(o) A requirement that, within five business days following the Effective Date,
the parties to the Observer Action shall execute a stipulation providing for the
discontinuance of that action, with prejudice on the merits and with each party
bearing its own costs, which stipulation shall be filed with the clerk of the
court by the defendant in said action.

(p) A requirement that, within five business days following the Effective Date,
the parties to the Proxy Action shall execute a stipulation providing for the
dismissal of that action, with prejudice on the merits and with each party
bearing its own costs, which stipulation shall be filed immediately thereafter
with the court by Burkle.

(q) A requirement for entry of a judgment dismissing the Delaware Action as to
the Settling Parties named in the Delaware Action, subject to Final Court
Approval and pursuant to Court of Chancery Rule 23.1, with prejudice on the
merits and with each Settling Party named in the Delaware Action bearing its own
costs, except as specifically set forth herein and in the Stipulation.

4. Other Stipulation Provisions. The Settlement embodied in the Stipulation to
be entered pursuant to this MOU shall include the following additional
provisions:

(a) Customary provisions concerning the entry of a scheduling order providing
for preliminary approval of the Stipulation, Notice to Morgans’ common
stockholders (as defined in sub-paragraph (b), below), the opportunity for
Morgans’ common stockholders to raise appropriate objections to the items
scheduled for hearing as set forth in the Notice and the scheduling of a hearing
before the Court of Chancery for approval of the Stipulation and the Settlement
embodied therein.

 

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(b) Customary provisions concerning the form, content and manner of providing
notice to Morgans’ common stockholders of the Settlement and any application for
fees and expenses by Delaware Plaintiffs’ Counsel, subject to Court of Chancery
approval (when approved by the Court of Chancery, the “Notice”). Morgans shall
be responsible for providing the Notice to its common stockholders in the manner
provided in the Stipulation and approved by the Court of Chancery, and shall pay
all reasonable costs and expenses incurred in providing the Notice, including
any costs and expenses associated with any additional copies of the Notice
requested by record holders of Morgans’ common stock (whether for purpose of
providing the Notice to beneficial owners or otherwise).

(c) In accordance with 10 Del. C. § 6304(b), this MOU and the Stipulation
contemplated hereby and the Settlement shall reduce the damages that OTK or
Morgans or the Current Directors may recover against tortfeasors other than the
Yucaipa Parties, Burkle, Friedman, Gault, and Sasson by the pro rata share of
the Yucaipa Parties’, Burkle’s, Friedman’s, Gault’s, and Sasson’s
liability. This language is intended to comply with 10 Del. C. § 6304(b) so as
to preclude any liability of the Yucaipa Parties, Burkle, Freidman, Gault, or
Sasson to any other alleged tortfeasors, for contribution or otherwise.

(d) Inclusion of such other terms and conditions as are customary or appropriate
to the Settlement contemplated herein.

5. Conditions. This MOU and the Stipulation shall be null and void and of no
force and effect, unless otherwise agreed to by the parties hereto pursuant to
the terms hereof, if (i) prior to the execution of the Stipulation by Morgans,
the Board of Directors of Morgans concludes, in the exercise of its fiduciary
duties, that the Stipulation and the Settlement embodied therein, is not in the
best interests of Morgans and its stockholders and, for that reason, Morgans
declines to execute the Stipulation; (ii) the Settlement is terminated pursuant
to the terms of the Stipulation; or (iii) the Settlement does not obtain Final
Court Approval. If any of the foregoing conditions arise and are not waived by
the Settling Parties hereto in writing, this MOU and the Stipulation shall not
be deemed to prejudice in any way the respective positions of any of the
Settling Parties in any of the Actions. In such event, and consistent with the
applicable evidentiary rules, neither this MOU, the Stipulation, their contents,
nor the existence of either shall be admissible in evidence or shall be referred
to for any purpose in the Actions or in any other proceeding, except in
connection with any claim for breach of this MOU or the Stipulation or as
otherwise specifically provided herein.

 

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6. Stay of Actions. Immediately following execution of this MOU, the Settling
Parties in each of the respective Actions shall inform the court presiding over
such Actions of this MOU and apply for or otherwise take such actions necessary
to obtain a stay of the relevant proceedings as to the Settling Parties pending
submission of the Stipulation to the Court of Chancery in the Delaware Action
and a final hearing to approve the Stipulation and the Settlement embodied
therein. All parties hereto agree that, prior to the Effective Date, they shall
not initiate or prosecute in any court any action or claim that is the subject
of any of the Released Claims that are contemplated to be included in the
Stipulation.

7. Related Litigation. If any action is later filed in state or federal court
asserting any of the Released Claims prior to Final Court Approval of the
Stipulation and the Settlement embodied therein, the Settling Parties hereto
shall use their best efforts to prevent, stay, or seek the dismissal of such
claims, and to oppose entry of any interim or final relief in favor of
plaintiffs in any such action against any of the Settling Parties hereto that
challenges the Settlement, the Stipulation or otherwise involves any of the
Released Claims. In the event that any final injunction, decision, order,
judgment, determination or decree is entered or issued by any court or
governmental entity prior to Final Court Approval of the Stipulation and the
Settlement embodied therein that would make consummation of the Settlement in
accordance with the terms of this MOU or the Stipulation unlawful or that would
restrain, prevent, enjoin or otherwise prohibit consummation of the Settlement,
the Settling Parties hereto each reserve the right to withdraw from the
Settlement. In addition, in the event that any preliminary or temporary
injunction, decision, order, determination, or decree (an “Interim Order”) is
entered or issued by any court or governmental entity prior to Final Court
Approval of the Stipulation and the Settlement embodied therein that would
restrain, prevent, enjoin or otherwise prohibit consummation of the Settlement,
then, notwithstanding anything herein to the contrary, the Settling Parties
hereto shall have no obligation to consummate the Settlement unless and until
such Interim Order expires or is terminated or modified in a manner such that
consummation of the Settlement in accordance with the terms of this MOU and the
Stipulation would no longer be restrained, prevented, enjoined or otherwise
prohibited.

 

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8. Execution. This MOU will be executed by counsel for each of the persons and
entities currently named as parties in the Actions who are Settling Parties,
each of whom represent and warrant that they have the authority from their
client(s) to enter into this MOU and bind their client(s) thereto with respect
to the particular matters that their respective clients have agreed to herein.
OTK represents and warrants that it has been a common stockholder of Morgans as
of December 1, 2011 to the present, that as of the date hereof it continues to
hold its stock in Morgans and that it shall continue to hold its stock in
Morgans through the Effective Date.

9. Governing Law and Consent to Exclusive Jurisdiction. This MOU, the
Stipulation, and the Settlement shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to Delaware’s principles
governing choice of law. The Settling Parties to this MOU irrevocably and
unconditionally (i) consent to submit to the sole and exclusive jurisdiction of
the Delaware Court of Chancery (or, if the Delaware Court of Chancery lacks
jurisdiction, a court located in Delaware with jurisdiction) for any litigation
arising out of or relating in any way to this MOU, the Stipulation, or the
Settlement; (ii) agree that any dispute arising out of or relating in any way to
this MOU, the Stipulation, or the Settlement shall not be litigated or otherwise
pursued in any forum or venue other than any such court; (iii) waive any
objection to the laying of venue of any such litigation in any such court;
(iv) agree not to plead or claim in any such court that such litigation brought
therein has been brought in any inconvenient forum; and (v) expressly waive any
right to demand a jury trial as to any such dispute.

 

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10. Modifications. This MOU may be modified or amended only by a writing, signed
by all of the signatories hereto, that refers specifically to this MOU.

11. Not an Admission of Liability. The provisions contained in this MOU shall
not be deemed a presumption, concession or admission by any Settling Party to
this MOU of any fault, liability, wrongdoing, or any infirmity or weakness of
any claim or defense, as to any facts or claims that have been or might be
alleged or asserted in the Actions, or any other action or proceeding that has
been, will be, or could be brought, and shall not be interpreted, construed,
deemed, invoked, offered, or received in evidence or otherwise used by any
person in the Actions, or in any other action or proceeding, whether civil,
criminal or administrative, for any purpose other than as provided expressly
herein.

12. Binding Effect. The Settling Parties hereto intend this MOU to be a binding
agreement, and this MOU shall be binding upon and inure to the benefit of the
parties hereto and their respective agents, executors, heirs, successors, and
assigns.

 

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13. Execution By Counterparts. This MOU may be executed in one or more
counterparts, each of which when so executed and delivered shall be deemed to be
an original but all of which together shall constitute one and the same
instrument.

14. Definitions. As used herein, the terms “Morgans’ Insurers” and “applicable
Insurer Policies” are defined to have the following meanings:

 

  (a) AXIS Insurance Company, Insurance Policy No. MNN750655/01/2013

 

  (b) Illinois National Insurance Company, Insurance Policy No. 01-701-88-43

 

  (c) Allied World Assurance Company (U.S.) Inc., Insurance Policy No. 0305-3205

IN WITNESS WHEREOF, the undersigned parties, by and through their respective
counsel, have executed this MOU effective as of the date set forth above.

OTK Associates, LLC v. Friedman, et al., Case No. 8447-VCL (Del. Ch.):

 

/s/ Peter L. Welsh

Peter L. Welsh

Matthew L. McGinnis

Jesse M. Boodoo

Ropes & Gray LLP

800 Boylston Street

Prudential Tower

Boston, MA 02199-3600

(617) 951-7000

 

Attorneys for Plaintiff OTK Associates, LLC

   

/s/ Jaclyn Levy

David J. Margules (#2254)

Joel Friedlander (#3163)

Jaclyn Levy (#5631)

Bouchard Margules & Friedlander, P.A.

222 Delaware Avenue, Suite 1400

Wilmington, Delaware 19801

(302) 573-3500

 

Attorneys for Plaintiff OTK Associates, LLC

 

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/s/ Steven M. Edwards

Steven M. Edwards

David F. Wertheimer

Hogan Lovells US LLP

875 Third Avenue

New York, N.Y. 10022

(212) 918-3100

 

Attorneys for Nominal Defendant Morgans Hotel Group Co.

   

/s/ Michael A. Pittenger

Michael A. Pittenger (#3212)

Matthew F. Davis (#4696)

Potter Anderson & Corroon LLP

1313 N. Market Street

Wilmington, Delaware 19899

(302) 984-6000

 

Attorneys for Nominal Defendant Morgans Hotel Group Co.

/s/ Mark. H. Epstein

Mark H. Epstein

George M. Garvey

Munger Tolles & Olson LLP

355 South Grand Ave., 35th Flr.

Los Angeles, CA 90071

(213) 683-9153

 

Attorneys for Defendants Ronald W. Burkle, Yucaipa American Alliance Fund II,
L.P., Yucaipa American Alliance (Parallel)Fund II, L.P., Yucaipa Aggregator
Holdings, LLC and The Yucaipa Companies LLC

   

/s/ Bruce Silverstein

Bruce Silverstein (#2495)

Kathaleen St. J. McCormick (#4579)

James M. Yoch, Jr. (#5251)

Young Conaway Stargatt & Taylor, LLP

Rodney Square

1000 North King Street

Wilmington, Delaware 19801

(302) 571-6600

 

Attorneys for Defendants Ronald W. Burkle, Yucaipa American Alliance Fund II,
L.P., Yucaipa American Alliance (Parallel)Fund II, L.P., Yucaipa Aggregator
Holdings, LLC and The Yucaipa Companies LLC

/s/ Greg A. Danilow

Greg A. Danilow

John A. Neuwirth

Stefania D. Venezia

Matthew S. Connors

Weil, Gotshal & Manges LLP

767 Fifth Ave.

New York, NY 10153

(212) 310-8297

 

Attorneys for Defendant Robert Friedman

   

/s/ Kenneth J. Nachbar

Kenneth J. Nachbar (#2067)

Shannon E. German (#5172)

Morris, Nichols, Arsht & Tunell LLP

1201 North Market St.

P.O. Box 1347

Wilmington, DE 19899

(302) 658-9200

 

Attorneys for Defendant Robert Friedman

 

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/s/ A. Thompson Bayliss

A. Thompson Bayliss (#4379)

Adam K. Schulman (#5700)

Sarah E. Hickie (#5833)

Abrams & Bayliss LLP

20 Montchanin Road, Ste. 200

Wilmington, DE 19807

(302) 778-1000

 

Attorneys for Jason T. Kalisman

 

   

/s/ David E. Ross

Collins J. Seitz, Jr. (#2237)

David E. Ross (#5228)

Eric D. Selden (#4911)

SEITZ ROSS ARONSTAM & MORITZ LLP

100 S. West Street, Suite 400

Wilmington, Delaware 19801

(302) 576-1600

 

Attorneys for Defendant Andrew Sasson

/s/ Robert L. Clarkson

Robert L. Clarkson

Clarkson Riley, LLP

1880 Century Park East, 12th Flr.

Los Angeles, CA 90067

(310) 552-0050

 

Attorneys for Defendant Jeffrey M. Gault

   

/s/ Stephen B. Brauerman

Stephen B. Brauerman (#4952)

Vanessa R. Tirandetes (#5398)

BAYARD, P.A.

222 Delaware Avenue, Suite 900

Wilmington, Delaware 19899

(302) 655-5000

 

Attorneys for Defendant Jeffrey M. Gault

Yucaipa American Alliance Fund II L.P., et al. v. Morgans Hotel Group Co., et
al., Index No. 652294/2013 (NY Sup.):

 

/s/ Mark H. Epstein

Mark H. Epstein

Randall G. Sommer

Munger Tolles & Olson LLP

355 South Grand Ave., 35th Flr.

Los Angeles, CA 90071

(213) 683-9153

 

Attorneys for Plaintiffs Yucaipa American Alliance Fund II, L.P., Yucaipa
American Alliance (Parallel)Fund II, L.P., Yucaipa Aggregator Holdings, LLC and
Vintage Deco Hospitality, LLC

     

/s/ Leo V. Leyva

Leo V. Leyva

Steven L. Klepper

Cole, Schotz, Meisel, Forman & Leonard, P.A.

900 Third Ave., 16th Flr.

New York, N.Y. 10022

(212) 752-8000

 

Attorneys for Plaintiffs Yucaipa American Alliance Fund II, L.P., Yucaipa
American Alliance (Parallel)Fund II, L.P., Yucaipa Aggregator Holdings, LLC and
Vintage Deco Hospitality, LLC

 

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/s/ Philippe Adler

Eric Seiler

Hal Neier

Philippe Adler

Friedman Kaplan Seiler & Adelman LLP

7 Times Square

New York, New York 10036

(212) 833-1100

Attorneys for Defendants Morgans Hotel Group

Co. and Morgans Group LLC

Burkle v. OTK Associates, LLC, et al. Case No. 13-CIV-4557 (S.D.N.Y.):

 

/s/ Mark H. Epstein     /s/ Leo V. Leyva

Mark H. Epstein

George M. Garvey

Randall G. Sommer

Munger Tolles & Olson LLP

355 South Grand Ave., 35th Flr.

Los Angeles, CA 90071

(213) 683-9153

   

Leo V. Leyva

Steven L. Klepper

Cole, Schotz, Meisel, Forman & Leonard, P.A.

900 Third Ave., 16th Flr.

New York, N.Y. 10022

(212) 752-8000

Attorneys for Plaintiff Ronald W. Burkle     Attorneys for Plaintiff Ronald W.
Burkle

/s/ Peter L. Welsh

   

Peter L. Welsh

Jesse M. Boodoo

Aliza F. Goren

Martin J. Crisp

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199-3600

(617) 951-7000

    Attorneys for defendants OTK Associates, LLC, Jason T. Kalisman, Michael E.
Olshan, Andrea L. Olshan, Mahmood Khimji, Jonathan Langer, Parang Vora and John
T. Dougherty    

 

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Yucaipa American Alliance Fund II L.P., et al. v. Morgans Hotel Group, Index
No. 653455/2013 (NY Sup.):

 

/s/ Mark H. Epstein     /s/ Leo V. Leyva

Mark H. Epstein

Randall G. Sommer

Munger Tolles & Olson LLP

355 South Grand Ave., 35th Flr.

Los Angeles, CA 90071

(213) 683-9153

   

Leo V. Leyva

Steven L. Klepper

Cole, Schotz, Meisel, Forman & Leonard, P.A.

900 Third Ave., 16th Flr.

New York, N.Y. 10022

(212) 752-8000

Attorneys for Plaintiffs Yucaipa American

Alliance Fund II, L.P., and Yucaipa American

Alliance (Parallel)Fund II, L.P.

    Attorneys for Plaintiffs Yucaipa American Alliance Fund II, L.P. and Yucaipa
American Alliance (Parallel)Fund II, L.P.

/s/ Philippe Adler

   

Eric Seiler

Hal Neier

Philippe Adler

Friedman Kaplan Seiler & Adelman LLP

7 Times Square

New York, New York 10036

(212) 833-1100

    Counsel for Defendant Morgans Hotel Group Co.    

 

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