For the Mall of America Case Study:
- What are the key facts of the case?
- Did Simon behave ethically towards Triple Five in this case? Support your position with a discussion of fiduciary duties, other general ethical principles, and the specific key facts you identified. (Note: This assignment is not looking for legal analysis, or a review of the actual court case. We are looking for your thoughts on the ethical issues raised by the case.)
Mall of America (A) 9-305-068 R E V : J U N E 9 , 2 0 0 5 ________________________________________________________________________________________________________________ Professor Lynn Sharp Paine and Research Associate Christopher M. Bruner, J.D., prepared this case from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. L Y N N S H A R P P A I N E C H R I S T O P H E R M . B R U N E R Mall of America (A) Triple Five of Minnesota, Inc., brought suit in the U.S. District Court for the District of Minnesota against Melvin and Herbert Simon, certain other individuals, and various entities controlled by the Simons (collectively referred to as the Simons). Triple Five and its owners, four members of the Canada-based Ghermezian family, alleged numerous breaches of fiduciary duty by the Simons, the Ghermezians’ partners in developing the internationally known Mall of America, a 4.2-million- square-foot retail and entertainment complex located in a Minneapolis suburb. The case centered on the Simons’ purchase in 1999 of a third party’s interest in the Mall. The case, heard by Judge Paul Magnuson, involved issues arising under Minnesota partnership law.1 Background The idea for the Mall of America was conceived by four brothers—Raphael, Nader, Bahman, and Eskander Ghermezian. The Ghermezians were the developers and owners of the West Edmonton Mall (Edmonton, Alberta), the “biggest indoor retail and entertainment complex in the world,” which opened in 1981.2 In 1986 their company, Triple Five, secured development rights for the land on which the Mall of America would be built, though they had trouble securing financing. In 1987 the Ghermezians became involved with Melvin and Herbert Simon, at which point Teachers Insurance and Annuity Association (“Teachers”) agreed to finance construction of the Mall. Teachers later converted its interest into an equity investment in the form of a 55% stake in the partnership that owned and controlled the Mall, the Mall of America Company LP (“MOAC LP”). The other partner in MOAC LP was an entity called Mall of America Associates (“MOAA”), itself “a 50/50 partnership” between Triple Five and another entity controlled by the Simons.3 (See Exhibit 1 for a chart showing the Mall’s initial ownership structure.) 1 Unless otherwise indicated, the facts presented in this case are drawn from Triple Five of Minnesota v. Simon et al., 280 F. Supp. 2d 895, 2003 U.S. Dist. LEXIS 15861 (2003), decided September 10, 2003. For a fact sheet on the Mall of America, see http://www.triplefive.com/factsheet.html. 2 See Triple Five of Minnesota v. Simon et al., 280 F. Supp. 2d at 897; “History and Development,” available at http://www.westedmontonmall.com/about/history.asp. 3 The “entertainment portion of the Mall” was held by an entity called Minntertainment Associates, in which the same parties “owned similar percentage interests.” Triple Five of Minnesota v. Simon et al., 280 F. Supp. 2d at 898. For the sake of clarity, the following discussion focuses on the Mall itself. For the exclusive use of M. Nacey, 2021. This document is authorized for use only by Meaghan Nacey in Ethics in Action Online Spring B 2021-1 taught by KATHLEEN BOLGER, Georgetown University from Mar 2021 to Sep 2021. 305-068 Mall of America (A) 2 Among other things, MOAA’s partnership agreement “provide[d] that no partner shall be liable to any other partner except in the case of fraud or gross negligence.” Although Teachers owned only 55% of the Mall, it received virtually all of the Mall’s profits. Under various agreements of the parties, a $683 million capital account was established (representing Teachers’ total investment), and Teachers received a guaranteed 8 ½% annual return on this account (approximately $58 million, an amount exceeding annual profits since the Mall’s inception). Any income beyond this amount would be split among the parties, with Teachers again having a preference on its additional portion of the profits. Moreover, if the Mall were ever sold or refinanced, the proceeds would first go to pay back Teachers’ contribution to the venture, and “after 2002, Teachers could force MOAA either to buy the Mall at a price set by Teachers or to allow Teachers to sell the Mall at a price set by Teachers.” MOAA received only a management fee of 5% of gross income per year. The Simon-controlled partner, which actually managed the Mall, received 80% of this fee, and Triple Five received the remaining 20%. The Teachers Transaction By March 1998, Teachers had communicated to MOAA its interest in selling “all or part of its interest in the Mall.” Herbert Simon responded (with a blind copy to Triple Five) acknowledging this, but made no mention of a possible transaction with the Simons, and in fact “warn[ed] Teachers that the interests of both [the Simons] and Triple Five should be considered or that MOAA would seek to enforce its rights to prevent a sale under the parties’ agreements.” The Simons did not disclose to Triple Five, however, that they began at this point to discuss a potential purchase of Teachers’ interest in MOAC LP. In July 1998 Teachers “announced that it was actively marketing the sale of its interest,” but Randolph Foxworthy (executive vice president for corporate development of the various Simon family entities) assured Triple Five that “the Simons were not interested in pursuing a deal with Teachers,” notwithstanding his having forwarded to the Simons a potential deal structure the day before. In January 1999, unbeknownst to Triple Five, Teachers allegedly announced at a meeting with the Simons that it wanted them “to purchase 50% of Teachers’ interest,” and in April the Simons notified Triple Five by letter that they intended to make the purchase. The letter explained “that after Teachers announced its intention to sell its interest ‘we began to investigate avenues’ to meet Teachers’ needs,” generally described the terms of the transaction (which would involve substantial borrowing), and “‘estimated’” that the deal would close less than six weeks later in June 1999. After receiving the letter, Triple Five made several requests for information about the specific terms of the transaction, but none were disclosed. In May, Foxworthy denied that any formal terms had been forwarded to lenders, though such communication was in fact under way by this time. The Simons ultimately offered Triple Five the opportunity to participate in the transaction but included no transaction specifics and required a response within a period of time that made securing adequate financing difficult or impossible. While Teachers might have contemplated including Triple Five back in 1998, by June 1999 they were unwilling to do so because the terms of the deal had been established, though Teachers had no problem with a “side deal” between the Simons and Triple Five. In October 1999, Teachers finally sold 50% of its interest to another entity controlled by the Simons through a series of related transactions involving a $312 million mortgage on the Mall, from which Teachers was paid $303.5 million in cash and the Simons received financing fees of $3.12 million. The Simons then paid $84.5 million in cash to Teachers for 50% of Teachers’ interest in the Mall, including associated income preferences, and Teachers bought $25 million worth of preferred stock in one of For the exclusive use of M. Nacey, 2021. This document is authorized for use only by Meaghan Nacey in Ethics in Action Online Spring B 2021-1 taught by KATHLEEN BOLGER, Georgetown University from Mar 2021 to Sep 2021. Mall of America (A) 305-068 3 the Simons’ transaction entities. In addition, it was agreed that “Teachers could not sell more than 50% of its remaining interest in the Mall prior to 2004 without the consent of” the Simons. (See Exhibit 2 for a chart showing the Mall’s post-transaction ownership structure.) Triple Five’s Allegations Triple Five brought suit against the Simons and various other individuals and entities involved with the Mall and the Teachers transaction, claiming that defendants had breached fiduciary duties owed to Triple Five by (1) failing to disclose to Triple Five material information about the transaction; (2) usurping an opportunity that should have been offered to the partnership (i.e., MOAA) or to Triple Five; and (3) behaving in an “intimidating and threatening manner toward Triple Five” (for which evidence including “transcripts of taped telephone conversations” was brought to the court’s attention). Defendants “maintain[ed] that the transaction not only did not injure Triple Five” but actually worked to its benefit “because it forestalled Teachers’ sale of the Mall and MOAA’s consequent loss of the management fee,” that under MOAA’s partnership agreement they could not be held liable to Triple Five unless the court found fraud or gross negligence (even if a breach of fiduciary duty were found), and that in any event, “to the extent that any of them owed a fiduciary duty to Triple Five, they fully complied with that duty.” For the exclusive use of M. Nacey, 2021. This document is authorized for use only by Meaghan Nacey in Ethics in Action Online Spring B 2021-1 taught by KATHLEEN BOLGER, Georgetown University from Mar 2021 to Sep 2021. 305-068 Mall of America (A) 4 Exhibit 1 Mall of America: Pre-Transaction Ownership Structure Source: