Investors in Morgans Hotel Group are considering forming a shareholder action group after it emerged that the board of the luxury hotel group last week rejected a $1.4 billion (£796 million) bid from a Dubai-based investment fund.

Times Online has learnt that David Hamamoto, the Morgans chairman, wrote to Zabeel Investments last week to notify the sovereign wealth fund that its indicative offer of $22 a share for the Nasdaq-listed company had been unanimously rejected by the board.

Zabeel, which declined to comment, is understood to be perplexed by the board’s reaction given that the shares were trading at about $10 at the end of July. Most shareholders contacted by The Times said that any offer above the $20 at which Morgans was floated two years ago should be considered by the board.

One institutional shareholder said today: “I’m furious about this. The only way such a rejection would be justified would be if there was a higher offer on the table from another party.”

A leading American hedge fund with a significant holding added: “We’re going to talk to other investors about setting up an activist group. Unless the board have another offer or something else up their sleeves, I can’t see shareholders letting them get away with this.”

Another Middle Eastern fund, Mubadala of Abu Dhabi, is also known to have run a sliderule over Morgans. Although it has completed some limited due diligence, it has yet to put forward a firm proposal. Mohamed Amasha, Mubadala's senior spokesman, declined to comment on a possible bid, calling it “a market rumour”.

Zabeel is believed to remain interested in the company, but is said to be unwilling to stage a hostile takeover. Its $22-a-share offer values Morgans at $684 million, or just over $1.4 billion including debt.

Morgans, which was founded by Ian Schrager, the so-called king of hip, runs ten style-led hotels, including the Clift in San Francisco, the Royalton in New York, the Delano in Miami and the Sanderson and St Martins Lane hotels in London.

The board has outlined plans to roll out the Delano and Mondrian concepts into international brands, recently announcing a project to develop a Delano property on Dubai’s waterfront comprising about 200 rooms and 100 branded residences.

Morgans, which could not be reached for comment today, is understood to believe its expansion plans will deliver much greater long-term value to shareholders than Zabeel’s bid, despite the deteriorating economic picture.

Shares of Morgans fell by $0.05 to $16.67 in early trading on Nasdaq.

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