Beginning in March 2012, class actions were commenced in the Supreme Court of the State of New York, County of New York and were consolidated before Justice O. Peter Sherwood (the “Court”) with the caption In re Empire State Realty Trust, Inc. Investor Litigation, under Index No. 650607/2012. The Litigation was brought on behalf of the investors in various private and public companies (“Class”), including the investors in Empire State Building Associates L.L.C., 60 East 42nd Street Associates L.L.C., and 250 West 57th Street Associates L.L.C. (the “Public LLCs”), who have been asked to approve the consolidation of their real estate entities, including the entities that own and operate the Empire State Building, into a publicly traded real estate investment trust to be known as Empire State Realty Trust, Inc. (the “Consolidation”). The Litigation was brought against the transaction’s chief proponents, including the entities’ Supervisor (Malkin Holdings LLC), members of the Malkin family, certain affiliated companies, and the Estate of Leona Helmsley (“Defendants”).
On or about February 13, 2012, Defendants caused to be filed with the SEC a preliminary Form S-4 seeking the Public LLC investors’ consent to, among other things, the proposed Consolidation, conditioned on an offering of Empire REIT’s shares to the public (the “Underwritten Offering”) and the listing of Empire REIT’s shares on a national exchange expected to be the New York Stock Exchange (the “IPO”). As part of the Consolidation and IPO as initially proposed, each participation interest in the Public LLCs would be exchanged for shares of Class A Common Stock of the REIT or a combination of cash plus shares of Class A Common Stock of the REIT in a ratio to be determined, without having the option to receive REIT Operating Partnership units (“OP Units”) and potentially Class B Common Stock instead of Class A Common Stock. Those receiving OP Units could defer taxation on the exchange between Participation interests and OP Units. The Litigation alleged that the Consolidation, as then proposed, was unfair to the Class, violated Defendants’ fiduciary obligations owed to the Class, and that Defendants failed to provide the Class with material information about the Consolidation and IPO. Defendants categorically deny the allegations.
Proposed Settlement: After several months of discovery and intense negotiations, the parties reached a proposed Settlement of the Litigation on behalf of the Class. The Settlement will benefit the Class, subject to the consummation of the Consolidation, in several ways:
- Settlement Fund. A settlement fund of $55 million will be established to pay monetary recoveries in accordance with a court-approved plan of allocation.
- Tax Deferral. The Litigation was a material factor in a redesign of the transaction to permit investors to defer taxation. Defendants have estimated the value of this tax benefit at over one hundred million dollars ($100,000,000.00).
- Disclosures. Extensive supplemental information was disclosed to investors about the Consolidation and IPO. The additional disclosures or changes to disclosures relate to, among other things: the property appraisals, fairness opinions, valuation methodologies, including the 50/50 allocation, joint venture and discounted cash flow methodologies, and the derivation of exchange values used in connection with the proposed Consolidation; the Malkin family’s interests, including ownership interests in the Public and Private LLCs, override interests and interests in management and construction companies, and the valuation of those interests; the conflicts of interest between the members of the Class and Defendants; the Helmsley Estate’s impetus to sell its interests and the risks associated with sale alternatives to the proposed Consolidation; the exchange value allocated to Defendants; the definition and explanation of enterprise value; the payment to the Class of excess cash held by the Public LLCs and additional distributions accrued prior to the closing and Consolidation; the transaction expenses of the Consolidation and their potential reimbursement; the projected distributions by the REIT as compared to historical distributions to Participants; the proposed centralized management structure and makeup of the REIT; and the assets being contributed to the REIT.
- Protections in connection with the IPO and Underwritten Offering. Defendants have agreed that: (i) the IPO will be on the basis of a firm commitment underwriting; (ii) if, during the solicitation period, any of the three Public LLC’s percentage of total exchange value is lower than what is presented in the final Form S-4 by a factor of ten percent (10%) or more, such decrease will be promptly disclosed by Defendants to investors in any such Public LLC, who will have the option to change their vote; and (iii) unless total gross cash proceeds of six hundred million dollars ($600,000,000.00) is committed in the IPO, Defendants will not proceed with the IPO without first obtaining further approval from the Public LLCs.
Final Approval. On May 2, 2013, the Court held the Final Approval Hearing to determine, among other things, whether to grant the proposed Settlement final approval. On May 17, 2013, the Court entered the Final Order and Judgment approving the Settlement as fair and reasonable, and filed decisions and orders in support of its approval of the Settlement and an award of attorneys’ fees and reimbursement of expenses.
If you need additional information about the Litigation and/or Settlement, please contact Kimberly Donaldson Smith, Esquire by filling out the form below or at 610-642-8500.