A new law suit by dissident shareholders of the Empire State Realty Trust has just been filed in a New York Court, according to a report by Bloomberg, essentially alleging coercion in forcing them to give up their rights when the trust was created.
After many previous legal battles had held up the process for quite a long time the Empire State Realty Trust finally became a publicly traded company more than a month ago in a successful initial public offering.
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It was at the time rightly billed as a significant success for the Malkin family, père Peter Malkin et fils Anthony, Chairman and President respectively of Malkin Holdings which controlled the management of the private syndicate of individual investors that previously owned the iconic skyscraper.
In the process of creating the new trust the Malkins had also contributed more than a dozen additional properties they controlled to the trust, which then raised US$930 million dollars of new money with the IPO, selling 71.5 million shares at US$13 per share, one of the largest IPOs ever for a real estate trust. Recently the trust has traded at around US$14 per share for a total market capitalization for the vehicle of about US$1.4 billion.
About US$660 million of the cash raised in the IPO then went to the Helmsley Trust, which is a charitable foundation which controls the estate of the late Leona Helmsley. The Helmsley Trust were significant investors in the property and their needs for liquidity were apparently a very important element in the whole Empire State Building equation that led to the eventual IPO. The charity were enabled to establish the liquidity of their foundation through the offering, and subsequent cash distribution to them for which they gave up their holding in the building.
You might think therefore that that would be that, and everyone would be happy to stash their new found liquid instruments in a drawer somewhere and continue to benefit from them, as the properties flourish and yield tax free distributions every year as a qualified real estate investment trust.
Well you would be wrong since this is New York where, in real estate matters, if complications can arise they usually eventually will. Accordingly so, too, in this case and, according to the report in Bloomberg, a number of the original investors in the private syndicate which preceded the publicly listed ownership are now suing the Malkin family all over again.
From the point of view of the legal community one might even describe the Empire State Building as the gift that keeps on giving, and one that has likely sustained whole generations of lawyers over the decades with the complex legal layers in its ownership structure, with its multiple changes of ownership and with the bouts of apparently at times endless litigation that have gone with it.
The recently completed initial public offering itself cost US$280 million alone in underwriting fees, legal expenses, and transfer taxes for establishing the new publicly listed trust.
The grounds for this new law suit are actually quite sophisticated and, indeed, one could have in a sense seen this coming even before the offering to the public that created the public real estate trust even closed.
One of the incentives used by the Malkins, père et fils, to persuade everybody to get on board and sign on for the new trust in the first place, was something of a very blunt instrument. This was, namely, that if they didn’t existing investors would only receive a small fraction of the worth for their original shares – just a nominal US$100 per share instead of the hundreds of thousands they were actually worth – if they voted against the deal and it then passed anyway.
So once the Malkins’ had the majority of the votes this “nuclear” option basically forced everyone else to tender to the deal as well, and thus essentially preempted potential subsequent dissident or minority shareholder claims.
Bloomberg now reports that a lawyer representing the earlier dissenting unit holders, who originally had opposed including the building in the real estate investment trust, has made a new application to the New York State Appeals Court in Manhattan. The request asks the court to reverse a decision made by Judge O. Peter Sherwood back in April, one that had denied the same request they made then to declare this particular buyout provision unlawful under state corporation law.
An outside observer not versed in the law, but reasonably experienced in the normal practicalities of these kinds of proceedings, could well be skeptical that such an application should succeed now rather than in the earlier flurry of appellate proceedings which also took place before the deal was given the final all clear to proceed. However the Appeals Court itself will now rule again and tell us whether this is going to fly, or again fall by the wayside.
But this is not all, not by any means and there is another new and delectably subtle wrinkle – to those who appreciate these things – now possibly lurking in the wings apparently. The Helmsley Trust is a charitable foundation. As such it falls under the general oversight of the Office of the New York State Attorney General.
Given the size of the sale of the charity’s interest in the Empire State Building, it would be normal for the Office to eventually take a look at the charity’s yield from the sale, after it does its required annual regulatory filing there. The New York real estate web site, The Real Deal, rather wickedly suggests today, perhaps even just in order simply to create some buzz of its own, that this may indeed now take place as part of the Office’s regular oversight activities, though with no suspicion of any improper exercise of the charity’s responsibilities.
The theoretical grounds for doing so could be the difference between the actual sum the charity reportedly realized from the transaction – US$660 million – and the formal “exchange value” of the interest which is reported to have been calculated to be as much as US$1 billion for its stake, in the months leading up to the IPO.
However, since the latter number is a theoretical valuation only, there is no particular reason why it should correspond to a tradable market value at a given point in time, especially one pragmatically established by the process of submitting to evaluation by the public marketplace itself; that is what public exchanges are after all for.
Thus, the charity may certainly have chosen appropriately to trade immediate liquidity against potential future long-term value, which such an “exchange value” might have expressed.
Nevertheless one can wonder if over the next year or two, and after all the requisite annual filings are made and filed away somewhere, somebody might again raise another voice in complaint.
This is after all New York, and this is the Empire State Building, which as the most iconic building in the city and the grand old lady of New York somehow may secretly even be happy with all the attention that such potential disagreements can bring.