Published On: Wed, Feb 26th, 2014

Appeals Court Throws Out Suit Against Malkin Family Over $900 Million 2013 Empire State Building IPO

NYC-Empire-StateBuilding-commons-wikimedia-FRONT


An appeals court in New York yesterday threw out one of the last lawsuits still outstanding in the fallout from the public listing last year of New York’s Empire State building on the New York Stock Exchange. The iconic property had been included as part of a real estate investment trust initial public offering initiated by the building’s operator Malkin Holdings, who also contributed several other properties they controlled to the new trust as well.

Last October the new trust, named Empire State Realty Trust, raised US$930 million by selling 71.5 million shares to the public at a price of US$13 each on the New York Stock Exchange, representing just under 75% of the company’s outstanding shares, post-issue.

Today the shares are trading at US$15 per share, so most people who bought them in the IPO are likely reasonably content, and the total market capitalization of the trust is now close to US$1.5 billion. With another US$1 billion of debt in its balance sheet the total enterprise value of Empire State Realty Trust is therefore now almost US$2.5 billion.

Malkin Holdings is controlled by the Malkin family, Peter Malkin and Anthony malkin, who are Chairman and President respectively. Malkin Holdings previously controlled the management of the private syndicate of individual investors that had long owned the iconic skyscraper. Anthony is today Chairman and CEO of Empire State Realty Trust.

PETER NAD TONY MALKIN

 (L-R) Peter and Tony Malkin / Getty


About US$660 million of the cash raised in the IPO then went to the Helmsley Trust, the charitable foundation that controls the estate of the late Leona Helmsley. Helmsley Trust were major investors in the syndicate and their needs for liquidity were an important element in the whole Empire State Building recapitalization issue that had led to the eventual IPO.

However a number of smaller private investors in the syndicate felt they should sue, saying a better deal could have somehow been done in some other way, and that the Malkins were wrong to put a gun to their head to make them approve the IPO.

It seems there was a clause in the agreements that were the organizing form for the Empire State building prior to the IPO which essentially allowed the Malkins to force out the minority by threatening them with only nominal compensation if they opposed the IPO, once a certain threshold was reached.

Some investors had already sued over this issue the previous spring, only to be overruled in April 2013 by Judge Peter Sherwood. Then they sued again in the New York Court of Appeals after the IPO was concluded, over the same issue.

Now the Manhattan state appellate court has agreed with the ruling from last year saying the Malkins behaved correctly and that the IPO was properly undertaken, essentially throwing out the suit for good.

It is interesting though that they did so on a technical knock-out without even considering whether fair value had indeed been obtained. It seems the entity holding legal title to the building, Empire State Associates LLC, acted for the investors in the syndicate but those persons were not themselves members of the LLC and therefore in the eyes of the judge had no standing to claim the protections of fair value appraisal protections that otherwise could have been available to its members.

So now it should be all over, the Malkins must be pleased and all the investors who still own shares in the trust can go home and simply enjoy their future dividends.

And yet, the Helmsley Trust itself falls under the supervision of the Office of the New York State Attorney General. Theoretically he could eventually take a look at whether or not the Hemsley Trust rushed to take a deal too quickly, without considering whether adequate value was being obtained.

Given the stabilization of the shares not that much above the IPO price however, this must remain in the realm of the fanciful. On the other hand this is New York, where in real estate everybody just loves to litigate….

To conclude on a much more positive note, however, ten days ago on Valentines day three couples previously chosen in a competition for the privilege were married at the top of the Empire State Building.

One after another the couples were married next to a wall made out of 4, 000 red, pink and white roses on the 86th-floor Observation Deck, looking out with a glorious view over the whole of Manhattan.

It seems the grand old lady of New York has not lots its romantic allure, even after all these years.

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