A settlement of a dispute over the public offering of a real estate investment trust that would include the Empire State Building (ESB:US) received preliminary approval by a New York judge.
Judge Peter O. Sherwood in Manhattan today gave tentative approval to the $55 million settlement reached in September. The agreement will let Empire State Realty Trust Inc., which controls the iconic skyscraper, continue its plan to become a real-estate investment trust and sell shares on the New York Stock Exchange.
Investors filed five class actions in New York state court last year, accusing the company and Malkin Holdings LLC, supervisor of the firm that holds title to the tower, of breaches of fiduciary duty.
“We are very pleased with today’s decisions which granted preliminary approval of the settlement,” Malkin Holdings said in a statement. “We will continue to move forward with the vote on the proposed transaction, which we believe is in the best interests of all investors.”
Sherwood denied a motion by a group of investors including Andrew Penson, the owner of Manhattan’s Grand Central Terminal, to intervene in the case, while letting them to argue a claim that a provision allowing the buyout of investors who vote against the proposal violates the state’s limited liability company law.
Penson is among higher-profile investors in a dispute between Malkin Holdings and a number of the unitholders in Empire State Building Associates LLC, which owns the tower.
Malkin Holdings supervises property partnerships led by Peter Malkin and his son Anthony Malkin. It owns the 2.9 million-square-foot (269,000-square-meter) Empire State Building in conjunction with the estate of Leona Helmsley.
The dissidents say disadvantages to a REIT include the potential loss of a reliable income stream that should rise as renovations are finished, while the Malkins have said their proposal would give investors liquidity and greater growth opportunities.
The unitholders in Empire State Building Associates hold 3,300 shares worth $323,803 or $358,670 each, depending on certain conditions, according to the prospectus for the transaction. The Malkins, in the prospectus, have asked them to vote to approve the REIT by March 25. Voters representing 80 percent of the units must approve the plan for the IPO to proceed.
Penson is a member of a limited liability company that owns about 10 Empire State Building Associates units, he said in an affidavit filed two days ago in New York State Supreme Court in Manhattan.
Investors who either vote against entering the REIT or abstain or don’t vote may be subject to a buyout of their stake for $100 per $10,000 originally invested, should 80 percent of the other shares vote for it, according to the offering statement.
The provision gives those participants 10 days to change their vote to yes after they receive written notice that the 80 percent has been achieved.
The provision, which dates back to the creation of the partnership in 1961, was a “practical” way to allow it to act in the interests of the overwhelming majority of investors without allowing a small group to hold up those actions, while retaining partnership status, the statement said.
This provision is “extremely coercive and punitive,” Stephen Meister, an attorney for the dissenting investors, told the judge, and illegal under New York’s limited liability law. He said yes votes obtained with it in effect are “irredeemably tainted.”
Attorney Lawrence Kolker, who negotiated the settlement on behalf of the investor plaintiffs, told reporters after today’s hearing that the buyout language was examined as part of their case.
Kolker said it gives the “no” votes a “chance to get with everyone else” once the approval is certain and called it a format common in closely held partnerships.
The case is Meyers v. Empire State Realty Trust Inc., 650607/2012, New York State Supreme Court, New York County (Manhattan).
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