Voting on the plan for an initial public offering (ESB:US) of a company including New York’s Empire State Building will be pushed beyond next week, extending a heated approval process as some investors campaign against the move.
Peter and Anthony Malkin, who lead the company that supervises the building, agreed to move the voting to at least April 8 from a previous deadline of March 25, Stephen Meister, the attorney representing a group of unitholders against the deal, said last night on a conference call organized by opponents. The extension was made to allow for New York state Supreme Court Justice O. Peter Sherwood to rule on whether investors who don’t approve the plan can be bought out for $100.
“There’s no pressure on anyone anymore,” Meister told investors on the call. “I would urge everyone to wait to hear what Justice Sherwood has to say, because I can’t imagine making this decision and not knowing whether the $100 buyout is legal or illegal.”
The Malkins had been urging quick approval of a plan to form a real estate investment trust owning the landmark tower and about 20 other New York-area properties, saying a longer process would be more costly, and at greater risk of disruption. They must win support from 80 percent of the shares held by Empire State Building unitholders, many of whom are retirees or second- and third-generation holders who had stakes in the building passed down after a syndication in the 1960s.
A group of investors opposed to the deal 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 provide greater liquidity, larger and more steady distributions, and growth opportunities.
The Malkins said in a regulatory filing today that the solicitation will be extended to the earlier of the court’s ruling on the matter or May 2, the date of a fairness hearing on a proposed $55 million class action settlement in the matter that Meister’s clients oppose. The extension will “simplify matters” and allow participants to enjoy “restful holidays” during Passover and Easter week, they said.
Sherwood gave the parties until April 8 to file briefs on the $100 buyout issue, Meister said on the call. The provision allows for investors to receive just $100 per $10,000 originally invested, should 80 percent of the other shares vote for the plan. Participants have 10 days to change their mind once the 80 percent is achieved.
Meister, speaking before Sherwood last month, called the provision “extremely coercive,” and illegal under state liability law. The Malkins’ company, Malkin Holdings, said in its offering statement that it as a “practical” way to allow it to act on behalf of an overwhelming majority of investors without having a small group hold up those actions.
Sherwood last month said that if he strikes the provision, then consents obtained while it was alive “would be irrelevant and void.”
Votes have been running 9 to 1 in favor of the REIT plan, with about two-thirds of the unitholders accounted for, the Malkins said last week. That still left holders of some 1,100 units out of a total 3,300 not tallied at that time.
Meister last night on the call said sentiment was running about 60 percent in favor of the REIT, since non-votes are equivalent to rejecting the plan.
“Mr. Malkin was at double the 20 percent blocking level days before the vote deadline,” he said, basing his comment on Malkin Holdings’ March 14 statement.
Andrew Penson, the owner of Manhattan’s Grand Central Terminal and an Empire State Building investor, also spoke against the plan on the call, and said the Malkins have suppressed the market for Empire State Building units for years, making it nearly impossible for holders to sell their stakes to anyone but them.
Hugh Burns, a Malkin spokesman with Sard Verbinnen & Co., said such claims are “completely untrue.”
“Interests of this type are by their nature illiquid, and it’s truly ironic that opponents of the proposed transaction would raise such a complaint when one of the benefits of the transaction would be to provide them with a liquidity option,” Burns said in an e-mailed statement.
Though it isn’t a market maker, Malkin Holdings has provided investors who wish to sell with information to assist in the process, he said.
Penson is a member of a limited liability company that holds about 10 shares of Empire State Building Associates LLC, which holds title to the tower, he said in an affidavit last month. Investors in the entity have 3,300 units that are valued at $323,803 or $358,670 under the REIT plan, depending on certain conditions, according to a prospectus for the transaction.
Penson said on the call that the REIT would probably price “at a significant discount” because the proposed voting structure favors the Malkins.
“There’s a Class A, Class B voting structure here, wherein Malkin keeps voting control for himself essentially,” said Penson, president of real estate investment firm Argent Ventures LLC, which once owned a stake in New York’s Chrysler Building. “That is a structure that institutional investors, mutual funds and the like really stay away from.”
Malkin Holdings will receive the same share-buying options as all other unitholders, and none will have any special voting rights, Burns said in the statement.
“The notion that there is some sort of super-majority voting structure at play, or that it will be a factor in investor demand for shares, is a deliberate misrepresentation,” he said.
The Malkins plan to own 16.5 percent of the REIT’s common stock and tax-protected operating units, according to the prospectus. They will have 30.4 percent of the company’s voting power under their plan to take the maximum number of Class B shares they are entitled. That share would fall to 20.2 percent if investors in companies related to Malkin Holdings opt to take all of the Class B shares they can receive. It would also decline as more operating units are redeemed for Class A voting shares.
There’s been “no efficient public market” for Empire State Building units, the Malkins said on a website for their investors, according to a March 19 regulatory filing. Sales until now “have been conducted at significant discounts to the true market price,” they said. Listing the REIT on the New York Stock Exchange will solve that, they said.
Estimated distributions per Empire State Building unitholder under a REIT structure for the year ending in September would be $5,866, compared with $3,110 for the five years through 2011, according to the prospectus. The building’s net operating income, which is shared with investors under a complicated formula, is estimated to almost double to $160.2 million by 2018, based on an analysis by Duff & Phelps Corp. (DUF:US), the Malkins’ valuation firm.
Future distributions “are projected to be higher than under the status quo historical average,” Anthony Malkin said in a investor call transcript filed with regulators on Feb. 6. “Over the longer term, we believe that all investors will have the greater potential for increasing distributions than they currently have.”
REITs are required under U.S. tax law to pay 90 percent of their taxable income as dividends.
The case is Meyers v. Empire State Realty Trust Inc. (ESB:US), 650607/2012, New York State Supreme Court, New York County (Manhattan).
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