A judge in New York said he intends to approve a $55 million settlement of lawsuits over a plan to take the Empire State Building public in potentially the second- biggest offering for a U.S. real estate investment trust.
Justice O. Peter Sherwood in state Supreme Court in Manhattan said today he will issue a written ruling. He gave the accord preliminary approval in February and rejected a request to intervene in the case by investors opposed to the settlement including Andrew Penson, owner of Grand Central Terminal.
“This settlement is the result of arms-length and intensive negotiations between parties with very different interests,” Sherwood said during today’s hearing.
Empire State Realty Trust Inc., as the new company would be called, is seeking to raise about $1 billion for the real estate investment trust. It’s to include the 102-story tower and 20 other properties supervised by the Malkin family. Only the 2006 initial public offering of Santa Monica, California-based Douglas Emmett Inc. was bigger in the industry, at $1.6 billion, according to data compiled by Bloomberg.
Opponents and supporters of the IPO are battling for the few remaining undecided votes. Malkin Holdings LLC needs support from 80 percent of shares.
Peter Malkin, the firm’s chairman, and his son Anthony, its president, have said shareholders representing about 75 percent of the skyscraper’s 3,300 ownership units voted for the buyout. The Malkins have been calling holdouts seeking their support.
Investors last year filed five class-action, or group, lawsuits, accusing the company and the Malkins of breaching their fiduciary duty. The trust announced the settlement of the cases in November.
Malkin Holdings said it would leave voting on the IPO open until Sherwood ruled on the legality of a $100-a-share buyout provision or until today’s hearing on the class-action settlement. Opponents can avoid being bought out if they change their votes to “yes” within 10 days after receiving written notice that the 80 percent approval has been achieved.
On April 30, Sherwood denied a request by opponents of the settlement to declare the buyout provision illegal. An appeals court judge yesterday declined to issue a stay of today’s hearing pending an appeal of that decision.
The deal’s opponents claimed the buyout coerces them to vote in favor of the REIT. They said their units are potentially worth more than $300,000 each.
A REIT conversion would mean giving up a reliable income stream that may rise as renovations at the skyscraper are finished, they argued.
Sherwood ruled that the investors aren’t members of Empire State Building Associates LLC and therefore aren’t entitled to protection under state law that the dissident investors said guaranteed them fair value for their interests.
Construction on the 1,453-foot (443-meter) Empire State Building began in March 1930, and the skyscraper opened to the public on May 1, 1931.
It was the tallest building in the world until New York’s World Trade Center was built in the 1970s. The building has been featured in more than 250 feature films, including the 1933 movie “King Kong,” in which the title character, a giant ape, climbed the structure.
At the end of 2012, the Empire State Building was about 69 percent occupied, with such tenants as LinkedIn Corp. (LNKD:US), the Federal Deposit Insurance Corp. and Coty Inc., according to the skyscraper’s annual report.
Eighty percent of the settlement will be funded with cash and 20 percent with securities, according to court filings. The settlement also provides that members of the class can choose receipt of operating units and Class B shares instead of Class A shares and/or cash, which would allow them to avoid most of an “otherwise massive tax burden,” a change estimated at about $100 million, attorneys for the plaintiffs said in a court filing.
It also provides for “deal protection provisions,” including that investors in the three public limited-liability corporations involved in the transaction must be told of a decrease of more than 10 percent in the exchange value of their property during the solicitation period.
The settlement also says the IPO won’t proceed unless gross cash proceeds of $600 million are committed or until the investors in the LLCs giver further approval.
Attorneys for the plaintiffs, led by Lawrence P. Kolker of Wolf Haldenstein Adler Freeman & Herz LLP, asked Sherwood to award them more than $15 million in fees and expenses. Sherwood said he would issue a separate ruling on that request.
About 75 percent of the settlement, or about $40.7 million, will go to the 2,800 class members who are participants in the limited-liability company that controls the Empire State Building, Kolker said in today’s hearing. About 11 of the 4,500 class members chose to opt out of the settlement, and another 17 objected, Kolker said.
The settlement has no bearing on the participants’ vote on the transaction, Kolker said.
“If there is no transaction there is no settlement,” Kolker said. “We did not try to tell anyone how to vote.”
Sherwood dismissed arguments by Stephen Meister, an attorney with Meister Seelig & Fein LLP representing six investors opposed to the transaction, and Alan Kovacs, a trustee for a family trust with an interest in the Empire State Building, to reject the settlement on the grounds that it doesn’t provide fair value for their investments.
The suit is “meaningless” unless the REIT is approved by Empire State Building owners, said Richard Edelman of Solana Beach, California, a grandson of an original unit-holder.
“The initial voting period of 60 days ended over a month ago and the vote is still ’no’ to the REIT,” he said. “‘The original class-action lawyers’ own expert reported that the owners of the ESB should have received over $200 million more in the REIT. Instead this settlement gives them less than $30 million.”
Howard Smith, 88, who attended today’s hearing, said he is an original unit holder who has received $130,000 in distributions for every $10,000 of the $55,000 he invested in the Empire State Building.
“The amount of money we’re getting is very, very good,” Smith said. “They have taken very good care of us financially. The bottom line is you’re going to get a lot of money.”
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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