Empire State Building IPO Opponents Seek to Block Buyout

Investors opposed to a deal to take New York’s Empire State Building public asked a judge to block a plan by the family that controls the iconic skyscraper to buy them out for $100 a share.

New York State Supreme Court Justice O. Peter Sherwood began hearing arguments from the objectors today in Manhattan. He has previously said he could throw out the votes the Malkin family has already received approving the plan if he determines the buyout provision is illegal.

The proposal for the second-biggest initial public offering of a U.S. real estate investment trust on record has faced challenges by investors, and both sides are fighting to bring the few remaining votes to their side.

Peter Malkin, Malkin Holdings LLC’s chairman, and his son Anthony, its president, said on April 3 that shareholders representing about 75 percent of the skyscraper’s 3,300 ownership units had voted in favor. They need 80 percent to move ahead and have been calling holdouts individually to urge their support.

The Malkins said last month they would leave voting open until Sherwood rules on the $100-a-share buyout or until May 2, when the judge is set to hold a hearing on a $55 million class- action settlement that’s opposed by some of the tower’s investors.

$1 Billion

Empire State Realty Trust Inc., as the new company would be called, is seeking to raise about $1 billion for the REIT, which would include the 102-story tower and 20 other properties the Malkins supervise. Only the 2006 debut of Santa Monica, California-based Douglas Emmett Inc. (DEI) was bigger in the industry, at $1.6 billion, according to data compiled by Bloomberg.

The dissidents say a conversion to a REIT would mean giving up a reliable income stream that should rise when renovations at the skyscraper are finished. The Malkins have said their plan would give unit-holders liquidity, regular dividends and greater growth opportunities. Some investors are also questioning more than $300 million in shares the Malkins would potentially receive under the deal.

At the end of 2012, the skyscraper was about 69 percent occupied, with such tenants as LinkedIn Corp., the Federal Deposit Insurance Corp. and Coty Inc., according to the building’s annual report.

Investors have claimed that the $100 buyout provision coerces them to vote in favor of the REIT because their units are potentially worth more than $300,000 each.

‘Fair Value’

Holders are entitled under New York state law to the “fair value” of their shares, regardless of how they vote, Stephen Meister, an attorney representing opponents of the class-action settlement tied to the plan, said in a March 15 court filing. He said it’s obvious “that $100 is not the fair value of a participation worth thousands of times that nominal sum.”

Opponents can avoid being bought out if they change their vote to “yes” within 10 days after receiving written notice that the 80 percent approval has been achieved, a time frame Meister called “impermissibly short.”

In defending the proposal, Thomas E.L. Dewey, an attorney representing Malkin Holdings, said the dissenters “misrepresent essentially every relevant fact concerning the allegedly punitive buyout” and have provided no evidence that any unit- holder has been coerced. The provision is necessary to prevent small minorities from thwarting the wishes of most investors, according to Dewey. It was fully disclosed and agreed upon when the partnership was formed in the 1960s, he said.

The opponents are connected with a group who have “waged a campaign of distortion and misrepresentation against the transaction,” Dewey wrote in an April 8 court filing. “These individuals will do or say anything to stop, delay or complicate” the offering.

The case is Meyers v. Empire State Realty Trust Inc. (ESB), 650607/2012, New York State Supreme Court, New York County (Manhattan).

To contact the reporter on this story: Chris Dolmetsch in New York State Supreme Court at cdolmetsch@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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