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Empire State IPO Opponents Appeal $100 Buyout Ruling

Investors opposed to a buyout proposal to take the Empire State Building public in what may be the second-biggest initial public offering of a U.S. real estate investment trust asked a state appeals court to block the deal.

New York State Supreme Court Justice O. Peter Sherwood in Manhattan yesterday rejected their request he block the buyout provision, which would pay them $100 per share. They argued it violates the state’s limited liability corporation law requirement that they get “fair value” for their assets.

Sherwood held that the investors aren’t members of Empire State Building Associates and thus not entitled to rights under the law.

“The supreme court committed reversible error by erroneously applying and disregarding the law and facts,” the investors said in a filing last night with the court’s appellate division in Manhattan.

Opposing investors have claimed the $100 buyout provision 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, the dissidents argued.

Malkin Holdings LLC, supervisor of the building, has said its plan would give unit-holders liquidity, regular dividends and greater growth opportunities. Some investors are also questioning the more than $300 million in shares the Malkins would potentially receive under the deal.

Iconic Skyscraper

At the end of 2012, the iconic 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.

Both opponents and supporters of the IPO are battling for the favor of the few remaining undecided votes.

Malkin needs support from 80 percent of shares. As of April 3, it had 75 percent.

Peter Malkin, the firm’s chairman, and his son Anthony, its president, said the shareholders representing about 75 percent of the skyscraper’s 3,300 ownership units had voted in favor of the buyout. They have been calling holdouts individually to urge their support.

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 Malkin family supervises. Only the 2006 debut of Santa Monica, California-based Douglas Emmett Inc. was bigger in the industry, at $1.6 billion, according to Bloomberg data.

Five Cases

Investors last year filed five class actions, or group lawsuits, accusing the company and Malkin of breaching their fiduciary duty. The trust announced a $55 million settlement of the cases in November.

Sherwood gave preliminary approval to the settlement in February and denied a motion by Andrew Penson, owner of Manhattan’s Grand Central Terminal, and the other investors opposing the deal to intervene in the case.

Sherwood did allow them to argue their claim that the $100 buyout provision is illegal. A final hearing on the settlement is set for tomorrow.

Stephen Meister, an attorney for the opponents, said yesterday he would seek a stay of the proceedings. He declined to comment today on when that would be.

The Malkins said last month they would leave voting open until Sherwood rules on the $100-a-share buyout or until tomorrow’s hearing on the class-action settlement.

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.”

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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