Empire State Building IPO Opponents Lose Buyout Challenge

Investors opposed to a deal to take New York’s iconic Empire State Building public failed to persuade a state court judge to declare illegal a plan to buy them out for $100 a share.

The opposing investors had asked State Supreme Court Justice O. Peter Sherwood in Manhattan to declare the buyout provision illegal, arguing that it deprived them of certain rights and therefore violated the state’s limited liability corporation law. Sherwood today denied the motion, saying that the opposing investors aren’t members of Empire State Building Associates.

“Applicants are not members because, in the plain words of the LLC law, ‘member’ means a person who has been admitted as a member of a liability company,” Sherwood wrote. “None of the participants have any ‘membership interest’ because they do not possess ‘a member’s aggregate rights in a limited liability company’ or a ’member’s right to vote and participate in the management of the limited liability company.’”

The proposal for potentially 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. Malkin Holdings LLC, supervisor of the building, still needs support from 80 percent of its shares. They had 75 percent as of April 3.

Stephen Meister, an attorney representing the opponents, said he plans to appeal Sherwood’s ruling tomorrow and seek a stay.

‘Compelling Case’

“I hope the Meister law firm and the investors who brought this compelling case win on appeal,” said Richard Edelman of Solana Beach, California, a grandson of an original unit-holder. “The owners of the Empire State Building did not approve the REIT proposal after the initial 60-day voting period. Now, after 90 days, the answer is still ‘no.’”

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 data compiled by Bloomberg.

Five Lawsuits

Investors filed five class actions, or group lawsuits, 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. 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, while letting them argue their claim that the $100 buyout provision is illegal. A final hearing on the settlement is scheduled for May 2.

Peter Malkin, Malkin Holdings’ 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.

“We are pleased by the court’s ruling and are proceeding with our solicitation with the intention of closing as soon as we reach the approval threshold,” Hugh Burns of Sard Verbinnen & Co., a spokesman for Malkin Holdings, said in an e-mail. “Far more investors support this transaction than oppose it. We are focused on delivering the majority what they want as quickly as possible.”

Written Notice

The Malkins said last month they would leave voting open until Sherwood rules on the $100-a-share buyout or until the May 2 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 dissidents say a conversion to a REIT would mean giving up a reliable income stream that should rise as 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.

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.

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.

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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