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Paradise Wire & Cable Defined Benefit Pension Plan v. Weil

United States District Court, D. Maryland

March 28, 2018

EDWARD M. WEIL, JR., et al.



         The plaintiffs, a putative class led by Stuart Wollman, have sued four entities and seven individuals-AR Global Investments, LLC (“AR Global”); American Finance Trust, Inc. (“AFIN”); American Realty Capital - Retail Centers of America, Inc. (“RCA”); American Capital Retail Advisor, LLC; RCA Directors Leslie Michelson, Edward Rendell, and Edward M. Weil; Nicholas Redesca, Chief Financial Officer of AFIN; and David Gong, Stanley R. Perla, and Lisa D. Kabnick, directors of AFIN-claiming one or more of them violated provisions of the Securities and Exchange Acts, breached duties of care and loyalty, breached their contractual duties, and were unjustly enriched during a merger between RCA and AFIN. For the reasons stated below, the defendants' motions to dismiss will be granted.


         Though this case arises out of a merger between RCA and AFIN, two non-publicly traded real estate investment trusts (“REITs”), events leading to the filing of this complaint began with AR Global, an asset manager that controls and manages several REITs, including RCA and AFIN, and several advisory companies, including RCA Advisor. (Am. Compl. ¶¶ 1, 10-11). The amended complaint alleges that AR Global's business was disrupted by the disclosure of fraud at two of its subsidiaries, causing some affiliated REITs to sever ties with AR Global subsidiaries. (Id. at ¶¶ 29-32). To limit the fallout from the adverse publicity, and to prevent other subsidiaries from terminating their advisory agreements, AR Global initiated a plan to merge or “roll-up” REITs bound to AR Global by weak contractual agreements with affiliates subject to more durable contracts. (Id. at ¶ 33). The merger between RCA and AFIN was part of this plan.

         In February 2016, AFIN sent RCA a letter expressing interest in combining their businesses. (Id. at ¶ 36). To consider AFIN's proposal, RCA created a special committee comprised of independent directors Leslie Michelson and former Governor Edward Rendell, who then hired BMO Capital Markets, Inc. to advise them on the possible merger. (Id. at ¶ 37). The complaint alleges that BMO had a preexisting financial relationship with AR Capital while it was advising RCA, and that the agreement between the special committee and BMO incentivized BMO to favor the merger by offering an addition $4.9 million in fees if the merger closed. (Id.).

         After negotiation, the parties agreed to the following merger terms: “per share consideration to RCA shareholders of 0.385 shares of AFIN common stock and $0.95 in cash, ” 45 days for RCA to shop for better deals, a clause that allowed RCA to accept a more favorable proposal, and a “two-tiered termination fee of 0.5% and 2.5% of the equity value of the transaction, ” the lower fee available if RCA terminated for a superior proposal. (Id. at ¶¶ 38-44). Notably, the special committee did not market check the consideration for the merger because it thought, based on market conditions, AFIN's offer would be the best it would receive. (Id. at ¶ 42).

         The merger was yet threatened, despite promising negotiations, by provisions of RCA's charter that disfavored advisory agreements, imposed a fiduciary duty on the RCA directors, provided stockholders certain rights in a merger, and prevented RCA from agreeing to transactions with affiliates (1) without a majority vote of disinterested directors and (2) if more favorable offers were made by unaffiliated third parties. (Id. at ¶¶ 49-52). RCA issued a proxy in April 2016 to eliminate these provisions. (Id. at ¶ 48). It failed. (Id. at ¶ 53).

         RCA nevertheless announced, in September 2016, that it had reached a merger agreement with AFIN for $10.26 of total consideration per RCA share based on AFIN's estimated per share net asset value (“NAV”), calculated in December 2015. (Id. at ¶ 54). The agreement was conditioned on RCA receiving stockholder approval for the charter amendments that RCA failed to obtain in April of 2016. (Id. at ¶ 55).

         Three months later, RCA issued another proxy to its shareholders seeking approval for, among other things, the removal of certain provisions in its charter related to merger transactions and the merger agreement with AFIN. (Id. at ¶ 63). The proxy relied heavily on AFIN's estimated per share NAV of $24.17 as of December 31, 2015, allegedly taking no heed of the estimate's staleness and thus its inaccuracy. (Id. at ¶¶ 64-65). The plaintiffs allege that by December 31, 2016, AFIN's NAV dropped to $23.37 per share, (id. at ¶ 65), the NAV was based on a deflated capitalization rate, (id. at ¶ 66), AFIN had suffered a sizable loss in a real estate deal, (id. at ¶ 67), and had to pay $27.3 million in fees related to SunTrust properties during 2016, (id. at ¶ 70). The proxy also relied on AFIN growth projections, which the plaintiffs claim failed to incorporate important financial statistics, in addition to charges incurred by some of its properties. (Id. at ¶¶ 70-71). Moreover, the proxy: included BMO's analysis, which relied on AFIN's allegedly misleading growth prospects; failed to explain the conflicting valuations of AFIN stock reached by BMO and another analyst, UBS Securities, LLC; did not specify what market conditions kept AFIN out of the New York Stock Exchange; failed to disclose that Rendell and Michelson earned a significant salary as directors of AR Global affiliated entities; did not disclose “strategic counterparts” or whether other offers solicited after the merger was agreed to included future involvement of AR Global; that RCA's 45 day go shop period was affected by AR Global's disclosure of fraud at two of its affiliates; and that the 45 day go shop period was unrealistically short. (Id. at ¶¶ 72-74).

         Notwithstanding these alleged deficiencies, shareholders approved the merger and charter amendments on February 13, 2017. (Id. at ¶ 76). Three days later, the merger was completed. (Id.). Over the next four months, AFIN made five disclosures, allegedly for the first time: (1) Michelson and Rendell joined AFIN's board of directors; (2) AFIN disclosed that it paid a $27.3 million fee related to some of its properties; (3) its NAV dropped to $23.37; (4) a decrease in its rental income from the same time the year before and an additional property related fee of $3.9 million; and (5) that it was limiting its share repurchase program and reducing its dividend from $1.65 per share to $1.30 per share. (Id. at ¶¶ 77-81).

         The plaintiffs filed a class action complaint in January 2017, before the merger, which they amended in June 2017, (ECF No. 54), claiming that the defendants violated various federal and state laws in connection with the proxy statement and the merger. The complaint does not allege fraud, intentional conduct, or recklessness as to any defendant. All defendants have moved to dismiss the complaint for failure to state a claim, (ECF Nos. 61-64), and the defendants AR Global and RCA Advisor also have moved to dismiss for lack of personal jurisdiction, (ECF No. 63).

         Standard of Review

         To survive a motion to dismiss for failure to state a claim, the factual allegations of a complaint “must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations omitted). “To satisfy this standard, a plaintiff need not ‘forecast' evidence sufficient to prove the elements of the claim. However, the complaint must allege sufficient facts to establish those elements.” Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012) (citation omitted). “Thus, while a plaintiff does not need to demonstrate in a complaint that the right to relief is ‘probable, ' the complaint must advance the plaintiff's claim ‘across the line from conceivable to plausible.'” Id. (quoting Twombly, 550 U.S. at 570). And the plaintiff typically must do so by relying solely on facts asserted within the four corners of his complaint. Zak v. Chelsea Therapeutics Intern., Ltd., 780 F.3d 597, 606-07 (4th Cir. 2015).


         The plaintiffs claim that by promulgating a misleading proxy, pushing RCA into a merger agreement for personal benefit, and failing to adequately assess the merits of the merger one or more of the defendants violated several provisions of the Securities and Exchange Acts. These claims will be dismissed because the plaintiffs fail to plausibly show that the proxy was misleading. Because the court will dismiss the plaintiffs' federal claims, it will choose not to exercise supplemental jurisdiction over the plaintiffs' remaining state law claims. Accordingly, it is not necessary to address the issue of personal jurisdiction.

         I. Violation of § 14(a) of the Exchange Act and SEC Rule 14a-9 - (Count I)

         On the merits, the plaintiffs first assert that RCA and its three directors, Michelson, Rendell, and Weil, violated § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and SEC Rule 14a-9, 17 C.F.R. § 240.14a-9, by promulgating a false and misleading proxy during the vote to amend the RCA Charter and approve the merger between RCA and AFIN.

         SEC Rule 14a-9 makes it unlawful to make a proxy statement:

which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same . . . subject matter which has become false or misleading.

17 C.F.R. § 240.14a-9(a).[2] The rule activates “when management seeks consent or authorization for actions requiring such approval.” Allen v. Lloyd's of London, 94 F.3d 923, 931 (4th Cir. 1996) (internal quotation marks omitted).

         A defendant violates Rule 14a-9 by making a material false or misleading statement or omitting material information in a proxy.[3] A fact is material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1090 (1991). The court must consider the “full context in which” the allegedly unlawful statements were made, including cautionary language captured by the so-called “bespeaks caution” doctrine, which counsels dismissal “if cautionary language in the offering document negates the materiality of the alleged misrepresentations or omissions.” Gasner v. Bd. of Supervisors of the Cty. Of Dinwiddie, Va., 103 F.3d 351, 358 (4th Cir. 1996).

         The plaintiffs identify several misleading statements or omissions in RCA's proxy, including AFIN's inaccurate NAV; AFIN's inaccurate growth projections; BMO and UBS's inaccurate and misleading valuation opinions; and a number of ...

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