United States District Court, D. Maryland
PARADISE WIRE & CABLE DEFINED BENEFIT PENSION PLAN, et al.
EDWARD M. WEIL, JR., et al.
CATHERINE C. BLAKE UNITED STATES DISTRICT JUDGE.
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.
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
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.).
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).
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
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).
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).
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).
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).
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
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.
Violation of § 14(a) of the Exchange Act and SEC Rule
14a-9 - (Count I)
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.
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). 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).
defendant violates Rule 14a-9 by making a material false or
misleading statement or omitting material information in a
proxy. 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).
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 ...