United States District Court, D. Maryland
MEMORANDUM OPINION
ELLEN
L. HOLLANDER UNITED STATES DISTRICT JUDGE
This
stockholder class action suit centers on a 220-page proxy
statement (the “Proxy”) issued by Gramercy
Property Trust (“Gramercy” or the
“Company”), a real estate investment trust, in
connection with the sale of Gramercy to an affiliate of the
Blackstone Group L.P. (“Blackstone”). Plaintiff
Raul Hurtado, a former shareholder of Gramercy, filed suit
individually and on behalf of a putative class of
shareholders against Gramercy; Gramercy's financial
advisor, Morgan Stanley & Co., LLC (“Morgan
Stanley”); and members of Gramercy's Board of
Trustees (the “Board Defendants”), [1] alleging that the
Proxy was materially misleading, in violation of Sections
14(a) and 20(a) of the Securities Exchange Act of 1934 (the
“Exchange Act” or the “Act”), 15
U.S.C. §§ 78a et seq., as well as
Securities and Exchange Commission (“SEC”) Rule
14a-9. ECF 1 (the “Complaint”). According to
plaintiff, the Proxy was misleading because it omitted
material information with respect to an analysis summarized
in the Proxy that underpinned Morgan Stanley's
determination that the merger was financially fair to
Gramercy's shareholders (the “Fairness
Opinion”).
In
particular, the Complaint contains two claims. Count I,
lodged against all defendants, alleges a violation of §
14(a) of the Exchange Act and Rule 14a-9. ECF 1, ¶¶
111-21. Count II, lodged against the Board Defendants,
asserts a violation of § 20(a) of the Act. Id.
¶¶ 122-28. Plaintiff seeks compensatory damages and
attorneys' fees and costs, as well as a declaratory
judgment that defendants violated the Exchange Act.
Id. at 26-27.
Gramercy
and the Board Defendants filed a joint motion to dismiss for
failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6).
ECF 26. It is supported by a memorandum of law. ECF 26-1
(collectively, the “Gramercy Motion”). Five
exhibits are appended to the Gramercy Motion. ECF 26-2 to ECF
26-6. Morgan Stanley has also moved to dismiss the Complaint,
pursuant to Rule 12(b)(6) (ECF 27), supported by a
memorandum. ECF 27-1 (collectively, the “Morgan Stanley
Motion”). The Morgan Stanley Motion also includes four
exhibits. ECF 27-3 to ECF 27-6. Plaintiff opposes the motions
(ECF 37), and defendants filed a joint reply. ECF 38.
No
hearing is necessary to resolve the motions. See
Local Rule 105(6). For the reasons that follow, I shall grant
the motions (ECF 26, ECF 27).
I.
Factual and Procedural Background[2]
A.
Gramercy's Pre-Acquisition Business
Gramercy
is a global real estate investment trust
(“REIT”). ECF 1, ¶¶ 2, 31. A REIT
“is a company that owns, operates or finances
income-producing real estate.” What's a
REIT?, Nariet, https://www.reit.com/what-reit
(last visited Dec. 4, 2019). Generally, REITs focus on a
particular market sector. For example, “industrial
REITs” hold properties such as warehouses and
distribution centers. REIT Sectors, Nareit,
https://www.reit.com/what-reit/reit-sectors (last
visited Dec. 4, 2019). REITs that hold an assortment of
properties are labeled “diversified REITs.”
Id.
In
December 2015, Gramercy owned a mix of industrial and office
properties in major markets throughout the United States and
Europe. ECF 1, ¶ 32. At the time, its portfolio was
approximately 48% office, 47% industrial, and 5% specialty
retail. Id. ¶ 44. But, in early 2016, Gramercy
announced its intent to grow its industrial holdings.
Id. ¶ 34. Over the course of 2016, Gramercy
sold over $1.5 billion in office assets and acquired $1.6
billion in industrial properties. Id. ¶ 35.
Gramercy continued to focus on industrial properties
throughout 2017. Id. ¶ 38.
Gramercy's
Board of Trustees (the “Board”) allegedly
regarded Gramercy's repositioning as a “key
transformation to the Company's core business.”
Id. ¶ 45. During a meeting held on April 26,
2017, the Board “‘reviewed the Company's
business plan and performance metrics comparing the Company
to other REITs operating in the industrial and net lease
sectors.'” Id. ¶ 47. On October 25,
2017, the Board authorized a preliminary discussion with an
industrial REIT to explore the possibility of a strategic
transaction. Id. ¶ 49. And, on January 24,
2018, the Board met with Morgan Stanley, which was providing
Gramercy with financial advisory services, to review
“‘the Company's recent financial performance
and recent market developments affecting the Company,
including the competitive environment for acquiring
industrial real estate assets and the market valuations of
the Company and peer companies.'” Id.
¶ 51. By April 2018, Gramercy's portfolio was
approximately 15% office, 81% industrial, and 4% specialty
retail. Id. ¶ 44.
Due to
Gramercy's swift transition, its financials “did
not yet fully reflect the value of the Company's
industrial portfolio.” Id. ¶ 53; see
Id. ¶ 54. As a result, the S&P Index and the
Morgan Stanley Capital International Index (the
“MSCI”), major stock market indices, continued to
classify Gramercy as a diversified REIT, as opposed to an
industrial REIT. Id. ¶ 55. The market's
perception of Gramercy as a diversified REIT was significant
because industrial REITs were outperforming diversified
REITs. Id. ¶¶ 55-57. Thus, plaintiff
alleges that Gramercy “was undervalued and mispriced in
the market.” Id. ¶ 52.
B.
The Blackstone Acquisition
On
March 1, 2018, the Senior Managing Director of
Blackstone's real estate group, Tyler Henritze, told
Gramercy's Chief Executive Officer (“CEO”),
Gordon DuGan, that Blackstone was interested in acquiring
Gramercy. Id. ¶ 59; see ECF 26-2 at 44
(the “Proxy”). DuGan directed Henritze to contact
Morgan Stanley. ECF 26-2 at 44. On April 3, 2018, Henritze
spoke with a representative of Morgan Stanley to express
Blackstone's interest in purchasing Gramercy because of
Gramercy's industrial portfolio. ECF 1, ¶ 60. The
next day, and again on April 11, 2018, Morgan Stanley invited
Henritze to make an offer before the Board met on April 26,
2018. Id. ¶ 61.
Henritze
informed Morgan Stanley on April 25, 2018, that Blackstone
intended to propose a price of $26.50 per share to acquire
Gramercy. ECF 26-2 at 47. However, Morgan Stanley advised
Blackstone that the Board would view that price as
inadequate. Id. On April 26, 2018, Blackstone
submitted a bid, proposing an all-cash acquisition of
Gramercy at $27.00 per share. ECF 1, ¶ 64; ECF 26-2 at
47.
Later
the same day, the Board discussed Blackstone's proposal
during its regularly scheduled meeting. ECF 26-2 at
47.[3]
Additionally, it reviewed other potential strategic
transactions that Morgan Stanley had explored on
Gramercy's behalf with other companies. Id.
Ultimately, the Board directed Morgan Stanley to inform
Blackstone that it would not pursue a transaction at $27 per
share. Id. at 48. Blackstone responded on April 27,
2018, by increasing its proposed price to $27.30 per share,
provided that Gramercy would agree not to issue its next
scheduled dividend, or $27.00 per share with no restriction
on Gramercy's ability to pay regular quarterly dividends
prior to the closing of the acquisition. Id.
The
Board held a telephonic meeting on April 28, 2018, to discuss
the offer. Id. It decided to continue negotiating
with Blackstone, with the goal of obtaining a higher price
per common share and with terms that allowed Gramercy to
solicit alternative acquisition proposals during the pendency
of the merger. Id. at 49; see ECF 1, ¶
65. Morgan Stanley relayed the Board's response to
Blackstone. ECF 26-2 at 49; ECF 1, ¶ 66. Blackstone
responded that it would not agree to Gramercy's proposed
terms. ECF 26-2 at 49. However, it increased its offer to
$27.50 per share. Id. Shortly thereafter, Blackstone
submitted a letter confirming its proposal. Id.
During a second telephonic meeting on April 28, 2019, the
Board agreed to move forward with those terms and to provide
Blackstone with additional due diligence information.
Id.
Gramercy
“held its first quarter 2018 earnings call” on
May 1, 2018. ECF 1, ¶ 69. During the call, DuGan claimed
that “the Company had finally been recognized and
reclassified as an industrial REIT in the S&P and MSCI
indices.” Id. He stated, id.:
Today, Gramercy is roughly 85% industrial by value. We're
the 8th largest owner in the United States, public or
private, with a high-quality portfolio in major markets of,
roughly, 77 million square feet. As part of that
acknowledgment, or the acknowledgment of the shift in the
business, as of April 30, as of yesterday, we changed our GIC
classification at S&P from diversified to industrial. And
similarly, for MSCI, our classification has changed. It's
actually - it's as of April 30, but when our associate
looked on the Bloomberg, we found we were still diversified
yesterday, but as of this morning, we're industrial. So
our MSCI classification has also changed to industrial. So
that kicks in today.
On May
6, 2018, the Board met with Morgan Stanley and its counsel,
Watchell, Lipton, Rosen & Katz (“Watchell”),
to review the terms of Blackstone's offer. Id.
¶ 70. During the meeting, Morgan Stanley presented its
opinion that the merger was financially fair to
Gramercy's common shareholders. Id.; ECF 26-2 at
50-51. And, Watchell reviewed the draft merger agreement with
the Board and discussed the interests that the Board and
executive officers had in the merger that differed from
shareholders. ECF 26-2 at 51. Based on this information, the
Board unanimously approved the merger agreement. ECF 1,
¶ 71; ECF 26-2 at 51. The parties executed the merger
agreement and other transaction documents during the evening
of May 6, 2018. ECF 26-2 at 51.
Gramercy
issued the Proxy to its shareholders on June 27, 2018, to
solicit votes on the proposed merger. ECF 1, ¶ 80;
see generally ECF 26-2. The Proxy was supplemented
on July 13, 2018. ECF 1, ¶ 80. And, on August 9, 2018, a
majority of shareholders approved Blackstone's
acquisition of Gramercy. See Id. ¶ 101; ECF
26-6 at 2. Approximately 117.5 million out of 119 million
shares, or 99% of shares, voted in favor of the deal. ECF
26-6 at 2.
C.
The Proxy Statement
The
Proxy contained numerous disclosures. Of relevance here, it
contained a nine-page summary of Morgan Stanley's
Fairness Opinion. See Id. 26-2 at 61-69. And, the
full text of the Fairness Opinion, dated May 6, 2018, was
included as an exhibit to the Proxy. Id. at 215-17.
The
Proxy disclosed that Gramercy “retained Morgan Stanley
to provide [the Company] with financial advisory services in
connection with the proposed merger.” Id. at
61. And, it stated that Morgan Stanley, “based upon and
subject to the various assumptions made, procedures followed,
matters considered and qualifications and limitations on the
scope of [its] review, ” informed the Board that, in
its opinion, “the merger consideration to be received
by the holders of [Gramercy's] common shares pursuant to
the merger was fair from a financial point of view[.]”
Id. Morgan Stanley's opinion was immediately
followed by a warning, in bold, id. (emphasis in
original):
The full text of the written opinion of Morgan Stanley, dated
as of May 6, 2018, is attached to this proxy statement as
Exhibit B and is hereby incorporated into this proxy
statement by reference in its entirety. You should read the
opinion in its entirety for a discussion of the assumptions
made, procedures followed, matters considered and
qualifications and limitations on the scope of the review
undertaken by Morgan Stanley in rendering its opinion. We
encourage you to read the entire opinion and the summary of
Morgan Stanley's opinion below carefully and in their
entirety. This summary of the opinion of Morgan Stanley set
forth in this proxy statement is qualified in its entirety by
reference to the full text of the opinion. Morgan
Stanley's opinion is directed to our board of trustees,
in its capacity as such, addresses only the fairness of the
merger consideration to be received by the holders of our
common shares pursuant to the merger agreement from a
financial point of view to such holders as of the date of the
opinion and does not address any other aspects or
implications of the mergers. Morgan Stanley's opinion was
not intended to, and does not, constitute a recommendation to
any holder of our common shares as to how to vote at the
special meeting to be held in connection with the mergers or
whether to take any other action with respect to the mergers.
Morgan Stanley was not requested to opine as to, and its
opinion did not in any manner address the relative merits of,
the transactions contemplated by the merger agreement as
compared to other business or financial strategies that might
be available to the Company, nor did it address the
underlying business decision of the Company to enter into the
merger agreement or proceed with any other transaction
contemplated by the merger agreement.
Further,
the Proxy disclosed that Morgan Stanley performed seven
financial valuations in connection with the Fairness Opinion:
(1) “Research Analyst Price Targets and NAV [‘Net
Asset Value'] Targets” analysis; (2)
“Comparable Public Companies Analysis”; (3)
“Net Asset Value Analysis”; (4) “Discounted
Cash Flow Analysis”; (5) “Premiums Paid
Analysis”; (6) “Private Buyer Analysis”;
and (7) “Historical Stock Price” analysis.
See Id. at 63-67.
Plaintiff
takes issue only with the Comparable Public Companies
Analysis (“CPC Analysis”). ECF 1, ¶¶
87-94. A CPC Analysis is a valuation technique that estimates
the market value of a company by comparing it to peer
companies using publicly available financial information.
See Shannon P. Pratt, The Market Approach to Valuing
Businesses 88-89 (2d ed. 2005).
The
Proxy disclosed that Morgan Stanley selected five
publicly-traded companies that “share similar business
characteristics” with Gramercy. ECF 26-2 at 63. The
comparator companies were: (1) Lexington Realty Trust; (2)
Monmouth Real Estate Investment Corporation; (3) STAG
Industrial, Inc.; (4) W.P. Carey Inc.; and (5) VEREIT, Inc.
Id. Further, the Proxy disclosed the specific
financial variables (i.e., ratios) that Morgan
Stanley used to evaluate Gramercy and the comparator
companies, and the ranges that it established for each ratio.
Id. at 64. The ratios examined were: (1) share price
to estimated funds from operations (“FFO”) for
the 2018 calendar year as determined from a consensus of Wall
Street research analysts (“Street consensus”);
(2) share price to Street consensus estimated adjusted funds
from operations (“AFFO”) for the 2018 calendar
year; (3) aggregate value to the Street consensus for
earnings before interest, taxes, depreciation, and
amortization (“EBITDA”) for the 2018 calendar
year; (4) share price to Street consensus NAV; and (5) share
price to management's NAV. Id.
In
addition, the Proxy described the way in which Morgan Stanley
calculated Gramercy's “implied per share equity
value reference range” for each ratio, i.e.,
the approximate market value of a Gramercy share based on
that particular financial metric. Id. Those
estimates were arranged in the following chart, id.:
(Image
Omitted)
Finally,
the Proxy explained that Morgan Stanley estimated that the
market value of a common share of Gramercy stock was between
$21.92 and $25.08. Id.
The
summary of the CPC Analysis concluded with the following
warning: “No company utilized in the comparable company
analysis is identical to the Company. . . . Morgan Stanley
made judgments and assumptions with regard to industry
performance, general business, economic, market and financial
conditions and other matters, which are beyond the
Company's control[.]” Id.
The
Proxy's summary of the Fairness Opinion contained
additional admonishments. For example, it cautioned that
“[t]he preparation of a financial opinion is a complex
process and is not necessarily susceptible to a partial
analysis or summary description.” Id. at 68.
And, it advised that “Morgan Stanley's opinion and
presentation to our board was one of many factors taken into
consideration by our board of trustees, ” and therefore
it “should not be viewed as determinative of the
opinion of our board of trustees with respect to the
merger[.]” Id.
D.
Plaintiff's Lawsuit
Plaintiff
filed suit against Gramercy, the Board Defendants, and Morgan
Stanley on August 31, 2018. ECF 1. According to plaintiff,
the merger “was timed to take advantage of a temporary
low point in the Company's stock prices.”
Id. ¶ 73. Gramercy was allegedly undervalued
because “the Company's financials did not reflect
the value of Gramercy's industrial assets, and because
the Company had not been classified as an industrial REIT in
the relevant indices.” Id. ¶74. Thus,
plaintiff claims that Blackstone's offer of $27.50 per
share “reflected a price of an acquisition of a
diversified REIT, not an industrial REIT.” Id.
¶ 75.
According
to plaintiff, neither the Board Defemdants nor Morgan Stanley
had an incentive to seek a better deal. See Id.
¶¶ 77-79. He asserts that a low sale price was
“very favorable” for the Company's officers,
because they “received the opportunity to roll over
their equity interest in Gramercy into the post-merger
company” and “[t]he lower the sale price, the
cheaper the roll, and the higher the upside when the Company
generated the growth expected by management.”
Id. ¶ 77. As for Morgan Stanley, it allegedly
earned $34 million for its services related to the merger,
including the Fairness Opinion, which was contingent on the
closing of the merger. Id. ¶ 79. Further,
Morgan Stanley had a “significant relationship”
with Blackstone, having received $100 million to $125 million
in fees from Blackstone between 2016 to 2018, a far greater
sum than the $10 million to $25 million that Morgan Stanley
received from Gramercy during the same period. Id.
¶ 62.
As
noted, the Proxy was filed on June 27, 2018, and supplemented
on July 13, 2018. Id. ¶ 80. Plaintiff alleges
that the Proxy contained several materially misleading
statements. Id. ¶ 95. “The Proxy
contained the recommendation of each of the Individual
Defendants to Gramercy stockholders to vote in favor of the
Merger.” Id. ¶ 81. Further, the Proxy
stated that the “‘merger was advisable and in the
best interests of the Company and our
shareholders.'” Id. ¶ 82 (quoting ECF
26-2 at 12). And, it suggested that the Board's
determination that the merger was financially fair to
shareholders “was supported by a valid valuation,
” stating that the Board considered Morgan
Stanley's Fairness Opinion a “‘material
factor[] . . . supporting its decision to approve the merger
agreement.'” Id. ¶ 83 (alterations in
ECF 1) (quoting ECF 26-2 at 51, 53).
In
plaintiff's view, these statements misled shareholders
because the Proxy “did not disclose facts demonstrating
that Morgan Stanley's analyses and conclusions [in the
CPC Analysis] were objectively flawed.” Id.
¶ 90. Specifically, plaintiff complains that the Proxy
omitted that the five companies that Morgan Stanley utilized
in the CPC Analysis “were not comparable to
Gramercy” because only two of the five companies were
industrial REITs. Id. ¶ 91. According to
plaintiff, had Morgan Stanley used industrial REITs as
comparison companies, the CPC Analysis would have generated
ratio ranges that implied a valuation of Gramercy's stock
“in the mid-$30s to $40s.” Id. ¶
93. And, plaintiff maintains that the failure to disclose the
comparison companies' REIT classification prevented
stockholders from “discern[ing] that Morgan
Stanley's valuation was objectively flawed, and the
Merger consideration was unfair.” Id. ¶
98. Hurtado asserts: “By ...