<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(AMENDMENT NO. 3)
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
ARV ASSISTED LIVING, INC.
(NAME OF SUBJECT COMPANY)
ARV ASSISTED LIVING, INC.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, NO PAR VALUE
(INCLUDING THE ASSOCIATED SERIES C JUNIOR PARTICIPATING
PREFERRED STOCK PURCHASE RIGHTS)
(TITLE OF CLASS OF SECURITIES)
00204C107
(CUSIP NUMBER OF CLASS OF SECURITIES)
SHEILA M. MULDOON, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ARV ASSISTED LIVING, INC.
245 FISCHER AVENUE, SUITE D-1
COSTA MESA, CA 92626
(714) 751-7400
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON(S)
FILING STATEMENT)
WITH COPIES TO:
WILLIAM J. CERNIUS, ESQ. ALEXANDER F. WILES, ESQ.
LATHAM & WATKINS IRELL & MANELLA LLP
650 TOWN CENTER DRIVE, 1800 AVENUE OF THE STARS,
20TH FLOOR SUITE 900
COSTA MESA, CA 92626 LOS ANGELES, CA 90067
(714) 540-1235 (310) 203-7659
<PAGE> 2
INTRODUCTION
The Solicitation/Recommendation Statement on Schedule 14D-9 (as amended
through the date hereof, the "Statement"), originally filed on January 5, 1998,
by ARV Assisted Living, Inc., a California corporation (the "Company"), relates
to an offer by EMAC Corp., a Delaware corporation ("EMAC") and a wholly-owned
subsidiary of Emeritus Corporation, a Washington corporation ("Emeritus"), to
purchase all outstanding shares of the Company's common stock, no par value
(including the associated Series C Junior Participating Preferred Stock Purchase
Rights issued pursuant to the Rights Agreement, dated as of July 14, 1997,
between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent). All capitalized terms used herein without definition have the respective
meanings set forth in the Statement.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
The response to Item 8 is hereby amended by adding the following after
the final paragraph of Item 8:
On January 7, 1998, the parties filed in the Court an Amended Joint
Stipulation and [Proposed] Protective Order (the "Amended Joint Stipulation").
The Amended Joint Stipulation expands the earlier Joint Stipulation and Proposed
Protective Order, filed with the Court on December 15, 1997, which prohibits the
disclosure by the receiving party of Confidential Information related to ARV.
The Amended Joint Stipulation would also prohibit the disclosure of Confidential
Information related to Emeritus. The Amended Joint Stipulation is filed as
Exhibit 14 hereto and is incorporated herein by reference.
On January 8, 1998, ARV filed in the Court the Defendants' Notice of
Demurrer and Demurrer to Plaintiff's Complaint for Injunctive and Declaratory
Relief, along with a Memorandum of Points and Authorities in Support Thereof
(collectively, the "Defendants' Demurrer"). The Defendants' Demurrer is in
response to plaintiff Emeritus' five claims for relief based on alleged
breaches of fiduciary duty asserted in the Amended State Complaint. The
Defendants' Demurrer is filed as Exhibit 15 hereto and is incorporated herein
by reference.
-2-
<PAGE> 3
ITEM 9. MATERIALS TO BE FILED AS EXHIBITS
The response to Item 9 is hereby amended by adding the following new
exhibits:
14 Amended Joint Stipulation and [Proposed] Protective Order in
Emeritus Corporation v. ARV Assisted Living, Inc., et al.,
case no. 787788, filed January 7, 1998.
15 Defendants' Demurrer and Memorandum of Points and Authorities
in Emeritus Corporation v. ARV Assisted Living, Inc., et al.,
case no. 787788, filed January 8, 1998.
-3-
<PAGE> 4
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
ARV ASSISTED LIVING, INC.
By: /s/ Sheila M. Muldoon
--------------------------------------
Sheila M. Muldoon, Esq.
Vice President, General
Counsel and Secretary
Dated January 14, 1998
-4-
<PAGE> 5
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------
14 Amended Joint Stipulation and [Proposed] Protective Order in
Emeritus Corporation v. ARV Assisted Living, Inc., et al.,
case no. 787788, filed January 7, 1998.
15 Defendants' Demurrer and Memorandum of Points and Authorities
in Emeritus Corporation v. ARV Assisted Living, Inc., et al.,
case no. 787788, filed January 8, 1998.
-5-
<PAGE> 1
EXHIBIT 14
LATHAM & WATKINS
Hugh Steven Wilson (State Bar No. 015961)
R. Brian Timmons (State Bar No. 155916)
650 Town Center Drive, Twentieth Floor
Costa Mesa, California 92626
Telephone: (714) 540-1235
Attorneys for Defendants ARV ASSISTED LIVING, INC.,
DAVID P. COLLINS, JOHN A. BOOTY, R. BRUCE ANDREWS,
JAMES M. PETERS, MAURICE J. DeWALD, JOHN J.
RYDZEWSKI, ROBERT P. FREEMAN, KENNETH M. JACOBS,
MURRY N. GUNTY, and HOWARD G. PHANSTIEL
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
EMERITUS CORPORATION, ) Case No. 787788
a Washington corporation, )
) ASSIGNED FOR ALL PURPOSES TO
Plaintiff, ) JUDGE JAMES A. JACKMAN, DEPT.
) 31
v. )
) AMENDED JOINT STIPULATION
ARV ASSISTED LIVING, INC., ) AND [PROPOSED] PROTECTIVE
a California corporation; ) ORDER
DAVID P. COLLINS, an individual; )
JOHN A BOOTY, an individual; ) Date of Filing
JAMES M. PETERS, an individual; ) This Action: December 9, 1997
MAURICE J. DeWALD, an individual; ) Trial Date: None Set
JOHN J. RYDZEWSKI, an individual; )
ROBERT P. FREEMAN, an individual; )
KENNETH M. JACOBS, an individual; )
MURRY N. GUNTY, an individual; )
and HOWARD G. PHANSTIEL, )
an individual, )
)
Defendants. )
)
- ---------------------------------------
Emeritus Corporation (hereinafter "Emeritus"), by and through their
counsel of record, and ARV Assisted Living, Inc. (hereinafter "ARV"), David P.
Collins, John A.
<PAGE> 2
Booty, R. Bruce Andrews, James M. Peters, Maurice J. DeWald, John J. Rydzewski,
Robert P. Freeman, Kenneth M. Jacobs, Murry N. Gunty, and Howard G. Phanstiel,
by and through their counsel of record, hereby AGREE and STIPULATE as follows:
1. All material that is produced, exchanged, or given at any time in the
course of this action that contains any proprietary information related to ARV
or Emeritus, including customer information, financial, sales, and marketing
data, research and development information, past, present and future business
plans, personnel information about any current or former ARV or Emeritus
employee, or that contains information pertaining to ARV's or Emeritus' business
that is not generally known and that would not ordinarily be disclosed to third
parties without requiring those third parties to maintain the information in
confidence, is subject to this Protective Order and shall be clearly identified
as "CONFIDENTIAL" and shall be deemed "Confidential Information" under the terms
of this Stipulation and Order. Documents identified as "CONFIDENTIAL" are those
that contain or disclose proprietary information which would create a
competitive disadvantage or work a hardship on ARV or Emeritus if such materials
were disclosed to plaintiff as opposed to plaintiff's counsel. Such Confidential
Information shall be used solely for the purpose of this case and shall not be
made available to persons other than those described below. No person shall use
any documents containing Confidential Information or information derived from
them for purposes other than in prosecution or defense of this litigation.
2. This Protective Order shall also govern any Confidential Information
contained in any transcript of testimony given in any deposition in this action
by any present or former officer, employee or agent of ARV or Emeritus, as well
as Confidential Information contained in all discovery responses and other
materials produced in discovery in response to interrogatories, requests for
admissions, requests for production of documents, subpoenas or subpoenas duces
tecum, now pending or hereafter requested, and any information obtained
therefrom.
2
<PAGE> 3
3. Any Confidential Information protected under paragraphs 1 and 2 above
may be disclosed only to counsel of record and employees of their law firm
assisting in the preparation and trial of this action, expert consultants, and
designated expert witnesses in preparation for and during their testimony.
Plaintiff's or defendant's counsel may disclose to expert consultants or expert
witnesses only the Confidential Information necessary for purposes of their
testimony or expert advice. All expert consultants and expert witnesses must
agree to sign the "ACKNOWLEDGMENT" in the form attached hereto attesting that
they agree to be bound by the Protective Order prior to the disclosure to them
of any Confidential Information. Such executed ACKNOWLEDGMENT must be filed with
the court under seal. The Confidential Information shall not be disclosed to any
expert who is currently, or is planning to be, an employee or affiliate of
Emeritus or ARV, or an individual holding any proprietary interest in Emeritus
or ARV, without the prior written consent of ARV with respect to disclosure of
documents produced by ARV or Emeritus with respect to disclosure of documents
produced by Emeritus.
4. In the event either party seeks to retain an expert or consultant who
cannot sign the ACKNOWLEDGMENT form attached hereto in good faith, counsel for
plaintiff and defendants shall attempt in good faith to agree to allow
disclosure of some narrowly defined subset of Confidential Information
contemplated by this Order to that expert or consultant. In the event counsel
for plaintiff and defendants cannot reach such an agreement, the party
requesting disclosure may bring an ex parte application before the Court to
resolve this issue.
5. Each person who receives any Confidential Information hereby agrees
to subject himself/herself to the jurisdiction of this Court for the purpose of
any proceedings relating to the performance, compliance with, or violation of
this Protective Order.
6. If any party files with the Court any documents containing
Confidential Information protected herein, or quotes material parts thereof in a
court filing, all such documents and filings shall be filed under seal, shall be
maintained under seal by the Court,
3
<PAGE> 4
and shall be made available only to the Court or persons authorized by the terms
of this Protective Order to have access thereto, unless the parties specifically
stipulate otherwise. The person filing any document or pleading containing
Confidential Information shall inform the clerk that all or a portion designated
thereof is subject to this Protective Order and is to be kept under seal, except
that, upon default of the filing party to so designate and inform the clerk, any
party may do so.
7. Nothing in the foregoing provisions of this Protective Order shall be
deemed to preclude any party from seeking and obtaining from the Court, upon an
appropriate showing:
a) such additional protection with respect to the confidentiality of
documents or other discovery materials as that party may consider
appropriate; or
b) an order permitting disclosure of documents or information beyond the
terms of this Stipulation and Order.
8. Within thirty (30) days of final determination of this litigation,
including all appeals, unless otherwise agreed to in writing by an attorney of
record for each party, each party shall assemble and return all documents
containing Confidential Information, including any copies, extracts, or
summaries thereof or documents containing information taken therefrom, to the
person or party from whom the documents were obtained. Alternatively, within
thirty (30) days of final determination of this litigation, counsel for the
receiving party may destroy all such documents and inform counsel of the
producing party of such destruction in writing. Materials which, in the judgment
of counsel for the receiving party, constitute work product are exempted from
the requirements of this paragraph.
9. No part of the restrictions imposed by this Protective Order may be
terminated except by written stipulation executed by counsel of record for each
designated party, or an order of this Court for good cause shown. The
termination of this action shall not automatically terminate this Order.
/ / /
4
<PAGE> 5
/ / /
/ / /
/ / /
/ / /
10. This Order may be modified by written stipulation among all the
parties, approved by the Court, or by application to the Court by noticed
motion.
DATED: January 6, 1997 LATHAM & WATKINS
By /s/ R. BRIAN TIMMONS
------------------------
R. Brian Timmons
Attorneys for Defendant
ARV Assisted Living, Inc.,
et al.
DATED: January 6, 1997 GIBSON, DUNN & CRUTCHER, LLP
By /s/ JOSEPH P. BUSCH
------------------------
Joseph P. Busch, III
Attorneys for Plaintiff
Emeritus Corporation
IT IS HEREBY ORDERED that the preceding Protective Order be followed,
and that the terms and conditions of this Order shall govern the handling of
documents, answers to interrogatories, depositions, pleadings, exhibits,
declarations, and other information exchanged by the parties in this action.
Dated: January __, 1997 -----------------------------------------
Judge James A. Jackman
Superior Court, Orange County, California
5
<PAGE> 6
ACKNOWLEDGMENT
--------------
I, ___________________________ (print name), hereby acknowledge that I
have read the Protective Order attached hereto which was entered by the Court on
December __, 1997, in connection with Emeritus Corp. v. ARV Assisted Living,
Inc., et al., Case No. 787788, that I am not currently an employee or affiliate
of, or hold any proprietary interest in, Emeritus Corporation or ARV Assisted
Living, Inc., nor am I planning to be an employee or affiliate of, or hold any
proprietary interest in, Emeritus Corporation or ARV Assisted Living, Inc. in
the future. I have been authorized by counsel for a party in this case to
receive Confidential Information. I fully understand and agree to abide by the
obligations and conditions set forth in the Protective Order.
-----------------------------------------------
(Signature)
Dated: __________________
6
<PAGE> 1
EXHIBIT 15
LATHAM & WATKINS
Peter H. Benzian (State Bar No. 047456)
Hugh Steven Wilson (State Bar No. 051961)
R. Brian Timmons (State Bar No. 155916)
650 Town Center Drive, Suite 2000
Costa Mesa, California 92626-1925
Telephone: (714) 540-1235
Facsimile: (714) 755-8290
Attorneys for Defendants
ARV ASSISTED LIVING, INC., DAVID P.
COLLINS, JOHN A. BOOTY, R. BRUCE
ANDREWS, MAURICE J. DeWALD, JOHN J.
RYDZEWSKI, ROBERT P. FREEMAN,
KENNETH M. JACOBS, MURRY N. GUNTY and
HOWARD G. PHANSTIEL
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF ORANGE
EMERITUS CORPORATION, | CASE NO. 787788
|
Plaintiff, | ASSIGNED FOR ALL PURPOSES TO JUDGE
| DAVID H. BRICKNER, DEPT. 17
v. |
|
| DEFENDANTS' NOTICE OF DEMURRER
ARV ASSISTED LIVING, INC., a | AND DEMURRER TO PLAINTIFF'S
California corporation; DAVID P. | COMPLAINT FOR INJUNCTIVE AND
COLLINS, an individual; JOHN A. | DECLARATORY RELIEF; MEMORANDUM
BOOTY, an individual; R. BRUCE | OF POINTS AND AUTHORITIES IN
ANDREWS, an individual; MAURICE J. | SUPPORT THEREOF
DeWALD, an individual; JOHN J. |
RYDZEWSKI, an individual; ROBERT P. | Hearing Date: January 23, 1998
FREEMAN, an individual; KENNETH M. | Time: 3:00 p.m.
JACOBS, an individual; MURRY N. | Dept.: 17
GUNTY, an individual; HOWARD G. | Judge: Hon. David H. Brickner
PHANSTIEL, an individual; and |
PROMETHEUS ASSISTED LIVING, | Date of Filing
LLC, a Delaware limited liability | This Action: December 9, 1997
company, | Trial date: None set
|
Defendants. |
_______________________________________|
/ / /
/ / /
/ / /
/ / /
/ / /
<PAGE> 2
TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:
PLEASE TAKE NOTICE THAT on January 23, 1998, at 3:00 p.m., or as soon
thereafter as the matter may be heard, in Department 17 of the above-entitled
Court, located at 700 Civic Center Drive West, Santa Ana, California 92701,
defendants, ARV Assisted Living, Inc., David P. Collins, John A. Booty, R. Bruce
Andrews, Maurice J. DeWald, John J. Rydzewski, Robert P. Freeman, Kenneth M.
Jacobs, Murry N. Gunty, and Howard G. Phanstiel ("the ARV Defendants"), will and
hereby do demur to the causes of action asserted against the ARV Defendants in
Plaintiff's First Amended Complaint for Injunctive and Declaratory Relief (the
"Complaint").
This demurrer, brought pursuant to section 430.10 of the California Code
of Civil Procedure, will be and is based upon this notice, the demurrer and
memorandum of points and authorities attached hereto, the appendix of
extrajurisdictional authorities filed concurrently herewith, and all other
matters presented to this Court at or before the hearing on this matter.
Dated: January 8, 1998 Respectfully Submitted,
LATHAM & WATKINS
Peter H. Benzian
Hugh Steven Wilson
R. Brian Timmons
By /s/ R. BRIAN TIMMONS
---------------------------
R. Brian Timmons
Attorneys for Defendant
ARV Assisted Living, Inc.
1
<PAGE> 3
DEMURRER
--------
Defendant, ARV Assisted Living, Inc., David P. Collins, John A. Booty,
R. Bruce Andrews, Maurice J. DeWald, John J. Rydzewski, Robert P. Freeman,
Kenneth M. Jacobs, Murry N. Gunty, and Howard G. Phanstiel, (the "Defendants")
demur to the First Amended Complaint for Injunctive and Declaratory Relief (the
"Complaint") as follows:
DEMURRER TO FIRST CLAIM FOR RELIEF
----------------------------------
(Breach of Fiduciary Duty: Use of the Prometheus Transactions as
an Improper Defensive Measure to Entrench ARV's Existing Board)
1. The first claim for relief fails to join a necessary and
indispensable party. Cal. Civ. Proc. Code ("CCP") ss. 430.10(d).
2. The first claim for relief fails to state facts sufficient to
constitute a cause of action against Defendants. CCP ss. 430.10(e).
DEMURRER TO SECOND CLAIM FOR RELIEF
-----------------------------------
(Breach of Fiduciary Duty: Sale of Control of ARV
and Failure to Maximize Shareholder Value)
3. The second claim for relief fails to join a necessary and
indispensable party. CCP ss. 430.10(d).
4. The second claim for relief fails to state facts sufficient to
constitute a cause of action against Defendants. CCP ss. 430.10(e).
DEMURRER TO THIRD CLAIM FOR RELIEF
----------------------------------
(Breach of Fiduciary Duty: Failure to Exercise Due Care in Considering
Emeritus' Proposals and Entering into the Prometheus Transactions)
5. The third claim for relief fails to join a necessary and
indispensable party. CCP ss. 430.10(d).
6. The third claim for relief fails to state facts sufficient to
constitute a cause of action against Defendants CCP ss. 430.10(e).
DEMURRER TO FOURTH CLAIM FOR RELIEF
-----------------------------------
(Breach of Fiduciary Duty and Violation of California
Statutory Law: Implementation of the Poison Pill)
7. The fourth claim for relief fails to join a necessary and
indispensable party. CCP ss. 430.10(d).
8. The fourth claim for relief fails to state facts sufficient to
constitute a cause of action against Defendants. CCP ss. 430.10(e).
2
<PAGE> 4
DEMURRER TO FIFTH CLAIM FOR RELIEF
----------------------------------
(Breach of Fiduciary Duty: Redemption of Prometheus Notes)
9. The fifth claim for relief fails to join a necessary and
indispensable party. ("CCP") ss. 430.10(d).
10. The fifth claim for relief fails to state facts sufficient to
constitute a cause of action against Defendants. CCP ss. 430.10(e).
Dated: January 8, 1998 Respectfully Submitted,
LATHAM & WATKINS
Peter H. Benzian
Hugh Steven Wilson
R. Brian Timmons
By /s/ R. BRIAN TIMMONS
---------------------------
R. Brian Timmons
Attorneys for Defendant
ARV Assisted Living, Inc.
<PAGE> 5
TABLE OF AUTHORITIES
CASES
<TABLE>
<S> <C>
Angie M. v. Superior Court,
37 Cal. App. 4th 1217 (1995)................................................................2
Baron v. Strawbridge & Clothier,
646 F. Supp. 690 (E.D. Pa. 1986) ...........................................................9
Beresford Neighborhood Association v. City of San Mateo,
207 Cal. App. 3d 1180 (1989) ...............................................................7
Cellular Plus, Inc. v. Superior Court,
14 Cal. App. 4th 1224 (1993) ...............................................................2
Covarrubias v. James,
21 Cal. App. 3d 129 (1971) .................................................................2
Crouse-Hinds Co. v. InterNorth, Inc.,
634 F.2d 690 (2d Cir. 1980) .............................................................7, 8
Holder v. Home Savings & Loan Association of Los Angeles,
267 Cal. App. 2d 91 (1968) .................................................................6
Holt v. College of Osteopathic Physicians & Surgeons,
61 Cal. 2d 750 (1964) ...................................................................6, 7
Jones v. H.F. Ahmanson & Co.,
1 Cal. 3d 93, 81 Cal. Rptr. 592 (1969) .....................................................9
Kraus v. Willow Park Public Golf Course,
73 Cal. App. 3d 354 (1977) .................................................................5
Larson v. Dumke,
900 F.2d 1363 (9th Cir. 1990) ..............................................................9
Lomayaktewa v. Hathaway,
520 F.2d 1324 (9th Cir. 1976) ...........................................................5, 7
Micheel v. Haralson,
586 F. Supp. 169 (E.D. Pa. 1983) ...........................................................6
SCE Corp. v. Superior Court (Tuscon Elec.),
3 Cal. App. 4th 676 (1992) .................................................................4
</TABLE>
i
<PAGE> 6
<TABLE>
<S> <C>
Sierra Club, Inc. v. California Coastal Commission,
95 Cal. App. 3d 495 (1979) ...........................................................5, 6, 7
STATUTES
Cal. Civ. Proc. Code ss. 389(a) ....................................................................................5
Cal. Corp. Code ss. 800(b)(1) ......................................................................................9
</TABLE>
ii
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. INTRODUCTION..............................................................1
II. SUMMARY OF ALLEGATIONS....................................................1
III. ARGUMENT..................................................................2
A. Because Lazard Is a Party to the Contracts that Emeritus
Seeks to Rescind, It Is an Indispensable Party and Must Be
Joined in This Action...............................................3
B. Emeritus' Entire Complaint Fails to State a Claim Because
Emeritus Has Failed to Allege That It Is the Owner of Any
ARV Stock...........................................................9
IV. CONCLUSION...............................................................10
</TABLE>
iii
<PAGE> 8
MEMORANDUM OF POINTS AND AUTHORITIES
------------------------------------
I. INTRODUCTION
Plaintiff Emeritus Corporation is engaged in a hostile takeover attempt
of defendant ARV Assisted Living, Inc., a California corporation. Both companies
are competitors in the highly competitive, rapidly growing assisted living
industry. To further its hostile takeover efforts, Emeritus has filed this
action seeking to nullify an $87 million investment in ARV by Lazard Freres Real
Estate Investors L.L.C., a well known Wall Street investment firm, and its
affiliate Prometheus Assisted Living LLC. Emeritus is seeking to unravel
Lazard's $87 million investment in ARV, which was initiated months before
Emeritus even launched its hostile tender offer, because it makes Emeritus'
attempted takeover of ARV more difficult and more costly. Emeritus' Complaint
thus asks this Court to rescind the various agreements between ARV and
Lazard/Prometheus in order to further its efforts to acquire ARV for the lowest
possible price. Emeritus' Complaint also seeks various forms of declaratory
relief based on allegations that ARV breached its fiduciary duty to Emeritus as
a result of ARV's transactions with Lazard/Prometheus.
Emeritus' Complaint, however, suffers from two glaring and fatal
defects. First, Emeritus has failed to name Lazard as a defendant in this
action, even though Lazard is clearly a party to the various agreements Emeritus
seeks to rescind. Second, in alleging that ARV and its Board of Directors
breached their fiduciary duties to Emeritus, Emeritus (a) has failed to allege
any facts sufficient to show that ARV owed Emeritus a fiduciary duty, and (b) as
a competitor and unsolicited potential purchaser of ARV, Emeritus has no
standing to assert the claims it has attempted to assert. These fundamental
defects require that defendants' Demurrer be sustained.
II. SUMMARY OF ALLEGATIONS
On January 7, 1998, Emeritus filed its First Amended Complaint ( the
"Complaint") against ARV, the nine current members of its board of directors
(collectively, "the ARV Defendants"), and against Prometheus Assisted Living
LLC, for alleged breaches of fiduciary duty./1/ Emeritus claims that: (1) the
ARV Defendants used the transactions with
- --------
/1/ Emeritus filed the original Complaint on December 9, 1997.
<PAGE> 9
Lazard/Prometheus to entrench the present Board in response to Emeritus'
takeover proposal; (2) the ARV Board violated its fiduciary duties by choosing
the Lazard/Prometheus transaction over an Emeritus takeover in that such choice
failed to maximize shareholder value; (3) the implementation of the
Shareholders' Rights Plan (the "poison pill") was an unreasonable response to
the Emeritus proposal and a violation of the Board's fiduciary duties; and (4)
the redemption of the Lazard/Prometheus Convertible Notes in exchange for ARV
stock was an improper attempt to entrench the ARV Board and prevent Emeritus
from acquiring the Company./2/
As a result of these claims, Emeritus seeks extensive declaratory and
injunctive relief. For example, Emeritus seeks a declaration that the ARV
Defendants have breached their fiduciary duties by (1) entering into the
Lazard/Prometheus transactions and (2) by redeeming the ARV notes held by
Lazard/Prometheus in exchange for common shares of ARV. More importantly,
Emeritus requests the court enter injunctive relief (1) rescinding and
nullifying ARV's transactions with Lazard/Prometheus and (2) preventing
Lazard/Prometheus from voting the shares for which they paid approximately $87
million. Emeritus, however, has not named Lazard as a defendant in the
Complaint. Nor has Emeritus alleged in the Complaint that it was ever a
shareholder of ARV.
III. ARGUMENT
A demurrer may be sustained where there is a failure to join necessary
and indispensable parties. CCP ss. 430.10(d) West Supp. 1998; Covarrubias v.
James, 21 Cal. App. 3d 129, 134 (1971)("[t]he objection that indispensable
parties are not before the court may be raised at any time, by demurrer or even
for the first time on appeal"). A demurrer must also be sustained where the
allegations of the Complaint fail to state a claim under any legal theory. Id.
ss. 430.10(e); Cellular Plus, Inc. v. Superior Court, 14 Cal. App. 4th 1224,
1231 (1993). Because Emeritus' Complaint fails to join necessary parties and
does not state a claim, the court should sustain ARV's demurrer.
- --------------
/2/ Because a demurrer tests the sufficiency of the pleadings, the well pleaded
factual allegations of the Complaint must be accepted as true for purposes
of review. Angie M. v. Superior Court, 37 Cal. App. 4th 1217, 1223, (1995).
But argument and legal conclusions pleaded by Emeritus may not be accepted
as true.
2
<PAGE> 10
A. BECAUSE LAZARD IS A PARTY TO THE CONTRACTS THAT EMERITUS SEEKS TO
RESCIND, IT IS AN INDISPENSABLE PARTY AND MUST BE JOINED IN THIS ACTION
On July 14, 1997, ARV entered into a Stock Purchase Agreement ("SPA")
with Prometheus and Lazard which provided for Prometheus, an entity formed by
Lazard to act as an investment vehicle in these transactions, to purchase up to
a 49.9% holding in ARV stock. (Complaint P. 35; Exh C to the Complaint) About
two weeks later, Prometheus purchased 1,921,012 shares of ARV common stock at
$14.00 a share, representing an aggregate investment of $26,894,168. (Id. P. 56)
On October 29, 1997, ARV and Lazard/Prometheus amended the SPA by entering into
an Amended and Restated Stock and Note Purchase Agreement, which provided for
Prometheus to purchase $60,000,000 in Convertible Subordinate Notes. (Id. Exh.
M) Lazard and Prometheus also entered into voting agreements, known as
Stockholders Agreements, in connection with the stock and convertible note
transactions. (Complaint P. P. 45-49, 76-83; Exhs. D and P to Complaint) Under
those voting agreements, Lazard and Prometheus each agreed to vote their stock
in a certain manner. (Id. P. P. 45, 78)
The Complaint filed by Emeritus asks this Court to invalidate the $87
million Lazard/Prometheus transactions with ARV and void the issuance of ARV
stock to Lazard/Prometheus pursuant to those agreements as well as to void
Lazard's and Prometheus' obligations to vote their stock according to the terms
of the various voting agreements. (Complaint P. 107) Specifically, the Complaint
seeks the following:
o a declaration that the Lazard/Prometheus transactions are null
and void or voidable by ARV;
o injunctive relief rescinding and nullifying the
Lazard/Prometheus transactions; and
o injunctive relief directing that the ARV shares issued to
Prometheus pursuant to the Lazard/Prometheus transactions and
the shares received as a result of the redemption of notes may
not be voted, or if voted, may not be counted.
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(Id. at P. 106-107) While Emeritus has named Prometheus as a defendant, Emeritus
has failed to name Lazard as a defendant, despite the fact that Lazard has a
substantial interest in the subject matter of this litigation and is a signatory
to the key contracts which Emeritus seeks to rescind in this action.
Lazard has been a party to all contracts signed between ARV and
Prometheus throughout the various stages of the Lazard/Prometheus Transactions.
Lazard was a party and, indeed, a separate signatory, to the original
Stockholders Agreement (Id., Exh. D), the Amended and Restated Stockholders
Agreement (Id., Exh. P), the Stockholders' Voting Agreement (Id., Exh. E), the
Amended and Restated Stockholders' Voting Agreement (Id., Exh. Q), the original
Stock Purchase Agreement and the Amended and Restated Stock and Note Purchase
Agreement. (Id., Exhs. C and M)/3/ Emeritus' Complaint seeks to rescind all of
these agreements. (Id., P. 107)
Lazard remains a signatory and liable party under the SPA, the voting
agreements, and the other related contracts Emeritus seeks to rescind./4/
Section 10.5 of the Amended Stock Purchase Agreement, referring to Lazard as the
"Advancing Party," states, for example:
Successors and Assigns. This agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors.
Buyer and the Advancing Party shall be permitted to assign any of their
rights hereunder to any Affiliate of Buyer or the Advancing Party,
provided that such Affiliate agrees to be bound hereby and by the
Stockholders Agreement, and provided that Buyer and the Advancing Party
shall remain liable hereunder . . . .
(Id., Exh. M)(emphasis added). Similarly, Lazard agreed to be perpetually bound
under the Amended and Restated Stockholders Agreement. Section 6.6 of that
agreement states in relevant part:
No party hereunder shall be permitted to assign any of its rights
hereunder to any third party, except that the Buyer, the Advancing
Party, and any Investor shall be permitted to assign its rights
hereunder to the same extent as the Buyer or Advancing Party is
permitted to assign its rights under the Stock Purchase Agreement,
provided that such person agrees to be bound by this Agreement.
(Id., Exh. P)(emphasis added).
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/3/ In the context of a demurrer, "written instruments . . . which are the
foundations of the causes of action and attached to the complaint as
exhibits may also be examined by the court." SCEcorp. v. Superior Court,
3 Cal. App. 4th 673, 677 (1992) (citing Weitzenkorn v. Lesser, 40 Cal.
2d 778, 785-86 (1953).
/4/ Although those contracts permit Lazard to assign its interest in those
contracts (which it has not done), such assignment is subject to the
requirement that Lazard remain liable under the various agreements.
Apparently, Lazard has assigned its ownership interest in Prometheus,
however, to another Lazard affiliate, Lazard Strategic Realty Investors
II, L.P. ("LFSRI") according to a public Form 13D Lazard has filed with
the SEC. Apparently, LFSRI became the sole and managing member of
Prometheus. Still, the sole general partner of LFSRI is Lazard.
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Emeritus' failure to name Lazard violates the well-settled rule that
when a claim seeks to set aside a contract, all parties to that contract are
indispensable parties to the action and must be joined therein. See Lomayaktewa
v. Hathaway, 520 F.2d 1324, 1325 (9th Cir. 1975) ("No procedural principle is
more deeply imbedded in the common law than that, in an action to set aside a
lease or a contract, all parties who may be affected by the determination of the
action are indispensable")./5/ Without Lazard, this case cannot proceed.
California law has consistently held that "[w]here the plaintiff seeks
some type of affirmative relief which, if granted, would injure or affect the
interest of a third person not joined, that third person is an indispensable
party." Sierra Club, Inc. v. California Coastal Comm'n, 95 Cal. App. 3d 495, 501
(1979). Specifically, Section 389 of the California Code of Civil Procedure
requires the joinder of:
(a) A person who is subject to service of process and whose joinder will
not deprive the court of jurisdiction over the subject matter of the
action . . . if (1) in his absence complete relief cannot be accorded
among those already parties or (2) he claims an interest relating to the
subject of the action and is so situated that the disposition of the
action in his absence may (i) as a practical matter impair or impede his
ability to protect that interest or (ii) leave any of the persons
already parties subject to a substantial risk of incurring double,
multiple, or otherwise inconsistent obligations by reason of his claimed
interest.
CCP Code ss. 389(a)(West 1973).
Lazard is undoubtedly a person within the meaning of Section 389(a).
Applying subparagraph (1), complete relief cannot be accorded in Lazard's
absence because it would not be bound by any judgment adversely affecting its
rights under the contracts and would be free to
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/5/ Because Section 389 of the California Code of Civil Procedure governing
joinder has been amended to conform to Rule 19 of the Federal Rules of
Civil Procedure, courts of this state have looked to federal precedents for
guidance when deciding whether parties must be joined in an action. See,
e.g., Kraus v. Willow Park Pub. Golf Course, 73 Cal. App. 3d 354, 368 n.9
(1977).
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attack collaterally any such judgment. See, e.g., Sierra Club, 95 Cal. App. 3d
at 501 (complete relief could not be accorded in action brought by third party
against commission to set aside building permit because developer had not been
joined and could collaterally attack any judgment).
Moreover, applying subparagraph (2)(i), Lazard has an interest relating
to the subject of this action. The relief Emeritus seeks -- nullification of the
Lazard/Prometheus transactions and an order preventing Lazard and Prometheus
from voting its stock -- would impair Lazard's ability to protect its respective
interests under the SPA and the Amended Stockholder Agreement. ARV could bring
an action against Lazard, for example, for damages or for specific performance
in a separate action seeking to enforce the very Lazard obligation that is
subject to rescission in this case. This is precisely the unsavory result
Section 389(a)(2)(i) was intended to avoid.
Likewise, applying subparagraph (2)(ii), a disposition in Emeritus'
favor would leave defendant Prometheus subject to a substantial risk of
incurring inconsistent obligations. Specifically, by virtue of the provisions
authorizing specific performance of ARV's voting agreements with Lazard and
Prometheus, Prometheus might be faced with one order (in this case) voiding its
voting obligations, and another order (in a separate case brought by ARV and
Lazard) compelling Prometheus to honor the very same voting obligation. Section
3.1 of the Amended and Restated Stockholders Agreement between ARV, Prometheus,
and Lazard, dated October 29, 1997 (Exh. P to the Complaint), for example,
obligates Lazard to cause any of its "controlled affiliates," such as
Prometheus, to vote any ARV shares it owns "in favor of the election of all
Directors nominated by the nominating committee [of the ARV Board]." (Complaint,
Exh. P, ss. 3.1) Emeritus seeks to rescind this obligation by Lazard and
Prometheus in this case, even though Lazard itself is not a party. Yet in a
separate action by Lazard, Lazard could require Prometheus, through specific
performance, to comply with this very obligation. Section 389(a)(2)(ii) was
intended to prevent parties like Prometheus from being faced with this
predicament. See Micheel v. Haralson, 586 F. Supp. 169, 171 (E.D. Pa. 1983)
(interpreting similar language in the federal rules to protect a party from
being faced with two court orders where "compliance with one might breach the
other").
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In analogous situations, California courts have routinely held that
third parties not named in a Complaint are indispensable to the action and that,
in their absence, a case should not proceed. See, e.g., Holder v. Home Sav. &
Loan Ass'n, 267 Cal. App. 2d 91, 107 (1968) ("In an action for rescission of a
contract, all parties to the contract are indispensable to the action"). In Holt
v. College of Osteopathic Physicians & Surgeons, 61 Cal. 2d 750 (1964), the
trustees of a charitable organization alleged breach of trust and sought to
enjoin the charitable organization from performing a contract with a non-party.
Noting that "the effect of a decree in favor of plaintiffs would be to enjoin
[the non-party] as well as [the defendant]," the Court ruled that the non-party
was an indispensable party and ruled that the Complaint should be amended to add
it as a party-defendant. Id. at 760-61.
Similarly, in both Sierra Club, 95 Cal. App. 3d at 501, and Beresford
Neighborhood Ass'n v. City of San Mateo, 207 Cal. App. 3d 1180, 1189 (1989),
appellate courts affirmed superior court dismissals of actions where developers
were not joined as defendants in actions seeking to set aside permits the
developers had received. In both instances, the courts recognized that the
developers, like Lazard here, met all of the conditions for compulsory joinder
under Section 389(a).
Consistent with the decisions of the California courts, federal courts
have also applied Federal Rule of Civil Procedure 19 to require that, in any
action seeking to set aside a contract, all parties to the contract are
indispensable and must be joined in the action. Lomayaktewa, 520 F.2d at 1325;
Crouse-Hinds Co. v. InterNorth, Inc., 634 F.2d 690, 701 (2d Cir. 1980)./6/ In
Crouse-Hinds, the Second Circuit was faced with an action nearly identical to
the instant case. There, the defendant-counterclaimant, InterNorth, sought to
invalidate a proposed merger between Crouse-Hinds and a third corporation,
Belden. Like Emeritus, InterNorth had put forth a competing tender offer. In
response to that offer, Crouse-Hinds and Belden modified
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/6/ As explained in footnote 5, supra, because Section 389 of the California
Code of Civil Procedure governing joinder has been amended to conform to
Rule 19 of the Federal Rules of Civil Procedure, courts of this state have
looked to federal precedents for guidance when deciding whether parties
must be joined in an action. See, e.g., Kraus v. Willow Park Pub. Golf
Course, 73 Cal. App. 3d 354, 368 n.9 (1977).
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<PAGE> 15
their existing merger agreement by entering into a second agreement providing
for an exchange of stock and containing provisions to encourage shareholders to
support the merger. InterNorth then challenged both agreements alleging that
they were unfair attempts to entrench Crouse-Hinds's board of directors. In a
lawsuit which named only Crouse-Hinds and its directors as defendants,
InterNorth sought a preliminary injunction to enjoin performance of the stock
exchange agreement.
In the district court, Crouse-Hinds challenged InterNorth's failure to
name Belden as a party to the action. The district court rejected this challenge
and refused to declare Belden an indispensable party. Id. at 698. On appeal,
however, the Second Circuit disagreed. Id. at 700. The court explained:
The counterclaims seek to enjoin Crouse-Hinds's performance of the
Exchange Agreement, to which Belden is a party and in reliance on which,
we are informed, Belden has materially altered its financial structure.
The district court's view that the existence of Belden's contractual
rights is dependent on a determination of Crouse-Hinds's "authority" to
enter into the Exchange Agreement appears to misconstrue the nature of
the claim actually asserted by InterNorth. The basis for the challenge
to the Exchange Agreement is not that the [a]greement was beyond the
power or corporate authority of Crouse-Hinds or its directors; there is
no question that a contract was entered into. Rather, InterNorth's
substantive contention is that the contract is unfair . . . . Since
there is no question that the Exchange Agreement is a contract that was
within the powers of the corporation, and since Belden's rights
thereunder would clearly be prejudiced if the relief sought by
InterNorth were to be granted, Belden's presence is required.
Id. at 701 (citations and footnotes omitted). The court also explained
that Belden had "altered its financial structure" in partial performance of its
obligations by Crouse-Hinds' redemption of outstanding convertible debentures
held by Belden, just as Lazard/Prometheus has done here. Id.
This case presents an even stronger argument for concluding that Lazard
is a party. Emeritus contends that ARV and its directors breached their
fiduciary duty and entered into unfair agreements with Lazard and Prometheus.
Like InterNorth, Emeritus purports to challenge as "unfair" the ARV Board's
alleged efforts to entrench itself. In this case, however, Emeritus also seeks
to undo a series of transactions that have already taken place. Lazard and
Prometheus have already spent $87,000,000 to purchase ARV stock. Emeritus' own
Complaint makes it clear that
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ARV, Lazard and Prometheus have entered into a series of contracts, and that
those contracts have, to a significant degree, been performed. (See, e.g.,
Complaint P.P. 39, 56, 91, 107.) Lazard's rights "would clearly be prejudiced
if the relief sought by" Emeritus "were to be granted." See Crouse-Hinds, 634
F.2d at 701. Accordingly, like the Second Circuit in Crouse-Hinds, this Court
should hold that the absent parties to the agreements must be joined as parties
to this action seeking to invalidate those agreements.
B. EMERITUS' ENTIRE COMPLAINT FAILS TO STATE A CLAIM BECAUSE EMERITUS HAS
FAILED TO ALLEGE THAT IT IS THE OWNER OF ANY ARV STOCK AND
BECAUSE EMERITUS LACKS STANDING
Additionally, Emeritus' entire Complaint fails to state a claim because
Emeritus has not alleged that it was the record or beneficial owner of any ARV
stock at the time the ARV Board allegedly breached its fiduciary duties to
Emeritus. Stock ownership is a necessary prerequisite to a shareholder's direct
or derivative action for breach of fiduciary duty. Cal. Corp. Code ss.
800(b)(1)(West 1990); Jones v. H. F. Ahmanson & Co., 1 Cal. 3d 93, 105-108
(1969) (holding that individual stockholder had standing to bring breach of
fiduciary duty claim against the corporation); 12B William Meade Fletcher,
Fletcher Cyclopedia of the law of Private Corporations ss. 5936.10 at 558 (1993)
("Stockholder status is required, however, since otherwise the plaintiff has no
standing to contest corporate action"). Because Emeritus does not allege that it
was a record or beneficial owner of any ARV stock during the ARV Board's acts in
question, then its allegations against the Company and its directors for breach
of fiduciary duty cannot succeed under California law.
Moreover, even if it can allege stock ownership, Emeritus cannot
represent ARV shareholders in a derivative suit. As a competitor and potential
purchaser of the Company, Emeritus' self-interest is to keep the market price of
ARV stock low in order to gain control of the Company at the lowest possible
cost. ARV shareholders, on the other hand, have an interest in maximizing the
value of their shares. This inherent conflict of interest renders Emeritus
incapable of representing the shareholders in a derivative action against the
Company. See Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990) ("An adequate
representative must . . . be free
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from economic interests that are antagonistic to the interests of the class");
Baron v. Strawbridge & Clothier, 646 F. Supp. 690, 695 (E.D. Pa. 1986) (holding
that hostile tender offeror could not represent shareholders because his
interests were "manifestly antagonistic").
Indeed, even for a non-derivative claim, given that Emeritus' primary
motivation is to acquire all of ARV's stock as cheaply as possible, its
interests are diametrically opposed to other ARV shareholders, who would prefer
to sell, if at all, for the highest possible price. The very foundation of a
director's fiduciary duty is premised on maximizing shareholder value, an
objective fundamentally incompatible with the interests of someone seeking to
buy those shares. Accordingly, Emeritus should not be allowed to invoke the
Board's fiduciary duty to shareholders as a basis for its own claim, even if it
alleged ownership of some ARV shares, because the Board's fiduciary duty to
other shareholders is at odds with any fiduciary duty it may owe to Emeritus as
a shareholder seeking to acquire the company. Thus, Emeritus lacks standing to
pursue either its derivative or direct claim against the ARV Defendants.
As a result, the Court should dismiss Emeritus' entire Complaint for
failure to state a claim.
IV. CONCLUSION
Defendants' demurrer to Emeritus' Complaint should be sustained for two reasons.
First, the Complaint fails to name Lazard, an indispensable party, as a
defendant. Second, the Complaint fails to allege that Emeritus was a record or
beneficial owner of ARV stock at the time
/ / /
/ / /
/ / /
/ /
/ /
/ / /
/ / /
/ / /
/ / /
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the ARV Board allegedly breached its fiduciary duties. Even if Emeritus were
able to allege that it is a shareholder, it cannot bring a derivative or direct
fiduciary duty claim because its interests are antagonistic to all other
shareholders of ARV. Accordingly, the demurrer should be sustained.
Dated: January 8, 1998 Respectfully Submitted,
LATHAM & WATKINS
Peter H. Benzian
Hugh Steven Wilson
R. Brian Timmons
By /s/ R. BRIAN TIMMONS
---------------------------
R. Brian Timmons
Attorneys for Defendant
ARV Assisted Living, Inc.
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