<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(AMENDMENT NO. 6)
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 4. THE SOLICITATION OR RECOMMENDATION
The response to Item 4 is hereby amended by adding the following after
the final paragraph of Item 4:
On January 16, 1998, the Company sent a letter to its shareholders
discussing Emeritus' tender offer and proxy contest, and recommending a vote
against the Emeritus nominees. A copy of such letter is filed as Exhibit 19
hereto and is incorporated herein by reference.
On January 20, 1998, the Company sent to its shareholders a letter and
an accompanying Notice, announcing a Special Meeting of Shareholders to be held
on February 6, 1998. Such letter and Notice are filed as Exhibit 20 hereto and
are incorporated herein by reference.
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 15, 1998, the Company filed with the United States Court of
Appeals for the Ninth Circuit (the "Circuit Court") a Petition for Emergency
Writ of Mandamus Compelling Exercise of Jurisdiction or Other Appropriate Relief
(the "Petition"). The Petition seeks reversal of a district court order staying
an action for injunctive relief. Such Petition is filed as Exhibit 21 hereto and
is incorporated herein by reference.
On January 16, 1998, the Circuit Court issued an Order compelling the
real parties in interest to file a response. The response must address whether
the district court's stay order is appealable and whether the district court
abused its discretion or committed clear error by staying proceedings on
petitioner's claims for declaratory and injunctive relief. Such Order is filed
as Exhibit 22 hereto and is incorporated herein by reference.
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<PAGE> 3
ITEM 9. MATERIALS TO BE FILED AS EXHIBITS
The response to Item 9 is hereby amended by adding the following new
exhibit:
19 Text of Company's Letter to Shareholders, dated January 16,
1998.
20 Text of Company's Letter and Notice of Special Meeting of
Shareholders, dated January 20, 1998.
21 Petition for Emergency Writ of Mandamus in ARV Assisted Living,
Inc. v. United States District Court, Central District of
California Southern Division, case no. 98-70040, filed January
15, 1998.
22 Circuit Court Order in ARV Assisted Living, Inc. v. United
States District Court for the Central District of California,
case no. 98-70040, issued January 16, 1998.
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<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 21, 1998
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EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------
19 Text of Company's Letter to Shareholders, dated January 16,
1998
20 Text of Company's Letter and Notice of Special Meeting of
Shareholders, dated January 20, 1998
21 Petition for Emergency Writ of Mandamus in ARV Assisted Living,
Inc. v. United States District Court, Central District of
California Southern Division, case no. 98-70040, filed January
15, 1998
22 Circuit Court Order in ARV Assisted Living, Inc. v. United
States District Court for the Central District of California,
case no. 98-70040, issued January 16, 1998
-5-
<PAGE> 1
EXHIBIT 19
ARV LETTERHEAD
January 16, 1998
TO OUR SHAREHOLDERS:
I am writing to bring to your attention important new information that we
have received from Emeritus. IN MY VIEW, THIS INFORMATION MAKES ABSOLUTELY CLEAR
THAT EMERITUS'S TENDER OFFER IS A PLOY TO GET YOU TO VOTE FOR ITS NOMINEES TO
THE ARV BOARD. I also need to relay to you some additional data to let you know
just how much danger Emeritus's proxy contest poses to your investment in ARV.
When you read this information, I hope you will conclude, as has ARV's former
Chairman and largest individual shareholder, Gary Davidson, not to vote for
Emeritus's slate of directors.
INFORMATION EMERITUS HAS PROVIDED TO US
DEMONSTRATES ITS INTENT TO USE THE PROXY CONTEST
AND TENDER OFFER TO FORCE NEGOTIATIONS,
NOT TO PAY YOU $17.50 CASH
In my last letter to you, I passed on our Board's concern that the $17.50
Emeritus tender offer is not a real offer, but merely a tactic designed to help
Emeritus gain control of your Company and negotiate a lower price. Emeritus's
Chief Executive Officer, Mr. Baty, testified recently in the ongoing litigation.
When asked about the tender offer, Mr. Baty testified that the tender offer is
part of Emeritus's "three pronged approach." The three prongs are litigation
against ARV, a proxy solicitation to elect Emeritus's nominees and, of course,
the tender offer. WE ASKED HIM WHY EMERITUS HAD LAUNCHED THE TENDER OFFER, AND
HE ADMITTED THAT HIS ADVISORS HAD WARNED HIM THAT UNLESS HE LAUNCHED A TENDER
OFFER HE WOULD NOT HAVE A REASONABLE CHANCE OF WINNING THE PROXY CONTEST. He
even admitted that Emeritus had concluded that it could make a conditional
tender offer and still improve its chances of winning the proxy contest.
The documents that Emeritus produced to us in legal proceedings are even
more explicit in discussing the use of a conditional tender offer to give
Emeritus leverage over ARV and as a ploy to gain victory in the proxy contest.
In handwritten notes from Emeritus's October 12 Board meeting, Emeritus's
president states that the tender offer is being considered to "make the proxy
contest real" and then he goes on to note some of the key conditions Emeritus
would place on that offer. Then, revealing Emeritus's true objective, he states
that this approach will get Emeritus "to the bargaining table in good form."
Another document prepared by Emeritus's financial advisor frankly states that
"the tender offer is contemplated as being a leverage point to force [ARV's]
management back to the negotiating table to discuss [an ARV/Emeritus] merger on
friendly terms." REMEMBER, IF YOU VOTE FOR EMERITUS'S SLATE, EMERITUS WILL WIND
UP NEGOTIATING A "FRIENDLY MERGER" WITH ITS OWN NOMINEES. DO YOU REALLY THINK,
WITH ALL OF THE CONDITIONS TO ITS OFFER, EMERITUS WILL PAY YOU $17.50 PER SHARE
WHEN IT CAN NEGOTIATE A BETTER DEAL WITH ITS OWN HAND PICKED DIRECTORS?
1
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We have also obtained the financial analyses prepared by Emeritus's
advisors to evaluate an ARV/Emeritus combination. In none of them does Emeritus
include a charge for either the loss of facilities or the rent increases that a
change of control could trigger under nearly all our leases. And, of course,
Emeritus has told you nothing about how it plans to deal with these increased
rents. To me it seems obvious -- EMERITUS WILL REDUCE THE PRICE AND/OR CHANGE
THE FORM OF CONSIDERATION IT OFFERS FOR YOUR SHARES SO THAT YOU WIND UP PAYING
FOR THE DECLINE IN ARV'S VALUE CAUSED BY THESE INCREASED RENTS.
With all of this evidence, do you still have any doubt that the $17.50
"offer" of so-called "immediate cash" is part of a scheme to mislead you into
voting for Emeritus's nominees? I do not think there is much doubt, but if you
do, please do not forget all of the conditions to Emeritus's offer.
Despite all of the attention that has been focused on the conditional
nature of the offer, Emeritus steadfastly refuses to waive any of its
conditions. EMERITUS STILL HASN'T EVEN EXECUTED COMMITMENT LETTERS WITH ITS
POTENTIAL LENDERS. It admits that it has made no effort to contact ARV's
landlords to try to negotiate for their consent to Emeritus's proposed change of
control. And, Emeritus continues to insist on a condition that requires the
rescission of the issuance to Lazard Freres of 4.3 million shares in exchange
for the cancellation of ARV's $60 million debt to Lazard Freres. That condition,
as we have pointed out, will take at least two years to satisfy. Mr. Baty
conceded that this is just a price issue and that there is no legal issue that
compels Emeritus to keep this condition. Yet, Mr. Baty will not even waive this
condition -- so Emeritus's "offer" is really about $16.65 a share, not $17.50.
DON'T LET EMERITUS USE THE ILLUSION OF ITS $17.50 CASH OFFER TO INFLUENCE
YOUR VOTE. REMEMBER, AS MR. BATY ADMITTED IN HIS DEPOSITION TESTIMONY, EMERITUS
MADE ITS TENDER OFFER IN ORDER TO GIVE IT A REASONABLE CHANCE OF WINNING THIS
PROXY CONTEST. PROTECT YOUR INVESTMENT. DON'T VOTE FOR EMERITUS'S NOMINEES.
THE WHOLE TRUTH:
WHAT GARY DAVIDSON REALLY SAYS ABOUT THE
ILLUSORY EMERITUS OFFER
Emeritus has gone to great lengths to mislead you. In its January 14
letter to you, Emeritus implies that Gary Davidson, the former CEO of ARV,
supports its offer. As Emeritus knew, on January 13, 1998, Gary Davidson filed
an amendment to his Schedule 13D in which he stated:
"[I] believe that $17.50 per share, in cash, is an attractive price under
current conditions. The Emeritus proposal, which is subject to numerous
conditions, including financing, is not attractive to [me] because of such
conditions and contingencies which [I] believe are unlikely to be met. [I]
do not intend to vote for the Emeritus nominees at ARV's Annual Meeting or
to vote in favor of the merger proposed by Emeritus, based upon the
present terms of the Emeritus proposal."
Mr. Davidson understands how significant the many conditions reserved by
Emeritus are. He understands how dangerous a vote in favor of the Emeritus slate
can be. Don't be misled by the Emeritus half-truths. PROTECT YOUR INVESTMENT BY
RE-ELECTING YOUR BOARD.
2
<PAGE> 3
LEASES ON 18 IMPORTANT ARV FACILITIES
WILL BE SUBJECT TO TERMINATION
IF EMERITUS WINS ITS
PROXY SOLICITATION
Since my last letter to you, ARV management has completed a more detailed
financial analysis of what we believe the change of control provisions in ARV's
leases could cost you in the event Emeritus elects its nominees and then uses
its many conditions to walk away. The results are sobering, and show how
reckless Emeritus's proxy contest really is. Your Board unanimously and strongly
urges that no ARV shareholder take this risk.
- The election of the Emeritus slate immediately triggers events of default
on at least 18 important leases.
- Leases for these 18 facilities will be subject to immediate termination.
These leases are not like mortgages that ARV would be able to refinance.
ARV is operating established businesses at these sites and cannot simply
substitute a different landlord.
- If the landlords exercise their right to terminate, the harm to your ARV
investment is substantial. These 18 facilities are among ARV's most
mature and profitable facilities. They accounted for $45 million (42%) of
ARV's gross revenue for the 12 months ended December 31, 1997. Even more
alarming, these facilities accounted for $18 million, or 86% of ARV's
EBITDAR (earnings before interest, taxes, depreciation, amortization and
rent) for the same period.
- Many of these facilities have rental terms that are significantly below
current market. If the landlords whose leases were breached by election
of the Emeritus slate simply renegotiate to current market rates, ARV
estimates that its annual rental costs could rise as much as $4 million
annually. The total loss over the term of all these leases would exceed
$25 million.
Thus, the financial impact on your ARV investment if you elect the
Emeritus slate, but Emeritus walks away without closing its tender offer, could
be staggering.
WILL EMERITUS HAVE THE RIGHT TO WALK AWAY?
LET ME COUNT THE WAYS
In its tender offer, Emeritus has left itself at least 16 "outs" or
conditions which, if not satisfied in Emeritus's sole discretion, entitle
Emeritus to walk away. At least three of those conditions or "outs" are almost
certain not to be satisfied.
- One "out" is the successful resolution of Emeritus's lawsuit seeking to
rescind the redemption of the Prometheus convertible note and to require
the return of the common stock issued to Prometheus. Last week, Emeritus
amended its complaint to name Prometheus as a defendant in that lawsuit.
Prometheus, which invested $60 million in ARV to purchase its convertible
notes and which had nothing to do with the decision to redeem, has
informed me that it will appeal any decision which requires it to return
its common stock. If Prometheus files an appeal, our lawyers advise us it
will be entitled to a stay of the Order simply by posting a bond. Appeals
from the Superior Court of California in Orange County are currently
taking about three years from the filing of a notice of appeal to
decision. Thus, this condition will remain an "out" for Emeritus for a
lengthy time (even in the unlikely event it wins the Court case).
3
<PAGE> 4
- Emeritus's offer has a lease consent condition. That means that if it
cannot get ARV's landlords to consent to leases (with a company far
weaker financially than ARV) on terms satisfactory to Emeritus, it can
simply walk away. In his deposition, Mr. Baty made it clear that Emeritus
would not proceed with a transaction if the rent increases demanded by
ARV's landlords are too high. Moreover, Mr. Baty testified that Emeritus
has not even begun to speak to ARV's landlords.
- Emeritus, and its commercial bank lender, each have material adverse
change conditions. The cost of renegotiating leases or the loss of a
significant amount of ARV facilities because of lease terminations would
be sufficiently serious for Emeritus or its lender to declare a material
adverse change. If Emeritus or its commercial bank lender (an entity over
which Emeritus has no control) made that determination, Emeritus could
walk away, leaving no one at the Board level to protect your investment.
- REMEMBER, THERE ARE AT LEAST 13 MORE "OUTS" IN THE EMERITUS OFFER.
In short, there is mounting evidence that all Emeritus is seeking is an
option to "kick the tires," see if it can deal with ARV's landlords, see if it
likes its final financing package, and then, if it chooses, commence a
"negotiation" with its own hand-picked nominees for ARV's Board. Emeritus is
paying you nothing for that option. Instead, its reckless conduct could, and I
think will, exact a heavy price. Protect your investment by voting for your
Board.
IMPORTANT
DO NOT VOTE ANY BLUE PROXY CARDS YOU MAY RECEIVE FROM EMERITUS CORPORATION --
NOT EVEN TO WITHHOLD ON THE EMERITUS NOMINEES. DOING SO MAY HAVE THE EFFECT OF
CANCELING YOUR VOTE FOR ARV'S NOMINEES. ALSO, DO NOT VOTE ANY GOLD PROXY CARDS.
TO BE CERTAIN YOUR VOTE WILL COUNT FOR ARV'S NOMINEES, PLEASE MARK, SIGN, DATE
AND PROMPTLY MAIL ARV'S WHITE PROXY CARD THAT YOU RECEIVED PREVIOUSLY OR IN THE
ENCLOSED ENVELOPE.
On Behalf of your Board of Directors,
Sincerely,
/s/ HOWARD G. PHANSTIEL
Howard Phanstiel
IF YOU HAVE ANY QUESTIONS OR REQUIRE ANY ADDITIONAL INFORMATION OR
ASSISTANCE, PLEASE CALL OUR PROXY SOLICITOR, MACKENZIE PARTNERS, AT
1-800-322-2885.
4
<PAGE> 1
EXHIBIT 20
ARV ASSISTED LIVING, INC.
January 20, 1998
DEAR SHAREHOLDER:
Emeritus Corporation ("Emeritus") and certain other shareholders of ARV
Assisted Living, Inc. (the "Company") have called for a special meeting of
shareholders (the "Special Meeting") to be held on February 6, 1998. The purpose
of the Special Meeting is to consider and vote upon Emeritus' proposal to
approve and adopt a purported agreement and plan of merger (the "Merger
Agreement") among the Company, EMAC Corp. and Emeritus Corporation pursuant to
which Emeritus will, subject to various conditions, acquire all of the
outstanding securities of the Company.
THE SPECIAL MEETING WILL BE HELD AFTER THE ANNUAL MEETING OF SHAREHOLDERS
WHICH WILL BE HELD ON WEDNESDAY, JANUARY 28, 1998.
The proposed Merger Agreement for which Emeritus seeks approval has not
even been presented to your Board of Directors. Emeritus has indicated through
its proxy materials related to the Annual Meeting, however, that the merger,
like its current tender offer, will be subject to several significant
conditions.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU REJECT EMERITUS'
PROPOSAL TO MERGE WITH THE COMPANY ON THE TERMS CURRENTLY PROPOSED BY EMERITUS
BECAUSE SUCH A MERGER IS NOT IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREHOLDERS.
Sincerely,
/s/ HOWARD G. PHANSTIEL
Howard G. Phanstiel
Chairman of the Board
<PAGE> 2
ARV ASSISTED LIVING, INC.
------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 6, 1998
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Special
Meeting") of ARV Assisted Living, Inc., a California corporation (the
"Company"), will be held on Friday, February 6, 1998, at 3:00 p.m. local time,
at the Airport Hilton, 18800 MacArthur Blvd., Irvine, California 92715, for the
following purposes:
To consider and vote upon the following matters:
1. Proposal to approve and adopt a purported agreement and plan of
merger (the "Merger Agreement") among the Company, EMAC Corp., and Emeritus
Corporation ("Emeritus") pursuant to which Emeritus will, subject to
various conditions, acquire all of the outstanding securities of the
Company; and
2. Transacting such other business as may properly come before the
Special Meeting or any postponement or adjournment thereof.
Holders of record of Common Stock of the Company as of the close of
business on January 27, 1998 are entitled to receive notice of, and to vote at,
the Special Meeting. The outstanding Common Stock constitutes the only class of
securities of the Company entitled to vote at the Special Meeting, and each
share of Common Stock entitles the holder thereof to one vote. At the close of
business on January 19, 1998, there were 15,848,498 shares of Common Stock
issued and outstanding.
Neither the Company nor Emeritus has filed definitive proxy materials with
respect to the proposal to approve the Merger Agreement. Emeritus has not even
presented the Merger Agreement to the Company's Board of Directors for
consideration.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU REJECT THE
PROPOSAL TO APPROVE THE MERGER AGREEMENT BECAUSE IT BELIEVES THAT A MERGER OF
THE COMPANY AND EMERITUS ON THE TERMS CURRENTLY PROPOSED BY EMERITUS IS NOT IN
THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
By Order of the Board of Directors,
/s/ HOWARD G. PHANSTIEL
Howard G. Phanstiel
Chairman of the Board
<PAGE> 1
EXHIBIT 21
================================================================================
No.
================================================================================
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
----------------------------
ARV ASSISTED LIVING, INC.,
a California corporation,
Petitioners,
v.
UNITED STATES DISTRICT COURT,
CENTRAL DISTRICT OF CALIFORNIA
SOUTHERN DIVISION
Respondent,
EMERITUS CORPORATION, a Washington corporation;
EMAC CORPORATION, a Delaware corporation,
Real Parties In Interest
-----------------------------
From the United States District Court
for the Central District of California
Southern Division
Master File No. SA-CV-98-9-LHM(EEx)
================================================================================
PETITION FOR EMERGENCY WRIT OF MANDAMUS COMPELLING
EXERCISE OF JURISDICTION OR OTHER APPROPRIATE RELIEF
(EMERGENCY RELIEF REQUESTED -- DISPOSITION REQUESTED BEFORE JANUARY 21, 1998)
================================================================================
IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067
(310) 277-1010
Attorneys for Petitioner
ARV Assisted Living, Inc.
<PAGE> 2
CIRCUIT RULE 27-3 CERTIFICATE
Because this petition for a writ of mandamus seeks relief on an
expedited and emergency basis, counsel for Petitioner ARV Assisted Living, Inc.
("ARV") have complied with the requirements of Circuit Court Rule 27-3 governing
emergency motions and certify as follows:
Counsel for the parties to this action are:
IRELL & MANELLA LLP GIBSON, DUNN & CRUTCHER LLP
Kenneth R. Heitz Wayne W. Smith
Alexander F. Wiles Joseph P. Busch, III
1800 Avenue of the Stars 4 Park Place, Suite 1400
Suite 900 Irvine, California 92614-8557
Los Angeles, California 90067 (714) 451-3800 (tel.)
(310) 277-1010 (tel.) (714) 451-4220 (fax.)
(310) 203-7199 (fax.)
DAVIS POLK & WARDWELL
Attorneys for Petitioner Michael P. Carroll
ARV Assisted Living, Inc. James H.R. Windels
450 Lexington Avenue
New York, N.Y. 10017
(212) 450-4000 (tel.)
United States District Court (212) 450-5567 (fax.)
Central District of California
Southern Division Attorneys for Real Parties
Hon. Linda H. McLaughlin in Interest Emeritus
751 West Santa Ana Boulevard Corporation and EMAC
Room 101 Corporation
Santa Ana, California 92701
(714) 836-2651 (tel.)
Respondent
This petition seeks reversal of a district court order that stayed an
action for injunctive relief under the securities laws and related claims. This
stay is improper as a matter of law and would preclude any timely relief for
ARV. If the emergency writ is not granted in time to permit ARV to bring a
motion to enjoin the use of misleading proxy and tender offer materials by Real
Party in Interest Emeritus in connection with a January 28, 1998 shareholder
meeting, ARV and its shareholders will be irreparably harmed. Without a hearing
on ARV's injunction request, ARV shareholders will elect a board of directors on
the basis of Emeritus's misleading materials. If Emeritus is successful in
swaying votes in its favor, the election will trigger "change of control"
provisions in numerous contracts
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ARV has with third-parties, resulting in ARV's default under these contracts.
The financial impact of these defaults, which is not disclosed in Emeritus's
proxy or tender offer materials, would be catastrophic and would also serve as a
basis for Emeritus to abandon the misleading tender offer it has presented to
ARV shareholders.
At 11:45 a.m. on January 15, 1998, Joseph P. Busch III, of Gibson, Dunn
and Crutcher, counsel for Real Party in Interest Emeritus was notified of this
Petition by telephone. A similar call was placed at 12:25 p.m. on January 15,
1998, to the chambers of the Hon. Linda H. McLaughlin where notice of this
Petition was provided to Deputy Clerk Debra Beard. Notice was also provided to
the District Court by letter dated January 15, 1998. App., Vol. III, at 675.
Service copies of this Petition were furnished to a messenger service at 11:30
p.m. on January 15, 1998 for delivery to the Honorable Linda H. McLaughlin,
United States District Court, and to Joseph P. Busch III of Gibson, Dunn &
Crutcher for service to be completed by 9:00 a.m. on January 16, 1998.
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CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure,
Plaintiff/Appellant certifies that ARV Assisted Living, Inc. is the only
appellant that is a corporation that has issued shares to the public. There are
no parent companies or subsidiaries that have issued shares to the public and
the following are the only affiliates of ARV Assisted Living, Inc. that have
issued shares to the public:
San Gabriel Retirement Villa
American Retirement Villas Properties II
American Retirement Villas Properties III
ARV Colorado ARV Elmwood
Villas ARV Partners 6 - Columbus, L.P.
ARV Springboro Villas
ARV Three Rivers Villas
ARV Troy Villas
ARV Vienna Forest Villas
ARV Holland Villas
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TABLE OF CONTENTS
<TABLE>
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<S> <C> <C>
I. PRELIMINARY STATEMENT............................................. 1
II. STATEMENT OF JURISDICTION......................................... 3
III. STATEMENT OF ISSUE AND STANDARD OF REVIEW......................... 4
IV. STATEMENT OF THE CASE............................................. 5
A. ARV and Emeritus Compete for Assisted Living
Facilities............................................... 5
B. Emeritus's Merger Proposal............................... 6
C. Emeritus Hostile Proxy Contest and Tender Offer
to Acquire ARV........................................... 7
D. The Federal Action....................................... 10
E. The State Action......................................... 12
F. The District Court's Order To Show Cause................. 14
G. The District Court's Stay Order.......................... 16
V. ARV IS ENTITLED TO MANDAMUS RELIEF
COMPELLING THE DISTRICT COURT TO EXERCISE
JURISDICTION OVER THE FEDERAL ACTION.............................. 17
A. Mandamus Is Required Because The District Court
Committed Clear Error In Staying ARV's Federal
Securities Law Claims And In Applying Colorado
River.................................................... 18
1. The District Court Committed Clear Error
Because It Lacked Discretion To Stay A Claim
Arising Under Laws Subject To The Exclusive
Jurisdiction Of the Federal Courts.............. 19
2. The District Court Committed Clear Error in
Staying ARV's Related State Court Claims........ 20
a. A Stay Was Improper Because The
State And Federal Actions Are Not
Parallel Or Substantially Similar....... 21
b. The Colorado River Balancing Factors
Preclude The District Court From
Ignoring Its "Virtually Unflagging"
Jurisdiction............................ 22
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C> <C> <C> <C>
(1) Issuance of a Stay Does Not
Avoid Piecemeal Litigation.... 23
(2) The Remaining Colorado River
Factors do not Support a Stay. 24
B. Mandamus Is Required Because ARV Has No Other Adequate
Means To Attain The Relief It Seeks...................... 25
C. Mandamus Is Required Because ARV Will Suffer
Serious and Irreparable Harm if Prohibited from
Pursuing this Case Until After a Final Decision in
the State Court Action................................... 26
D. Mandamus Is Required Because The District
Court's Order Raises New And Important
Problems, Or Issues Of Law Of First Impression........... 30
E. ARV's Petition Meets Four Of The Five Bauman
Factors.................................................. 31
VI. CONCLUSION........................................................ 31
</TABLE>
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TABLE OF AUTHORITIES
<TABLE>
<CAPTION>
CASES Pages
- ----- -----
<S> <C>
Advanced Micro Devices, Inc. v. Intel Corp.,
512 U.S. 1205, 114 S.Ct. 2675,
129 L.Ed.2d 810 (1994)......................................... 23
Alkoff v. Gold,
611 F. Supp. 63 (S.D.N.Y. 1985)................................ 20
Allegheny County v. Frank Mashuda Co.,
360 U.S. 185, 79 S.Ct. 1060,
3 L.Ed.2d 1163 (1959).......................................... 19
American Int'l Underwriters, Inc. v. Continental
Ins. Co., 843 F.2d 1253 (9th Cir. 1988).................... 22, 23
Andrea Theatres, Inc. v. Theatre Confections, Inc.,
787 F.2d 59 (2d Cir. 1986)..................................... 19
Bauman v. United States,
557 F.2d 650 (9th Cir. 1977)....................... 17, 18, 30, 31
Bethlehem Contracting Co. v. Lehrer/McGovern, Inc.,
800 F.2d 325 (2d Cir. 1986).................................... 24
Camelot Indus. Corp. v. Vista,
535 F. Supp. 1174 (S.D.N.Y. 1982).............................. 27
Colorado River Water Conservation Dist. v. United States,
424 U.S. 800 (1976)............................... 1, 4, 16-25, 30
Cort v. Ash,
422 U.S. 66, 95 S.Ct. 2080,
45 L.Ed.2d 26 (1975)........................................... 15
Goldblum v. National Broadcasting Corp.,
584 F.2d 904 n.2 (9th Cir. 1978)............................... 4
Gulfstream Aerospace Corp. v. Mayacamas Corp.,
485 U.S. 271, 108 S.Ct. 1133, 99 L.Ed.2d
296 (1988)..................................................... 22
Homac, Inc. v. DSA Financial Corp.,
661 F. Supp. 776 (E.D. Mich. 1987)............................. 27
In re Cement Antitrust Litig.,
688 F.2d 1297 (9th Cir. 1982).............................. 18, 30
Intel Corp. v. Advanced Micro Devices, Inc.,
12 F.3d 908 (9th Cir. 1993)................................ 22, 24
</TABLE>
-vi-
<PAGE> 8
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Interstate Material Corp. v. Chicago,
847 F.2d 1285 (7th Cir. 1988).................................. 21
Kayes v. Pacific Lumber Co.,
51 F.3d 1449 (9th Cir.)..................................... 4, 19
Kerr v. United States Dist. Court,
426 U.S. 394, 96 S.Ct. 2119
48 L.Ed.2d 725 (1976).......................................... 17
Marshall Field & Co. v. Icahn,
537 F. Supp. 413 (S.D.N.Y. 1982)............................... 27
Medema v. Medema Builders, Inc.,
854 F.2d 210 (7th Cir. 1988)................................... 19
Minucci v. Agrama,
868 F.2d 1113 (9th Cir. 1989).................................. 19
Moses H. Cone Memorial Hosp. v. Mercury Costr. Corp.,
460 U.S. 1 (1983).......................................... 22, 24
Nakash v. Marciano,
882 F.2d 1411 (9th Cir. 1989).............................. 21, 22
Norris v. Wirtz,
Nos. 80-C-6836, 84-C-1527, 1985 WL 1862,
*6 (N.D. Ill. 1985)............................................ 20
Pacific Realty Trust v. APC Inv., Inc.,
685 F.2d 1083 (9th Cir. 1982).................................. 27
Polaroid Corp. v. Disney,
862 F.2d 987 (3rd Cir. 1988)................................... 27
Rondeau v. Mosiness Paper Corp.,
422 U.S. 49, 95 S.Ct. 2069,
45 L.Ed.2d 12 (1975)........................................... 26
Santa Fe Indus. Inc. v. Green,
430 U.S. 462, 97 S.Ct. 1292,
51 L.Ed.2d 480 (1977).......................................... 15
Silberkleit v. Kantrowitz,
713 F.2d 433 (9th Cir. 1983)................................... 19
Silvaco Data Sys., Inc. v. Technology Modeling
Assocs., Inc. 896 F. Supp. 973 (N.D. Cal. 1995)................ 21
Stahl v. Gibralter Fin. Corp.,
967 F.2d 335 (9th Cir. 1992)................................... 26
</TABLE>
-vii-
<PAGE> 9
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Taiwan v. United States Dist. Court for the N. Dist.
of Cal., 128 F.3d 712 (9th Cir. 1997).......................... 18
Travelers Indemnity Co. v. Madonna,
914 F.2d 1364 (9th Cir. 1990)........................... 4, 22, 24
United States v. Schlette,
842 F.2d 1574, as amended,
854 F.2d 359 (9th Cir. 1988)................................... 4
United States v. Sears, Roebuck & Co.,
785 F.2d 777 (9th Cir.), cert. denied,
479 U.S. 988, 107 S.Ct. 580,
93 L.Ed.2d 583 (1986).......................................... 4
Wilson v. United States Dist. Ct. for the
C. Dist. of Colo., 103 F.3d, 828
(9th Cir. 1996), cert. denied,
___ U.S. 117 S.Ct. 1823, 137, L.Ed.2d 1031 (1997).............. 18
STATUTES
15 U.S.C. section 78aa.............................................. 25, 27
15 U.S.C. section 78n(a)................................................ 4
15 U.S.C. section 78n(d)................................................ 4
15 U.S.C. section 78n(e)................................................ 4
15 U.S.C. section 1331.................................................. 25
28 U.S.C. section 1332.................................................. 4
28 U.S.C. section 1651.................................................. 3
Exchange Act section 10(b).............................................. 19
OTHER AUTHORITIES
Central District Local Rule 4.4......................................... 14
Central District Local Rule 4.4.1....................................... 14
Securities Act of 1934 section 14(a).................................... 4
Securities Act of 1934 section 14(d)................................. 4, 30
Securities Act of 1934 section 14(e)................................. 4, 30
</TABLE>
-viii-
<PAGE> 10
I.
PRELIMINARY STATEMENT
ARV Assisted Living Inc. ("ARV") hereby seeks an emergency writ of
mandamus. In clear violation of the rule that a district court has no discretion
to stay an action arising under exclusive federal jurisdiction, the court below
stayed ARV's action asserting federal securities law violations and related
claims. If the emergency writ is not granted in time to permit the district
court to hear and decide ARV's motion to enjoin the use of misleading materials
in connection with a January 28, 1998, ARV shareholder meeting, ARV and its
shareholders will be irreparably harmed and will be left without an effective
remedy under the securities laws or otherwise.
ARV is the target of a hostile takeover effort by Real Party in
Interest Emeritus Corporation and its subsidiary EMAC Corporation (collectively
"Emeritus"), one of its competitors in the market for providing assisted living
services to the elderly. As part of its hostile takeover effort, Emeritus made a
tender offer for ARV's outstanding shares and solicited proxies from ARV
shareholders in an effort to replace ARV's current board of directors.
Emeritus's tender offer and proxy solicitation are both materially misleading.
The ARV shareholder meeting at which these matters will be considered and voted
upon will take place on January 28, 1998.
ARV brought the action below (the "Federal Action"), in part under the
Securities Act of 1934, to enjoin Emeritus from pursuing the misleading tender
offer and proxy solicitation until corrective disclosures were made. The day
after the complaint was filed, the district court, on its own volition issued an
order to show cause why the Federal Action should not be stayed (the "OSC") and
then, following expedited briefing, stayed the Federal Action, purportedly under
Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976),
pending final resolution of a state court action filed by Emeritus (the "State
Action"). Yet, ARV has not filed an answer or a cross-claim in the State Action
and cannot litigate its federal claims there, as the state court is powerless to
compel Emeritus to correct its tender offer and proxy materials.
-1-
<PAGE> 11
Without a hearing on ARV's injunction request in the district court,
voting at the January 28 meeting will be accomplished on the basis of Emeritus's
misleading materials, which promise that Emeritus's nominees to the board of
directors will accept Emeritus's highly conditional $17.50 per share tender
offer. While purportedly promising "immediate cash" to shareholders, this proxy
solicitation, in violation of the federal securities laws, fails to fully
disclose the unlikelihood of Emeritus's conditions ever being met. Indeed, some
of the very conditions to Emeritus's tender offer will be rendered impossible to
meet if Emeritus is successful in taking control of ARV -- all to the
extraordinary detriment of ARV's shareholders. For instance, if Emeritus's
efforts are successful, "change of control" provisions will be triggered that
would effect a default of 18 of ARV's 42 leases with the operators of its
assisted living facilities and many of ARV's contracts with its key employees.
The default would itself cause a "material adverse change" to ARV's financial
condition, a justification for Emeritus to walk away from the deal. The new
board, comprised of Emeritus's handpicked directors, can then vote to combine
the companies, not for the illusory price of $17.50 per share, but for some
lesser consideration, probably consisting largely of stock in a combined
Emeritus/ARV entity.
This is not some hypothetical scenario that ARV envisions. Handwritten
notes of an Emeritus board meeting reveal that Emeritus's takeover effort adopts
a "three prong approach" to "get [it] to the bargaining table in good form."
Appendix of Exhibits ("App."), Vol. III, at 663 (emphasis added). One of the
"prongs" is the proxy contest. App., Vol. III, at 664. Another "prong" is the
tender offer, which Emeritus "put in place to make proxy solicitation real."(1)
Id.
Moreover, even if Emeritus, having successfully replaced ARV's board,
does continue to pursue its tender offer, some of Emeritus's conditions to the
tender offer are highly unlikely to be satisfied for months or, even, years
after the January 28 election. One obvious example is the condition requiring
rescission of the redemption by ARV of
- -----------------
(1) The first of the three "prongs" has been redacted from the notes. See App.,
Vol. III, at 663-64. ARV can only speculate about what it might be.
-2-
<PAGE> 12
a $60 million convertible note (the "Notes") held by Prometheus Assisted Living,
LLC and Lazard Freres Real Estate Investors LLC (collectively, "Prometheus").
Prometheus acquired 4.3 million shares of ARV as a result of that redemption.
Rescission of this redemption is part of the relief Emeritus is seeking in the
State Action. However, even if Emeritus succeeds in obtaining its requested
relief, an appeal through the state courts would prevent Emeritus's condition
from being met until the appeals process is exhausted. Thus, even if Emeritus's
intentions in attempting to replace ARV's current board are honorable, the
conditions Emeritus has imposed would force ARV to operate for years under a
board of directors whose primary loyalty is to Emeritus. ARV shareholders,
during that period, would see no cash for their shares and would be faced with
an investment in a company run by one of its main competitors.
It is for these reasons that this emergency request for writ of
mandamus is filed. ARV requests that this Court rule on the merits of this
mandamus petition by no later than January 21, 1998.(2)
II.
STATEMENT OF JURISDICTION
The Order at issue in this mandamus proceeding is an interlocutory
decree staying ARV's federal claims pending resolution of a state court action,
subject to the district court's reservation of jurisdiction to lift the stay
once the state case becomes final. Mandamus is appropriate under the All Writs
Act, 28 U.S.C. section 1651.
- -------------
(2) With this proposed time frame, ARV seeks to ensure that Emeritus is able to
file an Opposition to the Motion for Preliminary Injunction, that ARV is
able to prepare and file a Reply and that the District Court is able to
weigh the issues and render a decision before the shareholders meeting
occurs on January 28.
-3-
<PAGE> 13
III.
STATEMENT OF ISSUE AND STANDARD OF REVIEW
The determinative issue presented by this petition is:
1. "Did the United States District Court for the Central District
of California commit clear error when it stayed an action
alleging securities law violations under Sections 14(a),
14(d) and 14(e) of the Securities Act of 1934, as amended, 15
U.S.C. section 78n(a), section 78n(d), section 78n(e), and
state law claims for unfair competition and breach of
fiduciary duty, subject to diversity jurisdiction under
28 U.S.C. 1332, in favor of state court proceedings between
some of the same parties?"
The district court stayed the Federal Action, purportedly "[b]ased on the
principles enunciated in Colorado River Water Conservation District v. United
States, 424 U.S. 800 (1976)." See App., Vol. I, at 1-2. The standard of review
in Colorado River abstention cases is abuse of discretion, though this standard
"should not be confused with the broader abuse of discretion test used in other
matters, such as rulings on certain evidentiary issues." Travelers Indem. Co. v.
Madonna, 914 F.2d 1364, 1367 (9th Cir. 1990). "A district court may abuse its
discretion if it does not apply the correct law or if it rests its decision on a
clearly erroneous finding of material fact." Kayes v. Pacific Lumber Co., 51
F.3d 1449, 1464 (9th Cir.) (quotations and citations omitted), cert. denied, 516
U.S. 914, 116 S.Ct. 301, 133 L.Ed.2d 206 (1995). The Ninth Circuit has
repeatedly held that "mandamus lies to correct an abuse of discretion." United
States v. Schlette, 842 F.2d 1574, 1577, as amended, 854 F.2d 359 (9th Cir.
1988); Goldblum v. National Broadcasting Corp., 584 F.2d 904, 906 n.2 (9th Cir.
1978).(3)
- -------------
(3) That the district court issued the stay only hours after ARV filed its
opposition to the stay, particularly in light of Emeritus's utter failure to
offer any credible authority for issuance of a stay (see IV.F. and IV.G.,
below), may give this Court pause as to whether "the appearance of justice
. . . would best be served by remand to another judge." United States v.
Sears, Roebuck & Co., 785 F.2d 777, 781 (9th Cir.), cert. denied, 479 U.S.
988, 107 S.Ct. 580, 93 L.Ed.2d 583 (1986) (remanding to different judge when
"district judge's statements and conduct evidence an appearance of his
unwillingness to preside" over the case). The district court today issued an
order finding ARV's counsel in violation of Central District Local Rule 2.10
for giving the district court, the respondent in the proceeding notice of
this Petition (as required by Circuit Rule 27-3). App., Vol. III, at 677.
ARV requests that this Court consider remanding this action to another
district court judge.
-4-
<PAGE> 14
IV.
STATEMENT OF THE CASE
A. ARV AND EMERITUS COMPETE FOR ASSISTED LIVING FACILITIES
ARV is a major provider of long-term, service enhanced housing for the
elderly known as "assisted living." App., Vol. II, at 297: paragraph 2.
Critical to ARV's viability is its ability to obtain suitable and reasonably
priced facilities to provide this housing. Id.: paragraph 3. ARV currently
operates 48 facilities, 32 of which are leased -- many at below market rates --
pursuant to long-term operating leases. Id. Emeritus is a direct competitor of
ARV, operating assisted living facilities nationwide, including in California.
App., Vol. II, at 374, 404, 409. Emeritus currently operates a total of
approximately 96 residential communities, leasing approximately 75% of these
facilities. App., Vol. II, at 350.
Since its organization in 1993, Emeritus has conducted an aggressive
acquisition campaign, seeking to lease, purchase or develop additional
residential living communities. App., Vol. II, 375, 398. In the first quarter of
1997, Emeritus stated its intention to continue its expansion program, and
stated that its growth strategy will continue to focus on "the acquisition of
existing senior housing facilities that are currently operated as
assisted-living communities or can be efficiently repositioned by [Emeritus] as
assisted-living communities." App., Vol. II, at 378, 381, 394, 398.
The long-term care service industry is highly competitive and
appropriate facilities for assisted-living communities are in short supply.
App., Vol. II, at 402; App., Vol. II, at 297: paragraph 4. Emeritus itself has
predicted that competition in the assisted-living industry will intensify. App.,
Vol. II, at 482. In early 1997, Emeritus stated that "in implementing its growth
strategy, [it] expects to face competition in its efforts to develop and acquire
assisted-living communities." Id.
-5-
<PAGE> 15
B. EMERITUS'S MERGER PROPOSAL
In early 1997, ARV decided to explore the possibility of a strategic
investment in the company in order to assist the company in continuing its
acquisition and development plans and repaying debt. Prior to June of 1997,
ARV's investment bankers and advisors met with representatives of Prometheus
Assisted Living LLC, an affiliate of Lazard Freres Real Estate Investors LLC
(collectively, "Prometheus") to explore the possibility of Prometheus investing
in ARV. Detailed discussions ensued. On June 27, 1997, ARV entered into an
exclusivity agreement with Prometheus pursuant to which ARV agreed not to pursue
a transaction with any other investor prior to August 8, 1997 while it
negotiated definitive agreements with Prometheus. By July 13, 1997, ARV and
Prometheus had reached agreement on the form of the definitive agreements
pertaining to the proposed transaction.
Recognizing the progress between ARV and Prometheus, Emeritus attempted
to prevent ARV from going forward with the Prometheus transaction. On July 10,
1997, Emeritus made a proposal for Emeritus to acquire ARV. App., Vol. III, at
587-88. As its first of two alternatives, Emeritus proposed that it acquire ARV
through a stock for stock trade, specifically, a tax free merger or similar
business combination transaction in which ARV shareholders would receive
Emeritus Common Stock equal in value to a minimum of $14.00 for each share of
ARV Common Stock.
App., Vol. III, at 587. As a second alternative, Emeritus proposed that ARV
shareholders be offered a combination of Emeritus Common Stock and "up to 50% in
cash." Id. Emeritus expressly acknowledged that its proposal was substantially
undeveloped, pointing out that "a number of structuring, tax and regulatory
considerations would have to be addressed before arriving at an agreement in
principle . . ." Id.
After careful review and consideration of the brief terms outlined in
the joint letter of July 10, 1997, the ARV Board determined that those terms
were significantly less
-6-
<PAGE> 16
attractive and definitive than the terms of the proposed Prometheus transaction.
Accordingly, the ARV Board voted unanimously to approve the Prometheus
transaction.
When ARV's board rejected Emeritus's vague proposal in favor of the
Prometheus transactions, Emeritus twice wrote to ARV with the stated desire of
pursuing negotiations for a vague and undefined proposal for an all-cash offer
to acquire ARV, first for $14, then for $16.50, per share. App., Vol. III, at
592-598. Within days of the second such proposal, however, Emeritus's investment
bankers faxed to ARV's investment bankers an informal, but far more detailed,
proposal for a stock for stock transaction. App., Vol. III, at 646: paragraph 3,
648. Moreover, even after it announced the purported $17.50 cash offer, Emeritus
continued to tell people associated with ARV that a stock for stock transaction
is Emeritus's best option. App., Vol. III, at 633: paragraph 4.
C. EMERITUS HOSTILE PROXY CONTEST AND TENDER OFFER TO ACQUIRE ARV
On January 28, 1998, ARV will hold an election for all nine seats on
its board of directors. App., Vol. III, at 632: paragraph 2. Because ARV
rejected Emeritus's proposed acquisition, Emeritus has now launched a proxy
contest seeking to fill all nine of ARV's board seats with its hand-picked
nominees. App., Vol. III, at 574 et seq. ARV's by-laws do not provide for
cumulative voting; thus, if Emeritus is successful in obtaining the proxies for
a plurality of ARV's outstanding shares, it will be able to remove the entire
ARV board and replace it with its customized slate. App., Vol. III, at 632:
paragraph 2. If successful in obtaining these proxies, Emeritus will be a
controlling shareholder possessing fiduciary obligations to the corporation and
its minority shareholders.
In another effort to force an acquisition, Emeritus has presented ARV
shareholders with a tender offer, purportedly offering to purchase ARV for
$17.50 per share in cash. App., Vol. III, at 502 et seq. Yet, while Emeritus's
tender offer and proxy solicitation materials list the conditions to the tender
offer, they fail to disclose material facts critical to an adequate
understanding and evaluation of these conditions. In fact, these documents say
virtually nothing about the likelihood that these conditions will be met.
-7-
<PAGE> 17
For example, while the tender offer and proxy solicitation materials
disclose the condition requiring that Emeritus obtain appropriate consents from
all ARV landlords entitled to declare a default following a "change of control"
of ARV, the full meaning of this condition will be lost on ARV's shareholders
because the tender offer and proxy solicitation materials fail to disclose that
ARV will default on at least 18 of its leases upon election of Emeritus's board
nominees and additional leases will be in default upon the contemplated change
in stock ownership. Compare App., Vol. II, at 301-324 with App., Vol. III, at
546-49. In addition, while disclosing the condition requiring rescission of the
Prometheus transaction, the tender offer and proxy solicitation materials fail
to reveal the two year time frame for satisfaction of this condition. App., Vol.
III, at 508, 583-84. To the contrary, Emeritus's tender offer states that it
will expire on January 21, 1998. App., Vol. III, at 529. Emeritus's proxy
solicitation materials repeatedly attempt to convince shareholders that election
of the Emeritus nominees will result in "immediate cash" for all ARV
shareholders. For example, these materials assert that "only the [tender offer]
provides an immediate cash payment to all ARV shareholders." App., Vol. III, at
583. (emphasis added). Emeritus's proxy solicitation materials also claim that,
while benefits from other transactions are "delayed and uncertain," the tender
offer "provides you an immediate return on your investment." App., Vol. III, at
584. (emphasis added). Finally, these solicitation materials dramatically warn,
"THIS IS THE LAST OPPORTUNITY TO REQUIRE THE ARV BOARD TO ACCEPT OUR $17.50 PER
SHARE ALL-CASH OFFER." App., Vol. III, at 577; see also App., Vol. III, at 574.
Emeritus's tender offer and proxy solicitation materials also fail to
reveal that Emeritus's alleged funding source for a $110 million bank loan has
conditioned this financing on the absence of any adverse material change in
either ARV or Emeritus. App., Vol. III, at 508, 524. Indeed, while the tender
offer claims that Emeritus has "fully negotiated" the terms and conditions of
financing commitment letters, neither the tender offer nor the proxy
solicitation materials disclose the identity of the potential funding sources or
any of the terms and conditions allegedly negotiated. Id. The tender offer and
proxy solicitation materials also fail to disclose that the author of Emeritus's
"highly
-8-
<PAGE> 18
confident" letter cannot make a reliable assertion about the availability of
financing because it has never arranged for a tender offer financing. Id.
Critical among these non-disclosures is the possible default on the
leases for at least 18 of the facilities ARV operates. These defaults will be
triggered by the election of Emeritus's nominees, a "change of control" of ARV's
board. App., Vol. II, at 297: paragraph 6. ARV's facilities are the foundation
of its entire business operation; termination of these leases would subject ARV
to potentially ruinous losses in revenue. App., Vol. II, at 298: paragraph 8.
Given the scarcity of adequate facilities, and ever increasing competition, ARV
might well be unable to replace these facilities. Even if ARV's landlords allow
the leases to continue, the price of their consent could be devastating for ARV.
ARV estimates that an increase to market rent would mean a $4 million increase
in ARV's estimated annual lease costs, an event which could have paralyzing
effects on ARV's ability to operate at its current level. Id.
In addition, by merely electing its nominees to ARV's board, Emeritus
will automatically provide over 18 ARV employees with the right to terminate
their employment contracts early and demand from ARV severance payments totaling
approximately $6.8 million. App., Vol. II, at 298: paragraph 10. Given the
increasingly high demand in the assisted living industry for knowledgeable and
experienced personnel, many of these employees may be unable to resist the huge
windfall of one to three years salary that they would be entitled to receive.
Such an exodus of key employees could leave ARV in rubble, forced to replace a
talented and experienced staff on little notice in an increasingly competitive
market. App., Vol. II, at 299: paragraph 11.
In sum, Emeritus has not put ARV shareholders on notice of the
potential catastrophes inherent in election of the Emeritus nominees, or of the
facts revealing the near certainty that many of the conditions to the promised
cash purchase will prove the escape hatch Emeritus has planned all along.(4)
- -------------
(4) The latter possibility is consistent with handwritten notes of a board of
directors meeting that Emeritus produced in the state action court
litigation between Emeritus and ARV. These notes identify that Emeritus
intends to use "a three prong approach which gets [Emeritus] to the
bargaining table in good form." App., Vol. III, at 663. Two of these prongs
are identified in the notes as the "proxy contest" and the "tender offer,"
which the notes suggest should be "put in place to make proxy solicitation
real." App., Vol. III, at 664. Obviously, it is hard to reconcile Emeritus's
repeated claims that it is seriously committed to completing its $17.50 all
cash tender offer with these notes suggesting that the tender offer is a
ploy to get Emeritus to the bargaining table "in good form."
-9-
<PAGE> 19
D. THE FEDERAL ACTION
Emeritus's proxy solicitation and tender offer led ARV to commence this
action (the "Federal Action"). The Federal Action was filed one day after the
ARV board of directors rejected the Emeritus offer as inferior to ARV's current
business plan at a meeting at which ARV's financial advisers, Salomon Smith
Barney, advised the board that the offer was inadequate from a financial point
of view. As ARV's Complaint for Injunctive and Declaratory Relief for Violation
of the Federal Securities Laws, Unfair Competition and Breach of Fiduciary Duty
(the "Federal Complaint") sets forth, Emeritus's tender offer and proxy
solicitation are materially misleading in violation of the Exchange Act and SEC
rules promulgated thereunder. App., Vol. I, at 66-71: paragraphs 55-78.
Specifically, Emeritus's tender offer and proxy solicitation fail to
disclose that: (1) Emeritus's highly conditional cash offer is a ploy to enable
Emeritus to gain control of the ARV board so that it can acquire ARV through a
stock for stock deal; (2) a substantial number of ARV leases contain provisions
which would cause ARV to incur substantial additional lease costs upon a change
of control; (3) the tender offer is conditioned on (among other things) an event
that most likely will not occur (if at all) for at least two years; (4) the
"highly confident" letter Emeritus touts as evidence of its ability to obtain
financing for the tender offer is largely meaningless since the author of this
letter is not itself in the business of providing or arranging financing for
hostile takeovers; (5) Emeritus has refused to pay the commitment fee necessary
to obtain financing since it knows it must
-10-
<PAGE> 20
wait at least two years to have any chance of obtaining the relief necessary to
satisfy one of the conditions to its offer; (6) Emeritus's proposed $110 million
commercial bank loan which constitutes a portion of its financing contains a
"material adverse change" condition which will permit the bank to decline the
loan when it learns that the merger will trigger events of default in 18 of
ARV's 32 leases; and, (7) Emeritus's offer is conditioned in such a way that it
is not an offer to pay $17.50 for all of the outstanding shares of ARV but
rather is the economic equivalent of paying about $16.65 for each outstanding
share of ARV. App., Vol. I, at 51-53: paragraphs 10-11.
The Federal Action also alleges claims under California law for unfair
competition and breach of fiduciary duty: that Emeritus has used its proxy
solicitation and its highly conditional tender offer to obtain a significant
benefit at the expense of ARV shareholders. App., Vol. I, at 71-73: paragraphs
82-87. ARV alleges that Emeritus, by engaging in its reckless proxy contest and
making an illusory tender offer, seeks to force ARV to agree to combine its
business with that of Emeritus or risk financial ruin.
Specifically, if Emeritus is successful in its proxy contest, and
manages to replace the current board of directors with one of its own choosing,
the resulting change of control would trigger the default of at least 18 of
ARV's 48 existing facilities and would trigger clauses that would permit many of
ARV's key employees to terminate their employment contracts and receive lump sum
payments upon their departure. App., Vol. I, at 53-54: paragraph 15. These
defaults would cause a "material adverse change" to ARV which, in turn, would be
grounds for Emeritus to abandon its tender offer. Consequently, Emeritus would
be in a "heads I win, tails, you lose" situation: either it could force ARV to
accept a business combination on more advantageous terms to Emeritus or it could
attempt to acquire ARV facilities and employees for itself. Id. Other conditions
to Emeritus's tender offer also would permit Emeritus to abandon its purported
$17.50 per share, all-cash tender offer, leaving ARV with a board loyal to
Emeritus and little option but to renegotiate the transaction on terms more
beneficial to Emeritus. Indeed, if Emeritus succeeds in replacing the ARV board,
it will have reached the "bargaining table in good form" (App.,
-11-
<PAGE> 21
Vol. III, at 663), being in the enviable position of renegotiating the terms of
the transaction with its own hand-picked directors.
The Federal Complaint asks the district court for declaratory and
injunctive relief. Specifically, ARV requests that the district court enjoin
Emeritus from: soliciting proxies from ARV shareholders; proceeding with the
tender offer; purchasing, acquiring or disposing of any shares of ARV common
stock; voting any shares of ARV common stock; and taking any steps to replace
the current board of directors. App., Vol. I, at 57-58: paragraphs 26-29. ARV
also requests that these prohibitions remain in effect until Emeritus corrects
its false and misleading statements, makes all disclosures required by law,
removes all conditions of its tender offer, and obtains written waivers from its
financing sources of all conditions which could allow them to refuse to provide
funds for the tender offer.
In short, the Federal Action seeks to ensure the fairness of any tender
offer -- that Emeritus make full disclosures in its tender offer and proxy
solicitation -- and to prevent Emeritus from using its proxy contest and tender
offer to cripple ARV financially by triggering the "change of control"
provisions, and then those using those provisions as reason to walk away from
its own tender offer. Likewise, ARV seeks to ensure that its shareholders are
fully informed so that they can avoid the irreparable harm that might result if
ARV is run by directors loyal to Emeritus while ARV's shareholders wait for the
numerous conditions to the tender offer to be satisfied.
E. THE STATE ACTION
Before ARV filed the Federal Action and before Emeritus issued its
tender offer, Emeritus commenced an action in the Superior Court of the State of
California (the "State Action"). The State Action has absolutely no substantive
overlap with the Federal Action. None of Emeritus's claims for relief in the
State Action implicate the proxy solicitation or the tender offer.
Emeritus's Complaint in the State Action (the "State Complaint")
alleges five claims for relief -- against ARV and its individual directors for
breaching their fiduciary duty and
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against Prometheus, for aiding and abetting that breach.(5) These claims arise
out of actions taken by ARV following Emeritus's proposed merger, particularly
ARV's implementation of a Shareholder's Rights Plan, ARV's completion of certain
agreements with Prometheus which invested nearly $85 million in ARV in exchange
for the Notes, and ARV's redemption of the Notes into ARV shares. Specifically,
Emeritus alleges that ARV and its board, with Prometheus's aid, breached their
fiduciary duties to ARV shareholders by: using transactions with Prometheus as
"an improper defensive measure" to prevent Emeritus's takeover (App., Vol. II,
at 282-84 (First Claims for Relief)); failing to maximize shareholder value when
ARV entered into the transactions with Prometheus (App., Vol. II, at 284-86
(Second Claim for Relief)); failing to exercise due care in rejecting Emeritus's
proposal and entering the Prometheus transactions (App., Vol. II, at 286-88
(Third Claim for Relief)); implementing a Shareholders Rights Plan (App., Vol.
II, at 288-89 (Fourth Claim for Relief)); and by redeeming the Notes for shares
of ARV stock (App., Vol. II, at 289-90 (Fifth Claim for Relief)).
Emeritus alleges that, with the exception of the redemption of the
Notes, these alleged breaches of fiduciary duty occurred in response to
Emeritus's initial proposal to enter into a business transaction with ARV.
Indeed, only the redemption of the Notes occurred after Emeritus announced its
proxy contest for control of ARV's board of directors (App., Vol. II, at 279:
paragraph 90), and all of these alleged breaches occurred before Emeritus's
tender offer of $17.50 per share for ARV's outstanding stock (App., Vol. II, at
280: Paragraphs 95-96).(6) Thus, the factual underpinnings of the State Action
almost entirely predate Emeritus's use of the materially misleading tender offer
and proxy solicitation.
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(5) Prometheus was only recently added as a defendant to the State Action when
Emeritus amended its State Complaint on January 7, 1998. The initial
Complaint in the State Action was filed on December 9, 1997.
(6) Emeritus's tender offer did not take place until December 19, 1997, ten days
after Emeritus filed the State Action.
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<PAGE> 23
Like ARV's Federal Complaint, Emeritus's State Complaint seeks
declaratory judgment and injunctive relief. App., Vol. II, at 281: paragraphs
97-98. The similarities go no further. Emeritus requests an order declaring that
ARV and its board breached their fiduciary duties to ARV's shareholders.
Emeritus's request for injunctive relief seeks to prevent implementation of the
Shareholder's Rights Plan, to rescind the transactions between ARV, Prometheus
and Lazard and to prevent Prometheus from voting its ARV shares in an election
of ARV directors. App., Vol. II, at 283-84: paragraphs 107, 285-86: paragraphs
114, 288: paragraphs 124, 289: paragraphs 132. 291 paragraph 139.
In short, Emeritus is seeking in the State Action to overturn the
actions ARV took after Emeritus's initial merger proposal and to dictate the
composition of the electorate at the next shareholders meeting. Emeritus's
claims do not relate to the proxy solicitation and tender offer that is the
subject of ARV's Federal Complaint.
F. THE DISTRICT COURT'S ORDER TO SHOW CAUSE
On January 6, 1998, ARV filed the Federal Action in the United States
District Court for the Central District of California. With the Federal
Complaint, ARV filed a Notice of Pendency of Other Actions or Proceedings
Pursuant to Central District Local Rule 4.4.(7)
On January 7, 1998, one day after ARV filed the Federal Action, the
district court issued a minute order requesting that Emeritus show cause why the
"federal action should not be stayed pending final resolution of the pending
action in Orange County Superior Court." App., Vol. I, at 6. The district court
ordered Emeritus to file a response (the "Response") by no later than January 9,
1998, and ordered ARV to reply to Emeritus's Response by no later than January
13, 1998. Id.
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(7) Central District Local Rule 4.4.1 requires plaintiff's counsel to file this
Notice whenever a civil action filed in the district "involves . . . a
material part of the subject matter of an action then pending before another
court . . ." Though the State Action and Federal Action raise distinct legal
questions and focus on different events -- ARV's defensive measures in the
state court and Emeritus's proxy and tender materials in the federal court
-- ARV's counsel concluded that because both actions concern Emeritus's
attempted takeover of ARV, the District Court should be advised of the State
Action.
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<PAGE> 24
Emeritus's Response raised three arguments. First, in a single
paragraph, Emeritus argued that "[b]ecause the essence of [the federal] dispute
is governed by state law, it should be decided in state court." App., Vol. I, at
41.(8) In the same paragraph, however, Emeritus conceded that the "state court
may not have jurisdiction over ARV's federal securities law claims" Id. Second,
notwithstanding the fact that such considerations should be irrelevant to the
district court's exercise of jurisdiction, Emeritus attacked the merits of ARV's
claims, including ARV's factual contentions, claiming, among other things, that
Emeritus had made no material omissions in its SEC filings and that ARV's state
law claims lacked merit.(9) Third, in another brief paragraph, Emeritus argued
that "questions of judicial economy militate in favor of staying the action,"
emphasizing that the "Court is in the best position to judge the state of its
calendar" and that a preliminary injunction hearing in the State Action "will
effectively resolve the State Court Action one way or the
- -------------
(8) Neither of the two cases cited in Emeritus's brief for this proposition
even mentions abstention. See Santa Fe Indus. Inc. v. Green, 430 U.S. 462,
97 S.Ct. 1292, 51 L.Ed.2d 480 (1977); Cort v. Ash, 422 U.S. 66, 95 S.Ct.
2080, 45 L.Ed.2d 26 (1975). Indeed, neither of the two cases even stands for
the proposition for which they were cited; though they state that issues of
corporate governance are questions of state law, they nowhere indicate that
those issues should only be addressed by state courts. At best, Emeritus's
reliance on these cases was without basis; at worst, it was intentionally
misleading.
(9) In its argument, Emeritus clearly misstated ARV's contentions. The crux of
ARV's claim is that Emeritus has withheld information that would permit ARV
shareholders to assess the likelihood (if any) of the conditions Emeritus
has disclosed being met. Thus, the Response misstates ARV's claim that the
tender offer is misleading about the potential defaults resulting from the
"change of control." The Response argues that Emeritus ARV's claim lacks
merit because Emeritus disclosed that its tender offer is conditional on ARV
landlords entitled to declare a default consenting to a change of control
"on terms satisfactory to" Emeritus. This, however, is not ARV's position:
Emeritus has revealed its condition, but has not disclosed the number of
leases subject to default nor the significant financial impact numerous
defaults will have on ARV's financial condition. That is what makes
Emeritus's disclosures misleading.
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<PAGE> 25
other." App., Vol. I, at 44.(10) Incredibly, Emeritus's Response never mentioned
the legal issues and factual disputes that are at issue in the State Action (the
alleged breach of fiduciary duty by ARV and its directors) and did not cite a
single case from the main line of cases governing discretionary stays, Colorado
River and its progeny.
ARV's Opposition to Emeritus's Response (the "Opposition") (App., Vol.
I, at 9 et seq.) provided an extensive factual background identifying the
factual and legal claims in the State Action, as opposed to those present in the
Federal Action. ARV also argued that the district court possessed no discretion
to stay ARV's federal securities law claims, and to the extent the state law
claims were subject to analysis under Colorado River and its progeny, issuance
of a stay would constitute a manifest abuse of the district court's discretion.
ARV also identified nine well-known examples of hostile takeover disputes --
including, for instance, the Mesa/Unocal, Paramount/Time and Wells Fargo/First
Interstate contests -- that led to concurrent litigation in state and federal
courts. See App., Vol. I, at 14-17. ARV's Opposition was filed by facsimile at
approximately noon on January 12, 1998, one day earlier than required by the
district court's OSC.(11)
G. THE DISTRICT COURT'S STAY ORDER
Within hours of ARV's filing of its Opposition, on January 12, 1998,
the district court issued a minute order staying "all proceedings in the
[federal] action pending final resolution of the state case." See App., Vol. I,
at 1-2. The district court expressly reserved jurisdiction to proceed with the
Federal Action on petition to lift the stay "after
- -------------
(10) Emeritus's Response assumes that the preliminary injunction hearing will
resolve the State Action, though it fails to mention the possibility of an
appeal or of further proceedings in the state court.
(11) Concurrent with the order directing the parties to brief the issue of a
stay, the District Court also set forth a briefing schedule on ARV's Ex
Parte Application for Leave to Conduct Expedited Discovery and Order
Shortening Time for Hearing on Motion for Preliminary Injunction and on
ARV's Motion for Preliminary Injunction. At the time the District Court
issued the stay, ARV had filed its Motion for Preliminary Injunction and
supporting documentation, and the Ex Parte Application had been fully
briefed by both parties.
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<PAGE> 26
a decision in the state case becomes final." Id. Moreover, against the clear
weight of authority cited in ARV's Opposition, the district court stated:
Based on the principles enunciated in Colorado River Water Conservation
District v. United States, 424 U.S. 800 (1976), as well as the
arguments raised by Emeritus in its Response to the Court's Order to
Show Cause, the Court defers to the current state proceeding between
these two parties, and stays this action pending the final outcome of
the state case.
App., Vol. I, at 2. On January 12, the district court also issued a formal order
removing the Federal Action from the district court's active docket. See App.,
Vol. I, at 4.(12)
V.
ARV IS ENTITLED TO MANDAMUS RELIEF COMPELLING THE DISTRICT
COURT TO EXERCISE JURISDICTION OVER THE FEDERAL ACTION
Though the "remedy of mandamus is a drastic one, to be invoked only in
extraordinary situations," the United States Supreme Court has recognized that
mandamus is appropriate "`to compel [an inferior court] to exercise its
authority when it is its duty to do so.'" Kerr v. United States Dist. Court, 426
U.S. 394, 402, 96 S.Ct. 2119, 2124 48 L.Ed.2d 725 (1976). The subsequent Ninth
Circuit opinion in Bauman v. United States, 557 F.2d 650 (9th Cir. 1977), set
forth five guidelines for determining when mandamus is appropriate.
(1) The party seeking the writ has no other adequate means, such
as a direct appeal, to attain the relief he or she desires;
(2) The petitioner will be damaged or prejudiced in a way not
correctable on appeal;
(3) The district court's order is clearly erroneous as a matter of
law;
(4) The district court's order is an oft-repeated error, or
manifests a persistent disregard of the federal rules;
(5) The district court's order raises new and important problems,
or issues of law of first impression.
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(12) Because these orders were sent to the parties by mail, ARV did not learn
that the case was stayed until the late afternoon of January 13, 1997.
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<PAGE> 27
Id. at 654-55. It is not necessary that all five factors be satisfied in order
for mandamus to issue. Wilson v. United States Dist. Ct. for the C. Dist. of
Cal., 103 F.3d, 828, 829-30 (9th Cir. 1996), cert. denied, ___ U.S. 117 ____,
S.Ct. 1823, 137, L.Ed.2d 1031 (1997). "[T]he guidelines are cumulative and . . .
are unlikely to be met in any one case." In re Cement Antitrust Litig., 688 F.2d
1297, 1301 (9th Cir. 1982). Nor are they "meant to supplant reasoned and
independent analysis by appellate courts." Id. Based on the circumstances of
this case, at least three, and possibly four, of the five factors are met.
Accordingly, under Bauman this Court should issue a writ of mandamus ordering
the district court to exercise jurisdiction over ARV's claims.
A. MANDAMUS IS REQUIRED BECAUSE THE DISTRICT COURT COMMITTED CLEAR ERROR
IN STAYING ARV'S FEDERAL SECURITIES LAW CLAIMS AND IN APPLYING
COLORADO RIVER
Courts applying Bauman have recognized one of its factors as paramount:
"it is clear that the third factor, the existence of clear error as a matter of
law, is dispositive." Taiwan v. United States Dist. Court for the N. Dist. of
Cal., 128 F.3d 712 (9th Cir. 1997). Analyzing that fraction first, it is evident
that the district court committed clear error in abstaining from exercising its
rightful jurisdiction over both (1) ARV's federal securities law claims and (2)
ARV's state law claims which are relevant to the tender offer and proxy
materials at issue in the securities law claims (and irrelevant to the state
court's determination of whether ARV breached its fiduciary duties). It is
extremely well established that a district court lacks discretion to stay
proceedings as to claims within exclusive federal jurisdiction such as claims
under the federal securities laws. (See Section V.A.1., below). Further, the
Court's decision to stay the state court claims not only was infected by its
erroneous ruling on the securities violations, but lacks any basis under
Colorado River and its progeny. (See Section V.A.2., below.)
A stay order is reviewed for abuse of discretion but should be reversed
if this Court reaches "a definite and firm conviction that the court below
committed a clear error of
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<PAGE> 28
judgment in the conclusion it reached upon weighing of the relevant factors."
Kayes, 51 F.3d at 1464. "The doctrine of abstention, under which a District
Court may decline to exercise or postpone the exercise of its jurisdiction, is
an extraordinary and narrow exception to the duty of a District Court to
adjudicate a controversy properly before it. Abdication of the obligation to
decide cases can be justified under this doctrine only in the exceptional
circumstances where the order to the parties to repair to the State court would
clearly serve an important countervailing interest." Colorado River, 424 U.S. at
813, quoting County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188-89, 79
S.Ct. 1060, 3 L.Ed.2d 1163 (1959) (emphasis added). These principles are
especially important where, as here, a stay order will preclude any effective
relief whatsoever.
1. The District Court Committed Clear Error Because It Lacked
Discretion To Stay A Claim Arising Under Laws Subject To The
Exclusive Jurisdiction Of the Federal Courts
Even Emeritus's Response conceded that "the state court may not have
jurisdiction over ARV's federal securities law claims." App., Vol. I, at 41.
This fact alone prohibited the district court from staying the Federal Action.
Well-settled decisions of this, and other courts, recognize that "the district
court has no discretion to stay proceedings as to claims within exclusive
federal jurisdiction." Silberkleit v. Kantrowitz, 713 F.2d 433, 435-36 (9th Cir.
1983); accord Minucci v. Agrama, 868 F.2d 1113, 1115 (9th Cir. 1989); Medema v.
Medema Builders, Inc., 854 F.2d 210, 213 (7th Cir. 1988); Andrea Theatres, Inc.
v. Theatre Confections, Inc., 787 F.2d 59, 62-63 (2d Cir. 1986). In both
Silberkleit and Medema, the plaintiffs had alleged violations of federal
securities laws which precluded issuance of a stay of proceedings in favor of
state proceedings. Silberkleit, 713 F.2d at 436 (finding district court abused
its discretion in staying claim under section 10(b) of the Exchange Act);
Medema, 854 F.2d at 213 (same). Thus, as a matter of law, the district court was
not entitled to stay ARV's federal securities law claims. The district court's
clear legal error, unless timely remedied, will cause extraordinary harm to ARV
and its shareholders. See Section V.C., below.
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<PAGE> 29
2. The District Court Committed Clear Error in Staying ARV's
Related State Court Claims
The district court's erroneous stay of the federal claims clearly
affected (and may well have determined) the decision to stay the state claims,
given how inextricably the state and federal claims are linked to one another.
It was error for the Court to stay the state court claims, not only because of
their close connection to the securities claims, but because nothing under
Colorado River and its progeny can support such a stay here.
The fact that the securities law claims cannot be stayed affects the
entire calculus. Where federal courts are required to exercise jurisdiction over
an exclusively federal claim, they typically retain jurisdiction over
supplemental state law issues. See, e.g., Alkoff v. Gold, 611 F. Supp. 63, 65-66
(S.D.N.Y. 1985) (in securities fraud claim, district court refused to stay
pendent claims for fraud, duress, mistake and New York Business Corporation Law
violations); Norris v. Wirtz, Nos. 80-C-6836, 84-C-1527, 1985 WL 1862, *6 (N.D.
Ill. June 26, 1985) (refusing to stay state law claims in securities fraud
litigation). Here, ARV's securities laws claims are inextricably linked to its
unfair competition and breach of fiduciary duty claims, but ARV could not raise
these claims together in a state court powerless to entertain ARV's federal
claims or to compel the corrective disclosures ARV seeks. Each of these claims
pertains to the tender offer and proxy solicitation and the fairness of
Emeritus's takeover attempt, issues not presented in the State Action. The
securities law claims require that the district court analyze the effect of the
tender offer and proxy solicitation on ARV's financial condition to determine if
these disclosures must be made. This same analysis is required to decide the
unfair competition and breach of fiduciary duty claims. These state law claims
also arise under the original diversity jurisdiction of the district court under
28 U.S.C. ss. 1332 and may not be lightly stayed. See Norris v. Wirtz, 1985 WL
1862, *6 (refusing to dismiss state law claims raised in securities fraud action
because court had diversity jurisdiction "and may not decline to exercise that
jurisdiction absent important countervailing interests"). Simply put, the
district court, ignoring all relevant authority, stayed the unfair competition
and breach of fiduciary duty claims in spite of the clear dictates of law.
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a. A Stay Was Improper Because The State And Federal
Actions Are Not Parallel Or Substantially Similar
As a threshold question, the district court, in choosing to abstain
from exercising its rightful jurisdiction under the Colorado River doctrine,
must have first determined whether the state and federal actions are parallel,
or at least substantially similar, so as to implicate the doctrine in the first
place. Nakash v. Marciano, 882 F.2d 1411, 1416 (9th Cir. 1989); Interstate
Material Corp. v. Chicago, 847 F.2d 1285, 1287-88 (7th Cir. 1988). "If the
answer is yes, the court must then evaluate the [Colorado River balancing]
factors to determine whether a stay of the federal action is appropriate. If the
answer is no, then the Colorado River doctrine does not apply and no stay may be
imposed." Silvaco Data Sys., Inc. v. Technology Modeling Assocs., Inc. 896 F.
Supp. 973, 975 (N.D. Cal. 1995) (emphasis added).
There is no basis in the record for the district court to have found
the State and Federal Actions to be parallel or substantially similar. The only
links between Emeritus's breach of fiduciary duty claims and ARV's securities
law, breach of fiduciary duty, and unfair competition claims is that both
actions implicate ARV and Emeritus and that both relate to Emeritus's attempt to
acquire ARV. Otherwise, there is no meaningful commonality between the two
actions.(13)
In particular, the Federal Action is not a "spin-off" of the State
Action. ARV's securities law, breach of fiduciary duty and unfair competition
claims relate to the tender offer and proxy solicitation and the tactics that
Emeritus is using to take control of ARV's board. None of these issues is
present in the State Action. In the state court, the only legal and factual
issues relate to the fiduciary duties that ARV's board owes its shareholders and
the actions ARV took in response to Emeritus's business proposal. Most
- --------
(13) In fact, only Emeritus and ARV overlap as parties. EMAC is not a party to
the State Action whereas Prometheus and ARV's individual directors are not
parties to the Federal Action.
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importantly, the tender offer cannot possibly be at the heart of the State
Action because Emeritus did not make its tender offer until ten days after it
filed the State Action.
b. The Colorado River Balancing Factors Preclude The
District Court From Ignoring Its "Virtually
Unflagging" Jurisdiction
Even if an analysis under Colorado River was warranted (which it was
not because the actions are not parallel), the Order contravened all relevant
authority. Colorado River and its progeny identify seven factors that should be
weighed to decide if exceptional circumstances warrant the district court's
abstention from exercising jurisdiction. These factors are: (1) whether a court
has assumed jurisdiction over any res or property; (2) the desirability of
avoiding piecemeal litigation; (3) the order in which jurisdiction was obtained
and the progress made in the two actions; (4) whether state or federal law
controls; (5) the relative convenience of the forums; (6) whether the state
litigation adequately protects the rights of the party invoking federal
jurisdiction; and (7) whether forum shopping is present. Colorado River, 424
U.S. at 818, Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
19-26 (1983); Nakash, 882 F.2d at 1415; American Int'l Underwriters, Inc. v.
Continental Ins. Co., 843 F.2d 1253, 1256 (9th Cir. 1988). "Any doubt as to
whether a factor exists should be resolved against a stay, not in favor of one."
Travelers Indem. Co. v. Madonna, 914 F.2d 1364, 1369 (9th Cir. 1990). In this
instance, none of the factors is present.
One factor alone should have been dispositive -- in ARV's favor -- on
the district court's OSC. If issuance of a stay will not avoid piecemeal
litigation, the district court cannot issue a stay. Moses Cone, 460 U.S. at 28;
accord Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 277, 108
S.Ct. 1133, 99 L.Ed.2d 296 (1988) (Colorado River stay may issue only if the
court has "full confidence" that the state proceeding will end the litigation).
Indeed, the Ninth Circuit has held that when "there exists a substantial doubt
as to whether the state court proceedings will resolve all of the disputed
issues in [a federal] case, it is unnecessary for [the court] to weigh the other
factors included in the Colorado River analysis." Intel Corp. v. Advanced Micro
Devices, 12 F.3d 908, 913 n.7
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<PAGE> 32
(9th Cir. 1993), cert. denied sub nom, Advanced Micro Devices, Inc. v. Intel
Corp., 512 U.S. 1205, 114 S.Ct. 2675, 129 L.Ed.2d 810 (1994). Because piecemeal
litigation could not have been avoided by staying the Federal Action, it was
clear error for the district court to stay this case.
(1) Issuance of a Stay Does Not Avoid Piecemeal Litigation
"Piecemeal litigation occurs when different tribunals consider the same
issue, thereby duplicating efforts and possibly reaching different results."
American Int'l Underwriters, 843 F.2d at 1258 (emphasis added). In this case,
issuance of a stay does not prevent duplicative litigation. Because the Federal
Action and the State Action arise from distinct events and present different
legal issues, resolution of the State Action would not dispose of any of the
claims raised in the Federal Action. As discussed above, Emeritus's State
Complaint claims only that ARV and its directors, aided and abetted by
Prometheus, breached their fiduciary duties to ARV's shareholders when they took
certain steps following Emeritus's merger proposal. The tender offer, which
occurred after Emeritus filed the State Action, and the proxy solicitation are
irrelevant to the state court's consideration. However the state court evaluates
the propriety of ARV's actions in responding to Emeritus's proposal and decides
who should cast votes at the shareholders meeting, the state court's
determination would not resolve (1) whether Emeritus has fully disclosed the
effects its acts will have on ARV or (2) whether Emeritus would violate its
fiduciary duties or California's unfair competition statute by electing its
slate of directors without waiving the conditions to its tender offer.(14)
Accordingly, the district court erred in issuing its Order.
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(14) Issuance of a stay in the Federal Action actually would increase the
likelihood of the type of piecemeal litigation that Colorado River seeks to
avoid. The fairness of the tender offer and proxy solicitation are key to
ARV's federal securities law claims and ARV's state law claims. If ARV is
forced to refile those claims as part of the State Action, it would
introduce new issues before the state court that are completely unrelated
to the substance of that action. At the same time, federal courts would
still be obligated to analyze the tender offer and proxy solicitation in
order to resolve the securities law claims.
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(2) The Remaining Colorado River Factors do not
Support a Stay
Though the district court's inquiry (and this Court's review of the
Order) should have ended with the determination that a stay will not avoid
piecemeal litigation, Intel, 12 F.3d at 913, n.7, even an analysis of the
remaining Colorado River factors proves that issuance of a stay would be
improper.
The relevant factors weigh against issuance of a stay. Very little
progress has been made in the State Action. Indeed, that the State Action was
filed only a few weeks before the Federal Action "cuts against, not for, [a]
stay." See Moses Cone, 460 U.S. at 21-22 ("priority should not be measured
exclusively by which complaint was filed first, but rather in terms of how much
progress has been made in the two actions").(15)
Likewise, the presence of ARV's federal securities law claims weighs
heavily against abstention, whereas the existence of state law claims does not
favor surrendering jurisdiction. Moses Cone, 460 U.S. at 26 (the "presence of
state-law issues may weigh in favor of that surrender" only "in some rare
circumstances"). Where, as here, the state law claims involve "routine issues of
state law . . . which the district court is fully capable of deciding, there are
no such `rare circumstances'" present. Travelers Indem., 914 F.2d at 1370
(district court abused its discretion in staying action founded on diversity for
breach of contract, misrepresentation and breach of fiduciary duty).
Finally, the state court cannot protect ARV's rights under federal law,
because the state court has no power under the Exchange Act to force Emeritus to
correct its materially misleading tender offer and proxy solicitation. Moreover,
"`the possibility that the state court proceeding might adequately protect the
interests of the parties is not enough to justify the district court's deference
to the state action.'" Travelers Indem., 914 F.2d at 1370 (noting that the Ninth
Circuit "has not applied this factor against the exercise of federal
jurisdiction, only in favor of it"), quoting Bethlehem Contracting Co. v.
Lehrer/McGovern, Inc., 800 F.2d 325, 328 (2d Cir. 1986).(16)
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(15) In fact, Prometheus, an indispensable party to the State Action, was only
added as a defendant on January 7, 1998.
(16) The remaining factors are irrelevant to the balancing test. There is no res
or property at issue in this litigation. Emeritus has filed the State
Action in California, so it cannot argue that it would be inconvenienced by
a California forum. There is also no evidence of forum shopping. ARV filed
the Federal Action in federal court for one reason: ARV's securities law
claims arise under laws subject to the exclusive jurisdiction of the
federal courts (see 15 U.S.C. section 78aa; 15 U.S.C. section 1331) and
the state law claims are closely related to the disclosure issues the
District Court must decide.
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Thus, balancing the Colorado River factors, it becomes clear that it
was improper for the district court to stay the Federal Action or any of ARV's
claims for relief. The Order issuing the stay is clearly erroneous as a matter
of law.
B. MANDAMUS IS REQUIRED BECAUSE ARV HAS NO OTHER ADEQUATE MEANS TO ATTAIN
THE RELIEF IT SEEKS
Having shown that the district court committed clear error warranting
mandamus, this Court's next consideration is whether ARV lacks adequate means to
attain the relief it seeks. Even assuming that a stay order is immediately
appealable, a direct appeal is of no practical use under these circumstances
because it cannot provide ARV with relief in a timely fashion. For that reason,
ARV raises this issue on mandamus.
For ARV to obtain relief from the district court's clearly erroneous
issuance of a stay and have its Motion for Preliminary Injunction heard before
the shareholders meeting, the merits of this Petition must be decided within a
week. As a practical matter, a ruling on the propriety of the district court's
stay within this time frame is simply impossible in the context of a direct
appeal given the procedural requirements for expediting such an appeal (for
example, filing a motion with the Motions Panel, awaiting a decision on the
emergency motion and filing a brief raising the merits of its claim). The amount
of time required to complete this process would effectively consume the time
necessary for briefing on the Motion for Preliminary Injunction to be completed
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and for the district court to resolve that motion prior to the shareholders
meeting.(17)
C. MANDAMUS IS REQUIRED BECAUSE ARV WILL SUFFER SERIOUS AND IRREPARABLE
HARM IF PROHIBITED FROM PURSUING THIS CASE UNTIL AFTER A FINAL DECISION
IN THE STATE COURT ACTION
The purpose of this petition is to prevent catastrophic harm to ARV as
a result of a shareholder vote that will take place in less than two weeks. If
ARV is precluded from pursuing this action on an expedited basis -- let alone
until after a final decision is reached in the state court case -- the hope of
meaningful relief for ARV and its shareholders will be effectively foreclosed.
On January 28, 1998 -- only 12 days from the filing of this petition --
ARV's shareholders will vote to fill all nine seats on its board of directors.
Emeritus threatens to use this election to inflict on ARV the potentially
ruinous loss of two crucial assets -- facility leases and key employees -- all
in breach of its fiduciary duties and obligations under federal securities laws
and California statutes against unfair competition.
In direct contravention of the federal securities laws, this critical
election will be distorted by Emeritus's incorrect and incomplete disclosures if
the stay is not lifted. The Exchange Act and rules promulgated thereunder are
intended to ensure that shareholders presented with a tender offer or proxy
solicitation have the benefit of information necessary to make an informed
decision as to whether to tender their shares or vote for a particular board
nominee. Rondeau v. Mosiness Paper Corp., 422 U.S. 49, 58, 95 S.Ct. 2069,
2075-76, 45 L.Ed.2d 12 (1975); Stahl v. Gibralter Fin. Corp., 967 F.2d 335, 336
(9th Cir. 1992).
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(17) In the event, however, that this Court believes this matter is more
appropriately raised as an emergency motion for expedited briefing and
hearing of an appeal -- and can be determined on the merits within a week
-- ARV requests that this Court treat this Petition as an emergency motion
and as its opening brief, and set a briefing schedule and any argument, if
necessary, so that a ruling on the merits issues by no later than January
21, 1998. ARV has filed a notice of appeal with the district court to
facilitate this course of action if the Court deems it appropriate.
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<PAGE> 36
As alleged in ARV's preliminary injunction motion, Emeritus's tender
offer and proxy solicitation materials (already distributed to ARV shareholders)
fail to disclose, among other things, material facts indicating a significant
likelihood that conditions to Emeritus's tender offer will not be satisfied.
Where such violations of the Exchange Act have occurred, courts have held that
curative disclosure is the "preferred remedy" with injunctions playing a
"supporting role." Pacific Realty Trust v. APC Inv., Inc., 685 F.2d 1083, 1085
(9th Cir. 1982). The difficulty in proving the effect of a disclosure violation
on the shareholder decisions, and the importance of accurate disclosure have led
courts to find irreparable harm sufficient to support injunctive relief in
connection with tender offers. Polaroid Corp. v. Disney, 862 F.2d 987, 1005 (3rd
Cir. 1988). Courts have further held that injunctive relief is particularly
appropriate in corporate takeover cases such as this, recognizing that "[o]nce
the company has been taken over, courts can rarely if ever `unscramble the
eggs.'" Homac, Inc. v. DSA Fin. Corp., 661 F. Supp. 776, 783 (E.D. Mich. 1987);
Camelot Indus. Corp. v. Vista Resources, Inc., 535 F. Supp. 1174, 1184 (S.D.N.Y.
1982) (irreparable harm is present when a vote for directors is based on
misleading information); Marshall Field & Co. v. Icahn, 537 F. Supp. 413, 416
(S.D.N.Y. 1982) (irreparable harm is present if the investing public and
existing shareholders trade in a marketplace that is deprived of important and
legally required information).
If ARV is unable to obtain expedited review of the district court's
stay, it will be denied any hope of obtaining the preferred remedy of injunctive
relief for Emeritus's violations of federal securities laws. The federal courts
are the only jurisdiction empowered to order disclosures under the Exchange Act.
15 U.S.C. ss. 78aa. If the federal courts do not afford ARV a forum prior to
January 28, 1998, ARV shareholders will vote to elect an entire board of
directors without the benefit of critical information regarding the likely
consequences of their choices. Indeed, not only will the continued stay allow
Emeritus to avoid its obligation to make the congressionally mandated
disclosures, but it will give Emeritus an additional weapon for inducing ARV
shareholders to ignore facts essential to an informed vote. Although the
district court's order does not address
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the merits of ARV's claims, shareholders are likely to interpret the order as a
rejection of the substantive issues raised by ARV.
The misinformation received from Emeritus by ARV shareholders is
especially troubling given the disastrous effect the election of Emeritus's
slate of directors would have on ARV and its shareholders. If Emeritus elects
its slate of director nominees, it will immediately trigger the "change of
control" provisions. The election would put ARV in default on the leases for at
least 18 of its facilities, the foundation of ARV's entire business operation.
Termination of these leases would financially cripple ARV, which may be unable
to replace these facilities. Even if ARV manages to renegotiate its agreements,
ARV would undoubtedly be forced to pay significantly higher rent -- a possible
$4 million increase in ARV's estimated annual lease cost.
Likewise, the election of Emeritus's nominees would trigger "change of
control" provisions in the employment contracts of numerous key ARV employees.
The employees could elect to terminate their employment with ARV and demand
severance payments totaling approximately $6.8 million. Not only would these
defaults result in significant liability to ARV, but the mere loss of
knowledgeable and experienced personnel would be a crippling blow to ARV.
Yet, despite the grave harms it will have inflicted upon ARV as a
result of the proxy contest, Emeritus will have no obligation to complete the
tender offer it used to solicit the proxies in the first place. The very act of
electing its slate of nominees will provide Emeritus with many loopholes for
abandoning its offer.(18) Without a firm offer, ARV's
- -------------
(18) The very act of electing its nominees will create two new reasons why
Emeritus need not consummate the offer. The "change of control" triggered
by that election will violate two of the conditions to Emeritus's offer,
i.e. that no material adverse change has occurred and that Emeritus has
received all necessary consents on leases. App., Vol. III, at 546-49. Thus,
having made a highly conditional tender offer and used the power of its
proxies to ensure that two of its conditions are not met, Emeritus will be
free to abandon its offer or force ARV to renegotiate the acquisition (with
its own handpicked directors) on terms more favorable to Emeritus. Indeed,
this tactic accomplishes Emeritus's goal of getting "to the bargaining
table in good form." App., Vol. III, at 633.
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<PAGE> 38
shareholders will be stuck with a devalued company, a board of directors loyal
to Emeritus and no way to get the $17.50 per share in cash that Emeritus has
promised. Worse yet, Emeritus could use its actual control of ARV to identify
the most profitable facilities and valuable employees, and then cherry pick
among ARV's core assets by negotiating directly with landlords, and by courting
ARV employees who can profit handsomely by simply taking another job.
In fact, an Emeritus takeover would result in irreparable harm to ARV
and its shareholders even if Emeritus were sincere about completing the $17.50
per share tender offer. While waiting for conditions, such as the rescission of
the Prometheus transactions and Prometheus's share of ARV (already the subject
of litigation), a board of directors loyal to Emeritus would be in control of
ARV's day-to-day operations.
In sum, the harm to ARV goes far beyond the normal inconvenience of
delay; a continued stay of this action would preclude ARV from obtaining any of
the relief it seeks. Emeritus will be free to flaunt clear Congressional policy
by continuing to obtain proxies by misleading ARV shareholders as to the nature
of its tender offer and the intentions of its board nominees. Once Emeritus
votes these proxies and elects its board nominees, the change of control
provisions in ARV's leases and employment contracts will be irrevocably
triggered.(19) At that point, ARV will be completely vulnerable, subject only to
the mercy of the third-party landlords and the loyalty of employees asked to
forego millions of dollars in immediate cash payment. Moreover, if Emeritus
succeeds in replacing the board, pending completion of the tender offer or an
alternative transaction Emeritus can obtain at the "bargaining table," ARV's
day-to-day operations will be managed by directors with loyalties to a direct
competitor. No party or court will have the power to remedy these breaches, or
the resulting catastrophic harms that will befall ARV, and, in fact, the
Emeritus' nominees will have the power to dismiss this case.
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(19) Especially because of the effect on contracts with third parties, this case
is not one where a simple voiding of the election can cure disclosure
defects found to exist after a trial on the merits.
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<PAGE> 39
D. MANDAMUS IS REQUIRED BECAUSE THE DISTRICT COURT'S ORDER RAISES NEW AND
IMPORTANT PROBLEMS, OR ISSUES OF LAW OF FIRST IMPRESSION
Though Bauman does not require a petitioner to satisfy all five
factors, and courts anticipate that it is unlikely that they will all be met in
a single case, In re Cement Antitrust Litig., 688 F.2d at 1301, another Bauman
factor, though of lesser importance than the other three present here, also
supports mandamus. Mandamus is favored if the "district court's order raises new
and important problems, or issues of law of first impression." Bauman, 557 F.2d
655. That is precisely what the district court's unprecedented stay order has
done.
Unlike any reported case of this Circuit, the district court purported
to stay an action for injunctive relief under Sections 14(a), 14(d) and 14(e) of
the Exchange Act, pending resolution of a state court action in which those
claims could not be raised. Not only was the stay in clear contravention of
settled law governing the duty of federal courts to decide issues subject to the
exclusive jurisdiction of the federal courts, but the stay effectively postponed
hearing on the injunction until after the State Action is final. Given that the
injunction is necessary to, among other things, correct the disclosures on which
the shareholders will rely, the Order permits the district court to evade
hearing the case until the issue of injunctive relief is moot. This novel
approach to disposing of injunctive relief presents a new issue for this Circuit
to consider -- and reject.
Moreover, insofar as Emeritus urged the district court to issue the
stay because the "[District] Court is in the best position to judge the state of
its calendar," an overcrowded docket should not be a legitimate rationale for
denying a litigant the opportunity to litigate claims properly subject to
jurisdiction in the federal courts. Given the pressure on district courts to
resolve pending matters, ARV believes that inferior courts of this Circuit may
look to Colorado River as an expedient means of removing cases from their
calendars. By addressing this issue now, this Court can prevent the misuse of
judicial abstention and provide supervisory guidance to the courts of this
Circuit.
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<PAGE> 40
E. ARV'S PETITION MEETS FOUR OF THE FIVE BAUMAN FACTORS
For the reasons stated above, four of the five Bauman factors have been
met.(20) Most importantly, ARV has shown that the district court committed clear
error when it issued the stay, has demonstrated that it has no alternative means
of relief and has proven that it will suffer irreparable harm unless the
district court's Order is immediately reversed. Accordingly, ARV has met its
burden in showing that mandamus is warranted.
VI.
CONCLUSION
For all of the foregoing reasons petitioner ARV Assisted Living, Inc.
respectfully requests that this Court reverse the order of the District Court
for the Central District of California, McLaughlin, J. presiding, staying ARV's
action and that this Court issue an order compelling the district court to set
ARV's Motion for Preliminary Injunction for immediate briefing and hearing so
that the motion is fully adjudicated by no later than January 24, 1998.
Dated: January 15, 1998
Respectfully submitted,
IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067-4276
Telephone: (310) 277-1010
By________________________
Alexander F. Wiles
Attorneys for Petitioner
ARV Assisted Living, Inc.
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(20) The final Bauman factor does not appear to be implicated on this petition,
though it is well-recognized that all five do not need to be met. In re
Cement Antitrust Litig., 688 F.2d at 1301. From published cases, ARV cannot
determine whether the District Court's Order staying claims subject to the
exclusive jurisdiction of federal courts and its wholehearted
misapplication of the Colorado River standards are oft- repeated errors or
manifest a persistent disregard of federal precepts. E.g., Bauman, 557 F.2d
at 655.
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<PAGE> 41
STATEMENT OF RELATED CASES
Petitioner ARV Assisted Living, Inc. knows of no cases related to this
Petition that are pending in this court.
<PAGE> 1
EXHIBIT 22
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ARV ASSISTED LIVING, INC., ) No. 98-70040
a California corporation, )
) DC# CV-98-9-LHM
Petitioner, ) Central California
)
vs. )
)
UNITED STATES DISTRICT COURT FOR THE )
CENTRAL DISTRICT OF CALIFORNIA, )
)
Respondent, ) ORDER
)
EMERITUS CORPORATION, a Washington )
corporation; EMAC CORPORATION, )
a Delaware corporation; )
)
Real Parties in Interest. )
)
- --------------------------------------------)
Before: Kleinfeld and THOMAS, Circuit Judges
This petition for writ of mandamus raises issues that warrant a
response. See Fed. R. App. P. 21(b). Accordingly, the real parties in interest
shall file a response by Tuesday, January 20, 1998 at 12:00 noon Pacific Time.
The response shall address: (1) whether the district court's stay order
is appealable, see Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 8-13 (1983); and (2) whether the district court abused its discretion
or committed clear error by staying proceedings on petitioner's claims for
declaratory and injunctive relief under Sections 14(a), (d), and (e) of the
Securities Exchange Act of 1934 and Securities and Exchange Commission Rules
14a-9 and 14d-3, pursuant to Colorado River Water Conservation District v.
United States, 424 U.S. 800 (1976).
Petitioner may file a reply by Wednesday, January 21, 1998 at 12:00
noon Pacific Time.
All service shall be by hand or by fax. The parties, and the district
court, may contact the court's motions unit at (415) 556-9890 for permission to
file by fax.
The Clerk shall serve a copy of this order on the district court.
