==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 2
TO
SCHEDULE 14D-1
Tender Offer Statement Pursuant to Section
14(d)(1) of the Securities Exchange Act of 1934
and
AMENDMENT NO. 5
TO
SCHEDULE 13D
under the Securities Exchange Act of 1934
ARV ASSISTED LIVING, INC.
(Name of Subject Company)
EMERITUS CORPORATION
and
EMAC CORP.
(Bidder)
Common Stock, No Par Value Per Share
(Including the Preferred Share Purchase Rights)
(Title of Class of Securities)
------------
00204C107
(CUSIP Number)
Raymond R. Brandstrom
Emeritus Corporation
3131 Elliot Avenue
Suite 500
Seattle, Washington 98121
Telephone: (206) 298-2909
(Name, Address and Telephone Number of Persons Authorized to Receive
Notices and Communications on Behalf of Bidder)
Copies to:
Phillip R. Mills, Esq. Michael Stansbury, Esq.
Davis Polk & Wardwell Perkins Coie
450 Lexington Avenue 1201 Third Avenue
New York, New York 10017 Suite 4000
Telephone: (212) 450-4000 Seattle, Washington 98101
Telephone: (206) 583-8888
------------
December 19, 1997
(Date Tender Offer First Published, Sent or Given to Security Holders)
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CUSIP No. 00204C107
- -------------------
1 NAMES OF REPORTING PERSONS
Emeritus Corporation
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
OO
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS
REQUIRED PURSUANT TO ITEMS 2(e) OR 2(f) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
WA
7 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH
REPORTING PERSON
1,077,200
8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7)
EXCLUDES CERTAIN SHARES [X]
9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
6.8%
10 TYPE OF REPORTING PERSON
CO
CUSIP No. 00204C107
- -------------------
1 NAMES OF REPORTING PERSONS
EMAC Corp.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
OO
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS
REQUIRED PURSUANT TO ITEMS 2(e) OR 2(f) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
DE
7 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH
REPORTING PERSON
1,077,200
8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7)
EXCLUDES CERTAIN SHARES [X]
9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
6.8%
10 TYPE OF REPORTING PERSON
CO
This Amendment No. 2 amends and supplements the Tender Offer
Statement on Schedule 14D-1 (the "Statement"), filed December 19, 1997 by
Emeritus Corporation, a Washington corporation ("Emeritus"), and EMAC Corp., a
Delaware corporation (the "Bidder") and a wholly owned subsidiary of Emeritus,
as amended by Amendment No. 1, relating to the Bidder's offer to purchase all
outstanding shares of Common Stock, no par value per share, of ARV Assisted
Living, Inc., a California corporation ("ARV"), at $17.50 per share, net to
the seller in cash, upon terms and subject to the conditions set forth in the
Offer to Purchase and the related Letter of Transmittal, copies of which are
attached as Exhibits (a)(1) and (a)(2) to the Statement. This Amendment No. 2
constitutes Amendment No. 5 to the Report on Schedule 13D filed October 14,
1997 by Emeritus, as amended. Capitalized terms not separately defined herein
shall have the meanings specified in the Statement.
Item 3. Past Contacts, Transactions or Negotiations with the Subject Company.
(b) On January 8, 1998, Emeritus sent the letter attached
hereto as Exhibit (g)(5) to ARV, responding to the allegations made in the ARV
Complaint and the ARV Schedule 14D-9 (each as defined below). The information
set forth in the letter is incorporated herein by reference.
Item 10. Additional Information.
(e) On January 7, 1998, Emeritus filed an Amended Complaint in
the Orange County Superior Court for the State of California (the "Amended
Complaint"). The Amended Complaint names ARV and the ARV Board as defendants
and adds Prometheus as a defendant. The Amended Complaint alleges that
Prometheus aided and abetted ARV and the ARV Board in the breach of their
fiduciary duties as described in the original Complaint. The Amended
Complaint makes the additional allegation that the individual board members,
aided and abetted by Prometheus, breached their fiduciary duties by rejecting
Emeritus' December 19, 1997 tender offer to purchase ARV for $17.50 per share
in cash. The Amended Complaint seeks the same relief as was requested in the
original Complaint.
On the basis of the facts set forth in the Amended Complaint,
on January 8, 1998, Emeritus filed a motion for a preliminary injunction
seeking (i) an injunction rescinding the redemption by ARV of the Notes or, in
the alternative, an injunction preventing the stock received by Prometheus
upon conversion of the Notes from being voted at the Annual Meeting; (ii) an
injunction rescinding the transactions between Prometheus and ARV and/or
directing that, consistent with their fiduciary duties, the individual board
member defendants take appropriate steps to secure the transaction offering
the best value reasonably available to shareholders; and (iii) an injunction
preventing the operation of ARV's poison pill Rights Agreement. Emeritus'
motion is scheduled to be heard on January 23, 1998 (prior to the January 28
Annual Meeting of ARV shareholders).
On January 6, 1998, ARV filed a complaint against Emeritus and
Bidder in the U.S. District Court for the Central District of California,
Southern Division (the "ARV Complaint"). The ARV Complaint alleges that
Emeritus and Bidder have (i) violated Sections 14(d) and 14(e) of the Exchange
Act and the rules promulgated thereunder by failing to disclose material
information concerning the tender offer; (ii) violated Section 14(a) of the
Exchange Act and the rules promulgated thereunder by failing to disclose
certain material information in the proxy statement; (iii) violated Section
17200 et seq. of California's Business and Professions Code by failing to
disclose certain material information in the tender offer and in the proxy
solicitation materials; and (iv) breached the fiduciary duties they would have
if Emeritus were to become a controlling shareholder by attempting to elect the
Emeritus Nominees. On January 7, 1998, the Court issued orders requiring
Emeritus to show cause why the federal action should not be stayed pending
final resolution of the pending state action and establishing a schedule for
arguing ARV's motion for a preliminary injunction and application for
expedited discovery. While Emeritus does not agree with ARV's allegations in
the ARV Complaint, shareholders should consider ARV's views as expressed in
the ARV Complaint (and in the ARV Schedule 14D-9, as defined below) when
deciding whether or not to tender their shares pursuant to the Offer to
Purchase and in deciding how to vote at the forthcoming Annual Meeting.
On January 9, 1998, Emeritus issued the press release attached
hereto as Exhibit (a)(9). The information set forth in the press release is
incorporated herein by reference.
(f) On January 5, 1998, ARV filed a Solicitation/Recommendation
Statement on Schedule 14D-9 (the "ARV Schedule 14D-9") with the Securities and
Exchange Commission.
Item 11. Material to be Filed as Exhibits
(a)(9) Press Release, dated January 9, 1998.
(g)(3) Complaint in ARV Assisted Living, Inc. v. Emeritus
Corporation and EMAC Corporation filed on January 6, 1998 in United States
District Court for the Central District of California, Southern Division, Case
No. SA-CV-98-9-LHM (EEx).
(g)(4) First Amended Complaint in Emeritus Corporation v. ARV
Assisted Living, Inc., David P. Collins, John A. Booty, R. Bruce Andrews,
Maurice J. DeWald, John J. Rydzewski, Robert P. Freeman, Kenneth M. Jacobs,
Murry N. Gunty, Howard G. Phanstiel and Prometheus Assisted Living, LLC filed
on January 7, 1998 in Superior Court for the State of California for the
County of Orange, Case No. 787788.
(g)(5) Letter from Emeritus to ARV, dated January 8, 1998.
SIGNATURE
After due 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.
Dated: January 9, 1998
EMERITUS CORPORATION
By: /s/ Raymond R. Brandstrom
--------------------------------
Name: Raymond R. Brandstrom
Title: President
EMAC CORP.
By: /s/ Raymond R. Brandstrom
--------------------------------
Name: Raymond R. Brandstrom
Title: President
Exhibit (a)(9)
Contacts: Kelly J. Price
Chief Financial Officer
(206) 298-2909
or
Roy Winnick or Mark Semer
Kekst and Company
(212) 521-4842 or 4802
EMERITUS CORPORATION FILES MOTION FOR PRELIMINARY INJUNCTION IN CALIFORNIA AND
COMMENTS ON ARV'S LAWSUIT AND PUBLIC STATEMENTS
- -- Emeritus "Disappointed" That ARV Voiced Concerns About Its Offer
Without Seeking to Resolve Them, Says Chairman/CEO Daniel Baty
in Letter to ARV Chairman/CEO Howard Phanstiel --
SEATTLE, January 9, 1998 -- Emeritus Corporation (Amex: ESC) said today
that it has filed a motion for a preliminary injunction in California
state court seeking, among other things, the rescission of the recent
redemption by ARV Assisted Living, Inc. (Amex: SRS; formerly Nasdaq:
ARVI) of the 6 3/4% Convertible Notes due 2007, and to prevent the
operation of the ARV poison pill. The motion is scheduled to be heard on
January 23, 1998, prior to the January 28 ARV Annual Meeting.
Emeritus also said that the lawsuit filed by ARV seeking to enjoin
Emeritus from proceeding with its $17.50 per share all-cash premium offer
for ARV and from soliciting proxies to replace ARV's current board of
directors is without merit, and that Emeritus will defend it vigorously.
Emeritus stated: "ARV's lawsuit is the latest effort by the ARV board of
directors to obfuscate the real issue of price in an attempt to entrench
itself at the expense of ARV's public shareholders. Their actions speak
for themselves. First, the ARV Board members agree to sell nearly 50% of
the company to an outside investor group for $14 per share without
obtaining a change of control premium. Then the ARV Board seeks to
bypass a shareholder vote by recutting its deal with Prometheus Assisted
Living LLC in a way that eliminates shareholder approval by issuing $60
million of convertible notes. Then, a short time later, they redeem the
notes at $14 per share, which results in the issuance of 4.3 million
shares and the significant dilution of all ARV public shareholders. Then
they urge ARV's public shareholders to reject our all-cash, premium offer
of $17.50 per share. And now, they are once again seeking to
disenfranchise their shareholders by preventing them from acting on our
offer and proxy solicitation through court action."
Separately, in a letter sent to ARV yesterday, Daniel R. Baty, Chairman
and Chief Executive Officer of Emeritus, stated: "We are disappointed
that you have decided to voice your concerns about the Offer without
seeking constructively to resolve them with us. The primary focus of
ARV's various responses to our Offer is on the conditions and not the
price of our Offer.... If your issue is the conditions, rather than the
price, then let's work together to address them. If you are willing to
enter into a $17.50 per share all-cash merger agreement, we are confident
that we can demonstrate to your reasonable satisfaction our ability to
complete such a transaction. Unfortunately, up to this point, ARV has
been unwilling to enter into a constructive dialogue."
As announced earlier, Emeritus and other shareholders of ARV Assisted
Living, Inc. who, in the aggregate, hold more than 2.6 million shares of
ARV common stock (or approximately 16.5% of such shares outstanding) have
requested that ARV call a special meeting of ARV shareholders for
February 6, 1998 at 3 o'clock p.m. The purpose of the special meeting is
to give the ARV shareholders an opportunity to vote on Emeritus' all-cash
offer of $17.50 net per share. The shareholders calling for the special
meeting included Gary Davidson, the former Chairman of the Board and
Chief Executive Officer of ARV.
Also as previously announced, Emeritus and EMAC Corp., its wholly-owned
subsidiary, on December 19 commenced a cash tender offer of $17.50 per
share for all outstanding shares of ARV Assisted Living, Inc. The offer
and withdrawal rights expire at 11:59 p.m., New York City time on January
21, 1998 unless the offer is extended or withdrawn.
Emeritus is a senior housing services company focused on operating
residential-style assisted-living communities. These communities provide
a residential housing alternative for senior citizens who need help with
the activities of daily living. Emeritus currently holds interests in
117 communities representing capacity for more than 11,000 residents in
25 states and Canada (including a minority interest in Alert Care Corp.).
Emeritus' common stock is traded on the American Stock Exchange under
the symbol "ESC."
# # #
Exhibit (g)(3)
IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
Elizabeth A. Camacho
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067-4276
Telephone: (310) 277-1010
Attorneys for Plaintiff
ARV Assisted Living, Inc.
UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
SOUTHERN DIVISION
ARV ASSISTED LIVING, INC., a CASE NO. SA-CV-98-9-LHM (EEX)
California corporation,
COMPLAINT FOR INJUNCTIVE
Plaintiff, AND DECLARATORY RELIEF FOR
VIOLATIONS OF THE FEDERAL
v. SECURITIES LAWS, UNFAIR
COMPETITION AND BREACH OF
EMERITUS CORPORATION, a FIDUCIARY DUTY
Washington corporation; EMAC
CORPORATION, a Delaware
corporation,
Defendants.
Plaintiff ARV Assisted Living, Inc. ("ARV" or the "Company"),
for its complaint for violations of the federal securities laws, unfair
competition and breach of fiduciary duty, alleges upon information and belief
as follows:
JURISDICTION AND VENUE
1. This Court has federal question jurisdiction pursuant to
Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), and 28
U.S.C. Section Section 1331 and 2201. The federal claims alleged herein
arise under Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder by the Securities and Exchange Commission ("SEC").
This Court also has jurisdiction over those portions of the Complaint that
arise under state law pursuant to both 28 U.S.C. Section 1332 and 28 U.S.C.
Section 1367(a). The matter in controversy exceeds $75,000.
2. Venue is proper in this District pursuant to Section 27 of
the Exchange Act and 28 U.S.C. Section 1391(b), because a substantial part of
the events or omissions giving rise to the claims asserted herein occurred
and, unless enjoined, will continue to occur in this District.
THE PARTIES
3. ARV is a fully integrated provider of assisted living
accommodations and services that operates, acquires and develops assisted
living facilities. As of December 31, 1997, ARV had approximately 15.9
million shares of common stock outstanding. ARV's common stock is registered
pursuant to Section 12(b) of the Exchange Act and is listed and traded on the
American Stock Exchange. ARV is a California corporation with its principal
executive offices located in Costa Mesa, California.
4. Defendant Emeritus Corporation ("Emeritus") is a competitor
of ARV that operates residential style assisted living communities. As of
December 31, 1997, Emeritus had approximately 11 million shares of common
stock outstanding. Emeritus' common stock is registered pursuant to Section
12(b) of the Exchange Act and is listed and traded on the American Stock
Exchange. Emeritus is a Washington corporation with its principal executive
offices located in Seattle, Washington.
5. Defendant EMAC Corporation ("EMAC") is a wholly owned
subsidiary of Emeritus that was organized to acquire ARV. All outstanding
shares of capital stock of EMAC are owned by Emeritus. EMAC is a Delaware
corporation with its principal executive offices located in Seattle,
Washington. Emeritus and EMAC may be referred to jointly herein as
"defendants."
NATURE OF THE CASE
6. This is action for injunctive and declaratory relief to
prevent Emeritus from continuing its plan to mislead and manipulate ARV
shareholders with an illusory promise of an all cash offer to purchase ARV.
7. Since it first expressed an interest in acquiring ARV,
Emeritus has been committed to a stock for stock merger between the two
companies. Unsuccessful in its efforts to persuade the ARV board to pursue a
stock for stock transaction, Emeritus has embarked on a plan to solicit ARV
shareholders directly and induce them to surrender control of the ARV board.
The linchpin of Emeritus' scheme to secure board control is an illusory all
cash offer to acquire ARV. This offer is illusory because, on information and
belief, Emeritus has neither the means nor the intention to pay cash for ARV
shares. Rather, Emeritus seeks to entice ARV shareholders with the promise of
"immediate cash" and induce them to surrender control of their board; once
Emeritus obtains board control, it would be able to "negotiate," as both buyer
and seller, and approve the stock for stock transaction it has contemplated
from the start.
8. In furtherance of its ultimate plan to acquire ARV for
stock, Emeritus has undertaken a proxy contest seeking control of the board of
directors of ARV. In an effort to maximize the appeal of its nominees,
Emeritus (through EMAC, its wholly owned subsidiary) has presented ARV
shareholders with a highly conditional tender offer to purchase shares at
$17.50 in cash. Emeritus has promoted its tender offer and board nominees by
filing with the SEC and distributing to ARV's shareholders proxy solicitation
materials. Emeritus has also filed a tender offer statement with the SEC, and
has distributed its tender offer ("Tender Offer") to ARV shareholders.
9. In an effort to avoid revealing its true plan, defendants
have omitted material information from the Tender Offer and the proxy and
tender offer statements, in violation of Sections 14(a), 14(d) and 14(e) of
the Exchange Act, and the SEC's rules thereunder. Absent compliance with the
federal securities laws by Emeritus, it will be impossible for ARV's
shareholders to make informed decisions concerning the tender of shares or the
suitability of the Emeritus nominees to act as directors of ARV.
10. On or about December 19, 1997, Emeritus announced a tender
offer whereby its subsidiary EMAC would purchase ARV shares at $17.50 per
share in cash. The Emeritus Tender Offer, and tender offer statement filed in
connection with the offer, violate Sections 14(d), 14(e) and SEC Rule 14d-3
because defendants fail to disclose material facts relating to the proposed
ARV/Emeritus merger. For example, defendants fail to disclose that (1) their
true plan is to use the highly conditional cash offer as 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) defendants' 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 defendants tout as
evidence of their ability to obtain financing for the Tender Offer is largely
meaningless since the author of this letter -- Northstar Capital Partners
L.L.C. -- is not itself in the business of providing or arranging financing
for hostile takeovers; (5) defendants have refused to pay the commitment fee
necessary to obtain financing since they know they must wait at least two
years to have any chance of obtaining the relief necessary to satisfy one of
the conditions to their offer; (6) defendants' 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 to
loan its portion of the tender offer financing when it learns that the merger
will trigger events of default in 18 of ARV's 32 leases; and, (7) defendants'
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.
11. On or about December 22, 1997, Emeritus distributed to ARV's
shareholders a proxy statement soliciting votes for its slate of director
candidates. The Emeritus proxy statement violates Section 14(a), and SEC Rule
14a-9 promulgated thereunder, because it fails to disclose material facts
relating to the proposed ARV/Emeritus merger. For example, Emeritus' proxy
statement fails to disclose that (1) the Tender Offer is merely a ploy to
enable Emeritus to gain control of the ARV board and then acquire ARV through
a stock for stock deal; (2) a substantial number of ARV leases contain
provisions in which a change of control constitutes an event of default which
subjects ARV to termination of the leases of profitable facilities, including
upon the election of the Emeritus nominees; (3) defendants' 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) there is a serious risk that Emeritus
will not be able to obtain the financing necessary to fund the Tender Offer;
Emeritus has failed to disclose that the commercial bank lender of $110
million of the tender offer consideration is subject to a "material adverse
change" condition that is unlikely to be waived in light of the events of
default triggered by the merger; (5) Emeritus relies upon a "highly confident"
letter from an entity that neither arranges nor provides takeover financing
itself; (6) Emeritus has refused to pay the commitment fee necessary to obtain
financing since it knows it must wait at least two years to have any chance of
obtaining the relief necessary to satisfy one of the conditions to its offer;
(7) Emeritus' 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; and, (8)
if Emeritus is successful in the proxy contest, but does not follow through
with the Tender Offer, it will be "negotiating" against itself to produce an
acquisition agreement that is fair to ARV shareholders.
12. In committing the securities laws violations set forth
above and in more detail below, defendants used the mails and other means and
instrumentalities of interstate commerce. Moreover, Emeritus' actions set
forth in this Complaint were reasonably calculated to result in either the
procurement or withholding of a proxy.
13. In sum, the Tender Offer and proxy solicitation are part of
Emeritus' plan to entice shareholders with a flimsy promise of a cash offer,
gain control of the ARV board, and implement a stock for stock trade, or
whatever merger or other acquisition plan it sees fit. Once an Emeritus slate
is in place, ARV shareholders will be left without any commitments and will
have little ability to stop a disadvantageous merger.
14. Based on the foregoing, it is apparent that these false
tender offer and proxy materials will make it impossible for ARV's
shareholders to make informed decisions with respect to tendering their shares
or considering the suitability of the Emeritus nominees for election to ARV's
board of directors. Unless enjoined from perpetrating these
misrepresentations and concealments, defendants will persist in their deceit
of ARV's shareholders and will succeed in their efforts to taint the ongoing
proxy context, all to the serious and irreparable detriment of ARV and its
shareholders.
15. Moreover, by obtaining proxies for a majority of ARV's
outstanding shares, Emeritus -- a competitor of ARV -- would be in a position
to cause a change of control within ARV and trigger serious losses for ARV.
First, an event of default on numerous ARV leases. Free from any obligation
to follow through with the Tender Offer or other transactions, Emeritus could
simply walk away, leaving ARV shareholders without any benefit from having
elected the Emeritus nominees but suffering the burdens associated with having
breached millions of dollars worth of leases. Worse still, having caused its
competitor to breach its leases, Emeritus would be in a position to take unfair
advantage of ARV's defaults and negotiate itself to lease the properties now
under lease to ARV. Second, a change in the composition of ARV's board of
directors would allow key employees under contract with ARV to leave ARV's
employ and receive a substantial lump sum payment upon their departure.
Again, Emeritus would be in a position to leave to ARV to deal with this loss,
or to acquire ARV's skilled and knowledgeable employees itself. If allowed to
continue, Emeritus' plan to obtain and vote proxies will result in acts of
unfair competition and breach of Emeritus' fiduciary duty by a controlling
shareholder. Unless enjoined, Emeritus' conduct will cause serious and
irreparable harm to ARV and its shareholders.
ARV'S NEGOTIATIONS WITH POTENTIAL INVESTORS
16. 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. ARV
initially commenced discussions with Starwood Capital Group LLC ("Starwood")
regarding potential financing arrangements between the two companies. In
connection with these discussions, Starwood began performing due diligence on
ARV in February of 1997. Pursuant to a confidentiality agreement dated April
3, 1997, Starwood agreed not to use or disclose confidential information it
obtained in the due diligence process except as specifically authorized by the
confidentiality agreement.
17. 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.
EMERITUS ATTEMPTED TO DERAIL PROMETHEUS
TRANSACTION WITH A PROPOSAL TO ACQUIRE ARV
THROUGH A STOCK FOR STOCK DEAL
18. Recognizing the progress between ARV and Prometheus,
Starwood joined forces with Emeritus to prevent ARV from going forward with
the Prometheus transaction. On July 10, 1997, Emeritus and Starwood wrote a
joint letter to ARV expressing a desire to present a proposal for Emeritus to
acquire ARV. As its first of two alternatives, Emeritus and Starwood proposed
that Emeritus 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."
As a second alternative, Emeritus and Starwood proposed that
ARV shareholders be offered a combination of Emeritus Common Stock and "up to
50% in cash."
19. 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..."
20. 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 attractive and definitive than the terms
of the proposed Prometheus transaction. Accordingly, the ARV Board voted
unanimously to approve the Prometheus transaction.
EMERITUS IS ATTEMPTING TO INDUCE ARV SHAREHOLDERS
TO SURRENDER CONTROL OF THEIR BOARD WITH
AN ILLUSORY PROMISE OF ALL CASH OFFER
21. Unable to convince the ARV board to pursue a stock for
stock merger, Emeritus changed its tactics but not its goal. Emeritus devised
a "proposal" of an all cash offer as a manipulative tool to induce ARV to
enter negotiations. 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 for $16.50 per share. When the ARV board declined to enter
negotiations concerning this flimsy proposal, Emeritus determined to use the
tactic of an illusory cash offer to replace the ARV board with a more
receptive audience.
22. On November 24, 1997, Emeritus launched a proxy contest for
control of the ARV board by filing with the SEC a Schedule 14A and preliminary
proxy statement. The message conveyed by Emeritus' proxy statement is
seemingly straightforward: Elect the Emeritus nominees and immediately receive
$17.50(1) in cash for each share of ARV Common Stock. In an effort to
strengthen its bid for board control, Emeritus presented ARV shareholders with
the Tender Offer to purchase ARV shares at $17.50 per share in cash. As
discussed in detail below, however, the Tender Offer and proxy solicitation
materials are seriously misleading and fail to disclose many material facts
critical to an informed decision by ARV shareholders.
- ---------------
(1) In the preliminary proxy statement filed with the SEC on November 24,
1997, Emeritus claimed a desire to purchase ARV for $16.50 per share.
Emeritus subsequently presented ARV shareholders with its Tender Offer
to purchase ARV shares at $17.50. Emeritus' final proxy statement
includes the $17.50 figure.
EMERITUS DOES NOT INTEND TO GO FORWARD
WITH AN ALL CASH PURCHASE OF ARV
23. Emeritus' failure to make the required disclosures in its
Tender Offer and proxy and tender offer statements only underscores its true
intentions with respect to ARV -- Emeritus has contemplated a stock for stock
transaction from the beginning, and lacks both the ability and the inclination
to go forward with an all cash deal.
Emeritus Is Committed to a Stock for Stock Merger with ARV
24. Even while it courts ARV's board and shareholders with
plans for an all cash offer, Emeritus' own behavior belies its claimed
intentions. For example, within days of Emeritus' October 1997 letter to the
ARV board claiming a desire to enter negotiations for an ill-defined cash
offer, Emeritus' investment bankers faxed to ARV's investment bankers an
informal proposal for a stock for stock transaction. This informal proposal
for a stock for stock merger was significantly more detailed than Emeritus'
more formal invitation to commence negotiations for an all cash deal.
25. Even more recently, shortly after announcing its Tender
Offer to purchase ARV shares at $17.50 cash per share, Emeritus continued to
tell people associated with ARV that a stock for stock transaction is
Emeritus' best option.
An All Cash Acquisition Would Spell Financial Disaster For
Emeritus
26. On information and belief, an all cash offer holds no
financial advantage for Emeritus. A preliminary analysis of Emeritus'
financial position reveals that an all cash purchase of ARV stock would
substantially weaken the Emeritus balance sheet and would result in a
significant reduction in Emeritus' earnings per share. This, in turn, would
be likely to trigger serious declines in the value of Emeritus' own stock.
An Acquisition Would Trigger Substantial Increases in ARV Lease
Costs
27. Emeritus' ability and incentive to follow through with an
all cash deal is further eroded by the substantial additional lease costs that
are likely to result from an acquisition by Emeritus.
28. ARV operates 48 assisted living facilities, a significant
portion of which are leased at below market rates pursuant to long-term
operating leases. Twenty-eight (28) of the leased facilities are subject to
leases that contain provisions allowing the landlord to terminate the lease
upon a change of control in ARV. At least eighteen (18) of these leases
define a change of control to include a change in the composition of ARV's
board of directors. These provisions obviously provide the landlord with
significant leverage to negotiate a higher rent -- either with ARV or one of
its competitors. Since so many of ARV's leases are currently below market, at
a minimum, a change of control is likely to burden ARV with a substantial
increase in lease costs, and, even worse, subjects it to the risk of losing
its leases entirely.
29. On information and belief, a substantial number of
Emeritus' assisted living facilities are located on leased property and are
governed by leases which contain change-of-control provisions. Thus, Emeritus
is aware of this potential increase in ARV's lease costs and actually
conditioned its Tender Offer on the receipt of consents from ARV's landlords
to the anticipated change of control. When those landlords insist on raising
ARV's rent in exchange for their consent, Emeritus will be free to reduce the
purchase price it is willing to pay to ARV's shareholders or to abandon its
all cash offer entirely.
Emeritus Has a History of Renegotiating Initial Offers
30. Emeritus' own history further confirms that Emeritus would
not follow through with its original terms of a merger proposal. On
information and belief, in 1996, Emeritus announced a stock for stock merger
at an agreed upon exchange ratio with Standish Healthcare. However, before
the merger closed, Emeritus attempted to renegotiate a more favorable exchange
ratio. When Standish Healthcare declined to renegotiate, Emeritus refused to
close the transaction.
EMERITUS' TENDER OFFER AND TENDER OFFER STATEMENT
ARE MATERIALLY MISLEADING
31. On December 19, 1997, in an effort to elicit support for
its slate of directors, Emeritus (through its wholly owned subsidiary EMAC)
presented to ARV shareholders a highly contingent tender offer to purchase ARV
shares at $17.50 per share in cash. A true and correct copy of defendants'
tender offer statement, including the Tender Offer, is attached hereto as
Exhibit A and is incorporated herein by this reference.
32. The conditions to defendants' Tender Offer include the
following:
a. The valid tender (without withdrawal) of a number of shares which,
together with shares owned by EMAC and its affiliates, constitute at least a
majority of the total number of outstanding shares of ARV on a fully diluted
basis (exclusive of any shares issuable upon conversion of ARV's 6-3/4%
convertible subordinated notes due 2006) as of the date of acceptance by EMAC;
b. The redemption by the ARV Board of Directors of the certain preferred
stock purchase rights issued by ARV, or EMAC being satisfied, in its
discretion, that these rights have been invalidated or are otherwise
inapplicable to the offer and proposed merger;
c. Emeritus and EMAC "being satisfied, in their discretion," that EMAC
has obtained financing "upon terms satisfactory to them in an amount
sufficient to consummate the offer and the proposed merger (including the
redemption or refinancing of all outstanding debt and payment of all fees and
expenses);"
d. "The redemption of the notes (as defined [in the Tender Offer])
having been rescinded."
e. Emeritus' determination that ARV landlords entitled to declare a
default of ARV leases upon a change of control have consented to the change of
control "on terms satisfactory to [Emeritus] in its sole discretion."
f. That no "material adverse change" in ARV's business or prospectus has
occurred.
33. Emeritus and EMAC have violated Sections 14(d) and 14(e) of
the Exchange Act, and Rule 14d(3) and Schedule 14d-1 promulgated under Section
14(d), because they have failed to disclose material facts or information
relating to the Tender Offer. Specifically, the Tender Offer is misleading as
to defendants' purpose because it fails to disclose defendants' plan to induce
ARV shareholders to surrender control of the ARV board and enable Emeritus to
acquire ARV in a stock for stock transaction.
34. In addition, Emeritus and EMAC have failed to disclose the
significant likelihood that ARV will incur substantial additional lease costs
as a result of Emeritus' proposed purchase. It is obvious from the conditions
to the Tender Offer that Emeritus is well aware of the change-of-control
provisions in ARV leases. Indeed, change-of-control provisions are typical in
the leasing industry. On information and belief, Emeritus is itself a party
to leases which contain change-of-control provisions.
35. The failure to disclose the magnitude of the potential
additional lease costs misleads ARV shareholders in many ways. First, and
most directly, Emeritus' inclusion of landlords' consents as a condition of
the Tender Offer provides Emeritus with both the opportunity and incentive to
walk away from the Tender Offer or reduce the price it is willing to pay to
ARV's shareholders. Second, these additional costs may preclude defendants
from obtaining financing. Third, these costs could leave ARV, or a new
combined company, in a precarious financial position after an acquisition is
complete -- a circumstance that bears directly on the credibility of Emeritus'
Tender Offer. Finally, the change-of-control provisions provide Emeritus with
a powerful tool for unfairly crippling a competitor. By obtaining a
sufficient number of proxies and electing its nominees to the ARV board,
Emeritus could trigger change-of-control provisions in at least 16 ARV leases.
If defendants have not waived the conditions to their Tender Offer, Emeritus
could then abandon the Tender Offer or proposed merger, leaving ARV with many
breached leases. Alternatively, having caused the default of its competitor,
Emeritus could take the opportunity to negotiate with ARV's landlords to lease
ARV's most profitable facilities itself.
36. Defendants' Tender Offer also fails to disclose the
significant probability that at least one of the conditions to the Tender
Offer -- the rescission of the redemption of the notes -- cannot be satisfied
in less than two years (if at all). The Tender Offer states that Emeritus has
challenged the redemption of the notes in California state court and attaches
a copy of Emeritus' complaint seeking the rescission. The Tender Offer fails
to reveal, however, that rescission of the notes cannot be obtained on an
expedited basis, that time must be allotted, even if Emeritus is to prevail in
the trial court, for the parties to exercise their right of appeal, and that
Emeritus will not know for at least two years whether the shares issued
pursuant to the redemption can in fact be canceled. By failing to inform
shareholders that the Tender Offer is conditioned on an event that most likely
will not occur for at least two years, defendants' Tender Offer is materially
misleading.
37. Defendants' Tender Offer is also misleading with respect to
the financing for the proposed purchase. The Tender Offer states that
Emeritus has "received a letter from Northstar Capital Partners L.L.C.
("Northstar") stating that Northstar is highly confident of its ability to
provide the necessary financing." Defendants have failed to disclose,
however, that Northstar is not in the business of arranging takeover financing
and has never arranged such financing before. Accordingly, Northstar cannot
itself make any reliable assertion that financing will be available; its
"highly confident" letter is essentially meaningless. Without this critical
information, Emeritus' statements regarding Northstar's letter are materially
misleading.
38. While defendants claim that Emeritus has "fully negotiated"
the terms and conditions of financing commitments, the Tender Offer fails to
disclose the identity of the potential funding source, or any of the terms and
conditions that have been negotiated. In particular, the Tender Offer fails
to disclose that Emeritus' alleged source for a $110 million bank loan has
conditioned the loan on the absence of any adverse material change in either
ARV or Emeritus -- a condition that could not be fulfilled if ARV defaults on
its leases.
39. Defendants' financing disclosures are also rendered misleading by
their failure to disclose the time frame for obtaining rescission of the
redemption of the Notes. The Tender Offer claims that Emeritus has not
executed commitment letters with financial sources "because it does not
want to incur certain related fees and expenses unnecessarily prior to the
outcome of its litigation challenging the Prometheus transactions." Because
they have failed to disclose the time frame for this litigation, defendants
have failed to disclose the significant likelihood that Emeritus will not
obtain a financing commitment for at least two years.
40. By conditioning its offer of $17.50 per share on the cancellation
of almost 4.3 million of ARV's outstanding shares and the replacement of those
shares with a $60 million note, Emeritus has in effect made an offer to
purchase the outstanding shares of ARV at a price that is the economic
equivalent of no more than $16.65 per share. The Tender Offer is also
materially misleading because it fails to reveal the true price Emeritus is
willing to pay for all of ARV's outstanding shares.
EMERITUS' PROXY STATEMENT IS MATERIALLY MISLEADING
41. On or about December 22, 1997, Emeritus mailed its proxy
solicitation materials to ARV shareholders. A true and correct copy of these
materials is attached hereto as Exhibit B and is incorporated herein by this
reference.
42. In the very first sentence of the letter that accompanied Emeritus'
proxy statement, Emeritus states that it "has offered to purchase ARV for
$17.50 per share in cash." A few sentences later, Emeritus makes the
fundamental pitch it continues to emphasize repeatedly throughout the proxy
statement:
"[W]e need your support to elect our nominees to the ARV
Board in order to facilitate a merger with Emeritus that will
net you $17.50 per share in cash."
Emeritus' proxy statement repeatedly attempts to convince
shareholders that election of the Emeritus nominees will result in "immediate
cash" for all ARV shareholders. For example, at one point in its proxy
statement Emeritus asserts that "only the [Tender Offer] provides an immediate
cash payment to all ARV shareholders." (Emphasis added). The proxy statement
also claims that, while benefits from other transactions are "delayed and
uncertain," the Tender Offer "provides you an immediate return on your
investment." (Emphasis added). Conveying the message that the Tender Offer
is ready for immediate implementation, the proxy statement dramatically warns.
"THIS IS THE LAST OPPORTUNITY TO REQUIRE THE ARV BOARD TO ACCEPT OUR $17.50
PER SHARE ALL CASH OFFER." Virtually identical statements are often repeated
in the proxy statement.
43. The Emeritus proxy statement violates Section 14(a) of the Exchange
Act, and Rule 14a-9 promulgated thereunder, because it fails to disclose
numerous material facts relating to the proposed ARV/Emeritus merger.
Specifically, contrary to the assertions described above, on information and
belief, Emeritus does not intend to follow through with its offer to purchase
ARV shares at $17.50 in cash. Rather, Emeritus plans to use the all cash
"offer" as a ruse to gain control of the ARV Board and acquire ARV through a
stock for stock merger. By design, Emeritus' proxy solicitations fail to
disclose the true plan for a stock for stock transaction, and mislead ARV
shareholders.
44. Moreover, even if Emeritus did intend to go forward with an all cash
offer, its proxy solicitations fail to disclose specific, identifiable risks
that render such action highly unlikely. For example, consistent with its
repeated claim to offer shareholders the opportunity to receive "immediate
cash," Emeritus fails to disclose the significant probability that at least
one of the conditions to the Tender Offer--the rescission of the redemption of
the Notes--cannot be satisfied in less than two years (if at all).
45. Emeritus' proxy statement also fails to disclose the existence and
effect of the change of control provisions in 28 of ARV's 32 leases. Emeritus
also fails to disclose that voting for the Emeritus nominees could result in
the termination of 18 of these leases--consequences for ARV, and for its
shareholders if the Tender Offer fails to close. As alleged above, these
provisions could preclude Emeritus from obtaining financing or alter Emeritus'
ability and incentive to follow through with the $17.50 cash offer (or with
any cash offer at all). Indeed, Emeritus has conditioned its Tender Offer on
ARV landlords consenting to the change of control on terms satisfactory to
Emeritus. None of these risks is disclosed to ARV shareholders in the proxy
statement. Moreover, if Emeritus is successful in the proxy contest, it could
use the change-of-control provisions unfairly to injure ARV by abandoning the
deal after causing defaults in ARV leases, or by using the default to acquire
ARV's facilities. Again, this risk of voting for the Emeritus slate has not
been disclosed.
46. The Emeritus proxy statement also fails to disclose the material
issues that will effect Emeritus' ability to obtain a financing commitment to
support its Tender Offer. While Emeritus claims to have "fully negotiated"
the terms and conditions of financing with potential funding sources, it fails
to disclose the identity of these sources or any of the negotiated terms and
conditions. In particular, the proxy statement fails to disclose that the
$110 million bank loan is conditioned on the absence of any material adverse
change in ARV or Emeritus. On information and belief, there is a serious risk
that Emeritus will be unable to obtain financing to purchase ARV common stock,
at $17.50 per share or otherwise.
47. Emeritus' proxy statement further fails to disclose that its
professed confidence in the availability of financing is premised largely upon
a "highly confident" letter from Northstar Capital LLC -- an entity that is
not in the business of arranging or providing takeover financing. Emeritus'
proxy statement also fails to disclose that it claims to have declined to
commit to financing for the Tender Offer while it waits for the outcome of
litigation that will likely last at least two years.
48. Moreover, while Emeritus proclaims in its proxy statement its
commitment to facilitating a merger with ARV and providing ARV shareholders
with "immediate cash," it fails to disclose that if Emeritus is successful in
the proxy contest, no true negotiations will ever take place in connection
with any acquisition or merger. Instead, to the extent the Tender Offer does
not go forward, the Emeritus controlled board would act as both buyer and
seller, adopting whatever terms and conditions it deems in its own best
interest without any mechanism for ensuring fairness to ARV shareholders.
49. Furthermore, Emeritus' proxy statement is materially misleading with
respect to the true price Emeritus is willing to pay for ARV's outstanding
shares. Emeritus' proxy statement fails to disclose that, as alleged above,
the Tender Offer is conditioned in such as way that it is not a true offer for
$17.50 per share, but rather is the economic equivalent of an offer for no
more that $16.65 per share.
50. In sum, the Emeritus proxy statement has all the indicia of a scheme
of "bait and switch". The Emeritus proxy statement attempts to entice ARV's
shareholders with an opportunity for "immediate cash." However, on
information and belief, once in control of the ARV board, Emeritus plans to
abandon the phantom cash offer, "negotiate" a stock for stock transaction and
present it to ARV shareholders as a fait accompli.
51. Emeritus has solicited proxies with these misleading materials by
mailing these materials to ARV shareholders. Absent compliance with the
federal securities laws by Emeritus, it will be impossible for ARV's
shareholders to make informed decisions concerning the suitability of the
Emeritus nominees to act as directors of ARV.
ELECTION OF EMERITUS' BOARD NOMINEES
WOULD TRIGGER DEVASTATING LOSSES FOR ARV
52. If Emeritus is successful in electing its nominees to ARV's board,
it would immediately cause ARV to suffer serious losses. A change in control
of ARV's board constitutes an event of default under at least 18 of ARV's
leases, thereby subjecting ARV to the risk of losing critical facilities, or
forcing ARV to renegotiate its leases, many of which are below market.
53. In addition, the election of Emeritus' nominees could cause ARV to
immediately incur significant liability to employees under contract. Fifteen
(15) of ARV's employees have employment contracts which entitle them, at their
own election, to leave ARV's employ upon a change of control in ARV's board.
Each of these contracts further entitles the employee to a lump sum payment of
either one or three years salary upon their departure. ARV's total potential
liability for these lump sum payments is approximately $6.8 million. These
employees are key to ARV's operations, and ARV would be seriously harmed by
their departure. Because these employees possess knowledge, skill and
experience which is highly valued in the assisted living industry, they would
be extremely attractive to ARV's competitors.
54. Because Emeritus' Tender Offer has so many conditions which are
unlikely to be fulfilled, it will be free to force these losses upon ARV
without providing any guarantee that it will follow through with its promised
purchase.
FIRST CLAIM FOR RELIEF
(For Violation of Section 14(d) and 14(e) of the Exchange
Act and SEC Rule 14d-3)
(Against All Defendants)
55. ARV repeats and realleges paragraph 1 through 53 as though set forth
fully herein.
56. The Exchange Act and rules promulgated thereunder are intended to
ensure that shareholders presented with a tender offer have the benefit of
information necessary to make an informed decision as to whether to tender
their shares. Item 5 of Schedule 14d-1, promulgated under Section 14(d) and
Rule 14d-3, require the bidder to "[s]tate the purpose or purposes of the
tender offer for the subject company's securities."
57. Defendants have violated the requirements of Item 5 because the
tender offer statement fails to disclose the true purpose of the Tender Offer,
i.e., to induce ARV shareholders to surrender control of the ARV board and
enable Emeritus to acquire ARV in a stock for stock transaction.
58. The Exchange Act and the rules promulgated thereunder are also
intended to ensure that the information provided to shareholders in connection
with a tender offer is truthful and not materially misleading. Item 10(f) of
Schedule 14d-1, requires that a bidder disclose:
"such additional material information, if any, as may be
necessary to make the required statements, in light of the
circumstances under which they are made, not materially
misleading."
In addition, Section 14(e) of the Exchange Act provides:
"It shall be unlawful for any person to make any untrue
statement of a material fact or omit to state any material
fact necessary in order to make the statements made, in the
light of the circumstances under which they are made, not
misleading, or to engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection with any
tender offer or request or invitation of tenders, or any
solicitation of security holders in opposition to or in favor
of any such offer, request, or invitation. . . ."
59. Defendants' Tender Offer (and tender offer statement) is
deliberately and materially false and misleading because it fails to disclose
material facts relating to the Tender Offer.
60. In particular, in addition to their failure to disclose their true
plan to pursue a stock for stock merger with ARV, defendants have failed to
disclose the existence and effect of change-of-control provisions in ARV
leases, and the significant risks these lease provisions pose to ARV to the
$110 million commercial bank loan that is part of Emeritus's financing and to
the consummation of the Tender Offer.
61. Additionally, defendants have failed to disclose that the Tender
Offer is conditioned on (among other things) an event that most likely will
not occur for at least two years.
62. Defendants have further failed to disclose that Northstar is not
itself in the business of providing or arranging takeover financing and that
Northstar's "highly confident" letter is unreliable and essentially
meaningless.
63. Defendants' financing disclosures are also misleading because, by
failing to disclose the time frame for rescinding the redemption of the Notes,
defendants have failed to disclose the significant likelihood that they will
not obtain any financing commitment for at least two years.
64. Defendants have also failed to disclose that, given the conditions
imposed on the Tender Offer, defendant's offer to purchase is not a true offer
for $17.50 per share, but rather is the economic equivalent of an offer for no
more than $16.65 per share.
65. Each of these omissions and misrepresentations is material because
ARV's shareholders would consider them important in deciding whether to tender
their shares to EMAC in connection with the Tender Offer.
66. Defendants have violated and, unless enjoined, will continue to
violate Sections 14(d) and 14(e) of the Exchange Act and rules and regulations
promulgated thereunder.
67. ARV and its shareholders have no adequate remedy at law.
SECOND CLAIM FOR RELIEF
(For Violation of Section 14(a) of the Exchange
Act and SEC Rule 14a-9 Promulgated Thereunder)
(Against All Defendants)
68. ARV repeats and realleges paragraphs 1 through 66 as though set
forth fully herein.
69. Section 14(a) of the Exchange Act and Rule 14a-9 promulgated
thereunder are intended to ensure that the proxy solicitation process is
truthful and not materially misleading to enable shareholders to evaluate
fully the information provided therein. In particular, Rule 14a-9 provides
that:
No solicitation subject to this regulation shall be made by
means of any proxy statement, form of proxy, notice of
meeting or other communication, written or oral, containing
any statement which, at the time and in the light of the
circumstances under which it is made, is false or misleading
with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any
statement in any earlier communication with respect to the
solicitation of a proxy for the same meeting or subject
matter which has become false or misleading.
70. Emeritus' proxy statement is deliberately and materially false and
misleading because it fails to disclose material facts relating to the
proposed ARV/Emeritus merger.
71. In particular, Emeritus has failed to disclose that it does not
intend to go forward with the Tender Offer, but plans to use the all cash
"offer" as a ruse to gain control of the ARV Board and acquire ARV through a
stock for stock transaction.
72. Additionally, the Emeritus proxy statement fails to disclose
serious, identifiable risks that render an all cash purchase highly unlikely.
For example, the Emeritus proxy statement fails to disclose that if the
Emeritus slate is elected, that change of control will trigger an event of
default in 18 of ARV's 32 leased facilities. Emeritus fails to disclose that
such defaults would constitute a material adverse change in the business and
prospects of ARV thereby entitling Emeritus not to close its tender offer.
Emeritus fails to disclose that, if its slate is elected but it does not
close, ARV shareholders will be left with a substantially weakened company.
73. The Emeritus proxy statement also fails to disclose the material
issues that will affect Emeritus' ability to obtain a financing commitment to
support its proposal for an all cash offer. Emeritus fails to disclose that
the election of its slate will trigger the default of 18 leases and that such
a default would constitute a material adverse change that would excuse the
bank providing Emeritus with $110 million for performance. Emeritus' proxy
statement fails to disclose the other contingencies or issues that must be met
or resolved in order to secure financing. It further fails to disclose that
its confidence in the availability of financing is premised largely upon a
"highly confident" letter from an entity that is not in the business of
arranging or providing takeover financing and has never arranged financing in
a hostile takeover situation. Emeritus' proxy statement also fails to
disclose that Emeritus claims to have declined to commit to financing for the
Tender Offer while it waits for the outcome of litigation that will likely
last at least two years.
74. The Emeritus proxy statement is also misleading with respect to the
price it has offered to pay for all of ARV's outstanding shares; Emeritus
fails to disclose that, given the conditions imposed on the Tender Offer,
defendants' offer to purchase is not a true offer for $17.50 per share, but
rather is the economic equivalent of an offer for no more than $16.65 per
share.
75. The Emeritus proxy statement also fails to disclose the fact that, if
Emeritus is successful in the proxy contest, to the extent it does not follow
through with the Tender Offer, no true negotiation will take place in
connection with the acquisition because Emeritus will be acting as both buyer
and seller of ARV.
76. Each of these omissions and misrepresentations is material because
ARV's shareholders would consider them important in deciding whether to vote
for the Emeritus nominees.
77. Defendants have violated and, unless enjoined, will continue to
violate Section 14(a) of the Exchange Act and rules and regulations promulgated
thereunder.
78. ARV and its shareholders have no adequate remedy at law.
THIRD CLAIM FOR RELIEF
(For Unfair Competition Under California
Business and Professions Code Section 17200 et seq.)
(Against All Defendants)
79. ARV repeats and realleges paragraphs 1 through 77 as though set
forth fully herein.
80. Defendants' actions as alleged herein constitute an unlawful, unfair
or fraudulent business act or practice under California Business and
Professions Code Section 17200. Defendants' unlawful, unfair or fraudulent
business act or practices include, without limitation, defendants' failure, as
alleged above, to include in their Tender Offer the disclosures required by
the Exchange Act and SEC rules promulgated thereunder.
81. Defendants' unlawful, unfair and/or fraudulent business act or
practices are continuing, thus entitling ARV to injunctive relief under
California Business and Professions Code Section 17203 to restrain defendants'
current and/or future acts of unfair competition.
FOURTH CLAIM FOR RELIEF
(For Unfair Competition Under California
Business and Professions Code Section 17200 et seq.)
(Against Defendant Emeritus Corporation)
82. ARV repeats and realleges paragraph 1 through 80 as though set forth
fully herein.
83. Emeritus' actions as alleged herein constitute an unlawful, unfair
or fraudulent business act or practice under California Business and
Professions Code Section 17200. Emeritus's unlawful, unfair or fraudulent
business act or practices include, without limitation: (1) Emeritus' failure,
as alleged above, to include in its proxy statement the disclosure required by
the Exchange Act and SEC rules promulgated thereunder; and (2) Emeritus' plan,
and acts in furtherance thereof, to obtain and vote proxies to elects its
nominees to the ARV board without waiving the conditions of the Tender Offer,
thereby causing ARV to default on its leases and suffer catastrophic
consequences as a result, all without any guaranty that the Tender Offer will
close.
84. Emeritus' unlawful, unfair and/or fraudulent business act or
practices are continuing, thus entitling ARV to injunctive relief under
California Business and Professions Code Section 17203 to restrain Emeritus'
current and/or future acts of unfair competition.
FIFTH CLAIM FOR RELIEF
(For Breach of Fiduciary Duty)
(Against Defendant Emeritus Corporation)
85. ARV repeats and realleges paragraphs 1 through 83 as though set
forth fully herein.
86. In the event that Emeritus obtains proxies which enable it to elect a
new ARV board of directors it will become and, for as long as said proxies are
in effect, will remain, a controlling shareholder of ARV. As a controlling
shareholder, Emeritus would owe a fiduciary duty to ARV and its minority
shareholders to act in good faith and use its ability to control ARV in a
fair, just and equitable manner.
87. Election of Emeritus' board nominees would directly and proximately
cause ARV to breach many of its leases, thereby providing ARV's landlords the
ability to increase the rent or terminate the lease. In the absence of a full
waiver of all of terms and conditions of the Tender Offer, Emeritus, at its
option and for its own benefit, could burden ARV and it minority shareholders
will all the adverse consequences of breached leases (including the
possibility of termination by the lessor(s)) without providing any
corresponding benefit. Under these circumstances, Emeritus' expressed
intention of electing its nominees to the ARV board would cause substantial
harm to ARV and its minority shareholders, and would constitute a breach of
Emeritus' fiduciary duty to act in good faith and control ARV in a fair, just
and equitable manner.
IRREPARABLE INJURY TO ARV
AND ITS SHAREHOLDERS
88. ARV and its shareholders are being and, unless defendants are
preliminarily and permanently enjoined as requested herein, will continue to be
immediately and irreparably injured as a result of defendants' conduct in
that, inter alia:
(a) ARV's shareholders have been and will continue to be denied
accurate and complete information to which they are lawfully entitled and thus
have been and are being denied the ability to make informed decisions with
respect to tendering their shares and selecting members of their board of
directors;
(b) Defendants' scheme to acquire control of ARV will be supported by
shareholders who do not have knowledge of material information;
(c) ARV's business, including its relationships with customers,
suppliers and employees, will continue to be jeopardized by the uncertainties
generated by defendants' misleading proxy solicitations;
(d) If Emeritus acquires control of ARV by virtue of the Emeritus
nominees' election to the ARV board, they will be in a position to terminate or
cease to prosecute this action, thus denying ARV's shareholders any meaningful
remedy against defendants' unlawful conduct.
(e) The market in ARV stock will continue to be disrupted and
artificially manipulated by virtue of the materially false and misleading
information that the defendants have injected into the marketplace by means of
their false and misleading proxy statement; and
(f) If Emeritus is successful in the proxy contest and acquires control
of ARV, it will cause ARV to breach numerous leases and suffer potentially
catastrophic consequences; Emeritus could then cause unfair competitive harm
to ARV by abandoning its purchase and merger plans, leaving ARV with many
breached leases, and/or negotiating with the landlords of the breached leases
to acquire ARV's facilities.
WHEREFORE, ARV prays for relief as follows:
1. On ARV's First Claim for Relief, an order requiring defendants to
return all shares previously tendered to them and preliminarily and
permanently enjoining defendants and all persons acting in concert with them
from doing any of the following unless and until the disclosures required by
law have been made and the false and misleading statements identified herein
have been corrected in a form approved by this Court and ARV's shareholders
have been given at least five days to consider such corrected information:
(a) soliciting any ARV shareholders with respect to tendering their
shares to EMAC;
(b) proceeding with its Tender Offer; or
(c) purchasing, acquiring or disposing of any shares of ARV common
stock.
2. On ARV's Second Claim for Relief, an order preliminarily and
permanently enjoining Emeritus and all persons acting in concert with it from
doing any of the following unless and until the disclosures required by law
have been made and the false and misleading statements identified herein have
been corrected in a form approved by this Court and ARV's shareholders have
been given at least five days to consider such corrected information:
(a) voting, in person or by proxy, any shares of ARV common stock;
(b) soliciting any new proxies or consents from holders of ARV common
stock;
(c) taking any steps to replace the current board of directors of ARV;
(d) purchasing, acquiring or disposing of any shares of ARV common
stock; and
(e) otherwise communicating with ARV shareholders.
3. On ARV's Third Claim for Relief, an order preliminarily and
permanently enjoining defendants and all persons acting in concert with them
from doing any of the following unless and until (1) the disclosures required
by law have been made and the false and misleading statements identified
herein have been corrected in a form approved by this Court and ARV's
shareholders have been given at least five days to consider such corrected
information; and (2) defendants have removed all conditions of their Tender
Offer and have provided written waivers from its financing sources of all
conditions which could allow them to refuse to provide funds to defendants:
(a) voting, in person or by proxy, any shares of ARV common stock;
(b) taking any steps to replace the current board of directors of ARV;
(c) soliciting any ARV shareholders with respect to tendering their
shares to EMAC; and
(d) proceeding with the Tender Offer.
4. On ARV's Fourth Claim for Relief, an order preliminarily and
permanently enjoining defendants and all persons acting in concert with them
from doing any of the following unless and until (1) the disclosures required
by law have been made and the false and misleading statements identified
herein have been corrected in a form approved by this Court and ARV's
shareholders have been given at least days to consider such corrected
information; and (2) defendants have removed all conditions of their Tender
Offer and have provided written waivers from its financing sources of all
conditions which could allow them to refuse to provide funds to defendants:
(a) voting, in person or by proxy, any shares of ARV common stock;
(b) soliciting any new proxies or consents from holders of ARV common
stock; and
(c) taking any steps to replace the current board of directors of ARV.
5. On ARV's Fifth Claim for Relief, an order preliminarily and
permanently enjoining defendants and all persons acting in concert with them
from doing any of the following unless and until defendants have removed all
conditions of their Tender Offer and until Emeritus has provided written
waivers from its financing sources of all conditions which could allow them to
refuse to provide funds to defendants:
(a) voting, in person or by proxy, any shares of ARV common stock;
(b) soliciting any new proxies or consents from holders of ARV common
stock; and
(c) taking any steps to replace the current board of directors of ARV;
6. On its Second Claim for Relief, a judgment declaring that defendants'
proxy solicitations have been made in violation of section 14(a) of the
Exchange Act and the rules promulgated thereunder, and that all proxies
obtained by the Emeritus nominees are therefore void.
7. On its First and Second Claims for Relief, an order requiring
defendants to disclose in any future proxy solicitations -- oral or written --
relating to the upcoming election for members of the ARV board of directors
any judicial finding herein that federal securities laws and rules have been
violated by them.
8. On its First and Second Claims for Relief, an order requiring
defendants to disclose in any future tender solicitations--oral or written--to
ARV shareholders by defendants or their affiliates any judicial finding herein
that federal securities laws and rules have been violated by them.
9. On all claims for relief, an order granting ARV its reasonable costs
and expenses and attorneys' fees.
10. On all claims for relief, an order granting ARV such other and
further relief as the Court deems just and proper.
Dated: January 6, 1998
IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
Elizabeth A. Camacho
By: /s/ Elizabeth A. Camacho
-------------------------------
Elizabeth A. Camacho
Attorneys for Plaintiff
ARV Assisted Living, Inc.
Exhibit (g)(4)
GIBSON, DUNN & CRUTCHER LLP
Wayne W. Smith, SBN 054593
Joseph P. Busch, III, SBN 070340
4 Park Plaza, Suite 1400
Irvine, California 92614-8557
(714) 451-3800
DAVIS POLK & WARDWELL
MICHAEL P. CARROLL
JAMES H.R. WINDELS
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
Attorneys for Plaintiff
Emeritus Corporation
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
EMERITUS CORPORATION, a CASE NO. 787788
Washington corporation,
ASSIGNED FOR ALL PURPOSES TO
Plaintiff, JUDGE JAMES A. JACKMAN, DEPT. 31
v. FIRST AMENDED COMPLAINT FOR
INJUNCTIVE AND DECLARATORY
ARV ASSISTED LIVING, INC., a RELIEF
California corporation; DAVID P.
COLLINS, an individual; JOHN A. Date of Filing: December 9, 1997
BOOTY, an individual; R. BRUCE Trial Date: None Set
ANDREWS, an individual; MAURICE
J. DeWALD, an individual; JOHN J.
RYDZEWSKI, an individual; ROBERT
P. FREEMAN, an individual;
KENNETH M. JACOBS, an individual;
MURRY N. GUNTY, an individual;
HOWARD G. PHANSTIEL, an
individual; and Prometheus Assisted
Living, LLC, a Delaware limited liability
company,
Defendants.
I.
NATURE OF THE ACTION
1. Plaintiff Emeritus Corporation ("Emeritus") brings this action
against ARV Assisted Living, Inc. ("ARV"), David P. Collins, John A. Booty, R.
Bruce Andrews, Maurice J. DeWald, John J. Rydzewski, Robert P. Freeman,
Kenneth M. Jacobs, Murry N. Gunty, Howard G. Phanstiel; and Prometheus
Assisted Living, LLC ("Prometheus") (collectively, "Defendants" or, excepting
ARV and Prometheus, the "Individual Defendants"). Defendants Collins, Booty,
Andrews, DeWald and Rydzewski (collectively, the "ARV Defendants") have
served together on ARV's board of directors (the "Board") since 1995.
Defendants Freeman, Jacobs and Gunty were appointed to the Board on October
30, 1997, and defendant Phanstiel was appointed on or about December 5, 1997.
Emeritus brings this complaint for injunctive and declaratory relief as set
forth below.
2. This an action to prevent the directors of a publicly-owned
California corporation from selling out their own shareholders. California
law requires directors of a corporation to act as fiduciaries for the
corporation's shareholders. In this case, however, the Individual Defendants
have breached their fiduciary duties by taking away control of ARV from its
public shareholders and depriving those shareholders of the opportunity to
maximize the value of their shares. Instead of acting in the best interests
of ARV's shareholders, the Individual Defendants have embarked on a program to
prevent an acquisition of ARV and entrench themselves in office for their own
personal benefit.
3. On July 10, 1997, Emeritus made a proposal to ARV's Board to
acquire ARV's outstanding shares for a premium of their market value.
However, because Emeritus' proposal would have resulted in the ARV Defendants
losing control of ARV, the ARV Defendants failed to give any serious
consideration to the proposal and refused to negotiate with Emeritus.
Instead, the ARV Defendants took immediate and decisive steps to block
Emeritus from acquiring ARV and to preserve their Board positions. These
steps included entering into a complex series of self-serving transactions
described below and putting into place a "shareholders rights plan" --
commonly known as a "poison pill."
4. On July 14, 1997 -- four days after Emeritus' proposal -- ARV
announced that it had entered into a transaction with Prometheus, an
affiliate of Lazard Freres Real Estate Investors L.L.C. ("Lazard") (the "First
Prometheus Transaction"). In the First Prometheus Transaction, the ARV
Defendants agreed to sell a vast amount of newly issued ARV stock to
Prometheus for $14 per share. ARV's directors and senior officers also
committed, subject to certain conditions, to vote their 20% holding of ARV
stock in support of Prometheus' nominees to ARV's Board. In return,
Prometheus would vote its sizable holding of stock in favor of keeping ARV's
existing Board in office for at least another three years. This massive stock
sale and mutual commitments to support each other's Board nominees radically
altered the ownership structure of ARV, locked up the Board under the control
of Prometheus and the ARV Defendants, and wrested control of the company away
from ARV's public shareholders. On August 22, 1997, ARV filed preliminary
proxy materials with the Securities and Exchange Commission (the "SEC")
stating that ARV was intending to hold a vote of its shareholders at an
October 14, 1997 meeting to approve the First Prometheus Transaction.
Subsequently, the annual meeting was rescheduled for November 18, 1997.
5. Also on July 14, 1997, the ARV Defendants took another step to
entrench themselves in office -- they hurriedly implemented a poison pill. The
poison pill effectively prevents Emeritus or any other party from attempting
to acquire ARV and denies ARV's shareholders the opportunity to receive a
premium for their shares in any public tender offer. The ARV Defendants
expressly excluded Prometheus from the effect of the poison pill, however,
thereby permitting Prometheus to acquire majority control of ARV. Without
paying any control premium to ARV's public shareholders.
6. On October 12, 1997, after stating its view that the First
Prometheus Transaction constituted a breach of the ARV Defendants' fiduciary
duties, Emeritus made a second proposal to the ARV Board to purchase all of
the publicly held shares of ARV in cash for $16.50 per share -- 16% higher
than the price at which Prometheus had purchased its ARV stock. Despite this
significant premium, the ARV Defendants again rejected Emeritus' proposal
without any serious consideration or negotiations with Emeritus. While
Emeritus' proposal offered substantial value to all of ARV's shareholders, the
First Prometheus Transaction gave unfair and special treatment to one
hand-picked shareholder which in return pledged to support the ARV Defendants
in their quest to remain in office.
7. On October 13, 1997, Gary Davidson, the Chairman and Chief
Executive Officer of ARV, as well as one of its principal founders, resigned
from the company. Mr. Davidson resigned because he disapproved of the extent
to which Prometheus was exerting control over ARV and because he believed that
the ARV Defendants had failed to act in the shareholders' best interest by
summarily rejecting Emeritus' October 12, 1997 proposal.
8. With Mr. Davidson having resigned in protest, Emeritus having
made proposals which were far superior to the First Prometheus Transaction, and
shareholder approval of the First Prometheus Transaction in doubt, the ARV
Defendants realized that they had to change strategies to achieve their goals.
The centerpiece of the new strategy was to enter into a second transaction with
Prometheus (the "Second Prometheus Transaction" or, together with the First
Prometheus Transaction, the "Prometheus Transactions"), one which would
preserve the standstill restrictions of the first transaction and allow
Prometheus to obtain additional ARV shares without putting the transaction up
for a shareholder vote.. Accordingly, the ARV Defendants canceled the
November 18, 1997 shareholder meeting and reneged on their commitment to hold
a shareholder vote to approve the Prometheus Transactions.
9. On October 29, 1997, ARV announced the Second Prometheus
Transaction which superseded parts of the First Prometheus Transaction. The
Second Prometheus Transaction would grant Prometheus three designated
directors on an expanded, nine-member ARV Board. In addition, Prometheus
would keep the shares it had already acquired in the First Prometheus
Transaction, representing over 16% of ARV, and would be free to acquire up to
49.9% of all outstanding shares without being subject to ARV's poison pill.
In return, Prometheus would agree to purchase $60 million in convertible
debentures (the "Notes") and, as before, to vote its stock in favor of keeping
ARV's existing Board in office for at least another three years. The Notes
would be redeemable at ARV's option in exchange for common shares of ARV, but
the initial redemption price would be exorbitant: Prometheus would be
entitled to receive approximately 4.3 million shares at an out-of-pocket cost
of approximately $14 per share, a substantial discount to the market price.
Like the First Prometheus Transaction, the Second Prometheus Transaction locks
up the Board under the joint control of Prometheus and ARV's existing
management while selling out the company's public shareholders. Shortly after
the announcement of the Second Prometheus Transaction, defendants Freeman,
Jacobs and Gunty were appointed to ARV's Board.
10. On November 21, 1997, ARV filed new preliminary proxy
materials (the "New Proxy Statement") with the SEC. The New Proxy Statement
no longer seeks shareholder approval of the Prometheus Transactions. Rather,
the New Proxy Statement states that ARV intends to solicit proxies for the
purpose of approving only three proposals at its annual meeting. Those
proposals seek (i) reincorporation of ARV as a Delaware corporation; (ii)
amendment of ARV's articles of incorporation to increase the maximum number of
authorized directors of ARV from nine to ten; and (iii) re-election of the
Individual Defendants as directors of ARV. The New Proxy Statement also
stated that Defendants Freeman, Jacobs and Gunty had been appointed to ARV's
Board on October 30, 1997. The New Proxy Statement announced January 8, 1998
as the rescheduled date of the annual meeting.
11. On November 24, 1997, Emeritus filed preliminary proxy
materials with the SEC stating that Emeritus intends to solicit proxies in
opposition to the reelection of the Individual Defendants as ARV Board members
at ARV's annual meeting, then scheduled for January 8, 1998. Emeritus' proxy
materials also state that Emeritus is proposing its own slate of nominees for
election to ARV's board at the annual meeting.
12. On December 8, 1997, ARV announced that it had redeemed the $60
million in Notes for approximately 4.3 million ARV common shares (the
"Redemption"). ARV redeemed the Notes for the specific purpose of attempting
to defeat Emeritus' slate of candidates to sit on ARV's Board. Although ARV
announced the price of the shares as $17.25 per share, because Prometheus
received a more than 23% "premium" over and above its $60 million investment,
the out-of-pocket cost to Prometheus was only $14 per share, substantially
less than the market price.
13. In conjunction with the Redemption, ARV announced that it had
rescheduled the annual meeting date for a third time, to January 28, 1998. In
addition, ARV moved the record date for the annual meeting to December 18,
1997, allowing Prometheus to vote its 4.3 million newly-issued ARV shares at
the annual meeting. In effect, ARV has delivered millions of discounted
shares to an investor, hand-picked by the Board, who is contractually
obligated to vote those shares in support of the Board's director nominees.
As a direct response to Emeritus' proxy contest, the Redemption is a blatant
attempt by the Board to entrench itself by buying votes at the expense of
ARV's public shareholders and Emeritus.
14. Also on December 8, 1998, ARV announced the appointment,
effective immediately, of defendant Phanstiel as its new Chairman of the Board
and Chief Executive Officer.
15. Emeritus' complaint seeks, among other things specified
further below, the following declaratory and injunctive relief: an order
declaring that Defendants have breached their fiduciary duties by (i) entering
into and failing to revoke the Prometheus Transactions; (ii) implementing and
retaining the poison pill; and (iii) redeeming the Notes issued to Prometheus;
and an injunction voiding the Prometheus Transactions in whole or part and
directing that Defendants redeem the poison pill.
II.
PARTIES AND JURISDICTION
16. Plaintiff Emeritus is a Washington corporation with its
principal offices located in Seattle, Washington. Emeritus is a long-term
care services company focused on operating residential style assisted living
communities. Emeritus is qualified to do business in California and does
business in California.
17. Defendant ARV is a California corporation with its principal
office located in Costa Mesa, California. ARV is also a provider of assisted
living accommodations and services that operates, acquires and develops
assisted living facilities.
18. Defendant David P. Collins is a Director and Senior Executive
Vice President of ARV and is currently responsible for managing ARV Assisted
Living International, Inc., a wholly owned subsidiary of ARV. Mr. Collins has
been a Director since 1985, and he beneficially owns 558,939 (4.8%) of ARV's
common stock. In 1997, solely in his capacity as Executive Vice President of
ARV, he stands to earn $204,791 in salary, $63,329 in bonuses and $10,000 in
stock options.
19. Defendant John A. Booty is Vice Chairman of the Board of ARV,
and prior to December 5, 1997, was its interim President and Chief Executive
Officer. Mr. Booty was a founder of ARV's predecessor company in 1980 and
served as interim President and Chief Executive Officer beginning October
1997. In addition, he has been a Director of ARV since its inception in 1985.
He also served as President of ARV from 1985 through September 1996 and
beneficially owns 699,246 (6%) of ARV's common stock. In 1997, solely in his
capacity as interim President and Chief Executive Officer, he stands to earn
$136,207 in salary, $50,582 in bonuses and $6,426 in other compensation.
20. Defendants R. Bruce Andrews, James M. Peters and Maurice J.
DeWald are currently Directors of ARV and have served as Directors since 1995.
They own, respectively, 2,500, 2,500, and 3,500 shares of ARV's common stock.
In 1997, as Directors, they will earn $12,000 per year plus $500 for each
meeting of the Board or committee of the Board that they attend. They also
each have the option to purchase 10,000 shares of ARV common stock.
21. Defendant John J. Rydzewski is a Director and, prior to
December 5, 1997, was Chairman of the Board of ARV. In 1997, as a Director of
ARV, he would have earned $12,000 plus $500 for each meeting of the Board or
committee of the Board that he attends. However upon his appointment as
Chairman of the Board in October 1997, it was agreed that Mr. Rydzewski would
receive $75,000 per year for his services. Mr. Rydzewski also owns 7,500
shares of ARV common stock and has an option to purchase 10,000 additional
shares of ARV common stock.
22. Defendants Robert P. Freeman, Kenneth M. Jacobs and Murry N.
Gunty are Directors of ARV, having been appointed to the Board on October 30,
1997. In addition to their positions as ARV Directors, Mr. Freeman is the
President and Managing director of Lazard, Mr. Jacobs is a Managing Director
in the Banking Group of Lazard Freres & Co. LLC, an affiliate of Lazard, and
Mr. Gunty is a Vice President of Lazard. Mr. Freeman and Mr. Gunty signed the
agreements effectuating the Prometheus Transactions on behalf of the
Prometheus.
23. Defendant Howard G. Phanstiel is Chairman of the Board of
Directors and Chief Executive Officer of ARV, having been appointed to these
position on December 5, 1997. His compensation package has not yet been
announced.
24. Defendant Prometheus is a Delaware limited liability company
with its principal offices located in New York, New York. Prometheus, an
affiliate of Lazard and Lazard Freres & Co. LLC, is a company that invests in
assisted living facilities.
25. This Court has jurisdiction over each of the Defendants
pursuant to California Code of Civil Procedure Section 410.10. ARV is a
California corporation, and the Individual Defendants are currently serving as
directors of a California corporation. In addition, on information and
belief, the Individual Defendants have participated in Board meetings in
California, either in person or telephonically via teleconferences originating
in California. Prometheus is the largest shareholder of ARV and has the
authority to designate three members (currently Freeman, Jacobs and Gunty) of
ARV's Board. The wrongful acts and transactions alleged herein have had and
will have significant effects within California.
III.
VENUE
26. Venue is proper in Orange County because ARV's headquarters and
principal offices are located here.
IV.
DERIVATIVE ALLEGATIONS
27. Emeritus asserts the claims herein individually and directly.
However, to the extent that any of these claims should be considered to be
derivative claims, Emeritus did not make demands on ARV's Board to institute
an action asserting the claims because, under the circumstances, demand was
not required, and not necessary and would have been futile in that: (a) the
ARV Defendants participated in and approved of the wrongful acts alleged
herein; (b) those acts occurred in response to and in the context of a contest
for control of ARV, which could have resulted in the removal of the ARV
Defendants from office; (c) the ARV Defendants have already repudiated
Emeritus' proposals and offers to negotiate; (d) the ARV Defendants have
recommended the First Prometheus Transaction in ARV's preliminary proxy
materials; and (e) defendants Freeman, Jacobs and Gunty aided and abetted the
ARV Defendants' breach of fiduciary duty and, together with defendant
Phanstiel, have done nothing since their appointment as Directors to revoke
the Prometheus Transactions or the poison pill or to mollify their entrenching
effects. Thus, the Board has at no time been either independent or
disinterested with respect to the decisions it made.
V.
FACTUAL BACKGROUND
A. ARV Ignores Emeritus' Proposal and Rushes to Close the First
Prometheus Transaction
28. In June 1997, Daniel R. Baty, Chairman and CEO of Emeritus,
telephoned Mr. Davidson of ARV. Mr. Baty told Mr. Davidson that Emeritus was
interested in exploring a business combination with ARV. On July 3, 1997, Mr.
Baty met with Mr. Davidson at ARV's headquarters and reiterated Emeritus'
possible interest in such a combination.
29. Instead of pursuing discussions with Emeritus, on June 27,
1997, ARV entered into an exclusivity agreement with Prometheus pursuant to
which ARV agreed not to pursue a transaction with another party prior to
August 8, 1997 while negotiations with Prometheus took place. Negotiations
between ARV and Prometheus continued into early July.
30. On July 10, 1997, Mr. Baty of Emeritus and a representative of
Starwood Capital Group, LLC ("Starwood") delivered by facsimile a letter to Mr.
Davidson of ARV. In the letter, Mr. Baty and the representative of Starwood
set forth a proposal for the acquisition of ARV by Emeritus and Starwood.
Under the proposal, ARV's shareholders would receive either Emeritus stock or
a combination of Emeritus stock and cash worth a minimum of $14 for their ARV
shares, which represented a premium of more than 35% over the then-current
market price of ARV stock. Starwood would provide ongoing financing for the
combined company.
31. In the final paragraph of the July 10 letter, Mr. Baty and the
representative of Starwood suggested that a meeting occur as soon as possible
between Emeritus, ARV and Starwood to discuss the proposals in greater detail
and explore possible structures and alternatives. The letter made clear that
Emeritus, Starwood and their advisors were ready to meet with ARV at its
offices in Costa Mesa at ARV's earliest convenience.
32. The following day, on Friday, July 11, 1997, Mr. Baty received
a letter back from ARV. ARV's letter stated that Emeritus' letter had been
received and that the ARV Board was "attempting to schedule a meeting next
week to consider your proposal."
33. In fact, as the ARV Defendants well knew, ARV's exclusivity
agreement with Prometheus precluded its pursuit of another transaction before
August 8, 1997.
34. Rather than waiting for the next week, ARV's Board met on
Sunday, July 13, 1997. At this meeting, the ARV Defendants summarily rejected
Emeritus' proposal after less than 30 minutes of deliberation, without so much
as considering further inquiry or discussions with Emeritus or Starwood. In
addition, the ARV Defendants decided to proceed with two major actions which
would effectively prevent Emeritus, or any other party, from acquiring control
of ARV. These two major actions were, first, rushing to complete and enter
into the First Prometheus Transaction, and second, implementing the poison
pill. The effect of these actions was to entrench the ARV Defendants in
office for their own personal benefit and to deny Emeritus the opportunity to
present its offer to ARV's public shareholders.
B. ARV Enters into the First Prometheus Transaction
35. On July 14, 1997, four days after receiving Emeritus'
proposal, ARV, certain of the ARV Defendants, Prometheus and Lazard entered
into a series of agreements under which Prometheus purchased up to a 49.9%
holding in ARV's stock. At the heart of the transactions were mutual promises
by the ARV Defendants and Prometheus to expand the size of the Board and to
vote all of their respective shares in support of each other's nominees for
positions on the Board. In addition, Prometheus agreed to abstain for the
next three years from participating in any acquisition of ARV or other acts
which could potentially unseat the ARV Defendants.
36. The terms of the First Prometheus Transaction rendered control
of the affairs of ARV a private arrangement between ARV's senior management and
Prometheus and thereby effectively disenfranchised ARV's public shareholders.
Before the transaction, ARV's public shareholders had the ability by acting in
concert to control the company; after the transaction, they did not. This
change of control was engineered by Defendants while denying Emeritus the
opportunity to make an offer to acquire ARV and thereby benefit all of ARV's
shareholders.
37. On information and belief, defendants Prometheus, Freeman,
Jacobs and Gunty each aided and abetted the ARV Defendants' breach of their
fiduciary duty to shareholders by encouraging and otherwise assisting the ARV
Defendants in the adoption of the First Prometheus Transaction.
38. The terms of the three principal agreements of the First
Prometheus Transaction -- the Stock Purchase Agreement (the "SPA"), the
Stockholders Agreement (the "SA"), and the Stockholders Voting Agreement (the
"SVA") -- are set forth below in greater detail.
39. SPA: Sale of ARV Stock to Prometheus. The SPA between Lazard,
Prometheus and ARV provided for the issuance to Prometheus of up to a total of
9,653,325 ARV shares. Because the First Prometheus Transaction was superseded
by the Second Prometheus Transaction, a total of 1,921,012 shares (or
approximately 16.6% of all outstanding shares) have been issued to Prometheus.
However, the SPA provided that ARV would issue a second block of stock
consisting of 3,078,988 shares to Prometheus on the date that shareholder
approval of the First Prometheus Transaction, as described more fully below,
took place. Thereafter, Prometheus would acquire additional ARV stock up to
an aggregate holding of 49.9% of all outstanding shares during a three-year
"standstill" period. After the standstill period ended, Prometheus would be
free to acquire additional shares of ARV and thus hold a majority interest in
the company.
40. SPA: Prometheus' Power to Veto Actions by ARV. Until four of
Prometheus' own directors had assumed positions on ARV's Board, the SPA
permitted Prometheus to veto any significant action by ARV's Board other than
in the ordinary course of business, including (i) the acquisition or sale of
any business or assets having a value in excess of 1% of ARV's assets; (ii)
the incurrence of indebtedness having a value in excess of 1% of ARV's assets;
(iii) the approval of ARV's annual operating budget; (iv) any material change
in ARV's management; (v) any change in the number of shares of ARV common
stock authorized for issuance; and (vi) any change in ARV's dividend policy.
41. SPA: "No Shop" Provision. The SPA forbade ARV from
initiating, soliciting, or encouraging any transaction which might compete
with the transaction with Prometheus -- a so-called "Competing Transaction."
A Competing Transaction was defined as the acquisition of more than 15% of
ARV's stock, or any business combination, restructuring or liquidation
involving ARV.
42. SPA: Expanded Board and Executive Committee With Prometheus
Veto. The SPA provided that the Board would be expanded from seven to eleven
directors, with the four new positions to be filled by Prometheus. In
addition, ARV's bylaws would be amended to require a super-majority of eight
directors for the approval of "any action other than in the ordinary course."
With Prometheus controlling four Board seats, it would have veto power over a
wide range of Board activity. The SPA also provided that votes by the
five-person Executive Committee of the Board, two members of which would be
nominated by Prometheus, be subject to a super-majority requirement for
approval. Thus, Prometheus would have had veto power over actions by the
Executive Committee as well.
43. SPA: Shareholder Ratification Requirement. The SPA required
ARV to seek to have the First Prometheus Transaction and the specific
agreements effectuating it approved by the affirmative vote of a majority of
the holders of ARV's common stock. For purposes of this ratification, the
shares owned by Prometheus (currently 16.6% of all outstanding shares) would
be counted in reaching a quorum but would not be counted toward the majority
necessary for ratification. As discussed more fully below, the shares held by
Gary Davidson and the ARV Defendants, which comprised over 20% of ARV's
outstanding shares, were required by the SVA to be voted in support of
ratification of the First Prometheus Transaction.
44. SPA: $13 Million "Break-up" Fee. The SPA required ARV to pay
significant "break-up" fees to Prometheus if the First Prometheus Transaction
was not consummated. Ordinarily, a "break-up" fee is justifiable on the
grounds that it deters a company from backing out of a transaction which
enhances shareholder value. But here the First Prometheus Transaction did not
enhance the value of ARV's outstanding shares, and thus the fees provided for
in the SPA were unjustified and punitive to ARV and its shareholders. In
addition, the fees were unduly large and grossly disproportionate to the size
of the First Prometheus Transaction. Such fees rarely exceed 3% of the value
of the transaction, but in one scenario set forth in the SPA were equal to
approximately 10% of the value of the First Prometheus Transaction. The
break-up fee was in fact intended to coerce ARV shareholders into approving
the First Prometheus Transaction. The break-up fees and "adjustments" to the
purchase price contemplated by the SPA would have reduced the price per share
received by ARV in the transaction to as little as $4.15 below market at the
time the First Prometheus Transaction was announced.
45. SA: Voting of Prometheus' Shares. The quid pro quo for the
astonishing benefits granted by ARV's Board to Prometheus under the SPA was
largely provided for in the SA among Lazard, Prometheus and ARV. The SA
obligated Prometheus to vote all of its shares of ARV "in favor of the
election of Directors nominated by the Nominating Committee or the Board".
Thus, in addition to their own sizable holding of shares, ARV's Board would
have been supported in office by Prometheus' holding as well.
46. SA: Resistance to Changes of Control or Policy. The
standstill restrictions of Sections 4.2 and 4.3 of the SA prohibited
Prometheus during a three-year period from acting either alone or in concert
with another person or group in any way which could threaten the existing
composition of the ARV Board or management.
47. SA: No Support of Disinterested Stockholders. In particular,
Section 4.2 prohibited Prometheus from directly or indirectly (i) soliciting,
proposing or otherwise encouraging a genuine election contest for the Board of
Directors; (ii) soliciting, encouraging or participating in any stockholder
proposals; (iii) calling a special meeting for a stockholder vote; (iv)
requesting a list of stockholders; or (v) seeking amendment, waiver or
invalidation of the First Prometheus Transaction.
48. SA: No Tendering or Other Transfer of Shares. Similarly,
Section 4.3 of the SA restricted Prometheus from transferring or tendering its
shares during the standstill period, with particular reference to transfers to
companies operating "assisted living facilities" such as Emeritus.
49. SA: Disenfranchisement of Disinterested Shareholders. In
essence, Sections 4.2 and 4.3 dictated that Prometheus' 49.9% interest be
immobilized and used as "ballast" for continuing Board control during any bids
for changes in control or policy. The exception, of course, was the election
of directors, when the Prometheus block had to be voted in support of Board
nominees. In addition, as indicated in its preliminary proxy materials, the
Board sought to reincorporate ARV in Delaware and to remove the possibility of
cumulative voting of directors. The combined effect of these changes would
have been to make it virtually impossible for Emeritus or any other
shareholder to elect its own director nominee, remove incumbent directors or
effectively challenge any action by the Board.
50. SVA: Voting by ARV Board Members. The SVA among Prometheus,
Lazard and four of the largest individual shareholders of ARV (defendants
Booty and Collins, Gary Davidson, and Graham Espley-Jones, the chief financial
officer of ARV) required each of the individual shareholders, subject to
certain conditions, to vote all of the shares under his control (i) in support
of the First Prometheus Transaction; and (ii) in support of the election of
ARV directors who are either nominated by Prometheus or the Nominating
Committee of the Board. In effect, the SVA provided that Prometheus, Lazard
and certain directors and senior officers of ARV would pool their substantial
voting power in an attempt to force approval of the First Prometheus
Transaction and, if they were successful, to perpetuate in office their own
designated nominees to ARV's Board.
C. The Implementation of ARV's Poison Pill
51. On July 14, 1997, in addition to entering into the First
Prometheus Transaction, Defendants implemented a Shareholders Rights Plan to
seek to prevent an acquisition by Emeritus or another bidder. In implementing
the Shareholders Rights Plan or "poison pill," ARV declared a dividend
distribution of one Preferred Share Purchase Right (a "Right") on each
outstanding share of ARV common stock. The Rights will be exercisable if,
among other things, a person or group (the "Acquiring Person") acquires 10% or
more of ARV's common stock. When exercisable, each Right will entitle its
holder to purchase additional newly issued shares of ARV common stock at
half-price. The effect of the pill, if triggered, is to greatly increase the
number of outstanding shares of ARV stock and make an acquisition
prohibitively expensive to the Acquiring Person. The Rights distributed on
shares owned by the Acquiring Person may not be exercised, thus putting the
Acquiring Person at an additional disadvantage in its efforts to acquire ARV.
52. Significantly, Defendants specifically exempted the shares
owned by Prometheus from triggering the poison pill. Thus, Prometheus --
which already owns over 16% of ARV's stock -- may continue to acquire ARV
shares either through future stock purchase agreements with ARV or through
open market purchases without triggering the pill. The exemption of
Prometheus from the pill gives Prometheus the opportunity to acquire a
majority interest in ARV without paying any control premium and, in the
meantime, to exercise significant leverage and control over ARV.
53. The poison pill, implemented only four days after ARV received
Emeritus' proposal, was adopted by the ARV Defendants for the improper purposes
of entrenching themselves in office, deterring any challenge to the First
Prometheus Transaction, and chilling or blocking Emeritus' proposal and any
other proposals by another bidder.
D. ARV's July 15 Press Release
54. On July 15, 1997, ARV issued a press release stating that on
the previous day its Board had approved the agreements with Prometheus and
Lazard and had implemented the poison pill. Emeritus learned of the
transactions between ARV and Prometheus for the first time in this press
release. The press release stated that the first phase of the stock sale to
Prometheus would close by the end of August 1997.
E. Emeritus' July 21, 1997 Letter to ARV Criticizing the First
Prometheus Transaction and Offering to Negotiate a Transaction to
Maximize Shareholder Value
55. On July 21, 1997, Emeritus delivered a letter to ARV
expressing surprise and disappointment with the announcement of the First
Prometheus Transaction. The letter raised a number of concerns with the
recent actions of ARV's Board, including (i) the negative effects that the
First Prometheus Transaction would have on the long-term value of ARV's stock,
especially as compared to the positive effects that Emeritus' proposal would
offer; (ii) the lack of serious consideration the ARV Board gave to Emeritus'
proposal; (iii) the inappropriately large size of the break-up fee in the SPA
with Prometheus; (iv) the effects of the poison pill in entrenching current
management and deterring challenges to the First Prometheus Transaction; and
(v) the fact that the First Prometheus Transaction had resulted in a change of
control of ARV without shareholder value being maximized. In conclusion,
Emeritus told ARV that it was prepared to discuss the terms of a potential
transaction between ARV and Emeritus that would maximize shareholder value.
F. After Receiving Emeritus' July 21 Letter, ARV and Prometheus
Hurriedly Close The First Prometheus Transaction
56. Although ARV's July 15 press release had stated that the
closing of the first phase of the Prometheus stock purchase would occur by the
end of August, four days after ARV received Emeritus' July 21 letter, the
first phase abruptly closed. Thus, on July 25, 1997, ARV issued Prometheus
1,921,012 shares of ARV common stock representing over 16% of ARV's
outstanding stock.
57. Also on July 25, ARV responded to Emeritus' July 21 letter.
In this letter, ARV asserted that ARV's Board had found the terms of Emeritus'
proposal as set forth in Emeritus' July 10 letter to be "significantly less
attractive and less definitive" than the terms of the First Prometheus
Transaction. ARV also claimed that the size of the break-up fee was normal
and that the poison pill was not implemented in response to Emeritus'
proposal. ARV then threatened to take legal action against both Emeritus and
Starwood if either entity attempted to "interfere" with consummation of the
First Prometheus Transaction.
G. ARV's Plan to Ratify the First Prometheus Transaction by
Shareholder Vote
58. On August 22, 1997, ARV filed with the SEC a preliminary proxy
statement in connection with its upcoming meeting of shareholders. In its
proxy statement, ARV stated that it intended to solicit proxies for the
purpose of approving four proposals at the meeting, which was at that time
scheduled for October 14, 1997. On information and belief, the annual meeting
was subsequently rescheduled for November 18, 1997. These proposals sought
(i) shareholder approval of the agreements implementing the First Prometheus
Transaction; (ii) shareholder approval of an amendment to ARV's Articles of
Incorporation, as required by the SA, increasing the maximum number of
directors of ARV from nine to eleven; (iii) reincorporation of ARV as a
Delaware corporation as opposed to a California corporation; and (iv)
re-election of the ARV Defendants as directors of ARV.
59. The preliminary proxy statement identified one of the
potential effects of shareholder approval of the First Prometheus Transaction
as follows: "Such approval may serve to extinguish potential claims, if any,
regarding any conduct of members of the Board in connection with the [First
Prometheus] Transaction, including potential claims alleging violations of the
Board's duties to shareholders. Under California Law, fully informed
shareholder approval of a transaction may, in certain circumstances, serve to
extinguish certain related fiduciary duty claims against directors." The
preliminary proxy materials thus candidly admitted the potential for breach of
fiduciary claims against ARV's directors based on the First Prometheus
Transaction.
60. The SVA between Prometheus, Lazard and certain insider
shareholders of ARV, however, provided that those individuals (including
defendants Booty and Collins) were required to vote their shares in favor of
approving the First Prometheus Transaction -- or, in other words, that they
were contractually required to vote in favor of exculpating themselves from
breach of fiduciary claims brought by ARV's shareholders. While this
arrangement was contrary to California law, the preliminary proxy materials
failed to disclose this fact. The preliminary proxy materials also failed to
disclose that the First Prometheus Transaction had been entered into by
Defendants for the improper purpose of entrenching the ARV Defendants in
office, that the First Prometheus Transaction had effectuated a change of
control at ARV without shareholder value being maximized, and that the ARV
Defendants had failed to properly consider or respond to Emeritus' July 10,
1997 proposal.
H. ARV Ignores Emeritus' October 12, 1997 Proposal
61. On October 12, 1997, Emeritus delivered a letter to ARV. The
letter reiterated Emeritus' concern that the First Prometheus Transaction
would transfer control of ARV to Prometheus without appropriate value being
paid to ARV's stockholders.
62. Emeritus' October 12, 1997 letter proposed the acquisition by
Emeritus of all the outstanding stock of ARV for $16.50 per share in cash, a
45% premium over ARV's stock price before the First Prometheus Transaction was
announced, and an 18% premium over the price per share paid by Prometheus in
purchasing its 16% block. The letter further indicated that Emeritus would
make its bid public the following day, and that Emeritus was available to meet
with ARV and its advisers immediately to discuss the proposal. As promised,
Emeritus announced its bid via press release on October 13.
63. Without any attempt to communicate or negotiate with Emeritus,
ARV issued a press release on October 14, 1997. Notwithstanding the signed
agreement to sell 49.9% of ARV to Prometheus, the press release contended that
ARV was not for sale. The release described the Emeritus offer as
unattractive because of what ARV characterized as "significant conditions,"
including the need for due diligence and the finalization of financing
agreements. Remarkably, the press release also cited the then-current trading
price of ARV stock, which had been bid higher in response to Emeritus'
proposal, as a reason to reject the offer.
64. The ARV Defendants failed to exercise due care and to take
diligent action to maximize shareholder value by rejecting, after only 45
minutes of deliberations, Emeritus' proposal to acquire the outstanding shares
of ARV for $16.50. As with Emeritus' July 10 offer, the ARV defendants did
not even consider contacting Emeritus to learn more about the terms of the
offer or the possibility of further negotiations. Emeritus' proposal offered
a significant premium to all of ARV's shareholders as opposed to the First
Prometheus Transaction which, by giving special treatment to one hand-picked
shareholder pledged to support the ARV Defendants in their quest to remain in
office, was in fact contrary to the interests of ARV's other shareholders.
I. Gary Davidson Resigns From ARV
65. On October 13, 1997, the day after ARV's Board received
Emeritus' $16.50 per share offer, Gary Davidson resigned from his positions as
Chairman, Chief Executive Officer and Director of ARV.
66. Mr. Davidson resigned because he disapproved of the extent to
which Prometheus was exerting control over ARV and because he believed that
the ARV Defendants had failed to act in the shareholders' best interest by,
among other things, summarily rejecting Emeritus' October 12, 1997 proposal.
J. ARV Retreats From the First Prometheus Transaction and Enters Into
the Second Prometheus Transaction Which Does Not Require
Shareholder Approval
67. The reaction of ARV shareholders to ARV's rejection of
Emeritus' $16.50 proposal was decidedly negative. On information and belief,
ARV was informed by its proxy consultants and others that shareholders would
likely reject the First Promethues Transaction, finding Emeritus' $16.50
all-cash offer superior.
68. Less than three weeks after receiving Emeritus' $16.50 per
share proposal, the ARV Defendants, Prometheus and Lazard made a strategic
decision to retreat from the First Prometheus Transaction and enter into a new
set of agreements -- the Second Prometheus Transaction -- which in part
supersede the First Prometheus Transaction. After communications with proxy
consultants and shareholders revealed that the First Prometheus Transaction
would likely be rejected by shareholders, the ARV Defendants entered into the
Second Prometheus Transaction (i) because they feared that the First
Prometheus Transaction would not be approved by ARV's shareholders, and (ii)
upon further information and belief, in order to entrench themselves in office
by preventing Emeritus from proceeding with its proposals.
69. As with the First Prometheus Transaction, at the heart of the
Second Prometheus Transaction were mutual promises by the ARV Defendants and
Prometheus to vote all of their respective shares in support of each other's
nominees for positions on the Board. As before, Prometheus agreed to abstain
for the next three years from participating in any acquisition of ARV or other
acts which could potentially unseat the ARV Defendants. Prometheus would also
retain its 16% interest in ARV acquired as part of the First Prometheus
Transaction.
70. The Second Prometheus Transaction differed from the first
transaction in several important respects. Most significantly, Defendants
crafted the Second Prometheus Transaction so that it did not have to be
approved by ARV's shareholders. Rather than issuing new shares directly to
Prometheus, the Second Prometheus Transaction called for the issuance of
convertible notes (the "Notes"), which could be converted into common shares
under various circumstances. Upon conversion of the Notes, Prometheus, in
conjunction with its 16% holding, would hold up to 35% of the outstanding
shares of ARV. As with the First Prometheus Transaction, Prometheus was free
to acquire a total of up to 49.9% of the outstanding shares of ARV during a
three-year standstill period, without triggering ARV's poison pill.
71. According to ARV's Form 8-K dated November 14, 1997 (the
"8-K"), Prometheus as of that date had not yet paid for the $60,000,000 in
convertible Notes issued to it by ARV, despite the fact that interest had
begun accruing on the Notes.
72. On information and belief, defendants Prometheus, Freeman,
Jacobs and Gunty each aided and abetted the ARV Defendants' breach of their
fiduciary duty to shareholders by encouraging and otherwise assisting the ARV
Defendants in the adoption of the Second Prometheus Transaction for the
financial benefit of Prometheus.
73. The terms of the five principal agreements constituting the
Second Prometheus Transaction -- the Amended and Restated Stock and Note
Purchase Agreement ("SPA2"), the related indenture (the "Indenture") and note
in favor of Prometheus (the "Prometheus Note"), the Amended and Restated
Stockholders Agreement ("SA2"), and the new Stockholders' Voting Agreement
("SVA2") -- are set forth below in greater detail.
74. SPA2: Sale of Convertible Notes to Prometheus. The SPA2
between Lazard, Prometheus and ARV provides for the issuance to Prometheus of
an aggregate of $60,000,000 principal amount of 6.75% Convertible Subordinated
Notes due 2007. The SPA2 amends and restates the SPA.
75. Indenture and Prometheus Note: Conversion to Common Shares.
The Indenture and Prometheus Note allow ARV to redeem the Notes at any time.
However, during the first three years after the Second Prometheus Transaction,
the Notes may only be redeemed for ARV common shares. Significantly, the
redemption price during the first three years of the transaction is
exorbitantly high: more than 123% of Prometheus' $60 million purchase price
for the Notes. Thus, for its $60 million investment, Prometheus would receive
approximately 4,285,000 shares at an out-of-pocket cost of $14 per share. In
essence, the redemption option allows ARV's Board, in the event the Board
perceives a threat to its control of ARV, to issue massive quantities of
discounted stock to Prometheus, shares which are contractually bound to be
voted in favor of the Board's director nominees. The Prometheus Note is thus
calculated to dilute the voting power of disinterested shareholders in order to
entrench the current Board. Accordingly, the adoption of the 123% redemption
provision by the ARV Defendants constituted a breach of their fiduciary duties
to Emeritus and other ARV shareholders.
76. SA2: Expanded Board with Prometheus Designees. The SA2 amends
and restates the SA. The SA2 provides that the Board be expanded to 9
directors, of whom Prometheus has the right to designate three. ARV is
restrained from expanding the Board beyond nine members.
77. SA2: Prometheus Veto of Choice of ARV President/CEO and
Director. The SA2 requires that ARV receive the prior written consent of
Prometheus approving ARV's selection of a President and CEO to replace Gary
Davidson. Once Prometheus has approved the new President/CEO, ARV must use
its best efforts to elect him or her to the Board, replacing one of the
directors not designated by Prometheus. Thus, in addition to having three
designees on the Board, Prometheus had veto power over the selection of an
additional director, defendant Phanstiel, effectively leaving Prometheus only
one member short of a majority of directors who, at the very least, are
sympathetic to Prometheus' interests.
78. SA2: Voting of Prometheus' Shares. As under the SA, during
the Second Prometheus Transaction's 3-year standstill period, Prometheus is
required to vote all of its shares of ARV "in favor of the election of all
Directors nominated by the nominating committee, if any, or the Board . . ."
Thus, as under the First Prometheus Transaction, the Board's own sizable
holding will be supported by Prometheus', the company's largest shareholder.
Since Prometheus' common stock holdings are likely to give it de facto voting
control of ARV, the SA2 virtually ensures that the Board will be able to
perpetuate itself and its nominees in office.
79. SA2: Resistance to Changes of Control or Policy. As under
the SA, the standstill restrictions of Sections 4.2 and 4.3 of the SA2
prohibit Prometheus during a three-year period from acting either alone or in
concert with another person or group in any way which could threaten the
existing composition of the ARV Board or management.
80. SA2: No Support of Disinterested Stockholders. As under the
SA, Section 4.2 of the SA2 prohibits Prometheus from directly or indirectly
(i) soliciting, proposing or otherwise encouraging a genuine election contest
for director positions on ARV's Board; (ii) soliciting, encouraging or
participating in any stockholder proposals; (iii) calling a special meeting
for a stockholder vote; (iv) requesting a list of stockholders; or (v) seeking
amendment, waiver or invalidation of the Second Prometheus Transaction.
81. SA2: No Tendering or Other Transfer of Shares. As under the
SA, Section 4.3 of the SA2 restricts Prometheus from transferring or tendering
its shares during the standstill period, with particular reference to
transfers to companies operating "assisted living facilities" such as Emeritus.
82. SA2: Disenfranchisement of Disinterested Shareholders. As
under the SA, Sections 4.2 and 4.3 of the SA2 essentially dictate that
Prometheus' up to 49.9% interest be immobilized and used as "ballast" for
continuing Board control during any bids for changes in control or policy.
The exception, of course, is the election of directors, when the Prometheus
block must be voted in support of Board nominees. The combined effect of
these changes will be to make it impossible for Emeritus or any other
shareholder to elect its own director nominee, remove incumbent directors or
effectively challenge any action by the Board.
83. SVA2: Voting By ARV Board Members. The SVA2 among Prometheus,
Lazard and three of the largest individual shareholders of ARV (Graham
Espley-Jones and defendants Booty and Collins) requires each of the three
individual shareholders to vote all of the shares under his control in support
of the election of ARV directors who are either nominated by Prometheus or the
Nominating Committee of the Board. Like the SVA, the SVA2 provides in effect
that Prometheus, Lazard and certain directors and senior officers of ARV pool
their substantial voting power to perpetuate in office their own designated
nominees to ARV's Board. Unlike the SVA, Gary Davidson is not a party to the
SVA2.
K. ARV Announces Stock Buy-back Program
84. On November 14, 1997, ARV announced it had allocated $25
million for the institution of a stock buy-back program to repurchase ARV
common shares on the open market. The implementation of the stock buy-back
program has the effect of further entrenching the Individual Defendants by
reducing the number of shares held by disinterested shareholders.
L. ARV Files New Preliminary Proxy Materials
85. On November 21, 1997, ARV filed new preliminary proxy
materials (the "New Proxy Statement") with the SEC. The New Proxy Statement
no longer seeks approval of the Prometheus Transactions. Rather, the New
Proxy Statement states that ARV intends to solicit proxies for the purpose of
approving only three proposals at its annual meeting. Those proposals seek
(i) reincorporation of ARV as a Delaware corporation; (ii) amendment of ARV's
articles of incorporation to increase the maximum number of authorized
directors of ARV from nine to ten; and (iii) re-election of the Individual
Defendants as directors of ARV. The New Proxy Statement was the first public
announcement by ARV that Defendants Freeman, Jacobs and Gunty were appointed
to ARV's Board. The New Proxy Statement announced January 8, 1998 as the
rescheduled date of the annual meeting.
86. Since the Individual Defendants chose to exempt the Second
Prometheus Transaction from a shareholder vote, the New Proxy Statement makes
little effort to describe it or its effects on ARV. Nevertheless, the New
Proxy Statement fails to disclose or misrepresents a number of material facts
concerning the Second Prometheus Transaction, including:
87. Entrenchment. ARV fails to disclose that the effect of the
Second Prometheus Transaction, like the first, will be to entrench the ARV
Defendants and effectively preclude the public shareholders from electing any
directors to the Board or, in fact, from having a meaningful voting franchise
on any issue.
88. Change of Control. ARV fails to disclose that the Second
Prometheus Transaction frees Prometheus to gain control of 49.9% of ARV's
common shares, and has effectively produced a change of control of ARV without
either (i) any payment to the public shareholders; or (ii) preserving an
opportunity for the public shareholders to realize a control premium for their
shares.
89. Failure to Consider Competing Proposal. ARV fails to disclose
that prior to the signing of the agreements which constitute the Second
Prometheus Transaction, Emeritus made a second proposal to ARV for the cash
purchase of all of the outstanding shares of ARV for $16.50 per share.
M. Emeritus Announces Its Proxy Contest
90. On November 24, 1997, Emeritus filed preliminary proxy
materials with the SEC, stating that Emeritus intends to solicit proxies
against the slate of director nominees that ARV had planned to submit to its
shareholders at the previously scheduled January 8, 1998 meeting. In its
proxy materials, Emeritus also proposed a slate of nominees to serve as
directors of ARV.
N. The Redemption of the Notes
91. On December 8, 1997, ARV announced that it had redeemed the $60
million in Notes for approximately 4.3 million ARV common shares (the
"Redemption"). Although ARV announced the price of the shares as $17.25 per
share, because Prometheus received a more than 23% "premium" over and above its
$60 million investment, the out-of-pocket cost to Prometheus was only $14 per
share, substantially less than the market price. The motive behind the
Redemption was to win the upcoming proxy fight with Emeritus.
92. Prometheus assisted in the Redemption by consenting to the
Redemption provisions in the Indenture and Prometheus Notes. Prometheus also
benefitted from the Redemption by receiving approximately 4.3 million ARV
shares at a substantial discount to their market price.
93. In accordance with Defendants' plan to use the Redemption to
ensure victory in the upcoming proxy fight, ARV announced that it had
rescheduled the annual meeting date for a third time, to January 28, 1998. In
addition, ARV moved the record date for the annual meeting to December 18,
1997, allowing Prometheus to vote its 4.3 million newly-issued ARV shares at
the annual meeting. In effect, ARV has delivered millions of discounted
shares to an investor, hand-picked by the Board, who is contractually
obligated to vote those shares in support of the Board's director nominees.
As a direct response to Emeritus' proxy contest, the Redemption is a blatant
attempt by the Board to entrench itself by buying votes at the expense of
ARV's public shareholders.
94. Also on December 8, 1998, ARV announced the appointment,
effective immediately, of defendant Phanstiel as its new Chairman of the Board
and Chief Executive Officer.
O. Emeritus Launches Its Tender Offer
95. On December 19, 1997, EMAC Corporation, a wholly owned
subsidiary of Emeritus, launched a tender offer for all the outstanding shares
of ARV for $17.50 cash per share (the "Tender Offer"). The Tender Offer is
subject to the conditions identified in Emeritus' Offer to Purchase dated
December 19, 1997 and filed with the SEC, including the redemption of the
Notes and of the shareholder rights associated with the poison pill. The
Tender Offer represents a significant premium to the current market price of
ARV shares and a 25% premium over the $14 price paid by Prometheus for its
shares.
96. On January 5, 1998, ARV filed with the SEC a response to
Emeritus' Tender Offer on Schedule 14D-9, rejecting Emeritus' offer and
recommending that ARV shareholders not tender their shares.
VI.
RELIEF SOUGHT
A. Declaratory Relief
97. The Court may grant the declaratory relief sought herein by
Emeritus, because an actual and immediate controversy exists between Emeritus
and Defendants. Emeritus contends that Defendants have breached, and are in
the process of breaching, their fiduciary duties to Emeritus by, among other
things as specified herein, (i) refusing to properly consider or respond to
Emeritus' proposals and offers to negotiate with Emeritus; (ii) entering into,
consummating, and failing to revoke the Prometheus Transactions; (iii)
implementing and retaining the poison pill; (iv) implementing the stock
buy-back program; (v) redeeming the Notes issued to Prometheus and moving the
record and annual meeting dates; (vi) taking other measures to entrench ARV's
Board; and (vii) failing to maximize the value of ARV's shares. Defendants
have disputed many of these claims and contend that ARV's Board found the
terms of Emeritus' proposal as set forth in Emeritus' July 10 letter to be
"significantly less attractive and less definitive" than the terms of the First
Prometheus Transaction, and that Emeritus' October 12 proposal was
"unattractive" and "conditional." ARV has also taken the position that the
poison pill, the stock buy-back program, and the Redemption are in the best
interests of ARV's shareholders.
98. The granting of the requested declaratory relief will serve
the practical purpose of affording relief from the disruption and uncertainty
regarding whether Defendants have acted and are acting in violation of their
fiduciary duties to Emeritus as alleged herein. The Court's declaratory
ruling will resolve the continued controversy over the ARV Board's defensive
schemes and voting arrangements, thereby avoiding delay and the waste of
judicial resources through piecemeal litigation.
B. Injunctive Relief
99. The Court may grant the injunctive relief sought herein by
Emeritus, because Defendants have already breached or aided and abetted the
breach, and are in the process of breaching, the Individual Defendants'
fiduciary duties to Emeritus by, among other things as specified herein, (i)
refusing to properly consider or respond to Emeritus' proposals and offers or
to negotiate with Emeritus; (ii) entering into, consummating, and failing to
revoke the Prometheus Transactions; (iii) implementing and retaining the
poison pill; (iv) implementing the stock buy-back program; (v) redeeming the
Notes issued to Prometheus and moving the record and annual meeting dates;
(vi) taking other measures to entrench ARV's Board; and (vii) failing to
maximize the value of ARV's shares.
100. The injunctive relief sought herein is justified because
Emeritus has properly stated claims for breach of fiduciary duty and is able
to prove a likelihood of success in proving its allegations. The denial of
injunctive relief will cause more harm to Emeritus than the granting of such
relief will cause to Defendants. Money damages are insufficient to make
Emeritus whole because of the unique, unreproducible and currently
immeasurable value to Emeritus of a corporate combination with ARV. Emeritus
faces irreparable harm if the Court does not act to preserve the status quo at
this juncture.
VII.
FIRST CLAIM FOR RELIEF
Breach of Fiduciary Duty: Use of the Prometheus Transactions as an
Improper Defensive Measure to Entrench ARV's Existing Board
(Declaratory and Injunctive Relief)
101. Emeritus repeats and realleges each and every allegation set
forth in Paragraphs 1 through 100 as if fully set forth herein.
102. By means of the Prometheus Transactions, the ARV Defendants,
aided and abetted by Defendants Prometheus, Freeman, Jacobs and Gunty, have
implemented a scheme to sell a substantial quantity of ARV common stock and
Notes to Prometheus in return for promises that Prometheus will vote those
shares in support of the ARV Board's director nominees. In addition,
Prometheus will have the exclusive ability to acquire up to 49.9% of ARV's
outstanding common shares without triggering the poison pill. These actions,
and others detailed above, indicate that the ARV Defendants entered into the
Prometheus Transactions for the purpose of entrenching themselves in office
and preventing a transaction with Emeritus from occurring.
103. The Individual Defendants owe fiduciary duties to Emeritus. As
fiduciaries, the Individual Defendants owe Emeritus the highest duties of care,
loyalty, candor and good faith. As part of those duties, Defendants are
prohibited from taking any defensive actions which have the effect of
entrenching existing management at the expense of Emeritus. Here, the effect
of the Prometheus Transactions is to entrench existing management to the
direct detriment of Emeritus.
104. On information and belief, Defendants Freeman, Jacobs, Gunty
and Phanstiel have done nothing since their appointment to the Board to
rectify these continuing breaches of fiduciary duty.
105. Given the Tender Offer by EMAC Corporation, Emeritus'
announcement that it will commence a proxy contest against the Board's
director nominees, and Emeritus' offers and proposals to acquire the
outstanding shares of ARV, Emeritus has been, and is being, harmed by
Defendants' breaches of their fiduciary duties as alleged in this claim.
106. Emeritus seeks a declaration that (i) Defendants have breached
or aided and abetted the breach of fiduciary duties owed to Emeritus by
entrenching ARV's existing board in office; (ii) the ARV Defendants have
breached their fiduciary duties by entering into and failing to revoke the
Prometheus Transactions; (iii) the Prometheus Transactions are null and void
or voidable by Defendants; (iv) the issuance of the Notes was in breach of the
ARV Defendants' fiduciary duties; (v) the Redemption of the Notes into common
shares of ARV was, and the voting or counting of votes of such shares would
be, in breach of Defendants' fiduciary duties; (vi) the moving of the record
and annual meeting dates was in breach of Defendants' fiduciary duties and
illegal under California law; (vii) the issuance to Prometheus of ARV shares
under the First Prometheus Transaction was in breach of the ARV Defendants'
fiduciary duties; and (viii) the voting or counting of votes of such shares
would be in breach of Defendants' duties.
107. Emeritus seeks an injunction (i) rescinding and nullifying the
Prometheus Transactions; (ii) directing that the 1,921,012 ARV shares issued
to Prometheus pursuant to the First Prometheus Transaction may not be voted,
or if voted may not be counted; (iii) directing that the common shares of ARV
received by Prometheus as a result of the Redemption of the Notes may not be
voted, or if voted may not be counted; and (iv) directing that the record and
annual meeting dates not be moved or be moved only in accordance with
Defendants' fiduciary duties. An injunction is necessary because (i) Emeritus
has no adequate remedy at law; (ii) Emeritus will be irreparably harmed if an
injunction is not issued; and (iii) granting an injunction will cause less
harm to Defendants than denying an injunction will cause harm to Emeritus.
VIII.
SECOND CLAIM FOR RELIEF
Breach of Fiduciary Duty: Sale of Control of ARV and
Failure to Maximize Shareholder Value
(Declaratory and Injunctive Relief)
108. Emeritus repeats and realleges each and every allegation set
forth in Paragraphs 1 through 107 as if fully set forth herein.
109. The Individual Defendants owe fiduciary duties to Emeritus. As
fiduciaries, the Individual Defendants owe Emeritus the highest duties of care,
loyalty, candor and good faith.
110. The Prometheus Transactions provide for, among other things,
(i) the acquisition by Prometheus of up to 49.9% of all outstanding shares of
ARV; (ii) mutual obligations on the part of Prometheus and ARV's Board to
support each other's Board nominees, which have the effect of disenfranchising
ARV's public shareholders; and (iii) restraints on Prometheus' sale of its
stock. Because (i) upon additional open-market purchases of ARV common shares
by Prometheus or members of ARV's Board, the stock owned by Prometheus and the
Board will constitute a majority position in ARV; (ii) those parties have
interlocking obligations and interests created by the agreements; and (iii)
those parties are acting in concert with respect to the control and management
of ARV, the Prometheus Transactions constitute and effectuate a sale of
control of ARV. Having determined to put control of ARV up for sale, the ARV
Defendants unfairly and unlawfully favored Prometheus and refused to enter
discussions regarding, or to investigate in any reasonable way, Emeritus'
proposals and offers. The ARV Defendants, aided and abetted by Defendants
Prometheus, Freeman, Jacobs and Gunty, have thus breached their fiduciary
duties by failing to maximize shareholder value. On information and belief,
Defendants Freeman, Jacobs, Gunty and Phanstiel have done nothing since their
appointment to the Board to rectify these continuing breaches of fiduciary
duty.
111. By entering voting agreements with Prometheus and
discriminating against Emeritus, the ARV Defendants have attempted to entrench
themselves and enhance the value of their own block of shares at the expense
of Emeritus and ARV's public shareholders. In particular, the voting
agreements allow the ARV Defendants to perpetuate themselves in office and to
command, with Prometheus, the entire value of any control premium from a
would-be acquirer of ARV.
112. Emeritus has been harmed by Defendants' failure to consider its
proposals and offers and ARV Defendants' rush to close the Prometheus
Transactions and issue a substantial quantity of ARV stock and the Notes to
Prometheus.
113. Emeritus seeks a declaration that (i) Defendants have breached
or aided and abetted the breach of fiduciary duties owed to Emeritus by
failing to take prompt and diligent steps to maximize shareholder value; (ii)
the ARV Defendants have breached their fiduciary duties by entering into and
failing to revoke the Prometheus Transactions; (iii) those agreements are null
and void or voidable by Defendants; (iv) the issuance of the Notes was in
breach of the ARV Defendants' fiduciary duties; (v) the Redemption of the
Notes into common shares of ARV was, and the voting or counting of votes of
such shares would be, in breach of Defendants' fiduciary duties; (vi) the
moving of the record and annual meeting dates was in breach of Defendants'
fiduciary duties and illegal under California law; (vii) the issuance to
Prometheus of ARV shares under the First Prometheus Transaction was in breach
of the ARV Defendants' fiduciary duties, and (viii) the voting or counting of
votes of such shares would be in breach of Defendants' duties.
114. Emeritus seeks an injunction (i) directing that Defendants
take prompt and diligent steps to maximize shareholder value; (ii) rescinding
and nullifying the Prometheus Transactions; (iii) directing that the 1,921,012
ARV shares issued to Prometheus pursuant to the First Prometheus Transaction
may not be voted, or if voted may not be counted; (iv) directing that common
shares of ARV received by Prometheus as a result of the Redemption of the
Notes may not be voted, or if voted may not be counted; and (v) directing that
the record and meeting dates not be moved or be moved only in accordance with
Defendants' fiduciary duties. An injunction is necessary because (i) Emeritus
has no adequate remedy at law; (ii) Emeritus will be irreparably harmed if an
injunction is not issued; and (iii) granting an injunction will cause less
harm to Defendants than denying an injunction will cause harm to Emeritus.
IX.
THIRD CLAIM FOR RELIEF
Breach of Fiduciary Duty: Failure to Exercise Due Care in
Considering Emeritus' Proposals and Entering into the
Prometheus Transactions
(Declaratory and Injunctive Relief)
115. Emeritus repeats and realleges each and every allegation set
forth in Paragraphs 1 through 114 as if fully set forth herein.
116. The ARV Defendants owe fiduciary duties to Emeritus. As
fiduciaries, the ARV Defendants owe Emeritus the highest duties of care,
loyalty, candor and good faith.
117. The ARV Defendants failed to exercise a reasonable amount of
care and diligence in reviewing and rejecting Emeritus' July 10, 1997 proposal
and thereby breached their fiduciary duties to Emeritus. The ARV Defendants
rejected Emeritus' July 10 proposal three days after less than 30 minutes of
deliberations and without even considering the possibility of conducting
further due diligence with respect to it. The ARV Defendants did not
attempt to negotiate terms with Emeritus and refused to meet with Emeritus and
its advisors to discuss the proposal further.
118. The ARV Defendants failed to exercise a reasonable amount of
care and diligence in negotiating and entering into the First Prometheus
Transaction. After receiving Emeritus' July 10, 1997 proposal, and driven by
fear of losing their positions as directors and officers of ARV, the ARV
Defendants unreasonably and in violation of their fiduciary duties rushed to
enter into the First Prometheus Transaction on July 14, 1997. After Emeritus
sent its July 23, 1997 letter to ARV objecting to numerous aspects of the
First Prometheus Transaction, the ARV Defendants unreasonably and in violation
of their fiduciary duties rushed to close the first phase of the transaction
(the sale of approximately 16% of ARV's stock) on July 25, 1997.
119. The ARV Defendants failed to exercise a reasonable amount of
care and diligence in reviewing and rejecting Emeritus' October 12, 1997
proposal and thereby breached their fiduciary duties to Emeritus. The ARV
Defendants rejected Emeritus' October 12 proposal after only 45 minutes of
deliberations without even considering the possibility of conducting further
due diligence with respect to it and without following the proper methods and
procedures to consider the offer. The ARV Defendants did not attempt to
negotiate terms with Emeritus and refused to meet with Emeritus and its
advisors to discuss the proposal further.
120. The ARV Defendants failed to exercise a reasonable amount of
care and diligence in negotiating and entering into the Second Prometheus
Transaction. After receiving Emeritus' October 12, 1997 proposal, and driven
by fear of losing their positions as directors and officers of ARV and fear
that the First Prometheus Transaction would be rejected by shareholders, the
ARV Defendants unreasonably and in violation of their fiduciary duties rushed
to enter into the Second Prometheus Transaction on October 29 and October 30,
1997. The ARV Defendants failed to exercise a reasonable amount of care and
diligence in entering into and closing the Second Prometheus Transaction.
Defendants failed to exercise reasonable care in deciding to redeem the Notes
and in moving the record and meeting dates.
121. The Individual Defendants failed to exercise a reasonable
amount of care and diligence in reviewing and rejecting the Tender Offer and
thereby breached their fiduciary duties to Emeritus. The Individual
Defendants filed a statement with the SEC on January 5, 1998, nine business
days after receiving the Tender Offer, recommending that ARV shareholders not
tender their shares to EMAC Corporation.
122. Emeritus has been harmed by Defendants' repeated breaches of
fiduciary duty, aided and abetted by Defendants Freeman, Jacobs and Gunty, in
failing to exercise due care in considering and rejecting its July 10, 1997
and October 12, 1997 proposals, in considering and rejecting the Tender Offer,
and in unreasonably rushing to enter into and close the Prometheus
Transactions. On information and belief, Defendants Freeman, Jacobs, Gunty
and Phanstiel have done nothing since their appointment to the Board to
rectify these continuing breaches of fiduciary duty.
123. Emeritus seeks a declaration that (i) the ARV Defendants have
breached their fiduciary duties by failing to exercise reasonable care and
diligence as specified above; (ii) the Prometheus Transactions are null and
void or voidable by Defendants; (iii) the issuance of the Notes was in breach
of the ARV Defendants' fiduciary duties; (iv) the Redemption of the Notes into
common shares of ARV was, and the voting or counting of votes of such shares
would be in breach of Defendants' fiduciary duties; (v) the moving of the
record and annual meeting dates was in breach of Defendants' fiduciary duties
and illegal under California law; (vi) the issuance to Prometheus of ARV
shares under the First Prometheus Transaction was in breach of the ARV
Defendants' fiduciary duties; and (vii) the voting or counting of votes of
such shares would be, in breach of Defendants' duties.
124. Emeritus seeks an injunction (i) directing Defendants to enter
into good faith negotiations with Emeritus, (ii) rescinding and nullifying the
Prometheus Transactions and (iii) directing that the 1,921,012 ARV shares
issued to Prometheus pursuant to the First Prometheus Transaction may not be
voted, or if voted may not be counted, (iv) directing that the redemption of
the Notes be rescinded or that the common shares of ARV received by Prometheus
as a result of the Redemption of the Notes may not be voted, or if voted may
not be counted, and (v) directing that the record and meeting dates not be
moved or be moved only in accordance with Defendants' fiduciary duties. An
injunction is necessary because (i) Emeritus has no adequate remedy at law,
(ii) Emeritus will be irreparably harmed if an injunction is not issued, and
(iii) granting an injunction will cause less harm to Defendants than denying
an injunction will cause harm to Emeritus.
X.
FOURTH CLAIM FOR RELIEF
Breach of Fiduciary Duty and Violation
Of California Statutory Law: Implementation of the Poison Pill
(Declaratory and Injunctive Relief)
125. Emeritus repeats and realleges each and every allegation set
forth in Paragraphs 1 through 124 as if fully set forth herein.
126. The ARV Defendants owe fiduciary duties to Emeritus. As
fiduciaries, the ARV Defendants owe Emeritus the highest duties of care,
loyalty, candor and good faith.
127. The ARV Defendants implemented the poison pill in response to
Emeritus' July 10, 1997 proposal to ARV. Implementation of the poison pill
was not a lawful and reasonable response to Emeritus' proposal and constituted
a breach, aided and abetted by Defendants Freeman, Jacobs and Gunty, of the ARV
Defendants' fiduciary duties. Likewise, the Individual Defendants' failure to
revoke or redeem the poison pill constitutes a separate and continuing breach
of their fiduciary duties.
128. The poison pill is discriminatory and violates, among others,
Sections 203 and 400 of the California Corporations Code in that under the
terms of the pill all shares of ARV are not granted the same rights,
preferences, privileges and restrictions. Specifically, and among other
things, (i) the shares owned by Prometheus are exempted from triggering the
pill; and (ii) the Rights on shares owned by a shareholder become void when
that shareholder becomes an Acquiring Person.
129. The poison pill is discriminatory and constitutes a breach of
Defendants' fiduciary duties in that under the terms of the pill shareholders
are not treated equally in connection with the issuance of the Rights.
130. Given Emeritus' Tender Offer, its announcement that it will
commence a proxy contest against the resolutions being put to ARV's
shareholders and Emeritus' offers and proposals to acquire the outstanding
shares of ARV, Emeritus has been, and is being, harmed by Defendants' breaches
of their fiduciary duties as alleged in this claim.
131. Emeritus seeks a declaration that (i) the ARV Defendants
violated their fiduciary duties by implementing the poison pill; (ii) the ARV
Defendants violated their fiduciary duties by exempting the shares owned by
Prometheus from triggering the pill; and (iii) failure to redeem the poison
pill or otherwise to amend it to make it inapplicable to Emeritus constitutes
a breach of Defendants' fiduciary duties.
132. Emeritus seeks an injunction compelling Defendants to redeem
the poison pill or otherwise to amend the poison pill to make it inapplicable
to Emeritus. An injunction is necessary because (i) Emeritus has no adequate
remedy at law, (ii) Emeritus will be irreparably harmed if an injunction is
not issued, and (iii) granting an injunction will cause less harm to
Defendants than denying an injunction will cause harm to Emeritus.
XI.
FIFTH CLAIM FOR RELIEF
Breach of Fiduciary Duty: Redemption of Prometheus Notes
133. Emeritus repeats and realleges each and every allegation set
forth in Paragraphs 1 through 132 as if fully set forth herein.
134. The Individual Defendants owe fiduciary duties to Emeritus. As
fiduciaries, the Individual Defendants owe Emeritus the highest duties of care,
loyalty, candor and good faith.
135. The Individual Defendants redeemed the Notes and moved the
record and annual meeting dates in response to Emeritus' November 24, 1997
announcement that it would solicit proxies for an alternative slate of
directors for ARV's Board. The Notes were redeemed at a significant discount
to market in exchange for some 4.3 million common shares of ARV to an investor
of the Board's own choosing. As a result, those newly-issued shares are
contractually required to be voted in favor of the reelection of the Board's
director nominees. In addition, with the addition of 4.3 million newly-issued
shares, Prometheus and the Board together control slightly less than 50% of
the outstanding common shares of ARV and with the inclusion of certain ARV
shares contained in an employee stock ownership plan may give Prometheus and
Defendants absolute majority control of ARV. In light of the interlocking
obligations and interests created by the Prometheus Transactions and the
coordinated effort by the Board and Prometheus with respect to the control and
management of ARV, the Redemption of the Notes constitutes a sale of control
of ARV. Having determined to put ARV up for sale, Defendants unfairly and
unlawfully favored Prometheus and have refused to enter discussions regarding,
or to investigate in any reasonable way, Emeritus' proposals and offers.
These actions indicate that Defendants redeemed the Notes for the purpose of
entrenching themselves in office and preventing Emeritus from winning the
proxy contest for the election of directors to the Board. Defendants failed
to exercise due care in the redemption of the Notes and the moving of the
record and annual meeting dates.
136. Prometheus aided and abetted these breaches of fiduciary duty
for its own financial benefit by providing substantial assistance in agreeing
to the inclusion of the Redemption provisions in the Indenture and in the
Prometheus Notes. Prometheus benefitted from the Redemption by receiving
approximately 4.3 million shares of ARV common stock at below market cost.
137. Emeritus has been harmed by Defendants failure to consider its
proposals and offers and also, given Emeritus' Tender Offer and its
announcement that it will commence a proxy contest, by the issuance of 4.3
million ARV shares which must be voted in favor of Defendants' Board nominees.
138. Emeritus seeks a declaration that (i) the Redemption of the
Notes into common shares of ARV was, and the voting or counting of votes of
such shares would be, in breach of Defendants' fiduciary duties; (ii) the
moving of the record and annual meeting dates was in breach of Defendants'
fiduciary duties, and (iii) the Redemption of Notes is void or voidable by ARV.
139. Emeritus seeks an injunction that (i) rescinding and
nullifying the Redemption of the Notes; (ii) directing that the approximately
4,285,704 shares issued to Prometheus as a result of the Redemption of the
Notes may not be voted, or if voted may not be counted, and (iii) directing
that the record and meeting dates may not be moved or be moved only in
accordance with Defendants' fiduciary duties. An injunction is necessary
because (i) Emeritus has no adequate remedy at law; (ii) Emeritus will be
irreparably harmed if an injunction is not issued; and (iii) granting an
injunction will cause less harm to Defendants than denying an injunction will
cause harm to Emeritus.
XII.
PRAYER FOR RELIEF
WHEREFORE, Emeritus respectfully requests that this Court enter
the following relief:
1. A declaration that (i) Defendants have breached their
fiduciary duties by entrenching ARV's existing board in office; (ii) the ARV
Defendants have breached their fiduciary duties by entering into the
Prometheus Transactions; (iii) the Prometheus Transactions are null and void
or voidable by ARV; (iv) the issuance of the Notes was in breach of the ARV
Defendants' fiduciary duties; (v) the Redemption of the Notes into common
shares of ARV was, and the voting or counting of votes of such shares would
be, in breach of Defendant's fiduciary duties; (vi) Defendants breached their
fiduciary duties by moving the record and annual meeting dates; (vii) the
issuance to Prometheus of ARV shares under the First Prometheus Transaction
was in breach of the ARV Defendants fiduciary duties; (viii) the voting or
counting of votes of such shares would be in breach of Defendant's duties;
(ix) Defendants have breached their fiduciary duties by failing to take prompt
and diligent steps that maximize shareholder value; and (x) the ARV Defendants
have breached their fiduciary duties by failing to exercise reasonable care
and diligence in considering Emeritus' proposals in entering into the
Prometheus Transactions.
2. An injunction (i) rescinding and nullifying the Prometheus
Transactions; (ii) directing that the 1,921,012 ARV shares issued to
Prometheus pursuant to the First Prometheus Transaction may not be voted, or
if voted may not be counted; (iii) directing that the redemption of the Notes
be rescinded or that the common shares of ARV received by Prometheus as a
result of the Redemption of the Notes may not be voted, or if voted may not be
counted; (iv) directing that the record and annual meeting dates not be moved
or be moved only in accordance with Defendants' fiduciary duties and in order
to prevent irreparable harm to Emeritus; (v) directing that Defendants take
prompt and diligent steps to maximize shareholder value; and (vi) directing
Defendants to enter into good faith negotiations with Emeritus.
3. A declaration that (i) the ARV Defendants violated their
fiduciary duties by implementing the poison pill; (ii) the ARV Defendants
violated their fiduciary duties by exempting the shares owned by Prometheus
from triggering the pill; and (iii) that failure to redeem the poison pill or
otherwise to amend it to make it inapplicable to Emeritus constitutes a breach
of Defendants' fiduciary duties;
4. A declaration that the actions of the Individual Defendants
were not taken in good faith and in a manner reasonably believed to be in the
best interests of ARV within the meaning of Section 317 of the California
Corporations Code;
5. An injunction directing Defendants to redeem the poison pill
or otherwise to amend the poison pill to make it inapplicable to Emeritus;
6. An order awarding Emeritus its costs and expenses in this
action; and
7. An order granting such other and further relief as the Court
deems just and proper.
DATED: January 7, 1998.
GIBSON, DUNN & CRUTCHER LLP
Wayne W. Smith
Joseph P. Busch, III
DAVIS POLK & WARDWELL
MICHAEL P. CARROLL
JAMES H.R. WINDELS
By: /s/ Joseph P. Busch, III
---------------------------------
Joseph P. Busch, III
Attorneys for Plaintiff
EMERITUS CORPORATION
Exhibit (g)(5)
[Emeritus letterhead]
January 8, 1998
Mr. Howard G. Phanstiel
Chairman of the Board of Directors
and Chief Executive Officer
ARV Assisted Living, Inc.
245 Fischer Avenue, Suite D-1
Costa Mesa, CA 92626
Dear Mr. Phanstiel,
Emeritus Corporation ("Emeritus") and its advisors have reviewed the recent
public filings of ARV Assisted Living, Inc. ("ARV") and the statements
made by you to the media and we want to respond to various comments
relating to our offer to purchase ARV for $17.50 per share in cash (the
"Offer"). We are disappointed that you have decided to voice your concerns
about the Offer without seeking to constructively resolve them with us.
The primary focus of ARV's various responses to our Offer is on the
conditions and not the price of our Offer. For example, the relief you are
seeking in your recent lawsuit is that we remove the conditions to our
Offer. If your issue is the conditions, rather than the price, then let's
work together to address them. If you are willing to enter into a $17.50
per share all cash merger agreement, we are confident that we can
demonstrate to your reasonable satisfaction our ability to complete such a
transaction. Unfortunately, up to this point, ARV has been unwilling to
enter into a constructive dialogue.
With respect to the leases, we note that the risk that the election contest
triggers the change of control provisions and, thus, exposes your
shareholders to the risk that ARV's landlords will renegotiate their leases
at higher prices can be eliminated if you enter into a merger agreement
with us. At that point, we would no longer need to pursue an acquisition
of ARV by means of a proxy contest and tender offer. We ask that you
provide us with the leases in question so that we can work together to make
the landlords comfortable with an acquisition by Emeritus. By refusing to
negotiate with us, you are compelling us to pursue a proxy contest which
you have stated will threaten the interests of your shareholders. Your
fiduciary duties require that you not subject your shareholders to these
risks by stonewalling us.
We also do not understand your statements that Emeritus' true objective is
a stock for stock deal. Once again, as we stated in our January 2 letter
to you, our Offer is $17.50 per share in cash and we are committed to
providing all ARV shareholders with cash. We believe that an all cash deal
at $17.50 is achievable and if you are willing to sit down and negotiate
with us we can demonstrate our position. ARV has no basis for
mischaracterizing our Offer, especially considering that you are unwilling
to talk with us.
We also do not agree with your concerns about Northstar Capital Partners
L.L.C. ("Northstar"). As we stated in our letter dated January 2, 1998,
David Hamamoto, a Northstar founder and a director of Emeritus, is
available to sit down with you and discuss Northstar's ability to provide
the necessary financing. If you would only agree to meet with Mr.
Hamamoto, we are confident that you would become fully comfortable with
Northstar's ability to provide the funds. We also note that since its
formation in July 1997, Northstar has committed approximately $320 million
of equity in 7 distinct transactions representing total transaction value
(including debt and equity) of $820 million. Additionally, Northstar
manages Northstar Capital Investment Corp., a paper-clip reit which
recently raised $290 million in a 144A common stock offering.
As for your stated belief that because of the Note Rescission Condition
contained in our tender offer, ARV shareholders will not see any money for
two years, it will be ARV's decision whether or not to appeal any
unfavorable court ruling. As you know, we are scheduled to appear in state
court on January 23, 1998, to argue our motion for a preliminary injunction
on this issue. If the judge issues a favorable decision for us, and you
decide to appeal, the court's ruling would remain in effect unless you
posted a substantial bond and successfully obtained a discretionary stay
from the court, which we believe would be unlikely to occur. We think that
any action by the ARV Board that results in further delaying ARV
shareholders from receiving $17.50 in cash would constitute a breach of its
fiduciary duties.
Finally, with respect to our prior relationship with Standish Care, we
think that your facts are incorrect. Emeritus did attempt to negotiate a
deal with Standish Care but ultimately Standish Care elected to enter into
an agreement with another party that offered to purchase the company for
significantly more money than Emeritus' original offer. The end result was
positive for all of Standish Care's shareholders.
We again encourage you to enter into negotiations with us so that we can
alleviate your concerns that your shareholders are at risk. ARV has forced
us to pursue the only alternative currently available to us, the proxy
contest. As we have stated in the past, we believe that a negotiated
transaction is in the best interest of all parties and Emeritus and its
advisers are available to discuss and negotiate the terms of a transaction
with you and your advisers immediately.
Sincerely yours,
/s/ Daniel R. Baty
- -------------------
Daniel R. Baty
cc: Sheila Muldoon
William Cernius
