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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(AMENDMENT NO. 2)
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
ARV ASSISTED LIVING, INC.
(NAME OF SUBJECT COMPANY)
ARV ASSISTED LIVING, INC.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, NO PAR VALUE
(INCLUDING THE ASSOCIATED SERIES C JUNIOR PARTICIPATING
PREFERRED STOCK PURCHASE RIGHTS)
(TITLE OF CLASS OF SECURITIES)
00204C107
(CUSIP NUMBER OF CLASS OF SECURITIES)
SHEILA M. MULDOON, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ARV ASSISTED LIVING, INC.
245 FISCHER AVENUE, SUITE D-1
COSTA MESA, CA 92626
(714) 751-7400
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON(S)
FILING STATEMENT)
WITH COPIES TO:
WILLIAM J. CERNIUS, ESQ. ALEXANDER F. WILES, ESQ.
LATHAM & WATKINS IRELL & MANELLA LLP
650 TOWN CENTER DRIVE, 1800 AVENUE OF THE STARS,
20TH FLOOR SUITE 900
COSTA MESA, CA 92626 LOS ANGELES, CA 90067
(714) 540-1235 (310) 203-7659
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INTRODUCTION
The Solicitation/Recommendation Statement on Schedule 14D-9 (as amended
through the date hereof, the "Statement"), originally filed on January 5, 1998,
by ARV Assisted Living, Inc., a California corporation (the "Company"), relates
to an offer by EMAC Corp., a Delaware corporation ("EMAC") and a wholly-owned
subsidiary of Emeritus Corporation, a Washington corporation ("Emeritus"), to
purchase all outstanding shares of the Company's common stock, no par value
(including the associated Series C Junior Participating Preferred Stock Purchase
Rights issued pursuant to the Rights Agreement, dated as of July 14, 1997,
between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent). All capitalized terms used herein without definition have the respective
meanings set forth in the Statement.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
The response to Item 8 is hereby amended by adding the following after
the final paragraph of Item 8:
On January 7, 1998, Emeritus filed in the Court an Amendment to the
Complaint (the "Amended State Complaint"). The Amended State Complaint joins
Prometheus Assisted Living, LLC, a Delaware limited liability company, as a
defendant. The Amended State Complaint is filed as Exhibit 11 hereto and is
incorporated herein by reference.
On January 8, 1998, ARV filed in the Federal Court a Memorandum of
Points and Authorities in Support of ARV's Motion for a Preliminary Injunction
against Emeritus (the "Memorandum"). In the Memorandum, ARV asked the Federal
Court to issue a preliminary injunction: (1) barring Emeritus from voting any
proxies it obtains unless and until Emeritus and all persons providing financing
waive all conditions to the Emeritus tender offer; (2) requiring Emeritus to
disseminate corrective materials to ARV's shareholders; (3) barring Emeritus
from purchasing any more shares of ARV and from soliciting any new proxies until
five days after disseminating the corrective disclosure; (4) barring Emeritus
from voting any proxies obtained on a date less than five days after
disseminating the corrective disclosure; and (5) requiring Emeritus to return
any shares tendered to it if those shares were tendered on a date less than five
days after disseminating the corrective disclosure. A copy of the Memorandum is
filed as Exhibit 12 hereto and is incorporated herein by reference.
In addition, a Class Action Complaint for Damages and Injunctive Relief
(the "Class Action Complaint") was filed by Steven M. Mizel, on behalf of
himself and all others similarly situated, against ARV and certain individuals
in California State Superior Court on December 12, 1997. The Class Action
Complaint was served on ARV on January 6, 1998. The Class Action Complaint
alleges certain breaches of fiduciary duty by the defendants. A copy of the
Class Action Complaint is filed as Exhibit 13 hereto and is incorporated herein
by reference.
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ITEM 9. MATERIALS TO BE FILED AS EXHIBITS
The response to Item 9 is hereby amended by adding the following new
exhibits:
11. First Amended Complaint in Emeritus Corporation v. ARV Assisted
Living, Inc., et al., case no. 787788, filed January 7, 1998.
12. Memorandum of Points and Authorities in Support of ARV's Motion
for a Preliminary Injunction against Emeritus, case no.
SA-CV-98-9-LHM (EEx), dated January 8, 1998.
13. Class Action Complaint in Mizel v. Booty, et al., case no.
787953, filed December 12, 1997.
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
ARV ASSISTED LIVING, INC.
By: /s/ Bernard Wheeler-Medley
--------------------------------------
Bernard Wheeler-Medley
Assistant Secretary
Dated January 9, 1998
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EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------
11. First Amended Complaint in Emeritus Corporation v.
ARV Assisted Living, Inc., et al., case no. 787788,
filed January 7, 1998.
12. Memorandum of Points and Authorities in Support of ARV's
Motion for a Preliminary Injunction against Emeritus,
case no. SA-CV-98-9-LHM (EEx), dated January 8, 1998.
13. Class Action Complaint in Mizel v. Booty, et al., case no.
787953, filed December 12, 1997.
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EXHIBIT 11
GIBSON, DUNN & CRUTCHER LLP FILED
WAYNE W. SMITH, SBN 054593 ORANGE COUNTY SUPERIOR COURT
JOSEPH P. BUSCH, III, SBN 070340 JAN 07 1998
4 Park Plaza, Suite 1400 ALAN SLATER, Executive Officer/Clerk
Irvine, California 92614-8557 /s/ A. KNOX
(714) 451-3800 BY A. KNOX
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 Washington ) CASE NO. 787788
corporation, )
)
)
) ASSIGNED FOR ALL PURPOSES TO
) JUDGE DAVID H. BRICKNER, DEPT. 17
Plaintiff, )
)
)
)
V. ) FIRST AMENDED COMPLAINT FOR
) INJUNCTIVE AND DECLARATORY RELIEF
)
)
)
ARV ASSISTED LIVING, INC., a California )
corporation; DAVID P. COLLINS, an ) Date of Filing: December 9, 1997
individual; JOHN A. BOOTY, an individual; )
R. BRUCE ANDREWS, an individual; MAURICE ) Trial Date: None Set
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. )
)
__________________________________________)
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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."
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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.
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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
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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
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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
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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.
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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.
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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."
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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.
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38. The terms of the three principal agreements of the First Prometheus
Transaction - the Stock Purchase Agreement (the "SPA"), the Stockholders
Agreement (the "SPA"), 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-
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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.
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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.
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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.
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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
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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
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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
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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 Prometheus 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
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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.
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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
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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
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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.
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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.
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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, handpicked 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.
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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)
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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.
V11.
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.
26
<PAGE> 27
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
27
<PAGE> 28
(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.
1010. 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.
28
<PAGE> 29
101. 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;
29
<PAGE> 30
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
30
<PAGE> 31
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
31
<PAGE> 32
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
32
<PAGE> 33
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
33
<PAGE> 34
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,
34
<PAGE> 35
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
35
<PAGE> 36
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;
36
<PAGE> 37
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 6, 1998.
GIBSON, DUNN & CRUTCHER LLP
WAYNE W. SMITH
JOSEPH P. BUSCH, III
DAVIS POLK & WARDWELL
NICHAEL P. CARROLL
JAMES H.R. WINDELS
By:/S/ Joseph P. Busch, III
--------------------------------
Joseph P. Busch, III
Attorneys for Plaintiff
EMERITUS CORPORATION
37
<PAGE> 1
EXHIBIT 12
IRELL & MANELLA LLP
Kenneth R. Heitz (SBN 53734)
Alexander F. Wiles (SBN 73596)
Elizabeth A. Camacho (SBN 171997)
Jessica M. Weisel (SBN 174809)
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 )
California corporation, ) CASE NO. SA-CV-98-9-LHM (EEx)
) PLAINTIFF ARV ASSISTED LIVING,
Plaintiff, ) INC.'S MEMORANDUM OF POINTS
) AND AUTHORITIES IN SUPPORT OF
v. ) MOTION FOR PRELIMINARY
) INJUNCTION
EMERITUS CORPORATION, a Washington )
corporation; EMAC CORPORATION, a ) Date: To be scheduled by Court
Delaware corporation, ) (Ex Parte Request for
) 1/27/98)
Defendants. ) Time:
) Place:
)
- ----------------------------------- )
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. INTRODUCTION..................................................... 1
II. STATEMENT OF FACTS............................................... 3
A. ARV and Emeritus Compete for Assisted Living
Facilities............................................... 3
B. Emeritus Has Launched a Proxy Contest and Tender
Offer to Acquire ARV..................................... 4
C. The Election of Emeritus's Director Nominees Is
Likely to Result in the Termination or Re-
Negotiation of At Least 18 ARV Leases.................... 5
D. The Election of Emeritus's Director Nominees Is
Likely to Result in the Loss of Key ARV Employees........ 6
E. Emeritus's Tender Offer is Highly Conditional and
Provides ARV Shareholders with No Guarantee That
Their Shares Will be Purchased........................... 7
1. Consent to Change of Control...................... 7
2. Absence of Material Adverse Change................ 8
3. Rescission of Redemption of the Notes............. 8
4. Financing......................................... 9
F. Emeritus's True Intention is to Force ARV Into A
Transaction That Is Unfavorable to ARV and its
Shareholders............................................. 11
G. Emeritus Has Failed to Disclose, In Either its
Tender Offer or its Proxy Solicitations, Material
Facts Critical to an Informed Decision by ARV
Shareholders............................................. 13
III. ARGUMENT......................................................... 15
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
A. ARV Is Entitled to Preliminary Injunctive Relief to
Prevent Emeritus From Electing Its Board Nominees
Unless and Until it Waives All Conditions to its
Tender Offer.....................................................16
1. ARV Is Likely to Prevail on Its Claim that
Emeritus Will Breach Its Fiduciary Duty If It
Elects Its Board Nominees.................................16
2. ARV Is Likely to Prevail On Its Claim That
Election of Emeritus's Nominees Without
Waiving The Conditions to its Tender Offer
Would Constitute Unfair Competition.......................22
3. ARV Will Suffer Irreparable Harm If Emeritus
Is Not Enjoined From Voting Proxies Unless
and Until It Waives All Conditions to Its Tender
Offer.....................................................25
B. ARV is Entitled to Preliminary Injunctive Relief to
Prevent Emeritus From Further Solicitation of
Tender of Shares and Solicitation or Voting of
Proxies in Violation of the Securities Laws......................25
1. ARV Is Likely to Prevail on Its Claims that
Emeritus Has Violated the Exchange Act By
Failing To Disclose Material Facts in its Tender
Offer and Proxy Solicitation Materials....................25
a. Emeritus Improperly Failed to Disclose
The Existence and Effect of Change of
Control Provisions in ARV Leases...................27
b. Emeritus Improperly Failed to Disclose
The Time Frame for Rescinding the
Redemption of the Notes............................28
c. Emeritus Improperly Failed to Disclose
Facts Jeopardizing Emeritus's Financing
for Its Tender Offer...............................30
d. Emeritus Improperly Failed to Disclose
Its Plan To Abandon The Cash Offer in
Favor of Stock For Stock Deal......................31
</TABLE>
-ii-
<PAGE> 4
Page
----
<TABLE>
<CAPTION>
<S> <C>
2. ARV Will Suffer Irreparable Injury If Emeritus
Is Not Enjoined From Violating the Exchange
Act................................................. 33
C. There is No Hardship to Emeritus........................... 35
IV. CONCLUSION......................................................... 35
</TABLE>
-iii-
<PAGE> 5
TABLE OF AUTHORITIES
Cases Pages
- ----- -----
Berkman v. Rust Craft Greeting Cards, Inc.,
454 F. Supp. 787 (S.D.N.Y. 1978)...............................27
Beverly Hills Federal Savings and Loan Ass'n.
v. Federal Home Loan Bank Bd., 371 F. Supp.
306 (C.D. Cal. 1973)...........................................19
Brown v. Allied Corrugated Box Co.,
91 Cal. App. 3d 477, 154 Cal. Rptr. 170
(1979).........................................................21
Camelot Indus. Corp. v. Vista,
535 F. Supp. 1174 (S.D.N.Y. 1982)..............................33, 34
Commonwealth Oil Refining Company, Inc. v.
Tesoro Petroleum Corp.,
394 F. Supp. 267 (S.D.N.Y. 1975)...............................34
Gilder v. PGA Tour, Inc.,
936 F.2d 417 (9th Cir. 1991)...................................15, 16
Heckmann v. Ahmanson, 168 Cal. App. 3d 119,
214 Cal. Rptr. 177 (1985)......................................19
Homac, Inc. v. DSA Financial Corp.,
661 F. Supp. 776 (E.D. Mich. 1987).............................33
Jones v. H.F. Ahmanson & Co.,
1 Cal. 3d 93, 108, 460 P.2d 464 (1969).........................18-22
Marshall Field & Co. v. Icahn,
537 F. Supp. 413 (S.D.N.Y. 1982)...............................33
Newmont Mining Co. v. Pickens,
831 F.2d 1448 (9th Cir. 1987)..................................31
Olsen v. Breeze, Inc., 48 Cal. App. 4th
608, 55 Cal. Rptr. 2d 818 (1996)...............................23
People v. Casa Blanca Convalescent Homes, Inc.,
159 Cal. App. 3d 509, 206 Cal. Rptr. 164 (1984)................23
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<PAGE> 6
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Podolsky v. First Healthcare Corp.,
50 Cal. App. 4th 632, 58 Cal. Rptr. 2d 89
(1996)....................................................23, 24
Polaroid Corp. v. Disney,
862 F.2d 987 (3rd Cir. 1988)..............................26, 28, 33, 34
Prudent Real Estate Trust v. Johncamp
Realty, Inc., 599 F.2d 1140 (2d Cir. 1979)............... 34
Rafal v. Geneen, [1972-73 Transfer Binder]
Fed. Sec. L. Rep. (CCH)
[P]93,505 (D.C. Pa. 1972)............................... 34
SEC v. American Real Estate Investment Trust,
529 F. Supp. 1300 (C.D. Cal. 1982)....................... 34
Sonesta International Hotels Corp. v.
Wellington Assoc., 483 F.2d 247 (2d Cir. 1973)........... 27, 34
State Farm Fire and Casualty Co. v. Superior Court,
45 Cal. App. 4th 1093,
53 Cal. Rptr. 2d 229 (1996).............................. 23
Tippett v. Terich, 37 Cal. App. 4th 1517,
44 Cal. Rptr. 2d 862 (1995)............................ 22
TSC Indus. Inc. v. Northway, Inc.,
426 U.S. 438, 96 S.Ct. 2126,
48 L.Ed. 2d 757 (1976).................................. 27
William Inglis & Sons Baking Co. v.
ITT Continental Baking Co., Inc.,
526 F.2d 86 (9th Cir. 1975)............................. 15
STATUTES
15 U.S.C. Section 78n(e)........................................ 26
17 C.F.R. Section 240.14a-9(a).................................. 26
17 C.F.R. Section 240.14d-100................................... 26, 32
</TABLE>
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<PAGE> 7
Pages
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Cal. Bus. and Prof. Code Section 17200............................. 23
Cal. Bus. and Prof. Code Section 17203............................. 23, 24
Cal. Corp. Code Section 1101....................................... 10
Cal. Corp. Code Section 1101.1..................................... 10
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<PAGE> 8
I.
INTRODUCTION
ARV Assisted Living ("ARV"), a California corporation with headquarters
in Costa Mesa, is a direct competitor of defendant Emeritus Corporation, a
Washington corporation. Both companies are in the business of providing assisted
living facilities for the elderly, and both compete vigorously in the California
market. Emeritus, however, has suffered mounting losses over the past twelve
months, and, beginning in July, 1997, it sought to merge with ARV by
communicating to ARV's Board of Directors that it would like to negotiate an
agreement pursuant to which it would give ARV's shareholders stock in the
combined companies in exchange for their shares in ARV. Not surprisingly, ARV's
Board rejected these overtures.
Beginning in mid-December, Emeritus Corporation and its wholly owned
subsidiary, defendant EMAC Corporation (collectively, "Emeritus"), began a
campaign, using the twin vehicles of a reckless proxy contest for control of the
Board of Directors of ARV and an illusory all cash tender offer directed to ARV
shareholders, to force ARV to agree to combine its business with that of
Emeritus or face the dire prospect of losing the leases on at least 18 of ARV's
48 existing facilities and losing many of its key employees if Emeritus is able
to elect its nominees for seats on the Board of Directors of ARV. ARV brings
this action and the instant motion for a preliminary injunction to prevent
Emeritus from effectively extorting ARV's Board and shareholders into agreeing
to combine the businesses of the two entities.
Emeritus's tactic is a clever one. Because it deals with some of the
same landlords as ARV, Emeritus knows that ARV has provisions in many (in fact,
more than
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<PAGE> 9
half) of its leases that place it in default if a majority of its directors
cease to serve. Since all assisted living companies, including ARV and Emeritus,
depend heavily on leased facilities for their revenues, Emeritus knows that ARV
cannot risk a hostile proxy contest that might result in triggering the change
of control provisions of these leases. Thus, after ARV rejected its merger
overtures, Emeritus announced in early December that it intended to nominate a
slate of directors to unseat ARV's Board of Directors at ARV's annual meeting of
shareholders on January 28, 1998. On December 19, 1997, Emeritus unleashed the
other half of its tactic, an illusory tender offer subject to a series of
conditions it knows will never be met in which Emeritus proposes to buy all of
the outstanding stock of ARV for $17.50 per share in cash. Finally, Emeritus
mailed to ARV shareholders tender offer and proxy materials that give ARV's
shareholders no hint that Emeritus will not, and indeed cannot, meet the
conditions to completion of its tender offer.
Thus, Emeritus's plan is now virtually complete. ARV's Board must either
bow to Emeritus's pressure to combine the two companies or Emeritus will deceive
ARV shareholders into voting to elect a new Board, thus triggering massive
losses for ARV because of the change of control provisions in ARV's leases and
employment contracts. These massive losses will then be one of the many
justifications Emeritus will use to abandon its $17.50 tender offer. If Emeritus
is successful, the new Board, controlled by Emeritus's nominees, will then vote
to combine the companies, not for the illusory price of $17.50 per share, but
for some lesser consideration, probably consisting largely of stock in a
combined Emeritus/ARV entity.
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Fortunately, the federal securities laws and California laws prohibiting
unfair competition and breaches of fiduciary duty provide ARV and its
shareholders the right to injunctive relief that will enable them to avoid the
irreparable harm they will suffer if Emeritus is allowed to follow its plan to
conclusion. Accordingly, in order to remedy Emeritus's violations of the federal
securities laws and to prevent Emeritus from violating California law, ARV asks
this Court to issue a preliminary injunction:
(1) barring Emeritus from voting any proxies it obtains unless and until
it waives all of the conditions to its December 19, 1997 tender offer and
secures, and provides this Court with, written waivers from all of the persons
providing financing for its tender offer of any conditions to their agreement to
finance Emeritus's tender offer;
(2) requiring Emeritus to disseminate corrective materials to ARV's
shareholders adequately disclosing all material facts related to the conditions
to its tender offer;
(3) barring Emeritus from purchasing any more shares of ARV and from
soliciting any new proxies until five (5) days after it has disseminated the
corrective disclosure required by the Court's order;
(4) barring Emeritus from voting any proxies if those proxies were
obtained on a date that is less than five (5) days after Emeritus disseminates
the corrective disclosure required by the Court's order; and
(5) requiring Emeritus to return any shares tendered to it if those
shares were tendered to it on a date that is less than five (5) days after
Emeritus disseminates the corrective disclosure required by the Court's order.
II.
STATEMENT OF FACTS
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A. ARV and Emeritus Compete for Assisted Living Facilities
ARV is a major provider of long-term, service enhanced housing for the
elderly known as "assisted living." Declaration of Graham Espley-Jones
("Espley-Jones Decl.") [P]2. Critical to ARV's viability is its ability to
obtain suitable and reasonably priced facilities to provide this housing. Id.
[P]3. ARV currently operates 48 facilities, 32 of which are leased -- many at
below market rates -- pursuant to long-term operating leases. Id. [P]3.
Emeritus is a direct competitor of ARV, operating assisted living
facilities nationwide, including in California. Declaration of Elizabeth A.
Camacho, ("Camacho Decl.") Exh. B, pp. 41, 71, 76. Emeritus currently operates a
total of approximately 96 residential communities, leasing approximately 75% of
these facilities. Id. Exh. A p. 18.
Since its organization in 1993, Emeritus has conducted an aggressive
acquisition campaign, seeking to lease, purchase or develop additional
residential living communities. Id., Exh. B, pp. 42, 65. In the first quarter of
1997, Emeritus stated its intention to continue its expansion program, and
stated that its growth strategy will continue to focus on "the acquisition of
existing senior housing facilities that are currently operated as
assisted-living communities or can be efficiently repositioned by [Emeritus] as
assisted-living communities." Id., Exh. B, pp. 45, 48, 61, 65.
The long-term care service industry is highly competitive and
appropriate facilities for assisted-living communities are in short supply. Id.
Exh. B, p. 69; Espley-Jones Decl. [P]4. Emeritus itself has predicted that
competition in the assisted-living industry will intensify. Camacho Decl. Exh.
B, p. 69. In early 1997, Emeritus stated
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<PAGE> 12
that "in implementing its growth strategy, [it] expects to face competition in
its efforts to develop and acquire assisted-living communities." Id.
B. Emeritus Has Launched a Proxy Contest and Tender Offer to Acquire ARV
Later this month, ARV will hold an election for all nine seats on its
board of directors. Phanstiel Decl. [P]2. Emeritus, which currently owns
1,077,200 shares, or approximately 6.7%, of ARV common stock, has launched a
proxy contest seeking to fill all nine of ARV's board seats with its hand-picked
nominees. Camacho Decl., Exh. D. ARV's by-laws do not provide for cumulative
voting; thus, if Emeritus is successful in obtaining the proxies for a plurality
of ARV's outstanding shares, it will be able to remove the entire ARV board and
replace it with its customized slate. Phanstiel Decl. [P]2. If successful in
obtaining these proxies, Emeritus will be a controlling shareholder possessing
fiduciary obligations to the corporation and its minority shareholders.
Emeritus has also presented ARV shareholders with a tender offer (the
"Tender Offer") to purchase ARV at $17.50 per share in cash.(1) Camacho Decl.
Exh. C.
C. The Election of Emeritus's Director Nominees Is Likely to Result in the
Termination or Re-Negotiation of At Least 18 ARV Leases
By merely electing its director nominees, Emeritus would trigger
provisions in ARV's leases which would have a catastrophic and long lasting
impact on ARV. If Emeritus fails to close its Tender Offer, these devastating
consequences would affect ARV shareholders as well.
- --------
(1) The Tender Offer was made by EMAC Corporation ("EMAC"), a wholly owned
subsidiary of Emeritus that was formed to acquire ARV. Camacho Decl., Exh. C. p.
168. As used in these preliminary injunction papers, the term "Emeritus" shall
refer to, where appropriate, both Emeritus and EMAC.
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<PAGE> 13
The leases for at least 18 of ARV's facilities -- over a third of ARV's
total facilities -- contain provisions that allow the landlord to terminate the
lease in the event of a change in the composition of ARV's board of
directors.(2) Espley-Jones Decl. [P]6, Exh. A, B. Sixteen of ARV's leases
provide:
"Tenant shall not, without the prior written consent of Landlord, which
may be withheld at Landlord's sole discretion, voluntarily or
involuntarily assign, mortgage, encumber or hypothecate this Lease or
any interest herein . . . . For purposes of this Lease, the following
shall be considered an assignment of this Lease by Tenant: . . . (b) any
change (voluntary or involuntary, by operation of law or otherwise but
excluding any change as a result of an initial public offering of
Tenant's stock) in the person(s), entity or entities which ultimately
exert effective control over the management of the affairs of Tenant as
of the date hereof. Any of the foregoing acts without such consent shall
be void but shall, at the option of Landlord in its sole discretion,
constitute an Event of Default giving rise to Landlord's right, among
other things, to terminate this Lease."
Espley-Jones Decl. [P]6, Exh. A (emphasis added). Two other ARV leases contain a
substantially similar provision. Id. The change of control provisions in these
18 leases subject ARV to the significant risk that, in the event of a change in
control of ARV's board, its landlords will declare a default and terminate at
least 18 of ARV's 32 leases. The loss of 18 facilities would have devastating
effects on ARV's operations and
- --------
(2) Additional ARV leases provide for an event of default upon a significant
change in the ownership of ARV's stock. Espley-Jones Decl. [P][P]3, 5.
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<PAGE> 14
financial results. These 18 facilities generate approximately $45 million of
ARV's gross revenue, or approximately 42% of annual revenue, and approximately
$18 million or approximately 86% of ARV's EBITDAR (defined as earnings before
interest, taxes, depreciation, amortization and rent). Id. [P]8. Given the
intense competition for assisted-living facilities, these 18 facilities would be
extremely difficult, if not impossible, to replace. Id.
Even if ARV's landlords do not elect to evict ARV, they will have the
incentive and leverage to re-negotiate the rent on ARV's leases, many of which
are currently below market. Id. [P]3. If the rent for these 18 facilities is
increased to current market rates, ARV's total estimated annual lease costs
could rise as much as $4 million annually. Id. [P]9. Over the average life of
these leases, the cumulative increase in lease expenses would exceed $25
million. Id.
Given the competition for scarce assisted living facilities, ARV's
default on its leases would provide Emeritus with a unique opportunity to
attempt to acquire additional facilities for its own operations.
D. The Election of Emeritus's Director Nominees Is Likely to Result in the
Loss of Key ARV Employees
A change of control in ARV's board of directors would trigger yet
another serious loss for ARV. Eighteen of ARV's employees (the "Employees") have
employment contracts which entitle them, at their own election, to terminate
their contracts early upon a change of control in ARV's board. Espley-Jones
Decl. [P]10. If the Employees elect to terminate their contracts, they will be
entitled to receive a lump sum payment of one to three years salary. Id.
Accordingly, in the event of a change of
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<PAGE> 15
control in its board, ARV could lose crucial staff members and be obligated to
pay more than $6.8 million pursuant to these employment contracts. Id.
Many of the Employees play a key role at ARV and possesses knowledge,
skill and experience which is highly valued in the growing and increasingly
competitive assisted living industry. Id. [P]11. A one to three year salary
"bonus," along with opportunities with other assisted living companies, offers a
powerful incentive for the Employees to exercise their termination option, and a
prime opportunity for competitors, such as Emeritus, to raid ARV. The loss of
these Employees, in the event Emeritus takes control of the ARV Board but uses
its conditions to walk away, could be crippling to ARV's business operations.
Id.
E. Emeritus's Tender Offer is Highly Conditional and Provides ARV
Shareholders with No Guarantee That Their Shares Will be Purchased
While Emeritus's Tender Offer promises ARV shareholders $17.50 in cash,
it is subject to numerous conditions which allow Emeritus to terminate the
Tender Offer in a number of circumstances, as described below.
1. Consent to Change of Control
Aware of the likelihood that election of its nominees would result in
breaches of ARV's leases, Emeritus has conditioned its Tender Offer on the
consent of ARV's landlords to the anticipated change of in control of ARV's
board. The Tender Offer states that Emeritus may terminate the offer if it
determines, in its sole judgment, that
"any approval, permit, authorization, license, contract, lease or
consent of any person, entity or Governmental Entity . . . shall not
have been
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<PAGE> 16
obtained, transferred or assigned on terms satisfactory to the Purchaser
in its sole discretion."
Camacho Decl., Exh. C, pp. 414-15.
As discussed above, at least 18 of ARV's leases provide that a change in
control of ARV's board of directors shall constitute an event of default,
allowing the landlord to terminate the lease, unless the landlord consents to
the change. See supra, at 5-6. Other ARV leases provide for an event of default
upon a significant change in stock ownership. Espley-Jones Decl. [P]5. When
these landlords terminate ARV's tenancy or insist on raising ARV's rents in
exchange for their consents, Emeritus will be free to reduce the purchase price
it is willing to pay to ARV's shareholders, or abandon its all cash offer
entirely.
2. Absence of Material Adverse Change
Again, anticipating the additional lease costs or other detriment likely
to result from election of Emeritus's nominees, the Tender Offer allows Emeritus
to cancel its offer if there occurs (or threatens to occur) any change in ARV's
"business, properties, assets, liabilities, capitalization, shareholders'
equity, condition, operations, licenses or franchises, results of operations or
prospects," that Emeritus determines is or may be materially adverse to ARV.
Camacho Decl. Exh. C, p. 212-13. Emeritus may also terminate the offer if it
becomes aware of any facts that, in its sole judgment, have or may have material
adverse significance regarding the value of ARV, or the value of ARV's shares to
Emeritus. Id. Under this condition, the lease defaults would provide a basis for
Emeritus to abandon on its offer.
3. Rescission of Redemption of the Notes
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<PAGE> 17
Emeritus's Tender Offer also provides that it will close only upon "the
redemption of the Notes having been rescinded." Camacho Decl. Exh. C, p. 174.
The "Notes" are Convertible Subordinated Notes that were previously issued to a
third party investor in return for its significant investment in ARV. Id. Exh.
C, 172. The Notes were convertible into shares of ARV common stock at the
election of either ARV or the investor. After executing formal agreements with
the investor, ARV exercised its right to redeem the Notes, converting them into
ARV stock. Id.
Emeritus has challenged the redemption of the Notes in California state
court. Id. Exh. C, p. 172, 174, 206. However, it will be virtually impossible
for Emeritus to obtain a judgment rescinding the redemption prior to the offer's
expiration date of January 21, 1998. Indeed, it is unlikely that rescission
would be ordered until a full trial on the merits. In any event, including time
for the parties to exercise their rights of appeal, it will likely be two or
three years before Emeritus knows whether the shares issued pursuant to the
redemption can in fact be cancelled. Id. [P]7.
The Tender Offer appears to anticipate the extended time frame for
rescinding the redemption, stating that, in the event Emeritus fails to have the
redemption rescinded, it "may elect to reduce the Offer Price to take into
account the purchase of approximately an additional 800,000 shares." Id. Exh. C,
p. 174. Emeritus estimates the purchase of these additional shares would cost
"approximately an additional $14 million." Id.
4. Financing
Emeritus has also conditioned its Tender Offer upon it being satisfied,
in its discretion, that it has obtained financing
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<PAGE> 18
"on terms satisfactory to [it] in an amount sufficient to permit
[Emeritus] to consummate the Offer and the Proposed Merger, including
the redemption or refinancing of all outstanding debt and payment of all
fees and expenses . . . ."
Id.
In its Tender Offer, Emeritus estimates that the total amount of funds
required to close its Tender Offer (assuming the redemption of the Notes is
rescinded) is "approximately $400 million." Id. p. 190. The Tender Offer does
not, however, disclose the source of the $400 million. Id.
On December 23, 1997, ARV's Chairman and Chief Executive Officer wrote
to Emeritus requesting additional information concerning Emeritus's financing
plans. Phanstiel Decl. [P]3, Exh. A. Emeritus responded by letter dated January
2, 1998, stating that it has obtained the commitment of a "major financial
institution" to provide Emeritus with a "Regulation U loan for approximately
$110 million for the purpose of acquiring ARV." Id. Exh. B. Emeritus's letter
further stated that this loan is conditioned on, among other things:
"satisfaction that nothing shall have occurred which is reasonably
likely to have a material adverse effect on the business, property,
assets, liabilities, condition (financial or otherwise) or prospects of
Emeritus or ARV or on the rights and remedies of the bank or on the
ability of the borrower to perform its obligations under the facility."
Id. (emphasis added).
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<PAGE> 19
Emeritus's letter reveals that its alleged financing commitment is
conditioned on several events over which Emeritus has no control, e.g., the
absence of any material adverse effect on ARV or Emeritus.(3) As discussed
above, the events of default that will be triggered by an election of Emeritus's
board nominees are more than "reasonably likely to have a material adverse
effect" on ARV. Since there is no indication that the bank has waived this
condition, Emeritus's election of its nominees would preclude Emeritus from
obtaining the $110 million loan. Without the $110 million loan, Emeritus will
not have the financing to purchase all of ARV's outstanding shares at $17.50 in
cash.(4)
The Tender Offer also asserts 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." Camacho Decl.,
Exh. C, p. 190. It is ARV's understanding, however, that Northstar is not in the
business of arranging
- --------
(3) As another example, Emeritus's letter reveals that the $110 million
loan is also conditioned upon another event that has virtually no chance of
occurring. The letter states that the loan will fund only if Emeritus acquires a
sufficient number of shares to merge with ARV for all cash consideration without
obtaining approval from the California Commissioner of Corporations. Phanstiel
Decl. Exh., B. California law provides that Emeritus can avoid Commissioner
approval of an all cash "squeeze" out of non-tendering shareholders only if it
acquires at least 90% of ARV's outstanding shares. Cal. Corp. Code
Sections 1101, 1101.1. This would require Emeritus to obtain the shares of
current ARV officers and directors, as well as the entity whose transaction
Emeritus seeks to void through its state court action. See Camacho Decl., Exh.
C. Given Emeritus's hostile posture with respect to these shareholders, the
chance of Emeritus acquiring their shares via its tender offer is essentially
nil.
(4) Emeritus says virtually nothing in either its Tender Offer or letter
to ARV's Chairman about how it plans to finance the remaining $290 million it
needs to close the Tender Offer. Phanstiel Decl., [P]3, Exh. B; Camacho Decl.,
Exh. C pp. [20, 42-25].
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<PAGE> 20
financing for hostile takeovers and has never arranged such financing.(5)
Accordingly, Northstar cannot make any reliable assertion that financing is or
will be available.
Given the likelihood that these numerous conditions will not be
satisfied, Emeritus will have many opportunities to terminate the Tender Offer.
Emeritus could then walk away, leaving ARV shareholders with no benefit, but
with the catastrophic effects of breached leases. Emeritus could also take
advantage of ARV's weakened financial condition and position of default, and
seek to negotiate with ARV's landlords to acquire for itself ARV's highly
coveted assisted-living facilities. Moreover, with control of ARV's board,
Emeritus would be in a position to "negotiate" a merger that is far more
favorable to Emeritus, but falls far short of the $17.50 in cash previously
promised to ARV's shareholders.
F. Emeritus's True Intention is to Force ARV Into A Transaction That Is
Unfavorable to ARV and its Shareholders
The highly conditional nature of Emeritus's Tender Offer and concurrent
attempt to seek control of ARV's Board are no coincidence. While Emeritus
promises ARV shareholders $17.50 cash for every share of ARV stock, its true
motivation is to use the Tender Offer to acquire control of ARV's board; once in
control, Emeritus plans to abandon the Tender Offer and force an acquisition
that provides ARV shareholders with
- --------
(5) ARV has requested permission to conduct expedited discovery to
obtain evidence in support of this belief.
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<PAGE> 21
substantially less -- either in the form of stock in the new combined company, a
reduced amount of cash, or a combination thereof.(6)
Emeritus's true motivation is revealed in several ways. First, an all
cash purchase of ARV would not make economic sense for Emeritus.(7) Emeritus has
had a negative operating cash flow since its formation, Camacho Decl., Exh. A,
p. 14; Exh. B., p. 82. ARV believes that an all cash purchase of ARV would
substantially weaken the Emeritus balance sheet, reducing Emeritus's earnings
per share, and triggering serious declines in the value of Emeritus's own stock.
Second, Emeritus's own behavior belies its claimed desire to pay $17.50
cash for ARV stock. When Emeritus first approached ARV in the summer of 1997, it
sought to acquire ARV in a stock for stock merger, or, alternatively, a merger
that would provide ARV shareholders with a combination of Emeritus stock and "up
to 50% in cash." Camacho Decl., Exh. D, pp. 252-53.
When ARV's board rejected this vague proposal in favor of the more
attractive and definitive terms of another transaction it had been negotiating
for weeks, Emeritus twice wrote to ARV with the stated desire of pursuing
negotiations for a vague and undefined proposal for an all-cash offer to acquire
ARV, first for $14, then for $16.50, per share. Camacho Decl., Exh. D. pp.
257-63. Within days of the second such
- --------
(6) ARV's evidence in support of this assertion is circumstantial by
necessity since it has not yet had the opportunity to review Emeritus's
documents or depose any witnesses. ARV is seeking expedited discovery in order
to obtain additional evidence in support of this motion for preliminary
injunction and has requested that it be permitted to file supplemental papers to
bring this additional evidence before the Court.
(7) If permitted to conduct expedited discovery, ARV intends to offer
further evidence in support of this assertion in its supplemental papers.
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<PAGE> 22
proposal, however, Emeritus's investment bankers faxed to ARV's investment
bankers an informal, but far more detailed, proposal for a stock for stock
transaction. Declaration of Michael Rimland ("Rimland Decl.") [P]3, Exh. A.
Moreover, even after it announced the purported $17.50 cash offer, Emeritus
continued to tell people associated with ARV that a stock for stock transaction
is Emeritus's best option. Phanstiel Decl. [P]4.
In addition, while Emeritus claims to have negotiated the terms of
commitment letters to obtain financing for its Tender Offer, it admits that it
has refused to incur the fees necessary to obtain a financing commitment.
Camacho Decl., Exh. C, p. 174. Finally, as recently as 1996, Emeritus used this
very tactic of offering one price to purchase a competitor and then insisting on
renegotiation to decrease the price it would pay. In 1996, Emeritus attempted to
acquire another assisted living company, Standish Healthcare. Camacho Decl.,
Exh. E. The two partners announced an agreement in principle at a set price.
During the process of finalizing the transaction, however,
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<PAGE> 23
Emeritus attempted to reduce its purchase price by changing the stock for stock
exchange ratio. Id. When Standish would not agree, Emeritus walked away.(8) Id.
G. Emeritus Has Failed to Disclose, In Either its Tender Offer or its Proxy
Solicitations, Material Facts Critical to an Informed Decision by ARV
Shareholders
While Emeritus's Tender Offer and proxy solicitation materials list the
conditions to the Tender Offer, they fail to disclose material facts critical to
an adequate understanding and evaluation of these conditions. In fact, these
documents say virtually nothing about the likelihood that these conditions will
be met.
For example, while the Tender Offer and proxy solicitation materials
disclose the condition requiring that Emeritus obtain appropriate consents, the
full meaning of this condition will be lost on ARV's shareholders because the
Tender Offer and proxy solicitation materials fail to disclose that ARV will
default in at least 18 of its leases upon election of Emeritus's board nominees
and additional leases will be in default upon the contemplated change in stock
ownership. Compare Espley-Jones Decl. Exh. A, B with Camacho Decl., Exh. C, p.
212-15. In addition, while disclosing the condition requiring rescission of the
redemption of the Notes, the Tender Offer and proxy solicitation materials fail
to reveal the two year time frame for satisfaction of this condition. Camacho
Decl. Exh. C, p. 174, Exh. D., pp. 248-49, 268-69. To the contrary, Emeritus's
Tender Offer states that it will expire on January 21, 1998. Id.,
- --------
(8) ARV is informed and believes that it was the discovery of
disadvantageous change of control provisions in Standish's leases that caused
Emeritus to seek a reduction in the purchase price. ARV will seek to obtain
evidence of Emeritus's motivation in the Standish deal through discovery.
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<PAGE> 24
Exh. C, p. 175. Emeritus's proxy solicitation materials repeatedly attempt to
convince shareholders that election of the Emeritus nominees will result in
"immediate cash" for all ARV shareholders. For example, these materials assert
that "only the [Tender Offer] provides an immediate cash payment to all ARV
shareholders." Camacho Decl. Exh. D, p. 248 (emphasis added). Emeritus's proxy
solicitation materials also claim that, while benefits from other transactions
are "delayed and uncertain," the Tender Offer "provides you an immediate return
on your investment." Id. p. 249 (emphasis added). Finally, these solicitation
materials dramatically warn, "THIS IS THE LAST OPPORTUNITY TO REQUIRE THE ARV
BOARD TO ACCEPT OUR $17.50 PER SHARE ALL CASH OFFER." Id., p. 242, see also p.
239.
Emeritus's Tender Offer and proxy solicitation materials also fail to
reveal that Emeritus's alleged funding source for a $110 million bank loan has
conditioned this financing on the absence of any adverse material change in
either ARV or Emeritus. Camacho Decl. Exh. C, p. 174, 190. Indeed, while the
Tender Offer claims that Emeritus has "fully negotiated" the terms and
conditions of financing commitment letters, neither the Tender Offer nor the
proxy solicitation materials disclose the identity of the potential funding
sources or any of the terms and conditions allegedly negotiated. Id. The Tender
Offer and proxy solicitation materials also fail to disclose that Northstar, the
author of Emeritus's "highly confident" letter, cannot make a reliable assertion
about the availability of financing because it has never arranged for a tender
offer financing. Id.
In sum, Emeritus has not put ARV shareholders on notice of the potential
catastrophes inherent in election of the Emeritus nominees, or of the facts
revealing
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the near certainty that many of the conditions to the promised cash purchase
will prove the escape hatch Emeritus has planned all along.
III.
ARGUMENT
Under well-established Ninth Circuit standards, a moving party is
entitled to preliminary injunctive relief if it can show either:
"(1) a likelihood of success on the merits and the possibility of
irreparable injury or (2) the existence of serious questions going to
the merits and the balance of hardships tipping in favor of the movant."
Gilder v. PGA Tour, Inc., 936 F.2d 417, 422 (9th Cir. 1991) (emphasis added). As
the Ninth Circuit explained in Gilder,
"The critical element in determining the test to be applied is the
relative hardship to the parties. If the balance of harm tips decidedly
toward the plaintiff, then the plaintiff need not show as robust a
likelihood of success on the merits as when the balance tips less
decidedly."
Id. (citation and internal quotations omitted); William Inglis & Sons Baking Co.
v. ITT Continental Baking Co., Inc., 526 F.2d 86, 88 (9th Cir. 1975) (if harm to
plaintiff is sufficiently serious, "only a fair chance of success on the merits"
is required). "Serious questions" refers to questions which cannot be resolved
at the hearing and as to which "the court perceives a need to preserve the
status quo lest one side prevent resolution of the questions or execution of any
judgment by altering the status quo." Gilder, 936 F.2d at 422 (citations and
quotations omitted). "Serious questions" need only involve a "fair chance of
success on the merits." Id. Because the balance of harms tips so decidedly in
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favor of ARV, ARV has a lower burden on the merits. Nonetheless, as discussed
below, ARV is entitled to the narrow relief sought herein under either of the
above standards.
A. ARV Is Entitled to Preliminary Injunctive Relief to Prevent Emeritus
From Electing Its Board Nominees Unless and Until it Waives All Conditions to
its Tender Offer
1. ARV Is Likely to Prevail on Its Claim that Emeritus Will Breach Its
Fiduciary Duty If It Elects Its Board Nominees
The moment that Emeritus obtains sufficient proxies to elect a new board
of directors of ARV, Emeritus becomes subject to longstanding California
corporate law principles which preclude Emeritus from taking any action to
further its own agenda if that action has the potential to injure the
corporation and its other shareholders. Under the undisputable facts at issue
here, the moment Emeritus votes its proxies to take control of the board, that
very act instantaneously will put at least 18 of ARV's facility leases in
default -- thereby crippling ARV and its shareholders in the event that Emeritus
fails to close its highly conditional $17.50 cash tender offer. Espley-Jones,
[P][P]3, 9. In addition, by electing its nominees to ARV's board, Emeritus will
automatically provide over 18 ARV employees the right to terminate their
employment contracts early and demand severance payments totaling approximately
$6.8 million from ARV. Id. [P]10. Yet, Emeritus will have no obligation to
complete its Tender Offer because of conditions Emeritus has imposed on that
offer. See supra, at 7-11. ARV's shareholders will be left with a devalued
company, a board of directors loyal to Emeritus and no way to get the $17.50 per
share in cash that Emeritus has promised.
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The situation here is even more egregious because, under the terms of
its Tender Offer, the very act of electing its nominees will create two new
reasons why Emeritus need not consummate the offer. Two of the conditions to
that offer, i.e. that no material adverse change has occurred and that Emeritus
has received all necessary consents on leases, will allow Emeritus to walk away
from its $17.50 cash offer once it elects it nominees. Camacho Decl., Exh. C.,
pp. 212-15. Thus, having made a highly conditional tender offer and used the
power of its proxies and its controlling shareholder status to ensure that two
of those conditions will not be met, Emeritus will be free to walk away from its
offer. Indeed, Emeritus will have manufactured its own excuse to abandon or
lower its offer.
It is difficult to conjure up a more blatant instance where a
controlling shareholder has placed itself more squarely in a conflict with the
interests of the corporation or its remaining shareholders. The risk of lease
defaults is clearly a risk Emeritus cannot avoid if it wishes to acquire ARV.
However, by its reckless proxy contest and its refusal to waive the many
conditions to its offer, Emeritus seeks to place this risk irretrievably upon
the other shareholders of ARV while reserving an option for itself to walk away
from that risk or even to benefit from the very defaults it will create.(9)
Fortunately, California law, indeed one of the landmark decisions of corporate
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(9) Because Emeritus directly competes with ARV in California and seeks
to expand its presence, Camacho Decl., Exh. B. pp. 41-42, 61, 65, 71, 76, it can
benefit directly from the lease defaults its misuse of corporate power will
create even if it does not acquire ARV. While in control, Emeritus can simply
determine which facilities in default it most prefers, then, after it uses its
conditions as an excuse to walk away, it can approach the landlords to offer
more than ARV is willing to pay to cure the default Emeritus created. Thus,
Emeritus has attempted to structure a "heads I win; tails I still win" scenario.
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jurisprudence, bars this self serving conduct and supports the narrow relief
sought by ARV.
One of the cornerstones of corporate law, not just in California, but
throughout the country, is Chief Justice Traynor's decision in Jones v. H.F.
Ahmanson & Co., 1 Cal. 3d 93, 460 P.2d 464 (1969). This opinion, which is used
in virtually every legal textbook on corporations to teach the duties owed by
controlling shareholders to the corporation and other shareholders, is directly
applicable to the facts of this case and bars Emeritus's proposed reckless use
of proxies it may receive. In Jones v. H.F. Ahmanson & Co., the California
Supreme Court held that "the comprehensive rule of good faith and inherent
fairness to the minority in any transaction where control of the corporation is
material properly governs controlling shareholders in this state. Id. at 112
(emphasis added.)
Jones v. H.F. Ahmanson & Co. expansively explains the reasons for this
rule and describes a number of situations to which it will apply -- situations
which parallel the facts at issue here. In describing the rationale for the
duties a controlling shareholder owes the minority, the Supreme Court stated:
"A director is a fiduciary. . . . So is a dominant or controlling
stockholder or group of stockholders. . . . Their powers are
powers of trust. . . .'" "He who is in such a fiduciary position
cannot serve himself first and his cestius second. He cannot
manipulate the affairs of his corporation to their detriment and
in disregard of the standards of common decency and honesty. He
cannot by the use of the corporate entity violate the ancient
precept against serving two masters. . . . He cannot utilize his
inside information and his strategic position for his
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own preferment. He cannot violate rules of fair play by doing indirectly
what he could not do directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders . . . no matter how
absolute in terms that power may be and no matter how meticulous he is
to satisfy technical requirements. For that power is at all times
subject to the equitable limitation that it may not be exercised for the
aggrandizement, preference, or advantage of the fiduciary to the
exclusion or detriment of the cestius. Where there is a violation of
these principles, equity will undo the wrong or intervene to prevent its
consummation.
Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 108-09 (1969) (internal citations
omitted) (emphasis added).
The Supreme Court added:
"The rule that has developed in California is a comprehensive rule of
"inherent fairness from the viewpoint of the corporation and those
interested therein." (Remillard Brick Co. v. Remillard-Dandini Co.,
supra, 109 Cal. App. 2d 405, 420. See also, In re Security Finance Co.,
supra, 49 Cal. 2d 370; Brown v. Halbert, supra, 271 Cal. App. 2d 252;
Burt v. Irvine Co., supra, 237 Cal. App. 2d 828; Efron v. Kalmanovitz,
supra, 226 Cal. App. 2d 546). The rule applies alike to officers,
directors, and controlling shareholders in the exercise of powers that
are theirs by virtue of their position and to transactions wherein
controlling shareholders seek to gain an advantage in the sale or
transfer or use of their controlling block of shares."
Id. at 110 (emphasis added.)
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There is no doubt that Emeritus is a controlling shareholder to whom the
fiduciary standards of the Jones v. H.F. Ahmanson & Co. rule applies. In its own
opinion, the Supreme Court stated: "`[when] a number of stockholders combine to
constitute themselves a majority in order to control the corporation as they see
fit, they become for all practical purposes the corporation itself, and assume
the trust relation occupied by the corporation towards its stockholders.'" Id.
at 110-111, quoting Ervin v. Oregon Ry. & Nav. Co., 27 F. 625, 631 (S.D.N.Y.
1886). Other California courts have observed that the application of this rule
does not turn upon the amount of shares a stockholder owns, but upon the "amount
of influence [the shareholder] could exert on the corporation by reason of its
holdings." See e.g., Heckmann v. Ahmanson, 168 Cal. App. 3d 119, 133 n.7, 214
Cal. Rptr. 177 (1985). Fiduciary duties like those imposed in Jones v. H.F.
Ahmanson have been applied to holders of proxies. See, e.g., Beverly Hills
Federal Savings and Loan Ass'n. v. Federal Home Loan Bank Bd., 371 F. Supp. 306,
314-15 (C.D. Cal. 1973) (holders of proxies "stood in position of trust and
confidence" with other shareholders "and owed them those obligations commonly
associated with fiduciaries").
The conduct in which Emeritus seeks to engage is impermissible under the
Jones v. H.F. Ahmanson & Co. rule. Emeritus seeks to utilize the control power
it obtains by proxy to advance its own purchase transaction notwithstanding that
when Emeritus votes its proxies and its own shares to change control of the ARV
board it will trigger the default of at least 18 leases, the loss of which could
deal a crippling blow to ARV's future prospects. The unfairness of this conduct
is exacerbated by the fact that Emeritus has reserved the right to walk away
from its cash offer through contractual conditions
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that cannot be satisfied as a result of the very lease defaults that the
Emeritus vote will trigger. Emeritus can then use its actual control of ARV to
survey which facilities are most profitable, and, to use the financial impact of
the defaults to reduce its offering price, to propose a stock for stock merger
or to cherry pick the facilities it most desires by negotiating directly with
landlords.(10)
Moreover, if Emeritus obtains and votes sufficient proxies to elect its
board nominees, Emeritus will subject ARV to the risk of being forced
essentially to pay valuable employees to leave the company. Upon a change in
board control, over 18 ARV employees will be entitled to terminate their
contracts early, and ARV will incur an immediate potential liability of
approximately $6.8 million in "golden parachute" payments to these individuals.
Espley-Jones Decl., [P]10. Given the increasingly high demand in the assisted
living industry for knowledgeable and experienced personnel, many of these
employees may be unable to resist the huge windfall of one to three years salary
that they would be entitled to receive. Such an exodus of key staff could leave
ARV in rubble, forced to replace a talented and experienced staff on little
notice in an increasingly competitive market. Id. [P]11. Again, Emeritus would
have another excuse to change the terms of the deal, and a rare opportunity to
hire away some of ARV's best employees.
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(10) These alternatives are far from speculation. In 1996, Emeritus
walked away from a publicly announced merger with Standish Healthcare when
Standish declined to accept a reduced exchange ratio after Emeritus finished due
diligence. Camacho Decl., Exh. E. Similarly, for months Emeritus's investment
bankers have been telling ARV's financial advisers and others that Emeritus
prefers to complete a stock for stock merger. Rimland Decl. P. 3; Phanstiel
Decl. [P]4.
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Since the actions which Emeritus can take by reason of its control
position can be used to reduce the value of ARV and the price that Emeritus will
offer to ARV shareholders, the facts herein become similar to another California
case which prevents such actions, Brown v. Allied Corrugated Box Co., 91 Cal.
App. 3d 477, 488, 154 Cal. Rptr. 170 (1979). In Brown, a controlling shareholder
who exercised control over the company's sales efforts was precluded from taking
actions to lower the corporation's overall value because, as a fiduciary, he
"was not entitled to use his dominant position . . . to benefit himself alone."
Here, by electing its nominees, Emeritus will lower the value of ARV for the
sole purpose of putting itself in position to complete a merger with ARV. By
doing this without having made an unconditional, financed tender offer that
assures ARV's shareholders they will actually get $17.50 per share, Emeritus
violates its fiduciary duties as a controlling shareholder.
Jones v. H.F. Ahmanson & Co. precludes the use of controlling
shareholder power for personal advantage and to the detriment of shareholders
"no matter how meticulous [the control person] is to satisfy technical
requirements." 1 Cal. 3d 93, at 109. Here, Emeritus's tender offer and proxy
statement do not even come close to satisfying "technical requirements." As
discussed in Section II. F above, Emeritus has failed to inform ARV shareholders
of the serious economic risks inherent in a change of control. In essence,
Emeritus has attempted to mislead ARV shareholders into giving Emeritus the very
control power it will abuse to their detriment.
This is not a close case. The misuse of controlling shareholder powers
by Emeritus and the dramatic harm a change of control will inflict upon ARV
cannot be seriously debated.
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Moreover, the narrowly crafted relief sought by ARV imposes no unfair
burden on Emeritus. The conditional injunction sought by ARV simply enjoins
Emeritus from voting its proxies to effect a change of control unless and until
it waives all the conditions to its cash tender offer and it supplies similar
waivers from its financing sources. In short, the relief sought merely requires
Emeritus to "SHOW ARV SHAREHOLDERS THE MONEY" before it inflicts upon them the
risks of lease defaults and employees departures. If the Emeritus cash offer is
real and not the illusory ruse ARV believes it to be, this relief imposes no
burden on Emeritus. At the same time, the relief requested does protect ARV
shareholders from Emeritus's reckless and self-serving course of conduct.
2. ARV Is Likely to Prevail On Its Claim That Election of Emeritus's
Nominees Without Waiving The Conditions to its Tender Offer Would
Constitute Unfair Competition
Emeritus's egregious conduct is also prohibited by California's unfair
competition statutes. These statutes were specifically designed to afford
injunctive relief to injured parties and are intended to protect both consumers
and competitors. Tippett v. Terich, 37 Cal. App. 4th 1517, 1536, 44 Cal. Rptr.
2d 862 (1995).
California Business and Profession Code Section 17203 provides that "any
court of competent jurisdiction" may enjoin "any person who engages, has
engaged, or proposes to engage in unfair competition . . . ." "Unfair
competition" is in turn defined to include "any unlawful, unfair or fraudulent
business act or practice." Cal. Bus. & Prof. Code Section 17200.
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The "unfair" standard, the second prong of the "unfair competition"
definition, provides an independent basis for relief. As the California Court of
Appeal explained in State Farm Fire and Casualty Co. v. Superior Court:
"This standard is intentionally broad, thus allowing courts maximum
discretion to prohibit new schemes to defraud. [Citation.] The test of
whether a business practice is unfair `involves an examination of [that
practice's] impact on its alleged victim, balanced against the reasons,
justifications and motives of the alleged wrongdoer. In brief, the court
must weigh the utility of the defendant's conduct against the gravity of
the harm to the alleged victim. . . . [Citations.]'"
45 Cal. App. 4th 1093, 1103-04, 53 Cal. Rptr. 2d 229 (1996); see also Podolsky
v. First Healthcare Corp., 50 Cal. App. 4th 632, 648, 58 Cal. Rptr. 2d 89
(1996); Olsen v. Breeze, Inc., 48 Cal. App. 4th 608, 618, 55 Cal. Rptr. 2d 818
(1996) (a business act or practice is "unfair" if its harm to the victim
outweighs its benefits). In interpreting the term "unfair," California courts
have also looked to factors specified in the Federal Trade Commission
guidelines, including whether the practice causes "substantial injury" to
competitors or consumers. See State Farm Fire and Casualty Co., 45 Cal. App. 4th
at 1104; People v. Casa Blanca Convalescent Homes, Inc., 159 Cal. App. 3d 509,
530, 206 Cal. Rptr. 164 (1984).
It cannot be denied that Emeritus's reckless plan for voting the proxies
it hopes to obtain would cause substantial injury to ARV. By voting proxies to
elect its hand-picked slate, Emeritus would throw its competitor ARV into
default on leases for at least 18 of its 48 facilities. Espley-Jones Decl.,
[P]6. ARV's facilities are the foundation of its
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entire business operation; termination of these leases would subject ARV to
potentially ruinous losses in revenue. Id. [P]8. Given the scarcity of adequate
facilities, and ever increasing competition, ARV might well be unable to recover
from a loss of this magnitude. Even if ARV's landlords allow it to remain, the
price of their consent could be devastating for ARV. ARV estimates that an
increase to market rent would mean a $4 million increase in ARV's estimated
annual lease costs, an event which could have paralyzing effects on ARV's
ability to operate at its current level. Id. Moreover, election of Emeritus's
nominees could cause ARV to lose key employees and incur an immediate liability
of $6.8 million. Id. [P]10-11.
Perhaps most egregiously, as discussed above, Emeritus has designed its
scheme to acquire ARV in such a way that it saddles ARV with these serious risks
without providing any guarantee that Emeritus will follow through with its
stated offer to purchase ARV at $17.50 per share in cash. Emeritus has
specifically crafted its Tender Offer to allow it to use the promise of $17.50
in cash to gain proxies, but then walk away from this offer once the exercise of
those proxies causes ARV to default on its leases or incur substantial severance
obligations. See supra, at 7-8. While ARV would suffer disastrous consequences,
Emeritus would emerge not merely unscathed, but with the enormous benefit of
control of its competitor's board of directors. Emeritus could then "negotiate"
whatever deal was most advantageous to it alone. Emeritus has also designed its
takeover plan in such a way that, if it decides not to combine with ARV
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after all, ARV would be ripe for a raid of its most valuable assets -- its
facilities and key personnel.(11)
On the other side of the scale, one can hardly see any utility in
Emeritus's lopsided allocation of risks and benefits. If Emeritus is truly
interested in following through with its Tender Offer, it can waive the
conditions and make the purchase. However, to allow Emeritus to wreck havoc with
ARV's leases and employment contracts without providing ARV any assurance that
its offer is for real would serve no purpose but to afford Emeritus an unfair
competitive advantage. The disastrous harm to ARV far outweighs any negligible
utility in Emeritus's clearly one-sided scheme.
Emeritus's scheme is truly clever; it can use the $17.50 cash offer to
convince shareholders to give Emeritus their proxies, and then use those very
proxies as one of many reasons to abandon the offer, leaving Emeritus in control
of ARV's board. Yet while clever, this strategy is grossly unfair to ARV and
must be enjoined.
3. ARV Will Suffer Irreparable Harm If Emeritus Is Not Enjoined From
Voting Proxies Unless and Until It Waives All Conditions to Its
Tender Offer
Once Emeritus votes its proxies and elects its board nominees, the
change of control provisions in ARV's leases and employment contracts will be
irrevocably triggered. At that point, ARV will be completely vulnerable, subject
only to the mercy of the third party landlords and the loyalty of employees
asked to forego millions of
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(11) ARV is entitled to injunctive relief despite the fact that Emeritus
has not yet completed the unfair business practice it clearly plans. Cal. Bus. &
Prof. Code Section 17203 (injunctive relief is proper against one who "proposes
to engage in unfair competition"); see also Podolsky, 50 Cal. App. 4th at 649,
n. 9 (California's unfair competition statute is properly invoked to enjoin
proposed unfair business practices).
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dollars in immediate cash payment. Neither the parties nor the Court will have
any power to remedy these breaches. Accordingly, if Emeritus is not enjoined
from voting proxies unless and until it waives the conditions of the Tender
Offer, ARV will suffer severe and irreparable harm.
B. ARV is Entitled to Preliminary Injunctive Relief to Prevent Emeritus
From Further Solicitation of Tender of Shares and Solicitation or Voting
of Proxies in Violation of the Securities Laws
1. ARV Is Likely to Prevail on Its Claims that Emeritus Has Violated
the Exchange Act By Failing To Disclose Material Facts in its
Tender Offer and Proxy Solicitation Materials
The Exchange Act and rules promulgated thereunder are intended to ensure
that shareholders presented with a tender offer or proxy solicitation have the
benefit of information necessary to make an informed decision as to whether to
tender their shares or vote for a particular board nominee. Accordingly, the
Exchange Act requires disclosure of material facts and prohibits false or
misleading statements in connection with both tender offers and proxy
solicitation materials.
With respect to tender offers, Section 14(e) of the Exchange Act
prohibits both false or misleading statements in connection with the offer. 15
U.S.C. Section 78n(e). Section 14(d) of the Exchange Act, and Rule 14(d)(3),
promulgated thereunder, identify specific information that a bidder must
disclose to the SEC in connection with a tender offer. In particular, 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." 17 C.F.R.
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Section 240.14d-100, Item 5. Rule 14(d)(3) further requires that a bidder in a
tender offer 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."
Id. Item 10(f).
Similar disclosure laws apply to proxy solicitation materials. Rule
14a-9, promulgated under Section 14(a) of the Exchange Act, prohibits the
solicitation of proxies by means of materials 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." 17 C.F.R. Section 240.14a-9(a) The test for determining whether an
omitted fact is material is essentially the same for both tender offers and
proxy solicitation materials. An omitted fact is material for purposes of
Sections 14(a) and 14(e) if there is a substantial likelihood that a reasonable
shareholder would consider it important in making the decision with which he or
she is confronted, i.e., whether to sell stock or how to vote. Polaroid Corp. v.
Disney, 862 F.2d 987, 1005 (3rd Cir. 1988) ("a misrepresentation is material
under section 14(e) `if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding whether to sell his or her
stock'"); Sonesta International Hotels Corp. v. Wellington Assoc., 483 F.2d 247,
251 (2d Cir. 1973). In other words, "there must be a substantial likelihood that
the disclosure of the omitted fact would have been viewed by the reasonable
investor as having significantly altered the `total mix' of information made
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available." TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126,
48 L.Ed. 2d 757 (1976) (footnote omitted); see also Berkman v. Rust Craft
Greeting Cards, Inc., 454 F. Supp. 787, 791 (S.D.N.Y. 1978) (omitted information
in proxy materials regarding board of directors election is material).(12)
a. Emeritus Improperly Failed to Disclose The Existence and
Effect of Change of Control Provisions in ARV Leases
Emeritus has violated the Exchange Act by failing to disclose -- in
either its Tender Offer or its proxy solicitation materials -- the existence and
likely effect of the change of control provisions in ARV leases. See supra, at
13-14.
A reasonable shareholder would consider the existence of these
provisions important in deciding whether to sell their shares and whether to
vote for Emeritus's board nominees. First, these provisions, if triggered, would
have a devastating effect on ARV's financial condition and continued viability.
Second, defaults by ARV could well preclude financing for the Tender
Offer, either because they trigger the material adverse change condition imposed
by Emeritus's potential financing sources, or because the damage to ARV makes
the transaction less attractive to funding sources. Not surprisingly, issues
likely to affect the possibility of financing are considered to be of
"substantial importance" to a reasonable shareholder in evaluating a tender
offer. Polaroid, 862 F.2d at 1005 (failure to disclose potential
- --------
(12) A statement referring to a prospective event may be material "even
though the event may not occur, provided there appears to be a reasonable
likelihood of its future occurrence." Sonesta, 483 F.2d at 251. "Where the
event, if it should occur, could influence the stock holder's decision to
tender, the chance that it might well occur is a factor that should be disclosed
to the investor for consideration in making his or her decision." Id.
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margin violation that could result in sanctions against lenders was material in
context of tender offer because it was likely to affect bidder's ability to
attract financing).
Third, ARV's default would substantially increase the likelihood that
Emeritus will not consummate its Tender Offer. If triggered, these provisions
would give rise to an adverse material change in ARV and would give ARV
landlords the option of terminating leases. Both of these events provide
Emeritus with a convenient escape from its cash offer of $17.50. If Emeritus
were in control of the board, it would be in a prime position to "negotiate," as
both buyers and seller, a merger that is far less beneficial than $17.50 cash
per share. Emeritus could also choose to abandon ARV completely, leaving it with
the burdens of breached leases, and could negotiate itself for ARV's most
profitable facilities.
b. Emeritus Improperly Failed to Disclose The Time Frame for
Rescinding the Redemption of the Notes
Emeritus also violates the Exchange Act by failing to disclose that its
condition of rescission of the redemption of the Notes most likely will not
occur for at least two years. See supra, at 9, 14. There can be little doubt
that this is the proper time frame. Last week, Emeritus announced that it will
name as a defendant in its state action the Lazard Freres entity which owns the
shares at issue.(13) This entity took no part in the decision to redeem and
will undoubtedly claim it is a bona fide purchaser of the shares (having
provided more than $60 million to ARV). There can be no doubt that this
defendant will appeal any decision purporting to rescind its share ownership.
Since the
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(13) This Court should have received a copy of Emeritus's amended
complaint from ARV's counsel in the state court case.
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average civil appeal from Orange County Superior Court decisions currently takes
approximately three years, Camacho Decl., [P]7, the two year time frame used
herein is conservative.
Since Emeritus's Tender Offer expires on January 21, 1998, the two year
time frame for satisfying the rescission condition presents a substantial
likelihood that the Tender Offer will not close. At the very least, the Tender
Offer will not be consummated as expeditiously as the offer itself suggests. A
reasonable shareholder would consider this possibility of failure or delay in
consummating a tender offer important to his or her decision as to how to
respond to the Tender Offer. Polaroid, 862 F.2d at 1005 (finding material the
likelihood of delay realized through the subsequent postponements in the closing
of a tender offer while the bidder sought an adjudication that shares previously
issued by the target company were invalid).
The fact that Emeritus could waive this condition does not render the
timing issue any less material. The Tender Offer states that if Emeritus fails
to have the redemption rescinded, it "may elect to reduce the Offer Price to
take into account the purchase of approximately an additional 800,000 Shares"
which Emeritus estimates would cost "approximately an additional $14 million."
Camacho Decl. Exh. C, p. 174. Emeritus's waiver of this condition is therefore
likely to result in a decrease in the purchase price (by about $.85/share), and
may well affect Emeritus's ability to obtain financing for the Tender Offer.
Because the time frame for obtaining rescission makes it far more likely that
Emeritus would reduce the purchase price or abandon the Tender Offer altogether,
it would be of critical importance to a shareholder deciding whether to sell to
Emeritus.
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These same issues are equally material in the context of the proxy
contest. Emeritus's proxy solicitation materials repeatedly promise ARV
shareholders "immediate cash" for its shares and in fact criticize ARV's other
options as "delayed and uncertain." Camacho Decl., Exh. D, p. 249. A reasonable
shareholder deciding how to vote in the proxy contest would certainly consider
important the possibilities of significant delay in consummation of the Tender
Offer, reduction in the purchase price or failure of the offer due to lack of
financing.
c. Emeritus Improperly Failed to Disclose Facts Jeopardizing
Emeritus's Financing for Its Tender Offer
Emeritus has failed to disclose at least two additional material facts
bearing on the likelihood of Emeritus obtaining financing for the Tender Offer.
First, while Emeritus claims that it has "fully negotiated" the terms and
conditions of financing commitment letters, it fails to disclose either the
identity of the potential funding sources or the slightest hint as to the
substance of those terms and conditions. See supra, at 14. In particular,
Emeritus has failed to reveal that one of Emeritus's potential funding sources
has conditioned its financing on the absence of any adverse material change to
ARV or Emeritus. Phanstiel Decl., Exh. B. ARV's shareholders are thus unaware
that the election of Emeritus's board nominees would preclude Emeritus's
financing for the Tender Offer.
Second, Emeritus misleadingly points to a letter from Northstar Capital
Partners LLC to support its confidence that it will obtain financing, failing to
disclose that Northstar is an unreliable source for such information because, as
ARV expects to
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<PAGE> 43
prove, Northstar has never arranged the financing for a hostile tender
offer.(14) See supra, at 11.
These facts cast doubt on Emeritus's ability to obtain financing, and
would be critical to a shareholder considering either the Tender Offer or the
Emeritus board nominees.
d. Emeritus Improperly Failed to Disclose Its Plan To Abandon
The Cash Offer in Favor of Stock For Stock Deal
Finally, Emeritus has failed to disclose that it has no intention of
consummating its Tender Offer, but rather is using the offer as a ruse to gain
control of ARV's board of directors; once in control, Emeritus will have the
power to reduce its purchase price, or substitute stock as consideration for the
merger. Camacho Decl., Exh. C, D.
The evidence currently available to ARV strongly suggests that Emeritus
has no intention of following through with an all cash offer. Since it first
expressed an interest in ARV, Emeritus has consistently demonstrated its
determination to acquire ARV with stock:
- -------
(14) In Newmont Mining Co. v. Pickens, 831 F.2d 1448 (9th Cir. 1987),
the Ninth Circuit rejected the plaintiff's attack on a "highly confident" letter
issued by Drexel Burnham Lambert Company as inadequate under the Williams Act.
This case differs from Newmont in at least two respects. First, while a letter
from Drexel Burnham in 1987 no doubt carried significant meaning and weight,
Northstar -- an entity which was formed last summer and which has never arranged
for financing in a hostile takeover -- is not able to give the type of
assurances Drexel Burnham was able to give in 1987. Second, the plaintiff in
Newmont did not assert that the defendant had failed to disclose known facts,
but argued that the tender offer could not even commence until firm financing
was in place. Id. at 1450. ARV does not argue that Emeritus cannot commence its
offer because it has not secured financing; rather, ARV argues that by putting
forth this letter without disclosing Northstar's missing credentials, Emeritus
misleads shareholders as to the meaning of the letter, and thus as to the
likelihood that the financing will ultimately materialize.
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<PAGE> 44
- Emeritus's initial proposal to ARV was a stock for stock merger,
Camacho Decl., Exh. D, p. 252-53;
- In October of 1997, within days of proposing a vague all cash
deal to ARV's board, Emeritus's investment bankers faxed to ARV's
investment bankers a far more detailed proposal for a stock for
stock transaction, Rimland Decl., [P]3, Exh. A;
- Shortly after announcing its all cash tender offer for $17.50 per
share, Emeritus continued to communicate to ARV its preference
for a stock for stock merger, Phanstiel Decl., [P]4.
Moreover, ARV expects discovery will show that an all cash purchase of
ARV makes no economic sense for Emeritus. The increased lease costs both ARV and
Emeritus are likely to incur upon a change of control may well preclude outside
financing. Emeritus's lack of commitment and ability to obtain financing are
demonstrated by its failure to identify any serious financing sources, and its
admitted refusal to incur the fees necessary to obtain a financing commitment.
Camacho Decl., Exh. C, pl. 190. In short, ARV believes that discovery will
confirm that Emeritus has neither the ability nor the incentive to close on its
Tender Offer.
A bidder's undisclosed plan to use a tender offer as a mere ruse to
obtain board control is clearly material in the context of the offer itself.
Indeed, Rule 14d-3 specifically requires the bidder to file with the SEC a
tender offer statement that states "the purpose or purposes of the tender offer
for the subject company's securities." 17 C.F.R. Section 240.14d-100, Item 5.
Such a plan would also be material in the context of a proxy fight; since the
Tender Offer is the foundation of Emeritus's bid for board control,
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<PAGE> 45
the existence of a plan to abandon the offer (especially if this were to occur
after Emeritus had gained control of ARV's board) would certainly be important
to shareholders deciding how to cast their vote.
2. ARV Will Suffer Irreparable Injury If Emeritus Is Not Enjoined
From Violating the Exchange Act
A finding of irreparable harm is particularly appropriate in a corporate
takeover case such as this because "[o]nce the company has been taken over,
courts can rarely if ever `unscramble the eggs.'" Homac, Inc. v. DSA Financial
Corp., 661 F. Supp. 776, 783 (E.D. Mich. 1987); Camelot Indus. Corp. v. Vista
Resources, Inc., 535 F. Supp. 1174, 1184 (S.D.N.Y. 1982) (irreparable harm is
present when a vote for directors is based on misleading information); Marshall
Field & Co. v. Icahn, 537 F. Supp. 413, 416 (S.D.N.Y. 1982) (irreparable harm is
present if the investing public and existing shareholders trade in a marketplace
that is deprived of important and legally required information). As the Third
Circuit explained in Polaroid in connection with tender offers,
"Upon announcement of a tender offer, shareholders must decide whether
to tender their shares, retain their shares or sell their shares to
arbitrageurs willing to assume the risk that the tender offer premium
might disappear if the tender offer fails. The theory of the [Williams]
Act is that shareholders are unable to protect their interests fully in
making these decisions if the tender offeror fails to provide all
material information regarding the offer. Irreparable harm arises
because of the difficulty of proving money damages in a suit based upon
material misrepresentations
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<PAGE> 46
by the tender offeror. While Congress has determined that accurate
disclosure is important to shareholders, it would often be impossible
for shareholders to prove that on the facts of their particular tender
offer accurate disclosure would have affected their decision making in a
particular way with concomitant quantifiable monetary loss. The
inadequacy of a remedy at law and the importance that Congress has
attached to accurate disclosure of material information establishes
irreparable harm."
862 F.2d at 1006. See also Camelot, 535 F. Supp. at 1184 (irreparable harm where
tender offer material contained misleading information); Sonesta, 483 F.2d at
250 ("once the tender offer has been consummated it becomes difficult, and
sometimes virtually impossible, for a court to `unscramble the eggs.'").
Under these standards, courts have enjoined defendants in cases like
this one from (1) soliciting proxies until defendants provide shareholders with
a proxy statement correcting previously made false and misleading statements.
SEC v. American Real Estate Inv. Trust, 529 F. Supp. 1300, 1305 (C.D. Cal.
1982); (2) voting or exercising any proxy obtained or solicited in violation of
the securities laws. Id.; Rafal v. Geneen, [1972-73 Transfer Binder] Fed. Sec.
L. Rep. (CCH) [P]93,505 (E.D. Pa. 1972); and (3) proceeding with a tender offer
until defendant makes appropriate corrective disclosures and offers shareholders
a reasonable time to rescind their tenders. Polaroid, 862 F.2d at 1006; Sonesta,
483 F.2d at 255; Prudent Real Estate Trust v. Johncamp Realty, Inc., 599 F.2d
1140, 1148 (2d Cir. 1979); Commonwealth Oil Refining Company, Inc. v. Tesoro
Petroleum Corp., 394 F. Supp. 267, 270 (S.D.N.Y. 1975).
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<PAGE> 47
Here, the injury to ARV goes beyond the typical harm caused by
disclosure violations in the context of a proxy contest or tender offer. Not
only will the Court be unable to reverse the harm to ARV's corporate governance,
or remedy shareholders problems of proof, but neither the parties nor the Court
will be able to extricate ARV from a disastrous position with respect to its
leases and employment contracts. ARV will be fundamentally and forever damaged
by the likely loss of facilities and key personnel. Espley-Jones Decl. [P]2-11.
C. There is No Hardship to Emeritus
Analysis under the Ninth Circuit's alternative test for preliminary
injunctive relief easily confirms that ARV is entitled to the narrow relief it
seeks. As set forth above, ARV's claims of breach of fiduciary duty, unfair
competition and violations of federal security disclosure requirements hold more
than a fair chance of success on the merits.
The balance of hardships tips decidedly in favor of ARV. The relief
requested would not subject Emeritus to any undue burden. Emeritus can hardly
cry foul if this Court requires it to make the accurate disclosures Congress
found so important in enacting the Exchange Act. Nor would the requested relief
preclude Emeritus from pursuing a valid Tender Offer; to the contrary, ARV seeks
to ensure that the offer is truly available to its shareholders, and will not
simply confer unfair advantage on Emeritus at ARV's profound expense. The only
"harm" Emeritus would suffer is the inability to use an illusory promise of an
all cash offer to injure a competitor for its own advantage. If the offer is
true, no such harm will befall Emeritus.
IV.
CONCLUSION
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<PAGE> 48
For all of the foregoing reasons, ARV respectfully submits that this
Court should issue a preliminary injunction enjoining Emeritus from the illegal
conduct described herein. ARV is submitting a proposed order setting forth the
exact terms of the relief requested. Dated: January 6, 1998
IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
Elizabeth A. Camacho
Jessica M. Weisel
By: /s/ ALEXANDER F. WILES
--------------------------------------------
Alexander F. Wiles
Attorneys for Plaintiff
ARV Assisted Living, Inc.
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<PAGE> 1
EXHIBIT 13
WECHSLER HARWOOD FILED
HALEBIAN & FEFFER LLP ORANGE COUNTY SUPERIOR COURT
488 Madison Avenue DEC 12 1997
New York, New York 10022 ALAN SLATER Executive Officer/Clerk
(212) 935-7400 /s/ KATHLEEN WOLFE
By K. WOLFE
KEVIN M. PRONGAY (087010)
JON W. BORDERUD (134355)
PRONGAY & BORDERUD
881 Alma Real Drive, Suite 211
Pacific Palisades, CA 90272
Telephone: (310) 573-3600
Attorneys for Class Plaintiff
Steven M. Mizel
THE SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF ORANGE
STEVEN M. MIZEL, on behalf of himself and )
all others similarly situated, ) CASE NO. 787953
) Class Action
Plaintiff, )
) JUDGE ROBERT E. THOMAS
) DEPT. 61
V. ) COMPLAINT FOR DAMAGES
JOHN A. BOOTY, DAVID P. COLLINS ) AND INJUNCTIVE RELIEF
R. BRUCE ANDREWS, MAURICE J. )
DEWALD, JAMES M. PETERS, JOHN J. )
RYDZEWSKI, and ARV )
ASSISTED LIVING INC., and DOES I )
THROUGH 50, )
)
Defendants. )
)
) JURY TRIAL DEMAND
)
__________________________________________ )
<PAGE> 2
Plaintiff, by his attorneys, alleges upon personal knowledge as to his
own acts and upon information and belief as to all other matters, as follows:
NATURE OF THE ACTION
--------------------
1. This is a stockholders' class action lawsuit brought on behalf of
the public stockholders of ARV Assisted Living ("ARV" or the "Company") who
have been, and continue to be, deprived of the opportunity to realize fully the
benefits of their investment in the Company. The individual defendants have
wrongfully refused to take the steps necessary to maximize stockholder value,
including properly considering a bona fide offer for the Company from Emeritus
Corporation ("Emeritus"). By failing and refusing to take such steps,
defendants have breached their fiduciary duties to the plaintiff and to the
class. The individual defendants are using their fiduciary positions of control
over ARV to thwart others in their legitimate attempts to acquire ARV, and the
individual defendants are trying to entrench themselves in their positions with
the Company.
JURISDICTION AND VENUE
----------------------
2. This Court has jurisdiction over this action because, among other
things, ARV's principal place of business is in Orange County, California,
plaintiff is informed and believes that the individual defendants reside in
Orange County, California, the wrongful conduct alleged herein occurred or
originated in, and/or was directed or controlled from Orange County,
California, and the amount of damages alleged is in excess of the
jurisdictional limit of this court.
PARTIES
-------
3. Plaintiff is and, at all relevant times has been, the owner of
shares of ARV common stock.
4. ARV is a corporation duly organized and existing under the laws of
the State of California. ARV acquires, develops, and operates assisted living
facilities that provide personalized assisted living services to the elderly.
ARV maintains its principal executive offices at 245 Fischer Avenue, Costa
Mesa, California 92626. ARV has
2
<PAGE> 3
approximately 11,584,272 shares of common stock outstanding and thousands of
stockholders of record. ARV's stock trades on the American Stock Exchange.
5. John A. Booty ("Booty"), at all times relevant hereto, has served as
a subsidiary officer of ARV and Vice Chairman of the ARV Board of Directors.
6. David P. Collins ("Collins"), at all times material hereto, has
served as Senior Vice President and a Director of ARV.
7. R. Bruce Andrews, Maurice J. Dewald, James M. Peters, and John J.
Rydzewski, at all times material hereto, have served as Directors of ARV.
8. The defendants named in paragraphs 4 through 6 above are hereinafter
referred to as the "Individual Defendants."
9. Because of their positions as officers and/or directors of the
Company, the Individual Defendants owe a fiduciary duty of loyalty and due care
to plaintiff and the other members of the class.
DOE ALLEGATIONS
---------------
10. The true names of those defendants sued herein as Does 1 through 50
("Doe Defendants") are unknown to plaintiff, who therefore sue these defendants
by such fictitious names. Plaintiff will seek leave of Court to amend this
Complaint to allege the true names and capacities of the Doe Defendants at such
time as they have been ascertained after appropriate discovery.
11. The Doe Defendants are officers, directors, employees, and/or
agents of ARV, or are entities owned or controlled by ARV, have participated
with defendants in the wrongful conduct complained of herein, have performed
acts and made statements in furtherance thereof, and/or were integrally involved
in planning or carrying out the wrongful conduct alleged herein. The Doe
Defendants also acted as agents and co-conspirators of defendants, and aided
and abetted or participated with defendants in the commission of the wrongful
acts alleged herein or otherwise caused the damages suffered by plaintiffs and
the other members of the Class.
3
<PAGE> 4
ALLEGATIONS OF CONCERTED ACTION
-------------------------------
12. At all relevant times, defendants pursued a common course of
conduct, acted in concert with one another, and conspired with one another to
accomplish the offenses complained of herein, and performed acts and made
statements in furtherance thereof. In addition to the wrongful conduct alleged
herein which gives rise to defendants' primary liability, defendants further
aided and abetted, and knowingly assisted one another, in perpetrating the
illegal and wrongful conduct complained of herein.
13. Whenever this complaint alleges an act, deed or transaction by a
corporation, partnership, or other business entity, the allegation means that
the corporation, partnership, or other business entity engaged in the act, deed
or transaction by or through its owners, partners, directors, officers,
managers, employees, agents, and/or representatives while acting within the
course and scope of their employment, partnership or agency; were actively
engaged in the management, direction, and/or control of the entity; and/or were
transacting the entity's ordinary business or its affairs.
CLASS ACTION ALLEGATIONS
------------------------
14. Plaintiff brings this action on behalf of himself and all other
stockholders of the Company (excluding defendants and any person, firm, trust,
corporation, or other entity related to or affiliated with any of the
defendants), who have been or will be injured by defendants' continuing wrongful
conduct and actions as alleged herein ("Class").
15. This action is properly maintainable as a class action.
16. The Class is so numerous that joinder of all members is
impracticable. The Company has thousands of stockholders who are geographically
dispersed throughout the United States, making joinder of all members of the
Class impracticable.
17. There are questions of law and fact common to the Class that
predominate
4
<PAGE> 5
over questions affecting any individual class member. The common questions
include, inter alia:
a. whether defendants have breached their fiduciary duties owed by
them to plaintiff and other members of the Class by failing and refusing to
attempt in good faith to maximize stockholder value, including considering the
sale of ARV;
b. whether defendants have breached, or aided and abetted the
breach of, the fiduciary duties owed by them to plaintiff and other members of
the Class;
c. whether defendants engaged in a plan and scheme to thwart and
reject better offers and proposals from third parties, including the offer made
by Emeritus to the detriment of plaintiff and the Class; and
d. whether plaintiff and the other members of the Class are being
and will continue to be injured by the wrongful conduct alleged herein and, if
so, what is the proper remedy and measure of damages.
18. Plaintiff is committed to prosecuting the action and has retained
competent counsel experienced in litigation of this nature. Plaintiff's claims
are typical of the claims of the other members of the Class and plaintiff has
the same interests as the other members of the Class. Plaintiff is an adequate
representative of the Class because his claims and the claims of other members
of the Class are coextensive.
19. The prosecution of separate actions by individual members of the
Class would create the risk of inconsistent or varying adjudications with
respect to individual members of the Class which would establish incompatible
standards of conduct for defendants, or adjudications with respect to individual
members of the Class which would as a practical matter be dispositive of the
interests of the other members not parties to the adjudications or substantially
impair or impede their ability to protect their interests.
20. The defendants have acted, or refused to act, on grounds generally
applicable to, and causing injury to, the Class and as a whole, therefore,
preliminary and final injunctive relief on behalf of the Class as a whole are
appropriate.
5
<PAGE> 6
COMMON ALLEGATIONS
------------------
21. In late June 1997, David R. Baty ("Baty"), Emeritus' Chairman and
Chief Executive Officer, telephoned Gary L. Davidson ("Davidson"), ARV's
Chairman, President and Chief Executive Officer to relay Emeritus' interest in
exploring a business combination between the two companies.
22. On July 10, 1997, Baty sent a letter outlining various proposals by
which a transaction might be accomplished. On July 11, 1997, the ARV Board
responded by stating that "We are attempting to schedule a meeting next week to
consider your proposal."
23. Unknown to Emeritus, on July 14, 1997, ARV approved an alternative
transaction with Prometheus Assisted Living LLC ("Prometheus") whereby
Prometheus would acquire 49.9% of ARV's outstanding stock for $14.00 per share
in three separate stock purchases over eighteen months. ARV had obtained an
opinion from its investment banker, Solomon Brothers, that $14.00 per share was
a fair price. ARV and Prometheus immediately thereafter entered into a Stock
Purchase Agreement for the purchase of 9,653,325 at $14.00 over the next two
years.
24. Notwithstanding ARV's misleading Emeritus as to the fact that the
Emeritus Offer would never even be considered by the Board of Directors, ARV
accepted the transaction with Prometheus in order to defeat the Emeritus Offer
and prevent negotiation with Emeritus or any other third party offeror.
25. ARV also agreed to pay Prometheus a breakup fee of $13,000.000,
including a $6,000,000 "adjustment" of the purchase price and a separate
termination fee of $7,000,000.
26. Defendants breached their fiduciary duties to shareholders by
wrongfully entering into a transaction with Prometheus, which included the
exorbitant break up fee, during the time period when there was active bidding
for control of ARV by at least one other offeror.
6
<PAGE> 7
27. The agreement with Prometheus further guaranteed Prometheus the
right to designate four out of eleven directors on ARV's Board of Directors and
provided for the amendment of ARV's by-laws to require approval of eight of
eleven directors for any board action, thereby, granting to Prometheus an
absolute right of veto over any board action by ARV.
28. In connection with the Prometheus transaction and the competitive
bid outlined by Emeritus, ARV also instituted a Stockholders Rights Plan
("poison pill") pursuant to which preferred share purchase rights were issued.
The poison pill effectively blocks Emeritus from acquiring additional shares of
ARV without the ARV Board of Directors first waiving the pill or judicial
intervention determining the poison pill invalid.
29. Defendants further breached their fiduciary duties owed to ARV
stockholders by instituting unreasonable defensive measures, such as the poison
pill, in response to Emeritus' bona fide offer for the Company.
30. On October 12, 1997, Emeritus formally proposed to acquire all of
the outstanding shares of ARV stock for $16.50 per share in cash (the "Emeritus
Offer").
31. At the time when the Emeritus Offer was made, Emeritus left open
the possibility that the consideration paid to shareholders could possibly be
greater if due diligence warranted such an increase in the price.
32. On October 14, 1997, the ARV Board of Directors met and immediately
rejected the Emeritus Offer without entering into any negotiation, despite the
fact that the Emeritus Offer placed a significantly higher value on ARV's shares
than the purchase of 49.9% of the Company's stock by Prometheus and well in
excess of the $14.00 price deemed fair by ARV's investment advisor.
33. On October 15, 1997, Gary L. Davidson ("Davidson"), who was ARV's
Chairman, President, and Chief Executive Officer, resigned following the Board
of Directors' failure to properly consider the Emeritus Offer.
7
<PAGE> 8
34. On October 31, 1997, Prometheus announced that it was amending its
transaction with ARV to provide for a $60 million purchase of ARV 6 3/4%
Convertible Subordinated Notes (the "Notes"), rather than make two additional
stock purchases. The ARV Notes were convertible into ARV common stock at $17.25.
However, a redemption premium provision under the amended terms reduced the
effective conversion price to $14.00 per share which is a significant discount
to the $16.50 Emeritus offer.
35. On November 10, 1997, ARV announced that it had transferred its
listing from NASDAQ National Market System to the American Stock Exchange which
has the effect of eliminating the availability of cumulative voting for the
public shareholders.
36. On November 14, 1997, the Company announced a $25 million share
repurchase program that will, in turn, increase the relative amount of stock
controlled by ARV management and Prometheus.
37. On November 24, 1997, Emeritus, left with no other option,
commenced a tender offer for all publicly-held shares of the Company's stock at
$16.50 per share.
38. Defendants' failure to fully inform themselves and consider any
bona fide offer like Emeritus's offer has no valid business purpose, and simply
evidences their disregard for the premium being offered to ARV stockholders. By
failing to meet promptly and negotiate with Emeritus, defendants are depriving
plaintiff and the Class of their right to share in the assets and businesses of
ARV and receive the maximum value for their ARV shares.
39. ARV represents a highly attractive acquisition candidate.
Defendants' conduct is depriving ARV's public stockholders of the control
premium that Emeritus or other third parties are prepared to pay, or of the
enhanced premium that further negotiation or exposure of ARV to the market could
provide.
40. Defendants owe fundamental fiduciary obligations to ARV's
stockholders to take all necessary and appropriate steps to maximize the value
of their shares. In addition, the Individual Defendants have the responsibility
to act independently so that the
8
<PAGE> 9
interests of ARV's public stockholders will be protected, to seriously consider
all bona fide offers for the Company, and to conduct fair and active bidding
procedures or other mechanisms for checking the market to assure that the
highest possible price is achieved. Further, the directors of ARV must
adequately ensure that no conflict of interest exists between the Individual
Defendants' own interests and their fiduciary obligations to maximize
stockholder value or, if such conflicts exist, to insure that all such conflicts
will be resolved in the best interests of the Company's stockholders.
41. Because the Individual Defendants dominate and control the business
and corporate affairs of ARV and because they are in possession of private
corporate information concerning ARV's assets, businesses and future prospects,
there exists an imbalance and disparity of knowledge of economic power between
defendants and the public shareholders of ARV. This discrepancy requires that
defendants take those steps necessary to maximize stockholder value.
Nevertheless, defendants have refused to seriously consider Emeritus's offer,
and have failed to announce any active auction or open bidding procedures that
would maximize stockholder value by entertaining offers to purchase the Company.
42. The Individual Defendants have breached their fiduciary and other
common law duties they owe to plaintiff and the other members of the Class in
that they have not exercised, and are not exercising, independent business
judgment and have acted, and are continuing to act, in their own self-interests
to the detriment of plaintiff and the Class.
43. The Individual Defendants are acting to entrench themselves in
their offices and positions and to maintain their substantial salaries and
perquisites, all at the expense, and to the detriment of, plaintiff and the
other stockholders of ARV.
44. As a result of the actions of defendants, plaintiff and the other
members of the Class have been, and will continue to be, damaged in that they
have not and will not receive their fair proportion of the value of ARV's assets
and businesses and/or have been
9
<PAGE> 10
and will be prevented from obtaining a fair and adequate price for their shares
of ARV's common stock.
45. Plaintiff seeks preliminary and permanent injunctive relief
preventing defendants from inequitably and unlawfully depriving plaintiff and
the Class of their rights to realize the full and fair value of their stock, and
at a premium over the market price, and preventing defendants from unlawfully
entrenching themselves in their positions of control and acting in their own
self-interests to the detriment of ARV's shareholders, and to compel defendants
to carry out their fiduciary duties and obligations to plaintiff and the other
members of the Class, including maximizing the value of the Company's stock.
46. Only through the exercise of this Court's equitable powers can
plaintiff and the Class be fully protected from the immediate and irreparable
injury that defendants' actions have inflicted and continue to inflict on ARV's
shareholders, including plaintiff and the other members of the Class. Defendants
are precluding the realization by ARV stockholders of the full economic value
and benefit of their investment by, among other things, failing to proceed
expeditiously and in good faith to evaluate and pursue a premium acquisition
proposal that would provide consideration for all shares at a premium price.
47. Unless enjoined by the Court, defendants will continue to breach
their fiduciary duties and obligations to plaintiff and the other members of the
Class, and/or will continue to participate, and/or aid and abet one another, in
such breaches of fiduciary duties, and will continue to prevent the sale of ARV
at a substantial premium to shareholders, all to the irreparable harm of
plaintiff and other members of the Class.
48. As a result of the wrongful conduct alleged herein, plaintiff and
the Class have no adequate remedy at law.
FIRST CAUSE OF ACTION FOR BREACH OF FIDUCIARY DUTY
(Against All Defendants)
49. Plaintiffs repeat and incorporate herein by reference, all of the
allegations contained in paragraphs 1 through 48 above.
10
<PAGE> 11
50. As alleged herein, defendants owe fiduciary duties to plaintiff and
the other members of the Class, including the duty to act in the best interests
of plaintiff and the other members of the Class and to maximize the value of the
Company's stock for the benefit of its shareholders, including plaintiff and the
other members of the Class.
51. As alleged herein, defendants breached their fiduciary duties to
plaintiff and the other members of the Class, and continue to breach their
fiduciary duties to plaintiff and the other members of the Class, and plaintiff
and the other members of the Class have been damaged thereby, and continue to be
damaged, in an amount to be determined at trial, but believed to be not less
than $14,000,000.
52. The foregoing actions and conduct by defendants were intentional,
fraudulent, oppressive and malicious. By reason defendants' wrongful conduct as
alleged herein, plaintiff and the other members of the Class have been damaged
and are entitled to the relief prayed for below. In addition, plaintiffs and the
Class seek an order enjoining defendants from engaging in any further breaches
of their fiduciary duties to plaintiff and the other members of the Class, and
to require defendants to act in the best interests of plaintiff and the other
shareholders of ARV with respect to maximizing the value of the Company's stock
for the benefit of its shareholders, including plaintiff and the other members
of the Class.
PRAYER FOR RELIEF
WHEREFORE, plaintiff demands judgment, as follows:
(a) Certifying this action as a class action and certifying plaintiff
as a class representative;
(b) Ordering defendants to carry out their fiduciary duties to
plaintiff and the other members of the Class by, among other things:
(i) cooperating fully with any entity or person, including
Emeritus, who has a bona fide and reasonable proposal for the Company concerning
any
11
<PAGE> 12
transaction that would maximize stockholder value including, but not limited to,
a merger or acquisition of ARV;
(ii) immediately undertaking an appropriate evaluation of ARV's
worth as a merger/acquisition candidate;
(iii) taking all appropriate steps to enhance ARV's value and
attractiveness as a merger/acquisition candidate;
(iv) taking all appropriate steps to effectively expose ARV to the
marketplace in an effort to create an active auction of the Company;
(v) acting independently so that the interests of the Company's
public stockholders will be protected; and
(vi) adequately ensuring that no conflicts of interest exist
between the Individual Defendants' own interests and their fiduciary obligations
to maximize stockholder value or, in the event such conflicts exist, to ensure
that all conflicts of interest are resolved in the best interests of the public
stockholders of ARV;
(c) Ordering defendants, jointly and severally, to account for and pay
to plaintiff and member of the Class all damages which plaintiff and the other
members of the Class have sustained as a result of the wrongful acts and conduct
alleged herein;
(d) Awarding plaintiffs and members of the Class punitive damages;
(e) Awarding plaintiff all costs and expenses incurred by plaintiff in
this action, including plaintiff's reasonable attorneys' and experts' fees; and
12
<PAGE> 13
(f) Awarding Pre- and post-judgment interest; and
(g) Granting such other and further relief as the Court may deem just
and proper.
Dated: December 11, 1997 Respectfully submitted,
PRONGAY & BORDERUD,
BY: /s/ Jon Borderud, Esq.
--------------------------------
Jon Borderud, Esq.
881 Alma Real Drive
Suite 211
Pacific Palisades, CA 90272
(310) 573-3600
WECHSLER HARWOOD
HALEBIAN & FEFFER LLP
488 Madison Avenue
New York, New York 10022
(212) 935-7400
13
<PAGE> 14
JURY DEMAND
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Plaintiff hereby demands a trial by jury of all issues of fact.
Dated: December 11, 1997 Respectfully submitted,
PRONGAY & BORDERUD,
By: /s/ Jon Borderud
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Jon Borderud
881 Alma Real Drive
Suite 2ll
Pacific Palisades, CA 90272
(310) 573-3600
WECHSLER HARWOOD
HALEBIAN & FEFFER LLP
488 Madison Avenue
New York, New York 10022
(212) 935-7400
14
