==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 6
TO
SCHEDULE 14D-1
Tender Offer Statement Pursuant to Section
14(d)(1) of the Securities Exchange Act of 1934
and
AMENDMENT NO. 9
TO
SCHEDULE 13D
under the Securities Exchange Act of 1934
ARV ASSISTED LIVING, INC.
(Name of Subject Company)
EMERITUS CORPORATION
and
EMAC CORP.
(Bidder)
Common Stock, No Par Value Per Share
(Including the Preferred Share Purchase Rights)
(Title of Class of Securities)
-------------
00204C107
(CUSIP Number)
Raymond R. Brandstrom
Emeritus Corporation
3131 Elliot Avenue
Suite 500
Seattle, Washington 98121
Telephone: (206) 298-2909
(Name, Address and Telephone Number of Persons Authorized to Receive
Notices and Communications on Behalf of Bidder)
Copies to:
Phillip R. Mills, Esq. Michael Stansbury, Esq.
Davis Polk & Wardwell Perkins Coie
450 Lexington Avenue 1201 Third Avenue
New York, New York 10017 Suite 4000
Telephone: (212) 450-4000 Seattle, Washington 98101
Telephone: (206) 583-8888
------------
December 19, 1997
(Date Tender Offer First Published, Sent or Given to Security Holders)
CUSIP No. 00204C107
- -------------------
1 NAMES OF REPORTING PERSONS
Emeritus Corporation
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
OO
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS
REQUIRED PURSUANT TO ITEMS 2(e) OR 2(f) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
WA
7 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,077,200
8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7)
EXCLUDES CERTAIN SHARES [X]
9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
6.8%
10 TYPE OF REPORTING PERSON
CO
CUSIP No. 00204C107
- -------------------
1 NAMES OF REPORTING PERSONS
EMAC Corp.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
OO
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS
REQUIRED PURSUANT TO ITEMS 2(e) OR 2(f) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
DE
7 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,077,200
8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7)
EXCLUDES CERTAIN SHARES [X]
9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7)
6.8%
10 TYPE OF REPORTING PERSON
CO
This Amendment No. 6 amends and supplements the Tender Offer
Statement on Schedule 14D-1 (the "Statement"), filed December 19, 1997 by
Emeritus Corporation, a Washington corporation ("Emeritus"), and EMAC Corp., a
Delaware corporation (the "Bidder") and a wholly owned subsidiary of Emeritus,
as amended by Amendments No. 1, 2, 3, 4 and 5 relating to the Bidder's offer
to purchase all outstanding shares of Common Stock, no par value per share, of
ARV Assisted Living, Inc., a California corporation ("ARV"), at $17.50 per
share, net to the seller in cash, upon terms and subject to the conditions set
forth in the Offer to Purchase and the related Letter of Transmittal, copies
of which are attached as Exhibits (a)(1) and (a)(2) to the Statement. This
Amendment No. 6 constitutes Amendment No. 9 to the Report on Schedule 13D
filed October 14, 1997 by Emeritus, as amended. Capitalized terms not
separately defined herein shall have the meanings specified in the Statement.
Item 10. Additional Information.
(e) On January 8, 1998, in the state court action, ARV and the
ARV Board filed a Demurrer and Memorandum of Points and Authorities (the
"Demurrer") in Emeritus Corporation v. ARV Assisted Living, Inc., et al., case
no. 787788. ARV and the ARV Board, by use of the Demurrer, seek to have the
state court action dismissed. The Demurrer is exhibit 15 to ARV's Schedule
14D-9 (Amendment No. 3).
On January 16, 1998, in the state court action, Emeritus filed
its Opposition to Defendants' Demurrer in Emeritus Corporation v. ARV Assisted
Living, Inc., et al., case no. 787788. Emeritus' Opposition to Defendants'
Demurrer, dated January 16, 1998, is attached hereto as Exhibit (g)(10).
On January 16, 1998, in the state court action, defendants ARV
and the ARV Board filed under seal their Brief in Opposition to Plaintiff's
Motion for Preliminary Injunction, and defendant Prometheus filed under seal a
Memorandum of Points and Authorities in Opposition to Emeritus' Motion for a
Preliminary Injunction in Emeritus Corporation v. ARV Assisted Living, Inc.,
et al., case no. 787788.
On January 21, 1998, in the state court action, Emeritus filed
under seal its Reply to ARV's Brief in Opposition to Emeritus' Motion for a
Preliminary Injunction and its Reply to Prometheus' Brief in Opposition to
Emeritus' Motion for a Preliminary Injunction in Emeritus Corporation v.
ARV Assisted Living, Inc., et al., case no. 787788.
On January 15, 1998, in the federal court action, plaintiff ARV
filed a Petition for Emergency Writ of Mandamus with the Court of Appeal for
the Ninth Circuit requesting that the Ninth Circuit lift the Stay issued by
the U.S. District Court for the Central District of California, Southern
Division.
On January 20, 1998, in the federal court action, Emeritus
filed a Response to Petition for Emergency Writ of Mandamus.
Item 11. Material to be Filed as Exhibits
(g)(10) Emeritus' Opposition to Defendant's Demurrer filed on
January 16, 1998 in Emeritus Corporation v. ARV Assisted Living, Inc., et al.,
Superior Court for the State of California for the County of Orange, Case No.
787788.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: January 21, 1998
EMERITUS CORPORATION
By: /s/ Raymond R. Brandstrom
--------------------------------
Name: Raymond R. Brandstrom
Title: President
EMAC CORP.
By: /s/ Raymond R. Brandstrom
--------------------------------
Name: Raymond R. Brandstrom
Title: President
Exhibit (g)(10)
GIBSON, DUNN & CRUTCHER LLP
WAYNE W. SMITH, SBN 054593
JOSEPH P. BUSCH, III, SBN 070340
RAFFAELE G. FAZIO, SBN 185378
4 Park Plaza, Suite 1400
Irvine, California 92614-8557
(714) 451-3800
DAVIS POLK & WARDWELL
MICHAEL P. CARROLL
JAMES H.R. WINDELS
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
Attorneys for Plaintiff
Emeritus Corporation
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
- -----------------------------------X
:
EMERITUS CORPORATION, a Washington : CASE NO. 787788
corporation, :
Plaintiff, : ASSIGNED FOR ALL PURPOSES
: TO JUDGE DAVID H. BRICKNER,
v. : DEPT. 17
:
ARV ASSISTED LIVING, INC., a : OPPOSITION TO DEFENDANTS'
California corporation; DAVID P. : DEMURRER
COLLINS, an individual; JOHN A. : Hearing date: January 23, 1998
BOOTY, an individual; R. BRUCE : Time: 3:00 p.m.
ANDREWS, an individual; MAURICE : Dept: 17
J. DeWALD, an individual; JOHN J. :
RYDZEWSKI, an individual; ROBERT : ORAL ARGUMENT REQUESTED
P. FREEMAN, an individual;KENNETH : Date of Filing
M. JACOBS, an individual; MURRAY N.: This Action: December 9, 1997
GUNTY, an individual; HOWARD G. : Trial date: None set
PHANSTIEL, an individual; and :
PROMETHEUS ASSISTED LIVING, LLC, a :
Delaware limited liability company,:
:
Defendants. :
:
- -----------------------------------X
Plaintiff Emeritus Corporation ("Emeritus") respectfully
submits this opposition to the demurrer of Defendants 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, Murray N.
Gunty and Howard G. Phanstiel (collectively, the "ARV Defendants").
TABLE OF CONTENTS
Page
1. SUMMARY OF ARGUMENT............................................... 1
2. BACKGROUND........................................................ 2
A. Overview of the Prometheus Transactions........................ 2
B. The Agreements at Issue........................................ 4
1. The SPA..................................................... 4
2. The SA...................................................... 5
3. The RSPA.................................................... 5
4. The RSA..................................................... 5
C. The Relationship Between LFREI and Prometheus.................. 5
3. LFREI IS NOT A NECESSARY AND INDISPENSABLE PARTY BECAUSE
LFREI'S ABSENCE WILL NOT RESULT IN SUBSTANTIAL PREJUDICE
TO LFREI, THE ARV DEFENDANTS OR PROMETHEUS..................... 6
4. EMERITUS HAS ALLEGED THROUGHOUT THE AMENDED COMPLAINT THAT
IT IS A SHAREHOLDER OF ARV.................................... 11
5. CONCLUSION.................................................... 12
TABLE OF AUTHORITIES
CASES Page(s)
Angie M. v. Superior Ct., 37 Cal. App. 4th 1217, 44 Cal. Rptr.
2d 197 (Cal. Ct. App. 1995)......................................... 12
Bank of California v. Supr. Ct., 16 Cal.2d 516, 521 (Cal. 1940).......... 10
Citizens Assn. v. County of Inyo, 172 Cal. App. 3d 151, 217 Cal. Rptr.
983 (Cal. Ct. App. 1985)............................................ 9,10
Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 81 Cal. Rptr. 592 (Cal.
1969)............................................................... 12
Lungren v. Community Redevelopment Agency, 56 Cal. App. 4th 868, 65 Cal.
Rptr. 786 (Cal. Ct. App. 1997)...................................... 6,7,8
Perkins v. Superior Ct., 117 Cal. App. 3d 1, 172 Cal. Rptr. 427 (Cal.
Ct. App. 1981)...................................................... 11
Sierra Club, Inc. v. California Coastal Com., 95 Cal. App. 3d 495,
157 Cal. Rptr. 190 (Cal. Ct. App. 1979)............................. 9
Slater v. Blackwood, 15 Cal.3d 791, 126 Cal. Rptr. 225 (Cal. Ct.
App. 1995).......................................................... 8
STATUTES
California Code of Civil Procedure Section 389.......................... 7,8
California Corporations Code Section 309................................ 12
TREATISES
5 B.E. Witkin, California Procedure - Pleading, Section 900, at 358
(4th ed. 1997)..................................................... 12
2 Harold Marsh, Jr. et al., Marsh's California Corporation Law, Section
11.7, at 828 (3rd ed. 1997 Supp.).................................. 12
MEMORANDUM OF POINTS AND AUTHORITIES
1. SUMMARY OF ARGUMENT
This action focuses on the most fundamental right of corporate
governance - the right of a corporation's shareholders to control the future
of their corporation through their election of the corporation's board of
directors. Emeritus is confident that it will establish to the satisfaction of
this Court that the defendants have illegally rigged the election of ARV's
board of directors at the upcoming annual meeting of ARV's shareholders on
January 28, 1998. By its demurrer, ARV does not attack the substance of
Emeritus' allegations of breach of fiduciary duty; rather, ARV raises two
highly technical arguments which, first, are meritless under the law, and,
second, will be rendered moot by the filing of Emeritus' proposed second
amended complaint (attached as Exhibit A).
The ARV Defendants advance two reasons why their demurrer to Emeritus'
first amended complaint (the "FAC") should be sustained. Both must fail.
First, Lazard Freres Real Estate Investors L.L.C. ("LFREI") is not a
necessary party to this action within the meaning of California Code of Civil
Procedure Section 389. The ARV Defendants ask this Court to adopt a per se
rule that all parties to a contract are necessary and indispensable in any
action relating that contract. This is not the law in California. Moreover, a
close examination of LFREI's interests, as required by CCP Section 389,
reveals that its absence from this action will not result in substantial
prejudice to LFREI or to any defendant here.
Second, the ARV Defendants' argument that Emeritus failed to allege that
it is a shareholder of ARV and, therefore, that Emeritus lacks standing is
utterly meritless. In fact, Emeritus referenced on at least four occasions in
the FAC that it is a shareholder of ARV. Additionally, in four Exhibits
attached to the original Complaint (the "OC"), including ARV's own proxy
materials filed in August of 1997, Emeritus is identified as a shareholder of
ARV. The ARV Defendants have received more than adequate notice in the FAC
and elsewhere that Emeritus is a shareholder of ARV, and, as they have done
throughout the events at issue in this proceeding, are once again attempting
to hamper Emeritus' efforts to seek a fair vote of ARV's shareholders.
In any event, the parties have agreed that, at least from a conceptual
standpoint, the defects alleged to exist in the FAC by the ARV Defendants can
be cured by amendment. If the Court is inclined to accept the arguments by
the ARV Defendants, then Emeritus is prepared to file the proposed second
amended complaint attached hereto as Exhibit A.(1)
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(1) Emeritus has sought the consent of all defendants to file the second
amended complaint. If defendants give their consent, Emeritus believes that
the ARV Defendants should withdraw their demurrer as moot.
2. BACKGROUND
To understand the relationship among ARV, Prometheus Assisted Living LLC
("Prometheus"), and LFREI, one must first understand the background of the
events that led to the filing of this action.
A. Overview of the Prometheus Transactions
On July 14, 1997, ARV announced that it had entered into a series of
agreements with Prometheus, at that time an affiliate of LFREI (the "First
Prometheus Transaction"). FAC Paragraph 35. In the First Prometheus
Transaction, ARV agreed to sell up to 49.9% of its stock to Prometheus at $14
per share. Id. Ultimately, Prometheus purchased approximately 16% of ARV
stock under the First Prometheus Transaction, and agreed to vote this stock in
support of reelection of ARV's Board. Id. at Paragraphs 4, 35, 39.
In return, ARV's directors and senior officers, who owned approximately 20% of
ARV's outstanding shares, agreed to vote their shares, subject to certain
conditions, in support of Prometheus' three board nominees. Id. The First
Prometheus Transaction also granted Prometheus' board representatives veto
power over virtually any material activity by the Board. Id. at Paragraph 40.
In mid-October, Emeritus made a proposal to the ARV Board to purchase
ARV's outstanding shares for $16.50 per share in cash, a price nearly 18%
higher than Prometheus had paid for its 16% block. Id. at Paragraph 62.
After no significant consideration, ARV's board of directors rejected that
offer, a decision that was received negatively by ARV's shareholders. Id.
at Paragraphs 67-68. Instead of heeding its shareholders and
exploring a transaction with Emeritus, however, ARV entered into a second
series of transactions with Prometheus (the "Second Prometheus
Transaction").
Under the Second Prometheus Transaction, Prometheus retained the 16%
block of ARV's stock, the right to three seats on ARV's Board and the option
of acquiring up to 49.9% of ARV over a three-year period. Id. at Paragraph
70. The parties also continued their mutual commitments to support each
other's Board nominees. Id. at Paragraph 69. The principal change from the
first transaction was that instead of committing to purchase additional common
stock outright, Prometheus bought $60 million worth of convertible notes from
ARV (the "Notes"). Id. at Paragraph 70.
Under the terms of the Notes, ARV was permitted to redeem and convert
the Notes into common stock at approximately $14 per share, well below the
then current market value of ARV's stock, and thereby place in Prometheus'
hands an additional 23% of ARV's stock. Id. at Paragraph 75. Because all
stock owned by Prometheus was contractually obligated to vote in support of
ARV's Board, the redemption provision gave the ARV Defendants the ability
to guarantee that 39% of ARV's stock (the original 16% block plus the
additional 23%) would be ready to vote in support of the existing Board.
Id. at Paragraph 70. Most significantly, ARV announced that the Second
Prometheus Transaction would not be subject to shareholder approval and
instead would be imposed involuntarily on its shareholders. Id. at
Paragraphs 85-86.
Realizing that ARV's Board was now fully entrenched and completely
unwilling to consider its proposals regardless of the views of shareholders,
on November 24, 1997, Emeritus filed proxy materials with the SEC indicating
its intent to field a slate of candidates to run against ARV's Board at the
annual meeting scheduled for January 8, 1998. Id. at Paragraph 90. In
response, ARV's Board met on December 5, 1997, and voted to redeem the Notes,
adjourned the annual meeting for a second time to January 28, 1998, and
adjourned the record date for the annual meeting to December 18, 1997. Id. at
Paragraphs 91, 93.
The impact of the Board's actions on Emeritus and its other shareholders
is severe. By redeeming the Notes and changing the record date, Prometheus
now owns approximately 39% of ARV's stock and is contractually committed to
vote that stock in support of ARV's current Board at the annual meeting. When
Prometheus' 39% block is added to shares controlled by several senior officers
and Board members of ARV and ARV's employee stock ownership plan, ARV's Board
has outright support of over 50% of the voting stock, ensuring its victory.
B. The Agreements at Issue.
There are four agreements to which Prometheus, LFREI and ARV are
parties, and which are the subject of the FAC.(2) The agreements are: the
Stock Purchase Agreement dated as of July 14, 1997 (the "SPA"), the
Stockholders Agreement dated as of July 14, 1997 (the "SA"), the Amended and
Restated Stock Purchase and Note Agreement dated as of October 29, 1997 (the
"RSPA"), and the Amended and Restated Stockholders Agreement dated as of
October 29, 1997 (the "RSA"). See OC, Exs. C, D, M, P. The ARV Defendants
would have this Court believe that the rights and obligations of Prometheus
and LFREI under these agreements are identical, and that LFREI is a necessary
party to any challenge to even portions of the contracts. Because the rights
of Prometheus and LFREI are not identical, however, and because Emeritus is
only seeking relief which would impact Prometheus' rights, the ARV Defendants'
argument must fail.
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(2) Emeritus joins in footnote 3, as corrected, to the Demurrer, which stands
for the proposition that the exhibits to the OC may be cited to and referred
to by the Court and parties in connection with the hearing on the Demurrer.
See Errata to Demurrer at 2. Emeritus pleaded those exhibits in haec verba in
the FAC, and did not attach copies of the exhibits (totaling 4" in thickness)
from the OC to the FAC to avoid overburdening the Court's files.
1. The SPA.
LFREI is the "Advancing Party" under the SPA, ARV is the "Company" and
Prometheus is the "Buyer." SPA (OC, Ex. C) at 8. Pursuant to Section 2.3 of
the SPA, Prometheus is obligated to buy certain amounts of ARV stock, and the
only obligation of LFREI is to advance money to Prometheus so that it can buy
that stock. Id. at 16. If the purchase of the ARV stock by Prometheus is
rescinded as Emeritus has requested, Prometheus will receive its money back.
What happens between LFREI and Prometheus will be based on whatever the
contractual arrangement between them is, if any; but that contractual
arrangement is not the subject of this litigation. Section 5.5 of the SPA
gives Prometheus, not LFREI, the ability to control corporate decisions. Id.
at 40-43. Finally, Section 5.10 gives Prometheus, not LFREI, certain rights
with respect to ARV's board of directors and executive committee. Id. at 44.
The only obligation or right of LFREI under the SPA is to lend money to
Prometheus. That obligation is simply not the subject of this action.
2. The SA.
The roles of the parties to the SA are the same as under the SPA. There
are few obligations or benefits for LFREI. Under Section 3.1 of the SA,
LFREI and Prometheus are separately required to vote any stock of ARV that
they might own in favor of management's slate of directors. SA (OC, Ex. D) at
10. However, as described above, the SPA provides that Prometheus, not LFREI,
is the buyer of the stock, and Emeritus is unaware that any of that stock has
been transferred to LFREI. LFREI and Prometheus also separately agree that
they will not act in concert or with others to acquire more than 49.9% of the
outstanding stock of ARV for a three-years period, and will not cause any
stock that they might acquire to be sold except under certain circumstances.
Id. Sections 4.2, 4.3 at 15-16. Again, the obligations are separable,
and Emeritus' action is not challenging any obligation of LFREI.
3. The RSPA.
The roles of the three signatories to the SPA are the same under the
RSPA. RSPA (OC, Ex. M), recitals. Under its terms, Prometheus lends ARV $60
million in exchange for the Notes. Id. at Sections 2.1, 2.2. There
is no obligation imposed on LFREI even to advance money to Prometheus in the
RSPA. Other than providing representations and warranties to ARV, LFREI has
no role whatsoever in the RSPA.
4. The RSA.
The only obligations imposed on LFREI under the RSA are found in
Sections 3.1, 4.2 and 4.3, which mirror the identical paragraphs in the SA.
RSA (OC, Ex. P) at Sections 3.1, 4.2, 4.3. As before, LFREI's
obligations are separable from those imposed on Prometheus.
C. The Relationship Between LFREI and Prometheus.
Throughout their papers, the ARV Defendants refer to LFREI and
Prometheus as "LFREI/Prometheus," as though the two were alter egos of each
other. E.g., Demurrer at 2:8-16. The record is clear: LFREI never acquired
one share of ARV stock or any of the Notes as a result of either of the
Prometheus Transactions.(3)
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(3) Of course, to the extent that LFREI and Prometheus are alter egos, that
fact would substantially undermine any argument that LFREI has been prejudiced
by not being formally named as a defendant in this action. Moreover,
Prometheus and LFREI were represented by the same law firm in the course of
negotiating the Prometheus Transactions. Finally, it is noteworthy that
Prometheus -- the party best situated to determine its relationship to LFREI
and whether LFREI will suffer any prejudice -- has not joined in the demurrer.
The position taken by the ARV Defendants is directly contradicted by
filings made by LFREI and Prometheus to the Securities & Exchange Commission
(the "SEC"). The Schedule 13D, amendment no. 3, filed by Prometheus and LFREI
with the SEC(4) discloses the following:
o Prometheus "has the sole power to vote or to direct the vote"
of all of the stock of ARV that it had acquired.
o Prometheus "has the sole right to receive or the power to
direct the receipt of any dividends from, or the proceeds of
sale of, the shares of Common Stock."
o On December 1, 1997, LFREI assigned all of its interest in
Prometheus to LF Strategic Realty Investors II L.P. ("LFSRI"),
of which LFREI is the general partner.
o The funds for the loan by Prometheus "are to be made available
to Prometheus through capital subscriptions from LFSRI's
limited partners and from bank financing."
Even LFREI and Prometheus recognize that their interests are separable.
- -------------
(4) Emeritus respectfully requests that the Court take judicial notice of
Prometheus' Schedule 13D, Amendment No. 3, filed with the SEC. A copy is
attached hereto as Exhibit B.
3. LFREI IS NOT A NECESSARY AND INDISPENSABLE PARTY BECAUSE LFREI'S
ABSENCE WILL NOT RESULT IN SUBSTANTIAL PREJUDICE TO LFREI, THE ARV
DEFENDANTS OR PROMETHEUS.
According to the ARV Defendants, LFREI's absence "violates a
well-settled rule that when a claim seeks to set aside a contract, all
parties to that contract are indispensable parties to the action and must
be joined." Demurrer at 5. This per se rule may be the law of some
jurisdictions, but it is not the law in California. Indeed, the Court of
Appeals recently rejected such a per se rule. Lungren v. Community
Redevelopment Agency, 56 Cal. App. 4th 868, 877-78, 65 Cal. Rptr. 786,
792 (1997). In Lungren, the court held that "[t]he effect of this as a firm
rule in determining whether to dismiss would be to eliminate the exercise
of discretion accorded to the trial court under Code of Civil Procedure
section 389." Id. The court rejected this result as one that would "render
a party indispensable" because of the "mere fact of participation in a
contract." Id.
Section 389(a) provides the guiding principles of whether a party is
necessary. The statute reads in relevant part as follows:
(a) A person . . . shall be joined as a party in the action if (1) in
his absence complete relief cannot be accorded among those already
parties or (2) he claims an interest relating to the subject of the
action and is so situated that the disposition of the action in his
absence may (i) as a practical matter impair or impede his
ability to protect that interest or (ii) leave any of the persons
already parties subject to a substantial risk of incurring
double, multiple, or otherwise inconsistent obligations by reason
of his claimed interest. If he has not been so joined, the court
shall order that he be made a party. [Emphasis added.]
"'This section, as adopted in 1971, limits compulsory joinder to those
situations where the absence of a person may result in substantial prejudice
to that person or to the parties already before the court.'" Lungren, 56 Cal.
App. at 874-75, 65 Cal. Rptr. at 790. The question of whether to proceed
without the absent party is a matter within the discretion and equity of the
Court. Id. at 875, 65 Cal. Rptr. at 791.
Specifically, section 389(a) requires LFREI's joinder "if (1) in [its]
absence complete relief cannot be accorded among those already parties." Cal.
Code of Civ. Proc. Section 389(a)(1). The ARV Defendants claim this
requirement is met because, unless LFREI is bound by the Court's judgment,
LFREI would be free to collaterally attack any such judgment. Demurrer at 5-
6. The ARV Defendants' argument is misplaced; they misunderstand section
389(a)(1)'s test. The issue is whether complete relief can be accorded among
those already parties -- not whether any conceivable future collateral attack
is possible.
In this case, and specifically in its motion for a preliminary
injunction, Emeritus requests that: (i) the sales of ARV stock to Prometheus
effected by the Prometheus Transactions be rescinded; (ii) ARV's redemption of
the convertible notes held by Prometheus be rescinded; (iii) Prometheus not be
permitted to vote its ARV shares at the upcoming annual meeting of
shareholders and that ARV not be permitted to count those votes, and (iv)
ARV's Poison Pill be enjoined. This relief simply does not affect LFREI.
LFREI has no stock to vote; and there have been no stock purchases by LFREI to
rescind. In short, the Court can afford complete relief among the parties
whether or not LFREI is joined as a defendant. As the Lungren court
explained, "[t]his is not a case, for example, in which a party not before the
court owns some unspecified interest in property which precludes a final
determination of the interests held in that property by those who do appear as
parties." Lungren, 56 Cal. App. 4th at 792, 65 Cal. Rptr. at 876-77.
The ARV Defendants' argument under Section 389(a)(2) is also incorrect.
As noted above, Section 389(a)(2) requires that a person be joined if
he claims an interest relating to the subject of the action and is
so situated that the disposition of the action in his absence may
(i) as a practical matter impair or impede his ability to protect
that interest or (ii) leave any of the persons already parties
subject to a substantial risk of incurring double, multiple, or
otherwise inconsistent obligations by reason of his claimed
interest.
In applying subparagraph (2)(i), the ARV Defendants claim that a
judgment rescinding the Prometheus Transactions in LFREI's absence could
subject LFREI to subsequent actions by ARV to enforce these transactions.
Again, the ARV Defendants' argument is deficient. First, the statute requires
that LFREI "claims an interest" in the case, which has not occurred here.
Second, the ARV Defendants' position completely ignores the principles of res
judicata. ARV would have had its day in court on the issue of whether the
stock and note sales in the Prometheus Transactions should be rescinded. If
defendants lose that issue in this case, ARV could not then bring suit against
LFREI to enforce the Prometheus Transactions. See Slater v. Blackwood, 15
Cal.3d 791, 795, 126 Cal. Rptr. 225, 226 (1995) ("A valid final judgment in
favor of a party serves as a complete bar to further litigation on the same
cause of action.").
Moreover, the ARV Defendants' argument, and the entire Demurrer, is
fundamentally flawed because it treats Prometheus as the alter ego of LFRE.
In fact, under the Prometheus Transactions, Prometheus and LFREI have
separable rights, obligations and benefits. The FAC does not seek to
disturb LFREI's interest, to the extent it has any, under the Prometheus
Transactions. Rather, the FAC seeks to enjoin and undo ARV's and
Prometheus' interests in the Prometheus Transactions.
For instance, under the RSA, one of the principal agreements
constituting the Second Prometheus Transaction, Prometheus and LFREI must vote
any ARV stock that they might separately own during the three-years standstill
period in favor of the present Board. See OC, Ex. P, Section 3.1. The FAC
requests that the Court enjoin Prometheus from voting the shares of ARV it
improperly obtained. FAC Paragraph 139. Contrary to the Demurrer, the FAC
is not concerned with any shares that LFREI obtained in the public market at
that stock's publicly traded value, but is concerned with the stock acquired
by Prometheus at a "sweetheart" price in a series of transactions that ARV is
attempting to impose forcibly on its shareholders without their approval.
Prometheus, not LFREI, is the purchaser of the ARV shares under the First
Prometheus Transaction and the purchaser of the Notes under the Second
Prometheus Transactions. OC, Exs. C at Section 2.1, Ex. M at Section 2.1.
Prometheus, not LFREI, is identified as the beneficial owner of the ARV stock
in ARV's preliminary proxy materials filed in August of last year. OC, Ex. R
at 22. Moreover, whatever limited interest LFREI may have had in the
Prometheus Transactions is now attenuated at best given its assignment of
interests in Prometheus to LFSRI and its concession in its SEC filings that
Prometheus has control over the voting of the ARV stock at issue in this case.
The cases relied on by the ARV Defendants in support of their argument
are distinguishable. Unlike this action, in the cases on which the ARV
Defendants rely, there was no other party to the litigation who could protect
the absent party's interest. This distinction is underscored in Citizens
Assn. v. County of Inyo, 172 Cal. App. 3d 151, 217 Cal. Rptr. 983 (Cal. Ct.
App. 1985).
In Citizens Assn., plaintiffs sued the County of Inyo and a real estate
developer, alleging that the County did not properly assess the environmental
impact of a real estate development project. The plaintiffs named the
developer who was the buyer in escrow of the property at issue, but did not
name the owner of the subject property. The court rejected the argument that
the owner of the real property was a necessary party under CCP Section
389(a), and held that "[a]lthough the owner of the subject property would have
been a proper real party in interest, such owner was not a necessary party
partly because his ability to protect his interest was not impaired or
impeded. Instead, that interest was ably argued by [the real estate
developer], as a real party in interest." Id. at 161-62, 217 Cal. Rptr. at
899. The court then distinguished Sierra Club, Inc. v. California Coastal
Com., 95 Cal. App. 3d 495, 157 Cal. Rptr. 190 (1979), a case relied upon by
the ARV Defendants. The court said that Sierra Club, Inc. was inapposite
because there the absent party's interest "was not represented by any party in
a similar position." Id.
Here, LFREI's interests (assuming that it has any) in the agreements is
adequately represented by the ARV Defendants and Prometheus. LFREI's
purported interest in this action presumably would be to defend the validity
of the Prometheus Transactions. This position is similar, if not identical,
to what the ARV Defendants and Prometheus will argue. Although the ARV
Defendants' and Prometheus' interests are separable from LFREI's, their
interests in the survival of the Prometheus Transactions are identical.
Moreover, Prometheus is represented in this action by the same law firm that
represented both Prometheus and LFREI in the negotiation of the Prometheus
Transactions.
Finally, the ARV Defendants claim that a disposition in Emeritus' favor
would subject Prometheus and LFREI to further suits to enforce the voting
obligations under the Prometheus Transactions. Demurrer at 6. This argument
is fanciful at best. First, if the Court rendered a judgment rescinding the
Prometheus Transactions, ARV could not then sue LFREI in a different action to
enforce these transactions under the basic principles of res judicata
described earlier. Second, the ARV Defendants expect the Court to believe
that LFREI might sue Prometheus, an investment wholly owned by a limited
partnership in which LFREI is a general partner, to enforce the Prometheus
Transactions. Clearly, the ARV Defendants are attempting to create issues,
facts and rules of law where they do not exist in an effort to divert the
Court's attention from the true nature of this case - the illegal rigging of
the vote to be taken at ARV's annual meeting of shareholders and the improper
seizure of control over ARV by the ARV Defendants and Prometheus. The
California Supreme Court has firmly cautioned against a liberal use of section
389 and observed that "we should...be careful to avoid converting a
discretionary power or a rule of fairness in procedure into an arbitrary and
burdensome requirement which may thwart rather than accomplish justice."
Citizens Assn., 172 Cal. App. 3d at 162, 217 Cal. Rptr. at 899 (citing Bank of
California v. Superior Ct., 16 Cal.2d 516, 521 (Cal. 1940)).
4. EMERITUS HAS ALLEGED THROUGHOUT THE AMENDED COMPLAINT THAT IT IS A
SHAREHOLDER OF ARV.
The ARV Defendants alternative ground for dismissal of the FAC is
equally meritless. First, the ARV Defendants claim that Emeritus failed to
allege that it is a shareholder of ARV. This is simply not true. Emeritus
alleges on at least four instances in the text of the FAC that it is a
shareholder of ARV. Amended Complaint at 6:2-3 ("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."), at 13:25-26 ("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..."), at 20:20-22
("Accordingly, the adoption of the 123% redemption provision by the ARV
Defendants constituted a breach of fiduciary duty to Emeritus and other ARV
shareholders."), at 22:2-3("The combined effect of these changes will be to
make it impossible for Emeritus or any other shareholder to elect its own
director nominee...").
Moreover, in four separate exhibits to the Original Complaint, Emeritus
clearly states that it is a shareholder of ARV. See OC, Exs. G, J, S, R.
Indeed, one such exhibit contains ARV's preliminary proxy materials filed with
the SEC last August, which clearly identify Emeritus as owning 1,077,200
shares of ARV or 9.3% of its outstanding stock at the time. OC, Ex. R at 22.
California courts have been clear that ultimately the important thing "is that
the complaint as a whole contain sufficient facts to apprise the defendant of
the basis upon which the plaintiff is seeking relief." Perkins v. Superior
Ct., 117 Cal. App. 3d 1, 6, 172 Cal. Rptr. 427, 430 (1981)(emphasis added).
Emeritus has easily satisfied this standard. Moreover, it would be
disingenuous for the ARV Defendants to contend that they are not on notice of
the fact that Emeritus is a shareholder of ARV.
Second, the ARV Defendants argue that dismissal is proper because
Emeritus, as a potential competitor and purchaser of ARV, cannot represent ARV
shareholders in a derivative suit. Demurrer at 9. This is not a derivative
suit, however. The FAC clearly alleges that the case is brought individually
and directly, and not derivatively. FAC, Paragraph 27 at 8:15.
Finally, without any legal, factual or logical basis, the ARV Defendants
argue in four sentences that Emeritus' entire FAC ought to be dismissed
because it is their subjective belief that Emeritus is not good enough to
deserve fiduciary duties. Demurrer at 10. Again, wishful thinking by the ARV
Defendants is not the law in California. "Emeritus' primary motivation"(5)
is irrelevant at the demurrer stage. A demurrer tests the sufficiency of the
pleadings alone. 5 B.E. Witkin, California Procedure - Pleading, Section
900, at 358 (4th ed. 1997). The well pleaded allegations of Emeritus' First
Amended Complaint must be accepted as true for purposes of review. Angie M.
v. Superior Ct., 7 Cal. App. 4th 1217, 1223, 44 Cal. Rptr. 2d 197, 201 (Cal.
Ct. App. 1995).
- -----------
(5) See Demurrer at 10.
Moreover, the ARV Defendants ignore another fundamental rule in
California. That is, ARV's Board owes a fiduciary duty to all of its
shareholders. California Corporations Code Section 309(a). ARV's Board
cannot pick-and-choose to which shareholders it will owe a fiduciary duty.
See 2 Harold Marsh, Jr. et al., Marsh's California Corporation Law, Section
11.7, at 828 (3rd ed. 1997 Supp.) ("Directors owe a duty of highest good
faith to the corporation and its shareholders."); see also, Jones v. H.F.
Ahmanson & Co., 1 Cal.3d 93, 107, 81 Cal. Rptr. 592, 599 (1969) (majority
shareholders "power to control the corporation must benefit all
shareholders"). This Court should also dismiss this argument as meritless.
5. CONCLUSION
For the foregoing reasons, Emeritus respectfully requests that the ARV
Defendants' Demurrer be overruled in all respects.
DATED: January 16, 1998.
GIBSON, DUNN & CRUTCHER LLP
WAYNE W. SMITH
JOSEPH P. BUSCH, III
RAFFAELE G. FAZIO
DAVIS POLK & WARDWELL
MICHAEL P. CARROLL
JAMES H.R. WINDELS
By: /s/ Joseph P. Busch, III
-------------------------
Joseph P. Busch, III
Attorneys for Plaintiff
EMERITUS CORPORATION
