<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 12, 1998
Commission file number 0-26980
ARV ASSISTED LIVING, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1
COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
<PAGE> 2
ITEM 5. OTHER EVENTS
On May 12, 1998, ARV Assisted Living, Inc. (the "Company" or "ARV") filed a
complaint in the Superior Court for the State of California, County of Orange,
seeking to enjoin Kapson Senior Quarters Corp. ("Kapson"), a controlled
affiliate of Lazard Freres Real Estate Investors LLC ("LFREI") from acquiring
Atria Communities ("Atria"). Atria is also named as a defendant in the suit, as
are three LFREI representatives on the Company's Board of Directors, Messrs.
Kenneth M. Jacobs, Robert P. Freeman and Murry N. Gunty. The Company alleges
that LFREI will be violating both its contractual and fiduciary duties to the
Company if it allows Kapson to proceed with the acquisition without first
offering ARV the right to be the acquiring party and then, if ARV declines,
obtaining ARV's permission to consummate the acquisition.
The lawsuit also seeks to enforce rights the Company obtained as part of the
strategic alliance with LFREI with respect to existing Kapson facilities. When
the Company consented to LFREI's acquisition of Kapson, the two companies signed
a letter agreement that was designed to make available to the Company's
stockholders some of the potential benefits of the Kapson acquisition. The
Company alleges that under the letter agreement, LFREI is obligated to negotiate
in good faith with the Company to identify commercially reasonable terms on
which the Company will lease or manage the existing Kapson facilities. The
Company further alleges that, since acquiring Kapson, LFREI has failed to
negotiate in good faith. In the complaint, the Company asserts that LFREI
instead proposed lease terms that are commercially unreasonable and refused to
accept lease terms proposed by the Company. ARV also contends in the lawsuit
that LFREI refused to accept the Company's proposal to manage the existing
Kapson properties at below market rates and that the only proposals LFREI has
made to the Company are proposals that would be dilutive to the Company's
earnings and are thus not in the best interests of the Company's stockholders.
In its lawsuit, the Company seeks both injunctive relief and damages for LFREI's
breach of its contractual obligations and fiduciary duties.
ITEM 7. EXHIBITS.
(c) Exhibits
Number Exhibit
------ -------
99.1 Complaint in ARV Assisted Living, Inc. v. Lazard Freres Real Estate
Investors LLC, et al., case no. 787788.
99.2 Press Release issued by the Company dated May 13, 1998.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARV Assisted Living, Inc.
By: /s/ Sheila M. Muldoon
------------------------------------------
Sheila M. Muldoon
Senior Vice President and General Counsel
(Duly authorized officer)
Date: May 22, 1998
<PAGE> 1
Exhibit 99.1
IRELL & MANELLA LLP
Kenneth R. Heitz (53734)
Alexander F. Wiles (73596)
Elizabeth A. Camacho (171997)
Seth M. Friedman (186239)
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067-4276
Telephone: (310) 277-1010
Attorneys for Plaintiff
ARV Assisted Living, Inc.
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
ARV ASSISTED LIVING, INC., a Delaware ) Case No.
corporation, )
)
Plaintiff, ) COMPLAINT FOR SPECIFIC
) PERFORMANCE, INJUNCTIVE
vs. ) RELIEF AND DAMAGES
)
LAZARD FRERES REAL ESTATE INVESTORS LLC, a )
New York limited liability company; )
PROMETHEUS ASSISTED LIVING LLC, a Delaware ) This case is related to OCSC
limited liability company; ROBERT P. FREEMAN, ) Case No. 787788 assigned to
an individual; KENNETH M. JACOBS, an ) Hon. John C. Woolley [Local.
individual; and MURRY N. GUNTY, an ) Rule 436]
individual; ATRIA COMMUNITIES, INC., a )
Delaware corporation; KAPSON SENIOR QUARTERS )
CORP. a Delaware corporation; DOES 1 through )
20, inclusive, )
)
Defendants. )
)
)
)
)
Plaintiff ARV Assisted Living, Inc. ("ARV") alleges as follows:
<PAGE> 2
NATURE OF THE CASE
1. ARV brings this action to prevent and remedy the repudiation of
contractual and fiduciary obligations owed to ARV by its purported investment
partner, Lazard Freres Real Estate Investors LLC ("LFREI") and the three members
of ARV's own Board of Directors nominated by LFREI. Despite having promised ARV
a partnership for mutual gain and having assumed positions as a fiduciary for
all ARV shareholders, LFREI has wrongfully used ARV as its springboard into the
increasingly profitable and growing assisted living industry, betraying its
partner and disregarding its commitments and fiduciary obligations as soon as it
achieved its desired unilateral advantage.
2. In the spring of 1997, ARV, a public company seeking to increase
value for its shareholders, selected LFREI, over several competing investment
opportunities, as a financial partner to pursue a plan for mutual benefit
through the growth of ARV. As the parties conceived the relationship:
"[ARV and LFREI] believe that the combination in a strategic
alliance of [ARV's] leadership, expertise and experience in
development, management and operation of assisted living
communities and the proven investment and capital markets
expertise and access to capital of [LFREI] and its affiliates
will significantly enhance [ARV's] ability to pursue its growth
and operating strategies."
3. Under this strategic alliance, ARV allowed LFREI to acquire slightly
less than 40% of ARV's stock in exchange for an investment of approximately $87
million and the opportunity to acquire another nine percent through open market
purchases of ARV stock. Because the parties intended that ARV would be LFREI's
<PAGE> 3
sole vehicle for investment in the assisted living industry, LFREI agreed that
neither it nor its controlled affiliates would own any equity interest in any
other assisted living company in the United States without the consent of 75% of
the members of ARV's board of directors who had not been nominated by LFREI. The
parties also agreed to give LFREI the right to designate several of its
executives to serve as directors of ARV.
4. Not long after the parties solidified their alliance in a series of
written contracts, LFREI sought to acquire Kapson Senior Quarters Corp.
("Kapson"), a competitor of ARV. Promising to use Kapson to provide ARV with
additional resources for development and acquisition of assisted living
facilities, LFREI requested a waiver of its agreement not to invest in other
assisted living companies to permit it to acquire Kapson. Relying on LFREI's
representations that the Kapson investment would be carried out in the spirit of
the ARV/LFREI partnership, ARV consented, subject to certain terms and
conditions, to a one-time waiver to allow LFREI to acquire Kapson. ARV's waiver
was specifically limited to the acquisition of Kapson. ARV did not waive its
right to prohibit LFREI from acquiring or investing in other assisted living
companies, whether directly, through Kapson, or otherwise.
5. As consideration for this one-time waiver, ARV obtained the right of
consent over all of Kapson's new developments or acquisitions of assisted living
facilities, excepting only those few projects Kapson had planned independent of
its affiliation with LFREI. ARV also obtained a "right of first offer" that
allows ARV, if it chooses, to purchase, lease or manage for its own account any
new Kapson developments or acquisitions. As further consideration for the
one-time waiver, LFREI agreed to negotiate with ARV in good faith for leasing or
management
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agreements, on commercially reasonable and customary terms, for all of Kapson's
facilities, both existing and planned.
6. In attempting to induce ARV to grant the Kapson waiver, LFREI gave
repeated assurances that ARV would operate the Kapson facilities, while Kapson
itself would function as a "black box" to which ARV could shift the start-up and
development costs associated with new facilities. These assurances gave ARV the
confidence that LFREI's purchase of Kapson would further the strategic alliance
with LFREI to which ARV and LFREI had agreed.
7. LFREI, apparently, had other plans. Having secured its position with
ARV, and having obtained the freedom to acquire Kapson, LFREI, and the three
directors it nominated to ARV's Board, have proceeded to eviscerate their
partnership with ARV. In blatant disregard of their contractual and fiduciary
duties to ARV, LFREI and its director nominees are attempting to use Kapson not
as a tool to strengthen the LFREI/ARV alliance, but as a means to escape their
obligations to ARV and maximize their own benefit to the exclusion of ARV's
other shareholders. With its feet firmly planted in the assisted living industry
thanks to its investment in ARV, LFREI now seeks to use the resources of the
promised partnership to abandon ARV's other shareholders.
8. First, LFREI and its three director nominees have actively sought to
develop opportunities for Kapson, not ARV, to acquire competing assisted living
companies. Shortly before this lawsuit was filed, LFREI, through Kapson, entered
into a definitive merger agreement to acquire one of ARV's competitors, Atria
Communities, Inc. ("Atria"), in a transaction valued at $750,000,000. In utter
disregard for both their fiduciary duties to ARV, and ARV's right of first offer
under its agreements with LFREI, LFREI, and the directors it nominated to ARV's
board, hid the Atria deal from ARV, thus denying ARV any opportunity to consider
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whether it, rather than Kapson, should be the acquiring party. Moreover, LFREI
has committed to the $750,000,000 Atria acquisition without requesting, much
less obtaining, a waiver of ARV's right to prohibit this transaction. LFREI,
through its Principal and Chief Investment Officer, defendant Robert Freeman,
who also serves as a director of ARV, has even admitted its motivations in
pursuing acquisitions through Kapson; when asked by ARV's other directors why
LFREI sought to use Kapson, rather than ARV, to acquire Atria, Mr. Freeman
replied that, while it owns just under 50% of ARV, LFREI has a "100% alignment
of interest" with Kapson.
9. Second, LFREI seeks to deny ARV any benefit from the Kapson
investment by refusing to honor its specific agreement to negotiate with ARV in
good faith for leasing or management arrangements on commercially reasonable
terms. By proposing lease terms that are so commercially unreasonable and
detrimental to ARV's shareholders that ARV could never accept them, and by
rejecting or simply ignoring ARV's proposals for commercially reasonable lease
and management arrangements, LFREI is attempting to create an artificial impasse
in the Kapson negotiations with ARV.
10. This artificial impasse holds great advantage for LFREI. Not only
does it allow LFREI to retain the fruits of the Kapson investment for its
exclusive benefit, but it accomplishes the death of ARV's "right of first offer"
and the non-compete covenant that allows ARV to prohibit LFREI from acquiring
other assisted living companies. The agreements signed by the parties as part of
the ARV/LFREI alliance provide that, if ARV and LFREI do not enter into
agreements for lease or management arrangements of the Kapson facilities within
ninety days of March 30, 1998 - the date the Kapson investment closed - the
Amended Kapson Agreement and non-compete covenant terminate and LFREI will be
free to invest in other assisted living companies either by itself or through
Kapson. If LFREI is able to
<PAGE> 6
stall negotiations until the ninety days run out, it will free itself to close
the Atria transaction, and acquire other competitors of ARV, unburdened by
further obligation to share its gains from these acquisitions with ARV.
11. Unless enjoined, LFREI, and the three members of ARV's own board
whom LFREI nominated, will continue with their plan to violate their contractual
and fiduciary obligations to ARV. These defendants will thus deny ARV the
loyalty of its directors and the benefits it negotiated when it agreed, first,
to allow LFREI to acquire almost 50% of ARV's stock, and, later, to allow LFREI
to acquire one of ARV's significant competitors in the assisted living industry.
This plan, if allowed to proceed to fruition, will cause ARV to suffer
substantial, immediate and irreparable harm.
PARTIES
12. ARV is a fully integrated provider of assisted living
accommodations and services that operates, acquires and develops assisted living
facilities. ARV is a Delaware corporation with its principal executive offices
located in Costa Mesa, California.
13. Defendant LFREI is an affiliate of Lazard Freres & Co. LLC
("Lazard"), a large New York-based investment bank. LFREI makes investments on
behalf of the Lazard group in real estate assets and businesses. LFREI is a New
York limited liability company with its principal executive offices located in
New York, New York. ARV is informed and believes and thereon alleges that Lazard
is the managing member of LFREI, and LFREI in turn is the managing member of
defendant Prometheus Assisted Living LLC.
14. Defendant Prometheus Assisted Living LLC ("Prometheus") is an
investment vehicle created by LFREI to hold LFREI's ownership interest in ARV.
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Prometheus is a Delaware limited liability company with its principal executive
offices located in New York, New York.
15. Defendants Robert P. Freeman ("Freeman"), Kenneth M. Jacobs
("Jacobs") and Murry N. Gunty ("Gunty") are each directors of ARV. In addition,
Freeman, Jacobs and Gunty each hold positions with Lazard, LFREI and their
affiliates: Freeman is a Partner and Managing Director of Lazard and a Principal
and Chief Investment Officer of LFREI (Freeman also signed the agreements
between LFREI and ARV as President of LFREI); Gunty is a Principal of LFREI;
and, Jacobs is a Partner and Managing Director in the Banking Group of Lazard.
Defendants Freeman, Jacobs and Gunty were nominated by LFREI to serve on the ARV
Board of Directors. They may be referred to collectively herein as the "LFREI
Directors." ARV is informed and believes, and on that basis alleges, that at all
relevant times each of the LFREI Directors were acting both in their individual
capacity and as the agent of LFREI, within the course and scope of such agency
and with the consent and ratification of LFREI.
16. Defendant Kapson is a Delaware corporation doing business in the
state of California. LFREI recently acquired through one of its investment
vehicles, Prometheus Senior Quarters, 100 percent of the outstanding stock of
Kapson.
17. Defendant Atria is a Delaware corporation doing business in the
state of California. It is sued solely because it is arguably a necessary party
to any action seeking to enjoin consummation of agreements to which it is a
party. ARV has been informed by LFREI's attorneys that Atria was made aware,
before signing the relevant agreements, of the risk that ARV might seek such
relief.
18. ARV is currently unaware of the true names and capacities, whether
individual, corporate, associate, or otherwise, of Does 1 through 20 and
therefore sues these defendants by fictitious names. Each Doe defendant in some
way
<PAGE> 8
participated in, contributed to, or was responsible for the matters alleged
in this Complaint. When ARV has learned the true name and capacity of a Doe
defendant, ARV will seek leave to amend this Complaint to allege that
defendant's true name and capacity, together with such other allegations as may
be appropriate.
FACTUAL BACKGROUND
THE ARV/LFREI PARTNERSHIP:
THE MARRIAGE OF MANAGEMENT AND CAPITAL
19. ARV is a publicly held corporation engaged in the provision of long
term service enhanced housing for the elderly known as "assisted living." The
assisted living industry is a relatively new industry that provides housing,
social activities, meals and various other services to seniors who no longer
choose to live on their own but who do not need the constant attention of a
skilled nurse. Due to the demographics of the population in the United States
and the increased life span of our citizens, the assisted living industry is
expected to grow dramatically in the coming years. ARV is one of the larger
assisted living companies in the United States. It engages in all facets of the
assisted living business, acquiring, developing and operating assisted living
facilities. Because of the anticipated growth of the assisted living industry,
participants in the capital markets, including large investment banks like
Lazard, have been searching for good opportunities to invest in established
assisted living companies.
20. ARV has long recognized that in order to survive and prosper as a
competitor it must develop and implement a long term strategic plan designed to
increase significantly the number of assisted living facilities it owns,
operates and/or manages. However, while ARV possesses the management and
operational capabilities to pursue an aggressive growth strategy, it needs a
financial partner to pursue its growth plans.
<PAGE> 9
21. Commencing in early 1997, ARV began a search for a financial
partner who would be willing to fund ARV's growth by channeling its investments
in the assisted living industry into ARV. ARV made inquiries of potential
funding sources and identified a number of opportunities with several potential
investors.
22. In the spring of 1997, ARV was introduced to LFREI, the real estate
investment arm of Lazard which was then looking to make its first investment in
the assisted living field. Defendants Freeman and Gunty, acting on behalf of
LFREI, informed ARV that LFREI wanted to make a strategic investment in a
growth-oriented company in the assisted living field. Freeman and Gunty touted
LFREI as having an enviable track record of achieving dramatic growth for the
companies in which it had invested by helping them access the capital necessary
for growth. Freeman and Gunty further stated that LFREI had no interest in
operating an assisted living company; rather, it wanted to leverage its capital
and ability to raise capital with good management in the assisted living field.
23. Based on the approach outlined by defendants Freeman and Gunty, ARV
concluded that the goals of LFREI fit perfectly with ARV's needs. After a few
months of negotiations, ARV and LFREI formed a strategic alliance to enhance
ARV's ability to pursue its plan for growth by combining ARV's management
expertise with LFREI's access to capital. Under the terms of the deal,
Prometheus, an LFREI affiliate created for this transaction, would purchase up
to 49.9 percent of ARV's outstanding common stock for $135.1 million.
24. Confirming their role as the financing arm of the ARV/LFREI
partnership, LFREI and Prometheus agreed that, for a three year period, they
would neither attempt to acquire control of ARV (the "Standstill Provision"),
nor pursue further investments in the assisted living industry without ARV's
consent (the "Non-Compete Covenant"). The Non-Compete Covenant provided as
follows:
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"Restrictions on Investments. From the date of this Agreement until
the occurrence of a Termination Event, [LFREI], [Prometheus] and
their Controlled Affiliates shall not, directly or indirectly, own
any equity interest (other than a de minimis amount) in any public
or private company the principal business of which is the
ownership, management, operation and development of assisted living
facilities in the United States, unless 75% of the Directors of the
Company (other than the Investor Nominees) have consented to such
ownership."
25. The agreements reached between ARV and LFREI/Prometheus are
reflected in the Stock Purchase Agreement, the Stockholders Agreement and other
related documents executed on or about July 14, 1997. The nature of the
relationship between ARV and LFREI/Prometheus was clearly spelled out in a
recital to the Stock Purchase Agreement: "[The parties] believe that the
combination in a strategic alliance of [ARV's] leadership, expertise and
experience in development, management and operation of assisted living
communities and the proven investment and capital markets expertise and access
to capital of [LFREI/Prometheus] and its affiliates will significantly enhance
[ARV's] ability to pursue its growth and operating strategies."
26. On July 23, 1997, LFREI/Prometheus purchased a 16.6% stake in ARV
for an aggregate price of $26,894.168. LFREI/Prometheus was to purchase the
<PAGE> 11
remaining 33% interest in ARV in two phases following approval of the
transaction by ARV's shareholders.
LFREI PROPOSES TO STRENGTHEN ARV IN A
STRATEGIC ALLIANCE WITH KAPSON SENIOR QUARTERS
27. In early September of 1997, LFREI informed ARV that an opportunity
had arisen to acquire Kapson Senior Quarters Corp., the largest public operator
of assisted living facilities in the northeast United States and a competitor of
ARV. Defendants Freeman and Gunty explained to ARV that LFREI, rather than ARV,
should be the acquiring party because, they stated, if ARV purchased Kapson
directly, ARV would incur large amounts of goodwill expense which would penalize
future earnings and would likely result in a lower price/earnings multiple and
reduce the value of ARV's shares. LFREI assured ARV that an acquisition by LFREI
would achieve a better result for ARV, Kapson and LFREI. Recognizing that the
Non-Compete Covenant precluded this proposed investment, LFREI requested that
ARV provide LFREI a waiver of the Non-Compete Covenant to allow LFREI to acquire
Kapson.
28. LFREI assured ARV that its acquisition of Kapson was designed to
enhance the LFREI/ARV strategic alliance. LFREI represented that it intended to
use ARV to operate the Kapson facilities. It further represented that Kapson
would become a development and financing company, functioning as a "black box"
to which ARV could shift the start-up and development costs associated with new
facilities, a practice that had become very common in the assisted living
industry. LFREI urged ARV to approve the transaction, arguing that ARV would
make money operating the Kapson facilities, would reduce its own capital needs
for future developments and would be able to operate or acquire Kapson's new
developments once they became stabilized without incurring losses on its income
statement during
<PAGE> 12
the development period. ARV in effect would become the "operating engine" which
produced greater operating earnings which, in turn, would be rewarded with a
higher price/earnings multiple and significantly increase the value of ARV's
shares.
29. LFREI's promised plans for Kapson appeared consistent with the
underlying strategy of the ARV/LFREI partnership -- to provide ARV with
additional resources for the development, acquisition and operation of assisted
living facilities. ARV, therefore, informed LFREI that, under certain terms and
conditions, it would consider a "one-time waiver" of the Non-Compete Covenant to
allow LFREI to acquire Kapson (the "Kapson Investment"). ARV made clear,
however, that any waiver would apply only to Kapson itself; ARV would not allow
LFREI to circumvent the Non-Compete Covenant by using Kapson to acquire
interests in other assisted living companies.
30. Accordingly, the parties negotiated and signed a letter agreement
on September 30, 1997 (the "Kapson Agreement"), providing LFREI with a one-time
waiver of the Non-Compete Covenant to acquire Kapson. In exchange, LFREI agreed
that ARV would be given certain rights with respect to all existing and future
Kapson properties. LFREI agreed that ARV would have the right to consent to all
future developments or acquisitions of new facilities by Kapson. LFREI also
agreed that ARV would have a "right of first offer" to look at all developments
and acquisitions proposed by Kapson to see if ARV wanted to undertake them for
its own account. Finally, LFREI agreed that it would undertake the obligation
"in good faith to negotiate with ARV for the leasing or management agreements,
on commercially reasonable and customary terms of all existing and planned
facilities of Kapson...." The September 30 Kapson Agreement did not modify the
Non-Compete Covenant other than by granting the one-time waiver of that covenant
necessary to allow LFREI to acquire Kapson.
<PAGE> 13
31. During the negotiation of the Kapson Agreement, LFREI reported that
Kapson's Board of Directors was concerned that the broad consent rights being
proposed by ARV would inhibit the ability of Kapson's Board to fulfill its
obligations to its then existing public shareholders by limiting Kapson's
ability to commit, in the period before the LFREI acquisition closed, to new
projects. Specifically, LFREI stated that the Kapson Board was concerned that
Kapson's then existing shareholders could be harmed by the consent rights ARV
sought in the event that the LFREI acquisition of Kapson did not ultimately
close. Accordingly, LFREI requested that a provision be added to clarify that
ARV would not have the right to withhold consent to Kapson's development or
acquisition of new facilities to the extent already agreed upon by Kapson before
LFREI completed its investment in that company. In seeking this clarification of
ARV's consent rights, LFREI assured ARV that Kapson's acquisitions only involved
"one-off" individual facility acquisitions , that Kapson's development and
acquisition plans were as disclosed in Kapson's filings with the Securities and
Exchange Commission, and that LFREI was only seeking to assure Kapson's Board
that it could pursue those plans.
32. In order to allow Kapson a reasonable opportunity to proceed with
those existing plans, ARV agreed that it would have no consent rights for those
transactions that Kapson executed before the close of the LFREI acquisition (the
"Kapson Pipeline"). ARV never agreed that this limitation on its consent rights
would encompass investments by Kapson that were planned, developed or funded by
LFREI. Similarly, ARV never agreed that LFREI, acting through Kapson, could make
acquisitions of entire assisted living companies. Any such acquisitions remained
subject to the provisions of the Non-Compete Covenant.
<PAGE> 14
ARV NEGOTIATED A REDUCTION OF LFREI'S INVESTMENT IN ARV
IN RELIANCE ON THE KAPSON ALLIANCE
33. Relying on LFREI's promise that Kapson would provide value to ARV's
shareholders by decreasing ARV's capital costs and on LFREI's commitment to
their strategic alliance, ARV determined that it would not have a short term
need for as large an amount of capital contemplated under its agreement with
LFREI/Prometheus. In October, 1997, ARV and LFREI began discussing a
modification of their original transaction to reduce the amount of LFREI's short
term capital investment.
34. On October 29, 1997, the parties amended their previous agreements.
In lieu of purchasing additional shares of ARV as originally contemplated,
LFREI/Prometheus agreed to purchase $60,000,000 in debt securities that could be
converted, at the option of either party, to ARV stock. ARV, LFREI and
Prometheus restated their agreement, as amended, in documents executed on or
about October 30, 1997. These documents, the Amended and Restated Stock and Note
Purchase Agreement (the "Amended Purchase Agreement"), Amended and Restated
Stockholders Agreement (the "Amended Stockholders Agreement") and the amended
letter agreement relating to the Kapson Alliance (the "Amended Kapson
Agreement") are attached hereto as Exhibits A through C, respectively and are
incorporated herein by this reference.
35. While the parties changed certain terms of their agreement,
including the elimination of certain super-majority provisions in ARV's bylaws,
the underlying premise of the ARV/LFREI partnership remained the same. The
Amended Purchase Agreement contained the identical recital found in the original
Stock Purchase Agreement:
<PAGE> 15
"[The parties] believe that the combination in a strategic alliance
of [ARV's] leadership, expertise and experience in development,
management and operation of assisted living communities and the
proven investment and capital markets expertise and access to
capital of [LFREI/Prometheus] and its affiliates will significantly
enhance [ARV's] ability to pursue its growth and operating
strategies."
36. Because the parties remained committed to building ARV by combining
ARV's experience in the assisted living industry and LFREI's access to capital,
the Standstill Provision and Non-Compete Covenant each remained a part of the
amended agreement. The parties even extended the anticipated termination date of
these provisions to October 29, 2000.
37. In amending their agreements, the parties also agreed to place time
restrictions on certain provisions. First, the Amended Kapson Agreement provides
that once LFREI funded the $60 million convertible note, the contractual
provision requiring Kapson to obtain ARV's permission before acquiring or
developing new facilities would terminate. Second, the Amended Kapson Agreement
states that, if ARV and LFREI have not entered into mutually agreeable
arrangements upon which ARV would lease or manage the existing or planned Kapson
facilities (including those in the Kapson "Pipeline") within three months of the
close of LFREI's acquisition of Kapson, the Amended Kapson Agreement would
terminate. Further, the parties agreed that upon the termination of the Amended
Kapson Agreement, the Non-Compete Covenant of the Amended Stockholders Agreement
would terminate as well. Thus, on October 29, 1997, ARV and LFREI restated the
Non-Compete Covenant as follows:
<PAGE> 16
"Section 5.1. Restrictions on Investments. Except as contemplated
by the [Amended] Kapson Agreement, from the date of this Agreement
until the occurrence of a Termination Event or an Early Standstill
Termination Event, [LFREI], [Prometheus], . . ., and their
Controlled Affiliates shall not, directly or indirectly, own any
equity interest (other than a de minimis amount) in any public or
private company the principal business of which is the ownership,
management, operation and development of assisted living facilities
in the United States, unless 75% of the Directors of the Company
(other than the Investor Nominees) have consented to such
ownership. Upon the termination of the [Amended] Kapson Agreement
or any provisions thereof, this Section 5.1 shall terminate and be
of no further effect."
As modified, Paragraph 5.1 would remain in place unless and until the
Amended Kapson Agreement terminated. So long as Paragraph 5.1 remained in place,
LFREI would not be free to invest in other assisted living companies, either by
itself or through Kapson.
38. Despite these changes to its agreements with ARV, LFREI reiterated
in the Amended Kapson Agreement its commitment to providing value to ARV's
shareholders from the inclusion of Kapson in the strategic alliance between ARV
and LFREI. The final sentence of that agreement thus reads:
"LFREI believes strongly that a strong alignment between LFREI,
Kapson and ARV and the synergies that could be created by a
strategic alliance between these two industry players, will
significantly benefit all shareholders of ARV and Kapson, including
LFREI as their largest shareholder."
<PAGE> 17
LFREI DEFENDANTS ASSUME AND SIMULTANEOUSLY VIOLATE
FIDUCIARY DUTIES TO ARV SHAREHOLDERS
39. Concurrently with the renegotiations of the agreements between
LFREI and ARV, LFREI acquired the right immediately, and without the approval of
ARV's other shareholders, to name three out of nine members of ARV's Board of
Directors. As of December 5, 1997, in accordance with the Amended Stockholders
Agreement, ARV's then-existing Board authorized an increase in the size of the
Board to nine members and filled the two newly created seats and one existing
vacancy by appointing the nominees of LFREI/Prometheus - defendants Freeman,
Jacobs and Gunty. Defendants Freeman, Jacobs and Gunty thus began to serve on
the Board of ARV at the behest of and as the agents of LFREI. Each of them also
has an ownership or other personal financial interest in LFREI and shares in its
profits.
40. Having solidified its position at ARV and also its ability to
pursue Kapson, LFREI promptly began a campaign to expropriate for itself, rather
than for all of the shareholders of ARV, opportunities to grow and profit from
the assisted living business. LFREI abandoned the very partnership concept it
had used to induce ARV, first, to allow LFREI to invest in ARV and, later, to
grant the Kapson waiver. Instead, LFREI and defendants Freeman, Gunty and Jacobs
embarked upon a campaign to deprive ARV of its ability to profit from the Kapson
alliance and, by causing a stalemate in the Kapson negotiations, to free LFREI
completely from both the "right of first offer" it had promised to ARV and the
Non-Compete Covenant. This campaign took two forms: (1) LFREI proposed to ARV
rates for leasing the Kapson facilities that LFREI knew ARV could not accept
because those rates were far higher than commercially reasonable lease rates and
ARV would lose at least two million dollars per year if it agreed to them; and,
(2) LFREI sought out
<PAGE> 18
acquisitions of other assisted living companies for LFREI or its soon to be
wholly owned subsidiary, Kapson, hid those potential transactions from ARV and
timed the closing of these transactions to coincide with LFREI's expected
expiration date for the "right of first offer" and Non-Compete Covenant.
LFREI AND THE LFREI DIRECTORS PURSUE DEALS WITH ARV'S
COMPETITORS BEHIND ARV'S BACK
41. On information and belief, LFREI and the LFREI Directors sometime
in late 1997 or early 1998 began negotiations with at least two major assisted
living companies Atria Communities, Inc. ("Atria") and Adult Care Management
Corp. ("ACMC"). LFREI and the LFREI Directors knew that Atria and ACMC were
exactly the type of assisted living company acquisitions that would be of
interest to ARV. Indeed, ARV had previously begun its own due diligence
regarding an acquisition of ACMC, but ceased its evaluation efforts in reliance
on the representations of defendant Gunty that LFREI would undertake the
diligence efforts for the benefit of ARV.
42. LFREI and the LFREI Directors also knew that, because of the "right
of first offer" and the Non-Compete Covenant, it could not close these
acquisitions without ARV's permission. It therefore conceived the idea that, if
it created a false impasse in the Kapson negotiations, it could cause the
termination of the Amended Kapson Agreement and the Non-Compete Covenant. LFREI
thus hid its ongoing negotiations from ARV in an effort to make it unlikely that
ARV could ever pursue those acquisitions for its own account. And, LFREI
simultaneously attempted to create a false record that it was negotiating in
good faith to allow ARV to lease the existing Kapson facilities in an attempt to
justify terminating the "right of first offer" and the Non-Compete Covenant on
the 90th day following completion of its acquisition of Kapson.
<PAGE> 19
43. In addition, and in further blatant disregard of its promises to
ARV, LFREI and the LFREI Directors sought unilaterally to expand the limited
scope of ARV's one-time waiver of the Non-Compete Covenant by soliciting
Kapson's management to certify that Kapson, rather than LFREI, had been pursuing
these acquisitions. LFREI closed the Kapson transaction on March 30, 1998. On
that same day, LFREI delivered a letter to Kapson's Chief Executive Officer
asking him to confirm that, despite its representations to its shareholders in
filings with the Securities and Exchange Commission that it had only $44 million
available for growth, Kapson was considering as part of its "Pipeline" the
acquisition of Atria and ACMC. The letter also asked Kapson's CEO to confirm
that the Kapson "Pipeline" consisted of well over 25,000 units of assisted
living properties and companies in the United States. Indeed, the list was so
expansive that ARV calculates that it would cost almost $3 billion to acquire
all of the properties on the list.
44. LFREI's purpose was clear. By improperly loading Kapson's purported
pipeline with facilities that Kapson never realistically considered acquiring
before its affiliation with LFREI, and with acquisitions of entire companies
(never encompassed at all in the "Pipeline" exception to ARV's consent rights),
LFREI and the LFREI Directors sought to create a justification for LFREI to make
assisted living industry acquisitions without benefiting ARV's other
shareholders.
45. In early March of 1998, ARV learned for the first time from
defendant Freeman that LFREI was considering the acquisition of another -
although at that point unknown -- competitor of ARV. On March 6, 1998, expecting
that LFREI and the LFREI Directors intended to honor their contractual and
fiduciary obligations to pursue value for all ARV shareholders, ARV wrote to
defendant Freeman expressing interest in receiving either a proposal from LFREI
regarding an acquisition of this then unknown company by ARV, or terms for
another waiver of
<PAGE> 20
the Non-Compete Covenant to allow LFREI or Kapson to complete this acquisition.
LFREI simply ignored this clear reminder of LFREI's obligations to ARV, neither
presenting the opportunity to ARV for its consideration, nor seeking ARV's
consent as required under the Non-Compete Covenant. Rather, LFREI and the LFREI
Directors conveyed the impression that the contemplated transaction was, at
best, unlikely to occur.
46. In mid-April, 1998, ARV learned that LFREI was on the verge of
announcing an agreement to purchase Atria and was in serious discussions with
ACMC. On April 14, 1998, ARV wrote to defendant Freeman, a Principal and the
Chief Investment Officer of LFREI, requesting that LFREI present both the Atria
and ACMC opportunities to ARV so that ARV could consider whether it, rather than
LFREI, should be the acquiring party. ARV explained that it was entitled to
receive this information by virtue of the fiduciary duties held by defendants
Freeman, Jacobs and Gunty and because of ARV's right of first offer under the
Amended Kapson Agreement. ARV also explained that, because of the Non-Compete
Covenant, neither LFREI nor Kapson could consummate the Atria transaction
without the approval of 75% of the non-LFREI directors of ARV.
47. In its April 14, 1998 letter, ARV also demanded that LFREI assure
ARV in writing that LFREI had explained to Atria and ACMC ARV's view that it had
the right to make the acquisition itself and the right, in any event, to block
LFREI from consummating the transaction.
48. That same day, the non-LFREI affiliated members of ARV's Board held
a telephone conference with defendant Freeman. ARV inquired as to why LFREI had
not explored with ARV the possibility of ARV, rather than Kapson, acquiring
Atria. Defendant Freeman admitted that LFREI had decided to explore making the
acquisition through Kapson because, while LFREI owned only 48 percent of ARV,
<PAGE> 21
it
owned essentially 100 percent of Kapson. Defendant Freeman also kept up LFREI's
scheme of hiding the truth from ARV by denying that LFREI or Kapson was in fact
on the verge of announcing a transaction to acquire Atria.
49. Notwithstanding ARV's requests, LFREI, Freeman, Jacobs and Gunty
continued to deprive ARV of access to the terms LFREI was negotiating with
either Atria or ACMC so that ARV has had no opportunity to consider an
acquisition of either of those companies for its own account. LFREI and the
LFREI Directors have also repeated their repudiation of LFREI's obligations
under the Non-Compete Covenant.
50. On April 17, 1998, LFREI confirmed in writing to ARV that both
LFREI and its outside counsel had informed Atria of ARV's position with respect
to the transaction.
51. Despite ARV's objections, LFREI, Kapson and Atria announced, on
April 20, 1998, that they had signed a definitive merger agreement (the "Atria
Agreement") under which Kapson plans to acquire Atria in a transaction valued at
approximately $750,000,000 (the "Atria Transaction"). Later that same day, ARV,
through its counsel, requested that LFREI immediately provide ARV with a copy of
the Atria Agreement and related documentation. LFREI, Freeman, Jacobs and Gunty
again refused to comply with ARV's request.
LFREI ATTEMPTS TO FREE ITSELF FROM THE
NON-COMPETE COVENANT BY CREATING A FALSE IMPASSE
IN NEGOTIATIONS UNDER THE AMENDED KAPSON AGREEMENT
52. LFREI has also sought to create another artificial argument to
justify its failure to honor ARV's "right of first offer" and the Non-Compete
Covenant. The Amended Kapson Agreement and Amended Stockholders Agreement signed
on October 29, 1997 for the first time created the possibility that LFREI could
be freed
<PAGE> 22
of ARV's "right of first offer" and the Non-Compete Covenant before the
year 2000. Those agreements provide that, if mutually agreeable arrangements
concerning the terms on which ARV will manage or lease the existing and planned
Kapson facilities are not entered into by the 90th day following LFREI's
acquisition of Kapson, the Amended Kapson Agreement and the Non-Compete Covenant
will terminate. Upon termination of the Amended Kapson Agreement and the
Non-Compete Covenant, LFREI would be free to invest in other assisted living
companies either by itself or through Kapson. Attempting to induce this impasse,
LFREI has put forward a series of commercially unreasonable proposals containing
terms on which LFREI would allow ARV to lease the existing Kapson facilities. It
has also rejected several commercially reasonable proposals from ARV either to
lease or manage those same facilities. And, most recently, it has notified ARV
that it will consider itself free of all of its obligations under the Amended
Kapson Agreement if ARV and LFREI do not reach an agreement on these items by
June 28, 1998. Of course, LFREI knows full well that it cannot afford to reach
such an agreement with ARV because, if it does so, ARV's "right of first offer"
and the Non-Compete Covenant will remain in effect and LFREI and Kapson will be
unable to close the $750,000,000 acquisition of Atria without offering it first
to ARV.
53. On or about December 11, 1997, LFREI presented ARV with its first
proposal to allow ARV to lease the Kapson facilities. That proposal completely
contradicted LFREI's assurance on October 29, 1997 that the Kapson alliance
would "significantly benefit all shareholders of ARV." LFREI asked ARV to accept
lease rates that would have caused ARV to lose money even assuming LFREI's
optimistic projections about the performance of the Kapson facilities came to
pass. ARV quickly determined that the reason for this loss was that LFREI's
proposal required ARV to pay lease rates that were well above market. In total,
<PAGE> 23
ARV calculated that it would be paying approximately $50,000,000 above market
over the life of the leases.
54. ARV countered this proposal with lease rates that reflected
existing market conditions. LFREI rejected this proposal, arguing that ARV was
not entitled to lease the facilities at market rates but must instead pay a
lease rate that assured LFREI a 20 percent return on its investment in Kapson.
LFREI then submitted another proposal. In this proposal, LFREI reduced the lease
rates closer to market rates, but instead demanded that ARV pay the $50,000,000
as an up front payment. Analysis by ARV's financial advisors confirmed that this
proposal would be even more harmful to ARV's other shareholders than LFREI's
initial proposal.
55. In addition, LFREI and the LFREI Directors have repeatedly denied
ARV the basic information necessary to evaluate LFREI's proposals properly.
Despite requests from ARV, LFREI and the LFREI Directors have denied ARV access
to the Kapson due diligence materials. LFREI and the LFREI Directors have also
refused to provide ARV's financial advisors with the numbers underlying LFREI's
lease proposals, until recently, taking the absurd position that LFREI will
provide the numbers only after a deal is reached.
56. In an effort to break this artificial impasse, ARV notified LFREI,
on or about April 24, 1998, that ARV would be willing to agree to manage, rather
than lease, the Kapson facilities (The Amended Kapson Agreement provides that
LFREI has the obligation in good faith to negotiate "commercially reasonable
terms" for management agreements with ARV on all existing or planned Kapson
facilities.). Assisted living facilities, like hotels, are frequently managed by
someone other than the owner of the facility. Management fees and the terms of
management contracts are thus quite readily ascertainable and what is a
"commercially reasonable" management fee is not subject to debate. The standard
management fee is 5 percent
<PAGE> 24
of the gross revenues of the facility plus an incentive payment based on
performance. ARV offered to manage the Kapson facilities for 4 percent of gross
revenues on the first 2600 units and 3 1/2 percent of gross revenues for
additional units that Kapson develops.
57. LFREI's response to this proposal further demonstrates its bad
faith. Rather than respond substantively, LFREI sought to delay the
negotiations. Amazingly, given that LFREI itself just invested over $100 million
in ARV, LFREI stated that it had forwarded the proposal to Glenn Kaplan,
Kapson's CEO, so that he could "formulate a process for providing ARV with the
data on the Kapson assets and evaluating ARV Assisted Living, Inc. as the
potential manager of the Kapson properties." (emphasis added). Since
communicating this response on April 27, 1998, LFREI has refused to commit to
allow ARV to manage the existing and planned Kapson facility as it is obliged to
do under the Amended Kapson Agreement.
58. LFREI's conduct breaches its obligations under the Amended Kapson
Agreement. It also reveals that LFREI's true plan is not to negotiate lease or
management arrangements with ARV, but to create an artificial impasse that in an
attempt to justify termination of the Amended Kapson Agreement and of the
Non-Compete Covenant and allow LFREI to abandon its partnership with ARV. If it
is able to accomplish this objective, LFREI will have accomplished an amazing
coup. It will have induced ARV to allow it to buy almost 50% percent of ARV's
stock by promising to create an exclusive arrangement to be ARV's financial
partner in the assisted living industry. It will have obtained for itself 100
percent of the benefits of the Kapson acquisition, despite having promised to
share those benefits with ARV's other shareholders as consideration for ARV's
agreement to a one-time waiver of the Non-Compete Covenant on which LFREI's
original investment was
<PAGE> 25
conditioned. And, it will have freed itself completely of its obligation to
offer acquisition opportunities to ARV and from the Non-Compete Covenant so that
it can acquire ownership of another $750,000,000 in assisted living industry
assets by purchasing Atria. To make matters worse, LFREI will have accomplished
all of this while three of its nominees, defendants Freeman, Gunty and Jacobs,
have served as members of ARV's Board of Directors.
FIRST CAUSE OF ACTION
(FOR SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF AND DAMAGES FOR BREACH OF
AMENDED STOCKHOLDERS AGREEMENT)
(AGAINST DEFENDANTS LFREI, PROMETHEUS AND KAPSON)
59. ARV repeats and realleges each and every allegation set forth in
paragraphs 1 through 58 above as if fully set forth herein.
60. Paragraph 5.1 of the Amended Stockholders Agreement entered into by
ARV, LFREI and Prometheus provides that LFREI, Prometheus and their controlled
affiliates shall not, directly or indirectly, own any equity interest in any
public or private company the principal business of which is the ownership,
management, operation and development of assisted living facilities in the
United States unless it first obtains the consent of 75% of the directors of ARV
(other than the Investor Nominees).
61. ARV has performed all conditions, covenants, and promises that it
is required to perform under the Amended Stockholders Agreement.
62. LFREI has repudiated its obligations under Paragraph 5.1 of the
Amended Stockholders Agreement by, among other things, causing its controlled
affiliate Kapson to enter into a definitive written agreement to acquire Atria.
63. In Section 5.12 of the Amended Stockholders Agreement, the parties
acknowledged that "in view of the arrangements contemplated by this Agreement"
<PAGE> 26
they "would not have an adequate remedy at law for money damages in the event
that this Agreement were not performed in accordance with its terms...." Thus,
LFREI and ARV agreed that each would be "entitled to specific enforcement of the
terms hereof in addition to any other remedy to which the parties ... may be
entitled at law or in equity."
64. As a direct and proximate result of the conduct alleged above, ARV
has suffered irreparable harm. There is no adequate remedy at law to redress all
of the injuries that ARV has suffered as a result of the conduct of LFREI, which
injuries ARV will continue to suffer so long as LFREI engages in such conduct.
Unless this Court specifically enforces Section 5.1 of the Amended Stockholders
Agreement, LFREI will cause Kapson to close the Atria Transaction and will
violate that section by acquiring an equity interest in Atria, causing ARV to
suffer further irreparable injury.
65. ARV is entitled to specific enforcement of Section 5.1 of the
Amended Stockholders Agreement and thus to preliminary and permanent injunctions
prohibiting LFREI, Kapson and their respective affiliates, and each of them, for
such time as the Amended Kapson Agreement is in effect, from closing the Atria
Transaction or from otherwise acquiring an equity interest in Atria, ACMC, or
any other assisted living company. If the requested injunctive relief were to be
denied, ARV would suffer substantial and immediate harm far greater than any
harm that might befall LFREI if the requested injunctive relief is granted.
66. In addition, as a direct and proximate result of the conduct
alleged above, ARV has suffered actual and consequential damages in an amount
not yet ascertained, but in excess of the jurisdictional minimum of this Court.
<PAGE> 27
SECOND CAUSE OF ACTION
(FOR SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF AND DAMAGES FOR BREACH OF
PARAGRAPH 3 OF THE AMENDED KAPSON AGREEMENT)
(AGAINST DEFENDANTS LFREI, PROMETHEUS AND KAPSON)
67. ARV repeats and realleges each and every allegation set forth in
paragraphs 1 through 66 above as if fully set forth herein.
68. Paragraph 3 of the Amended Kapson Agreement entered into by ARV,
LFREI and Prometheus provides that LFREI shall seek in good faith to negotiate
with ARV for the leasing or management agreements, on commercially reasonable
and customary terms of all existing and planned facilities of Kapson (including
those in the Kapson "Pipeline").
69. ARV has performed all conditions, covenants, and promises that it
is required to perform under the Amended Kapson Agreement.
70. LFREI has breached the Amended Kapson Agreement by, among other
things, failing to negotiate in good faith with ARV for leasing or management
agreements, on commercially reasonable and customary terms, of all existing or
planned facilities of Kapson (including those in the Kapson "Pipeline"). In
addition, LFREI has acted in bad faith by attempting to delay the negotiations
and manufacture an impasse in those negotiations in an attempt to cause the
termination of the Amended Kapson Agreement and the Non-Compete Covenant.
71. As a direct and proximate result of the conduct alleged above, ARV
has suffered irreparable harm. There is no adequate remedy at law to redress all
of the injuries that ARV has suffered and will continue to suffer as a result of
such conduct by LFREI. Unless enjoined by this Court, LFREI will continue its
refusal to bargain in good faith, preventing LFREI and ARV from entering into
mutually agreeable arrangements for the lease or management of Kapson facilities
by ARV. By engaging in such conduct, LFREI may improperly bring about the
termination of the Amended Kapson Agreement and the Non-Compete Covenant of the
Amended
<PAGE> 28
Stockholders Agreement, causing ARV to suffer further irreparable injury
by freeing LFREI to close the Atria and ACMC acquisitions and to make other
investments in the assisted living industry without offering those opportunities
to ARV.
72. ARV is entitled to preliminary and permanent injunctions: (a)
suspending termination of the Amended Kapson Agreement, and also Paragraph 5.1
of the Amended Stockholders Agreement, until such time as ARV and LFREI have in
fact reached an impasse not caused by LFREI's failure to negotiate in good faith
for leasing or management agreements, on commercially reasonable and customary
terms, of all existing or planned facilities of Kapson; and (b) directing LFREI
to negotiate in good faith with ARV for leasing or management agreements, on
commercially reasonable and customary terms, of all existing or planned
facilities of Kapson.
73. If the requested injunctive relief were to be denied, ARV would
suffer substantial and immediate harm far greater than any harm that might
befall LFREI if the requested injunctive relief is granted.
74. In addition, as a direct and proximate result of the conduct
alleged above, ARV has suffered actual and consequential damages in an amount
not yet ascertained, but in excess of the jurisdictional minimum of this Court.
<PAGE> 29
THIRD CAUSE OF ACTION
(FOR SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF AND DAMAGES FOR BREACH OF
PARAGRAPH 2 OF THE AMENDED KAPSON AGREEMENT)
(AGAINST DEFENDANTS LFREI, PROMETHEUS AND KAPSON)
75. ARV repeats and realleges each and every allegation set forth in
paragraphs 1 through 74 above as if fully set forth herein.
76. Paragraph 2 of the Amended Kapson Agreement provides ARV with a
"right of first offer" to negotiate management, lease and/or purchase
arrangements on commercially reasonable terms on any new developments or
acquisitions Kapson is considering.
77. ARV has performed all conditions, covenants, and promises that it
is required to perform under the Amended Kapson Agreement.
78. LFREI has breached Paragraph 2 of the Amended Kapson Agreement by,
among other things, refusing to present to ARV the terms of any new developments
or acquisitions currently under consideration by Kapson, including but not
limited to the Atria Transaction and Kapson's potential acquisition of ACMC, so
that ARV may consider and attempt to negotiate management, lease and/or purchase
arrangements regarding such new developments or acquisitions.
79. LFREI has also negotiated provisions in the final Atria acquisition
documents that, if enforced, would prevent ARV from negotiating a transaction
with Atria on an equal basis with LFREI and Kapson. One of those provisions
calls for Atria to pay Kapson over $18 million as a break up fee if Atria
terminates the merger agreement to accept another offer. The other provisions,
contained in so-called "Support Agreements" grant to defendants Freeman and
Gunty an irrevocable proxy to vote over 43 percent of the outstanding shares of
Atria in favor of the merger between Kapson and Atria.
<PAGE> 30
80. As a direct and proximate result of the conduct alleged above, ARV
has suffered irreparable harm. There is no adequate remedy at law to redress all
of the injuries that ARV has suffered as a result of the conduct of LFREI, which
injuries ARV will continue to suffer so long as LFREI engages in such conduct.
Unless enjoined by this Court, LFREI will continue to violate Paragraph 2 of the
Amended Kapson Agreement as alleged above, causing ARV to suffer further
irreparable injury.
81. ARV is entitled to specific performance of Paragraph 2 of the
Amended Kapson Agreement and to preliminary and permanent injunctions:
(a) directing LFREI, Kapson and Prometheus, and each of them, to
provide ARV with all information in their possession about any acquisition or
development opportunity currently under consideration by Kapson or any of its
affiliates, including but not limited to the Atria Transaction and any other
opportunities involving Atria or ACMC;
(b) directing LFREI to refrain from pursuing, directly or indirectly,
any acquisition or development opportunity in the assisted living industry,
including but not limited to the Atria Transaction and any other opportunities
involving Atria or ACMC, unless and until (i) ARV has been given sufficient time
to consider and attempt to negotiate management, lease and/or purchase
arrangements regarding that new development or acquisition; and (ii) ARV has
decided not to pursue such development opportunity or acquisition for its own
account;
(c) enjoining LFREI and Kapson, and each of them, from enforcing the
break-up fee in their merger agreement with Atria if Atria withdraws from that
transaction to enter into an agreement with ARV; and
(d) enjoining LFREI and defendants Freeman and Gunty, and each of them,
from voting any shares of Atria in favor of a merger between Kapson and
<PAGE> 31
Atria in the event the Board of Directors of Atria determines to withdraw from
the Kapson merger agreement to enter into an agreement with ARV.
82. If the requested injunctive relief were to be denied, ARV would
suffer substantial and immediate harm far greater than any harm that might
befall LFREI if the requested injunctive relief is granted.
83. In addition, as a direct and proximate result of the conduct
alleged above, ARV has suffered actual and consequential damages in an amount
not yet ascertained, but in excess of the jurisdictional minimum of this Court.
FOURTH CAUSE OF ACTION
(BREACH OF FIDUCIARY DUTY)
(AGAINST DEFENDANTS LFREI, FREEMAN, JACOBS AND GUNTY)
84. ARV repeats and realleges each and every allegation set forth in
paragraphs 1 through 83 above as if fully set forth herein.
85. As directors of ARV, Freeman, Jacobs and Gunty, and each of them,
owe fiduciary duties to ARV including the highest duties of care, loyalty,
candor and good faith. As part of these fiduciary duties, Freeman, Jacobs and
Gunty, and each of them, are prohibited from seizing for themselves, to the
detriment of ARV, business opportunities in ARV's line of activities which ARV
has an interest and prior claim to obtain. Having nominated Freeman, Jacobs and
Gunty to serve on ARV's Board as its agents and for its benefit, LFREI is
responsible for the actions of the LFREI Directors and shares the same fiduciary
duties to ARV as Freeman, Jacobs and Gunty.
86. LFREI, Freeman, Jacobs and Gunty, and each of them, have breached
the above described fiduciary duties by impermissibly usurping ARV's corporate
opportunities. LFREI, Freeman, Jacobs and Gunty, and each of them, have
developed and pursued opportunities to obtain an interest in Atria, ACMC and
other
<PAGE> 32
companies that own, manage, operate and/or develop assisted living facilities in
the United States (the "Assisted Living Opportunities"). ARV was financially
able to undertake or PARTICIPATE in each of the Assisted Living Opportunities,
and had an interest and reasonable expectancy in, and prior claim to, each such
opportunity. However, LFREI, Freeman, Jacobs and Gunty, and each of them, have
failed to present any of the Assisted Living Opportunities to ARV and to allow
ARV to consider whether it wants to pursue any of these opportunities itself.
87. For the sole purpose of furthering the financial interests of
LFREI, LFREI Freeman, Jacobs and Gunty, and each of them, have caused or enabled
Kapson to enter into a written agreement to acquire Atria, and have otherwise
cultivated and pursued other Assisted Living Opportunities for the sole benefit
of LFREI, Kapson and/or their respective affiliates. ARV is informed and
believes, and on that basis alleges, that Freeman, Jacobs and Gunty, and each of
them, have ownership interests in, or otherwise share in the profits of, LFREI,
Kapson and their respective affiliates.
88. As stated above in paragraph 79, LFREI and the LFREI Directors have
caused to be included in the Atria merger documents provisions that, if
enforced, would prevent ARV from negotiating a transaction with Atria on an
equal basis with LFREI and Kapson.
89. As a direct and proximate result of the acts and omissions alleged
above, ARV has suffered irreparable harm. There is no adequate remedy at law to
redress all of the injuries that ARV has suffered as a result of the acts and
omissions of LFREI, Freeman, Jacobs and Gunty, and each of them, which injuries
ARV will continue to suffer so long as these defendants engage in such conduct.
Unless enjoined by this Court, LFREI, Freeman, Jacobs and Gunty, and each of
them, will continue to breach their fiduciary duties to ARV by improperly
usurping ARV's
<PAGE> 33
corporate opportunities as alleged above, causing ARV to suffer further
irreparable injury.
90. ARV is entitled to preliminary and permanent injunctions:
(a) directing LFREI, Freeman, Jacobs, and Gunty, and each of them, to
provide ARV with all information in their possession about any Assisted Living
Opportunity currently under consideration by LFREI, Kapson or their respective
affiliates, including but not limited to the Atria Transaction and any
opportunities involving ACMC;
(b) directing LFREI, Freeman, Jacobs, and Gunty, and each of them, to
refrain from pursuing, directly or indirectly, any Assisted Living Opportunity,
including but not limited to the Atria Transaction or any opportunities
involving ACMC, for the benefit of LFREI, Kapson or their respective affiliates,
unless and until (i) ARV has been given sufficient time to consider that
opportunity and to pursue negotiations to undertake that opportunity, and (ii)
ARV decides not to pursue the opportunity for its own account;
(c) enjoining LFREI, Kapson and their respective affiliates, and each
of them, from closing the Atria Transaction until such time as ARV has been
presented with all information in their possession about the Atria Transaction,
and has been afforded sufficient time to attempt to negotiate a deal with Atria
without interference from LFREI;
(d) enjoining LFREI and Kapson, and each of them, from enforcing the
break-up fee in their merger agreement with Atria if Atria withdraws from that
transaction to enter into an agreement with ARV; and
(e) enjoining LFREI, Freeman and Gunty, and each of them, from voting
any shares of Atria in favor of a merger between Kapson and Atria in the event
the
<PAGE> 34
Board of Directors of Atria determines to withdraw from that agreement to enter
into an agreement with ARV.
91. If the requested injunctive relief were to be denied, ARV would
suffer substantial and immediate harm far greater than any harm that might
befall LFREI, Kapson, Freeman, Jacobs or Gunty if the requested injunctive
relief is granted.
92. In addition, as a direct and proximate result of the acts and
omissions alleged above, ARV has suffered actual and consequential damages in an
amount not yet ascertained, but in excess of the jurisdictional minimum of this
Court.
93. The unjustified and wrongful conduct of LFREI, Freeman, Jacobs and
Gunty, and each of them, in breaching their fiduciary duties to ARV, was
intentional and despicable, was committed with oppression, fraud and malice
toward ARV and in conscious disregard of ARV's rights and needs, and has
subjected ARV to cruel and unjust hardship. ARV is therefore entitled to an
award of punitive damages, in an amount to be determined at trial.
WHEREFORE, ARV prays for relief as follows:
1. On the First Cause of Action:
a. For an order specifically enforcing Section 5.1 of the Amended
Stockholder's Agreement by issuing preliminary and permanent injunctions
prohibiting LFREI, Prometheus, Kapson and their respective affiliates, and each
of them, for such time as the Amended Kapson Agreement is in effect, from
closing the Atria Transaction or from otherwise acquiring an equity interest in
Atria, ACMC, or any other assisted living company.
b. For damages in an amount to be proven at trial;
2. On the Second Cause of Action:
a. For preliminary and permanent injunctions:
(1) suspending termination of the Amended Kapson
<PAGE> 35
Agreement, and thus Paragraph 5.1 of the Amended Stockholders Agreement, until
such time as ARV and LFREI have in fact reached an impasse not caused by LFREI's
failure to negotiate in good faith for leasing or management agreements, on
commercially reasonable and customary terms, of all existing or planned
facilities of Kapson;
(2) directing LFREI to negotiate in good faith with ARV for
leasing or management agreements, on commercially reasonable and customary
terms, of all existing or planned facilities of Kapson;
b. For damages in an amount to be proven at trial;
3. On the Third Cause of Action:
a. For an order specifically enforcing Paragraph 2 of the Amended
Kapson Agreement by issuing preliminary and permanent injunctions:
(1) directing LFREI, Kapson and Prometheus, and each of them, to
provide ARV with all information in their possession about any acquisition or
development opportunity in the assisted living industry currently under
consideration by Kapson or its affiliates, including but not limited to the
Atria Transaction and any opportunities involving ACMC, for purposes of allowing
ARV to consider the exercise of its rights under the Amended Kapson Agreement;
(2) directing LFREI to refrain from pursuing, directly or
indirectly, any acquisition or development opportunity in the assisted living
industry, including but not limited to the Atria Transaction and any other
opportunities involving Atria or ACMC, unless and until (i) ARV has been given
sufficient time to consider and attempt to negotiate management, lease and/or
purchase arrangements regarding that new development or acquisition; and (ii)
ARV has decided not to pursue such development opportunity or acquisition for
its own account;
<PAGE> 36
(3) enjoining LFREI and Kapson, and each of them, from enforcing
the break-up fee in their merger agreement with Atria if Atria withdraws from
that transaction to enter into an agreement with ARV; and
(4) enjoining LFREI and defendants Freeman and Gunty, and each
of them, from voting any shares of Atria in favor of a merger between Kapson and
Atria in the event the Board of Directors of Atria determines to withdraw from
the Kapson merger agreement to enter into an agreement with ARV.
b. For damages in an amount to be proven at trial;
4. On the Fourth Cause of Action:
a. For preliminary and permanent injunctions:
(1) directing LFREI, Freeman, Jacobs, and Gunty, and each of
them, to provide ARV with all information in their possession about each
Assisted Living Opportunity currently under consideration by LFREI, Kapson or
their respective affiliates, including but not limited to the Atria Transaction
and any opportunities involving ACMC;
(2) directing LFREI, Freeman, Jacobs, and Gunty, and each of
them, to refrain from pursuing, directly or indirectly, any Assisted Living
Opportunity, including but not limited to the Atria Transaction or any
opportunities involving ACMC, for the benefit of LFREI, Kapson or their
respective affiliates, unless and until (i) ARV has been given sufficient time
to consider that opportunity and to pursue negotiations to undertake that
opportunity; and (ii) ARV decides not to pursue the opportunity for its own
account;
(3) enjoining LFREI, Kapson and their respective affiliates, and
each of them, from closing the Atria Transaction until such time as ARV has been
presented with all information in their possession about the Atria Transaction,
and has been afforded sufficient time to attempt to negotiate a deal with Atria
without interference from LFREI;
<PAGE> 37
(4) enjoining LFREI and Kapson, and each of them, from enforcing
the break-up fee in their merger agreement with Atria if Atria withdraws from
that transaction to enter into an agreement with ARV; and
(5) enjoining LFREI, Freeman and Gunty, and each of them, from
voting any shares of Atria in favor of a merger between Kapson and Atria in the
event the Board of Directors of Atria determines to withdraw from the Kapson
merger agreement to enter into an agreement with ARV.
b. For general and punitive damages in amounts to be proven at
trial.
Dated: May 12, 1998 IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
Elizabeth A. Camacho
Seth M. Friedman
By: /s/ Alexander F. Wiles
------------------------------
Alexander F. Wiles
Attorneys for Plaintiff
ARV Assisted Living, Inc.
<PAGE> 1
Exhibit 99.2
FOR FURTHER INFORMATION:
Suzanne C. Shirley
Vice President--Investor & Public Relations
(714) 751-7400
or
Sitrick & Co.
Michael Kolbenschlag
(310) 788-2850
ARV ASSISTED LIVING FILES SUIT TO ENJOIN
THE CLOSING OF KAPSON/ATRIA TRANSACTION
COSTA MESA, CA, May 13, 1998 - ARV Assisted Living, Inc. (AMEX: SRS) announced
today that it has filed a lawsuit in the Superior Court for the State of
California, County of Orange, seeking to enjoin Kapson Senior Quarters Corp., a
controlled affiliate of Lazard Freres Real Estate Investors LLC ("LFREI") from
acquiring Atria Communities (OTC: ATRC) in a transaction valued at approximately
$750 million. Atria, based in Louisville, Kentucky, is also named as a defendant
in the suit, as are three LFREI representatives on ARV's Board of Directors.
In addition to a request that ARV be awarded compensatory and punitive
damages, the lawsuit seeks to obtain preliminary and permanent injunctions to
prevent LFREI from breaching or continuing to breach its contractual and
fiduciary duties to ARV by acquiring Atria, through Kapson, without first
offering ARV the opportunity to be the acquiring party and without obtaining
ARV's consent to allow LFREI to make the acquisition should ARV choose not to
pursue it.
LFREI's contractual obligations to ARV arise out of agreements entered
as part of a strategic alliance formed between the two companies in 1997 to
enhance ARV's ability to pursue its plans for growth by combining ARV's
management experience with LFREI's access to capital. Under these agreements,
LFREI and its controlled affiliates are prohibited from owning any equity
interest in any assisted living company in the United States, other than ARV,
without the consent of 75% of the members of ARV's Board of Directors who are
not nominees of LFREI. In September 1997, these directors gave ARV's consent to
allow LFREI to acquire Kapson. Now that LFREI owns Kapson, these agreements
prohibit acquisitions of assisted living companies by either company. These
agreements also provide ARV with a right of first offer to purchase, lease or
manage any new developments or acquisitions proposed by Kapson.
LFREI's fiduciary duties to ARV arise out of LFREI's nomination,
pursuant to the strategic alliance, of three of the nine members of ARV's Board.
LFREI and its director nominees each owe ARV a duty of loyalty that requires
LFREI to offer ARV the chance to acquire Atria before LFREI appropriates that
opportunity for itself.
<PAGE> 2
According to ARV Chairman and Chief Executive Officer Howard G.
Phanstiel, "LFREI has completely disregarded its obligations to ARV. LFREI
identified and negotiated the opportunity to acquire Atria, then chose to have
Kapson rather than ARV enter into a definitive agreement to acquire Atria
because, in their own words, LFREI owned 100 percent of Kapson and slightly less
than 50 percent of ARV. LFREI never presented this opportunity to ARV and
refused to provide ARV with sufficient information about the acquisition to
allow the members of our Board to exercise their fiduciary duties and to
consider whether ARV would be interested in pursuing Atria for its own account.
Despite repeated requests from ARV, LFREI also repudiated its obligations to
obtain the consent of ARV's directors before making the acquisition."
The lawsuit also seeks to enforce rights ARV obtained as part of the
strategic alliance with LFREI with respect to existing Kapson facilities. When
ARV consented to LFREI's acquisition of Kapson, the two companies signed a
letter agreement that was designed to make available to ARV's shareholders some
of the potential benefits of the Kapson acquisition. Thus, under its agreement
with ARV, LFREI is obligated to negotiate in good faith with ARV to identify
commercially reasonable terms on which ARV will lease or manage the existing
Kapson facilities. However, since acquiring Kapson, LFREI has failed to
negotiate in good faith. LFREI instead proposed lease terms that are
commercially unreasonable and refused to accept lease terms proposed by ARV.
LFREI also refused to accept ARV's proposal to manage the existing Kapson
properties at below market rates. The only proposals LFREI has made to ARV are
proposals that would be dilutive to ARV's earnings and are thus not in the best
interests of ARV's shareholders. In its lawsuit, ARV seeks both injunctive
relief and damages for LFREI's breach of its contractual obligations.
LFREI is an affiliate of the New York investment bank Lazard Freres &
Co. LLC.
Founded in 1980, ARV is one of the largest operators of assisted living
communities in the nation, currently operating 58 facilities containing
approximately 7,468 units in 10 states. The Company has four communities
comprising 504 units under construction in California, Florida, Massachusetts
and Nevada, and is also under contract to purchase interests in an additional
six senior housing communities located in California containing approximately
1,000 units.
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