A shareholder of Apple REIT Ten Inc., a publicly registered non-traded real estate investment trust, has filed a complaint in the United States District Court for the Eastern District of Virginia alleging that the company, its board of directors, and certain executives have breached their fiduciary duties of loyalty and good faith in approving a $1.3 billion merger with Apple Hospitality REIT (NYSE: APLE). Apple Hospitality was also named as a defendant in the complaint.
Both companies intend to defend against the allegations which they maintain are without merit, according to a filing with the Securities and Exchange Commission.
In Quinn v. Knight, investor James Quinn, alleges that the potential merger is “the product of a conflict-riddled process designed to favor the interests of founder and CEO Glade Knight and certain directors and executives at the expense of Apple Ten and its shareholders.” The complaint alleges that the board failed to fulfill its fiduciary obligations by not forming a truly independent special committee to negotiate the proposed merger on behalf of Apple Ten. It also said that the special committee breached its duties by failing to explore any third party acquisition options for the REIT.
If the merger is approved, Apple REIT Ten shareholders will receive $1.00 and 0.522 shares of APLE for each share of Apple Ten. The complaint alleges this is well below the fair value considering Apple Ten’s “impressive performance” in recent years. The plaintiff believes that the minimum possible fair price for Apple Ten’s common shares would be at least $12.50 to $13 per share.
The complaint also alleges that the proxy statement issued to shareholders included materially false, incomplete and misleading statements, and did not discuss the basis for the agreed upon exchange ratio or the valuation process leading to it.
It maintains that an independent appraisal of the company’s assets has not been performed, and that Citi, Apple Ten’s financial advisor, relied on financial information provided by the defendants and used 10-year-old comparable transactions in its determination that the merger was fair to shareholders.
The plaintiff alleges the negotiation process was designed to be a liquidation event which would allow Knight to cash out his 480,000 series B shares, which he previously paid $0.10 each, and provide a significant payout to him, certain insiders, and his son Justin Knight, who serves as the president and CEO of Apple Hospitality and the president of Apple Ten.
If the merger is approved, Knight stands to receive more than $65 million from the liquidation of the shares, of which he intends to keep $48 million, and distribute the remaining $16 million to certain defendants. Specifically, Justin Knight, David McKenney and Kristian Gathright will each receive $4.1 million, while Bryan Peery and David Buckley will each receive a $2.1 million.
McKenny is the president of capital markets at Apple Ten; Gathright is the executive vice president and chief operating officer for both Apple Ten and Apple Hospitality; Peery is the executive vice president and chief financial officer for Apple Ten and Apple Hospitality; and Buckley is the executive vice president and chief legal counsel for Apple Ten and Apple Hospitality.
The complaint states that, “The deficient and misleading proxy is not surprising given that Glade Knight and his team have a poor history of making truthful and accurate public disclosures.”
The plaintiff was referring to a previous SEC violation where, according to the complaint, Apple REIT Six, Seven, Eight and Nine, “had made material misrepresentations and omissions that misled investors about their share-pricing methods, concealed related inter-fund transactions, and failed to disclose significant compensation paid to executives.”
It states that the REITs “failed to disclose certain profit-sharing arrangements between its advisors and executives, as well as failed to disclose the economic benefits associated with the Series B shares that had been assigned to certain executives.”
As part of the settlement with the SEC in 2014, defendants Glade Knight, Peery and the Apple REITs implicated in the SEC action paid a collective $1.7 million in penalties.
Quinn v. Knight seeks to enjoin the shareholder vote on the merger, currently scheduled on August 31st, damages, rescission, costs and attorney’s fees. Quinn is demanding a trial by jury on all claims.
Apple Ten primarily invests in hotels and other income-producing real-estate and owns 55 hotels located in 17 states. All of Apple Ten’s hotels operate under Marriott or Hilton brands.