Shareholders of American Realty Capital – Retail Centers of America have filed a class action lawsuit in the United States District Court for the District of Maryland alleging that its officers and directors are soliciting shareholders’ approval of a proposed merger with American Finance Trust through a materially false and misleading proxy statement, and in breach of their fiduciary duties. Plaintiffs are demanding a jury trial.
As previously reported by The DI Wire, ARC Retail and American Finance Trust (AFIN), two publicly registered non-traded REITs sponsored by AR Global, are seeking to merge into a single retail-focused REIT with an enterprise value of approximately $3.9 billion.
In addition to ARC Retail, defendants include CEO Edward “Michael” Weil, Jr., independent directors Leslie Michelson and Edward Rendell, AR Global, and American Finance Trust.
Weil serves as the CEO of ARC Retail, AFIN and AR Global, and is the chairman of the boards of both REITs. Michelson and Rendell serve as directors on a number of AR Global-affiliated company boards, including ARC Retail.
According to the complaint, if the merger is consummated, it will enable AR Global to secure a “lucrative” management contract and fees for a period of 20 years. The plaintiffs believe that this strategy will result in inadequate compensation for the value of the company’s assets which could be achieved through an alternative transaction including a liquidation of RCA’s real estate assets.
The complaint notes the similarity between the ARC Retail/AFIN merger proposal to the now defunct New York REIT/JBG Companies proposed merger that was blasted by institutional shareholders.
“AR Global has responded to its inability to raise money through syndication, in part, by seeking to engage in related party transactions that are designed to enable it to continue to earn lucrative management fees to which it might otherwise not be entitled,” according to the complaint.
Earlier this year, Robert A. Stanger & Co. issued a scathing special report on the proposed merger titled “Bottom of the Ninth – RCA Investors at Bat: Will AFIN and ARC Global ‘Pitch’ the Perfect Game?”
Like the complaint, Stanger criticizes the inadequate compensation to RCA investors, the 20-year post-merger management agreement with AR Global, the elimination of investor protections, and potential conflicts of interest with the REITs’ respective financial advisors/bankers.
The lawsuit alleges that the proposed merger eliminates the protections that RCA stockholders currently have against “abuse” by the advisor, including the annual approval of its agreement by its independent directors, and its fiduciary duties to both the company and stockholders.
ARC Retail must also pay AFIN a $25.6 million termination fee if the proposed merger is not completed, or $5 million if it is unable to obtain stockholder approval.
Plaintiffs are demanding a permanent enjoining of the proposed merger or any vote relating to the proxy. If the merger is consummated, the plaintiffs are asking to rescind the transaction and award rescissory damages. Plaintiffs are also asking defendants to pay damages and lawsuit costs.
The plaintiffs include Paradise Wire & Cable Defined Benefit Plan; Hollingsworth, Mendenhall and McFadden LLC; IG Holdings, Inc.; and IG Revocable Trust.
ARC Retail and American Finance Trust shareholders are scheduled to vote on the proposed merger on February 13, 2017. If approved by shareholders, the combined portfolio will total 494 properties, comprising 20.8 million rentable square feet of single-tenant net lease, power center, and lifestyle center assets.