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Patricia Fox, On Behalf of Herself and All Others Similarly v. Prime Group Realty Trust

December 21, 2012


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:


Patricia Fox, on behalf of a putative class of minority shareholders, has sued to enjoin Prime Group Realty Trust (PGRT), its directors, and PGRT's majority shareholder Five Mile Capital Partners LLC and its affiliates (Five Mile), from proceeding with a proposed cash-out merger transaction between PGRT and Five Mile. Plaintiffs claim that defendants have breached their fiduciary duties owed to plaintiffs as minority shareholders and have breached their disclosure duties by failing to provide material information necessary for shareholders to cast an informed vote on the proposed merger.

Plaintiffs have moved for a preliminary injunction. Both sides have submitted affidavits and documentary evidence in support of their respective positions. The Court also held a hearing at which several witnesses testified. Defendants have moved to strike the opinion of plaintiffs' disclosure expert. For the reasons stated below, the Court denies plaintiffs' motion for a preliminary injunction and also denies defendants' motion to strike. This constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a)(2).


PGRT, a Maryland corporation, is a real estate investment trust that currently owns and manages two office buildings in the Chicago metropolitan area: 330 N. Wabash in Chicago and 4343 Commerce Court in Lisle.

In 1998, PGRT issued four million shares of Series B Cumulative Redeemable Preferred Stock (preferred shares). Under the Articles Supplementary, a document that, among other things, describes the rights of the preferred shareholders, preferred shareholders are entitled to vote on any proposed merger that will result in the exchange of their shares. For a merger to take place, at least two-thirds of the preferred shareholders must vote in its favor.

In 2005, a subsidiary of The Lightstone Group (Lightstone) acquired all of PGRT's outstanding common shares. That same year, Lightstone elected John Sabin, Shawn Tominus, and George Whittemore to PGRT's board of trustees. On February 11, 2011, Lightstone transferred all of its common shares back to PGRT for no financial consideration, leaving the preferred shareholders as PGRT's sole shareholders. Sabin, Tominus, and Whittemore remained on PGRT's board.

On February 14, 2011, PGRT and Five Mile, a Connecticut-based investment and asset management company, announced a joint venture agreement concerning the 330 N. Wabash building as well as a proposed merger agreement. Under the terms of the joint venture, PGRT contributed its interest in the 330 N. Wabash building, Five Mile contributed financing, the building's lender was paid, and the loan was written down.

According to PGRT, "[t]he joint venture with Five Mile for the 330 N. Wabash property provide[d] the capital resources necessary to lease up the property to stabilization."

Pls.' Ex. 3. With respect to the proposed merger agreement, Five Mile made a tender offer for $5.00 per share for PGRT's preferred shares. On April 5, 2011, PGRT issued a proxy statement concerning the proposed merger. PGRT administered a vote of the preferred shareholders on June 6, 2011. Because less than two-thirds of the preferred shareholders voted for the merger, the merger failed.

In October 2011, PGRT and Five Mile announced a common stock purchase agreement pursuant to which PGRT would sell new common shares to Five Mile. The agreement also provided that Five Mile would make a tender offer to purchase PGRT's preferred shares for a purchase price no less than $5.00 per share. According to PGRT, the board derived this price from Duff & Phelps, LLC (D&P), its independent financial advisor, which provided a fairness opinion and determined that $5.00 per share represented a premium of approximately 86% over the high end of D&P's valuation range of the preferred shares at that time.

The common stock purchase agreement contained a "go shop" provision allowing PGRT to seek a better offer for the preferred shares and a "fiduciary out" provision allowing PGRT to walk away from the agreement without paying a breakup fee if it received a better offer. The agreement stated that the buyout of the preferred shareholders required the approval of two-thirds of those shareholders. PGRT hired Compass Point Research & Trading, LLC, an independent investment banking firm, to conduct a "market check." Compass Point identified and contacted twenty-seven potential purchasers in an effort to get a superior offer, but none of them entered into substantive discussions with PGRT or proposed an offer better than Five Mile's proposal.

After the sale of common stock to Five Mile closed, Five Mile, pursuant to a settlement agreement in litigation brought by a PGRT shareholder, agreed to increase its tender offer price for the preferred shares to $5.25 per share. A number of preferred stockholders tendered their shares, leaving Five Mile with 100 percent of PGRT's common shares and approximately sixty-five percent of PGRT's preferred shares.

At PGRT's annual meeting of shareholders on March 29, 2012, Five Mile voted its shares and elected five trustees, one of whom was Tominus. Because of the change in control, Sabin volunteered to resign from the board. Five Mile and PGRT management told Sabin that they wanted him to stay on the board. As a result, Five Mile nominated trustees Sabin and Whittemore to fill two trusteeships reserved for the preferred shareholders. Another preferred shareholder nominated Samuel Orticelli. The preferred shareholders, including a majority of the non-Five Mile preferred shareholders, voted overwhelmingly to keep Sabin and Whittemore on the board.

In conjunction with refinancing the 330 N. Wabash building, PGRT's proposed lender retained Cushman & Wakefield (C&W) to conduct an appraisal. C&W released its appraisal of the building on May 25, 2012, and the lender loaned PGRT $200 million secured by a mortgage on the building.

On June 27, 2012, PGRT announced that it had received an offer from Five Mile to acquire the balance of the preferred shares for $5.25 per share in cash. Like the 2011 common stock purchase agreement, the proposed cash-out merger agreement did not include any measures preventing PGRT from accepting a superior offer, nor did it provide for a breakup fee. The agreement also required the approval of two-thirds of the preferred shareholders.

The next day, the trustees formed a special committee consisting of outside trustees Sabin, Whittemore, and Tominus to evaluate the proposed cash-out merger. Throughout the summer and fall of 2012, the special committee members participated in a half-dozen meetings, had a number of conversations with each other and counsel, and reviewed documents relating to the transaction. Given how recently PGRT had unsuccessfully "shopped" the 2011 transaction, the special committee decided not to engage an investment banker to conduct a market check. The committee did, however, retain D&P to provide an opinion on the fairness of the merger consideration. The committee provided to D&P, among other things, a copy of the draft merger agreement; audited financial ...

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