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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 14D-9/A-2
(Amendment No. 2)
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
CHATEAU PROPERTIES, INC.
(NAME OF SUBJECT COMPANY)
CHATEAU PROPERTIES, INC.
(NAME OF PERSON(S) FILING STATEMENT)
------------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS OF SECURITIES)
161739 10
(CUSIP NUMBER OF CLASS SECURITIES)
------------------------
C. G. Kellogg
President and Chief Executive Officer
Chateau Properties, Inc.
19500 Hall Road
Clinton Township, MI 48038
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED
TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE
PERSON(S) FILING STATEMENT)
COPIES TO:
Arthur Fleischer, Jr., Esq.
Peter Golden, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8000
Henry J. Brennan, III, Esq.
Charles W. Royer, Esq.
Timmis & Inman L.L.P.
300 Talon Centre
Detroit, MI 48207
(313) 396-4200
This Amendment No. 2 amends and supplements the
Solicitation/Recommendation Statement on Schedule 14D-9 (as amended, the
"Schedule 14D-9") originally filed with the Securities and Exchange Commission
(the "SEC") on September 18, 1996 by Chateau Properties, Inc., a Maryland
corporation (the "Company"), relating to the offer by MHC Operating
Limited Partnership, an Illinois limited partnership ("MHC OP"), the sole
general partner of which is Manufactured Home Communities, Inc., a
Maryland corporation ("MHC"), to purchase all outstanding shares of
common stock, $.01 par value per share (the "Shares"), of the Company,
at a price of $26.00 per Share, net to the seller in cash. Capitalized
terms used but not defined herein have the meanings previously set
forth in the Schedule 14D-9.
1. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
Item 8 is hereby amended and supplemented by adding the
following to the end of the "Litigation" section:
On September 25, 1996, MHC OP and MHC filed an answer and
verified counterclaims and third party complaint to the complaint filed on
September 17, 1996 by the Company in the United States District Court for the
District of Maryland, Northern Division. The verified counterclaims name
as counterclaim defendants, the Company, ROC Communities, Inc., and the
directors of the Company (the "Director Defendants") and allege
that, among other things:
(i) the Company violated Section 14(e) of the Securities
Exchange Act of 1934 (the "Exchange Act") by falsely stating
that the Excess Stock provisions in the Company's Articles of
Amendment and Restatement (the "Articles") would apply to the
Offer;
(ii) the Company violated Section 14(e) of the Exchange Act by
failing to disclose the full, negative tax implications from
transferring unrecognized gain from OP Unitholders to the
Company;
(iii) the Company violated Section 14(d) of the Exchange Act by
making an unauthorized solicitation designed to discourage
stockholders from tendering their Shares;
(iv) the Company violated Section 14(e) of the Exchange Act
by falsely stating that the Company was prohibited from
negotiating with other parties by the terms of the
Chateau/ROC merger agreement;
(v) the directors of the Company breached their fiduciary
duties of good faith and prudence by self-dealing and pursuing
their own financial interest to the detriment of the Company's
stockholders; and
(vi) ROC knowingly participated in and aided and abetted
the directors' breaches and self dealing.
The counterclaims seek, among other things, an order from
the Court:
(a) enjoining the Company and the Director Defendants from
carrying out the Company's announced repurchase program;
(b) enjoining ROC from purchasing up to 350,000 shares of the
Company's common stock;
(c) enjoining the counterclaim defendants from consummating or
proceeding with the proposed Chateau/ROC merger;
(d) enjoining the Company and the Director Defendants from
making any false statements or engaging in any fraudulent or
deceptive conduct;
(e) directing the Company to issue public statements correcting
any previously made false statements;
(f) declaring that stock purchased by MHC pursuant to its tender
offer would not be deemed "Excess Stock" under the terms of
Chateau's Articles;
(g) directing the Director Defendants to exempt MHC from the
Maryland Business Combination Law; and
(h) awarding MHC compensatory damages and its costs and
expenses.
In addition, on the same date, MHC OP and MHC filed a motion
for a temporary restraining order, together with a memorandum in support of
the motion. The temporary restraining order requests the court to enjoin the
Company from purchasing or selling any Shares or from taking any other actions
to alter the status quo.
On September 26, 1996, the United States District Court for the
District of Maryland, Northern Division, denied MHC's motion for a temporary
restraining order.
2. ITEM 9. MATERIALS TO BE FILED AS EXHIBITS
Item 9 is hereby amended and supplemented by amending and
restating Exhibit 99.4 as attached hereto and by adding the following
exhibits:
Exhibit 99.8 Answer and Verified Counterclaims in Chateau
Properties, Inc. v. Manufactured Home
Communities, Inc. and MHC Operating Limited
Partnership v. Chateau Properties, Inc., ROC
Communities, Inc., John A. Boll, C.G. Kellogg,
Jay G. Rudolph, Gebran S. Anton, Jr., James M.
Lane, Kenneth E. Myers and Edward R. Allen.
Exhibit 99.9 Memorandum of the MHC Parties in support of
their Motion for a Temporary Restraining Order in
Chateau Properties, Inc. v. Manufactured Home
Communities, Inc. and MHC Operating Limited
Partnership v. Chateau Properties, Inc., ROC
Communities, Inc., John A. Boll, C.G. Kellogg,
Jay G. Rudolph, Gebran S. Anton, Jr., James M.
Lane, Kenneth E. Myers and Edward R. Allen.
SIGNATURE
After reasonable 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.
By: /s/ C.G. Kellogg
-----------------------
Name: C.G. Kellogg
Title: President and Chief Executive Officer
Dated: September 27, 1996
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EXHIBIT INDEX
Exhibit 99.4 Employment Agreement, dated October 27, 1993, between
the Company and C.G. Kellogg, as amended
Exhibit 99.8 Answer and Verified Counterclaims in Chateau
Properties, Inc. v. Manufactured Home
Communities, Inc. and MHC Operating Limited
Partnership v. Chateau Properties, Inc., ROC
Communities, Inc., John A. Boll, C.G. Kellogg,
Jay G. Rudolph, Gebran S. Anton, Jr., James M.
Lane, Kenneth E. Myers and Edward R. Allen.
Exhibit 99.9 Memorandum of the MHC Parties in support of
their Motion for a Temporary Restraining Order in
Chateau Properties, Inc. v. Manufactured Home
Communities, Inc. and MHC Operating Limited
Partnership v. Chateau Properties, Inc., ROC
Communities, Inc., John A. Boll, C.G. Kellogg,
Jay G. Rudolph, Gebran S. Anton, Jr., James M.
Lane, Kenneth E. Myers and Edward R. Allen.
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Exhibit 99.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 27th day of October, 1993 is by
and between CHATEAU PROPERTIES, INC., (hereinafter referred to as the
"Company"), a Maryland corporation with principal offices located at 19500
Hall Road, Clinton Township, Michigan 48038, and C.G. KELLOGG, an individual
residing at 48930 Pointe Lakeview, Chesterfield, Michigan 48047 (hereinafter
referred to as the "Executive").
WITNESSETH:
WHEREAS, the Executive has been previously employed in various capacities
by Chateau Estates, a predecessor to the Company; and
WHEREAS, the Company is in the process of making an initial public
offering of its common stock ("Public Offering") and, in connection therewith
desires to hire the Executive as President and Chief Executive Officer upon
the terms and conditions contained herein and the Executive is willing and
agrees to accept such employment upon such terms and conditions;
NOW, THEREFORE, in consideration of the premises and covenants set forth
herein, the parties hereto agree as follows:
1. EMPLOYMENT
A. The Company shall employ the Executive, and the Executive hereby
accepts such employment upon the terms and conditions hereinafter set forth.
B. The Executive will be employed by the Company in the capacity of
President and Chief Executive Officer and will have such responsibilities as
shall be assigned to him by the Board of Directors of the Company from time to
time. As used herein, the term "Company" shall mean Chateau Properties, Inc.,
CP Limited Partnership, a Maryland limited partnership of which the Company is
the general partner, and any other entity over which the Company has direct or
indirect control.
C. While employed by the Company, the Executive shall devote his full
time and exert his best efforts to perform his duties, and shall faithfully,
diligently and to the utmost of his ability and to the reasonable satisfaction
of the Company, perform all such management duties consistent with his
positions at the Company.
II. TERM
A. The employment of the Executive pursuant to the provisions of this
Agreement shall commence as of the date of the Public Offering and shall
continue for a period of three (3) years thereafter ("Initial Period").
Thereafter this Agreement shall automatically be renewed for successive one
(1) year periods ("Renewal Periods") unless terminated by either party by
delivering written notice to the other party at least 120 days prior to the
end of the Initial Period or any Renewal Period, or as otherwise provided in
paragraph E1 hereof. The Initial Period and each Renewal Period shall
collectively be referred to as the "Employment Period."
B. Any termination of this Agreement shall not, however, effect the
provisions of paragraphs IV and V which shall survive such termination in
accordance with their terms.
III. COMPENSATION
A. Salary. In consideration of services rendered by the Executive
hereunder, the Company shall pay the Executive a salay during the
Employment Period at the rate of One Hundred Fifty Thousand ($150,000)
Dollars per year, payable in accordance with the Company's existing
payroll practices.
B. Bonus. The Executive shall receive an annual bonus in such
amount as shall be determined by the Board of Directors of the Company
in its sole discretion.
C. Other Benefits.
1. The Company shall provide the Executive during the
Employment Period with such other fringe benefits as the Company may
from time to time provide its executives, including life insurance,
health insurance, disability insurance, participation in any pension
or profit sharing plan then in effect, and vacation benefits. In
addition, the Company shall provide the Executive an automobile which
is commensurate with his position in the Company.
2. In addition, the Company will reimburse the Executive for
any and all travel and out-of-pocket expenses reasonably incurred by
the Executive for the purpose of performing his services hereunder,
such reimbursement to be made upon presentation to and approval by the
Company of receipts, vouchers and other evidence satisfactory in
itemizing such expenses in reasonable detail in accordance with the
Company's regular practice.
IV. COVENANT NOT TO COMPETE
A. The Executive hereby acknowledges and recognizes the highly
competitive nature of the business of the Company and accordingly agrees
for the consideration stated above that, during and for the period
commencing with the date hereof and ending on the later of the date of the
termination of the Employment Period hereunder, or the date on which the
Executive shall no longer be a director of the Company, ("Primary Non-
Compete Period") he will not other than on behalf of the Company, directly
or indirectly, in any state where the Company is then conducting business:
1. Conduct, engage in or have an interest in any person or entity
engaging in (whether as an owner, principal, agent, representative,
lender, stockholder, partner, employer, consultant, officer, director or
otherwise) any business, operation and/or service in any manner similar
to or related to the business of owing, acquiring, developing and/or
operating manufactured housing communities (except as a passive investor
in less than one (1%) percent of the outstanding capital stock of a
publicly traded corporation);
2. Directly or indirectly solicit, divert, take away, accept or
interfere with any business, customer (including former customers of
the Company) trade or patronage of the
2.
Company; or
3. Directly or indirectly employ, attempt to employ or solicit
for employment any employee of the Company;
B. It is expressly understood and agreed that although the Executive
and the Company consider the restrictions contained above reasonable for the
purpose of preserving for the Company its good will and other proprietary
rights, if the aforesaid restrictive covenant is found by any court having
jurisdiction to be unreasonable because it is too broad in any extent, then
the restrictions herein contained shall nevertheless remain effective, but
shall be deemed amended as may be considered to be reasonable by such court,
and as so amended shall be enforced. If the Executive violates the provisions
hereof, the Company shall not, as a result of the time involved in obtaining
relief, be deprived of the benefit of the full period of the restrictive
covenant. Accordingly, in the event of such a violation, the term of this
covenant not to compete shall toll until the date relief is granted.
C. The Company shall have the right to elect to extend the term of
the non-compete for a period of one (1) year ("Extension Period") following
the end of the Primary Non-Compete Period, by giving written notice to the
Executive on or prior to the end of the Primary Non-Compete Period and by
paying the Executive an amount equal to the base salary earned by the
Executive during the last 12 months of the Employment Period, such amount
to be paid in 12 equal consecutive monthly payments, with the first payment
due at the end of the first month of the Extension Period. In the event the
Company so elects to extend the period of the non-compete, the Executive
agrees to be bound by the provisions of that paragraph IV A hereof for
such additional 12-month period.
V. CONFIDENTIALITY OF INFORMATION
The Executive acknowledges that the Company may have trade secrets and
confidential information concerning the operation of their real estate and
acquisition strategy which are valuable, special and unique assets of the
Company, access to and knowledge of which may be essential to the performance
of the Executive's duties hereunder ("Confidential Information"). In
recognition of this fact, the Executive agrees that he will not, during or
after the Employment Period, disclose any Confidential Information to any
person, firm, corporation, association or other entity for any reason or
purpose whatsoever, except as necessary in the performance of his duties as an
employee of the Company and then only under a written confidentiality
agreement in such form and content as requested by the Company from time to
time, nor shall the Executive make use of any Confidential Information (other
than information in the public domain) for his own purposes or for the benefit
of any person, firm, corporation or other entity (except the Company) under
any circumstances during or after the Employment Period.
VI. REMEDIES
In the event of a breach or threatened breach by the Executive of the
provisions of Paragraphs IV or V hereof, the Executive agrees that money
damages would be inadequate and that the Company shall be entitled to an
injunction restraining him from such breach and, at the election of the
Company, upon the failure of the Executive, to cure or correct such breach
within thirty days
3.
after written notice thereof has been given to the Executive all rights of
the Executive under Paragraph III shall thereupon terminate. Nothing herein
contained shall be construed as prohibiting the Company from pursuing any
other remedies available to it for such breach or threatened breach.
VII. MISCELLANEOUS
A. Notices. Any notice required or permitted to be given under this
Agreement shall be deemed properly given if in writing and if mailed by
registered or certified mail, postage prepaid with return receipt requested,
to his residence in the case of the Executive, or, in the case of the Company,
to the principal office of the Company, to the attention of its Chairman of
the Board, with a copy to Timmis and Inman, 300 Talon Centre, Detroit,
Michigan 48207 or to any subsequent address as the parties may hereafter
provide.
B. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach.
C. Assignment. This Agreement is personal in its nature and neither of
the parties hereto shall, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder, except that the Company
may assign or transfer this Agreement to a successor corporation in the event
of merger, consolidation or transfer or sale of all or substantially all of
the business and assets of the Company; provided that, in the case of any such
assignment or transfer, this Agreement shall, subject to the provisions
hereof, be binding upon and inure to the benefit of such successor corporation
and such successor corporation shall discharge and perform all the obligations
of the Company hereunder.
D. Entire Agreement. This Agreement supersedes any and all prior
understandings, oral or written, between the parties as to services to be
performed by the Executive for the Company, constitutes the entire agreement
between the parties and cannot be amended, supplemented, or modified except in
writing signed by both parties. Notwithstanding the foregoing, the parties
acknowledge that the Deferred Compensation Agreement shall continue in full
force and effect with respect to the compensation earned thereunder.
E. Termination of Employment.
1. The Executive's employment hereunder may be terminated at
any time during the Employment Period, for cause (as hereinafter
defined) by action of the Board of Directors of the Company upon
giving the Executive notice of such termination, which termination may
be effective immediately. As used herein, the term "Cause" shall mean
any of the following events:
(a) The Executive's conviction of or plea of guilty or nolo
contendere to a crime involving moral turpitude or a crime
providing for a term of imprisonment of one year or more;
(b) The Executive's (A) willful gross misconduct, or (B)
neglect of or inattention to duties which is not cured within
thirty (30) days after written notice thereof by the Company to
the Executive; or
4.
(c) The violation by the Executive of any covenant or
provisions set forth in this Agreement.
2. If the Executive dies, his employment under Paragraph I
hereof shall be deemed to cease as of the date of his death.
3. Notwithstanding the provisions of cause (1) above, if the
Executive is incapacitated by accident, sickness or otherwise so as to
render him mentally or physically incapable of performing the services
required of him under Paragraph I for a period of one hundred eighty
(180) days during any twelve month period ("Total Disability"), upon
the expiration of such period or at any time thereafter, by action of
the Board of Directors of the Company, the Executive's employment
under Paragraph I may be terminated immediately upon giving him notice
to that effect, without any obligation to pay any severance pay as
otherwise provided in Paragraph VII E hereof, other than disability
payments made pursuant to any disability insurance policy maintained
by the Company.
F. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Michigan, the principal place
of business of the Company.
G. Headings. The headings of the Paragraphs hereof are for convenience
only and shall not control or affect the meaning or construction or limit the
scope or intent of any of the provisions of this Agreement.
H. Public Offering. In the event the Public Offering is not consummated
on or before December 31, 1993, this Agreement shall be null and void and
neither party shall have any liability to the other hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
CHATEAU PROPERTIES, INC.
/s/ John A. Boll
-------------------------
By: John A. Boll
Its: Chairman of the Board
EXECUTIVE:
/s/ C.G. Kellogg
-------------------------
By: C.G. Kellogg
5.
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated this 17th day of September, 1996 between Chateau
Properties, Inc. (the "Company"), a Maryland Corporation and C.G. Kellogg
(the "Executive").
WITNESSETH
WHEREAS, on October 27, 1993 the parties entered into an Employment Agreement
(the "Agreement") under which the Executive was employed by the Company; and
WHEREAS, the parties desire to amend the Agreement as hereinbelow set forth.
Section VII of the Agreement is hereby amended by adding the following
paragraph I, to read in full as follows:
I. Payments Pursuant to Severance Agreements.
In the event that there is a change in control (as defined in the
Severance Protection Agreement between the Executive and the Company of
September 17, 1996), and Section 3 of the Severance Protection Agreement
becomes applicable, this Agreement shall terminate and no longer be in full
force or effect.
Except as herein modified, the Agreement remains in full force and
effect, unmodified and unamended.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment Agreement
on the day and date first above written.
/s/ C.G. Kellogg
---------------------------
C.G. KELLOGG
CHATEAU PROPERTIES, INC.
By: /s/ John A. Boll
----------------
Name: John A. Boll
Title: Chairman of the Board
Exhibit 99.8
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND, NORTHERN DISTRICT
CHATEAU PROPERTIES, INC.
Plaintiff,
v.
MANUFACTURED HOME COMMUNITIES, INC., Case No. 96-2930
MHC OPERATING LIMITED PARTNERSHIP,
Judge Nickerson
Defendants and Counterclaim-Plaintiffs,
v.
CHATEAU PROPERTIES, INC., ROC COMMUNITIES,
INC., JOHN A. BOLL, C.G. KELLOGG, JAY G.
RUDOLPH, GEBRAN S. ANTON, JR., JAMES M.
LANE, KENNETH E. MYERS and EDWARD R. ALLEN,
Counterclaim-Defendants.
ANSWER AND VERIFIED COUNTERCLAIMS
AND THEIR PARTY COMPLAIN
ANSWER
Defendants Manufactured Home Communities, Inc. ("MHC") and MHC
Operating Limited Partnership ("MHC OP") hereby answer the Complain as
follows:
1. Denied.
2. Without knowledge and therefore denied.
3. Admitted.
4. Admitted.
5. Legal conclusions that do not require a response. Denied that
Counts I through IX state claims.
6. Venue is admitted. To the extent the plaintiff characterizes
MHC's conduct and requests relief, denied.
7. Without knowledge and therefore denied.
8. Without knowledge and therefore denied.
9. Admitted.
10-20. Without knowledge and therefore denied.
21. MHC admits that on August 16, 1996, it made a merger proposal
to Chateau. Because the proposal is contained in a document that speaks for
itself, the remaining characterizations and allegations are denied.
22-23. Denied
24. Defendants admit to participating in a conference call and
providing a written outline to MHC shareholders and analysts. The remaining
allegations and characterizations are denied.
25-29. Denied.
30. Without knowledge and therefore denied.
31-32. MHC's tender offer speaks for itself. The remaining
characterizations and allegations are denied.
33-34. Without knowledge and therefore denied.
35-36. Denied.
37. Previous answers are reincorporated.
38-39. These legal conclusions and characterizations require no
response.
40-41. Denied.
42. Previous answers are reincorporated.
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43. Admitted.
44-47. Denied.
48. Previous answers are reincorporated.
49-54. Denied.
55. Previous answers are reincorporated.
56. Denied.
57. Previous answers are reincorporated.
58. Defendants admit that MHC OP has made an offer. The terms of
that offer are set forth in documents that speak for themselves. The remainder
of the allegation is denied.
59-61. The allegations purport to characterize a document which
speaks for itself, and are therefore denied.
62. Vague and ambiguous and therefore denied.
63-64. Denied.
65. To the extent the allegation characterizes the document which
speaks for itself, it is denied. The remainder of the allegation is denied.
66-67. Denied.
68. Previous answers are reincorporated.
69-71. Denied.
72. Previous answers are reincorporated.
73. Admitted.
74. The allegation summarizes a document that speaks for itself
and is therefore denied.
75. Denied.
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76. No response required.
77. Denied.
78. Previous answers are reincorporated.
79. The initial three sentences of the allegation purport to
summarize a document that speaks for itself and are therefore denied. The
remaining allegations are denied.
80-81. The allegations purport to summarize a statute; accordingly,
no response is required.
82. Without knowledge and therefore denied.
83. The allegations purport to summarize a statute; accordingly,
no response is required. In addition, the final sentence is vague and
ambiguous and therefore denied.
84-85. To the extent the allegation purports to characterize a
statute that speaks for itself, it is denied. The legal conclusions
contained in the allegation do not require a response. In all other
respects, the allegation is denied.
86-88. Denied.
89. Previous answers are reincorporated.
90. MHC admits that it has made an Offer containing conditions.
Because the document speaks for itself, the remaining characterizations are
denied.
91. MHC admits that it has requested Chateau's Board of Directors
to adopt a resolution. Because that request is contained in a document that
speaks for itself, the remaining allegations and characterizations of
paragraph 91 are denied.
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92. Denied.
93. No response required.
94. The first sentence is denied. It is further denied that
plaintiff is entitled to any of its requested relief. The remaining
allegations of paragraph 94 are denied.
* * *
AFFIRMATIVE DEFENSES
First Affirmative Defense
The Complaint fails to state a claim upon which relief can be granted.
Second Affirmative Defense
Plaintiff's claims are barred because plaintiff and its board of
directors have breached their fiduciary duties to Chateau's shareholders,
including MHC.
Third Affirmative Defense
Plaintiff's claims are barred by the equitable doctrine of unclean
hands.
Fourth Affirmative Defense
Plaintiff's claims are barred by the equitable doctrine of estoppel.
Fifth Affirmative Defense
Plaintiff's claims are barred, in whole or in part, by the doctrine of
comparative fault.
Sixth Affirmative Defense
-5-
Plaintiff's claims are barred, in whole or in part, by the doctrine of
contributory negligence.
Seventh Affirmative Defense
Plaintiff's claims are barred because plaintiff's alleged damages were
not caused by anything done, on not done, by the defendants.
Eighth Affirmative Defense
Plaintiff's claims are barred because plaintiff failed to mitigate its
alleged damages.
Ninth Affirmative Defense
Plaintiff's claims are barred by the equitable doctrine of laches.
Tenth Affirmative Defense
Plaintiff's claims are barred by the equitable doctrine of waiver.
Eleventh Affirmative Defense
Plaintiff's claims are barred because of plaintiff's failure to comply
with the requirements of the Federal securities laws.
Twelfth Affirmative Defense
Plaintiff's claims are barred because of plaintiff's failure to comply
with the requirements of the Maryland Business Corporation Statute.
Plaintiff's claims may be subject to additional defenses. Defendants
reserve the right to add such defenses upon completion of discovery.
* * *
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COUNTERCLAIMS
MHC and MHC OP, as Counterclaim-Plaintiffs, hereby sue Chateau
Properties, Inc., ("Chateau"), ROC Communities, Inc., ("ROC"), John A.
Boll, C.G. Kellogg, Jay G. Rudolph, Gebran S. Anton, Jr., James M. Lane,
Kenneth E. Myers and Edward R. Allen (the aforesaid individuals comprising
Chateau's Board of Directors) for injunctive, declaratory and compensatory
relief and say as follows:
INTRODUCTION
1. The Insiders' attempt to sacrifice the shareholders' best interests
in favor of the Insiders' selfish desire to entrench themselves and avoid
millions of dollars in personal tax liability is a breach of their fiduciary
duties to the shareholders. In a desperate effort to prevent Chateau's
shareholders from accepting MRC's alternative Tender Offer, Chateau's Insiders
have undertaken an unprecedented effort to rig the corporate voting process by
diluting the non-insider shareholders' collective voting power.
2. The scheme developed by Chateau's Insiders involves a series of
complicated maneuvers which will result in irreparable harm, including the
following:
o misrepresenting that the MHC Tender Offer is "illusory";
o revising the proposed Chateau-ROC merger to allow the
Insiders to spend approximately $35 million of corporate
funds to reduce the number of outstanding shares of
Chateau and thereby ensure that the Insiders will have
the votes necessary to force upon the shareholders the
Chateau-ROC merger even if every shareholder would prefer
the superior MHC $26.00 per share offer;
-7-
o transferring more than $100 million in tax liabilities
from the Insiders to the non-insider shareholders so
that the Insiders can convert their non-voting
partnership units into voting shares of Chateau without
having to pay millions of dollars in tax themselves.
o restructuring the Chateau-ROC merger to avoid the Maryland
law requirement that two-thirds of outstanding shares
approve the merger.
This elaborate scheme, intended to accomplish a simple goal, --
the disenfranchisement of Chateau's non-insider shareholders for the personal
benefit of Chateau's Insiders -- should not be countenanced by this Court.
3. These counterclaims arise out of the refusal of Chateau's Board of
Directors to allow its shareholders the opportunity to participate in a
voluntary Tender Offer by MHC. Their refusal is intended to protect the
conflicting interests of Chateau Insiders, including the Chairman of its Board
of Directors and its President and Chief Executive Officer. Rather than permit
Chateau's shareholders the opportunity to chose the transaction they favor,
Chateau's Insiders have continued to pursue, with the aid of ROC, an inferior
plan to cause Chateau to merge with ROC and thereby block the Tender Offer.
While the ROC deal is worse for Chateau's non-insider shareholders, it is
better for Chateau's Insiders: these Insiders seek to egregiously shift tax
liabilities from themselves to the shareholders of the new entity under the
proposed Chateau-ROC merger, while at the same time entrenching themselves. By
their continuing efforts to block the Tender Offer in favor of a ROC deal that
is preferable only to Chateau's Insiders, the members of Chateau's Board
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of Directors (aided by ROC) have violated and continue to violate the most
fundamental fiduciary duties owed to Chateau's shareholders.
4. In their efforts to minimize the current tax liability of Chateau's
Insiders and to maintain their positions, Chateau's directors (aided by ROC)
have grossly breached their fiduciary duties to Chateau's shareholders. They
have restructured the previously-announced ROC merger plan to effectively
deprive non-insider shareholders of the ability to vote down the ROC merger.
Furthermore, they have done so by implementing a series of complex maneuvers
amounting to a scheme that calls for the expenditure of corporate funds by
Chateau to significantly diminish, and thereby effectively void, the voting
power of non-Insiders (while delivering definitive, controlling voting power
to the Insiders); this same scheme averts Federal income tax liabilities
arising from in excess of $100 million in taxable gains which otherwise would
be the personal responsibility of Insiders and transfers the tax burden to the
shareholders of the proposed Chateau-ROC entity.
5. Forced to react to the public market's favorable response to MHC's
Tender Offer, Chateau has also made numerous false and misleading public
statements and omitted material information in connection with the Tender
Offer in violation of Sections 14(d) and 14(e) of the Securities Exchange Act
of 1934 (the "Exchange Act") and the rules promulgated thereunder. These
statements and omissions were calculated to induce Chateau's shareholders not
to tender their shares pursuant to the Tender Offer. They include false
statements that
-9-
certain provisions of Chateau's Articles of Amendment and Restatement (the
"Charter") prevent MHC or MHC OP from acquiring more than a 7% interest in
Chateau without the Board's approval and a false statement that Chateau cannot
negotiate in a "friendly" combination with MHC or any other company under the
terms of its merger agreement with ROC.
6. MHC, MHC OP and all of Chateau's shareholders face imminent and
irreparable harm as a result of the continuing misconduct of Chateau, members
of its Board of Directors and ROC. If such misconduct is allowed to continue,
the voting rights of Chateau shareholders will be rendered meaningless.
Approximately $35 million of Chateau's corporate assets will be spent to
accomplish the purposes of the Insiders and the shareholders of any resulting
Chateau-ROC combination will inherit huge potential tax liability.
Accordingly, MHC and MHC OP request, among other relief, that this Court
preliminarily and permanently enjoin Chateau, the members of its Board of
Directors and ROC from consummating the ROC/Chateau merger, from spending
Chateau's corporate funds and taking other action in violation of Chateau's
shareholders' rights and from making any further false and misleading
statements in connection with the Tender Offer. MHC and MHC OP also seek a
preliminary and permanent injunction against Chateau and its Board of
Directors from treating the transfer of more than 7% of Chateau's outstanding
common shares to MHC or MHC OP as invalid (i.e., resulting in "Excess Stock")
under Chateau's Charter. Prompt relief is necessary if Chateau and its Board
of Directors are to be prevented from irreversibly sacrificing
-10-
Chateau's shareholders' interests for the benefit of Chateau's Insiders and
directors.
PARTIES
7. MHC is a corporation organized under the laws of Maryland having
its principal place of business in Chicago, Illinois. MHC is publicly held,
and its stock trades on the New York Stock Exchange ("NYSE").
8. MHC OP is a limited partnership organized under the laws of
Illinois having its principal place of business in Chicago, Illinois. The sole
general partner of MHC OP is MHC. MHC owns approximately a 90% interest in MHC
OP. MHC OP has been a shareholder of Chateau continuously since August 8, 1996.
9. Chateau is a corporation organized under the laws of Maryland
having its principal place of business in Clinton Township, Michigan.
Chateau is publicly held, and its stock trades on the NYSE.
10. ROC is a corporation organized under the laws of Maryland having
its principal place of business in Englewood, Colorado. ROC is publicly held,
and its stock trades on the NYSE.
11. John A. Boll is the Chairman of the Board of Directors of
Chateau.
12. C.G. Kellogg is the President, Chief Executive Officer, and a
member of the Board of Directors of Chateau.
13. Jay G. Rudolph, Gebran S. Anton, Jr., James M. Lane, Kenneth E.
Meyers and Edward R. Allen are members of the Board of Directors of
Chateau. They and Messrs. Boll and Kellogg will be referred to
-11-
collectively hereinafter as the "Individual Defendants." The Chateau
Insiders (the "Insiders") are John A. Boll, C. G. Kellogg and Edward R.
Allen.
JURISDICTION AND VENUE
14. This court has jurisdiction over these counterclaims pursuant to
Section 27 of the Exchange Act (15 U.S.C. Section 78aa), 28 U.S.C. Section
1331, 28 U.S.C. Section 1367, 28 U.S.C. Section 2201 and 28 U.S.C. Section
2202.
15. Venue is proper in this judicial district pursuant to Section 27
of the Exchange Act (15 U.S.C. Section 78aa), 28 U.S.C. Sections 1391(b) and
(c), and principles of ancillary and pendent venue.
BACKGROUND
16. MHC, through MHC OP, owns and operates manufactured home
communities (formerly known as mobile home parks) in nineteen states.
17. Upon information and belief, Chateau, through CP Limited
Partnership ("CP OP"), a limited partnership organized under the laws of
Maryland having its principal place of business in Clinton Township, Michigan,
owns and operates manufactured home communities in five states.
Chateau is the sole general partner of CP OP.
18. ROC is also in the business of owning and operating manufactured
home communities.
19. MHC, Chateau and ROC are real estate investment trusts, or
"REITs," as defined in section 856 of the Internal Revenue Code of 1986, as
amended ("Code"). Entities that qualify as REITs under the Code are entitled
to certain favorable federal income tax treatment
-12-
(i.e., no corporate level tax to the extent income is distributed to
shareholders).
THE ORIGINAL MERGER PROPOSALS AND THE TENDER OFFER
20. On July 18, 1996, Chateau and ROC announced an agreement to
combine the two companies into a new combined entity through an exchange of
stock. As initially proposed, the Chateau-ROC merger required the approval of
the holder of two-thirds of Chateau's shares.
21. On August 16, 1996, MHC made an offer to Mr. Boll, as Chairman of
Chateau's Board of Directors, to merge with Chateau for $26.00 cash per share
or 1.15 shares of MHC common stock per share or a combination of cash and MHC
common stock at such ratio. MHC's cash offer of $26.00 for each common share
of Chateau represented a substantial premium over the value of between $23.00
and $24.00 per share the market was assigning to the proposed Chateau-ROC
combination and a 17% premium over Chateau's closing price of $22.25 on July
17, 1996 (the day before the proposed merger with ROC was announced).
22. On August 19, 1996, Chateau issued a press release disclosing that
it had received an unsolicited offer from MHC. The press release stated that
Chateau's "Articles of Incorporation prohibit a person from beneficially
owning in excess of 7% of its outstanding shares of common stock without Board
approval."
22. On August 21, 1996, Sun Communities, Inc. ("SUN"), another
Maryland corporation that owns and operates manufactured home communities,
announced that it had offered in a letter to Chateau's Board of Directors
dated August 20, 1996, to acquire Chateau through a
-13-
stock-for-stock merger. Under Sun's proposal, Chateau's shareholders would
receive 0.892 shares of Sun's common stock for each share of Chateau's common
stock.
24. In a letter from Mr. Zell to Mr. Boll dated August 23, 1996, Mr.
Zell reiterated MHC's offer to merge with Chateau and emphasized that is was a
superior offer.
25. On August 23, 1996, Chateau announced that its Board of Directors,
at its August 22, 1996 meeting, had begun to consider the proposals of Sun and
MHC and "will continue that review." Until September 17, 1996, when it
initiated this lawsuit, Chateau never directly responded to MHC's proposal.
26. On September 4, 1996, MHC OP announced the Tender Offer. The
Tender Offer expires on October 1, 1996, unless extended. As explained in a
letter dated September 4, 1996 from Mr. Zell to Mr. Boll, due to Chateau's
non-responsiveness to the MHC offer, "MHC has determined that its offer, which
is financially and strategically superior to both the pending transaction with
[ROC] and the proposal made by [Sun], should be presented directly to
Chateau's shareholders."
27. The Tender Offer is subject to several conditions, including (1)
that there be validly tendered pursuant to the Tender Offer and not withdrawn
that number of Chateau's common shares which, together with shares owned by
MHC OP and its affiliates, constitutes at least two-thirds of Chateau's
outstanding common stock; (2) that MHC OP be satisfied that after consummation
of the Tender Offer none of the
-14-
Chateau shares acquired by MHC OP will be deemed "Excess Stock" (which, if
applied by Chateau's Board, would deprive MHC OP of all voting and dividend
rights with respect to such shares and possibly result in a severe economic
loss to MHC OP or a subsequent sale of such shares) and (3) that consummation
of a merger or similar business combination be exempted from Maryland Business
Corporation Law by board resolution, or that MHC OP be satisfied that the
provisions of the Maryland Business Corporation Law are otherwise inapplicable
to the acquisition of shares pursuant to the Tender Offer. Such conditions are
typical of conditions routinely used in offering materials and necessitated in
a tender offer such as MHC's because of the presence of an entrenched board of
directors unwilling to negotiate or cooperate. MHC OP's Schedule 14D-1, setting
out the complete terms of the Tender Offer, was filed with the SEC on
September 4, 1996; a copy is attached along with MHC OP's Schedule 14D-1/A-1
as Exhibit A.
THE MARKET'S REACTION TO MHC'S OFFER AND THE TENDER OFFER
28. On August 16, 1996, the trading day before MHC announced its offer
to combine with Chateau at $26.00 per share, Chateau's stock closed at $23
1/4. On August 19, 1996, the day of the announcement, Chateau's stock rose $2
5/8 and closed at $25 7/8. From August 19 until September 17, 1996 (the day
that Chateau announced the Revised Chateau-ROC Agreement and filed this
lawsuit) Chateau's stock traded between $25 1/2 and $26 7/8.
-15-
29. Analysts and investors who follow the REIT industry and have
reviewed the competing offers for Chateau have stated that the $26.00 per
share in cash offered by MHC and MHC OP is the better deal for Chateau's
shareholders than the Chateau-ROC proposed transaction. According to September
5, 1996 articles in The New York Times and the Chicago Tribune, for example,
most analysts and investors believe that the $26.00 per share cash offer by
MHC and MHC OP is better for Chateau's shareholders than either the proposed
Chateau-ROC merger or the Sun offer. On September 11, 1996, the New York Times
reported that "analysts and investors say the $26.00 in cash offered by [MHC]
is clearly the best deal so far for shareholders."
THE CHATEAU INSIDERS' CONFLICT OF INTERESTS
30. Chateau is structured as an umbrella partnership REIT, or
"UPREIT." The UPREIT structure allows real estate owners to gain access to the
capital markets by contributing their properties to the REIT entity in
exchange for equity interests in the entity without triggering any tax
liabilities (i.e., with respect to the value of such properties in excess of
the tax basis of the contributing real estate owners) on the contributions. In
order to accomplish this access to capital and tax deferral under the Code,
property owners (including the Chateau Insiders) contributed their properties
not for cash or common stock but for non-voting limited partnership units in
Chateau's operating partnership, CP OP, of which Chateau is the sole corporate
general partner. In return for tax deferral and access to public capital, OP
unit holders give up control of their properties to
-16-
the publicly-traded REIT and its shareholders. These "CP OP units" do not give
their holders voting rights in Chateau, but the CP OP units are convertible
into shares of Chateau common stock on a one-for-one basis. Conversion of CP
OP units to Chateau common shares, however, ordinarily causes the converting
CP OP unit holder to trigger the tax liabilities that holding the CP OP units
had allowed the holder to defer. Thus, the conversion of CP OP units would
normally result in a significant tax liability for the converting CP OP unit
holder resulting from the built-in gain in the contributed asset, an amount in
excess of $100 million. Such conversions would allow the REIT to have a higher
basis in the partnership and its assets and to achieve additional depreciation
deductions.
31. There are approximately six million shares of Chateau common stock
outstanding. There are approximately 8.8 million CP OP units outstanding of
which approximately 5 million are immediately exchangeable.
32. Upon information and belief, Mr. Boll owns approximately 3.4
million of the outstanding CP OP units; Mr. Kellogg owns over 50,000 of the
outstanding CP OP units; and Mr. Allen owns over 750,000 of the outstanding CP
OP units. Upon information and belief, Messrs. Boll, Kellogg and Allen each
have a low tax basis in their CP OP units (in comparison with such units'
market value).
33. Upon information and belief, if Messrs. Boll, Kellogg or Allen
were to convert their CP OP units into shares of Chateau common stock in
order to tender pursuant to the Tender Offer or in response
-17-
to MHC's offer to combine with Chateau at $26.00 per share in cash, they
would realize large taxable gains that they would otherwise have been able to
defer for many years. The realization of these gains would result in
substantial tax liabilities to such individuals personally.
34. The Chateau-ROC merger as currently proposed, however, although
economically inferior (for Chateau's shareholders) to the $26.00 per share
offered by MHC and MHC OP, would not result in tax liabilities for the CP OP
unit holders and thus would be economically superior for Messrs. Boll, Kellogg
and Allen. As a result and to the detriment of Chateau shareholders, Messrs.
Boll, Kellogg and Allen each have a material, personal financial interest in
favoring the merger with ROC over a transaction with MHC.
35. Upon information and belief, by virtue of their positions and
holdings in Chateau and CP OP, Messrs. Boll, Kellogg and Allen dominate and
effectively control Chateau and its Board of Directors.
CHATEAU'S RESPONSE TO THE TENDER OFFER -- CHANGES TO THE ROC DEAL
36. On September 4, 1996, Chateau issued a pres release in which it
"announced its awareness that [MHC OP had] commenced a tender offer for $26.00
a share of [Chateau's] common stock." The press release went on to allege
"that [Chateau's] Articles of Incorporation prohibit a person from
beneficially owning in excess of 7% of its outstanding shares of common stock
without Board approval." Also on September 4, 1996, The Wall Street Journal
quoted Mr. Kellogg, Chateau's Chief Executive Officer, as having stated in an
interview on
-18-
Friday, August 30, 1996 that "[o]ur board has never waived [the 7%
ownership limit], and I don't believe they are about to waive it now." The
Wall Street Journal also quoted Mr. Kellogg as saying, "'[w]e have signed a
definitive merger agreement' with ROC . . . . 'It requires that we don't
negotiate with any other company.'"
37. Faced with a negative market response to their proposed merger
with ROC, Chateau's Insiders and Board embarked on an unprecedented scheme to
maintain their positions by eliminating shareholders' voting power and
shifting their personal tax responsibilities to the shareholders.
38. On September 18, 1996, Chateau issued a press release announcing
that Chateau and ROC had agreed to revised terms for their merger (the
"Revised Agreement"). The text of the press release is reproduced in Chateau's
Schedule 14D-9.
39. The Revised Agreement represents part of a plan to prevent the
existing shareholders of Chateau from participating in the decision as to
whether the Chateau-ROC merger should be consummated or whether they wish to
accept MHC's financially superior offer. Among other things, by creating a
structure in which Chateau avoids a merger (unlike the original proposal in
which Chateau merged into a newly formed entity), the number of outstanding
Chateau shares required to be voted in favor of the transaction is lowered
from the two-thirds of all such outstanding shares presently required of
Chateau under Maryland law to a simple majority of shares actually voted.
40. Furthermore, in connection with the Revised Agreement and as
-19-
part of the overall scheme formulated by Chateau, ROC and the Insiders to
block a meaningful shareholder vote on the proposed Chateau-ROC merger,
Messrs. Boll, Kellogg and Allen, and other CP OP unit holders, may exchange
their CP OP units for shares of Chateau common stock on a tax-advantaged basis
and thereby effectively diminish shareholder voting power. At the same time,
Chateau and ROC intend to use corporate funds to acquire 1.8 million
outstanding shares of Chateau's common stock from existing shareholders prior
to the shareholder vote. Chateau also intends to permit the converting CP OP
unit holders to purchase additional shares of Chateau common stock in addition
to the shares they will receive upon conversion. As a result of this scheme,
Messrs. Boll, Kellogg and Allen, together with another CP OP unit holder, will
be able to collectively acquire, with company funds and without incurring tax
liability, majority voting power in Chateau, and thus insuring approval of the
Chateau-ROC merger over the objection of non-insider shareholders. Chateau
announced that Messrs. Boll, Kellogg and Allen intend to exchange their OP
units in connection with this scheme, that "[converting CP OP unit holders]
are expected to have sufficient voting power to assure shareholder approval of
the ROC Merger" and that "[i]t is also expected that OP Unit holders will vote
in favor of the ROC Merger."
41. However, the plan to give Messrs. Boll, Kellogg and Allen voting
control over Chateau free of tax liability comes at the expense of Chateau's
non-insider shareholders:
-20-
(a) In order for the contemplated exchange of the Insiders' CP OP
units for votable shares to be tax free under the Code, the
converting CP OP unit holders must end up owning, together with
existing ROC shareholders, over 80% of Chateau's outstanding
common stock after consummation of the merger. As a part of its
complex scheme, Chateau's Board has adopted a program to spend
corporate funds to repurchase up to 1.45 million shares of Chateau
common stock in order to reduce the amount of outstanding stock
and sell shares to insiders. The results of these Board Actions
ensures that the 80% requirement for tax-free treatment of the
Insiders' conversions will be satisfied. To the same end, ROC,
with the agreement of Chateau, intends to purchase 350,000 shares
of outstanding Chateau common stock. These repurchases have the
dual purpose of allowing the 80% test to be satisfied and to place
more than 50% of Chateau's voting power in the converting CP OP
unit holders' hands after they exchange their CP OP units for
common stock.
(b) The plan for the tax-free conversion of CP OP units into Chateau
common shares will also cause more than $100 million in deferred
tax gains to be transferred from the converting CP OP unit holders
to the shareholders of the merged entity, thereby shifting at
least $27 million in deferred tax gains to the present non-insider
shareholders of Chateau and shifting an even larger amount to the
present shareholders
-21-
of ROC. The plan to allow tax-free conversion of CP OP units will
impair the value of the merged entity, and thus harm both
Chateau's and ROC's shareholders, by not stepping up the company's
tax basis in its underlying properties, resulting in greater
potential tax liabilities. Significantly, if Chateau today sold
any property contributed to the company by Mr. Boll or any of the
other CP OP unit holders, the deferred tax liability relating to
the sale of that property would be borne personally by Mr. Boll or
such other CP OP unit holder alone. If the Insiders' scheme under
the Revised Agreement were to prevail, that same tax liability
would be borne by shareholders of the proposed merged entity
instead of the contributing OP Unit holders.
(c) In addition, as a result of the planned conversion of CP OP units
by the Insiders, a higher proportion of the annual cash dividends
that Chateau's shareholders will receive in the future will be
taxable income/capital gains rather than a non-taxable return of
capital, as compared to the original Chateau-Roc deal or a taxable
conversion. The proposed Chateau-ROC merger, as amended, clearly
adversely affects Chateau's shareholders while generously
benefiting Messrs. Boll, Kellogg, Allen and the other Insiders.
42. Chateau also disclosed in its press release than on September 12,
1996, Chateau's Board of Directors amended Chateau's
-22-
1993 Long-Term Incentive Stock Plan so that, among other things, upon a
change in control of Chateau (except if preceded by a timely merger with
ROC) all outstanding stock options awarded under such Plan not previously
exercisable and vested will become fully exercisable and vested. According
to Chateau's Notice of Annual Meeting and Proxy Statement dated April 10,
1996, Mr. Kellogg holds 126,000 stock options. Chateau also disclosed that
on September 16, 1996, Chateau entered into "severance agreements" with
five of its senior executive officers (the "Golden Parachutes"), including
Mr. Kellogg. Under the Golden Parachutes, if, within two years of a
"'change in control' (which would include the consummation of the MHC
offer)," the officer is terminated without "cause" or "terminates his or
her employment for 'good reason,'" the officer is entitled to a lump sum
payment from Chateau of either two or three times his or her annual salary
as well as a one or two-year extension of health benefits.
MARKET REACTION TO THE REVISED CHATEAU-ROC MERGER PLAN
43. The stock market's reaction to Chateau's September 17-18
announcements was swift, unequivocal and negative: on September 18, 1996,
Chateau's stock closed at $24-7/8, down $1-3/4, representing a loss of $26
million in the company's equity capitalization, and closing at its lowest
price since MHC announced its offer to combine with Chateau.
44. On September 19, 1996, The Wall Street Journal reported that the
revised deal with ROC was worth between $23.53 and $24.21 per share of
Chateau. The New York Times reported on the same date that
-23-
analysts valued the revised ROC deal "at somewhere between $24.00 and $24.50 a
share." The New York Times also reported that "investors in Chateau and
analysts reacted angrily to the restructured merger agreement." A
representative of a major shareholder of Chateau told the New York Times, in
regards to Chateau's board, that "[t]heir main objective with this merger
seems to be to structure a transaction that is tax-advantaged to the OP unit
holders with little regard given to the wishes of the common shareholders."
The New York Times reported that "shareholders were particularly exercised by
a provision of the merger agreement that would saddle the shareholders of the
combined company with $27 million or more in deferred gains, which serve to
reduce the tax burden that John Boll, the chairman and chief executive of
Chateau, Edward Allen, a Chateau director, and others would incur in swapping
units for stock." The New York Times also noted that analysts "questioned"
Chateau's plan to repurchase its own shares and that "shareholders regarded
the repurchase as a way to ensure that they could not block the merger." The
New York Times observed that as a result of the repurchase plan "Chateau would
be virtually certain to achieve the simple majority it needs for approval [of
the merger]."
45. On September 19, 1996, Everen Securities, Inc., an independent
REIT industry analyst, reacted to the announcement of the revised Chateau-ROC
merger agreement as follows:
The revised merger agreement is a disappointment from an economic
standpoint and a disaster from a fairness standpoint. . . . When
we first heard of the Chateau-ROC merger we were supportive. . . .
While there are plenty of synergies to the ROC/Chateau
combination, we actually
-24-
believed MHC and Chateau were a better fit and perhaps offered
more accretion. However, synergies and accretion are really no
longer the point here, the point is now management credibility.
Conflicts of Interests: Instead of demonstrating to shareholders
the merit of their proposed merger Chateau management has done
nothing but highlight their own conflicts of interest --
protecting their tax position, jobs and egos. Chateau has shifted
tax liability effectively to the common shareholder, reduced
shareholders voting power to assure approval, initiated a share
buyback which has absolutely no economic merit relative to the
acquisition of property.....
* * *
We recommend investors consider the following: most REITs trade
above net asset value, in the case of manufactured home REITs the
premium is as much as 20%. The only reason REITs trade above NAV
is for the value of the "ongoing concern", or the inability of
management to create value on a sustainable basis. One way in
which REITs create sustainable value is through acquisitions and
development. New investments require capital. REITs do not have
significant retained earnings, and hence make frequent trips to
the equity market. In our opinion, neither Chateau nor Chateau-ROC
can be thought of as shareholder friendly. How do these companies
ever expect to raise additional capital. With no capital there is
less growth, with less growth there is a reduced multiple, with a
reduced [multiple] follows a falling stock price. This is the
future Chateau and ROC have chosen.
46. On the previous day, Louis Taylor, Prudential Securities, another
independent REIT industry analyst, had commented:
[T]he extraordinary tactics to avoid the MHC offer, including the
transfer of $27 million of unrecognized gains and the future tax
liability to the new entity, imply management is concerned about
its own interests, not public shareholders.
* * *
We believe the combined value of [Chateau] and [ROC] has been
permanently impaired by [Chateau's Board's] tactics. We believe
the shares of the combined entity, if the merger
-25-
goes through, will trade at a significant discount to the real
estate industry averages. We believe the combined entity will have
little or no access to public market capital or it will be at a
very high cost.
47. On September 20, 1996, several of Chateau's largest shareholders,
each a significant institutional investor, sold all of their common stock in
Chateau in response to the announcement by Chateau's Board of the Revised
Agreement, according to news reports. A managing director at one of the
institutional investors, ABKB/LaSalle Securities (the third largest
sophisticated REIT investor with over $1 billion invested), was quoted in a
report by Bloomberg L.P. as follows:
It's clear that Chateau's board is looking out for (Chairman John)
Boll and other insiders rather than shareholders.
The Bloomberg L.P. report continued:
The sales are especially troubling in that these companies are
some of the biggest and most influential REIT investors. Since they
have sold their stakes, the pool of future investors in a newer,
larger Chateau could narrow substantially.
CHATEAU'S SCHEDULE 14D-9
48. On September 18, 1996, Chateau filed its response to the Tender
Offer with the SEC in a Schedule 14D-9 which it amended in a Schedule 14D-9/A
filed the next day (collectively the "Schedule 14D-9"). The untimely filing of
the Schedule 14D-9 violated SEC rule 14e-2, which requires a
subject company of a public tender offer to respond with such a filing no
later than 10 business days from the
-26-
date on which the tender offer is first published (which, in the case of the
Tender Offer, required response on September 17, 1996).
49. In the Schedule 14D-9, Chateau announced that its Board of
Directors recommended to Chateau's shareholders that they not tender their
shares pursuant to the Tender Offer.
50. The Schedule 14D-9 cites a number of factors influencing the
misplaced focus on the Board's decision, including the terms of the Revised
Agreement that were announced in a press release issued the same day and the
fact that under the Revised Agreement "OP Unitholders will have the
opportunity. . . to assign and transfer their OP Units to the Company in
exchange for Shares on a substantially tax-free basis as opposed to a taxable
basis pursuant to the structure of the MHC Offer and the Proposed MHC Merger."
A copy of the full Schedule 14D-9/A is attached as Exhibit B.
MISLEADING STATEMENTS IN THE SCHEDULE 14D-9
51. The Schedule 14D-9 states that in deciding to reject the MHC OP
Tender Offer:
[t]he Board of Directors took into account the conditional nature
of the MHC Offer, in that the MHC Offer is conditioned on a
condition the Board does not believe can be satisfied: MHC OP
being satisfied, in its sole judgment, that after consummation of
the MHC Offer none of the Shares purchased by MHC OP will be
deemed Excess Stock (as defined in Article VI of the Company's
Articles of Amendment and Restatement (the "Articles")). In this
regard, the Company has commenced litigation seeking a declaratory
judgment as to the applicability to the MHC Offer of the
provisions of the Articles relating to Excess Stock.
* * *
-27-
In light of all the above factors, the Board determined that its
fiduciary duties require that it not take steps to facilitate the
MHC Offer and the Proposed MHC Merger and not waive the provisions
of . . . the Ownership Limit . . . or the Excess Stock provisions
of the Articles with respect to the MHC Offer or the Proposed MHC
Merger.
52. The statements contained in the Schedule 14D-9, alone and in
combination with earlier statements by Chateau and its representatives, are
misleading in that they falsely suggest that the 7% ownership restriction
provisions found in Article VI of the Charter would apply to MHC's or MHC OP's
ownership of Chateau shares. These statements were calculated to induce
Chateau shareholders not to tender their shares pursuant to the Tender Offer.
53. After filing the Schedule 14D-9, Chateau representatives including
Messrs. Boll and Kellogg participated in a telephonic conference with analysts
and further engaged in false and misleading statements and representations
regarding the proposed Chateau-ROC deal.
REIT STATUS, ARTICLE VI OF THE CHARTER AND THE TENDER OFFER
54. Among other conditions, in order for a corporation to qualify as a
REIT, it cannot be "closely held" (Code Section 856(a)(6)).
55. In order for a REIT not to be "closely held" under the Code, not
more than 50% of the value of the REIT's issued and outstanding capital stock
may be owned, directly or indirectly, by five or fewer individuals during the
last half of a taxable year (except for the first year of the entity's
qualification as a REIT). With respect to this test for "closely held" status,
the Code contains certain rules
-28-
for determining ownership of REIT stock. REIT stock owned by a corporation,
partnership, estate or trust is treated as being owned proportionately by its
stockholders, partners or beneficiaries (Code Section 856(h)(1), incorporating
by reference, with modifications, rules of Code Sections 542(a)(2) and
544 (a)). Thus, even if a publicly held parent corporation owns 100% of a
REIT's stock, so long as there are not five or fewer shareholders who
collectively own more than 50% of the parent's stock, the "closely held"
condition is not violated. This rule is commonly referred to as a
"look-through" rule because the owners of the stock are deemed to be the
underlying owners of the partnership or corporate interests after looking
through the partnership or corporate forms.
56. Corporations intended to qualify as REITs often include in their
corporate charters ownership restrictions designed to help ensure that the
REIT ownership restrictions contained in the Code will be met.
57. On numerous occasions prior to MHC's Tender Offer, Chateau
indicated that its 7% ownership restriction was included in its Charter for
REIT purposes. According to Chateau's Notice of Annual Meeting and Proxy
Statement dated April 13, 1995 (the "1995 Proxy Statement"), Chateau's Charter
contains a 7% ownership restriction "[i]n order to preserve REIT status."
Similarly, the Form S-3 Registration Statement that Chateau filed with the SEC
on May 3, 1996 states that Chateau's Charter contains the 7% ownership
restriction "[b]ecause the Board of Directors believes it is essential for the
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Company to continue to qualify as a REIT." Chateau has made identical
statements in several documents it has filed with the SEC, including its
initial offering prospectus dated November 16, 1993. In addition, the reverse
side of Chateau's stock certificates reads, "[t]he securities represented
by this certificate are subject to restrictions on transfer for the
purpose of the Corporation's maintenance of its status as a real estate
investment trust under the Internal Revenue Code of 1986, as amended,"
followed by a description of the 7% provision. Further, a private letter
ruling issued by the Internal Revenue Service which, upon information and
belief was obtained by Chateau, describes the ownership limitation from the
perspective of the definitions of beneficial ownership set forth in the
Internal Revenue Code ("Code").
58. (a) Article VI, Section 2 of Chateau's Charter provides that, with
certain limited exceptions, "no Person . . . shall Beneficially Own shares
of Common Stock . . . in excess of the applicable Ownership Limit"; Article
VI, Section 1 defines the "Ownership Limit" as, "in the case of Common
Stock, seven (7.0%) percent in number of shares or value, of the
outstanding Common Stock. . . ."
(b) Article VI, Section 1 of the Charter defines "Beneficial
Ownership" as "ownership of Common Stock or Preferred Stock by a Person who
would be treated as an owner of such Equity Stock under Section 542(a)(2) of
the Code, either directly or constructively through the application of Section
544 of the Code, as
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modified by Section 856(h)(1)(B) of the Code." Sections 542(a)(2) and 544 of
the Code codify the "look-through" rule whereby ownership of equity interests
held by a partnership or corporation is attributed proportionately to the
partners of the partnership or the shareholders of the corporation, as the
case may be. Therefore, Article VI, Section 2 of Chateau's Charter allows a
widely-held partnership, corporation or other entity (such as MHC or MHC OP)
from holding more than 7% of Chateau's stock so long as, after application of
the "look-through" rule, no partner of such partnership or shareholder of such
corporation or equity holder of such other entity would be deemed individually
to own more than 7% of Chateau's stock.
A copy of Chateau's Charter is attached as Exhibit C.
59. According to Chateau's 1995 Proxy Statement, at least one entity
shareholder of Chateau, Capital Growth Management Limited Partnership
("Capital Growth"), has owned more than 7% of Chateau's outstanding common
stock. Upon information and belief, Capital Growth is a "look through" entity
like MHC and no IRS ruling was ever solicited or received pursuant to Article
VI, Section 12 of Chateau's Charter with respect to Capital Growth's ownership
of more than 7% of Chateau's outstanding common stock. Because the provisions
of Article VI did not apply, Chateau's Board never deemed any portion of this
or any other entity shareholder's holdings to be "Excess Stock" under Article
VI of its Charter, thus acknowledging that Article VI's Ownership Limit and
definition of Beneficial Ownership are "look-through" provisions.
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60. After the Tender Offer is completed, MHC OP will own a substantial
number of shares of Chateau's common stock.
61. Under the Code's rules for determining the "closely held" status
of REITs under Code Section 856(a)(6), the owners of the Chateau common shares
acquired by MHC OP will be deemed to be, proportionately, MHC OP's limited
partners and MHC, its general partner; and the owners of MHC's proportionate
interest will be further deemed to be MHC's shareholders. As a result of such
deemed ownership, Chateau would not be "closely held" under section 856 of the
Code by virtue of MHC OP's ownership of its stock and will continue to qualify
as a REIT if all the other relevant conditions under the Code continue to be
met.
62. Nevertheless, Chateau, in its Schedule 14D-9 and its public
statements, has misleadingly stated that MHC OP's acquisition of Chateau stock
in excess of the 7% ownership limitation would result in "Excess Stock" under
its Charter and thereby strip MHC OP (and MHC, as its general partner) of
virtually every right ordinarily provided to a shareholder, including the
voting and dividend rights that would normally attach to such shares. The
stock market, as well as journalists and analysts who comment on the REIT
industry, have understood Chateau's statements in this way.
63. Chateau's stated position that the acquisition of more than 7% of
its common shares by MHC OP would result in "Excess Stock" (and thus the
effective confiscation of such shares from MHC OP) is plainly incorrect
under the terms of Article VI of Chateau's Charter. Any
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interpretation beyond the purpose of preserving REIT status may result in
Chateau shares being nontransferable in violation of the Internal Revenue
Code.
64. "Beneficial Ownership" is defined in Article VI of the Charter as
"ownership of Common Stock or Preferred Stock by a Person who would be treated
as an owner of such Equity Stock under Section 542(a)(2) of the Code, either
directly or constructively through the application of Section 544 of the Code,
as modified by Section 856(h)(1)(B) of the Code." MHC OP (or MHC) would not be
"treated as an owner of such Equity Stock under Section 542(a)(2)" either
"directly" under Code Section 542(a)(2) -- the plain language of which applies
(with certain inapplicable exceptions) only to "individuals" -- or
"constructively" under Code Section 544 -- the plain language of which
indicates that stock owned by a partnership is deemed to be owned
proportionately by its partners and that stock owned by a corporation is
deemed to be owned proportionately by its shareholders. As a result, under the
plain language of the Charter, the ownership limits of Article VI would not
apply to MHC OP's acquisition of more than 7% of Chateau's outstanding common
stock.
COUNT I
(Section 14(e) violation by Chateau --
false statements about Chateau's Charter)
65. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
66. Section 14(e) of the Exchange Act provides in relevant part;
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It shall be unlawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements made, in the light of the circumstances under
which they are made, not misleading, or to engage in any fraudulent,
deceptive, or manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or any solicitation
of security holders in opposition to or in favor of any such offer,
request, or invitation.
67. Chateau's repeated references to its Charter's ownership
restriction provisions in its Schedule 14D-9 and in public statements
commenting on MHC's offer to combine with Chateau and on the Tender Offer
constitute -- and have been understood by the market as -- assertions that the
ownership restriction provisions would apply to MHC OP's acquisition of
Chateau shares pursuant to the Tender Offer and will prevent the consummation
of the Tender Offer by allowing Chateau's Board to treat any Chateau shares
MHC OP acquires in excess of 7% of Chateau's outstanding common stock. These
assertions are false because the Charter provisions, by their plain language,
incorporate the "look-through" ownership rules of the Code, application of
which to MHC OP's ownership of all or substantially all of Chateau's stock
would result in no person being deemed to own more than 7% of Chateau's stock.
These false assertions are designed to discourage Chateau's shareholders from
tendering their shares pursuant to the Tender Offer and to discourage MHC from
seeking to ensure that Chateau's shareholders receive full value for their
shares.
68. As a result of these assertions, the Schedule 14D-9 contains
untrue statements of material fact and omits to state material facts necessary
in order to make the statements made, in the light of the
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circumstances under which they are made, not misleading. The Schedule 14D-9,
therefore, violates Section 14(e) of the Exchange Act.
69. The false assertions and omissions in the Schedule 14D-9 are
material in that a reasonable Chateau shareholder would consider important in
deciding whether to tender such shareholder's shares pursuant to the Tender
Offer the purported fact that MHC OP's acquisition of more than 7% of
Chateau's stock would result in the ownership of MHC OP of "Excess Stock"
under Chateau's Charter, thus seeking to mislead a reasonable Chateau
shareholder that one of the conditions for the consummation of the Tender
Offer could not be satisfied.
70. These false assertions and omissions were knowingly or recklessly
made. Chateau's Charter plainly incorporates the "look-through" rules of the
Code. Chateau has recognized as much in the past when it did not deem shares
owned by other "look-through" entities in excess of the 7% ownership
limitation as "Excess Stock" under its Charter.
71. MHC's Tender Offer expires on October 1, 1996. MHC, MHC OP and
Chateau's shareholders stand to suffer imminent and irreparable harm unless
Chateau's Board of Directors is enjoined from continuing to make false
statements about the applicability of the Charter's ownership restrictions to
the Tender Offer and are ordered to correct publicly the false statements and
omissions that they have made already.
72. MHC and MHC OP have no adequate remedy at law.
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COUNT II
(Section 14(e) violation by Chateau -- false statements and material
omissions about the tax consequences of the proposed Chateau/ROC
merger)
73. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
74. Chateau's Schedule 14D-9 fails to fully inform its shareholders of
the significantly adverse tax consequences that will result from the proposed
Chateau-ROC merger. It does not fully and adequately explain the tax
implications inherent in the transfer of in excess of $100 million in
unrecognized gains and the future tax liability relating thereto to the new
entity and its shareholders.
75. As a result of these failures to so inform Chateau's shareholders
the Schedule 14D-9 contains untrue statements of material fact and omits to
state material facts necessary in order to make the statements made, in the
light of the circumstances under which they are made, not misleading. The
Schedule 14D-9, therefore, violates Section 14(e) of the Exchange Act.
76. The false assertions and omissions in the Schedule 14D-9 are
material in that a reasonable Chateau shareholder would consider such
assertions and omissions important in deciding whether to tender such
shareholder's shares pursuant to the Tender Offer, or retain or sell such
shares if the proposed Chateau-ROC merger if permitted.
77. These false assertions and omissions were knowingly or recklessly
made. After filing its Schedule 14D-9, Chateau reluctantly conceded in a
public conference telephone call with securities
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analysts and sophisticated institutional investors that the proposed merger
would result in a transfer of at least $27 million of unrecognized gains and
therefore the attendant future tax liabilities from the insider CP OP unit
holders to the existing Chateau shareholders. That material fact was omitted
in the Schedule 14D-9. In contrast to misleading statements made in such
public conference call, the tax detriment to the public shareholders will not
be eliminated.
78. MHC's Tender Offer expires on October 1, 1996, MHC, MHC OP and
Chateau's shareholders stand to suffer imminent and irreparable harm unless
Chateau and its Board of Directors are enjoined from continuing to make false
statements and omit to state material facts about the tax consequences of the
proposed Chateau-ROC merger and ordered to correct publicly the false
statements and omissions that they have made already.
79. MHC and MHC OP have no adequate remedy at law.
COUNT III
(Section 14(d) violation by Chateau --
unauthorized solicitation or recommendation)
80. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
81. Chateau's public assertions made before it filed its Schedule
14D-9 that the Charter's ownership restrictions will prevent the successful
consummation of the Tender Offer constitute solicitations or recommendations to
its security holders with respect
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to the Tender Offer. They were designed to discourage shareholders from
tendering their shares pursuant to the Tender Offer.
82. These solicitations or recommendations violate SEC Rule 14D-9.
83. Under Rule 14D-9, a subject company of a tender offer may make no
solicitation or recommendation with respect to a tender offer before filing a
Schedule 14D-9, other than (pursuant to subsection (e) of the Rule) a
communication to its shareholders that (1) identifies the tender offeror, (2)
states that the tender offer is under consideration, (3) states that the
company will, as of a specified date (i.e., when it files its Schedule 14D-9),
advise shareholders whether the company recommends acceptance or rejection of
the tender offer or remains neutral toward the offer and the reasons for its
position.
84. Chateau had not filed a Schedule 14D-9 when it and its Board of
Directors began making solicitations or recommendations concerning the
Charter's ownership restriction provisions and the Tender Offer. These
solicitations or recommendations do not fall within the exception described in
subsection (e) of Rule 14D-9.
COUNT IV
(Section 14(e) violation by Chateau --
false statement/omission about Chateau-ROC merger agreement)
85. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
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86. The public statement made by Chateau's Chief Executive Officer to
The Wall Street Journal that the Chateau-ROC merger agreement "requires that
we don't negotiate with any other company" is untrue, and Chateau has omitted
any correction of it in all its public statements and filings to date,
including its Schedule 14D-9, all in violation of Section 14(e) of the
Exchange Act.
87. Nothing in the Chateau-ROC merger agreement forbids Chateau from
"negotiat[ing] with any other company" as stated by Mr. Kellogg. Section
5.6 of the merger agreement only forbids Chateau from "initiat[ing]
or solicit[ing]" Competing Transactions (as defined therein) to the
proposed Chateau-ROC merger. In fact, Section 7.1 of the merger agreement
explicitly permits Chateau's Board of Directors to "participate in
discussions or negotiations with . . . any person in connection with a
competing transaction proposed by such person" and to "approve or
recommend" a "Superior Competing Transaction" to the ROC deal with a third
party and in such event to "withdraw . . . its approval or recommendation
of this Agreement."
88. Chateau's false statements and omissions as to the terms of its
agreement with ROC with knowingly or recklessly made because they were
contrary to the explicit terms of the merger agreement signed only days
earlier.
89. The false statements and omissions were material in that a
reasonable Chateau shareholder would consider important in deciding whether to
tender such shareholder's shares pursuant to the Tender
-39-
Offer the purported fact that Chateau could not, even if it wanted to,
effectuate a "friendly" deal with MHC or MHC OP.
90. MHC, MHC OP and Chateau's shareholders stand to suffer imminent
and irreparable harm unless Chateau and its Board of Directors are enjoined
from continuing to make false statements about their ability to negotiate with
MHC or MHC OP and ordered to correct publicly the false statements that they
have already made.
91. MHC and MHC OP have no adequate remedy at law.
COUNT V
(Section 14(e) violations by Chateau, ROC and the
Individual Defendants -- fraudulent, deceptive and
manipulative conduct in connection with the Tender Offer)
92. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
93. Chateau, ROC and the Individual Defendants have engaged in a
course of fraudulent, deceptive and manipulative conduct in connection with
the Tender Offer in violation of Section 14(e) of the Exchange Act. This
course of conduct was designed to provide a series of false and misleading
statements and omissions that are intended to block the consummation of the
Tender Offer and impose the lower value Chateau-ROC merger on Chateau's
shareholders.
94. As part of this course of fraudulent, deceptive and manipulative
conduct, Chateau, ROC and the Individual Defendants, individually and
collectively, have issued and caused to be issued a series of false and
misleading statements about the Tender Offer, including false statements
about MHC OP's ability to acquire in excess
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of 7% of Chateau's stock under the Charter and Chateau's ability to negotiate
with MHC under the terms of the Chateau-ROC merger agreement.
95. MHC's Tender Offer is due to expire on October 1, 1996, MHC, MHC
OP and Chateau's shareholders stand to suffer imminent and irreparable harm
unless Chateau, ROC and the Individual Defendants are enjoined from continuing
their course of fraudulent, deceptive and manipulative conduct designed to
thwart the Tender Offer.
96. MHC and MHC OP have no adequate remedy at law.
COUNT VI
(Breach of fiduciary duties under Section 2-405.1 of the Maryland
General Corporation Law against the Individual Defendants)
97. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
98. By virtue of their positions as directors of Chateau, the
Individual Defendants owe fiduciary duties to Chateau and its shareholders, as
codified in Section 2-405.1 of the Maryland General Corporation Law. (The MGCL
is Titles 1 through 3 of the Corporation and Association Articles of the
Annotated Code of Maryland). Section 2-405.1(a) requires each director of a
Maryland corporation to perform his duties (1) "in good faith," (2) in a
manner he reasonably believes to be in the best interests of the corporation"
and (3) "with the care that an ordinarily prudent person in a like position
would use under similar circumstances."
99. The Individual Defendants' duty under Section 2-405.1(a)(1) to act
"in good faith" requires them, at a minimum, to place the
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interests of Chateau and its stockholders ahead of their own personal
interests and not to cause Chateau to enter into transactions that confer on
the Individual Defendants benefits not proportionately conferred on the other
stockholders. The Individual Defendants have violated their statutory duty to
act in good faith by, among other things:
(a) refusing to seek transaction offering the highest value for
Chateau and its stockholders;
(b) refusing to negotiate with MHC and recommending that Chateau
stockholders not sell their shares in the Tender Offer;
(c) causing Chateau to enter into a transaction that preserves
for the Individual Defendants favorable tax benefits not enjoyed by the
overwhelming majority of other Chateau stockholders;
(d) causing Chateau to restructure the Chateau-ROC merger so as
to shift a significant potential tax liability from the Individual Defendants
to Chateau, with the further result that a higher proportion of annual cash
dividends subsequently received by Chateau stockholders will be taxable,
thereby adversely affecting the value of the Chateau stockholders' investment;
(e) causing Chateau to restructure the Chateau-ROC merger to
effectively deprive non-insider stockholders of the ability to vote down the
Chateau-ROC merger;
(f) proposing to cause Chateau and ROC to use corporate funds to
repurchase outstanding shares of Chateau in furtherance of
-42-
their scheme to obtain majority voting power in Chateau at no cost to
themselves;
(g) repeatedly making and causing Chateau to make false and
misleading statements and omitting material information in connection with the
Tender Offer in order to induce Chateau's stockholders not to tender their
shares pursuant to the Tender Offer;
(h) causing Chateau to amend its 1993 Long-Term Incentive Stock
Plan so that, among other things, upon a change in control of Chateau (except
through a merger with ROC), all outstanding options awarded under the Plan
become fully exercisable and vested, for no apparent purpose other than to
entrench and enrich the participants in the Plan;
(i) causing Chateau to enter into the lucrative Golden
Parachute with five senior executive officers, including Mr. Kellogg, for no
apparent reason other than to entrench and enrich these executives;
(j) failing to adopt a resolution opting out of the Maryland
Business Combination Law so as to permit the Tender Offer, which will provide
more value to the Chateau stockholders than the Chateau-ROC merger, to go
forward; and
(k) failing to take action to exempt MHC, if that were
necessary, from the Excess Stock provisions of Chateau's Charter.
100. The Individual Defendants' duty under Section 2-405.1(a)(2) is to
act with a reasonable belief that their actions are in the best interests of
the persons with the residual equity interest in Chateau
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- -- its stockholders. The Individual Defendants have violated their statutory
duty to act in the best interests of the Chateau stockholders by, among other
things:
(a) refusing to seek a transaction offering the highest value
for Chateau and its stockholders;
(b) refusing to negotiate with MHC and recommending that
Chateau stockholders not sell their shares in the Tender Offer;
(c) causing Chateau to enter into a transaction that preserves
for the Individual Defendants favorable tax benefits not enjoyed by the
overwhelming majority of other Chateau stockholders;
(d) causing Chateau to restructure the Chateau-ROC merger so as
to shift a significant potential tax liability from the Individual Defendants
to Chateau, with the further result that a higher portion of annual cash
dividends subsequently received by Chateau stockholders will be taxable,
thereby adversely affecting the value of the Chateau stockholders' investment;
(e) causing Chateau to restructure the Chateau-ROC merger to
effectively deprive non-insider stockholders of the ability to vote down the
Chateau-ROC merger;
(f) proposing to cause Chateau and ROC to use corporate funds
to repurchase outstanding shares of Chateau in furtherance of their scheme to
obtain majority voting power in Chateau at no cost to themselves;
(g) repeatedly making and causing Chateau to make false and
misleading statements and omitting material information in connection
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with the Tender Offer in order to induce Chateau's stockholders not to
tender their shares pursuant to the Tender Offer;
(h) causing Chateau to amend its 1993 Long-Term Incentive Stock
Plan so that, among other things, upon a change in control of Chateau (except
through a merger with ROC), all outstanding options awarded under the Plan
become fully exercisable and vested, for no apparent purpose other than to
entrench and enrich the participants in the Plan;
(i) causing Chateau to enter into the lucrative Golden
Parachutes with five senior executive officers, including Mr. Kellogg, for no
apparent reason other than to entrench and enrich these executives; and
(j) failing to adopt a resolution opting out of the Maryland
Business Combination Law so as to permit the Tender Offer, which will provide
more value to the Chateau stockholders than the Chateau-ROC merger, to go
forward.
100. The Individual Defendants' duty under Section 2-405.1(a)(3) to
act with the care of an ordinarily prudent person in a like position under
similar circumstances requires them to reach their decisions with full
information (including consultation with independent experts), upon arm's-
length negotiations and after adequate deliberation (including exploration and
comparison of alternative transactions). The Individual Defendants have
violated their statutory duty to act with the care of an ordinarily prudent
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person in a like position under similar circumstance by, among other
things:
(a) refusing to negotiate with MHC and recommending that
Chateau stockholders not sell their shares in the Tender Offer;
(b) repeatedly making and causing Chateau to make false and
misleading statements and omitting material information in connection with the
Tender Offer in order to induce Chateau's stockholders not to tender their
shares pursuant to the Tender Offer;
(c) failing to appoint a committee of independent directors to
evaluate the proposed Chateau-ROC merger and negotiate its terms and
conditions -- the traditional approach to addressing a conflict-ridden
situation such as this one; and
(d) failing to file the Schedule 14D-9 on time as required by
law.
102. Chateau's Schedule 14D-9 states that the stock repurchases will
take place either through open market purchases, negotiated purchases or a
self-tender offer. Accordingly, Chateau may have already begun to disburse
corporate funds in furtherance of the plan to guarantee insider control over
the voting process.
103. MHC, MHC OP and Chateau's shareholders will be imminently and
irreparably harmed unless the Individual Defendants and Chateau are enjoined
from paying out corporate funds or taking any other steps in furtherance of
the stock reissuance and repurchase plan.
104. Unless enjoined by this Court, Chateau and the Individual
Defendants will continue to breach their fiduciary duties to Chateau's
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shareholders to the imminent and irreparable detriment of MHC, MHC OP and
Chateau's shareholders.
105. MHC and MHC OP have no adequate remedy at law.
COUNT VII
(Aiding and abetting the Individual Defendants' and
Chateau's breach of fiduciary duties of loyalty and care and
self-dealing against ROC)
106. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
107. By agreeing to the Revised Agreement and by agreeing to buy
350,000 shares of Chateau's outstanding common stock as part of Chateau's and
the Individual Defendants' plan to deprive Chateau's shareholders of a
meaningful vote with regard to the Chateau-ROC merger, ROC has knowingly
participated in and aided and abetted Chateau's and the Individual Defendants'
breach of their fiduciary duties to Chateau's shareholders and their
self-dealing.
108. Unless enjoined, ROC will continue to aid and abet Chateau's and
the Individual Defendants' breach of their fiduciary duties to Chateau's
shareholders and their self-dealing.
109. MHC and MHC OP have no adequate remedy at law.
COUNT VIII
(Declaration of nonviolation of Chateau's Charter)
110. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
111. If, despite the plain language of the Charter, Chateau's Board of
Directors is permitted to apply its erroneous construction to
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the ownership limitation provisions of the Charter and treat Chateau shares
acquired by MHC OP pursuant to the Tender Offer as Excess Stock, as it has
indicated that it will, MHC OP will be unable to consummate the Tender Offer.
As a result, MHC, MHC OP and Chateau's shareholders will suffer imminent and
irreparable harm. Such an interpretation would also produce the unwarranted
punitive result of effectively confiscating from MHC OP any Chateau shares it
has acquired (despite MHC OP having paid for such shares) by depriving MHC OP
of any voting rights and dividend rights appurtenant to those shares and
allowing Chateau to direct the sale of such shares at a potentially severe
economic loss to MHC OP.
112. Whether Chateau's Board of Directors will treat shares acquired
by MHC OP pursuant to the Tender Offer as "Excess Stock" under the Charter is
a matter of actual controversy that affects the rights and legal relations of
MHC, MHC OP and Chateau.
113. Accordingly, MHC and MHC OP are entitled to a declaration that
MHC OP's acquisition of more than 7% of Chateau's outstanding common shares
pursuant to the Tender Offer will not result in ownership of "Excess Stock"
under the terms of Chateau's Charter.
COUNT IX
(Declaration that MHC and MHC OP are exempt
the Maryland Business Combination Act)
114. MHC and MHC OP repeat and reallege each of the preceding
paragraphs as if fully set forth here.
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115. Despite MHC and MHC OP's proper request to Chateau to approve or
otherwise exempt any proposed merger or business combination among MHC, MHC
OP, and Chateau from the requirements of the Maryland Business Combination
Act, Chateau has indicated it will not adopt any such resolution. The
Individual Defendant's refusal to properly consider such a resolution to
either approve a merger or similar business combination or cause an exemption
from the requirements of the Maryland Business Combination Act is a further
aspect of their scheme to prevent Chateau's shareholders from accepting MHC's
superior Tender Offer and part of the breach of their fiduciary duties to
Chateau's shareholders and their self-dealing. As a result the Individual
Defendants' breach of their fiduciary duties and self-dealing, MHC OP will
either have to waive the condition and close with a structure that may be
detrimental to shareholders or be unable to accomplish the Tender Offer. In
either case, MHC, MHC OP and Chateau's shareholders will suffer imminent and
irreparable harm.
116. Whether Chateau and the Individual Defendants properly refused to
adopt a resolution under the Maryland Business Combination Act approving or
exempting a merger or proposed business combination from the requirements of
the Act is a matter of actual controversy that affects the rights and legal
relations of MHC, MHC OP and Chateau.
117. Accordingly, MHC and MHC OP are entitled to a declaration that
Chateau and the Individual Defendants failed to give proper consideration
to the adoption of a resolution under the Maryland
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Business Combination Act approving or exempting a merger or proposed business
combination from the requirements of the Act. Further, MHC and MHC OP are
entitled to a declaration that had Chateau and the Individual Defendants
properly considered such a resolution, it should and would have been approved
and would exempt MHC and MHC OP from the requirements of the Maryland Business
Combination Act.
WHEREAS, Counterclaim-Plaintiffs request:
A. That the Court temporarily restrain and preliminarily and
permanently enjoin Chateau and the Individual Defendants from spending Chateau
corporate funds or otherwise taking steps to carry out the plan to repurchase
up to 1.45 million outstanding Chateau common shares.
B. That the Court temporarily restrain and preliminarily and
permanently enjoin ROC from its plan to purchase up to 350,000 outstanding
Chateau common shares.
C. That the Court preliminarily and permanently enjoin Chateau, the
Individual Defendants and ROC from consummating or otherwise proceeding
with the proposed Chateau-ROC merger.
D. That the Court preliminarily and permanently enjoin Chateau and the
Individual Defendants from making any further false statements that because
of the ownership restrictions provisions of Chateau's Charter, the Tender
Offer will result in ownership of "Excess Stock" by MHC OP and thus cannot be
successfully consummated.
E. That the Court preliminarily and permanently enjoin Chateau and
the Individual Defendants from making any further false statements
-50-
that the merger agreement with ROC prevents Chateau from negotiating a
business combination with MHC or MHC OP.
F. That the Court order Chateau to immediately issue public statements
correcting the false statements and omissions of material fact that it has
already made.
G. That the Court preliminarily and permanently enjoin Chateau, the
Individual Defendants and ROC from engaging in further fraudulent, deceptive
and manipulative conduct in connection with the Tender Offer.
H. That the Court declare that MHC OP's acquisition of more than 7% of
Chateau's outstanding common shares pursuant to the Tender Offer would not
result in ownership by MHC OP or MHC of "Excess Stock" under the terms of
Chateau's Charter.
I. That the Court order Chateau's Board of Directors to exempt MHC and
MHC OP from the Maryland Business Combination Act.
J. That the Court award MHC and MHC OP compensatory damages in an
amount to be determined at trial.
K. That the Court award MHC and MHC OP the costs and expenses of this
action, including reasonable attorneys fees.
L. That the Court grant such other and further relief as it deems
appropriate.
-51-
Dated: September 25, 1996
Respectfully submitted,
-----------------------
Arthur F. Fergernson
BALLARD SPAHR
ANDREWS & INGERSOLL
Suite 1900
300 East Lombard Street
Baltimore, Maryland 21202
(410) 528-5600
Federal Bar No. 00304
Of Counsel:
Vincent J. Connelly
Scott J. Davis
Joseph A. Starkman
MAYER, BROWN & PLATT
190 South LaSalle Street
Chicago, IL 60603
(312) 782-0600
VERIFICATION
I, David H. Helfand, on oath, state that I am President and Chief
Executive Officer of the Counterclaim-Plaintiffs Manufactured Home
Communities, Inc., and MHC Operating Limited Partnership, that I have read the
foregoing Counterclaims, and that the statements of fact contained therein are
true to the best of my knowledge, information and belief.
/s/ David A. Helfand
--------------------
SUBSCRIBED AND SWORN TO
before me this 24th day
of September, 1996.
/s/ Monika Castiglioni
- ----------------------
Notary Public
My Commission Expires:
11/29/98
"OFFICIAL SEAL"
Monika Castiglioni
Notary Public, State of Illinois
My Commission Expires 11/29/98
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND, NORTHERN DIVISION
CHATEAU PROPERTIES, INC., )
)
Plaintiff, )
)
v. )
)
MANUFACTURED HOME COMMUNITIES, INC., ) Case No. 96-2930
MHC OPERATING LIMITED PARTNERSHIP, )
) Judge Nickerson
Defendants and Counterclaim-Plaintiffs, )
)
v. )
)
CHATEAU PROPERTIES, INC., ROC COMMUNITIES, )
INC., JOHN A. BOLL, C.G. KELLOGG, JAY G. )
RUDOLPH, GEBRAN S. ANTON, JR., JAMES M. )
LANE, KENNETH E. MYERS and EDWARD R. ALLEN, )
)
Counterclaim-Defendants. )
)
_________________________________________________)
MOTION FOR TEMPORARY RESTRAINING ORDER
Pursuant to Fed. R. Civ. P. 65, Defendants Manufactured Home
Communities, Inc., ("MHC") and MHC Operating Limited Partnership ("MHC OP")
(collectively, the "MHC Parties") hereby move for a temporary restraining
order enjoining the purchase or sale of Chateau Properties, Inc. stock by
Chateau and its directors and prohibiting Chateau and its directors from
taking any other steps to materially alter the status quo until the MHC
Parties' motion for a preliminary injunction is decided. The grounds for
this motion are set forth in the accompanying memorandum in support filed
herewith.
Manufactured Home Communities, Inc. and
MHC Operating Limited Partnership
By: ______________________________________
One of their Attorneys
Arthur F. Fergernson
BALLARD SPAHR
ANDREWS & INGERSOLL
Suite 1900
300 East Lombard Street
Baltimore, Maryland 21202
(410) 528-5600
Of Counsel:
Vincent J. Connelly
Scott J. Davis
Joseph A. Starkman
MAYER, BROWN & PLATT
190 South LaSalle Street
Chicago, IL 60603
(312) 782-0600
Dated: September 25, 1996
Exhibit 99.9
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND, NORTHERN DIVISION
CHATEAU PROPERTIES, INC., )
)
Plaintiff, )
)
v. )
)
MANUFACTURED HOME COMMUNITIES, INC., ) Case No. 96-2930
MHC OPERATING LIMITED PARTNERSHIP, )
) Judge Nickerson
Defendants and Counterclaim-Plaintiffs, )
)
v. )
)
CHATEAU PROPERTIES, INC., ROC COMMUNITIES, )
INC., JOHN A. BOLL, C.G. KELLOGG, JAY G. )
RUDOLPH, GEBRAN S. ANTON, JR., JAMES M. )
LANE, KENNETH E. MYERS and EDWARD R. ALLEN, )
)
Counterclaim-Defendants )
)
_________________________________________________)
MEMORANDUM OF THE MRC PARTIES IN SUPPORT OF
THEIR MOTION FOR A TEMPORARY RESTRAINING ORDER
Defendants and counterclaim-plaintiffs Manufactured Home Communities,
Inc. ("MHC") and MHC Operating Limited Partnership ("MHC OP") (collectively,
the "MHC Parties") respectfully submit this memorandum in support of their
motion for a temporary restraining order preventing the purchase or sale, by
Chateau Properties, Inc. ("Chateau") or its directors, of Chateau stock or the
taking of other steps to materially alter the status quo until the MHC
Parties' motion for a preliminary injunction is decided. These purchases and
sales are part of a larger scheme designed by entrenched management to
preclude Chateau's shareholders from having the opportunity to accept a $26
per
share cash offer for their shares from MHC OP and to force shareholders to
accept inferior consideration for their shares pursuant to a revised merger
agreement (the "Revised Merger Agreement") between Chateau and ROC
Communities, Inc. ("ROC").
Under the scheme contemplated in the Revised Merger Agreement:
* The Chateau Insiders (as defined herein) will transfer at least
$27 million in taxable gain to Chateau's shareholders and over
$100 million in taxable gain to the new entity created by the
merger.
* Up to $35 million in corporate funds will be used for a stock
repurchase program that is detrimental to existing
shareholders. The sole purpose of this repurchase program is to
assure both the approval of the Revised Merger Agreement and
the achievement of the personal tax objectives of the Chateau
Insiders.
* Chateau will sell stock to the Insiders, again for the sole
purpose of assuring approval of the Revised Merger Agreement
and achieving the Insiders' personal tax objectives.
* Unlike the original Chateau-ROC merger agreement, which
required the approval of two-thirds of Chateau's outstanding
shares, the Revised Merger Agreement need
-2-
only be approved by a majority of the shares voted, which will
allow the Insiders to ensure that their scheme is successful.
The net effect of all of these machinations is that the shareholders
will effectively be disenfranchised. Chateau's Insiders will give themselves
the power to approve the Chateau-ROC merger EVEN IF EVERY SINGLE EXISTING
SHAREHOLDER DISAGREES. Moreover, because consummation of the Chateau-ROC
merger would cause MHC OP to terminate its tender offer, the shareholders will
be deprived of the opportunity to choose for themselves the future of their
investment.
In pursuing this scheme, Chateau's directors are engaging in
transparent self-dealing in blatant disregard of their fiduciary duties to the
shareholders. If the directors had not placed their own interests ahead of
those of the shareholders, Chateau and ROC could have merely adjusted the
exchange ratio pursuant to the Revised Merger Agreement without also depriving
the shareholders of effective voting rights and burdening them with
substantial tax liabilities.
What makes this case astonishing is that Chateau's directors have gone
beyond simply attempting to entrench themselves in office by preventing a
change in corporate control. Entrenchment IS an important element of the
directors' plan. But the plan also contemplates that the shareholders will be
compelled to bear the burden of millions of dollars in tax liabilities from
the
-3-
insiders. It is as if the shareholders are being required to pay a fee for
the privilege of being cheated. This is an unprecedented breach of
fiduciary duty that the Court should not countenance.
I. FACTUAL BACKGROUND
A. CHATEAU'S CORPORATE AND PARTNERSHIP STRUCTURE
Chateau, a Maryland corporation that is publicly traded on the New
York Stock Exchange, is a real estate investment trust (a "REIT") in the
business of operating manufactured home communities. Chateau is the corporate
general partner of CP Limited Partnership, the operating partnership that
holds the REIT's assets.
The Chateau insiders (the "Insiders") are John A. Boll, the Chairman
of the Board of Directors, C.G. Kellogg, the President, Chief Executive
Officer, and a member of the Chateau Board and Edward R. Allen, a member of
the Board.(1) The Insiders own virtually no stock in Chateau even though
they control the company through their positions as directors and officers.
Instead, they own units in CP Limited Partnership ("OP units"). The reason for
this is tax-driven. Under federal tax law, the Insiders could not have
contributed real estate to Chateau in exchange for common stock without
triggering substantial tax
- -----
1 Jay G. Rudolph, Gebran S. Anton, Jr., James M. Lane and Kenneth E.
Myers are the other members of the Board of Directors of Chateau.
-4-
liabilities. They avoided these taxes by creating and taking OP units for
their properties instead. The OP units are convertible into Chateau common
stock on a 1-for-1 basis, but conversion of the OP units would, under ordinary
circumstances, trigger the substantial tax liabilities which the Insiders have
thus far avoided.
B. THE INITIAL CHATEAU-ROC MERGER PROPOSAL
On July 18, 1996, Chateau and ROC, another REIT in the manufactured
home communities business, announced an agreement to merge the two companies
into a combined entity through an exchange of stock. Immediately after the
announcement of the proposed transaction, the market price of Chateau stock
was between $23 and $24 per share.
C. THE MHC PROPOSAL AND THE TENDER OFFER
On August 16, 1996, MHC, which is also a REIT in the manufactured home
communities business, communicated to Chateau's Chairman, Mr. Boll, an offer
to merge with Chateau. The offer provided a choice to shareholders and OP unit
holders of $26 cash per share or 1.15 shares of MHC common stock per share, or
a combination of cash and MHC common stock at that ratio. The $26 per share
price represented a substantial premium over the value of between $23 and $24
per share that the market was assigning to the proposed Chateau-ROC
combination and a 17 percent premium over Chateau's closing price on July 17,
1996, the day before the original Chateau-ROC merger agreement was announced.
The Chateau
-5-
Board reiterated its commitment to the Chateau-ROC merger and rejected the MHC
offer.
MHC decided to give Chateau's shareholders the choice of whether to
accept MHC's offer, and it therefore caused MHC OP(2) to commence a tender
offer on September 4, 1996 for all outstanding shares of Chateau's common
stock that it does not already own at a price of $26 per share ("the Tender
Offer"). The Tender Offer expires on October 1, 1996, unless extended. MHC OP
presently owns approximately two percent of Chateau's outstanding common
stock.
D. THE INSIDERS' RESPONSE TO THE TENDER OFFER
On September 17, 1996, Chateau and ROC entered into the Revised Merger
Agreement, providing for minor adjustments in the exchange ratio for the
merger. What is startling about the Revised Merger Agreement is that it
contemplates a series of devices that would effectively disenfranchise the
shareholders, cause a transfer of substantial tax liabilities to the
shareholders from the Insiders and have as their sole purpose preventing the
shareholders from exercising their rights.
The crux of the Insiders' plan is to obtain majority voting power in
Chateau and leave the existing shareholders with no
- -----
2 MHC OP is a limited partnership organized under the laws of Illinois.
The sole general partner of MHC OP is MHC. MHC owns approximately a
90% interest in MHC OP. MHC is a Maryland corporation.
-6-
meaningful control over the future of their investment. If the Insiders
succeed in obtaining voting control over Chateau, they will be able to assure
shareholder approval of the Chateau-ROC merger even if all of the existing
shareholders disagree. Consummation of the Chateau-ROC merger would cause MHC
to terminate the Tender Offer and deprive the shareholders of the opportunity
to receive $26 per share. However, to make their plan succeed, the Insiders
need to cause a number of events to occur, all of which are detrimental to the
shareholders.
First, the Revised Merger Agreement would enable the Insiders to
exchange their OP units for shares of Chateau common stock on a tax-efficient
basis and avoid more than $100 million in taxable gain. The ability to convert
their nonvoting OP units into shares on a tax-efficient basis would be a
triumph for the Insiders: they have never previously been able to exchange
their OP units into voting common stock without incurring very large taxes,
and some of their OP units were not convertible at all. Indeed, they were not
able to make a tax-efficient conversion of their OP units under the original
Chateau-ROC Agreement.
However, the Insiders' gain would be the shareholders' loss because
the contemplated conversion of OP units would transfer substantial amounts of
taxable gain from the Insiders to the existing shareholders. Chateau and its
directors do not contest this point; a Chateau representative conceded at an
analysts' conference held on September 18, 1996 that the planned conversion
-7-
would cause a net transfer of $27 million (or $4 to $5 per share) of taxable
gain to the existing shareholders of Chateau. (Transcript of Analysts'
Conference (transcribed from a tape), attached as Exhibit A, at pp. 19, 38.)
Although having both common stock and operating partnership units in
REITs (called "UPREITS") is common, the transfer of tax liabilities from
operating partnership unit holders to common shareholders is unprecedented in
the REIT industry. No purchaser of common stock in an UPREIT, including
Chateau, has ever had any reason to expect that he or she could be mistreated
in this way. In fact, it could not happen absent the self-dealing present in
this case.
Second, the Insiders' scheme calls for Chateau to spend approximately
$35 million to repurchase up to 1.45 million Chateau shares through open
market purchases, private transactions or a tender offer. By reducing the
number of shares outstanding, these repurchases would move the Insiders closer
to their goal of having voting control over Chateau after they convert their
OP units. The repurchases would also help to ensure that at least 80 percent
of the stock in the new company formed in the Chateau-ROC merger would be
owned by ROC shareholders or converting OP unit holders. Satisfaction of this
80% test is essential under the Internal Revenue Code for the success of the
Insiders' scheme to achieve the transfer of tax liabilities from OP unit
holders to shareholders.
-8-
Thus, the contemplated repurchases would confer a very large benefit
on the Insiders. By contrast, the repurchases would be highly detrimental for
the existing shareholders. $35 million from Chateau's corporate treasury would
be used for the precise purpose of preventing the shareholders from taking the
best transaction available to them. The shareholders would suffer doubly --
not only would they be unable to receive the $26 per share MHC OP is offering,
but they also would suffer because corporate assets would be spent for a
purpose that is detrimental to their interests.
Third, the Revised Merger Agreement contemplates a series of further
machinations designed to give the Insiders voting control over Chateau. These
include a planned sale of shares to the Insiders and a purchase of Chateau
shares by ROC, each of which would help the Insiders and their allies achieve
the votes necessary to consummate the merger and satisfy the 80 percent
threshold necessary to ensure that the Insiders can transfer their tax
liability to the shareholders. The directors have also restructured the merger
so that it need only be approved by a majority of the Chateau shares voted
rather than by two-thirds of the Chateau shares outstanding, which the
original Chateau-ROC merger required.(3) All of these machinations serve no
purpose
- -----
3 Because Chateau was a direct participant in the original merger,
Maryland law would have required the approval of two-thirds of
Chateau's outstanding shares to approve that
(continued...)
-9-
other than to benefit the Insiders by assuring that the vote of the public
shareholders will be effectively nullified. If the Insiders' interests had not
been paramount, Chateau and ROC could have merely increased the stock
conversion ratio in favor of Chateau shareholders without taking the
additional steps of depriving the shareholders of effective voting rights and
saddling them with a substantial tax burden.
At the same time that Chateau announced the Revised Merger Agreement,
it also filed a Schedule 14D-9 opposing MHC OP's Tender Offer. Chateau took
the position in the Schedule 14D-9 that the Tender Offer could not proceed
because a provision in Chateau's corporate charter allegedly prohibits any
person from owning more than seven percent of its common stock. MHC disagrees
with this position and notes that it cannot be correct because, among other
things, Chateau, as reported in its 1995 Annual Proxy Statement, has had a
shareholder owning substantially in excess of seven percent of its stock.
- -----
3 (...continued)
merger. Under the Revised Merger Agreement, ROC is to merge with a
subsidiary of Chateau and the Maryland law requirement is therefore
avoided. The New York Stock Exchange Rules still require the approval
of Chateau shareholders, but that approval need only be by a majority
of the shares voted.
-10-
E. THE RESPONSE OF SHAREHOLDERS AND MARKET ANALYSTS TO THE
INSIDERS' MANEUVERS HAS BEEN UNEQUIVOCALLY NEGATIVE.
Shareholders and market analysts were shocked at the brazen
self-dealing reflected in the Revised Merger Agreement. On September 18, 1996,
the day the Revised Merger Agreement was announced, Chateau stock closed at
24-7/8, down 1-3/4 (reducing the equity capitalization by more than $26
million), closing at its lowest price since MHC announced its offer.
On September 19, 1996, the New York Times reported (Exhibit B) that a
representative of a major shareholder of Chateau said "[t]heir main objective
with this merger seems to be to structure a transaction that is tax-advantaged
to the OP unit holders with little regard given to the wishes of the common
shareholders." The New York Times reported that "shareholders were
particularly exercised by a provision of the merger agreement that would
saddle the shareholders of the combined company with $27 million or more in
deferred gains, which serve to reduce the tax burden that John Boll, the
chairman and chief executive of Chateau, Edward Allen, a Chateau director, and
others would incur in swapping units for stock."
On September 18, 1996, Louis Taylor of Prudential Securities, an
independent REIT analyst, observed (Exhibit C):
"Chateau And Roc Shareholders Are Potentially Big Losers If The Merger
Goes Forward. Chateau's announcement that it intends to pursue its
merger with ROC Communities (RCI 23 7/89 -- Not Rated) is a blow to
shareholders of both CPJ and ROC. In our view, its
-11-
tactics are designed only to thwart a valid offer of $26 cash per
share from MHC. We believe the MHC offer is the best offer for the CPJ
shares and the CPJ board's unanimous rejection of the offer can be
construed as a rejection of maximizing shareholder value. Moreover,
the extraordinary tactics to avoid the MHC offer, including the
transfer of $27 million of unrecognized gains and the future tax
liability to the new entity, imply management is concerned about its
own interests, not public shareholders."
Similarly, on September 19, 1996, independent REIT analysts at Everen
Securities, Inc. described the transaction as follows (Exhibit D):
"The revised merger agreement is a disappointment from an economic
standpoint and a disaster from a fairness standpoint...While there are
plenty of synergies to the ROC/Chateau combination, we actually
believed MHC and Chateau were a better fit and perhaps offered more
accretion. However, synergies and accretion are really no longer the
point here, the point is now management credibility.
Conflicts of Interest: Instead of demonstrating to shareholders the
merit of their proposed merger Chateau management has done nothing but
highlight their own conflicts of interest -- protecting their tax
position, jobs and egos. Chateau has shifted tax liability effectively
to the common shareholder, reduced shareholders voting power to assure
approval, initiated a share buyback which has absolutely no economic
merit relative to the acquisition of property..."
F. THE CURRENT LITIGATION
On September 17, 1996, Chateau brought an action in this Court against
the MHC Parties, contending that MHC OP's Tender Offer should be enjoined
because the Schedule 14D-1 filed by the MHC Parties was false and misleading.
Chateau also sought declarations that a provision in its corporate charter
prevents
-12-
the MHC Parties from owning more than seven percent of Chateau's outstanding
common stock and that Chateau's Board was not required to exempt the MHC
Parties from the application of the Maryland Business Combination Act.
On September 25, 1996, the MHC Parties filed a counterclaim against
Chateau, Chateau's directors and ROC, contending that the Revised Merger
Agreement and the transactions contemplated thereunder constituted a breach
(which ROC had aided) of the directors' fiduciary duties to Chateau's
shareholders, that the Schedule 14D-9 filed by Chateau was false and
misleading, that Chateau's charter did not prohibit the MHC Parties from
owning more than seven percent of Chateau's outstanding common stock and that
Chateau's Board was required to exempt the MHC Parties from the application of
the Maryland Business Combination Act. The counterclaim seeks preliminary and
permanent injunctive relief, and the MHC Parties have filed a motion for a
preliminary injunction to prevent the counterclaim-defendants from carrying
out the wrongful acts identified in the counterclaim.
The various aspects of the counterclaim-defendants' scheme to unjustly
enrich themselves while preventing the shareholders from accepting MHC OP's
offer are interrelated and should be considered together at the preliminary
injunction stage of this litigation. However, the MHC Parties have brought
this motion for a temporary restraining order because it is important that
this Court preserve the status quo until it reaches a decision on
-13-
the MHC Parties' motion for a preliminary injunction. The temporary
restraining order requested would prohibit the purchase or sale of Chateau
shares by Chateau or its directors. It would also prohibit Chateau from taking
other steps that would materially alter the status quo before the motion for a
preliminary injunction is decided.
II. THE APPLICABLE STANDARDS FOR A TEMPORARY RESTRAINING ORDER.
Under Fourth Circuit law, the decision whether to grant a temporary
restraining order involves the consideration of four factors: (1) the
likelihood of irreparable harm to the plaintiff if injunctive relief is
denied; (2) the likelihood of harm to the defendant if an injunction is
issued; (3) the likelihood of success on the merits; and (4) the public
interest. Blackwelder Furniture Co. v. Seilig Manufacturing Co., 550 F.2d
189 (4th Cir. 1977); The Citrus Group, Inc. v. Cadbury Beverages, Inc., 781
F. Supp. 386, 388 (D. Md. 1991) (Nickerson, J.) (applying
Blackwelder).(4) As the Blackwelder court explained, "[t]he two more
important factors are those of probable irreparable injury
- ----
4 The cases cited discussed the standard for granting a preliminary
injunction. However, in the Fourth Circuit, "[t]he factors to be
weighed before issuing a temporary restraining order are the same as
those considered before issuance of a preliminary injunction." Perdue
Farms, Inc. v. National Labor Relations Board, 927 F. Supp. 897, 904
(E.D.N.C. 1996); see also Commonwealth of Virginia v. Kelly, 29 F.3d
145, 147 (4th Cir. 1994) (applying Blackwelder test to temporary
restraining order); James A. Merritt & Sons v. Marsh, 791 F.2d 328
(4th Cir. 1986) (same).
-14-
to plaintiff without a decree and of likely harm to the defendant with a
decree. If that balance is struck in favor of plaintiff, it is enough that
grave or serious questions are presented; and plaintiff need not show a
likelihood of success." 550 F.2d at 196. As we explain below, all of these
factors favor the granting of the requested temporary restraining order.
III. THE MHC PARTIES ARE ENTITLED TO A TEMPORARY RESTRAINING ORDER.
A. MHC OP AND THE OTHER SHAREHOLDERS OF CHATEAU WILL SUFFER
IRREPARABLE HARM IF THIS COURT DOES NOT ISSUE A TEMPORARY
RESTRAINING ORDER.
MHC OP and the other shareholders of Chateau will suffer irreparable
harm if the requested temporary restraining order is not granted. If Chateau
repurchases stock or sells stock to Insiders prior to a decision on a motion
for preliminary injunction, the status quo will be altered irrevocably. The
voting power and ownership of Chateau, and the amount of cash held by or
available to Chateau, will be materially different than they now are; the
Insiders will have taken significant steps toward obtaining voting control of
Chateau and will have depleted corporate assets in doing so.
Moreover, if a temporary restraining order is not granted and Chateau
repurchases its stock, a number of existing shareholders will have sold their
stock to Chateau prior to a decision on the MHC Parties' motion for a
preliminary injunction. These shareholders would be unfairly and irremediably
prejudiced
-15-
in making those sales because at present the market has discounted Chateau's
stock price in light of the announcement of the Revised Merger Agreement and
Chateau's misstatements in its Schedule 14D-9 about the MHC Parties' Tender
Offer. If this Court agrees with the MHC Parties on the merits of this case
and MHC OP's Tender Offer is successful, that is information the shareholders
should have known before selling their stock. But it will be too late to undo
what has occurred even if this Court were to agree with the MHC Parties'
position after a preliminary injunction hearing unless the requested temporary
restraining order is granted.
The repurchases and sales to Insiders of Chateau stock proposed by
Chateau are an integral part of the Insiders' scheme to prevent the
shareholders from accepting MHC OP's offer. If this Court concludes that that
scheme is a breach of the Chateau directors' fiduciary duties, it would be
unjust if the repurchases or sales had already been consummated. This Court
should maintain the status quo until it has decided the merits of the case
after a preliminary injunction hearing.
For reasons similar to those discussed above, a number of courts have
entered temporary restraining orders to prevent the purchase of shares and
to preserve the status quo in contests for corporate control. See, e.g.,
UIS, Inc. v. Walbro Corp., 1987 WL 18108, at *3-4 (Del. Ch. 1987); Petty v.
Penntech Papers, Inc., 347 A.2d 140, 143 (Del. Ch. 1975).
-16-
B. NEITHER CHATEAU NOR THE INSIDERS WILL BE HARMED BY A TEMPORARY
RESTRAINING ORDER.
In contrast to the immediate, irreparable harm to Chateau shareholders
and Chateau that will occur if the stock repurchases or sales proceed, neither
Chateau nor its directors will be harmed if the Court temporarily restrains
those purchases or sales. A short delay in the consummation of any purchases
or sales would not preclude Chateau from proceeding with its plan if it
succeeds at the preliminary injunction stage. Neither Chateau nor ROC have
distributed proxy statements or set a record date for voting. Accordingly, the
balance of harms clearly favors the entry of a temporary restraining order.
See Petty v. Penntech Papers, Inc., 347 A.2d 140, 143 (Del. Ch. 1975)
(temporarily restraining selective stock redemption where the potential harm
from delay in redemption was minimal in comparison to evidence that
expenditure of corporate funds appeared designed to ensure management voting
control); UIS, Inc. v. Walbro Corp., 1987 WL 18108, *4 (Del. Ch. Oct. 6, 1987)
(temporarily restraining stock repurchase where "colorable" claim of breach of
duty outweighed right of board to begin stock repurchase plan and where order
would "allow a more thoughtful treatment of the issues presented").
-17-
C. THE MHC PARTIES HAVE A HIGH PROBABILITY OF SUCCESS ON THE
MERITS.
The MHC Parties have a high probability of succeeding on the merits of
their claim that the Chateau directors' plan to have the company purchase and
sell stock, as part of their overall scheme to thwart MHC OP's offer at the
expense of Chateau's shareholders, is a breach of the directors' fiduciary
duties to those shareholders. The directors' duties are defined in Section
2-405.1(a) of the Maryland General Corporation Law, which provides:
"A director shall perform his duties as a director, including
his duties as a member of a committee of the board on which he
serves:
(1) In good faith;
(2) In a manner he reasonably believes to be in the best
interests of the corporation; and
(3) With the care that an ordinarily prudent person in a
like position would use under similar circumstances."
The directors cannot satisfy the statutory requirement that they act
in good faith, in a manner they reasonably believe to be in the best interests
of the corporation and with the care that an ordinarily prudent person in a
like position would use. The Revised Merger Agreement was plainly the product
of an egregious conflict of interest that caused the Insiders, who own
virtually no common stock and who dominate Chateau and its Board, to favor
their own positions at the expense of the shareholders. There is
-18-
simply no explanation other than this conflict for the timing and structure of
the Revised Merger Agreement.
As discussed above, the clear purpose of the revisions to the original
Chateau-ROC merger agreement is to prevent Chateau's shareholders from
accepting MHC OP's offer even if they wish to do so and to force the
consummation of the Chateau-ROC merger against the will of the shareholders.
Under the Revised Merger Agreement, the OP unit holders -- primarily the
Insiders -- can convert their units into common stock on a tax-efficient
basis. This conversion, along with the proposed expenditure of approximately
$35 million by Chateau to repurchase shares, the proposed sale of shares to
the Insiders and the restructuring of the merger so that only a majority of
the voting (instead of two-thirds of the outstanding) Chateau shareholders
need to approve it, would give the Insiders the power to approve the ROC
merger on their own, even if every single existing shareholder objects. MHC
OP's offer would be terminated because the merger would be consummated even if
MHC OP acquired 100 percent of the existing common stock.
The advantage to the Insiders would go beyond entrenching themselves
and preventing MHC OP's offer from succeeding. The Insiders would also be able
to obtain voting common stock in the new company while transferring to others
a huge tax burden (the taxes on more than $100 million of taxable gain),
something they have never been able to do since Chateau was formed and would
not
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have been able to do under the original Chateau-ROC Agreement. This would
be of enormous economic value to the Insiders.
However, while the transaction would be a bonanza for the Insiders, it
would be a disaster for the existing shareholders. As defendants have
conceded, the exchange of OP units by the Insiders would make the existing
Chateau shareholders responsible for at least $27 million ($4 to $5 per share)
in taxable gain. More significantly, they would lose the right they now have
to reject a merger with ROC and accept MHC OP's offer. To add insult to
injury, this result would have been achieved by the expenditure by Chateau of
up to $35 million of corporate funds for the repurchase of stock that is
designed to prejudice the shareholders' rights.
Chateau's directors should not be permitted to enter into transactions
that allow the Insiders to transfer tax liabilities to the shareholders and
at the same time prevent the shareholders from doing what is best for them.
"'Since a director is vested with the responsibility for the management of
the affairs of the corporation, he must execute that duty with the
recognition that he acts on behalf of others. Such obligation does not
tolerate faithlessness or self-dealing.'" NCR Corp. v. American Telephone
and Telegraph Co., 761 F. Supp. 475, 491 (S.D. Ohio 1991) (applying
Maryland law), quoting Smith v. Van Gorkom, 488 A. 2d 858, 872 (Del. 1985).
Under Maryland law, a "court may intervene to prevent (or annul) conduct on
the part of directors that is
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fraudulent or represents a breach of their fiduciary obligations." Mountain
Manor Realty, Inc. v. Buccheri, 461 A. 2d 45, 51 (Md. App. 1983). Given the
circumstances of this case, there is a high probability that this Court
will intervene to prevent the Chateau directors from breaching their duties
under Section 2-405.1.
D. THE PUBLIC INTEREST FAVORS GRANTING THE REQUESTED TEMPORARY
RESTRAINING ORDER.
The public interest in ensuring that directors adhere to their
fiduciary duties is manifest. "A PUBLIC POLICY, existing through the years,
and derived from a profound knowledge of human characteristics and motives,
has established a rule that DEMANDS of a corporate officer or director,
peremptorily and inexorably, the MOST SCRUPULOUS OBSERVANCE OF HIS DUTY, not
only affirmatively to protect the interests of the corporation committed to
his charge, but also to refrain from doing anything that would work injury to
the corporation...The rule that requires an undivided and unselfish loyalty to
the corporation demands that there shall be NO CONFLICT BETWEEN DUTY AND
SELF-INTEREST." Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (emphasis
added). This language concisely sums up a long-established principle of
American corporate law: that directors owe their corporation and its
shareholders an uncompromising duty of loyalty. Under the circumstances
present here, a temporary restraining order will ensure that Chateau and its
directors do
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not continue to allow self-interest to conflict with and compromise their
fiduciary duty to Chateau's shareholders.
CONCLUSION
For the reasons set forth above, the MHC Parties request that this
Court temporarily restrain Chateau and its directors from purchasing or
selling Chateau shares or from taking other steps that would materially alter
the status quo before the MHC Parties' motion for a preliminary injunction is
decided.
Respectfully submitted,
-----------------------
Arthur F. Fergenson
BALLARD SPAHR ANDREWS &
INGERSOLL
Suite 1900
300 East Lombard Street
Baltimore, Maryland 21202
(410) 528-5600
Federal Bar No. 00304
Of Counsel:
Vincent J. Connelly
Scott J. Davis
Joseph A. Starkman
Daniel L. Ring
MAYER, BROWN & PLATT
190 South LaSalle Street
Chicago, IL 60603
(312) 782-0600
Dated: September 25, 1996
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