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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-1/A-2
Tender Offer Statement Pursuant to Section 14(d)(1)
of the Securities Exchange Act of 1934
(Amendment No. 2)
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CHATEAU PROPERTIES, INC.
(Name of Subject Company)
MHC OPERATING LIMITED PARTNERSHIP
MANUFACTURED HOME COMMUNITIES, INC.
(Bidder)
Common Stock
(Title of Class of Securities)
161739 10
(CUSIP Number of Class of Securities)
Ellen Kelleher
Senior Vice President and General Counsel
Manufactured Home Communities, Inc.
Suite 800
Two North Riverside Plaza
Chicago, Illinois 60606
(312) 474-1122
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications on Behalf of Bidder)
with a copy to:
Edward J. Schneidman
Edward S. Best
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
(312) 782-0600
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1. Name of Reporting Person: MHC Operating Limited Partnership
Manufactured Home Communities, Inc.
S.S. or I.R.S. Identification No. of Above Persons: 36-3853565
36-3857664
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2. Check the Appropriate Box if a Member of a Group: (a) /X/
(b) / /
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3. SEC Use Only:
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4. Sources of Funds: BK
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items
2(e) or 2(f): / /
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6. Citizenship or Place of Organization: Illinois
Maryland
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7. Aggregate Amount Beneficially Owned by Each Reporting Person: 127,010
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8. Check if the Aggregate in Row (7) Excludes Certain Shares: / /
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9. Percent of Class Represented by Amount in Row (7): 2%
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10. Type of Reporting Person: PN
CO
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This Statement constitutes Amendment No. 2 to the Tender Offer Statement
on Schedule 14D-1 originally filed on September 4, 1996 by MHC Operating
Limited Partnership, an Illinois limited partnership ("Purchaser"), the sole
general partner of which is Manufactured Home Communities, Inc., a Maryland
corporation ("MHC"), and MHC, relating to the offer by Purchaser to purchase
all outstanding shares of common stock, $.01 par value per share (the
"Shares"), of Chateau Properties, Inc., a Maryland corporation (the
"Company"), at a price of $26.00 per Share, net to the seller in cash, upon
the terms and subject to the conditions set forth in the Offer to Purchase,
dated September 4, 1996 (the "Offer to Purchase") and in the related Letter of
Transmittal. Capitalized terms not defined herein shall have the meanings
assigned thereto in the Offer to Purchase.
1. Item 10 is hereby amended to add the following:
ITEM 10. ADDITIONAL INFORMATION.
(e) On September 25, 1996, Purchaser and MHC filed an answer and
verified counterclaims and third party complaint to the complaint filed
on September 17, 1996 by the Company. The verified counterclaims assert
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 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 millions of dollars in 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 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
(v) ROC knowingly participated in and aided and abetted the
directors' breaches and self-dealing.
In addition, on the same date, Purchaser 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
Chateau and ROC from taking any action that would dilute the Company's
stockholders or otherwise alter the current status quo.
(f) On September 25, 1996, MHC issued a press release stating:
MHC FILES SUIT AGAINST CHATEAU
Seeks Immediate Hearing
CHICAGO, IL - SEPTEMBER 25, 1996 -- Manufactured Home Communities,
Inc. (NYSE:MHC) announced today that it has filed suit against Chateau
Properties, Inc. (NYSE:CPJ) and ROC Communities, Inc. (NYSE:RCI), and
Chateau Board members John A. Boll, C.G. Kellogg, Jay A. Rudolph, Gebran
S. Anton, Jr., James M. Lane, Kenneth E. Myers, and Edward R. Allen (the
"Individual Defendants").
"We were forced to take this action in response to the drastic
steps taken last week by Chateau and ROC. Their restructured merger
disenfranchises Chateau's shareholders and ultimately reallocates tax
liability from Chateau insiders to the shareholders," said Samuel Zell,
Chairman of MHC. "From the outset, we expected that Chateau's Board
would recognize the superiority of MHC's all-cash offer. Apparently the
Chateau Board has other priorities," Mr. Zell added.
The lawsuit was filed in the United States District Court for the
District of Maryland, and seeks a Temporary Restraining Order preventing
Chateau and the Individual Defendants from expending Chateau corporate
assets or otherwise carrying out the purchase of 1.45 million outstanding
Chateau common shares and preventing ROC from carrying out its plan to
purchase 350,000 outstanding Chateau common shares in order to manipulate
the vote on the proposed merger.
MHC is also seeking various other forms of judicial relief in
connection with the scheme by Chateau insiders (aided by ROC) to:
. block MHC's tender offer by misrepresenting material facts;
. expend up to approximately $35 million of Chateau corporate
assets to repurchase Chateau shares;
. transfer more than $100 million in deferred taxable gain from
the insiders to shareholders; and
. restructure the proposed merger to effectively disenfranchise
Chateau shareholders by reducing the voting requirement and
manipulating the vote.
The complaint also asks for a declaration that the 7% ownership
limitation in Chateau's charter does not apply to MHC and alleges that
the Individual Defendants and Chateau breached their fiduciary duties to
Chateau shareholders.
"We are seeking an immediate hearing and expeditious judicial
review of all the issues so that MHC may close its tender offer at the
earliest possible date," stated Mr. Zell.
MHC owns or has controlling interest in 67 quality manufactured
housing communities across the country. Its portfolio consists of 26,820
sits in 19 states. MHC is a self-administered and self-managed real
estate investment trust (REIT), with headquarters in Chicago.
2. Item 11 is hereby amended to add the following:
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
(a)(10) 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.
(a)(11) 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.
(a)(12) Text of Press Release, dated September 25, 1996, issued
by Manufactured Home Communities, Inc.
SIGNATURES
After due inquiry and to the best of our knowledge and belief, we certify
that the information set forth in this statement is true, complete and
correct.
Dated: September 25, 1996 MHC OPERATING LIMITED PARTNERSHIP
By: Manufactured Home Communities, Inc.,
its General Partner
By: /s/ DAVID A. HELFAND
----------------------
Name: David A. Helfand
Title: President and Chief
Executive Officer
MANUFACTURED HOME COMMUNITIES, INC.
By: /s/ DAVID A. HELFAND
-----------------------
Name: David A. Helfand
Title: President and Chief
Executive Officer
EXHIBIT INDEX
(a)(10) 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.
(a)(11) 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 Partner-
ship 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.
(a)(12) Text of Press Release, dated September 25, 1996, issued
by Manufactured Home Communities, Inc.
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. )
)
)
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ANSWER AND VERIFIED COUNTERCLAIMS
AND THIRD PARTY COMPLAINT
---------------------------------
ANSWER
Defendants Manufactured Home Communities, Inc. ("MHC") and MHC
Operating Limited Partnership ("MHC OP") hereby answer the Complaint
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.
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.
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 allegation purports 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.
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
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, or 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.
* * *
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
MHC'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:
. misrepresenting that the MHC Tender Offer is
"illusory";
. 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;
. 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.
. restructuring the Chateau-ROC merger to avoid the
Maryland law requirement that two-thirds of outstanding
shares approve the transaction.
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
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 gain 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
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 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
Chateau's shareholders' interests for the benefit of Chateau's
Insiders and directors.
Parties
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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. Myers and Edward R. Allen are members of the Board of Directors of
Chateau. They and Messrs. Boll and Kellogg will be referred to
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
(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."
23. 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
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 it 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
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 the 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.
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
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
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 press 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
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
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:
(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
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 that on
September 12, 1996, Chateau's Board of Directors amended Chateau's
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
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
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 . . ..
* * *
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
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
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 of 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 Unit-
holders 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.
* * *
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
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
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
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.
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
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:
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
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 by 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.
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 is 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
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
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.
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 were 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
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
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
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 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 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
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
Parachutes 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 provision 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
- - -- 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 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
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
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.
101. 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
person in a like position under similar circumstances 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
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
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.
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 Defendants' 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
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.
WHEREFORE, 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 restriction 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
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.
Dated: September 25, 1996
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
MAYER, BROWN & PLATT
190 South La Salle Street
Chicago, IL 60603
(312) 782-0600
VERIFICATION
I, __________________________, on oath, state that I am
_______________________ 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.
______________________________
SUBSCRIBED AND SWORN TO
before me this ____ day
of _______________, 1996.
__________________________
Notary Public
My Commissions Expires:
__________________________
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 MHC 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
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
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. 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
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.
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.
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
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
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.
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.
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
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
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.
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. All of these machinations serve no purpose
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.
Because Chateau was a direct participant in the original
merger, Mayrland law would have required the approval of
two-thirds of Chateau's outstanding shares to approve that
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.
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.
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
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
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
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). As the Blackwelder court explained, "[t]he two
more important factors are those of probable irreparable injury
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.
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."
Purdue 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).
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
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).
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").
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
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
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
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
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
MHC FILES SUIT AGAINST CHATEAU
------------------------------
Seeks Immediate Hearing
CHICAGO, IL - SEPTEMBER 25, 1996 -- Manufactured Home Communities, Inc.
(NYSE:MHC) announced today that it has filed suit against Chateau Properties,
Inc. (NYSE:CPJ) and ROC Communities, Inc. (NYSE:RCI), and Chateau Board members
John A. Boll, C.G. Kellogg, Jay A. Rudolph, Gebran S. Anton, Jr., James M.
Lane, Kenneth E. Myers, and Edward R. Allen (the "Individual Defendants").
"We were forced to take this action in response to the drastic steps
taken last week by Chateau and ROC. Their restructured merger disenfranchises
Chateau's shareholders and ultimately reallocates tax liability from Chateau
insiders to the shareholders," said Samuel Zell, Chairman of MHC. "From the
outset, we expected that Chateau's Board would recognize the superiority of
MHC's all-cash offer. Apparently the Chateau Board has other priorities," Mr.
Zell added.
The lawsuit was filed in the United States District Court for the
District of Maryland, and seeks a Temporary Restraining Order preventing
Chateau and the Individual Defendants from expending Chateau corporate assets
or otherwise carrying out the purchase of 1.45 million outstanding Chateau
common shares and preventing ROC from carrying out its plan to purchase 350,000
outstanding Chateau common shares in order to manipulate the vote on the
proposed merger.
MHC is also seeking various other forms of judicial relief in connection
with the scheme by Chateau insiders (aided by ROC) to:
. block MHC's tender offer by misrepresenting material facts;
. expend up to approximately $35 million of Chateau corporate assets
to repurchase Chateau shares;
. transfer more than $100 million in deferred taxable gain from the
insiders to shareholders; and
. restructure the proposed merger to effectively disenfranchise
Chateau shareholders by reducing the voting requirement and
manipulating the vote.
The complaint also asks for a declaration that the 7% ownership
limitation in Chateau's charter does not apply to MHC and alleges that the
Individual Defendants and Chateau breached their fiduciary duties to Chateau
shareholders.
"We are seeking an immediate hearing and expeditious judicial review of
all the issues so that MHC may close its tender offer at the earliest possible
date," stated Mr. Zell.
MHC owns or has controlling interest in 67 quality manufactured housing
communities across the country. Its portfolio consists of 26,820 sits in 19
states. MHC is a self-administered and self-managed real estate investment
trust (REIT), with headquarters in Chicago.