Exhibit 11
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT DEPARTMENT
OF THE TRIAL COURT
CIVIL ACTION NO. 95-2095A
RICHARD M. OSBORNE and
ROBERT G. STERN,
Plaintiffs,
v.
COMPLAINT
PRUDENTIAL REALTY TRUST, a
Massachusetts Business Trust, and
JEFFREY L. DANKER, THOMAS F.
MURRAY, JOSEPH M. SELZER,
RICHARD J. BOYLE, FRANCIS L.
BRYANT, as Trustees of the
Prudential Realty Trust,
Defendants.
Parties
1. Plaintiff Richard M. Osborne ("Mr. Osborne")is an Ohio
resident and, both in his own right and as the managing member of a
limited liability company, a shareholder of Prudential Realty Trust.
2. Plaintiff Robert G. Stern ("Mr. Stern") is a Massachusetts
resident and shareholder of Prudential Realty Trust.
3. Defendant Prudential Realty Trust ("Prudential" or
"Trust") is a voluntary association established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated
June 19, 1985. Prudential maintains an office in Boston,
Massachusetts and has its principal place of business at Prudential
Plaza, Newark, New Jersey. The Trust's place of business, according
to paragraph 1.2 of the Trust, is Prudential Center, 4th Floor,
Boston, MA 02199.
4. Defendant Jeffrey L. Danker is the President and a trustee
of Prudential. He resides at 231 Oak Ridge Avenue, Summit, New
Jersey.
5. Defendant Joseph M. Selzer is the Vice-President,
Treasurer, Principal Financial Officer and a trustee of Prudential.
He resides at 16 Lombard Drive, West Caldwell, New Jersey.
6. Defendant Richard J. Boyle is a trustee of Prudential who
resides at 83 Druid Hill Road, Summit, New Jersey.
7. Defendant Thomas F. Murray is a trustee of Prudential who
resides at 7 Midland Gardens, Bronxville, New York.
8. Defendant Francis L. Bryant is a trustee of Prudential who
resides at 2 Sturgis Road, Bronxville, New York.
Jurisdiction and Venue
9. This Court has jurisdiction over this matter in that
Prudential maintains an office in Massachusetts and the terms of the
Declaration of Trust provide that the rights of all parties and the
effect and construction of every provision of the Declaration of
Trust shall be subject to, and construed according to, the statutes
and laws of the Commonwealth of Massachusetts.
10. Venue is proper in this Court pursuant because Prudential
maintains an office in Boston, Suffolk County, Massachusetts.
The Trust
11. On June 19, 1985, Prudential, a Massachusetts business
trust, was formed pursuant to a Declaration of Trust for the purpose
of investing in real property; it was further desired that the trust
qualify as a real estate investment trust ("REIT") under the REIT
provisions of the U.S. Internal Revenue Code. Shares of the trust
are traded on the New York Stock Exchange. Prudential is managed by
its trustees and the shareholders of Prudential are beneficiaries of
the trust.
12. Prudential owns in trust for its beneficiaries three
properties: two office complexes and an industrial park. These
properties were purchased by the Trust at or around the time of the
Trust's formation. On information and belief, Prudential paid
$99.9 million for the three properties.
13. Mr. Osborne, in his own right and as managing member of a
limited liability company, is the beneficial owner of 2,043,800
capital shares of beneficial interest of Prudential (or 18.4% of the
class) and 1,011,900 income shares of beneficial interest of
Prudential (or 9.1% of the class). Mr. Stern owns 1,000 income
shares and 1,000 capital shares of beneficial interest of
Prudential. Under the terms of the Declaration of Trust, income
shares of beneficial interest are entitled to receive dividends and
a liquidation preference as to distributions (beyond any realized
capital gains) over the capital shares of beneficial interest. Mr.
Osborne currently owns approximately 13.7% percent of Prudential's
outstanding shares of beneficial interests.
14. Article 3.2(l) of the Declaration of Trust granted the
trustees the express authority to sell or transfer the Trust Estate
to any person in exchange for the shares of beneficial interest in
Prudential, or to merge or consolidate the Trust with any person.
15. According to the terms of the Declaration of Trust, it was
intended that the trustees would "hold the Trust's investments in
interests in Real Property for a period of approximately 10-1/2
years after the effective date of the Registration Statement and,
after that time, the Trustees would dispose of any remaining assets
of the Trust in an orderly fashion within a period of approximately
18 months in order to achieve a complete liquidation of the Trust by
the end of the quarter in which the twelfth anniversary after the
effective date of the Registration Statement shall fall." On
information and belief, the Registration Statement became effective
on or about August 26, 1985.
16. However, the Declaration of Trust did not provide for the
automatic liquidation of the Trust. On the contrary, the
Declaration of Trust expressly provided that
The Trust's existence and the maximum holding
period for its investments may be extended beyond
such twelve year period only if (a) (i) at any
time after December 31, 1994, a majority of the
Trustees. . . affirmatively determines that such
extension would be in the best interest of the
Shareholders, taking into consideration the then
prevailing conditions in the relevant real estate
markets, and recommends to the Shareholders a
single specified extension of the aforesaid
twelve year period (not to exceed two years) and
(ii) the holders of a majority of each class of
the Shares then outstanding and entitled to vote
thereon approve such extension or (b) the Trust
is a party to any judicial . . . proceeding . . .
with respect to the Trust, which in the Trustees'
reasonable judgment makes impracticable a final
distribution in liquidation to the Shareholders.
The Prospectus
17. The public offering of shares of Prudential was
accomplished pursuant to a Prospectus dated August 22, 1985, as
approved by the United States Securities and Exchange Commission.
Under the heading "Fiduciary Responsibility of Trustees," the
Prospectus informed shareholders that, consistent with the terms of
the Declaration of Trust and Massachusetts law, "the Trustees are
accountable to the Trust's shareholders as fiduciaries and are
required to perform their duties in good faith in a manner each
Trustee believes to be in the best interest of the Trust, with such
care, including reasonable inquiry, as a prudent person in a like
position would use under similar circumstances."
18. The Prospectus further provides that all capital gains
accrued by the Trust shall be payable to Prudential's capital
shareholders. The Prospectus defines "capital gain" as "the amount
computed consistent with the Trust's tax records in respect of any
disposition of a capital asset of the Trust and equal to the
difference between the adjusted basis of such asset and the amount
realized on disposition, net of brokers' fees and other disposition
expenses." Once the Trust has realized capital gains from the sale
or other disposition of any of the Trust's assets (i.e., one of the
three real properties owned by the Trust), the Trustees must
immediately distribute the capital gains to the holders of capital
shares. The Prospectus plainly states that, "upon any sale of a
property prior to the adoption by the Trust of a plan of
liquidation, the Trust intends promptly to distribute all Capital
Gains to the holders of the Capital Shares." Although the holders
of capital shares are entitled to receive distributions of assets,
"dividends on such shares will be payable only following the
recognition of Capital Gain (as defined) by the Trust."
19. According to the Prospectus, holders of income shares, in
addition to receiving dividends, are entitled to receive a
preference over capital shares for distributions from the
liquidation of Trust assets. The payment of dividends during the
life of the Trust, and distributions following the termination of
the Trust or the disposition of any Trust assets, are payable from
Prudential's "distributable cash," which is defined as the net
revenues of the Trust. And the Prospectus further provides:
"Distributable Cash shall not, however, include any Capital Gain
...." At the time of the termination of the Trust, holders of
income shares are entitled to the redemption of their shares in the
amount of $8.00 per share plus accrued and unpaid dividends, and
such redemption shall receive a preference in payment from the
Trust's distributable cash.
The Trustees' Failure to Act in the
Best Interest of the Beneficiaries
20. During the nearly ten years of the Trust's existence, the
value of its shares and underlying real estate have dropped
precipitously. The capital share trading price has declined from a
high of $2.30 per share on August 30, 1985 to only $0.41 per share
on February 17, 1995. Similarly, the income share trading price
has declined from a high of $8.11 on August 30, 1985 to $4.13 per
share on February 17, 1995. Meanwhile, the appraised value of the
underlying assets has plummeted. On information and belief, the
appraised value in 1985 of the Trust Estate was between $90 million
and $100 million. In a Form 8-K Report filed on February 15, 1995,
by the Trustees with the Securities and Exchange Commission, the
appraised value of the Trust Estate by the close of 1994 was only
$73.7 million.
21. As the value of the Trust Estate and Prudential's shares
of beneficial interest declined, the Trustees took no significant
actions to halt the slide. The administrative costs of the Trust
Estate were unreasonably high at the same time that occupancy rates
in the properties was low. Moreover, even though it became evident
that the marketability of the shares was being materially harmed by
the two-tiered share structure that was constructed when the real
estate market was rapidly rising, the Trustees failed to collapse
the shares into a single class of stock as other REITs had
successfully done in the early 1990s.
22. Nonetheless, despite Prudential's historically poor
financial performance, there are signs that Prudential is finally
turning around. Modest gains in the value of the Trust Estate and
the price of the shares have been recorded during the last fifteen
months. The February 17, 1995, Form 8-K reveals that the market
value of the Trust Estate increased by 13% during the calendar year
1994. Similar increases have occurred during 1994 and 1995 in the
price of Prudential's capital and income shares.
23. Notwithstanding such a financial turnaround, and in the
face of modest gains and the opportunity to give the beneficiaries -
including the plaintiff - a long-awaited chance to recoup their
losses, the Trustees have embarked on a course of conduct intent on
liquidating the trust as quickly as possible. During the latter
half of 1994, the Trustees retained the services of J.P. Morgan
Securities, Inc. to solicit bids for the liquidation of the Trust's
assets as contemplated by the Declaration of Trust - even though
such liquidation is not called for under the terms of the
Declaration of Trust for another year.
24. In addition, the Trustees have announced that they intend
to favor the interests of the income shareholders over those of the
capital shareholders in the event that they are successful in
liquidating the Trust. In their Form 10-K filing with the
Securities and Exchange Commission dated March 29, 1995, the
Trustees stated their intention to redeem the income shares at $8.00
per share plus accrued interest and unpaid dividends prior to
calculating the amount of any capital gains payable to capital
shareholders. According to the Form 10-K,
The holders of the Income Shares are entitled, in general, to
all Distributable Cash of the Trust (as defined in the
Declaration of Trust) and, at or prior to the termination of the
Trust, to redemption of such shares up to the stated
value of $8.00 per share plus accrued and unpaid dividends.
The holders of the Capital Shares are entitled to all other
shareholder distributions which will, in general, include
capital gains, if any, of the Trust.
25. Nowhere in the Declaration of Trust or Prospectus does it
state that the redemption of the income shares shall be made payable
prior to the payment of capital gains to capital shareholders. On
the contrary, the offering documents specify that the payment of
capital gains is distinct from distributions and dividends, and
shall be paid immediately upon the disposition of any trust assets
if any such capital gain is realized.
26. On December 21, 1994, February 21, 1995 and March 16,
1995, Mr. Osborne met with representatives of Prudential to discuss
his investment in Prudential. At those meetings, Mr. Osborne noted
that he believed that Prudential's stock price was undervalued and
Prudential was dogged by high advisory costs.
27. Because Mr. Osborne believes that the Shareholders can and
should have the opportunity to recoup their investment, Mr. Osborne
proposed to the trustees that Prudential be merged into a new entity
with a single class of common stock. In addition, Mr. Osborne has
proposed that experienced professional management be retained to
manage the Trust Estate on an ongoing basis and, in connection with
this proposal, Mr. Osborne has guaranteed that management expenses
will be reduced by at least 50%, i.e., $400,000. Mr. Osborne's
proposal also has the added advantage of providing a mechanism
through which shareholders who wish to withdraw and liquidate their
investment can do so while the remaining shareholders can continue
to hold their shares.
28. The trustees have rebuffed Mr. Osborne's attempts to
streamline the structure and management of the Trust Estate. And,
in meetings with the Trustees and their representatives, the
Trustees have indicated that they are not interested in Mr.
Osborne's proposals and that they are not inclined to bring his
proposals to a vote of the shareholders. Indeed, the Trustees have
specifically rejected Mr. Osborne's oral proposal that the parties
enter into a standstill agreement whereby the Trustees would agree
to refrain from disposing of any of the Trust Estate while the
Trustees evaluated Mr. Osborne's proposal.
29. Instead, the Trustees have continued their efforts to
liquidate the Trust Estate at the earliest available dates and, upon
information and belief, Prudential is presently negotiating to sell
the property in Indianapolis.
30. The liquidation of the Trust Estate at this time would
cause the plaintiffs and other beneficiaries significant harm. At
best, there would be a modest premium, if any, over the current
market to the Income stockholders and no payout to the Capital
stockholders. This is because the liquidation value of the assets
of the Trust Estate is significantly lower than it is likely to be
in the coming years. It is thus anticipated that the liquidation
would not be well received in the stock market; the price of the
income shares would be less than half the price paid by the
plaintiffs, and the capital shares would be virtually worthless.
COUNT I
(Breach of Fiduciary Duty)
31. Plaintiffs reallege and repeat paragraphs 1 through 30 as
if fully restated herein.
32. The Trustees have failed to protect the interests of all
of the Trust's beneficiaries and perform their duties in good faith
by acting in a manner that is in the best interests of the Trust,
with such care, including reasonable inquiry, as a prudent person in
a like position would use under similar circumstances. By so doing,
the Trustees' have breached their fiduciary duty of utmost good
faith and loyalty owed to the plaintiffs; this breach has caused,
and will continue to cause, the plaintiffs substantial harm and
damage.
Count Two
(Violation of G.L. c. 93A, section 11)
33. Plaintiffs reallege and repeat paragraphs 1 through 30 as
if fully restated herein.
34. The Trustees' continuing breaches of fiduciary duty
constitute unfair and deceptive acts and practices by them in
violation of Chapter 93A, section 11 of the laws of the Commonwealth
of Massachusetts. On information and belief, such conduct on the
part of the Trustees was both knowing and willful.
Count Three
(Declaratory Judgement)
35. Plaintiffs reallege and repeat paragraphs 1 through 30 as
if fully restated herein.
36. There presently exists an actual and justiciable
controversy between the parties with respect to the rights and
obligations of the Trustees under the Declaration of Trust and
Prospectus. Accordingly, the plaintiffs seek declaratory relief
pursuant to G.L. c. 231A, and ask the Court to determine the
respective rights and obligations of the parties.
WHEREFORE, plaintiffs seek the following relief:
1. That they be awarded judgement against the defendants on
Counts I and II of this complaint for the full amount of their loss
and damage;
2. That the amount of the judgement against the defendants on
Count II of this complaint be trebled, or at least doubled, and that
the plaintiffs be awarded their costs and expenses of bringing this
action, including reasonable attorneys' fees;
3. That the respective rights and responsibilities of the
parties be determined, as requested in Count III; and
4, For such other and further relief as the Court shall deem
appropriate and just.
THE PLAINTIFFS HEREBY DEMAND A TRIAL BY JURY OF ALL CLAIMS
CONTAINED IN THIS COMPLAINT WHICH ARE TRIABLE BY JURY.
Dated: April 14, 1995 The Plaintiffs,
By their counsel,
/s/ Philip Y. Brown /s/ Edwin A. McCabe
Philip Y. Brown(BBO #552366) Edwin A. McCabe (BBO #327040)
Grant Schwartz & Brown Joseph P. Davis III (BBO #551111)
31 Newbury Street Cuddy Bixby
Boston, Massachusetts 02116 One Financial Center
(617) 421-1800 Boston, Massachusetts 02116
(6170 348-3600