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EXHIBIT 5
GIBSON, DUNN & CRUTCHER LLP
WAYNE W. SMITH SBN 054593
JOSEPH P. BUSCH, III, SBN 070340
4 Park Plaza, Suite 1400
Irvine, California 92614-8557
(714) 451-3800
DAVIS POLK & WARDWELL
MICHAEL P. CARROLL
JAMES H.R. WINDELS
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
Attorneys for Plaintiff
Emeritus Corporation
FILED
ORANGE COUNTY SUPERIOR COURT
DEC 9 1997
ALAN SLATER, Executive Officer/Clerk
BY J. GAMBOA
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
EMERITUS CORPORATION, a Washington
corporation
Plaintiff,
V.
ARV ASSISTED LIVING, INC., a California
corporation; DAVID P. COLLINS, an individual;
JOHN A. BOOTY, an individual; R. BRUCE
ANDREWS, an individual; JAMES M. PETERS,
an individual; MAURICE J. DeWALD, an
individual; JOHN J. RYDZEWSKI, an individual;
ROBERT P. FREEMAN, an individual;
KENNETH M. JACOBS, an individual; MURRY
N. GUNTY, an individual; and HOWARD G.
PHANSTIEL, an individual.
Defendants.
CASE NO. 787788
COMPLAINT FOR INJUNCTIVE AND
DECLARATORY RELIEF
JUDGE THOMAS N. THRASHER, SR.
DEPT. 13
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I.
NATURE OF THE ACTION
1. Plaintiff Emeritus Corporation ("Emeritus") brings this action
against ARV Assisted Living, Inc. ("ARV"), David P. Collins, John A. Booty, R.
Bruce Andrews, James M. Peters, Maurice J. DeWald, John J. Rydzewski, Robert P.
Freeman, Kenneth M. Jacobs, Murry N. Gunty, and Howard G. Phanstiel
(collectively, "Defendants" or, excepting ARV, the "Individual Defendants").
Defendants Collins, Booty, Andrews, Peters, DeWald and Rydzewski (collectively,
the "ARV Defendants") have served together on ARV's board of directors (the
"Board") since 1995. Defendants Freeman, Jacobs and Gunty were appointed to the
Board on October 30, 1997, and defendant Phanstiel was appointed on or about
December 5, 1997. Emeritus brings this complaint for injunctive and declaratory
relief as set forth below.
2. This an action to prevent the directors of a publicly-owned
California corporation from selling out their own shareholders. California law
requires directors of a corporation to act as fiduciaries for the corporation's
shareholders. In this case, however, the Individual Defendants have breached
their fiduciary duties by taking away control of ARV from its public
shareholders and depriving those shareholders of the opportunity to maximize the
value of their shares. Instead of acting in the best interests of ARV's
shareholders, the Individual Defendants have embarked on a program to prevent an
acquisition of ARV and entrench themselves in office for their own personal
benefit.
3. On July 10, 1997, Emeritus made a proposal to ARV's Board to acquire
ARV's outstanding shares for a premium of their market value. However, because
Emeritus' proposal would have resulted in the ARV Defendants losing control of
ARV, the ARV Defendants failed to give any serious consideration to the proposal
and refused to negotiate with Emeritus. Instead, the ARV Defendants took
immediate and decisive steps to block Emeritus from acquiring ARV and to
preserve their Board positions. These steps included entering into a complex
series of self-serving transactions described below and putting into place a
"shareholders rights plan" commonly known as a "poison pill."
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4. On July 14, 1997 - four days after Emeritus' proposal - ARV announced
that it had entered into a transaction with Prometheus Assisted Living, LLC
("Prometheus"), an affiliate of Lazard Freres Real Estate Investors L.L.C.
("Lazard") (the "First Prometheus Transaction"). In the First Prometheus
Transaction, the ARV Defendants agreed to sell a vast amount of newly issued ARV
stock to Prometheus for $14 per share. ARV's directors and senior officers also
committed, subject to certain conditions, to vote their 20% holding of ARV stock
in support of Prometheus' nominees to ARV's Board. In return, Prometheus would
vote its sizable holding of stock in favor of keeping ARV's existing Board in
office for at least another three years. This massive stock sale and mutual
commitments to support each other's Board nominees radically altered the
ownership structure of ARV, locked up the Board under the control of Prometheus
and the ARV Defendants, and wrested control of the company away from ARV's
public shareholders. On August 22, 1997, ARV filed preliminary proxy materials
with the Securities and Exchange Commission (the "SEC") stating that ARV was
intending to hold a vote of its shareholders at an October 14, 1997 meeting to
approve the First Prometheus Transaction. Subsequently, the annual meeting was
rescheduled for November 18, 1997.
5. Also on July 14, 1997, the ARV Defendants took another step to
entrench themselves in office - they hurriedly implemented a poison pill. The
poison pill effectively prevents Emeritus or any other party from attempting to
acquire ARV and denies ARV's shareholders the opportunity to receive a premium
for their shares in any public tender offer. The ARV Defendants expressly
excluded Prometheus from the effect of the poison pill, however, thereby
permitting Prometheus to acquire majority control of ARV. Without paying any
control premium to ARV's public shareholders.
6. On October 12, 1997, after stating its view that the First Prometheus
Transaction constituted a breach of the ARV Defendants' fiduciary duties,
Emeritus made a second proposal to the ARV Board to purchase all of the publicly
held shares of ARV in cash for $16.50 per share - 16% higher than the price at
which Prometheus had purchased its ARV stock. Despite this significant premium,
the ARV Defendants again rejected Emeritus' proposal without any serious
consideration or negotiations with Emeritus. While Emeritus' proposal offered
substantial value to all of ARV's
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shareholders, the First Prometheus Transaction gave unfair and special treatment
to one hand-picked shareholder which in return pledged to support the ARV
Defendants in their quest to remain in office.
7. On October 13, 1997, Gary Davidson, the Chairman and Chief Executive
Officer of ARV, as well as one of its principal founders, resigned from the
company. Upon information and belief, Mr. Davidson resigned because he
disapproved of the extent to which Prometheus was exerting control over ARV and
because he believed that the ARV Defendants had failed to act in the
shareholders' best interest by summarily rejecting Emeritus' October 12, 1997
proposal.
8. With Mr. Davidson having resigned in protest, Emeritus having made
proposals which were far superior to the First Prometheus Transaction, and
shareholder approval of the First Prometheus Transaction in doubt, the ARV
Defendants realized that they had to change strategies to achieve their goals.
The centerpiece of the new strategy was to enter into a second transaction with
Prometheus (the "Second Prometheus Transaction" or, together with the First
Prometheus Transaction, the "Prometheus Transactions"). The ARV Defendants also
canceled the November 18, 1997 shareholder meeting and reneged on their
commitment to hold a shareholder vote to approve the Prometheus Transactions.
9. On October 29, 1997, ARV announced the Second Prometheus Transaction
which superseded parts of the First Prometheus Transaction. The Second
Prometheus Transaction would grant Prometheus three designated directors on an
expanded, nine-member ARV Board. In addition, Prometheus would keep the shares
it had already acquired in the First Prometheus Transaction, representing over
16% of ARV, and would be free to acquire up to 49.9% of all outstanding shares
without being subject to ARV's poison pill. In return, Prometheus would agree to
purchase $60 million in convertible debentures (the "Notes") and, as before, to
vote its stock in favor of keeping ARV's existing Board in office for at least
another three years. The Notes would be redeemable at ARV's option in exchange
for common shares of ARV, but the initial redemption price would be exorbitant:
Prometheus would be entitled to receive approximately 4.3 million shares at an
out-of-pocket cost of approximately $14 per share, a substantial discount to
the market price. Like the First Prometheus Transaction, the Second Prometheus
Transaction locks up the Board under the joint control of Prometheus and ARV's
existing management while selling out the company's public
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shareholders. Shortly after the announcement of the Second Prometheus
Transaction, defendants Freeman, Jacobs and Gunty were appointed to ARV's Board.
10. On November 21, 1997, ARV filed new preliminary proxy materials (the
"New Proxy Statement") with the SEC. The New Proxy Statement no longer seeks
shareholder approval of the Prometheus Transactions. Rather, the New Proxy
Statement states that ARV intends to solicit proxies for the purpose of
approving only three proposals at its annual meeting. Those proposals seek (i)
reincorporation of ARV as a Delaware corporation; (ii) amendment of ARV's
articles of incorporation to increase the maximum number of authorized directors
of ARV from nine to ten; and (iii) re-election of the Individual Defendants as
directors of ARV. The New Proxy Statement also stated that Defendants Freemen,
Jacobs and Gunty had been appointed to ARV's Board on October 30, 1997. The New
Proxy Statement announced January 8, 1998 as the rescheduled date of the annual
meeting.
11. On November 24, 1997, Emeritus filed preliminary proxy materials
with the SEC stating that Emeritus intends to solicit proxies in opposition to
the reelection of the Individual Defendants as ARV Board members at ARV's annual
meeting, then scheduled for January 8, 1998. Emeritus' proxy materials also
state that Emeritus is proposing its own slate of nominees for election to ARV's
board at the annual meeting.
12. On December 8, 1997, ARV announced that it had redeemed the $60
million in Notes for approximately 4.3 million ARV common shares (the
"Redemption"). Although ARV announced the price of the shares as $17.25 per
share, because Prometheus received a more than 23% "premium" over and above its
$60 million investment, the out-of-pocket cost to Prometheus was only $14 per
share, substantially less than the market price.
13. In conjunction with the Redemption, ARV announced that it had
rescheduled the annual meeting date for a third time, to January 28, 1998. In
addition, ARV moved the record date for the annual meeting to December 18, 1997,
allowing Prometheus to vote its 4.3 million newly-issued ARV shares at the
annual meeting. In effect, ARV has delivered millions of discounted shares to an
investor, hand-picked by the Board, who is contractually obligated to vote those
shares in support of the Board's director nominees. As a direct response to
Emeritus' proxy contest, the
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Redemption is a blatant attempt by the Board to entrench itself by buying votes
at the expense of ARV's public shareholders and Emeritus.
14. Also on December 8, 1998, ARV announced the appointment, effective
immediately, of defendant Phanstiel as its new Chairman of the Board and Chief
Executive Officer.
15. Emeritus' complaint seeks, among other things specified further
below, the following declaratory and injunctive relief: an order declaring that
Defendants have breached their fiduciary duties by (i) entering into and failing
to revoke the Prometheus Transactions; (ii) implementing and retaining the
poison pill; and (iii) redeeming the Notes issued to Prometheus; and an
injunction voiding, or making voidable by Defendants, the Prometheus
Transactions in whole or part and directing that Defendants redeem the poison
pill.
II.
PARTIES AND JURISDICTION
16. Plaintiff Emeritus is a Washington corporation with its principal
offices located in Seattle, Washington. Emeritus is a long-term care services
company focused on operating residential style assisted living communities.
Emeritus is qualified to do business in California and does business in
California.
17. Defendant ARV is a California corporation with its principal office
located in Costa Mesa, California. ARV is also a provider of assisted living
accommodations and services that operates, acquires and develops assisted living
facilities.
18. Defendant David P. Collins is a Director and Senior Executive Vice
President of ARV and is currently responsible for managing ARV Assisted Living
International, Inc., a wholly owned subsidiary of ARV. Mr. Collins has been a
Director since 1985, and he beneficially owns 558,939 (4.8%) of ARV's common
stock. In 1997, solely in his capacity as Executive Vice President of ARV, he
stands to earn $204,791 in salary, $63,329 in bonuses and $10,000 in stock
options.
19. Defendant John A. Booty is Vice Chairman of the Board of ARV, and
prior to December 5, 1997, was its interim President and Chief Executive
Officer. Mr. Booty was a founder of ARV's predecessor company in 1980 and served
as interim President and Chief Executive Officer beginning October 1997. In
addition, he has been a Director of ARV since its inception in 1985. He
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also served as President of ARV from 1985 through September 1996 and
beneficially owns 699,246 (6%) of ARV's common stock. In 1997, solely in his
capacity as interim President and Chief Executive Officer, he stands to earn
$136,207 in salary, $50,582 in bonuses and $6,426 in other compensation.
20. Defendants R. Bruce Andrews, James M. Peters and Maurice J. DeWald
are currently Directors of ARV and have served as Directors since 1995. They
own, respectively, 2,500, 2,500, and 3,500 shares of ARV's common stock. In
1997, as Directors, they will earn $12,000 per year plus $500 for each meeting
of the Board or committee of the Board that they attend. They also each have the
option to purchase 10,000 shares of ARV common stock.
21. Defendant John J. Rydzewski is a Director and, prior to December 5,
1997, was Chairman of the Board of ARV. In 1997, as a Director of ARV, he would
have earned $12,000 plus $500 for each meeting of the Board or committee of the
Board that he attends. However upon his appointment as Chairman of the Board in
October 1997, it was agreed that Mr. Rydzewski would receive $75,000 per year
for his services. Mr. Rydzewski also owns 7,500 shares of ARV common stock and
has an option to purchase 10,000 additional shares of ARV common stock.
22. Defendants Robert P. Freeman, Kenneth M. Jacobs and Murry N. Gunty
are Directors of ARV, having been appointed to the Board on October 30, 1997. In
addition to their positions as ARV Directors, Mr. Freeman is the President and
Managing Director of Lazard, Mr. Jacobs is a Managing Director in the Banking
Group of Lazard Freres & Co. LLC, an affiliate of Lazard, and Mr. Gunty is a
Vice President of Lazard. Mr. Freeman signed the agreements effectuating the
Prometheus Transactions on behalf of the Prometheus.
23. Defendant Howard G. Phanstiel is Chairman of the Board of Directors
and Chief Executive Officer of ARV, having been appointed to these position on
December 5, 1997. His compensation package has not yet been announced.
24. This Court has jurisdiction over each of the Defendants pursuant to
California Code of Civil Procedure Section 410.10. ARV is a California
corporation, and the Individual Defendants are currently serving as directors of
a California corporation. In addition, on information and belief, the Individual
Defendants have participated in Board meetings in California, either in person
or
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telephonically via teleconferences originating in California. The wrongful acts
and transactions alleged herein have had and will have significant effects
within California.
III.
VENUE
25. Venue is proper in Orange County because ARV's headquarters and
principal offices are located here.
IV.
DERIVATIVE ALLEGATIONS
26. Emeritus asserts the claims herein individually and directly.
However, to the extent that any of these claims should be considered to be
derivative claims, Emeritus did not make demands on ARV's Board to institute an
action asserting the claims because, under the circumstances, demand was not
required, and not necessary and would have been futile in that: (a) the ARV
Defendants participated in and approved of the wrongful acts alleged herein; (b)
those acts occurred in response to and in the context of a contest for control
of ARV, which could have resulted in the removal of the ARV Defendants from
office; (c) the ARV Defendants have already repudiated Emeritus' proposals and
offers to negotiate; (d) the ARV Defendants have recommended the First
Prometheus Transaction in ARV's preliminary proxy materials; and (e) defendants
Freeman, Jacobs and Gunty aided and abetted the ARV Defendants' breach of
fiduciary duty and, together with defendant Phanstiel, have done nothing since
their appointment as Directors to revoke the Prometheus Transactions or the
poison pill or to mollify their entrenching effects. Thus, the Board has at no
time been either independent or disinterested with respect to the decisions it
made.
V.
FACTUAL BACKGROUND
A. ARV IGNORES EMERITUS' PROPOSAL AND RUSHES TO CLOSE THE FIRST PROMETHEUS
TRANSACTION
27. In June 1997, Daniel R. Baty, Chairman and CEO of Emeritus,
telephoned Mr. Davidson of ARV. Mr. Baty told Mr. Davidson that Emeritus was
interested in exploring a business
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combination with ARV. On July 3, 1997, Mr. Baty met with Mr. Davidson at ARV's
headquarters and reiterated Emeritus' possible interest in such a combination.
28. Instead of pursuing discussions with Emeritus, on June 27, 1997, ARV
entered into an exclusivity agreement with Prometheus pursuant to which ARV
agreed not to pursue a transaction with another party prior to August 8, 1997
while negotiations with Prometheus took place. Negotiations between ARV and
Prometheus continued into early July.
29. On July 10, 1997, Mr. Baty of Emeritus and a representative of
Starwood Capital Group, LLC ("Starwood") delivered by facsimile a letter to Mr.
Davidson of ARV, a copy of which is attached as Exhibit A. In the letter, Mr.
Baty and the representative of Starwood set forth a proposal for the acquisition
of ARV by Emeritus and Starwood. Under the proposal, ARV's shareholders would
receive either Emeritus stock or a combination of Emeritus stock and cash worth
a minimum of $14 for their ARV shares, which represented a premium of more than
35% over the then-current market price of ARV stock. Starwood would provide
ongoing financing for the combined company.
30. In the final paragraph of the July 10 letter, Mr. Baty and the
representative of Starwood suggested that a meeting occur as soon as possible
between Emeritus, ARV and Starwood to discuss the proposals in greater detail
and explore possible structures and alternatives. The letter made clear that
Emeritus, Starwood and their advisors were ready to meet with ARV at its offices
in Costa Mesa at ARV's earliest convenience.
31. The following day, on Friday, July 11, 1997, Mr. Baty received a
letter back from ARV, a copy of which is attached as Exhibit B. ARV's letter
stated that Emeritus' letter had been received and that the ARV Board was
"attempting to schedule a meeting next week to consider your proposal."
32. In fact, as the ARV Defendants well knew, ARV's exclusivity
agreement with Prometheus precluded its pursuit of another transaction before
August 8, 1997.
33. Rather than waiting for the next week, ARV's Board met on Sunday,
July 13, 1997. At this meeting, the ARV Defendants summarily rejected Emeritus'
proposal without any further inquiry or discussions with Emeritus or Starwood.
In addition, the ARV Defendants decided to proceed with two major actions which
would effectively prevent Emeritus, or any other party, from acquiring
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control of ARV. These two major actions were, first, rushing to complete and
enter into the First Prometheus Transaction, and second, implementing the poison
pill. The effect of these actions was to entrench the ARV Defendants in office
for their own personal benefit and to deny Emeritus the opportunity to present
its offer to ARV's public shareholders.
B. ARV ENTERS INTO THE FIRST PROMETHEUS TRANSACTION
34. On July 14, 1997, four days after receiving Emeritus' proposal, ARV,
certain of the ARV Defendants, Prometheus and Lazard entered into a series of
agreements under which Prometheus purchased up to a 49.9% holding in ARV's
stock. At the heart of the transactions were mutual promises by the ARV
Defendants and Prometheus to expand the size of the Board and to vote all of
their respective shares in support of each other's nominees for positions on the
Board. In addition, Prometheus agreed to abstain for the next three years from
participating in any acquisition of ARV or other acts which could potentially
unseat the ARV Defendants.
35. The terms of the First Prometheus Transaction rendered control of
the affairs of ARV a private arrangement between ARV's senior management and
Prometheus and thereby effectively disenfranchised ARV's public shareholders.
Before the transaction, ARV's public shareholders had the ability by acting in
concert to control the company; after the transaction, they did not. This change
of control was engineered by Defendants while denying Emeritus the opportunity
to make an offer to acquire ARV and thereby benefit all of ARV's shareholders.
36. On information and belief, defendants Freeman, Jacobs and Gunty each
aided and abetted the ARV Defendants' breach of their fiduciary duty to
shareholders by encouraging and otherwise assisting the ARV Defendants in the
adoption of the First Prometheus Transaction.
37. The terms of the three principal agreements of the First Prometheus
Transaction - the Stock Purchase Agreement (the "SPA"), the Stockholders
Agreement (the "SA"), and the Stockholders Voting Agreement (the "SVA") - are
set forth below in greater detail.
38. SPA: Sale of ARV Stock to Prometheus. The SPA between Lazard,
Prometheus and ARV, a copy of which is attached as Exhibit C, provided for the
issuance to Prometheus of up to a total of 9,653,325 ARV shares. See SPA Section
2.1. Because the First Prometheus Transaction was superseded by the Second
Prometheus Transaction, a total of 1,921,012 shares (or approximately
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16.6% of all outstanding shares) have been issued to Prometheus. However, the
SPA provided that ARV would issue a second block of stock consisting of
3,078,988 shares to Prometheus on the date that shareholder approval of the
First Prometheus Transaction, as described more fully below, took place. See SPA
Section 2.4(a), (b). Thereafter, Prometheus would acquire additional ARV stock
up to an aggregate holding of 49.9% of all outstanding shares during a
three-year "standstill" period. After the standstill period ended, Prometheus
would be free to acquire additional shares of ARV and thus hold a majority
interest in the company.
39. SPA: Prometheus' Power to Veto Actions by ARV. Until four of
Prometheus' own directors had assumed positions on ARV's Board, the SPA
permitted Prometheus to veto any significant action by ARV's Board other than in
the ordinary course of business, including (i) the acquisition or sale of any
business or assets having a value in excess of 1% of ARV's assets; (ii) the
incurrence of indebtedness having a value in excess of 1% of ARV's assets; (iii)
the approval of ARV's annual operating budget; (iv) any material change in ARV's
management; (v) any change in the number of shares of ARV common stock
authorized for issuance; and (vi) any change in ARV's dividend policy. See SPA
Section 5.5.
40. SPA: "No Shop" Provision. The SPA forbade ARV from initiating,
soliciting, or encouraging any transaction which might compete with the
transaction with Prometheus - a so-called "Competing Transaction." See SPA
Section 5.6. A Competing Transaction was defined as the acquisition of more than
15% of ARV's stock, or any business combination, restructuring or liquidation
involving ARV. See SPA Section 1.33.
41. SPA: Expanded Board and Executive Committee With Prometheus Veto.
The SPA provided that the Board would be expanded from seven to eleven
directors, with the four new positions to be filled by Prometheus. See SPA
Section 5.10. In addition, ARV's bylaws would be amended to require a
super-majority of eight directors for the approval of "any action other than in
the ordinary course." Id. With Prometheus controlling four Board seats, it would
have veto power over a wide range of Board activity. The SPA also provided that
votes by the five-person Executive Committee of the Board, two members of which
would be nominated by Prometheus, be subject to a super-majority
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requirement for approval. See SPA Section 5.10. Thus, Prometheus would have
had veto power over actions by the Executive Committee as well.
42. SPA: Shareholder Ratification Requirement. The SPA required ARV to
seek to have the First Prometheus Transaction and the specific agreements
effectuating it approved by the affirmative vote of a majority of the holders of
ARV's common stock. See SPA Sections 3.19, 7.2(a). For purposes of this
ratification, the shares owned by Prometheus (currently 16.6% of all outstanding
shares) would be counted in reaching a quorum but would not be counted toward
the majority necessary for ratification. As discussed more fully below, the
shares held by Gary Davidson and the three Individual Defendants who are
directors or senior officers of ARV, which comprise over 20% of ARV's
outstanding shares, were required by the SVA to be voted in support of
ratification of the First Prometheus Transaction.
43. SPA: $13 Million "Break-up" Fee. The SPA required ARV to pay
significant "breakup" fees to Prometheus if the First Prometheus Transaction was
not consummated. Ordinarily, a "break-up" fee is justifiable on the grounds that
it deters a company from backing out of a transaction which enhances shareholder
value. But here the First Prometheus Transaction did not enhance the value of
ARV's outstanding shares, and thus the fees provided for in the SPA were
unjustified and punitive to ARV and its shareholders. In addition, the fees were
unduly large and grossly disproportionate to the size of the First Prometheus
Transaction. Such fees rarely exceed 3% of the value of the transaction, but in
one scenario set forth in the SPA were equal to approximately 1O% of the value
of the First Prometheus Transaction. See SPA Section 9.3(b). The break-up fee
was in fact intended to coerce ARV shareholders into approving the First
Prometheus Transaction. The break-up fees and "adjustments" to the purchase
price contemplated by the SPA would have reduced the price per share received by
ARV in the transaction to as little as $4.15 below market at the time the First
Prometheus Transaction was announced.
44. SA: Voting of Prometheus' Shares. The quid pro quo for the
astonishing benefits granted by ARV's Board to Prometheus under the SPA was
largely provided for in the SA among Lazard, Prometheus and ARV, a copy of which
is attached as Exhibit D. The SA obligated Prometheus to vote all of its shares
of ARV "in favor of the election of Directors nominated by the
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Nominating Committee or the Board". See SA Section 3.1. Thus, in addition to
their own sizable holding of shares, ARV's Board would have been supported in
office by Prometheus' holding as well.
45. SA: Resistance to Changes of Control or Policy. The standstill
restrictions of Sections 4.2 and 4.3 of the SA prohibited Prometheus during a
three-year period from acting either alone or in concert with another person or
group in any way which could threaten the existing composition of the ARV Board
or management.
46. SA: No Support of Disinterested Stockholders. In particular, Section
4.2 prohibited Prometheus from directly or indirectly (i) soliciting, proposing
or otherwise encouraging a genuine election contest for the Board of Directors;
(ii) soliciting, encouraging or participating in any stockholder proposals;
(iii) calling a special meeting for a stockholder vote; (iv) requesting a list
of stockholders; or (v) seeking amendment, waiver or invalidation of the First
Prometheus Transaction.
47. SA: No Tendering or Other Transfer of Shares. Similarly, Section 4.3
of the SA restricted Prometheus from transferring or tendering its shares during
the standstill period, with particular reference to transfers to companies
operating "assisted living facilities" such as Emeritus.
48. SA: Disenfranchisement of Disinterested Shareholders. In essence,
Sections 4.2 and 4.3 dictated that Prometheus' 49.9% interest be immobilized and
used as "ballast" for continuing Board control during any bids for changes in
control or policy. The exception, of course, was the election of directors, when
the Prometheus block had to be voted in support of Board nominees. In addition,
as indicated in its preliminary proxy materials, the Board sought to
reincorporate ARV in Delaware and to remove the possibility of cumulative voting
of directors. The combined effect of these changes would have been to make it
virtually impossible for Emeritus or any other shareholder to elect its own
director nominee, remove incumbent directors or effectively challenge any action
by the Board.
49. SVA: Voting by ARV Board Members. The SVA among Prometheus, Lazard
and four of the largest individual shareholders of ARV (defendants Booty and
Collins, Gary Davidson, and Graham Espley-Jones, the chief financial officer of
ARV), a copy of which is attached as Exhibit E, required each of the individual
shareholders, subject to certain conditions, to vote all of the shares under his
control (i) in support of the First Prometheus Transaction; and (ii) in support
of the election
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of ARV directors who are either nominated by Prometheus or the Nominating
Committee of the Board. See SVA Section 1. In effect, the SVA provided that
Prometheus, Lazard and certain directors and senior officers of ARV would pool
their substantial voting power in an attempt to force approval of the First
Prometheus Transaction and, if they were successful, to perpetuate in office
their own designated nominees to ARV's Board.
C. THE IMPLEMENTATION OF ARV'S POISON PILL
50. On July 14, 1997, in addition to entering into the First Prometheus
Transaction, Defendants implemented a Shareholders Rights Plan, a copy of which
is attached as Exhibit F, to seek to prevent an acquisition by Emeritus or
another bidder. In implementing the Shareholders Rights Plan or "poison pill,"
ARV declared a dividend distribution of one Preferred Share Purchase Right (a
"Right") on each outstanding share of ARV common stock. The Rights will be
exercisable if, among other things, a person or group (the "Acquiring Person")
acquires 10% or more of ARV's common stock. When exercisable, each Right will
entitle its holder to purchase additional newly issued shares of ARV common
stock at half-price. The effect of the pill, if triggered, is to greatly
increase the number of outstanding shares of ARV stock and make an acquisition
prohibitively expensive to the Acquiring Person. The Rights distributed on
shares owned by the Acquiring Person may not be exercised, thus putting the
Acquiring Person at an additional disadvantage in its efforts to acquire ARV.
51. Significantly, Defendants specifically exempted the shares owned by
Prometheus from triggering the poison pill. Thus, Prometheus - which already
owns over 16% of ARV's stock may continue to acquire ARV shares either through
future stock purchase agreements with ARV or through open market purchases
without triggering the pill. The exemption of Prometheus from the pill gives
Prometheus the opportunity to acquire a majority interest in ARV without paying
any control premium and, in the meantime, to exercise significant leverage and
control over ARV.
52. The poison pill, implemented only four days after ARV received
Emeritus' proposal, was adopted by the ARV Defendants for the improper purposes
of entrenching themselves in office, deterring any challenge to the First
Prometheus Transaction, and chilling or blocking Emeritus' proposal and any
other proposals by another bidder.
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D. ARV'S JULY 15 PRESS RELEASE
53. On July 15, 1997, ARV issued a press release stating that on the
previous day its Board had approved the agreements with Prometheus and Lazard
and had implemented the poison pill. Emeritus learned of the transactions
between ARV and Prometheus for the first time in this press release. The press
release stated that the first phase of the stock sale to Prometheus would close
by the end of August 1997.
E. EMERITUS' JULY 21, 1997 LETTER TO ARV CRITICIZING THE FIRST PROMETHEUS
TRANSACTION AND OFFERING TO NEGOTIATE A TRANSACTION TO MAXIMIZE
SHAREHOLDER VALUE
54. On July 21, 1997, Emeritus delivered a letter to ARV expressing
surprise and disappointment with the announcement of the First Prometheus
Transaction, a copy of which is attached as Exhibit G. The letter raised a
number of concerns with the recent actions of ARV's Board, including (i) the
negative effects that the First Prometheus Transaction would have on the
long-term value of ARV's stock, especially as compared to the positive effects
that Emeritus' proposal would offer; (ii) the lack of serious consideration the
ARV Board gave to Emeritus' proposal; (iii) the inappropriately large size of
the break-up fee in the SPA with Prometheus; (iv) the effects of the poison pill
in entrenching current management and deterring challenges to the First
Prometheus Transaction; and (v) the fact that the First Prometheus Transaction
had resulted in a change of control of ARV without shareholder value being
maximized. In conclusion, Emeritus told ARV that it was prepared to discuss the
terms of a potential transaction between ARV and Emeritus that would maximize
shareholder value.
F. AFTER RECEIVING EMERITUS' JULY 21 LETTER, ARV AND PROMETHEUS HURRIEDLY
CLOSE THE FIRST PROMETHEUS TRANSACTION
55. Although ARV's July 15 press release had stated that the closing of
the first phase of the Prometheus stock purchase would occur by the end of
August, four days after ARV received Emeritus' July 21 letter, the first phase
abruptly closed. Thus, on July 25, 1997, ARV issued Prometheus 1,921,012 shares
of ARV common stock representing over 16% of ARV's outstanding stock.
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56. Also on July 25, ARV responded to Emeritus' July 21 letter. In this
letter, a copy of which is attached as Exhibit H, ARV asserted that ARV's Board
had found the terms of Emeritus' proposal as set forth in Emeritus' July 1O
letter to be "significantly less attractive and less definitive" than the terms
of the First Prometheus Transaction. ARV also claimed that the size of the
break-up fee was normal and that the poison pill was not implemented in response
to Emeritus' proposal. ARV then threatened to take legal action against both
Emeritus and Starwood if either entity attempted to "interfere" with
consummation of the First Prometheus Transaction.
G. ARV'S PLAN TO RATIFY THE FIRST PROMETHEUS TRANSACTION BY SHAREHOLDER
VOTE
57. On August 22, 1997, ARV filed with the SEC a preliminary proxy
statement in connection with its upcoming meeting of shareholders, a copy of
which is attached as Exhibit I. In its proxy statement, ARV stated that it
intended to solicit proxies for the purpose of approving four proposals at the
meeting, which was at that time scheduled for October 14, 1997. On information
and belief, the annual meeting was subsequently rescheduled for November 18,
1997. These proposals sought (i) shareholder approval of the agreements
implementing the First Prometheus Transaction; (ii) shareholder approval of an
amendment to ARV's Articles of Incorporation, as required by the SA, increasing
the maximum number of directors of ARV from nine to eleven; (iii)
reincorporation of ARV as a Delaware corporation as opposed to a California
corporation; and (iv) re-election of the ARV Defendants as directors of ARV.
58. The preliminary proxy statement identified one of the potential
effects of shareholder approval of the First Prometheus Transaction as follows:
"Such approval may serve to extinguish potential claims, if any, regarding any
conduct of members of the Board in connection with the [First Prometheus]
Transaction, including potential claims alleging violations of the Board's
duties to shareholders. Under California Law, fully informed shareholder
approval of a transaction may, in certain circumstances, serve to extinguish
certain related fiduciary duty claims against directors." Ex. I at 9. The
preliminary proxy materials thus candidly admitted the potential for breach of
fiduciary claims against ARV's directors based on the First Prometheus
Transaction.
59. The SVA between Prometheus, Lazard and certain insider shareholders
of ARV, however, provided that those individuals (including defendants Booty and
Collins) were required to
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vote their shares in favor of approving the First Prometheus Transaction (see
SVA Section 1) - or, in other words, that they were contractually required to
vote in favor of exculpating themselves from breach of fiduciary claims brought
by ARV's shareholders. While this arrangement was contrary to California law,
the preliminary proxy materials failed to disclose this fact. The preliminary
proxy materials also failed to disclose that the First Prometheus Transaction
had been entered into by Defendants for the improper purpose of entrenching the
ARV Defendants in office, that the First Prometheus Transaction had effectuated
a change of control at ARV without shareholder value being maximized, and that
the ARV Defendants had failed to properly consider or respond to Emeritus' July
10, 1997 proposal.
H. ARV IGNORES EMERITUS' OCTOBER 12,1997 PROPOSAL
60. On October 12, 1997, Emeritus delivered a letter to ARV, a copy of
which is attached hereto as Exhibit J. The letter reiterated Emeritus' concern
that the First Prometheus Transaction would transfer control of ARV to
Prometheus without appropriate value being paid to ARV's stockholders.
61. Emeritus' October 12, 1997 letter proposed the acquisition by
Emeritus of all the outstanding stock of ARV for $16.50 per share in cash, a 45%
premium over ARV's stock price before the First Prometheus Transaction was
announced, and an 18% premium over the price per share paid by Prometheus in
purchasing its 16% block. The letter further indicated that Emeritus would make
its bid public the following day, and that Emeritus was available to meet with
ARV and its advisers immediately to discuss the proposal. As promised, Emeritus
announced its bid via press release on October 13.
62. Without any attempt to communicate or negotiate with Emeritus, ARV
issued a press release on October 14, 1997, a copy of which is attached hereto
as Exhibit K. Notwithstanding the signed agreement to sell 49.9% of ARV to
Prometheus, the press release contended that ARV was not for sale. The release
described the Emeritus offer as unattractive because of what ARV characterized
as "significant conditions," including the need for due diligence and the
finalization of financing agreements. Remarkably, the press release also cited
the then-current trading price of ARV stock, which had been bid higher in
response to Emeritus' proposal, as a reason to reject the offer.
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63. The ARV Defendants failed to exercise due care and to take diligent
action to maximize shareholder value by rejecting, after only two days,
Emeritus' proposal to acquire the outstanding shares of ARV for $16.50.
Emeritus' proposal offered a significant premium to all of ARV's shareholders as
opposed to the First Prometheus Transaction which, by giving special treatment
to one hand-picked shareholder pledged to support the ARV Defendants in their
quest to remain in office, was in fact contrary to the interests of ARV's other
shareholders.
I. GARY DAVIDSON RESIGNS FROM ARV
64. On October 13, 1997, the day after ARV's Board received Emeritus'
$16.50 per share offer, Gary Davidson resigned from his positions as Chairman,
Chief Executive Officer and Director of ARV.
65. Upon information and belief, Mr. Davidson resigned because he
disapproved of the extent to which Prometheus was exerting control over ARV and
because he believed that the ARV Defendants had failed to act in the
shareholders' best interest by, among other things, summarily rejecting
Emeritus' October 12, 1997 proposal.
J. ARV RETREATS FROM THE FIRST PROMETHEUS TRANSACTION AND ENTERS INTO THE
SECOND PROMETHEUS TRANSACTION WHICH DOES NOT REQUIRE SHAREHOLDER
APPROVAL
66. Less than three weeks after receiving Emeritus' $16.50 per share
proposal, the ARV Defendants, Prometheus and Lazard made a strategic decision to
retreat from the First Prometheus Transaction and enter into a new set of
agreements - the Second Prometheus Transaction - which in part supersede the
First Prometheus Transaction. Upon information and belief, the ARV Defendants
entered into the Second Prometheus Transaction (i) because they feared that the
First Prometheus Transaction would not be approved by ARV's shareholders, and
(ii) in order to entrench themselves in office by preventing Emeritus from
proceeding with its proposals.
67. As with the First Prometheus Transaction, at the heart of the Second
Prometheus Transaction were mutual promises by the ARV Defendants and Prometheus
to vote all of their respective shares in support of each other's nominees for
positions on the Board. As before, Prometheus agreed to abstain for the next
three years from participating in any acquisition of ARV or
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other acts which could potentially unseat the ARV Defendants. Prometheus would
also retain its 16% interest in ARV acquired as part of the First Prometheus
Transaction.
68. The Second Prometheus Transaction differed from the first
transaction in several important respects. Most significantly, Defendants
crafted the Second Prometheus Transaction so that it did not have to be approved
by ARV's shareholders. Rather than issuing new shares directly to Prometheus,
the Second Prometheus Transaction called for the issuance of convertible notes
(the "Notes"), which could be converted into common shares under various
circumstances. Upon conversion of the Notes, Prometheus, in conjunction with its
16% holding, would hold up to 35% of the outstanding shares of ARV. As with the
First Prometheus Transaction, Prometheus was free to acquire a total of up to
49.9% of the outstanding shares of ARV during a three-year standstill period,
without triggering ARV's poison pill.
69. According to ARV's Form 8-K dated November 14, 1997 (the "8-K"), a
copy of which is attached as Exhibit L, Prometheus has not yet paid for the
$60,000,000 in convertible Notes issued to it by ARV, despite the fact that
interest has begun accruing on the Notes. See 8-K Item 5 at 4.
70. On information and belief, defendants Freeman, Jacobs and Gunty each
aided and abetted the ARV Defendants' breach of their fiduciary duty to
shareholders by encouraging and otherwise assisting the ARV Defendants in the
adoption of the Second Prometheus Transaction.
71. The terms of the five principal agreements constituting the Second
Prometheus Transaction - the Amended and Restated Stock and Note Purchase
Agreement ("SPA2"), the related indenture (the "Indenture") and note in favor of
Prometheus (the "Prometheus Note"), the Amended and Restated Stockholders
Agreement ("SA2"), and the new Stockholders' Voting Agreement ("SVA2") are set
forth below in greater detail.
72. SPA2: Sale of Convertible Notes to Prometheus. The SPA2 between
Lazard, Prometheus and ARV, a copy of which is attached as Exhibit M, provides
for the issuance to Prometheus of an aggregate of $60,000,000 principal amount
of 6.75% Convertible Subordinated Notes due 2007. See SPA2 Section 2.1. The
SPA2 amends and restates the SPA.
73. Indenture and Prometheus Note: Conversion to Common Shares. The
Indenture and Prometheus Note, copies of which are attached as Exhibits N and 0,
allow ARV to redeem the Notes
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at any time. However, during the first three years after the Second Prometheus
Transaction, the Notes may only be redeemed for ARV common shares. See Note
[paragraph symbol] 5; Indenture Section 3.7. Significantly, the redemption price
during the first three years of the transaction is exorbitantly high: more than
123% of Prometheus' $60 million purchase price for the Notes. See Note
[paragraph symbol] 5. Thus, for its $60 million investment, Prometheus would
receive approximately 4,285,000 shares at an out-of-pocket cost of $14 per
share. See Note [paragraph symbol] 5. In essence, the redemption option allows
ARV's Board, in the event the Board perceives a threat to its control of ARV, to
issue massive quantities of discounted stock to Prometheus, shares which are
contractually bound to be voted in favor of the Board's director nominees.
Paragraph 5 of the Prometheus Note is thus calculated to dilute the voting power
of disinterested shareholders in order to entrench the current Board.
Accordingly, the adoption of the 123% redemption provision by the ARV Defendants
constituted a breach of their fiduciary duties to Emeritus and other ARV
shareholders.
74. In addition, Prometheus has the right, exercisable at any time after
90 days following the date of issuance of the Notes, to convert the Notes into
shares of ARV common stock. See Note [paragraph symbol] 10; Indenture Section
5.1. While the Note designates the "initial Conversion Price" at $17.25 per
share, see Note [paragraph symbol] 10, the Indenture leaves ARV the option to
reduce the conversion price "to the extent permitted by law" for any 20-day
period, Indenture Section 5.10. Thus, ARV's Board is free to attempt a
sweetheart deal with Prometheus to convert the Notes into common stock at a
price well below Emeritus' offer or the then-current market price.
75. SA2: Expanded Board with Prometheus Designees. The SA2, a copy of
which is attached as Exhibit P, amends and restates the SA. The SA2 provides
that the Board be expanded to 9 directors, of whom Prometheus has the right to
designate 3. SA2 Section 2.1(a). ARV is restrained from expanding the Board
beyond nine members. SA2 Section 2.1(d).
76. SA2: Prometheus Veto of Choice of ARV President/CEO and Director.
The SA2 requires that ARV receive the prior written consent of Prometheus
approving ARV's selection of a President and CEO to replace Gary Davidson. SA2
Section 2.5. Once Prometheus has approved the new President/CEO, ARV must use
its best efforts to elect him or her to the Board, replacing one of the
directors not designated by Prometheus. SA2 Section 5. Thus, in addition to
having three designees on the
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Board, Prometheus will have veto power over the selection of an additional
director, effectively leaving Prometheus only one member short of a majority of
directors who, at the very least, are sympathetic to Prometheus' interests.
77. SA2: Voting of Prometheus' Shares. As under the SA, during the
Second Prometheus Transaction's 3-year standstill period, Prometheus is required
to vote all of its shares of ARV "in favor of the election of all Directors
nominated by the nominating committee, if any, or the Board. . ." SA2 Section
3.1. Thus, as under the First Prometheus Transaction, the Board's own sizable
holding will be supported by Prometheus', the company's largest shareholder.
Since Prometheus' common stock holdings are likely to give it de facto voting
control of ARV, the SA2 virtually ensures that the Board will be able to
perpetuate itself and its nominees in office.
78. SA2: Resistance to Changes of Control or Policy. As under the SA,
the standstill restrictions of Sections 4.2 and 4.3 of the SA2 prohibits
Prometheus during a three-year period from acting either alone or in concert
with another person or group in any way which could threaten the existing
composition of the ARV Board or management.
79. SA2: No Support of Disinterested Stockholders. As under the SA,
Section 4.2 of the SA2 prohibits Prometheus from directly or indirectly (i)
soliciting, proposing or otherwise encouraging a genuine election contest for
director positions on ARV's Board; (ii) soliciting, encouraging or participating
in any stockholder proposals; (iii) calling a special meeting for a stockholder
vote; (iv) requesting a list of stockholders; or (v) seeking amendment, waiver
or invalidation of the Second Prometheus Transaction.
80. SA2: No Tendering or Other Transfer of Shares. As under the SA,
Section 4.3 of the SA2 restricts Prometheus from transferring or tendering its
shares during the standstill period, with particular reference to transfers to
companies operating "assisted living facilities" such as Emeritus.
81. SA2: Disenfranchisement of Disinterested Shareholders. As under the
SA, Sections 4.2 and 4.3 of the SA2 essentially dictate that Prometheus' up to
49.9% interest be immobilized and used as "ballast" for continuing Board control
during any bids for changes in control or policy. The exception, of course, is
the election of directors, when the Prometheus block must be voted in support of
Board nominees. The combined effect of these changes will be to make it
impossible for Emeritus
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or any other shareholder to elect its own director nominee, remove incumbent
directors or effectively challenge any action by the Board.
82. SVA2: Voting By ARV Board Members. The SVA2 among Prometheus, Lazard
and three of the largest individual shareholders of ARV (Graham Espley-Jones and
defendants Booty and Collins), a copy of which is attached as Exhibit Q,
requires each of the three individual shareholders to vote all of the shares
under his control in support of the election of ARV directors who are either
nominated by Prometheus or the Nominating Committee of the Board. See SVA2
Section 1. Like the SVA, the SVA2 provides in effect that Prometheus, Lazard and
certain directors and senior officers of ARV pool their substantial voting power
to perpetuate in office their own designated nominees to ARV's Board. Unlike the
SVA, Gary Davidson is not a party to the SVA2.
K. ARV ANNOUNCES STOCK BUY-BACK PROGRAM
83. On November 14, 1997, ARV announced it had allocated $25 million for
the institution of a stock buy-back program to repurchase ARV common shares on
the open market. The implementation of the stock buy-back program has the effect
of further entrenching the Individual Defendants by reducing the number of
shares held by disinterested shareholders.
L. ARV FILES NEW PRELIMINARY PROXY MATERIALS
84. On November 21, 1997, ARV filed new preliminary proxy materials (the
"New Proxy Statement") with the SEC. The New Proxy Statement, which is attached
as Exhibit R, no longer seeks approval of the Prometheus Transactions. Rather,
the New Proxy Statement states that ARV intends to solicit proxies for the
purpose of approving only three proposals at its annual meeting. Those proposals
seek (i) reincorporation of ARV as a Delaware corporation; (ii) amendment of
ARV's articles of incorporation to increase the maximum number of authorized
directors of ARV from nine to ten; and (iii) re-election of the Individual
Defendants as directors of ARV. The New Proxy Statement was the first public
announcement by ARV that Defendants Freeman, Jacobs and Gunty were appointed to
ARV's Board. The New Proxy Statement announced January 8, 1998 as the
rescheduled date of the annual meeting.
85. Since the Individual Defendants chose to exempt the Second
Prometheus Transaction from a shareholder vote, the New Proxy Statement makes
little effort to describe it or its effects on
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ARV. Nevertheless, the New Proxy Statement fails to disclose or misrepresents a
number of material facts concerning the Second Prometheus Transaction,
including:
86. Entrenchment. ARV fails to disclose that the effect of the Second
Prometheus Transaction, like the first, will be to entrench the ARV Defendants
and effectively preclude the public shareholders from electing any directors to
the Board or, in fact, from having a meaningful voting franchise on any issue.
87. Change of Control. ARV fails to disclose that the Second Prometheus
Transaction frees Prometheus to gain control of 49.9% of ARV's common shares,
and has effectively produced a change of control of ARV without either (i) any
payment to the public shareholders; or (ii) preserving an opportunity for the
public shareholders to realize a control premium for their shares.
88. Failure to Consider Competing Proposal. ARV fails to disclose that
prior to the signing of the agreements which constitute the Second Prometheus
Transaction, Emeritus made a second proposal to ARV for the cash purchase of all
of the outstanding shares of ARV for $16.50 per share.
M. EMERITUS ANNOUNCES ITS PROXY CONTEST
89. On November 24, 1997, Emeritus filed preliminary proxy materials
with the SEC, attached as Exhibit S, stating that Emeritus intends to solicit
proxies against the slate of director nominees that ARV had planned to submit to
its shareholders at the previously scheduled January 8, 1998 meeting. In its
proxy materials, Emeritus also proposed a slate of nominees to serve as
directors of ARV.
N. THE REDEMPTION OF THE NOTES
90. On December 8, 1997, ARV announced that it had redeemed the $60
million in Notes for approximately 4.3 million ARV common shares (the
"Redemption"). Although ARV announced the price of the shares as $17.25 per
share, because Prometheus received a more than 23% "premium" over and above its
$60 million investment, the out-of-pocket cost to Prometheus was only $14 per
share, substantially less than the market price.
91. In conjunction with the Redemption, ARV announced that it had
rescheduled the annual meeting date for a third time, to January 28, 1998. In
addition, ARV moved the record date
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for the annual meeting to December 18, 1997, allowing Prometheus to vote its 4.3
million newly-issued ARV shares at the annual meeting. In effect, ARV has
delivered millions of discounted shares to an investor, hand-picked by the
Board, who is contractually obligated to vote those shares in support of the
Board's director nominees. As a direct response to Emeritus' proxy contest, the
Redemption is a blatant attempt by the Board to entrench buying votes for itself
at the expense of ARV's public shareholders.
92. Also on December 8, 1998, ARV announced the appointment, effective
immediately, of defendant Phanstiel as its new Chairman of the Board and Chief
Executive Officer.
VI.
RELIEF SOUGHT
A. DECLARATORY RELIEF
93. The Court may grant the declaratory relief sought herein by
Emeritus, because an actual and immediate controversy exists between Emeritus
and Defendants. Emeritus contends that Defendants have breached, and are in the
process of breaching, their fiduciary duties to Emeritus by, among other things
as specified herein, (i) refusing to properly consider or respond to Emeritus'
proposals and offers to negotiate with Emeritus; (ii) entering into,
consummating, and failing to revoke the Prometheus Transactions; (iii)
implementing and retaining the poison pill; (iv) implementing the stock buy-back
program; (v) redeeming the Notes issued to Prometheus and moving the record and
annual meeting dates; (vi) taking other measures to entrench ARV's Board; and
(vii) failing to maximize the value of ARV's shares. Defendants have disputed
many of these claims and contend that ARV's Board found the terms of Emeritus'
proposal as set forth in Emeritus' July 10 letter to be "significantly less
attractive and less definitive" than the terms of the First Prometheus
Transaction, and that Emeritus' October 12 proposal was "unattractive" and
"conditional." ARV has also taken the position that the poison pill, the stock
buy-back program, and the Redemption are in the best interests of ARV's
shareholders.
94. The granting of the requested declaratory relief will serve the
practical purpose of affording relief from the disruption and uncertainty
regarding whether Defendants have acted and are acting in violation of their
fiduciary duties to Emeritus as alleged herein. The Court's declaratory
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ruling will resolve the continued controversy over the ARV Board's defensive
schemes and voting arrangements, thereby avoiding delay and the waste of
judicial resources through piecemeal litigation.
B. INJUNCTIVE RELIEF
95. The Court may grant the injunctive relief sought herein by Emeritus,
because Defendants have already breached, and are in the process of breaching,
their fiduciary duties to Emeritus by, among other things as specified herein,
(i) refusing to properly consider or respond to Emeritus' proposals and offers
or to negotiate with Emeritus; (ii) entering into, consummating, and failing to
revoke the Prometheus Transactions; (iii) implementing and retaining the poison
pill; (iv) implementing the stock buy-back program; (v) redeeming the Notes
issued to Prometheus and moving the record and annual meeting dates; (vi) taking
other measures to entrench ARV's Board; and (vii) failing to maximize the value
of ARV's shares.
96. The injunctive relief sought herein is justified because Emeritus
has properly stated claims for breach of fiduciary duty and is able to prove a
likelihood of success in proving its allegations. The denial of injunctive
relief will cause more harm to Emeritus than the granting of such relief will
cause to Defendants. Money damages are insufficient to make Emeritus whole
because of the unique, unreproducible and currently immeasurable value to
Emeritus of a corporate combination with ARV. Emeritus faces irreparable harm if
the Court does not act to preserve the status quo at this juncture.
VII.
FIRST CLAIM FOR RELIEF
BREACH OF FIDUCIARY DUTY: USE OF THE PROMETHEUS
TRANSACTIONS AS AN IMPROPER DEFENSIVE MEASURE TO
ENTRENCH ARV'S EXISTING BOARD
(DECLARATORY AND INJUNCTIVE RELIEF)
97. Emeritus repeats and realleges each and every allegation set forth
in Paragraphs 1 through 96 as if fully set forth herein.
98. By means of the Prometheus Transactions, the ARV Defendants, aided
and abetted by Defendants Freeman, Jacobs and Gunty, have implemented a scheme
to sell a substantial quantity of
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ARV common stock and Notes to Prometheus in return for promises that Prometheus
will vote those shares in support of the ARV Board's director nominees. In
addition, Prometheus will have the exclusive ability to acquire up to 49.9% of
ARV's outstanding common shares without triggering the poison pill. These
actions, and others detailed above, indicate that the ARV Defendants entered
into the Prometheus Transactions for the purpose of entrenching themselves in
office and preventing a transaction with Emeritus from occurring.
99. Defendants owe fiduciary duties to Emeritus. As fiduciaries,
Defendants owe Emeritus the highest duties of care, loyalty, candor and good
faith. As part of those duties, Defendants are prohibited from taking any
defensive actions which have the effect of entrenching existing management at
the expense of Emeritus. Here, the effect of the Prometheus Transactions is to
entrench existing management to the direct detriment of Emeritus.
100. On information and belief, Defendants Freeman, Jacobs, Gunty and
Phanstiel have done nothing since their appointment to the Board to rectify
these continuing breaches of fiduciary duty.
101. Given Emeritus' announcement that it will commence a proxy contest
against the Board's director nominees, and Emeritus' offers and proposals to
acquire the outstanding shares of ARV, Emeritus has been, and is being, harmed
by Defendants' breaches of their fiduciary duties as alleged in this claim.
102. Emeritus seeks a declaration that (i) Defendants have breached
their fiduciary duties by entrenching ARV's existing board in office; (ii) the
ARV Defendants have breached their fiduciary duties by entering into and failing
to revoke the Prometheus Transactions; (iii) the Prometheus Transactions are
null and void or voidable by Defendants; (iv) the issuance of the Notes was in
breach of the ARV Defendants' fiduciary duties; (v) the Redemption of the Notes
into common shares of ARV was, and the voting or counting of votes of such
shares would be, in breach of Defendants' fiduciary duties; (vi) the moving of
the record and annual meeting dates was in breach of Defendants' fiduciary
duties and illegal under California law; (vii) the issuance to Prometheus of ARV
shares under the First Prometheus Transaction was in breach of the ARV
Defendants' fiduciary duties; and (viii) the voting or counting of votes of such
shares would be in breach of Defendants' duties.
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103. Emeritus seeks an injunction (i) rescinding and nullifying the
Prometheus Transactions; (ii) directing that the 1,921,012 ARV shares issued to
Prometheus pursuant to the First Prometheus Transaction may not be voted, or if
voted may not be counted; (iii) directing that the common shares of ARV received
by Prometheus as a result of the Redemption of the Notes may not be voted, or if
voted may not be counted; and (iv) directing that the record and annual meeting
dates not be moved or be moved only in accordance with Defendants' fiduciary
duties. An injunction is necessary because (i) Emeritus has no adequate remedy
at law; (ii) Emeritus will be irreparably harmed if an injunction is not issued;
and (iii) granting an injunction will cause less harm to Defendants than denying
an injunction will cause harm to Emeritus.
VIII.
SECOND CLAIM FOR RELIEF
BREACH OF FIDUCIARY DUTY: SALE OF CONTROL OF ARV AND
FAILURE TO MAXIMIZE SHAREHOLDER VALUE
(DECLARATORY AND INJUNCTIVE RELIEF)
104. Emeritus repeats and realleges each and every allegation set forth
in Paragraphs 1 through 103 as if fully set forth herein.
105. Defendants owe fiduciary duties to Emeritus. As fiduciaries,
Defendants owe Emeritus the highest duties of care, loyalty, candor and good
faith.
106. The Prometheus Transactions provide for, among other things, (i)
the acquisition by Prometheus of up to 49.9% of all outstanding shares of ARV;
(ii) mutual obligations on the part of Prometheus and ARV's Board to support
each other's Board nominees, which have the effect of disenfranchising ARV's
public shareholders; and (iii) restraints on Prometheus' sale of its stock.
Because (i) upon conversion of the Notes and/or additional open-market purchases
of ARV common shares by Prometheus or members of ARV's Board, the stock owned by
Prometheus and the Board will constitute a majority position in ARV; (ii) those
parties have interlocking obligations and interests created by the agreements;
and (iii) those parties are acting in concert with respect to the control and
management of ARV, the Prometheus Transactions constitute and effectuate a sale
of control of ARV. Having determined to put control of ARV up for sale, the ARV
Defendants unfairly and unlawfully
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favored Prometheus and refused to enter discussions regarding, or to investigate
in any reasonable way, Emeritus' proposals and offers. The ARV Defendants, aided
and abetted by Defendants Freeman, Jacobs and Gunty, have thus breached their
fiduciary duties by failing to maximize shareholder value. On information and
belief, Defendants Freeman, Jacobs, Gunty and Phanstiel have done nothing since
their appointment to the Board to rectify these continuing breaches of fiduciary
duty.
107. By entering voting agreements with Prometheus and discriminating
against Emeritus, the ARV Defendants have attempted to entrench themselves and
enhance the value of their own block of shares at the expense of Emeritus and
ARV's public shareholders. In particular, the voting agreements allow the ARV
Defendants to perpetuate themselves in office and to command, with Prometheus,
the entire value of any control premium from a would-be acquirer of ARV.
108. Emeritus has been harmed by Defendants' failure to consider its
proposals and offers and ARV Defendants' rush to close the Prometheus
Transactions and issue a substantial quantity of ARV stock and the Notes to
Prometheus.
109. Emeritus seeks a declaration that (i) Defendants have breached
their fiduciary duties by failing to take prompt and diligent steps to maximize
shareholder value; (ii) the ARV Defendants have breached their fiduciary duties
by entering into and failing to revoke the Prometheus Transactions; (iii) those
agreements are null and void or voidable by Defendants; (iv) the issuance of the
Notes was in breach of the ARV Defendants' fiduciary duties; (v) the Redemption
of the Notes into common shares of ARV was, and the voting or counting of votes
of such shares would be, in breach of Defendants' fiduciary duties; (vi) the
moving of the record and annual meeting dates was in breach of Defendants'
fiduciary duties and illegal under California law; (vii) the issuance to
Prometheus of ARV shares under the First Prometheus Transaction was in breach of
the ARV Defendants' fiduciary duties, and (viii) the voting or counting of votes
of such shares would be in breach of Defendants' duties.
110. Emeritus seeks an injunction (i) directing that Defendants take
prompt and diligent steps to maximize shareholder value; (ii) rescinding and
nullifying the Prometheus Transactions;(iii) directing that the 1,921,012 ARV
shares issued to Prometheus pursuant to the First Prometheus Transaction may not
be voted, or if voted may not be counted; (iv) directing that common shares of
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ARV received by Prometheus as a result of the Redemption of the Notes may not be
voted, or if voted may not be counted; and (v) directing that the record and
meeting dates not be moved or be moved only in accordance with Defendants'
fiduciary duties. An injunction is necessary because (i) Emeritus has no
adequate remedy at law; (ii) Emeritus will be irreparably harmed if an
injunction is not issued; and (iii) granting an injunction will cause less harm
to Defendants than denying an injunction will cause harm to Emeritus.
IX.
THIRD CLAIM FOR RELIEF
BREACH OF FIDUCIARY DUTY: FAILURE TO EXERCISE DUE CARE IN
CONSIDERING EMERITUS' PROPOSALS AND ENTERING INTO THE
PROMETHEUS TRANSACTIONS
(DECLARATORY AND INJUNCTIVE RELIEF)
111. Emeritus repeats and realleges each and every allegation set forth
in Paragraphs 1 through 11O as if fully set forth herein.
112. The ARV Defendants owe fiduciary duties to Emeritus. As
fiduciaries, Defendants owe Emeritus the highest duties of care, loyalty, candor
and good faith.
113. The ARV Defendants failed to exercise a reasonable amount of care
and diligence in reviewing and rejecting Emeritus' July 10, 1997 proposal and
thereby breached their fiduciary duties to Emeritus. The ARV Defendants rejected
Emeritus' July 10 proposal three days after receiving it and without any
opportunity to conduct appropriate due diligence with respect to it. The ARV
Defendants did not even attempt to negotiate terms with Emeritus and refused to
meet with Emeritus and its advisors to discuss the proposal further.
114. The ARV Defendants failed to exercise a reasonable amount of care
and diligence in negotiating and entering into the First Prometheus Transaction.
After receiving Emeritus' July 10, 1997 proposal, and driven by fear of losing
their positions as directors and officers of ARV, the ARV Defendants
unreasonably and in violation of their fiduciary duties rushed to enter into the
First Prometheus Transaction on July 14, 1997. After Emeritus sent its July 23,
1997 letter to ARV objecting to numerous aspects of the First Prometheus
Transaction, the ARV Defendants
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unreasonably and in violation of their fiduciary duties rushed to close the
first phase of the transaction (the sale of approximately 16% of ARV's stock) on
July 25, 1997.
115. The ARV Defendants failed to exercise a reasonable amount of care
and diligence in reviewing and rejecting Emeritus' October 12, 1997 proposal and
thereby breached their fiduciary duties to Emeritus. The ARV Defendants rejected
Emeritus' October 12 proposal two days after receiving it and without any
opportunity to conduct appropriate due diligence with respect to it. The ARV
Defendants did not even attempt to negotiate terms with Emeritus and refused to
meet with Emeritus and its advisors to discuss the proposal further.
116. The ARV Defendants failed to exercise a reasonable amount of care
and diligence in negotiating and entering into the Second Prometheus
Transaction. After receiving Emeritus' October 12, 1997 proposal, and driven by
fear of losing their positions as directors and officers of ARV and fear that
the First Prometheus Transaction would be rejected by shareholders, the ARV
Defendants unreasonably and in violation of their fiduciary duties rushed to
enter into the Second Prometheus Transaction on October 29 and October 30, 1997.
The ARV Defendants failed to exercise a reasonable amount of care and diligence
in entering into and closing the Second Prometheus Transaction. Defendants
failed to exercise reasonable care in deciding to redeem the Notes and in moving
the record and meeting dates.
117. Emeritus has been harmed by Defendants' repeated breaches of
fiduciary duty, aided and abetted by Defendants Freeman, Jacobs and Gunty, in
failing to exercise due care in considering and rejecting its July 10, 1997 and
October 12, 1997 proposals and in unreasonably rushing to enter into and close
the Prometheus Transactions. On information and belief, Defendants Freeman,
Jacobs, Gunty and Phanstiel have done nothing since their appointment to the
Board to rectify these continuing breaches of fiduciary duty.
118. Emeritus seeks a declaration that (i) the ARV Defendants have
breached their fiduciary duties by failing to exercise reasonable care and
diligence as specified above; (ii) the Prometheus Transactions are null and void
or voidable by Defendants; (iii) the issuance of the Notes was in breach of the
ARV Defendants' fiduciary duties; (iv) the Redemption of the Notes into common
shares of ARV was, and the voting or counting of votes of such shares would be
in breach of Defendants'
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fiduciary duties; (v) the moving of the record and annual meeting dates was in
breach of Defendants' fiduciary duties and illegal under California law; (vi)
the issuance to Prometheus of ARV shares under the First Prometheus Transaction
was in breach of the ARV Defendants' fiduciary duties; and (vii) the voting or
counting of votes of such shares would be, in breach of Defendants' duties.
119. Emeritus seeks an injunction (i) directing Defendants to enter into
good faith negotiations with Emeritus, (ii) rescinding and nullifying the
Prometheus Transactions and (iii) directing that the 1,921,012 ARV shares issued
to Prometheus pursuant to the First Prometheus Transaction may not be voted, or
if voted may not be counted, (iv) directing that the common shares of ARV
received by Prometheus as a result of the Redemption of the Notes may not be
voted, or if voted may not be counted, and (v) directing that the record and
meeting dates not be moved or be moved only in accordance with Defendants'
fiduciary duties. An injunction is necessary because (i) Emeritus has no
adequate remedy at law, (ii) Emeritus will be irreparably harmed if an
injunction is not issued, and (iii) granting an injunction will cause less harm
to Defendants than denying an injunction will cause harm to Emeritus.
X.
FOURTH CLAIM FOR RELIEF
BREACH OF FIDUCIARY DUTY: IMPLEMENTATION OF THE POISON PILL
(DECLARATORY AND INJUNCTIVE RELIEF)
120. Emeritus repeats and realleges each and every allegation set forth
in Paragraphs 1 through 119 as if fully set forth herein.
121. Defendants owe fiduciary duties to Emeritus. As fiduciaries,
Defendants owe Emeritus the highest duties of care, loyalty, candor and good
faith.
122. The ARV Defendants implemented the poison pill in response to
Emeritus' July 10, 1997 proposal to ARV. Implementation of the poison pill was
not a lawful and reasonable response to Emeritus' proposal and constituted a
breach, aided and abetted by Defendants Freeman, Jacobs and Gunty, of the ARV
Defendants' fiduciary duties. Likewise, the Individual Defendants' failure to
revoke or redeem the poison pill constitutes a separate and continuing breach of
their fiduciary duties.
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123. The poison pill is discriminatory and violates, among others,
Sections 203 and 400 of the California Corporations Code in that under the terms
of the pill all shares of ARV are not granted the same rights, preferences,
privileges and restrictions. Specifically, and among other things, (i) the
shares owned by Prometheus are exempted from triggering the pill; and (ii) the
Rights on shares owned by a shareholder become void when that shareholder
becomes an Acquiring Person.
124. The poison pill is discriminatory and constitutes a breach of
Defendants' fiduciary duties in that under the terms of the pill shareholders
are not treated equally in connection with the issuance of the Rights.
125. Given Emeritus' announcement that it will commence a proxy contest
against the resolutions being put to ARV's shareholders and Emeritus' offers and
proposals to acquire the outstanding shares of ARV, Emeritus has been, and is
being, harmed by Defendants' breaches of their fiduciary duties as alleged in
this claim.
126. Emeritus seeks a declaration that (i) the ARV Defendants violated
their fiduciary duties by implementing the poison pill; (ii) the ARV Defendants
violated their fiduciary duties by exempting the shares owned by Prometheus from
triggering the pill; and (iii) failure to redeem the poison pill or otherwise to
amend it to make it inapplicable to Emeritus constitutes a breach of Defendants'
fiduciary duties.
127. Emeritus seeks an injunction compelling Defendants to redeem the
poison pill or otherwise to amend the poison pill to make it inapplicable to
Emeritus. An injunction is necessary because (i) Emeritus has no adequate remedy
at law, (ii) Emeritus will be irreparably harmed if an injunction is not issued,
and (iii) granting an injunction will cause less harm to Defendants than denying
an injunction will cause harm to Emeritus.
XI.
FIFTH CLAIM FOR RELIEF
BREACH OF FIDUCIARY DUTY: REDEMPTION OF PROMETHEUS NOTES
128. Emeritus repeats and realleges each and every allegation set forth
in Paragraphs 1 through 127 as if fully set forth herein.
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129. Defendants owe fiduciary duties to Emeritus. As fiduciaries,
Defendants owe Emeritus the highest duties of care, loyalty, candor and good
faith.
130. The Individual Defendants redeemed the Notes and moved the record
and annual meeting dates in response to Emeritus'November 24, 1997 announcement
that it would solicit proxies for an alternative slate of directors for ARV's
Board. The Notes were redeemed at a significant discount to market in exchange
for some 4.3 million common shares of ARV to an investor of the Board's own
choosing. As a result, those newly-issued shares are contractually required to
be voted in favor of the reelection of the Board's director nominees. In
addition, with the addition of 4.3 million newly-issued shares, Prometheus and
the Board together control slightly less than 50% of the outstanding common
shares of ARV and with the inclusion of certain ARV shares contained in an
employee stock ownership plan may give Prometheus and Defendants absolute
majority control of ARV. In light of the interlocking obligations and interests
created by the Prometheus Transactions and the coordinated effort by the Board
and Prometheus with respect to the control and management of ARV, the Redemption
of the Notes constitutes a sale of control of ARV. Having determined to put ARV
up for sale, Defendants unfairly and unlawfully favored Prometheus and have
refused to enter discussions regarding, or to investigate in any reasonable way,
Emeritus' proposals and offers. These actions indicate that Defendants redeemed
the Notes for the purpose of entrenching themselves in office and preventing
Emeritus from winning the proxy contest for the election of directors to the
Board. Defendants failed to exercise due care in the redemption of the Notes and
the moving of the record and annual meeting dates.
131. Emeritus has been harmed by Defendants failure to consider its
proposals and offers and also, given Emeritus' announcement that it will
commence a proxy contest, by the issuance of 4.3 million ARV shares which must
be voted in favor of Defendants' Board nominees.
132. Emeritus seeks a declaration that (i) the Redemption of the Notes
into common shares of ARV was, and the voting or counting of votes of such
shares would be, in breach of Defendants' fiduciary duties; (ii) the moving of
the record and annual meeting dates was in breach of Defendants' fiduciary
duties, and (iii) the Redemption of Notes is void or voidable by ARV.
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133. Emeritus seeks an injunction that (i) rescinding and nullifying the
Redemption of the Notes; (ii) directing that the approximately 4,285,704 shares
issued to Prometheus as a result of the Redemption of the Notes may not be
voted, or if voted may not be counted, and (iii) directing that the record and
meeting dates may not be moved or be moved only in accordance with Defendants'
fiduciary duties. An injunction is necessary because (i) Emeritus has no
adequate remedy at law; (ii) Emeritus will be irreparably harmed if an
injunction is not issued; and (iii) granting an injunction will cause less harm
to Defendants than denying an injunction will cause harm to Emeritus.
XII.
PRAYER FOR RELIEF
WHEREFORE, Emeritus respectfully requests that this Court enter the
following relief
1. A declaration that (i) Defendants have breached their fiduciary
duties by entrenching ARV's existing board in office; (ii) the ARV Defendants
have breached their fiduciary duties by entering into the Prometheus
Transactions; (iii) the Prometheus Transactions are null and void or voidable by
ARV; (iv) the issuance of the Notes was in breach of the ARV Defendants'
fiduciary duties; (v) the Redemption of the Notes into common shares of ARV was,
and the voting or counting of votes of such shares would be, in breach of
Defendant's fiduciary duties; (vi) Defendants breached their fiduciary duties by
moving the record and annual meeting dates; (vii) the issuance to Prometheus of
ARV shares under the First Prometheus Transaction was in breach of the ARV
Defendants fiduciary duties; (viii) the voting or counting of votes of such
shares would be in breach of Defendant's duties; (ix) Defendants have breached
their fiduciary duties by failing to take prompt and diligent steps that
maximize shareholder value; and (x) the ARV Defendants have breached their
fiduciary duties by failing to exercise reasonable care and diligence in
considering Emeritus' proposals in entering into the Prometheus Transactions.
2. An injunction (i) rescinding and nullifying the Prometheus
Transactions; (ii) directing that the 1,921,012 ARV shares issued to Prometheus
pursuant to the First Prometheus Transaction may not be voted, or if voted may
not be counted; (iii) directing that the common shares of ARV received by
Prometheus as a result of the Redemption of the Notes may not be voted, or if
voted may not be counted; (iv) directing that the record and annual meeting
dates not be moved or be moved only
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in accordance with Defendants' fiduciary duties; (v) directing that Defendants
take prompt and diligent steps to maximize shareholder value; and (vi) directing
Defendants to enter into good faith negotiations with Emeritus.
3. A declaration that (i) the ARV Defendants violated their fiduciary
duties by implementing the poison pill; (ii) the ARV Defendants violated their
fiduciary duties by exempting the shares owned by Prometheus from triggering the
pill; and (iii) that failure to redeem the poison pill or otherwise to amend it
to make it inapplicable to Emeritus constitutes a breach of Defendants'
fiduciary duties;
4. A declaration that the actions of the Individual Defendants were not
taken in good faith and in a manner reasonably believed to be in the best
interests of ARV within the meaning of Section 317 of the California
Corporations Code;
5. An injunction directing Defendants to redeem the poison pill or
otherwise to amend the poison pill to make it inapplicable to Emeritus;
6. An order awarding Emeritus its costs and expenses in this action; and
7. Granting such other and further relief as the Court deems just and
proper.
DATED: December 9, 1997
GIBSON, DUNN & CRUTCHER, LLP
WAYNE W. SMITH
JOSEPH P. BUSCH, III
DAVIS POLK & WARDWELL
MICHAEL P. CARROLL
JAMES H. R. WINDELS
By: /s/ JOSEPH P. BUSCH, III
--------------------------------
Joseph P. Busch, III
Attorneys for Plaintiff
EMERITUS CORPORATION
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[EMERITUS CORPORATION LETTERHEAD]
July 10, 1997
Gary L. Davidson
Chairman of the Board, President,
Chief Executive Officer
ARV Assisted Living, Inc.
245 Fischer Avenue, Suite D-1
Costa Mesa, California 92626
RE: PROPOSAL
Dear Mr. Davidson:
Starwood Capital Group, LLC ("Starwood") and Emeritus Corporation
("Emeritus") would like to present to you and your Board of Directors a detailed
proposal for the acquisition of ARV Assisted Living, Inc. ("ARV"). As discussed
below, alternative proposals would be designed to result in a minimum value of
$14.00 per share to ARV shareholders, optional liquidity, and the opportunity to
participate in the upside of the combined entities.
In the first alternative, Emeritus would acquire ARV in a tax free
merger or similar business combination transaction in which ARV shareholders
would receive Emeritus Common Stock equal in value to a minimum of $14.00 for
each share of ARV Common Stock. Starwood, through a significant investment in
Emeritus, would provide ongoing financing for the combined company.
In the second alternative, the ARV shareholders would be offered
consideration consisting of Emeritus Common Stock and cash. The consideration
would be valued at a minimum of $14.00 per ARV share of Common Stock and, at the
election of the ARV shareholders, could consist of up to 50% in cash. Starwood,
through its private $830 million investment fund, would provide financing for
the cash portion of the offer and ongoing financing for the combined company.
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Of course, a number of structuring, tax and regulatory considerations
would have to be addressed before arriving at an agreement in principle, but the
objective would be to achieve a minimum value of $14.00 per share for ARV
shareholders and immediate liquidity if desired. Nevertheless, both Starwood and
Emeritus, are familiar with ARV's assets and operations and will be in a
position to accelerate the due diligence process.
As you know, Starwood has reviewed with your management team certain
information, pursuant to that certain confidentiality agreement dated April 3,
1997, between ARV and Starwood. Starwood has of course not shared any such
confidential information with Emeritus.
Independent of Starwood, Emeritus has visited and inspected 41 of 48
properties, analyzed publicly available financial information, and currently
owns approximately 4.9% of the outstanding ARV common stock, which shares were
acquired prior to any contact between Emeritus and Starwood.
Starwood and Emeritus believe that the combination of Emeritus, ARV, and
Starwood would create the largest, strongest and fastest growing company in the
assisted living industry. We also believe that these proposals provide a
significant premium value to the ARV shareholders of over 35% above the current
market price, and a superior value and more attractive liquidity option than
other transactions you may be currently contemplating, while allowing them the
flexibility of continuing their investment in what would be the dominant and
fastest growing assisted living concern in the United States.
We propose that a meeting be held as soon as possible to discuss these
proposals and explore possible structures and alternatives. We and our advisors
are available to meet you in Costa Mesa at your earliest convenience. Please
call us at (206) 298-2909 to arrange such a meeting.
Sincerely,
EMERITUS CORPORATION
By /s/ [SIG]
------------------------------------------
Its Chairman
Starwood Capital Group, LLC
By /s/ [SIG]
------------------------------------------
Its Managing Director
cc: Brad Razook
Sherwin Samuels, Esq.
Mike Stansbury, Esq.
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[ARV LETTERHEAD]
July 11, 1997
Mr. Daniel R. Baty
Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121-1031
Dear Dan:
Thank you for your July 10th fax. I have forwarded copies to each of the
directors for their review. We are attempting to schedule a meeting next week to
consider your proposal.
Sincerely yours,
/s/ [SIG]
Gary L. Davidson
GLD/ctc
P.S. I see from the national weather report that it's still cloudy in Seattle -
it's sunny in Costa Mesa.