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EXHIBIT 9
IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
Elizabeth A. Camacho
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067-4276
Telephone: (310) 277-1010
Attorneys for Plaintiff
ARV Assisted Living, Inc.
UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
SOUTHERN DIVISION
ARV ASSISTED LIVING, INC., a ) CASE NO. SA-CV-98-9-LHM (EEX)
California corporation, )
) COMPLAINT FOR INJUNCTIVE
Plaintiff, ) AND DECLARATORY RELIEF FOR
) VIOLATIONS OF THE FEDERAL
v. ) SECURITIES LAWS, UNFAIR
) COMPETITION AND BREACH OF
EMERITUS CORPORATION, a ) FIDUCIARY DUTY
Washington corporation; EMAC )
CORPORATION, a Delaware )
corporation, )
)
Defendants. )
)
)
- ---------------------------------- )
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Plaintiff ARV Assisted Living, Inc. ("ARV" or the "Company"), for its
complaint for violations of the federal securities laws, unfair competition and
breach of fiduciary duty, alleges upon information and belief as follows:
JURISDICTION AND VENUE
1. This Court has federal question jurisdiction pursuant to Section 27
of the Securities Exchange Act of 1934 (the "Exchange Act"), and 28 U.S.C.
Sections 1331 and 2201. The federal claims alleged herein arise under Section 14
of the Exchange Act and the rules and regulations promulgated thereunder by the
Securities and Exchange Commission ("SEC"). This Court also has jurisdiction
over those portions of the Complaint that arise under state law pursuant to both
28 U.S.C. Section 1332 and 28 U.S.C. Section 1367(a). The matter in controversy
exceeds $75,000.
2. Venue is proper in this District pursuant to Section 27 of the
Exchange Act and 28 U.S.C. Section 1391(b), because a substantial part of the
events or omissions giving rise to the claims asserted herein occurred and,
unless enjoined, will continue to occur in this District.
THE PARTIES
3. ARV is a fully integrated provider of assisted living accommodations
and services that operates, acquires and develops assisted living facilities. As
of December 31, 1997, ARV had approximately 15.9 million shares of common stock
outstanding. ARV's common stock is registered pursuant to Section 12(b) of the
Exchange Act and is listed and traded on the American Stock Exchange. ARV is a
California corporation with its principal executive offices located in Costa
Mesa, California.
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4. Defendant Emeritus Corporation ("Emeritus") is a competitor of ARV
that operates residential style assisted living communities. As of December 31,
1997, Emeritus had approximately 11 million shares of common stock outstanding.
Emeritus' common stock is registered pursuant to Section 12(b) of the Exchange
Act and is listed and traded on the American Stock Exchange. Emeritus is a
Washington corporation with its principal executive offices located in Seattle,
Washington.
5. Defendant EMAC Corporation ("EMAC") is a wholly owned subsidiary of
Emeritus that was organized to acquire ARV. All outstanding shares of capital
stock of EMAC are owned by Emeritus. EMAC is a Delaware corporation with its
principal executive offices located in Seattle, Washington. Emeritus and EMAC
may be referred to jointly herein as "defendants."
NATURE OF THE CASE
6. This is action for injunctive and declaratory relief to prevent
Emeritus from continuing its plan to mislead and manipulate ARV shareholders
with an illusory promise of an all cash offer to purchase ARV.
7. Since it first expressed an interest in acquiring ARV, Emeritus has
been committed to a stock for stock merger between the two companies.
Unsuccessful in its efforts to persuade the ARV board to pursue a stock for
stock transaction, Emeritus has embarked on a plan to solicit ARV shareholders
directly and induce them to surrender control of the ARV board. The linchpin of
Emeritus' scheme to secure board control is an illusory all cash offer to
acquire ARV. This offer is illusory because, on information and belief, Emeritus
has neither the means nor the intention to pay cash for
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ARV shares. Rather, Emeritus seeks to entice ARV shareholders with the promise
of "immediate cash" and induce them to surrender control of their board; once
Emeritus obtains board control, it would be able to "negotiate," as both buyer
and seller, and approve the stock for stock transaction it has contemplated from
the start.
8. In furtherance of its ultimate plan to acquire ARV for stock,
Emeritus has undertaken a proxy contest seeking control of the board of
directors of ARV. In an effort to maximize the appeal of its nominees, Emeritus
(through EMAC, its wholly owned subsidiary) has presented ARV shareholders with
a highly conditional tender offer to purchase shares at $17.50 in cash. Emeritus
has promoted its tender offer and board nominees by filing with the SEC and
distributing to ARV's shareholders proxy solicitation materials. Emeritus has
also filed a tender offer statement with the SEC, and has distributed its tender
offer ("Tender Offer") to ARV shareholders.
9. In an effort to avoid revealing its true plan, defendants have
omitted material information from the Tender Offer and the proxy and tender
offer statements, in violation of Sections 14(a), 14(d) and 14(e) of the
Exchange Act, and the SEC's rules thereunder. Absent compliance with the federal
securities laws by Emeritus, it will be impossible for ARV's shareholders to
make informed decisions concerning the tender of shares or the suitability of
the Emeritus nominees to act as directors of ARV.
10. On or about December 19, 1997, Emeritus announced a tender offer
whereby its subsidiary EMAC would purchase ARV shares at $17.50 per share in
cash. The Emeritus Tender Offer, and tender offer statement filed in connection
with the offer, violate Sections 14(d), 14(e) and SEC Rule 14d-3 because
defendants fail to
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disclose material facts relating to the proposed ARV/Emeritus merger. For
example, defendants fail to disclose that (1) their true plan is to use the
highly conditional cash offer as a ploy to enable Emeritus to gain control of
the ARV board so that it can acquire ARV through a stock for stock deal; (2) a
substantial number of ARV leases contain provisions which would cause ARV to
incur substantial additional lease costs upon a change of control; (3)
defendants' Tender Offer is conditioned on (among other things) an event that
most likely will not occur (if at all) for at least two years; (4) the "highly
confident" letter defendants tout as evidence of their ability to obtain
financing for the Tender Offer is largely meaningless since the author of this
letter -- Northstar Capital Partners L.L.C. -- is not itself in the business of
providing or arranging financing for hostile takeovers; (5) defendants have
refused to pay the commitment fee necessary to obtain financing since they know
they must wait at least two years to have any chance of obtaining the relief
necessary to satisfy one of the conditions to their offer; (6) defendants'
proposed $110 million commercial bank loan which constitutes a portion of its
financing contains a "material adverse change" condition which will permit the
bank to decline to loan its portion of the tender offer financing when it learns
that the merger will trigger events of default in 18 of ARV's 32 leases; and,
(7) defendants' offer is conditioned in such a way that it is not an offer to
pay $17.50 for all of the outstanding shares of ARV but rather is the economic
equivalent of paying about $16.65 for each outstanding share of ARV.
11. On or about December 22, 1997, Emeritus distributed to ARV's
shareholders a proxy statement soliciting votes for its slate of director
candidates. The
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Emeritus proxy statement violates Section 14(a), and SEC Rule 14a-9 promulgated
thereunder, because it fails to disclose material facts relating to the proposed
ARV/Emeritus merger. For example, Emeritus' proxy statement fails to disclose
that (1) the Tender Offer is merely a ploy to enable Emeritus to gain control of
the ARV board and then acquire ARV through a stock for stock deal; (2) a
substantial number of ARV leases contain provisions in which a change of control
constitutes an event of default which subjects ARV to termination of the leases
of profitable facilities, including upon the election of the Emeritus nominees;
(3) defendants' Tender Offer is conditioned on (among other things) an event
that most likely will not occur (if at all) for at least two years; (4) there is
a serious risk that Emeritus will not be able to obtain the financing necessary
to fund the Tender Offer; Emeritus has failed to disclose that the commercial
bank lender of $110 million of the tender offer consideration is subject to a
"material adverse change" condition that is unlikely to be waived in light of
the events of default triggered by the merger; (5) Emeritus relies upon a
"highly confident" letter from an entity that neither arranges nor provides
takeover financing itself; (6) Emeritus has refused to pay the commitment fee
necessary to obtain financing since it knows it must wait at least two years to
have any chance of obtaining the relief necessary to satisfy one of the
conditions to its offer; (7) Emeritus' offer is conditioned in such a way that
it is not an offer to pay $17.50 for all of the outstanding shares of ARV but
rather is the economic equivalent of paying about $16.65 for each outstanding
share of ARV; and, (8) if Emeritus is successful in the proxy contest, but does
not
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follow through with the Tender Offer, it will be "negotiating" against itself to
produce an acquisition agreement that is fair to ARV shareholders.
12. In committing the securities laws violations set forth above and in
more detail below, defendants used the mails and other means and
instrumentalities of interstate commerce. Moreover, Emeritus' actions set forth
in this Complaint were reasonably calculated to result in either the procurement
or withholding of a proxy.
13. In sum, the Tender Offer and proxy solicitation are part of
Emeritus' plan to entice shareholders with a flimsy promise of a cash offer,
gain control of the ARV board, and implement a stock for stock trade, or
whatever merger or other acquisition plan it sees fit. Once an Emeritus slate is
in place, ARV shareholders will be left without any commitments and will have
little ability to stop a disadvantageous merger.
14. Based on the foregoing, it is apparent that these false tender offer
and proxy materials will make it impossible for ARV's shareholders to make
informed decisions with respect to tendering their shares or considering the
suitability of the Emeritus nominees for election to ARV's board of directors.
Unless enjoined from perpetrating these misrepresentations and concealments,
defendants will persist in their deceit of ARV's shareholders and will succeed
in their efforts to taint the ongoing proxy contest, all to the serious and
irreparable detriment of ARV and its shareholders.
15. Moreover, by obtaining proxies for a majority of ARV's outstanding
shares, Emeritus -- a competitor of ARV -- would be in a position to cause a
change of control within ARV and trigger serious losses for ARV. First, an event
of default on numerous ARV leases. Free from any obligation to follow through
with the Tender
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Offer or other transaction, Emeritus could simply walk away, leaving ARV
shareholders without any benefit from having elected the Emeritus nominees but
suffering the burdens associated with having breached millions of dollars worth
of leases. Worse still, having caused its competitor to breach its leases,
Emeritus would be in a position to take unfair advantage of ARV's defaults and
negotiate itself to lease the properties now under lease to ARV. Second, a
change in the composition of ARV's board of directors would allow key employees
under contract with ARV to leave ARV's employ and receive a substantial lump sum
payment upon their departure. Again, Emeritus would be in a position to leave to
ARV to deal with this loss, or to acquire ARV's skilled and knowledgeable
employees itself. If allowed to continue, Emeritus' plan to obtain and vote
proxies will result in acts of unfair competition and breach of Emeritus'
fiduciary duty by a controlling shareholder. Unless enjoined, Emeritus' conduct
will cause serious and irreparable harm to ARV and its shareholders.
ARV'S NEGOTIATIONS WITH POTENTIAL INVESTORS
16. In early 1997, ARV decided to explore the possibility of a strategic
investment in the company in order to assist the company in continuing its
acquisition and development plans and repaying debt. ARV initially commenced
discussions with Starwood Capital Group LLC ("Starwood") regarding potential
financing arrangements between the two companies. In connection with these
discussions, Starwood began performing due diligence on ARV in February of 1997.
Pursuant to a confidentiality agreement dated April 3, 1997, Starwood agreed not
to use or disclose confidential
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information it obtained in the due diligence process except as specifically
authorized by the confidentiality agreement.
17. Prior to June of 1997, ARV's investment bankers and advisors met
with representatives of Prometheus Assisted Living LLC, an affiliate of Lazard
Freres Real Estate Investors LLC (collectively, "Prometheus") to explore the
possibility of Prometheus investing in ARV. Detailed discussions ensued. On June
27, 1997, ARV entered into an exclusivity agreement with Prometheus pursuant to
which ARV agreed not to pursue a transaction with any other investor prior to
August 8, 1997 while it negotiated definitive agreements with Prometheus. By
July 13, 1997, ARV and Prometheus had reached agreement on the form of the
definitive agreements pertaining to the proposed transaction.
EMERITUS ATTEMPTED TO DERAIL PROMETHEUS
TRANSACTION WITH A PROPOSAL TO ACQUIRE ARV
THROUGH A STOCK FOR STOCK DEAL
18. Recognizing the progress between ARV and Prometheus, Starwood joined
forces with Emeritus to prevent ARV from going forward with the Prometheus
transaction. On July 10, 1997, Emeritus and Starwood wrote a joint letter to ARV
expressing a desire to present a proposal for Emeritus to acquire ARV. As its
first of two alternatives, Emeritus and Starwood proposed that Emeritus acquire
ARV through a stock for stock trade, specifically, a
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"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."
As a second alternative, Emeritus and Starwood proposed that ARV
shareholders be offered a combination of Emeritus Common Stock and "up to 50% in
cash."
19. Emeritus expressly acknowledged that its proposal was substantially
undeveloped, pointing out that "a number of structuring, tax and regulatory
considerations would have to be addressed before arriving at an agreement in
principle . . ."
20. After careful review and consideration of the brief terms outlined
in the joint letter of July 10, 1997, the ARV Board determined that those terms
were significantly less attractive and definitive than the terms of the proposed
Prometheus transaction. Accordingly, the ARV Board voted unanimously to approve
the Prometheus transaction.
EMERITUS IS ATTEMPTING TO INDUCE ARV SHAREHOLDERS
TO SURRENDER CONTROL OF THEIR BOARD WITH
AN ILLUSORY PROMISE OF ALL CASH OFFER
21. Unable to convince the ARV board to pursue a stock for stock merger,
Emeritus changed its tactics but not its goal. Emeritus devised a "proposal" of
an all cash offer as a manipulative tool to induce ARV to enter negotiations.
Emeritus twice wrote to ARV with the stated desire of pursuing negotiations for
a vague and undefined proposal for an all-cash offer to acquire ARV for $16.50
per share. When the ARV
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board declined to enter negotiations concerning this flimsy proposal, Emeritus
determined to use the tactic of an illusory cash offer to replace the ARV board
with a more receptive audience.
22. On November 24, 1997, Emeritus launched a proxy contest for control
of the ARV board by filing with the SEC a Schedule 14A and preliminary proxy
statement. The message conveyed by Emeritus' proxy statement is seemingly
straightforward: Elect the Emeritus nominees and immediately receive $17.50(1)
in cash for each share of ARV Common Stock. In an effort to strengthen its bid
for board control, Emeritus presented ARV shareholders with the Tender Offer to
purchase ARV shares at $17.50 per share in cash. As discussed in detail below,
however, the Tender Offer and proxy solicitation materials are seriously
misleading and fail to disclose many material facts critical to an informed
decision by ARV shareholders.
EMERITUS DOES NOT INTEND TO GO FORWARD
WITH AN ALL CASH PURCHASE OF ARV
23. Emeritus' failure to make the required disclosures in its Tender
Offer and proxy and tender offer statements only underscores its true intentions
with respect to ARV -- Emeritus has contemplated a stock for stock transaction
from the beginning, and lacks both the ability and the inclination to go forward
with an all cash deal.
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(1) In the preliminary proxy statement filed with the SEC on November 24, 1997,
Emeritus claimed a desire to purchase ARV for $16.50 per share. Emeritus
subsequently presented ARV shareholders with its Tender Offer to purchase ARV
shares at $17.50. Emeritus' final proxy statement includes the $17.50 figure.
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EMERITUS IS COMMITTED TO A STOCK FOR STOCK MERGER WITH ARV
24. Even while it courts ARV's board and shareholders with plans for an
all cash offer, Emeritus' own behavior belies its claimed intentions. For
example, within days of Emeritus' October, 1997 letter to the ARV board claiming
a desire to enter negotiations for an ill-defined cash offer, Emeritus'
investment bankers faxed to ARV's investment bankers an informal proposal for a
stock for stock transaction. This informal proposal for a stock for stock merger
was significantly more detailed than Emeritus' more formal invitation to
commence negotiations for an all cash deal.
25. Even more recently, shortly after announcing its Tender Offer to
purchase ARV shares at $17.50 cash per share, Emeritus continued to tell people
associated with ARV that a stock for stock transaction is Emeritus' best option.
AN ALL CASH ACQUISITION WOULD SPELL FINANCIAL DISASTER FOR EMERITUS
26. On information and belief, an all cash offer holds no financial
advantage for Emeritus. A preliminary analysis of Emeritus' financial position
reveals that an all cash purchase of ARV stock would substantially weaken the
Emeritus balance sheet and would result in a significant reduction in Emeritus'
earnings per share. This, in turn, would be likely to trigger serious declines
in the value of Emeritus' own stock.
AN ACQUISITION WOULD TRIGGER SUBSTANTIAL INCREASES IN ARV LEASE COSTS
27. Emeritus' ability and incentive to follow through with an all cash
deal is further eroded by the substantial additional lease costs that are likely
to result from an acquisition by Emeritus.
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28. ARV operates 48 assisted living facilities, a significant portion of
which are leased at below market rates pursuant to long-term operating leases.
Twenty-eight (28) of the leased facilities are subject to leases that contain
provisions allowing the landlord to terminate the lease upon a change of control
in ARV. At least eighteen (18) of these leases define a change of control to
include a change in the composition of ARV's board of directors. These
provisions obviously provide the landlord with significant leverage to negotiate
a higher rent -- either with ARV or one of its competitors. Since so many of
ARV's leases are currently below market, at a minimum, a change of control is
likely to burden ARV with a substantial increase in lease costs, and, even
worse, subjects it to the risk of losing its leases entirely.
29. On information and belief, a substantial number of Emeritus'
assisted living facilities are located on leased property and are governed by
leases which contain change-of-control provisions. Thus, Emeritus is aware of
this potential increase in ARV's lease costs and actually conditioned its Tender
Offer on the receipt of consents from ARV's landlords to the anticipated change
of control. When those landlords insist on raising ARV's rent in exchange for
their consent, Emeritus will be free to reduce the purchase price it is willing
to pay to ARV's shareholders or to abandon its all cash offer entirely.
EMERITUS HAS A HISTORY OF RENEGOTIATING INITIAL OFFERS
30. Emeritus' own history further confirms that Emeritus would not
follow through with its original terms of a merger proposal. On information and
belief, in 1996, Emeritus announced a stock for stock merger at an agreed upon
exchange ratio
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with Standish Healthcare. However, before the merger closed, Emeritus attempted
to renegotiate a more favorable exchange ratio. When Standish Healthcare
declined to renegotiate, Emeritus refused to close the transaction.
EMERITUS' TENDER OFFER AND TENDER OFFER STATEMENT
ARE MATERIALLY MISLEADING
31. On December 19, 1997, in an effort to elicit support for its
slate of directors, Emeritus (through its wholly owned subsidiary EMAC)
presented to ARV shareholders a highly contingent tender offer to purchase ARV
shares at $17.50 per share in cash. A true and correct copy of defendants'
tender offer statement, including the Tender Offer, is attached hereto as
Exhibit A and is incorporated herein by this reference.
32. The conditions to defendants' Tender Offer include the following:
a. The valid tender (without withdrawal) of a number of shares
which, together with shares owned by EMAC and its affiliates, constitute at
least a majority of the total number of outstanding shares of ARV on a fully
diluted basis (exclusive of any shares issuable upon conversion of ARV's 6-3/4%
convertible subordinated notes due 2006) as of the date of acceptance by EMAC;
b. The redemption by the ARV Board of Directors of the certain
preferred stock purchase rights issued by ARV, or EMAC being satisfied, in its
discretion, that these rights have been invalidated or are otherwise
inapplicable to the offer and proposed merger;
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c. Emeritus and EMAC "being satisfied, in their discretion," that
EMAC has obtained financing "upon terms satisfactory to them in an amount
sufficient to consummate the offer and the proposed merger (including the
redemption or refinancing of all outstanding debt and payment of all fees and
expenses);"
d. "The redemption of the notes (as defined [in the Tender
Offer]) having been rescinded."
e. Emeritus' determination that ARV landlords entitled to declare
a default of ARV leases upon a change of control have consented to the change of
control "on terms satisfactory to [Emeritus] in its sole discretion."
f. That no "material adverse change" in ARV's business or
prospects has occurred.
33. Emeritus and EMAC have violated Sections 14(d) and 14(e) of the
Exchange Act, and Rule 14d(3) and Schedule 14d-1 promulgated under Section
14(d), because they have failed to disclose material facts or information
relating to the Tender Offer. Specifically, the Tender Offer is misleading as to
defendants' purpose because it fails to disclose defendants' plan to induce ARV
shareholders to surrender control of the ARV board and enable Emeritus to
acquire ARV in a stock for stock transaction.
34. In addition, Emeritus and EMAC have failed to disclose the
significant likelihood that ARV will incur substantial additional lease costs as
a result of Emeritus' proposed purchase. It is obvious from the conditions to
the Tender Offer that Emeritus is well aware of the change-of-control provisions
in ARV leases. Indeed, change-of-
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control provisions are typical in the leasing industry. On information and
belief, Emeritus is itself a party to leases which contain change-of-control
provisions.
35. The failure to disclose the magnitude of the potential additional
lease costs misleads ARV shareholders in many ways. First, and most directly,
Emeritus' inclusion of landlords' consents as a condition of the Tender Offer
provides Emeritus with both the opportunity and incentive to walk away from the
Tender Offer or reduce the price it is willing to pay to ARV's shareholders.
Second, these additional costs may preclude defendants from obtaining financing.
Third, these costs could leave ARV, or a new combined company, in a precarious
financial position after an acquisition is complete -- a circumstance that bears
directly on the credibility of Emeritus' Tender Offer. Finally, the
change-of-control provisions provide Emeritus with a powerful tool for unfairly
crippling a competitor. By obtaining a sufficient number of proxies and electing
its nominees to the ARV board, Emeritus could trigger change-of-control
provisions in at least 16 ARV leases. If defendants have not waived the
conditions to their Tender Offer, Emeritus could then abandon the Tender Offer
or proposed merger, leaving ARV with many breached leases. Alternatively, having
caused the default of its competitor, Emeritus could take the opportunity to
negotiate with ARV's landlords to lease ARV's most profitable facilities itself.
36. Defendants' Tender Offer also fails to disclose the significant
probability that at least one of the conditions to the Tender Offer -- the
rescission of the redemption of the notes -- cannot be satisfied in less than
two years (if at all). The Tender Offer states that Emeritus has challenged the
redemption of the notes in California state court
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and attaches a copy of Emeritus' complaint seeking the rescission. The Tender
Offer fails to reveal, however, that rescission of the notes cannot be obtained
on an expedited basis, that time must be allotted, even if Emeritus is to
prevail in the trial court, for the parties to exercise their right of appeal,
and that Emeritus will not know for at least two years whether the shares issued
pursuant to the redemption can in fact be cancelled. By failing to inform
shareholders that the Tender Offer is conditioned on an event that most likely
will not occur for at least two years, defendants' Tender Offer is materially
misleading.
37. Defendants' Tender Offer is also misleading with respect to the
financing for the proposed purchase. The Tender Offer states that Emeritus has
"received a letter from Northstar Capital Partners L.L.C. (`Northstar') stating
that Northstar is highly confident of its ability to provide the necessary
financing." Defendants have failed to disclose, however, that Northstar is not
in the business of arranging takeover financing and has never arranged such
financing before. Accordingly, Northstar cannot itself make any reliable
assertion that financing will be available; its "highly confident" letter is
essentially meaningless. Without this critical information, Emeritus' statements
regarding Northstar's letter are materially misleading.
38. While defendants claim that Emeritus has "fully negotiated" the
terms and conditions of financing commitments, the Tender Offer fails to
disclose the identity of the potential funding source, or any of the terms and
conditions that have been negotiated. In particular, the Tender Offer fails to
disclose that Emeritus' alleged source for a $110 million bank loan has
conditioned the loan on the absence of any
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adverse material change in either ARV or Emeritus -- a condition that could not
be fulfilled if ARV defaults on its leases.
39. Defendants' financing disclosures are also rendered misleading by
their failure to disclose the time frame for obtaining rescission of the
redemption of the Notes. The Tender Offer claims that Emeritus has not executed
commitment letters with financial sources "because it does not want to incur
certain related fees and expenses unnecessarily prior to the outcome of its
litigation challenging the Prometheus transactions." Because they have failed to
disclose the time frame for this litigation, defendants have failed to disclose
the significant likelihood that Emeritus will not obtain a financing commitment
for at least two years.
40. By conditioning its offer of $17.50 per share on the cancellation of
almost 4.3 million of ARV's outstanding shares and the replacement of those
shares with a $60 million note, Emeritus has in effect made an offer to purchase
the outstanding shares of ARV at a price that is the economic equivalent of no
more than $16.65 per share. The Tender Offer is also materially misleading
because it fails to reveal the true price Emeritus is willing to pay for all of
ARV's outstanding shares.
EMERITUS' PROXY STATEMENT IS MATERIALLY MISLEADING
41. On or about December 22, 1997, Emeritus mailed its proxy
solicitation materials to ARV shareholders. A true and correct copy of these
materials is attached hereto as Exhibit B and is incorporated herein by this
reference.
42. In the very first sentence of the letter that accompanied Emeritus'
proxy statement, Emeritus states that it "has offered to purchase ARV for $17.50
per share in
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cash." A few sentences later, Emeritus makes the fundamental pitch it continues
to emphasize repeatedly throughout the proxy statement:
"[W]e need your support to elect our nominees to the ARV Board in order
to facilitate a merger with Emeritus that will net you $17.50 per share
in cash."
Emeritus' proxy statement repeatedly attempts to convince shareholders that
election of the Emeritus nominees will result in "immediate cash" for all ARV
shareholders. For example, at one point in its proxy statement Emeritus asserts
that "only the [Tender Offer] provides an IMMEDIATE cash payment to all ARV
shareholders." (Emphasis added). The proxy statement also claims that, while
benefits from other transactions are "delayed and uncertain," the Tender Offer
"provides you an IMMEDIATE return on your investment." (Emphasis added).
Conveying the message that the Tender Offer is ready for immediate
implementation, the proxy statement dramatically warns, "THIS IS THE LAST
OPPORTUNITY TO REQUIRE THE ARV BOARD TO ACCEPT OUR $17.50 PER SHARE ALL CASH
OFFER." Virtually identical statements are often repeated in the proxy
statement.
43. The Emeritus proxy statement violates Section 14(a) of the Exchange
Act, and Rule 14a-9 promulgated thereunder, because it fails to disclose
numerous material facts relating to the proposed ARV/Emeritus merger.
Specifically, contrary to the assertions described above, on information and
belief, Emeritus does not intend to follow through with its offer to purchase
ARV shares at $17.50 in cash. Rather, Emeritus plans to use the all cash "offer"
as a ruse to gain control of the ARV Board
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and acquire ARV through a stock for stock merger. By design, Emeritus' proxy
solicitations fail to disclose the true plan for a stock for stock transaction,
and mislead ARV shareholders.
44. Moreover, even if Emeritus did intend to go forward with an all cash
offer, its proxy solicitations fail to disclose specific, identifiable risks
that render such action highly unlikely. For example, consistent with its
repeated claim to offer shareholders the opportunity to receive "immediate
cash," Emeritus fails to disclose the significant probability that at least one
of the conditions to the Tender Offer -- the rescission of the redemption of the
Notes -- cannot be satisfied in less than two years (if at all).
45. Emeritus' proxy statement also fails to disclose the existence and
effect of the change of control provisions in 28 of ARV's 32 leases. Emeritus
also fails to disclose that voting for the Emeritus nominees could result in the
termination of 18 of these leases -- an event which would have disastrous
consequences for ARV, and for its shareholders if the Tender Offer fails to
close. As alleged above, these provisions could preclude Emeritus from obtaining
financing or alter Emeritus' ability and incentive to follow through with the
$17.50 cash offer (or with any cash offer at all). Indeed, Emeritus has
conditioned its Tender Offer on ARV landlords consenting to the change of
control on terms satisfactory to Emeritus. None of these risks is disclosed to
ARV shareholders in the proxy statement. Moreover, if Emeritus is successful in
the proxy contest, it could use the change-of-control provisions unfairly to
injure ARV by abandoning the deal after causing defaults in ARV leases, or by
using the default to
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acquire ARV's facilities. Again, this risk of voting for the Emeritus slate has
not been disclosed.
46. The Emeritus proxy statement also fails to disclose the material
issues that will affect Emeritus' ability to obtain a financing commitment to
support its Tender Offer. While Emeritus claims to have "fully negotiated" the
terms and conditions of financing with potential funding sources, it fails to
disclose the identity of these sources or any of the negotiated terms and
conditions. In particular, the proxy statement fails to disclose that the $110
million bank loan is conditioned on the absence of any material adverse change
in ARV or Emeritus. On information and belief, there is a serious risk that
Emeritus will be unable to obtain financing to purchase ARV common stock, at
$17.50 per share or otherwise.
47. Emeritus' proxy statement further fails to disclose that its
professed confidence in the availability of financing is premised largely upon a
"highly confident" letter from Northstar Capital LLC -- an entity that is not in
the business of arranging or providing takeover financing. Emeritus' proxy
statement also fails to disclose that it claims to have declined to commit to
financing for the Tender Offer while it waits for the outcome of litigation that
will likely last at least two years.
48. Moreover, while Emeritus proclaims in its proxy statement its
commitment to facilitating a merger with ARV and providing ARV shareholders with
"immediate cash," it fails to disclose that if Emeritus is successful in the
proxy contest, no true negotiation will ever take place in connection with any
acquisition or merger. Instead, to the extent the Tender Offer does not go
forward, the Emeritus controlled
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board would act as both buyer and seller, adopting whatever terms and conditions
it deems in its own best interest without any mechanism for ensuring fairness to
ARV shareholders.
49. Furthermore, Emeritus' proxy statement is materially misleading with
respect to the true price Emeritus is willing to pay for ARV's outstanding
shares. Emeritus' proxy statement fails to disclose that, as alleged above, the
Tender Offer is conditioned in such as way that it is not a true offer for
$17.50 per share, but rather is the economic equivalent of an offer for no more
than $16.65 per share.
50. In sum, the Emeritus proxy statement has all the indicia of a scheme
of "bait and switch." The Emeritus proxy statement attempts to entice ARV's
shareholders with an opportunity for "immediate cash." However, on information
and belief, once in control of the ARV board, Emeritus plans to abandon the
phantom cash offer, "negotiate" a stock for stock transaction and present it to
ARV shareholders as a FAIT ACCOMPLI.
51. Emeritus has solicited proxies with these misleading materials by
mailing these materials to ARV shareholders. Absent compliance with the federal
securities laws by Emeritus, it will be impossible for ARV's shareholders to
make informed decisions concerning the suitability of the Emeritus nominees to
act as directors of ARV.
ELECTION OF EMERITUS' BOARD NOMINEES
WOULD TRIGGER DEVASTATING LOSSES FOR ARV
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52. If Emeritus is successful in electing its nominees to ARV's board,
it would immediately cause ARV to suffer serious losses. A change in control of
ARV's board constitutes an event of default under at least 18 of ARV's leases,
thereby subjecting ARV to the risk of losing critical facilities, or forcing ARV
to renegotiate its leases, many of which are below market.
53. In addition, the election of Emeritus' nominees could cause ARV to
immediately incur significant liability to employees under contract. Fifteen
(15) of ARV's employees have employment contracts which entitle them, at their
own election, to leave ARV's employ upon a change of control in ARV's board.
Each of these contracts further entitles the employee to a lump sum payment of
either one or three years salary upon their departure. ARV's total potential
liability for these lump sum payments is approximately $6.8 million. These
employees are key to ARV's operations, and ARV would be seriously harmed by
their departure. Because these employees possess knowledge, skill and experience
which is highly valued in the assisted living industry, they would be extremely
attractive to ARV's competitors.
54. Because Emeritus' Tender Offer has so many conditions which are
unlikely to be fulfilled, it will be free to force these losses upon ARV without
providing any guarantee that it will follow through with its promised purchase.
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FIRST CLAIM FOR RELIEF
(For Violation of Sections 14(d) and 14(e) of the Exchange
Act and SEC Rule 14d-3)
(Against All Defendants)
55. ARV repeats and realleges paragraphs 1 through 53 as though set
forth fully herein.
56. The Exchange Act and rules promulgated thereunder are intended to
ensure that shareholders presented with a tender offer have the benefit of
information necessary to make an informed decision as to whether to tender their
shares. Item 5 of Schedule 14d-1, promulgated under Section 14(d) and Rule
14d-3, require the bidder to "[s]tate the purpose or purposes of the tender
offer for the subject company's securities."
57. Defendants have violated the requirements of Item 5 because the
tender offer statement fails to disclose the true purpose of the Tender Offer,
i.e., to induce ARV shareholders to surrender control of the ARV board and
enable Emeritus to acquire ARV in a stock for stock transaction.
58. The Exchange Act and the rules promulgated thereunder are also
intended to ensure that the information provided to shareholders in connection
with a tender offer is truthful and not materially misleading. Item 10(f) of
Schedule 14d-1 requires that a bidder disclose:
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"such additional material information, if any, as may be necessary to
make the required statements, in light of the circumstances under which
they are made, not materially misleading."
In addition, Section 14(e) of the Exchange Act provides:
"It shall be unlawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements made, in the light of the circumstances under which
they are made, not misleading, or to engage in any fraudulent,
deceptive, or manipulative acts or practices, in connection with any
tender offer or request or invitation of tenders, or any solicitation of
security holders in opposition to or in favor of any such offer,
request, or invitation. . . ."
59. Defendants' Tender Offer (and tender offer statement) is
deliberately and materially false and misleading because it fails to disclose
material facts relating to the Tender Offer.
60. In particular, in addition to their failure to disclose their true
plan to pursue a stock for stock merger with ARV, defendants have failed to
disclose the existence and effect of change-of-control provisions in ARV leases,
and the significant risks these lease provisions pose to ARV to the $110 million
commercial bank loan that is part of Emeritus's financing and to the
consummation of the Tender Offer.
61. Additionally, defendants have failed to disclose that the Tender
Offer is conditioned on (among other things) an event that most likely will not
occur for at least two years.
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62. Defendants have further failed to disclose that Northstar is not
itself in the business of providing or arranging takeover financing and that
Northstar's "highly confident" letter is unreliable and essentially meaningless.
63. Defendants' financing disclosures are also misleading because, by
failing to disclose the time frame for rescinding the redemption of the Notes,
defendants have failed to disclose the significant likelihood that they will not
obtain any financing commitment for at least two years.
64. Defendants have also failed to disclose that, given the conditions
imposed on the Tender Offer, defendants' offer to purchase is not a true offer
for $17.50 per share, but rather is the economic equivalent of an offer for no
more than $16.65 per share.
65. Each of these omissions and misrepresentations is material because
ARV's shareholders would consider them important in deciding whether to tender
their shares to EMAC in connection with the Tender Offer.
66. Defendants have violated and, unless enjoined, will continue to
violate Sections 14(d) and 14(e) of the Exchange Act and rules and regulations
promulgated thereunder.
67. ARV and its shareholders have no adequate remedy at law.
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SECOND CLAIM FOR RELIEF
(For Violation of Section 14(a) of the Exchange
Act and SEC Rule 14a-9 Promulgated Thereunder)
(Against All Defendants)
68. ARV repeats and realleges paragraphs 1 through 66 as though set
forth fully herein.
69. Section 14(a) of the Exchange Act and Rule 14a-9 promulgated
thereunder are intended to ensure that the proxy solicitation process is
truthful and not materially misleading to enable shareholders to evaluate fully
the information provided therein. In particular, Rule 14a-9 provides that:
No solicitation subject to this regulation shall be made by means of any
proxy statement, form of proxy, notice of meeting or other
communication, written or oral, containing any statement which, at the
time and in the light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or which omits to
state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in
any earlier communication with respect to the solicitation of a proxy
for the same meeting or subject matter which has become false or
misleading.
70. Emeritus' proxy statement is deliberately and materially false and
misleading because it fails to disclose material facts relating to the proposed
ARV/Emeritus merger.
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71. In particular, Emeritus has failed to disclose that it does not
intend to go forward with the Tender Offer, but plans to use the all cash
"offer" as a ruse to gain control of the ARV Board and acquire ARV through a
stock for stock transaction.
72. Additionally, the Emeritus proxy statement fails to disclose
serious, identifiable risks that render an all cash purchase highly unlikely.
For example, the Emeritus proxy statement fails to disclose that if the Emeritus
slate is elected, that change of control will trigger an event of default in 18
of ARV's 32 leased facilities. Emeritus fails to disclose that such defaults
would constitute a material adverse change in the business and prospects of ARV
thereby entitling Emeritus not to close its tender offer. Emeritus fails to
disclose that, if its slate is elected but it does not close, ARV shareholders
will be left with a substantially weakened company.
73. The Emeritus proxy statement also fails to disclose the material
issues that will affect Emeritus' ability to obtain a financing commitment to
support its proposal for an all cash offer. Emeritus fails to disclose that the
election of its slate will trigger the default of 18 leases and that such a
default would constitute a material adverse change that would excuse the bank
providing Emeritus with $110 million for performance. Emeritus' proxy statement
fails to disclose the other contingencies or issues that must be met or resolved
in order to secure financing. It further fails to disclose that its confidence
in the availability of financing is premised largely upon a "highly confident"
letter from an entity that is not in the business of arranging or providing
takeover financing and has never arranged financing in a hostile takeover
situation. Emeritus' proxy statement also fails to disclose that Emeritus claims
to have
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declined to commit to financing for the Tender Offer while it waits for the
outcome of litigation that will likely last at least two years.
74. The Emeritus proxy statement is also misleading with respect to the
price it has offered to pay for all of ARV's outstanding shares; Emeritus fails
to disclose that, given the conditions imposed on the Tender Offer, defendants'
offer to purchase is not a true offer for $17.50 per share, but rather is the
economic equivalent of an offer for no more than $16.65 per share.
75. The Emeritus proxy statement also fails to disclose the fact that,
if Emeritus is successful in the proxy contest, to the extent it does not follow
through with the Tender Offer, no true negotiation will take place in connection
with the acquisition because Emeritus will be acting as both buyer and seller of
ARV.
76. Each of these omissions and misrepresentations is material because
ARV's shareholders would consider them important in deciding whether to vote for
the Emeritus nominees.
77. Defendants have violated and, unless enjoined, will continue to
violate Section 14(a) of the Exchange Act and rules and regulations promulgated
thereunder.
78. ARV and its shareholders have no adequate remedy at law.
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THIRD CLAIM FOR RELIEF
(For Unfair Competition Under California
Business and Professions Code Section 17200 et seq.)
(Against All Defendants)
79. ARV repeats and realleges paragraphs 1 through 77 as though set
forth fully herein.
80. Defendants' actions as alleged herein constitute an unlawful, unfair
or fraudulent business act or practice under California Business and Professions
Code Section 17200. Defendants' unlawful, unfair or fraudulent business act or
practices include, without limitation, defendants' failure, as alleged above, to
include in their Tender Offer the disclosures required by the Exchange Act and
SEC rules promulgated thereunder.
81. Defendants' unlawful, unfair and/or fraudulent business act or
practices are continuing, thus entitling ARV to injunctive relief under
California Business and Professions Code Section 17203 to restrain defendants'
current and/or future acts of unfair competition.
FOURTH CLAIM FOR RELIEF
(For Unfair Competition Under California
Business and Professions Code Section 17200 et seq.)
(Against Defendant Emeritus Corporation)
82. ARV repeats and realleges paragraphs 1 through 80 as though set
forth fully herein.
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83. Emeritus' actions as alleged herein constitute an unlawful, unfair
or fraudulent business act or practice under California Business and Professions
Code Section 17200. Emeritus' unlawful, unfair or fraudulent business act or
practices include, without limitation: (1) Emeritus' failure, as alleged above,
to include in its proxy statement the disclosures required by the Exchange Act
and SEC rules promulgated thereunder; and (2) Emeritus' plan, and acts in
furtherance thereof, to obtain and vote proxies to elect its nominees to the ARV
board without waiving the conditions of the Tender Offer, thereby causing ARV to
default on its leases and suffer catastrophic consequences as a result, all
without any guaranty that the Tender Offer will close.
84. Emeritus' unlawful, unfair and/or fraudulent business act or
practices are continuing, thus entitling ARV to injunctive relief under
California Business and Professions Code Section 17203 to restrain Emeritus'
current and/or future acts of unfair competition.
FIFTH CLAIM FOR RELIEF
(For Breach of Fiduciary Duty)
(Against Defendant Emeritus Corporation)
85. ARV repeats and realleges paragraphs 1 through 83 as though set
forth fully herein.
86. In the event that Emeritus obtains proxies which enable it to elect
a new ARV board of directors it will become and, for as long as said proxies are
in effect, will remain, a controlling shareholder of ARV. As a controlling
shareholder, Emeritus
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would owe a fiduciary duty to ARV and its minority shareholders to act in good
faith and use its ability to control ARV in a fair, just and equitable manner.
87. Election of Emeritus' board nominees would directly and proximately
cause ARV to breach many of its leases, thereby providing ARV's landlords the
ability to increase the rent or terminate the lease. In the absence of a full
waiver of all the terms and conditions of the Tender Offer, Emeritus, at its
option and for its own benefit, could burden ARV and its minority shareholders
with all the adverse consequences of breached leases (including the possibility
of termination by the lessor(s)) without providing any corresponding benefit.
Under these circumstances, Emeritus' expressed intention of electing its
nominees to the ARV board would cause substantial harm to ARV and its minority
shareholders, and would constitute a breach of Emeritus' fiduciary duty to act
in good faith and control ARV in a fair, just and equitable manner.
IRREPARABLE INJURY TO ARV
AND ITS SHAREHOLDERS
88. ARV and its shareholders are being and, unless defendants are
preliminarily and permanently enjoined as requested herein, will continue to be
immediately and irreparably injured as a result of defendants' conduct in that,
inter alia:
(a) ARV's shareholders have been and will continue to be denied
accurate and complete information to which they are lawfully entitled and thus
have been and are being denied the ability to make informed decisions with
respect to tendering their shares and selecting members of their board of
directors;
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(b) Defendants' scheme to acquire control of ARV will be
supported by shareholders who do not have knowledge of material information;
(c) ARV's business, including its relationships with customers,
suppliers and employees, will continue to be jeopardized by the uncertainties
generated by defendants' misleading proxy solicitations;
(d) If Emeritus acquires control of ARV by virtue of the Emeritus
nominees' election to the ARV board, they will be in a position to terminate or
cease to prosecute this action, thus denying ARV's shareholders any meaningful
remedy against defendants' unlawful conduct;
(e) The market in ARV stock will continue to be disrupted and
artificially manipulated by virtue of the materially false and misleading
information that the defendants have injected into the marketplace by means of
their false and misleading proxy statement; and
(f) If Emeritus is successful in the proxy contest and acquires
control of ARV, it will cause ARV to breach numerous leases and suffer
potentially catastrophic consequences; Emeritus could then cause unfair
competitive harm to ARV by abandoning its purchase and merger plans, leaving ARV
with many breached leases, and/or negotiating with the landlords of the breached
leases to acquire ARV's facilities.
WHEREFORE, ARV prays for relief as follows:
1. On ARV's First Claim for Relief, an order requiring defendants to
return all shares previously tendered to them and preliminarily and permanently
enjoining defendants and all persons acting in concert with them from doing any
of the following
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unless and until the disclosures required by law have been made and the false
and misleading statements identified herein have been corrected in a form
approved by this Court and ARV's shareholders have been given at least five days
to consider such corrected information;
(a) soliciting any ARV shareholders with respect to tendering
their shares to EMAC;
(b) proceeding with its Tender Offer; or
(c) purchasing, acquiring or disposing of any shares of ARV
common stock.
2. On ARV's Second Claim for Relief, an order preliminarily and
permanently enjoining Emeritus and all persons acting in concert with it from
doing any of the following unless and until the disclosures required by law have
been made and the false and misleading statements identified herein have been
corrected in a form approved by this Court and ARV's shareholders have been
given at least five days to consider such corrected information:
(a) voting, in person or by proxy, any shares of ARV common
stock;
(b) soliciting any new proxies or consents from holders of ARV
common stock;
(c) taking any steps to replace the current board of directors of
ARV;
(d) purchasing, acquiring or disposing of any shares of ARV
common stock; and
(e) otherwise communicating with ARV shareholders.
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3. On ARV's Third Claim for Relief, an order preliminarily and
permanently enjoining defendants and all persons acting in concert with them
from doing any of the following unless and until (1) the disclosures required by
law have been made and the false and misleading statements identified herein
have been corrected in a form approved by this Court and ARV's shareholders have
been given at least five days to consider such corrected information; and (2)
defendants have removed all conditions of their Tender Offer and have provided
written waivers from its financing sources of all conditions which could allow
them to refuse to provide funds to defendants:
(a) voting, in person or by proxy, any shares of ARV common
stock;
(b) taking any steps to replace the current board of directors of
ARV;
(c) soliciting any ARV shareholders with respect to tendering
their shares to EMAC; and
(d) proceeding with the Tender Offer.
4. On ARV's Fourth Claim for Relief, an order preliminarily and
permanently enjoining defendants and all persons acting in concert with them
from doing any of the following unless and until (1) the disclosures required by
law have been made and the false and misleading statements identified herein
have been corrected in a form approved by this Court and ARV's shareholders have
been given at least days to consider such corrected information; and (2)
defendants have removed all conditions of their Tender Offer and have provided
written waivers from its financing sources of all conditions which could allow
them to refuse to provide funds to defendants:
(a) voting, in person or by proxy, any shares of ARV common
stock;
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(b) soliciting any new proxies or consents from holders of ARV
common stock; and
(c) taking any steps to replace the current board of directors of
ARV.
5. On ARV's Fifth Claim for Relief, an order preliminarily and
permanently enjoining defendants and all persons acting in concert with them
from doing any of the following unless and until defendants have removed all
conditions of their Tender Offer and until Emeritus has provided written waivers
from its financing sources of all conditions which could allow them to refuse to
provide funds to defendants:
(a) voting, in person or by proxy, any shares of ARV common
stock;
(b) soliciting any new proxies or consents from holders of ARV
common stock; and
(c) taking any steps to replace the current board of directors of
ARV;
6. On its Second Claim for Relief, a judgment declaring that defendants'
proxy solicitations have been made in violation of section 14(a) of the Exchange
Act and the rules promulgated thereunder, and that all proxies obtained by the
Emeritus nominees are therefore void.
7. On its First and Second Claims for Relief, an order requiring
defendants to disclose in any future proxy solicitations -- oral or written --
relating to the upcoming election for members of the ARV board of directors any
judicial finding herein that federal securities laws and rules have been
violated by them.
8. On its First and Second Claims for Relief, an order requiring
defendants to disclose in any future tender solicitations -- oral or written --
to ARV shareholders
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by defendants or their affiliates any judicial finding herein that federal
securities laws and rules have been violated by them.
9. On all claims for relief, an order granting ARV its reasonable costs
and expenses and attorneys' fees.
10. On all claims for relief, an order granting ARV such other and
further relief as the Court deems just and proper.
Dated: January 6, 1998
IRELL & MANELLA LLP
Kenneth R. Heitz
Alexander F. Wiles
Elizabeth A. Camacho
By: /s/ Elizabeth A. Camacho
-------------------------------
Elizabeth A. Camacho
Attorneys for Plaintiff
ARV Assisted Living, Inc.
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