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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
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WILLIAM STEINER,
Plaintiff, C.A. No. 18005NC
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PATRICK L. BEACH, W. ROSS MARTIN,
H. REID SHERARD, RICHARD J. PETERS,
CREED L. FORD, III, WILLIAM H.
KRUL, II, LEE C. HOWLEY, ALBERT T.
ADAMS, WILLIAM J. CHADWICK, CAPTEC NET
LEASE REALTY ADVISORS, INC., CAPTEC
FINANCIAL GROUP, INC. and
CAPTEC NET LEASE REALTY, INC.,
Defendants.
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COMPLAINT
Plaintiff alleges upon personal knowledge as to his own acts and upon
information and belief as to all other matters, as follows;
NATURE OF THE ACTION
1. Plaintiff brings this action individually and as a class action on
behalf of all persons, other than defendants herein and any entity related to or
affiliated with defendants, who own shares of the common stock of Captec Net
Lease Realty, Inc. ("Captec" or the "Company") for injunctive and other
appropriate relief in connection with a proposed transaction pursuant to which
the Company will be reorganized, financially restructured, and no longer able to
do business as a real estate investment trust
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("REIT"). As part of the transaction, Captec will merge with two private
companies owned or controlled by Captec management, defendants Captec Financial
Group, Inc. ("Financial Group") and Captec Net Lease Realty Advisors, Inc.
("Realty Advisors"). Defendants have agreed to the transaction despite the fact
that the terms overvalue management's privately held companies to the detriment
of Captec's public stockholders and the transaction will shift control of
Captec to Captec Management without maximizing value for Captec's public
shareholders.
2. Alternatively, in the event that the transaction is consummated,
plaintiff seeks to recover damages caused by the breaches of fiduciary duties
owed by defendants to plaintiff and the Class.
PARTIES
3. Plaintiff is and, at all relevant times, has been, the owner of
shares of Captec's common stock.
4. Captec is a Delaware corporation. Captec is an operating REIT that
invests in long-term net leased restaurant and retail properties.
5. Defendant Patrick L. Beach ("Beach") is and has been, at all
relevant times, President, Chief Executive Officer, and Chairman of the Board of
Captec. Beach owns or controls approximately 6.5% of Captec's outstanding stock.
Beach controls Financial Group and Realty Advisors.
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6. Defendant W. Ross Martin ("Martin"), is and has been, at all
relevant times, an Executive Vice President, Chief Financial Officer,
Treasurer, and a Director of Captec. Martin owns or controls approximately 3.2%
of Captec's outstanding stock. Martin is a well-compensated principal of
Financial Group and Realty Advisors.
7. Defendant H. Reid Sherard ("Sherard"), is and has been, at all
relevant times, a Senior Vice President and a Director of Captec. Sherard also
is a well-compensated principal of Financial Group and Realty Advisors.
8. Creed L. Ford, III, ("Ford") is and has been, at all relevant
times, a director of Captec. Ford is Chief Executive Officer of Kona Restaurant
Group, which is a lessee of four Captec properties. 1999 total rents for these
properties were expected to be $750,000. Despite this substantial business
relationship, Ford was a member of the purportedly independent committee formed
to consider the self-dealing transaction which is challenged in this action.
9. Albert T. Adams ("Adams"), is and has been, at all relevant times,
a director of Captec. Adams is a partner at Baker & Hostetler LLP, which
provides legal services to Captec. Despite the on-going legal representation,
Adams was a member of the purportedly independent committee formed to consider
the self-dealing transaction which is challenged in this litigation.
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10. Defendant Richard J. Peters, William H. Krul, II, Lee C. Howley,
and William J. Chadwick are and have been, at all relevant times, directors of
Captec.
11. The Individual Defendants, by reason of their corporate
directorships and/or executive positions, stand in a fiduciary position relative
to the Company's public shareholders and owe them the highest obligations of
good faith, loyalty and care.
CLASS ACTION ALLEGATIONS
12. Plaintiff brings this action on his own behalf and as a class
action on behalf of all stockholders of the Company (except defendants herein
and any person, firm, trust, corporation, or other entity related to or
affiliated with any of the defendants,) who are threatened with injury arising
from defendants' actions complained of herein.
13. This action is properly maintainable as a class action because:
(a) The Class is so numerous that joinder of all members is
impracticable. Approximately 9.5 million shares of the Company's common stock
are held by hundreds of stockholders of record and many more beneficial owners;
(b) There are questions of law and fact common to the Class
including, inter alia, whether:
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(i) defendants have breached and will continue to breach
their fiduciary and other common law duties owed by them to plaintiff and the
members of the Class;
(ii) the proposed transaction is unfair to Captec's
public shareholders and;
(iii) plaintiff and the other members of the Class would
be irreparably damaged were the transaction complained of herein consummated.
(c) Plaintiff is committed to prosecuting this action and has
retained competent counsel experienced in litigation of this nature. Plaintiff's
claims are typical of the claims of the other members of the Class and plaintiff
has the same interests as the other members of the Class. Accordingly, plaintiff
is an adequate representative of the Class.
(d) The prosecution of separate actions by individual members
of the Class would create the risk of inconsistent or varying adjudications with
respect to individual members of the Class which would establish incompatible
standards of conduct for defendant, or adjudications with respect to individual
members of the Class which, as a practical matter, would be dispositive of the
interests of the other members not parties to the adjudications or substantially
impair or impede their ability to protect their interests.
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(e) Defendants have acted, or refused to act, on grounds
generally applicable to, and causing injury to, the Class and, therefore,
preliminary and final injunctive relief on behalf of the Class as a whole is
appropriate.
SUBSTANTIVE ALLEGATIONS
14. On December 20, 1999, Captec announced a series of transactions
(the "Transaction") designed to reorganize the Company, principally changing it
from a REIT to a C corporation. As a C corporation, Captec would no longer be
required to distribute 95 percent of its taxable income to its shareholders. The
immediate effect will be a reduction of shareholder's dividends by approximately
71%.
15. The Transaction provides that Captec will merge with the
privately-held Financial Group and Realty Advisors, which are both owned by
Beach and other members of Captec's senior management. As part of the
Transaction, shares of Captec will be exchanged for equity interests in
Financial Group, and Captec also will forgive an $11 million loan that Captec
made to Financial Group. Additionally, Captec will issue 2.75 million common
shares to its public shareholders and cash payments of $2.5 million to certain
institutional warrant holders. Captec will issue an additional 2.0 million
common shares, payable solely to management pursuant to an earn-out agreement,
if it achieves certain performance targets.
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16. Financial Group is grossly overvalued to the detriment of Captec's
public stockholders. Financial Group has continually lost money and is dependent
solely upon the $11 million loan from Captec for its survival. Captec's public
shareholders are receiving little, if anything, in exchange for the forgiveness
of the $11 million loan to Financial Group.
17. Beach, Martin and Sherard, along with other Captec employees, will
continue to act as the senior management team of the newly-constituted public
company. Beach, Martin and Sherard will increase their ownership in Captec to
almost 35%, vesting complete, effective working control in them. Notwithstanding
this shift in control, defendants have failed to explore strategic alternatives
which would maximize value for Captec's public shareholders.
18. The Company announced that the transaction was considered by a
purportedly independent committee of Captec directors other than Beach, Martin,
and Sherard. At a minimum, the independence of the committee was compromised by
the presence of Messrs. Ford and Adams who were not independent from the
interests of senior management.
19. Since the announcement of the proposed transaction that will
benefit Beach and other members of Captec management, the Company's stock price
has continually declined, most recently trading at $8.75 per share.
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20. The consideration offered is unfair and inadequate, and offers no
advantage to any stockholder other than the senior management. Further, this
transaction is essentially a financial work-out for Financial Group that
favors the interests of senior management to the exclusion of strategic
alternatives that would favor the interests of the public stockholders such as
an arm's-length, third party transaction.
21. By reason of all of the foregoing, defendants have breached their
fiduciary duties to the Class by favoring senior management over Captec's public
shareholders and by failing to maximize shareholder value in a change of control
transaction.
22. As a result of defendants' wrongdoing, plaintiff and the Class
will be irreparably damaged. Unless enjoined by this Court, defendants will
continue to breach their fiduciary duties owed to plaintiff and the Class, and
will succeed in foisting an unfair and harmful transaction on Class members to
the irreparable harm of the Class.
23. Plaintiff and the Class have no adequate remedy of law.
WHEREFORE, plaintiff prays for judgment and relief as follows:
a. declaring that this lawsuit is properly maintainable as a
class action and certifying plaintiff as representative of the Class;
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b. preliminarily and permanently enjoining defendants and
their counsel, agents, employees, and all persons acting under, in concert with,
or for they, from proceeding with or implementing the proposed Transaction;
c. in the event the Transaction is consummated, rescinding it
and setting it aside;
d. awarding the Class compensatory damages against defendants,
in an amount to be determined at trial, together with prejudgment interest at
the maximum rate allowable by law;
e. awarding plaintiff his costs and disbursements and
reasonable allowances for plaintiff's counsel and experts' fees and expenses;
and
f. granting such other and further relief as may be just and
proper.
ROSENTHAL MONHAIT GROSS
& GODDESS, P.A.
By: [SIG]
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Mellon Bank Center
919 Market Street
Wilmington, Delaware 19899
(302) 656-4433
Of Counsel:
WECHSLER HARWOOD HALEBIAN
& FEFFER LLP
468 Madison Avenue
New York, New York 10022
(212) 935-7400
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