1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY`
- -------------------------------------------
JOHN BAILEY and WILLIAM STEINER,
Individually and on Behalf of All
others Similarly Situated,
Plaintiffs,
- vs. -
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, and CAPTEC NET
LEASE REALTY INC.,
Defendants.
- -------------------------------------------
CLASS ACTION COMPLAINT
Plaintiffs, by their attorneys, allege upon personal knowledge as to
their own acts and upon information and belief as to all other matters, as
follows:
PARTIES
1. Plaintiffs are and, at all relevent times, have been, the owner of
shares of Captec's common stock.
2. Captec Net Lease Realty Inc. ("Captec" or the "Company") is a
Delaware corporation with its principal executive offices located at 124 Frank
Lloyd Wright Drive, Ann Arbor, Michigan. Captec is an operating REIT that
invests in long-term net leased restaurant and retail properties. As of May
15, 2001, Captec had approximately 9,508,108 shares of stock outstanding that
trade on the NASDAQ National Marketing System.
2
3. 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 owns or controls Financial Group and Realty Advisors.
4. 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 owns or controls Financial Group and
Realty Advisors.
5. Defendant H. Reid Sherard ("Sherard"), is and has been, at all
relevant times, a Senior Vice President and a Director of Captec. Sherard owns
or controls Financial Group and Realty Advisors.
6. 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. Total rents in
1999 for these properties were expected to be $750,000. Despite this
substantial business relationship with the Company, Ford was a member of the
puportedly independent committee formed to consider the self-dealing
transaction described herein.
7. Albert T. Adams ("Adams"), is and has been, at all relevant times,
a director of Captec. Adams is a partner at Baker
- 2 -
3
& Mostetler 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 described herein.
8. 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.
9. The individuals described in paragraphs 3 through 8 are referred
to as the "Individual Defendants."
10. The Individual Defendants, by reason of their corporate
directorships and/or executive positions, stand in a fiduciary position relative
to the Company's shareholders, which fiduciary relationship, at all times
relevant herein, required them to exercise their best judgment, and to act in a
prudent manner and in the best interests of the Company's shareholders.
CLASS ACTION ALLEGATIONS
11. Plaintiffs bring this case in their own behalf and as a class
action, pursuant to Court of Chancery Rule 23, 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 as described more fully
below.
- 3 -
4
12. This action is properly maintainable as a class action.
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, who reside in geographically
diverse areas of the country.
b. There are questions of law and fact common to the Class
including, inter alia, whether:
(i) defendants have breached and will continue to
breach their fiduciary and other common law duties owed by them to plaintiffs
and the members of the Class;
(ii) the proposed transaction is grossly unfair to
Captec's public shareholders;
(iii) defendants wrongfully failed or refused to obtain
or attempt to obtain a purchaser for the assets of Captec at a higher price;
and,
(iv) plaintiffs and the other members of the Class
would be irreparably damaged were the transaction complained of herein
consummated.
c. Plaintiffs are committed to prosecuting this action and
have retained competent counsel experienced in litigation of this nature.
Plaintiffs' claims are typical of the claims of the other members of the Class
and plaintiffs have the
- 4 -
5
same interests as the other members of the Class. Plaintiffs are adequate
representatives of the Class.
13. 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 defendants, 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 adjudication or substantially
impair or impede their ability to protect their interests.
14. 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
15. In December, 1999, the Individual Defendants proposed and entered
into a self-dealing merger agreement, over the vociferous objection of
shareholders, between the Company and Captec Financial Group, Inc., a company
owned by Beach, Ross and Sherard. Shortly after the filing of two class actions
challenging the transaction as unfair self-dealing in April 2000, the Individual
Defendants abandoned the proposed merger.
- 5 -
6
16. Following the withdrawal of the proposed merger, and in response to
a proxy contest waged by a dissident shareholder, the Individual Defendants
began to consider alternatives to maximize shareholder value. In September,
2000, they announced that they would pursue a sale of the Company.
17. On July 2, 2001, Captec announced that it had entered into a
definitive agreement with Commercial Net Lease Realty, Inc. ("Commercial Net")
whereby Commercial Net would acquire all of the outstanding shares of Captec
common stock in a transaction valued at $225 million.
18. Under the terms of the agreement, each share of Captec would be
exchanged for 0.4575 shares of Commercial Net stock, 0.21034679 shares of a new
class of Commercial Net preferred stock, and $1.27 in cash.
19. Based upon the closing price of Commercial Net stock on
June 29, 2001, the estimated value placed on the Captec stock was $13.05 per
share. However, there was no collar placed on the movement of Commercial Net
stock, which will subject Captec holders to potentially declining per share
values.
20. As part of the proposed transaction, Patrick Beach, the Company's
Chief Executive Officer, will purchase the non-real estate assets of Captec and
assume the liabilities thereon, for $7.5 million. Those assets, however, have a
stated value on the books of Captec of well over $20 million
- 6 -
7
a. Included in the "non-real estate" assets to be purchased
by Beach is a demand obligation in the amount of $9.5 million from Captec
Financial Group to Captec. Beach and the Company have repeatedly assured
Captec's shareholders in the last year that Captec Financial could pay the face
value of the loan at any time, and the Company has always carried the value of
the demand obligation at full face value. Yet the total price to be paid for all
of the "non-real estate" assets by Beach is $2 million less than the face value
of the demand obligation alone.
b. In addition to the $9.5 million demand obligation, Beach
will receive Captec's general partnership interest in two limited partnerships.
Captec paid $4.5 million for those general partnership interest in 1998, and
carries the value of those interests on its books at the same amount.
c. Finally, Beach will acquire Captec's interest in the FC
Venture I joint venture, in which Captec originally invested $7.1 million.
Captec carries this joint venture interest on its books at the same value.
21. Thus, Beach will acquire, in connection with the merger, assets
of the Company valued at over $20 million for $7.5 million. The sale of assets
to Beach in connection with the transaction at far less than their actual value
constitutes a breach of fiduciary duty by the defendants.
- 7 -
8
22. As a result of the unfair self-dealing transactions described
above, the consideration offered to the shareholders of Captec is unfair and
inadequate, and the transaction unfairly benefits Beach at the expense of the
Class.
23. By reason of all of the foregoing, defendants herein have
wrongfully engaged in unfair dealing toward plaintiffs and the other members of
the Class, and have breached their fiduciary duties to plaintiffs and the Class.
24. As a result of defendants' wrongful actions, plaintiffs and the
Class will not receive the fair value of Captec's assets and businesses, and
will, as a result, be irreparably damaged.
25. Unless enjoined by this Court, defendants will continue to
breach their fiduciary duties owed to plaintiffs and the Class, and will succeed
in their plan to exclude plaintiffs and the Class from the fair proportionate
share of the Company's valuable assets and businesses, all to the irreparable
harm of the Class.
26. Plaintiffs and the Class have no adequate remedy at law.
WHEREFORE, plaintiffs pray for judgment and relief as follows:
- 8 -
9
a. declaring that this lawsuit is properly maintainable as
a class action and certifying plaintiffs as representatives of the Class;
b. declaring that defendants have breached their fiduciary
duties to plaintiffs and the other members of the Class;
c. preliminary and permanently enjoining defendants and
their counsel, agents, employees, and all persons acting under, in concert with,
or for them, from proceeding with or implementing the proposed transactions;
d. in the event the transaction is consummated, rescinding
it and setting it aside or awarding rescissory damages;
e. Directing defendants to account to the Class for all
damages they have suffered as a result of defendants' actions, with interest;
f. awarding plaintiffs and the Class their costs and
disbursements and reasonable allowances for plaintiff's counsel and experts'
fees and expenses; and
- 9 -
10
g. granting such other and further relief as may be just
and proper.
ROSENTHAL MONHAIT GROSS
& GODDESS, P.A.
By: /s/ CARMELLA P. KEENER
------------------------
Mellon Bank Center
919 Market Street
Wilmington, Delaware 19899
(302) 656-4433
Attorneys for Plaintiffs
Of Counsel:
HARNES & KELLER LLP
964 Third Avenue
New York, NY 10022
(212) 755-0022
WECHSLER HARWOOD HALEBIAN
& FEFFER LLP
488 Madison Avenue
New York, New York 10022
(212) 935-7400
- 10 -