Exhibit (a)(7)
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Kenneth J. Philpot (State Bar No. 62401)
Raymond A. Cardozo (State Bar No. 173263)
Heather Lenhardt (State Bar No. 217580)
REED SMITH CROSBY HEAFEY LLP
Two Embarcadero Center, Suite 2000
San Francisco, CA 94111
MAILING ADDRESS:
P.O. Box 7936
San Francisco, CA 94120-7936
Telephone: 415.543.8700
Facsimile: 415.391.8269
Attorneys for Plaintiff
METRIC GROWTH SUITE INVESTORS, L.P.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
METRIC GROWTH SUITE INVESTORS, No. C03-2523-CRB
L.P., A California Limited
Partnership, MEMORANDUM OF POINTS AND AUTHORITIES IN
SUPPORT OF EX PARTE APPLICATION FOR
Plaintiff, TEMPORARY RESTRAINING ORDER AND ORDER TO
SHOW CAUSE WHY A PRELIMINARY INJUNCTION
vs. SHOULD NOT ISSUE
KENNETH E. NELSON, Date: As Soon As Court May Hear Matter
Time: See Above
Defendant. Place: See Above
Compl. Filed: May 28, 2003
Trial Date: Not Yet Set
Honorable Charles R. Breyer
No. C03-2523-CRB - 1 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
I INTRODUCTION
In this action, plaintiff Metric Partners Growth Suite
Investors, L.P. (Metric) will show that defendant Kenneth Nelson's (Nelson)
tender offer to purchase a bare majority of the limited partnership units of the
Metric partnership violates federal securities law and California fiduciary duty
law. For purposes of this application, Metric will show that Nelson's tender
offer, and accompanying consent solicitations, is causing and will cause
immediate irreparable harm to Metric and its unit holders unless enjoined by
this Court.
Nelson is a career litigant who has spent the past 20 years
pursuing litigation schemes that have been uniformly unsuccessful. Multiple
juries and jurists have questioned his honesty and integrity. For the past 10 of
those years he has waged litigation against Metric in the courts of California,
Wisconsin and Tennessee. The lawsuits all stem from a disputed settlement
agreement that the parties failed to finalize in 1993. Metric has largely
prevailed in these matters by establishing that it has no damages liability to
Nelson and his related entities. Facing likely defeat in the courts, Nelson has
embarked on a new strategy to attempt to turn the tide. He has concocted a
scheme, proposing a tender offer to "purchase" just over 50% of Metric's units,
appoint himself as its managing partner, approve a $10 million settlement of his
lawsuits against Metric, and then use funds from that settlement to pay for his
"purchase" of the Metric units. He also plans to use Metric's assets to file new
lawsuits against Metric's current management based on its handling of the
litigation adverse to him. In other words, he proposes to deplete Metric's
assets to pay himself an outrageous sum to settle a lawsuit whose probable value
is nothing, and to use additional Metric assets to pursue his personal vendetta
against Metric's management.
Nelson's proposals and supporting disclosures to Metric's unit
holders, however, (1) breach the Partnership Agreement's provisions governing a
vote of the unit holders, (2) mislead the unit holders in his tender offer and
consent solicitations and (3) coerce a majority of
No. C03-2523-CRB - 1 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Metric's unit holders to join him in a breach of his and the majority's
fiduciary duty to minority unit holders.
Metric's Partnership Agreement and companion Assignment
Agreement 1 provide that only its Managing General Partner may call for a vote
of the unit holders. The Managing General Partner is required to call for a vote
following the receipt of a written request therefor from unit holders holding
10% or more of the Partnership units. Yet, Nelson has distributed thousands of
consent solicitations directly to Metric's unit holders without the Managing
General Partner or the required 10% or more of unit holders calling for a vote
of his takeover proposals. Accordingly, although Nelson's consent solicitations
are invalid, Metric's unit holders may not be aware of this and may have
returned or may soon return consents on Nelson's proposal. Moreover, although
Metric has notified Nelson that it is not recognizing his consent solicitations
because he has not followed the Partnership Agreement and asked him to modify
his proposals to comply with that Agreement, he has refused to recall his
solicitations.
Nelson is also violating Metric's Partnership Agreement in a
second way. Had Nelson purchased a controlling share of Metric units and then
attempted to implement his self-dealing proposals, no court would uphold his
actions because he would have an irreconcilable conflict in settling Metric's
litigation against himself and his related entities. Nelson seeks to avoid this
conflict by obtaining the "approval" of a bare majority of outgoing Metric unit
holders who must agree to his terms as condition to cash out their holdings. But
Metric's Partnership Agreement forbids the submission of a self-dealing
transaction for unit holder "approval" and only allows a vote of the unit
holders on other specified matters. The Court should prevent both of Nelson's
end runs on the Partnership Agreement from getting off the ground by entering a
TRO that orders Nelson to conduct his offer according to the Agreement's terms.
- -----------------------
1 Metric's limited partnership interests are held by unit holders that hold
units in a single entity that serves as the limited partner. There are a total
of 59,919 units held by approximately 4,000 unit holders.
No. C03-2523-CRB - 2 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Moreover, in violation of the federal securities laws,
Nelson's consent solicitation and tender offer statements are riddled with
material misstatements and omissions that are likely to deceive Metric's unit
holders into failing to realize that he is proposing a raw deal. Among other
things, although his litigation against Metric has resulted in a judgment of
zero dollars, he tells the unit holders in his consent solicitation that he
"believes" his claims against Metric could result in an award of $12 million or
more. He also does not disclose the nature of the relationship between himself
and an entity, GP Credit, through which he proposes to funnel the settlement and
his units purchase. And he fails to disclose other litigation in which he is
involved that, in the event his tender offer is approved, could lead to a
determination that Metric colluded with him through his tender offer to help
Nelson avoid other judgment creditors. Because of the difficulty of undoing such
widely disseminated fraudulent materials and the irreparable harm that such
fraud inflicts, a TRO is a settled basis for preventing this kind of fraud.
Nelson also seeks to coerce a breach of fiduciary duty by a
majority of Metric's unit holders against the minority. Nelson proposes to
purchase just over 50% of Metric's units--no matter how many units are tendered.
After he uses that controlling share to raid Metric's assets to pay himself and
to pursue new meritless claims (the operative facts of which have been known for
over ten years and the substance of which has been litigated adverse to Nelson)
against Metric's management, the remaining units will be virtually worthless.
Thus, although Nelson is proposing to buy just over 50% of the units for a price
that is a significant discount from the assets' present liquidation value, he is
obviously hoping that his deficient tender price will be perceived as better
than the dregs left for the remaining minority unit holders. Worse still, he
threatens any unit holders that do not tender with personal liability and also
emphasizes that he will litigate to the end of the earth to delay a distribution
of the partnership assets if his offer does not succeed. Under the
circumstances, Nelson's proposal may coerce enough Metric's unit holders to
accept his limited buyout and takeover plan in order to "cash out" and avoid
being one of the minority unit holders who risk being left out in the cold. The
Court should enjoin the offer
No. C03-2523-CRB - 3 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
now to ensure that a breach of fiduciary duty is not consummated in the interim
between now and when the Court can adjudicate the lawfulness of Nelson's
audacious takeover scheme.
All three violations--the violations of the Partnership
Agreement's voting provisions, the dissemination of fraudulent material, and the
breach of fiduciary duty--are continuing daily and causing irreparable harm.
Thus, an immediate TRO on minimum notice is warranted to preserve the status quo
pending a hearing on a motion for a preliminary injunction.
II FACTUAL BACKGROUND
A. NELSON WAGES A 10-YEAR LOSING LITIGATION BATTLE AGAINST METRIC
Nelson's tender offer has its roots in protracted litigation
in Tennessee, California and Wisconsin state courts, between Nelson,
Nelson-related entities and Metric, which in turn followed 10-years of
litigation between Nelson and others. The Tennessee Court of Appeals summarized
this "continuing saga" in Nelson v. Metric Realty, 2002 Tenn. App. LEXIS 698,
(attached as Ex. 2 to Philpot Decl.). The seeds of the dispute were sown in 1981
when a Samuel Hardage fired Nelson, who was overseeing one of Hardage's
businesses, precipitating litigation between Nelson and various Hardage-owned
entities. (Philpot Decl., Ex. 2 at 5) The parties eventually settled with a
Nelson-controlled entity, Nashville Residence Corporation ("Nashville
Residence"), receiving land at 2300 Elm Hill Pike in Nashville in exchange for
its execution of a $250,000 note to Orlando Residence, Ltd. ("Orlando
Residence"), a Hardage-controlled limited partnership. (Id.) Nashville Lodging
Company ("Nashville Lodging"), a limited partnership with Nashville Residence as
its general partner, then built a hotel on the Elm Hill Property. (Id.)
In December 1986, Orlando Residence sued Nashville Residence
in federal court to enforce the note. (Id. at 6) Nashville Residence promptly
quitclaimed the Elm Hill property to Nashville Lodging. (Id.) In 1989, Nashville
Lodging sold the hotel and leased the property to
No. C03-2523-CRB - 4 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Metric. In March 1990, Orlando Residence obtained a federal court judgment
against Nashville Residence for $250,000 plus interest. (Id.) Orlando Residence
then filed suit in Tennessee state court against Nashville Residence, Nashville
Lodging, Nelson, and Metric, attacking the conveyance of the Elm Hill property
as fraudulent. (Id.) Orlando Residence was awarded $1.35 million in compensatory
and punitive damages from Nashville Residence and Nashville Lodging in that
action, but the Tennessee court of appeals reversed and remanded for a new
trial. (Id.) On the second trial, a jury again found Nashville Residence's 1986
conveyance to Nashville Lodging to have been fraudulent and on appeal, the court
of appeals affirmed the judgment. (Id. at 7)
That background is essential to understand the parallel
litigation in California between Nelson and Metric. In the late 1980's, Metric
acquired from Nelson both the hotel and lease at the Elm Hill property in
Nashville and another Residence Inn in Ontario, California. (Id.) For a time,
Nelson continued to provide management services at these hotels. (Id.) In 1991,
however, Metric terminated the management agreement and sued Nelson in
California state court in San Francisco, claiming breach of contract and seeking
damages, declaratory and injunctive relief. Nelson counter-claimed for damages
and declaratory relief. (Id.)
In the California lawsuit, Metric was seeking approximately
$250,000 from Nelson, but was concerned that he was judgment proof. (Philpot
Decl., Ex. 5 at 4) Shortly before trial, Nelson offered to settle by giving
Metric the opportunity to purchase the land under Metric's hotel at the Elm Hill
property in Nashville. (Id.) This appeared to be Nelson's only valuable asset.
(Id.) Accordingly, at a court supervised settlement conference, the parties
agreed to settle by Nelson transferring this land to Metric in return for a note
and release from Metric. (Id.) A few weeks later, however, Metric's Tennessee
lawyer advised its Managing General Partner that if Metric accepted the
settlement and took control of the Nashville land, there was a substantial risk
that a court might find that Metric's interest in the land and the hotel would
be found to have merged which could cause Metric to be subject to any judgment
lien that Hardage and Orlando Residence might ultimately obtain against Nelson.
(Id.) In addition, Metric's lawyer advised that
No. C03-2523-CRB - 5 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
a court might also find that Metric and Nelson had conspired to defraud the
creditors who had challenged Nelson's 1989 transfer of the Elm Hill hotel to
Metric. Up to then, Metric had successfully argued that it was a "bona fide
purchaser." (Id.) Rejection of that argument could result in Metric losing its
entire interest in the hotel. (Id.) Faced with that advice, Metric's management
determined that it could not consummate the settlement until it received
clarification that Nelson was solely responsible for the fraudulent conveyance
action that Hardage and Orlando Residence were pursuing against Nelson and his
companies. (Id.)
Nelson responded with lawsuits in California, Wisconsin and
Tennessee that all rested on the same allegations--that Metric had breached its
settlement contract with Nelson, causing him substantial damages. (Id.) These
include Nashville Lodging Co. v. Metric Partners Growth Suite Investors, L.P. et
al., Circuit Court, State of Wisconsin, No. 94CV001212 (inactive); Orlando
Residence, Ltd. v. 2300 Elm Hill Pike, Inc. and Nashville Lodging Co. v. Metric
Partners Growth Suite Investors, L.P., Chancery Court for Davidson Co.,
Tennessee, No. 94-1911-I; Metric Partners Growth Suite Investors, L.P. v.
Nashville Lodging Co. et al., Chancery Court for Davidson Co., Tennessee, No.
96-1405-III; Nelson and Nashville Lodging Co. v. Metric Realty et al., Chancery
Court for Davidson Co., Tennessee, No. 97-2189-III; GP Credit Co., LLC v. Metric
Partners Growth Suite Investors, L.P. et al., Superior Court of California, San
Francisco Co., No. CGC-02-403301. (Philpot Decl., Ex. 1 at 12)
Nelson also filed a separate fraudulent conveyance lawsuit in
California against Metric, its Managing Partners and a putative class of unit
holders who received partnership distributions. (Id., Ex. 5 at 4) He alleges
that these distributions were fraudulent because they drained Metric of assets
necessary to pay a judgment in his favor should he be successful in his claims
for breach of the aborted settlement. (Id.) In one of his lawsuits, Nelson also
brought claims against the Managing General Partner, claiming it improperly
induced Metric to breach the settlement agreement. Nelson lost that lawsuit and
it has been affirmed on appeal. (Id. at 5) At this point, there has been a
determination in the principal action in Tennessee that Metric's failure
No. C03-2523-CRB - 6 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
to consummate the settlement agreement was a breach, but that Nelson suffered no
damages as a result. (Id.) These findings are now on appeal. (Id.)
Meanwhile, in August 2001, a Tennessee court found that there
were "elements of fraud" in Nelson's attempts to avoid payment of Hardage's and
Orlando Residence's fraudulent conveyance judgment. (Orlando Residence, Ltd. v.
Nashville Lodging Co., Tennessee Chancery Ct, Davidson Co., No. 92-3086-III
(unpublished opinion Aug. 15, 2001) at 2, attached as Ex. 3 to Philpot Decl.)
The court found that one of these fraudulent elements was Nelson's purported
transfer to GP Credit, an entity that his wife owns, of the rights and
obligations previously held by Nelson and Nashville Lodging Company. (Id. at 3)
Accordingly, the court appointed a receiver to take possession of any proceeds
that Nelson might obtain in his claims against Metrics, stating:
What all of the foregoing have in common are attempts by [Nashville
Lodging Company] and Mr. Nelson to avoid collection of judgments. That
a jury determined one such attempt was fraudulent, that Chancellor
Brandt found another attempt was contemptuous and that there is yet
another post-judgment conveyance in issue all cause the Court to
conclude that there are sufficient "elements of fraud affecting the
remedy at law" such that appointment of a receiver to take possession
of proceeds in the Metric lawsuit is necessary. (Id.)
B. TO FUND HIS LITIGATION VENDETTAS AND TO REVERSE HIS IN-COURT RESULTS,
NELSON VIOLATES THE PROVISIONS IN METRIC'S PARTNERSHIP AGREEMENT THAT
GOVERN VOTES OF THE LIMITED PARTNERS AND PRESENTS ITS LIMITED PARTNERS
WITH AN INVALID, MISLEADING AND COERCIVE TENDER OFFER
1. NELSON'S VIOLATIONS OF THE PARTNERSHIP AGREEMENT
Paragraph 4 of Metric's Assignment Agreement provides that
Metric's designated voting representative will vote the units assigned to
holders of limited partnership assignee units (unit holders) of Metric in
accordance with written instructions received from the unit holders with respect
to any matter upon which a vote of Limited Partners is taken "in accordance with
the Partnership Agreement." (Philpot Decl, Ex. 7) Metric's Partnership Agreement
specifies only two valid methods to call such a vote of the Limited Partners.
First, under paragraph 16.3 of that
No. C03-2523-CRB - 7 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Agreement, the Managing General Partner may call for a vote of the Limited
Partners. (Id., Ex. 6) Under paragraph 16.3 of the Partnership Agreement or
Paragraph 4 of the Assignment Agreement, a vote may be submitted to the Limited
Partners upon the written request of persons owning units which represent ten
percent or more of the outstanding units. (Id., Exs. 6-7) Moreover, as detailed,
post, the Partnership Agreement prohibits a limited partner vote to "approve" a
self-dealing transaction and limits the matters that can be submitted to a
limited partner vote to specified subjects, none of which are at issue. (Id. Ex.
6,Sections 15.1.7, 15.3.39, 16.2)
The Managing General Partner has not called for a vote of any
of the matters identified in Nelson's proxy solicitation statement and tender
offer and the Managing General Partner has not received a written request for
such a vote by unit holders holding ten percent or more of the units. (Id., Ex.
5 at Ex. (a)(2)) Nevertheless, on May 14, 2003, Nelson--who holds no Metric
units of his own--filed with the SEC and disseminated to each Metric unit holder
consent solicitation statements and a tender offer. (Philpot Decl., Ex. 4)
2. NELSON SUBMITS MISLEADING AND COERCIVE OFFER AND SOLICITATIONS
TO USE METRIC'S OWN ASSETS TO "PURCHASE" FOR NELSON CONTROL OF
METRIC SO THAT HE CAN CAUSE METRIC TO AWARD HIMSELF A GENEROUS
LITIGATION SETTLEMENT
Although, as detailed below, Nelson's materials misleadingly
describe his offer, the actual, salient offer terms are as follows. Nelson has
offered to purchase 30,000 of the 59,919 Metric units at $86 a unit. (Philpot
Decl., Ex. 4 at 14, 17) The offer is effective only if at least 30,000 units are
tendered. (Id. at 17) If more than 30,000 are tendered, Nelson will purchase
only a pro-rata share from the tendering unit holders so that his total purchase
is limited to 30,000 units. (Id. at 14, 67) Nelson's offer is also conditioned
on the acceptance of four proposals: (a) an amendment to the Partnership
Agreement that would allow a purchaser to acquire control of the Partnership;
(b) removal of the Managing General Partners; (c) election of Nelson as the sole
general partner; and (d) settlement of pending litigation between Nelson,
Nashville Lodging, GP
No. C03-2523-CRB - 8 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Credit and Metric by entry of a judgment in favor of GP Credit against Metric
for $10 million, of which $4 million must be immediately paid to GP Credit. (Id.
at 17, 26, 34, 63)
Within 10 business days after all these conditions occur,
Nelson proposes to pay $2.85 million to purchase the 30,000 units at $86 per
unit. (Id. at 12, 32, 34-35, 39) He states that he will use a loan from GP
Credit--whom Metric will have paid $4 million by that point--to fund the
purchase. (Id. at 32, 34) Thus, Nelson's offer permits him to pay for the units
that he proposes to purchase using Metric's own assets. He may then further
deplete its assets--and satisfy any lingering vendettas--by bringing new
lawsuits against the current Managing General Partner or others. (Id. at 25, 34)
Although GP Credit would be entitled to claim proceeds from such lawsuits to
satisfy its $10 million judgment balance, it would only be obligated to
reimburse Metric the expenses of such lawsuits up to the amount recovered in
them. (Id. at 63)
Alternatively, Nelson would be able to liquidate Metric and
use its remaining assets to satisfy the balance of GP Credit's judgment.
Assuming no further litigation expenses, Metric would have approximately $4.4
million remaining upon liquidation before it paid GP Credit's judgment
balance--$6.9 million in current cash holdings, a $525,000 settlement payment
due on June 2, 2003, $914,000 due from the general partners upon liquidation,
less the $4 million it would have already paid to GP Credit as a precondition of
the tender offer. (Id., Ex. 5 (cover letter)) Nelson's proposed settlement
provides, "GP Credit further agrees that . . . it will not attempt to collect
more from Metric than an amount which would leave Metric with Two Million
Dollars . . . immediately prior to liquidation." (Id., Ex. 4 at 63) GP Credit
could argue that this language no longer applies once Metric enters liquidation.
This would enable GP Credit to seize the entire $4.4 million in remaining Metric
assets to satisfy its judgment, leaving $0 in distributions for the 29,919 units
that Nelson does not intend to buy. Even assuming that GP Credit would leave
Metric with a $2 million reserve that Nelson generally described in his
materials, upon liquidation, over $ 1 million of that sum would go to Nelson as
a 50 percent plus unit holder, leaving at most $33 per unit for the remaining
29,919 units. (Id., Ex. 5 at 14)
No. C03-2523-CRB - 9 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Conversely, if Metric's unit holders were to reject Nelson's
offer, and if the Tennessee court affirmed the zero damages judgment in Nelson's
lawsuit against Metric, the $8.4 million in total Metric assets could be
distributed upon liquidation at the rate of approximately $139 a unit for all
59,919 Metric units. (Id. (cover letter))
Nelson's offering materials also emphasize that he has been in
litigation against Metric for years and that such litigation could continue for
years--and prevent distributions to the unit holders--if his offer is not
accepted. (Id., Ex. 4 at 24-25, 37-38, 59-60) He adds that if he succeeds, those
who did not tender likely will have to endure multiple additional bouts of
litigation that he will initiate if he obtains control of Metric. (Id. at 10,
23, 25-27) He also emphasizes that the unit holders are defendants in a lawsuit
that seeks to force them to return past distributions and that if his offer does
not succeed or for those who do not tender, those limited partners will be
pursued personally. (Id. at 8, 12, 15, 17, 37) Worse still, Nelson's offer was
riddled with misstatements and material omissions, which we recite in detail,
post.
C. METRIC OBJECTS TO NELSON'S ATTEMPTED END-RUN ON THE PARTNERSHIP
AGREEMENT AND GIVES HIM NOTICE THAT IT WILL SEEK AN INJUNCTION IF HE
DOES NOT CURE THE VIOLATIONS; NELSON REFUSES, SO METRIC GIVES NOTICE OF
THIS APPLICATION
On May 28, 2003, Metric's Managing General Partner advised
Nelson in writing that his tender offer and proxy solicitation were invalid
because he had failed to comply with the Partnership Agreement's procedure for
calling a vote of the Limited Partners. (Philpot Decl, Ex. 5 at Ex. (a)(2))
Metric requested that he withdraw his invalid offer and solicitations and
proceed anew in compliance with the Agreement and stated that it would seek an
injunction if Nelson did not agree to do so within two days. (Id.) The next day,
Nelson's counsel requested an additional 3 days, or until June 2, 2003, to
respond. (Id., 4) On the afternoon of June 2, 2003, Nelson refused to withdraw
his invalid offer and solicitations. (Id.) Metric immediately gave notice that
No. C03-2523-CRB - 10 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
it would be filing this TRO application the next day in this Court. (Id.) Nelson
advised that he would be filing an opposition. (Id.)
III LEGAL ANALYSIS
The Federal Rules of Civil Procedure and the Williams Act
grant courts the power and authority to issue both an ex parte TRO and
preliminary injunction in cases just such as this.(2) To prevail on a motion for
a TRO or a preliminary injunction, the moving party must show either (1) a
combination of probable success on the merits and the possibility of irreparable
injury if relief is not granted, or (2) the existence of serious questions on
the merits and that the balance of hardships tips in its favor. GoTo.com, Inc.
v. Walt Disney Co., 202 F.3d 1199, 1204-05 (9th Cir. 2000); Rodeo Collection,
Ltd. v. West Seventh, 812 F.2d 1215, 1217 (9th Cir. 1987); Wininger v. SI
Management L.P., 32 F. Supp. 2d 1144, 1146-47 (N. D. Cal. 1997). These are not
separate tests, but rather "opposite ends of a single `continuum in which the
required showing of harm varies inversely with the required showing of
meritoriousness.'" Rodeo Collection, 812 F.2d at 1217 (citations omitted).
To balance the moving party's rights against the defendant's
right to be heard, Rule 65 authorizes a court to issue an immediate TRO ex parte
and to fix a hearing on a motion for a preliminary injunction within 10 days
thereafter. Fed. R. Civ. Proc. 65(b). Metric demonstrates below that it is
likely to succeed on the merits and is suffering immediate and continuing
irreparable harm. It respectfully submits that its TRO application should be
granted forthwith and the Court should issue an order to show cause why a
preliminary injunction should not issue that sets the matter for hearing within
10 days of entry of the TRO.
- -------------------------
(2) Rule 65(b) provides for an ex parte TRO to prevent "immediate and
irreparable injury, loss or damage [which] will result to the applicant before
the adverse party or the party's attorney can be heard in opposition." Moreover,
upon a showing of violation of the federal securities laws, the Court has broad
powers to fashion an appropriate remedy. Mills v. Electric Auto-Lite Co., 396
U.S. 375, 391 (1970). Courts therefore may and do issue immediate TROs followed
by preliminary injunctions to restrain defective tender offers. See, e.g.
Marathon Oil v. Mobil Corp., 35o F. Supp. 315 (N. D. Ohio) aff'd 669 F.2d 378
(6th Cir. 1981) and cases cited, post.
No. C03-2523-CRB - 11 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
A. METRIC'S CLAIM THAT NELSON'S OFFER VIOLATES METRIC'S PARTNERSHIP
AGREEMENT ESTABLISHES A LIKELIHOOD OF SUCCESS AND IRREPARABLE HARM
1. NELSON'S FAILURE TO FOLLOW THE AGREEMENT'S VOTING PROCEDURE IS
A CRYSTAL CLEAR VIOLATION THAT PROVIDES A SETTLED BASIS FOR A
TRO
Metric's Partnership and Assignment Agreements are unambiguous
that Nelson could only submit his consent proposals to a vote of the limited
partners by first obtaining the written request of 10% of the unit holders or
the approval of the Managing General Partner to call such a vote. And it is
undisputed that he failed to do so. Because his tender offer is preconditioned
on acceptance of his invalid consents, there is no point in allowing his invalid
offer and solicitations to proceed. Doing so would only create confusion among
Metric's limited partners, would cause the loss of the costs expended on the
invalid offer and solicitation efforts and inevitable legal challenges, and
could also produce the unseemly result of having votes cast that could not be
counted due to Nelson's violation of the Partnership Agreement. Therefore,
Nelson's invalid solicitations should be restrained immediately. See Pennwalt
Corp. v. Centaur Partners, 710 F. Supp. 111, 117 (E. D. Pa. 1989) (issuing TRO
followed by preliminary injunction to restrain consent solicitation where
solicitor had no authority to call special shareholder meeting; "It is beyond
cavil that to permit the shareholder's meeting to go forward when there is no
proper authority to call the meeting would cause irreparable harm."); C.A.
Cavendes , S. Sociedad Finaciera v. Florida Nat. Banks Of Fla., 556 F. Supp.
254, 259 (M. D. Fla. 1982) (failure to follow voting procedure in company's
bylaws causes irreparable injury; voiding election held in violation of bylaws
and issuing preliminary injunction).
Indeed, "once a tender offer has been consummated, it becomes
difficult and sometimes virtually impossible for a court to `unscramble the
eggs.'" Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d
247, 250 (2d Cir. 1970); Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d
252, 261 (2d Cir. 1989) (injunction is "remedy of choice" where it is difficult
to unscramble transaction after it has been consummated). Moreover, an
No. C03-2523-CRB - 12 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
after-the-fact invalidation causes irreparable harm and confusion for those
shareholders who have cast votes, only to see those votes go unrecognized. Thus,
"in the normal situation, when it appears likely that the offer may contain
materially misleading statements or omissions as made, the interests of the
shareholders and of the public in full disclosure of relevant circumstances
renders preliminary injunctive relief an appropriate method of remedying the
deficiencies in disclosure before the offer is consummated." Ronson Corp. v.
Liquifin Atkiegesellschaft, 483 F.2d 846, 851 (3rd Cir. 1973); accord Koppers
Co. v. American Express Co., 689 F. Supp. 1371, 1382 (W. D. Pa. 1988) (immediate
injunction is a "particularly useful remedy to prevent violations of the
disclosure requirements of the securities laws."). That logic also warrants an
immediate injunction here to restrain Nelson's continuing violation of the
Partnership Agreement before Nelson scrambles the eggs of his invalid offer and
solicitation any further.
Because Nelson's violation of the Partnership Agreement is
crystal clear and beyond dispute, it is difficult to imagine what he might say
in response. The only defense he has asserted to Metric is that his
solicitations should be deemed an attempt to merely canvass the limited partners
to gauge the level of support for his proposals. But allowing such "canvassing"
would in and of itself confuse Metric's unit holders and violate the securities
laws because Nelson did not inform the unit holders that he was merely
"canvassing" but that he has not followed the required Partnership Agreement
procedure for calling a vote of the unit holders.
Indeed, Nelson's failure to obtain preliminary 10% unit holder
approval and failure to disclose that he lacks such approval unfairly enables
him to boost his chances of success. Each unit holder has no idea how her fellow
limited partners will vote but may be tempted to approve by the erroneous belief
that at least 10% must have given preliminary approval, since the matter has
been submitted for a vote. Worse still, Nelson makes misleading statements in
his offering materials that imply that over 10% of the voting units support his
proposal. (Philpot Decl, Ex. 4 at 13) Because acceptance of Nelson's offer will
likely destroy the value of any units not purchased, a unit holder's erroneous
belief that Nelson has cleared the
No. C03-2523-CRB - 13 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
initial hurdle to success gives Nelson a large boost in getting votes from unit
holders who fear being left out in the cold. Thus, as discussed further, post,
Nelson's failure to disclose that he has not obtained the required approval of
10% of the units to call a vote on his proxy proposals is itself a material
omission that invalidates his tender offer. Allowing him to proceed in violation
of the Partnership Agreement only compounds the problems with his offer. The
better approach is to enjoin the offer now and require him to comply with the
Agreement.
2. NELSON'S PROPOSED CONSENTS ALSO VIOLATE THE PARTNERSHIP
AGREEMENT PROVISIONS THAT PROHIBIT A LIMITED PARTNER VOTE TO
"APPROVE" A SELF-DEALING TRANSACTION
Nelson openly admits that he would have a disabling conflict
of interest if he had acquired control of Metric then caused it to settle its
litigation against him. He states in his offering materials that it is his
"objective" to sanitize that conflict by obtaining the "approval" of a majority
of the limited partners for his self-dealing proposals. (Philpot Decl, Ex. 4 at
34) But Metric's Partnership Agreement does not allow such limited partner
"approval" of self-dealing.
Paragraph 15.1.7 of the Partnership Agreement prohibits the
Managing General Partner from using or permitting another to use any Partnership
assets "in any manner except for the exclusive benefit of the Partnership."
(Philpot Decl., Ex. 6) Under paragraph 15.3.39, the General Partner may not
"cause the Partnership to permit a Unit Holder to contract away the fiduciary
duty owed by the General Partners to the Unit Holder under common law." (Id.)
And paragraph 16.2 provides that limited partners shall have the right by
majority vote "to vote only upon the following matters": removal of the General
Partners and election of a successor, dissolution and termination of the
Partnership, amendment of the Partnership Agreement, extension of the
Partnership term, and any proposal to sell all or substantially all of the
Partnership's assets." (Id. (emph. added)) The list of permissible voting
matters does not include
No. C03-2523-CRB - 14 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
a vote to "approve" a self-dealing transaction that an incoming General Partner
anticipates. (Id.) Rather, as noted, section 15.3.39 prohibits any such vote.
Again, because the Partnership Agreement unambiguously
prohibits the preapproval on which Nelson's offer is conditioned, the time to
enjoin the offer is now.
B. METRIC'S CLAIMS THAT NELSON HAS VIOLATED THE DISCLOSURE REQUIREMENTS OF
THE SECURITIES LAWS ALSO ESTABLISHES A LIKELIHOOD OF SUCCESS AND
IRREPARABLE HARM
1. VIOLATION OF THE SECURITIES LAWS CAUSES IRREPARABLE HARM TO A
COMPANY AND ITS UNIT HOLDERS
Sections 14(a), (d) and (e) of the Securities and Exchange Act
of 1934 (the anti-fraud provision of the Williams Act, 15 U.S.C. Section 78n(a),
(d)-(e)), and SEC Rule 14a-9, prohibit in any form of proxy solicitation or
tender offer (1) the omission of any material fact that is necessary to make
statements made in the solicitation or offer not misleading, or (2) any other
statement or act that is "fraudulent, deceptive or manipulative." An omitted
fact is "material" if there is "a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote." TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
The purpose of these rules is to provide the shareholder
confronted with a tender offer "with complete and truthful information about the
offeror [and] the terms and probable consequences of the offer." Applied Digital
Data Systems v. Milgo Electronic, 425 F. Supp. 1145, 1152 (S.D.N.Y. 1977). "It
was felt that in a tender offer situation, the stockholders of the target
corporation should have complete information concerning the persons seeking to
assume control." Berman v. Gerber Products Co., 454 F. Supp. 1310, 1322-23 (W.
D. Mich. 1978). Similarly, the proxy rules promote "the free exercise of the
voting rights of shareholders" by ensuring that proxies would be solicited with
"explanation to the stockholder of the real nature of
No. C03-2523-CRB - 15 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
the questions for which authority to cast his vote is sought." Mills, 396 U.S.
at 381 (1970) (quoting H. R. Rep. No. 1383, 73d Cong., 2d Sess., 14; S Rep. No.
792, 73d Cong., 2d Sess., 12)
Because there is no guarantee that shareholders will read
responsive opposition statements, the securities laws place an affirmative duty
on any offeror or proxy solicitor to provide a complete and candid disclosure.
See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477-78 (1977) ("the Court
repeatedly has described the `fundamental purpose' of the [1934] act as
implementing a `philosophy of full disclosure.'"). Accordingly, disclosures made
in statements opposing the offer or proxy solicitation therefore do not cure
misleading disclosures in an offering statement or proxy solicitation. Cf.
Koppers, 689 F. Supp. at 1407 (upon finding that defendants' tender offer
materials violated securities laws, court found it unnecessary to review claims
concerning management's responsive Schedule 14D-9).
Violation of these rules causes irreparable injury because
security holders are denied the ability to make investment decisions on the
basis of adequate information. See General Aircraft Corp. v. Lampert, 556 F.2d
90, 96 (1st Cir. 1977) (affirming finding that shareholders would suffer
irreparable harm if injunction requiring defendant to comply with securities
laws was not issued); Kaufman v. Cooper Companies, Inc., 719 F. Supp. 174, 178
(S.D.N.Y. 1989) (irreparable injury results from violation of federal proxy
rules, as "the purposes of the securities laws is to provide information to
investors so that they have the opportunity to make informed choices"); Riggs
Nat'l Bank v. Allbritton, 561 F. Supp. 164, 181 (D.D.C. 1981) (rejecting defense
argument that shareholders had adequate remedy in damages); see also Mills, 396
U.S. at 383 (stating that use of solicitation that is materially misleading
violates securities laws and injunctive relief is appropriate to remedy such a
defect). These cases recognize that the injury inflicted upon a shareholder's
voting rights is a distinct injury from the economic harm inflicted by the
passage of a proposed tender offer or proxy solicitation. Id; see also Diceon
Electronics, Inc. v. Calvary Partners, L.P., 772 F. Supp. 859, 869 (D. Del.
1991) (damages inadequate remedy for harm to voting rights caused by misleading
tender offer).
No. C03-2523-CRB - 16 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
Eisenberg v. Chicago Miwaukee Corp., 537 A. 2d 1051, 1062
(Del. Ch. 1987) explains why an injunction is required, and money damages
inadequate in such cases:
[A]t issue is the shareholders' right to make an informed, uncoerced
decision. That right is specific, and its enforcement requires a
specific, not a substitutional remedy. As this Court has recognized, to
permit a deficient offer to go forward might forever deprive the
tendering and non-tendering shareholders of their right to be treated
fairly. In that event, the harm could not easily be undone, and given
the nature of the shareholder interests at stake, damages would not be
a meaningful or adequate remedy. Therefore, the threatened harm is
irreparable. An injunction is the remedy most likely to achieve
disclosure of the information necessary to achieve an informed decision
and to eliminate the offer's coercive aspects.
Moreover, because it is impossible to assess the extent of the
taint from a misleading disclosure, a court must void any acceptances or
consents returned. See Kaufman, 719 F. Supp. at 185-86 (invalidating proxies
tainted by misleading statements). Thus, as noted above, an immediate injunction
is preferable to an attempt to "unscramble the eggs."
2. NELSON'S DISCLOSURES VIOLATE THE SECURITIES LAWS AND ARE
CAUSING CONTINUING IRREPARABLE HARM
Nelson's tender offer statement and consent solicitations made
numerous statements that are misleading in light of the material facts that he
omitted to mention. These misleading statements and material omissions are
recited fully in Metric's complaint and include:
(1) He fails to disclose that he has proceeded even
though neither the Managing General Partner nor 10% of the voting units have
called for a vote on his offer. Given that the Partnership Agreement requires
such preapproval and that Nelson misleadingly suggests he has obtained the
support of more than 10% of the unit holders, the unit holders are likely to be
deceived into failing to realize that his offer has been compromised by a fatal
procedural error. It is hard to imagine a more material omission than a failure
to inform a shareholder that his or her vote will be invalid. Moreover, as
noted, Nelson's misleading of the unit holders as to his failure
No. C03-2523-CRB - 17 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
to obtain 10% approval also is material because his prospects of success will be
critical to any unit holders assessment of whether to take the risk of not
tendering.
(2) Nelson states he does not believe his financial
condition is relevant to his offer because he will be funding the purchase with
a loan from GP Credit, but that in any event, he has a negative net worth in
excess of $10 million. Philpot Decl., Ex. 4 at 9. He does not however, disclose
GP Credit's financial condition; nor does he disclose that there is nothing in
his offer that protects the unit holders should GP Credit decide not to proceed
with its loan to him. Because Nelson is not obligated to pay for the tendered
units until 10 business days after Metric approves the settlement and pays GP
Credit $4 million, the lack of protection for Metric's unit holders if GP Credit
reneges on its loan commitment, and GP Credit's ability to satisfy any judgment
in an action to recover the $4 million payment are critical to an assessment of
the offer. This is particularly true because Nelson's $10 million negative net
worth makes it unlikely that Metric would be able to recover from him if GP
Credit reneges. Accordingly, Nelson's failure to disclose GP Credit's financial
condition and the lack of protection if it reneges constitute material
omissions. Cf. Pabst Brewing Co. v. Kalmanovitz, 551 F. Supp. 882, 891-92 (D.
De. 1982) (financial information about two businessmen who were providing
necessary funding for tender offer was required to be disclosed); Koppers, 689
F. Supp. at 1390-91 (failure to disclose financial condition of investment bank,
"one of the principal planners and players in this transaction," was material
omission and warranted preliminary injunction against tender offer).
(3) Similarly, Nelson discloses that his wife is a
"manager" of GP Credit. (Philpot Decl., Ex. 4 at 9) But he apparently told a
Tennessee court that she owned GP Credit, and that court recited her ownership
as a fact. (Id., Ex. 3 at 2-3) He also discloses no information concerning how
or why GP Credit acquired the litigation rights and obligations of the
Nelson-related entities, whether it can legally deliver effective releases or
what precisely is the nature of his relationship with GP Credit. Given GP
Credit's essential role, these omitted facts are material. Cf. Schedule 14D-Item
7 (requiring disclosure in tender offer of any contracts,
No. C03-2523-CRB - 18 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
arrangements or understandings between the bidder and any other person with
respect to the target's securities); Koppers, 689 F. Supp. at 1395 (because of
creditor's key role in offer, further disclosure concerning offeror's
obligations to creditor was required); Riggs, 516 F. Supp. at 173-75 (offeror
required to disclose information concerning his ability to repay financing for
offer).
(4) He also fails to disclose that a Tennessee state
court has cited his purported transfer to GP Credit of his litigation rights and
obligations as evidence of the "elements of fraud" in his schemes to evade
Hardage's and Orlando Residence's Tennessee judgment against him. (Philpot
Decl., Ex. 3 at 2-3) A disclosure of this fact is necessary to evaluate the risk
that Metric's approval of Nelson's offer might be viewed as evidence of a Metric
conspiracy with Nelson to defraud Hardage and Orlando Residence and the
Tennessee court. In deciding how to vote, a reasonable shareholder would
certainly consider it important to know that he or she might be considered a
party to a fraud if he or she voted for the proposal. Moreover, it is settled
that information reflecting a takeover bidder's competence and integrity is
material--particularly where the offer will leave a substantial number of
minority shares untouched. See Life Investors, Inc. v. AGO Holding, N.V., Fed.
Sec. L. Rep. (CCH) 98,356 (8th Cir. 1981) ("Where, as here, the partial offer
means that a substantial minority will necessarily remain, the shareholder must
weigh staying with the company and the bidder as part of the minority bloc";
ordering injunction pending appeal where tender offer did not fully disclose
financial condition of bidder ); Berman, 454 F. Supp. at 1322-23 ("Congress in
enacting the Williams Act clearly intended that information with respect to the
integrity of the tender offeror's management be disclosed"), quoting H. R. No.
171, 90th Cong., 2d Sess. ("The competence and integrity of . . . the persons
who seek management positions are of vital importance to the stockholder").
(5) Nelson states that he is offering to pay $86 for each
unit. (Philpot Decl, Ex. 4 at 8) But he fails to disclose that when all factors
are taken into account, the unit holders' recovery is likely to be substantially
lower. If more than 30,000 of the units are tendered, Nelson proposes to
purchase only a pro-rata share from the tendering unit holders. For example, if
No. C03-2523-CRB - 19 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
50,000 units are tendered, because Nelson will purchase only 30,000 units, a
unit holder who tenders 100 units will end up selling 60 units and retaining 40.
Accordingly, to evaluate Nelson's offer, each unit holder must determine not
only the likely sum to be obtained on the portion of units Nelson purchases, but
also the potential value of his or her remaining units if Nelson's offer
succeeds. Under Nelson's proposal, all remaining Metric assets will likely end
up being paid to Nelson or his related entities, or in the best-case, a $2
million liquidation reserve will be left. (And, even then, one-half of that $2
million will go to Nelson because he will then own half the units.) Thus, as
noted, the remaining 29,919 units --held either by those who did not tender or
those who retained units as the result of a tender of more than 50 percent of
all units--are likely to receive somewhere between nothing, or at most $33 a
unit. Nelson does not, however, disclose the devastating effect on the value of
the units that he declines to buy if his offer succeeds.
(6) He states "I believe the Partnership will ultimately
be found liable for damages in excess of $12 million from its breach of the 1993
settlement agreement" and that "the Proposed Settlement Agreement permits the
Partnership to pay only a fraction of the amount for which it may be held
liable." (Philpot Decl, Ex. 4 at 60) But he offers no factual or legal analysis
in support. He also states that a Tennessee judge "decided that the
Partnership's breach caused no damages. I believe he made a mistake. How the
appellate courts will view the matters cannot be known with certainty." (Id.)
But he nowhere states that appellate reversals are the exception, not the rule.
It is impossible based on Nelson's selective disclosure for the unit holders to
assess whether his proposal bears a reasonable relationship to Metric's
litigation exposure.
(7) Similarly, he states his "feeling" that breach of
fiduciary claims against the present General Partner and others based on their
purported mishandling of the settlement agreement "may be worth millions of
dollars." (Id. at 25) But he offers no supporting facts or legal analysis to
enable unit holders to evaluate this claim. He also fails to disclose that he
has already lost analogous tortious interference claims, that a court would
likely find the proposed claims barred by the statute of limitations, and that
his proposed claims for management's
No. C03-2523-CRB - 20 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
purported mishandling of the settlement would have little or no value if the
Tennessee appellate court were to affirm the judgment awarding Nelson zero
dollars for his aborted settlement claim.
(8) Nelson states that his "objective" in seeking to
settle his lawsuits against Metric as a precondition to his offer is to
eliminate the conflict of interest between himself and Metric. (Id. at 34) But
he fails to disclose that he will continue to have an irreconcilable
post-acceptance conflict of interest with regard to prosecution of the lawsuits
that he proposes to bring on Metric's behalf. GP Credit is not obligated to
reimburse the expenses of the proposed lawsuits unless those expenses are less
than the amount paid to GP Credit in addition to its initial $4 million
recovery. (Id. at 63) Because Nelson owes GP Credit millions, he would have an
interest in satisfying it by pursuing lawsuits that would be unjustified under a
cost-benefits analysis for Metric, but that might be in GP Credit's interests
(since it only pays if the lawsuits succeed). His failure to disclose these
"delicate ethical issues" is a material omission. Cf. Koppers, 689 F. Supp. at
1391 (disclosure of ramifications of potential conflict of interest issues posed
by broker-dealer's involvement in tender offer would be material to
stockholders)
(9) Nelson fails to disclose the existence of Securities
and Exchange Commission Rule 14d-7 which provides that any person who has
deposited securities pursuant to a tender offer has the right to "withdraw any
such securities during the period such offer request or invitation remains
open." As a result of this material omission, any unit holders who have tendered
have done so without realizing they can change their mind once they receive
Metric's position on the tender offer. Similarly, Nelson's materials state that
by executing and delivering an Agreement of Sale, a tendering unit holder (who
does not properly withdraw acceptance of Nelson's Offer prior to the Expiration
Date), irrevocably appoints Nelson as that unit holder's proxy. But the
Agreement of Sale states that the power of attorney granted is irrevocable and
does not state that it terminates (as to voting the units) upon withdrawal of
the tender. As a result, Nelson, contrary to his offer characterization but
under the terms of his Agreement of Sale, can vote the units of a person who at
one time tendered and has subsequently withdrawn and now
No. C03-2523-CRB - 21 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
does not want the Nelson proposal to go forward. In addition, the tender offer
materials state that by executing and delivering the Agreement of Sale, the
tendering unit holder also irrevocably appoints Nelson as the unit holder's
attorney-in-fact, to be effective only upon Nelson's payment for the units. But
the Agreement of Sale has no such carve out, and in fact, has language that
would permit Nelson to transfer the units to his name without paying for them.
To the extent Nelson intended to have these powers, the tender offer materials
must disclose this and also disclose the risks inherent in these provisions. Cf.
Calumet Industries v. MacClure, 464 F. Supp. 19, 27-28 (N.D. Ill. 1978)
(enjoining defendants from exercising shareholders' consents where defendants
had misrepresented that consents were irrevocable).
C. ENJOINING NELSON NOW IS PREFERABLE TO PERMITTING HIS TAINTED OFFER TO
PROCEED
Nelson's fraud will eventually require the invalidation of any
acceptances or solicitations that Metric's limited partners return. Kaufman, 719
F. Supp. at 185-86. The difficulty of "unscrambling the eggs," however, could
prove insurmountable because Nelson's offer calls for an immediate payout of $4
million to a third party--GP Credit--without any security for the transferred
assets. After-the-fact invalidation raises the unseemly spectre of shareholders
who have cast votes, only to see those votes go unrecognized. And, of course,
voiding the election at the end of the day results in a loss of the considerable
expenses associated with the vote tally and legal challenge--a loss which Metric
is unlikely to recover from Nelson, given his $10 million negative net worth.
Thus, the wiser course is to enjoin the offer and solicitation immediately and
order Nelson to comply with the securities laws going forward.
D. THE HARM TO NELSON IN MERELY REQUIRING HIM TO FOLLOW THE LAW AND
METRIC'S PARTNERSHIP AGREEMENT IS MINIMAL WHEN COMPARED TO METRIC'S
INJURY
Although Nelson has a right to freely compete in tender offer
situations [see, e.g., Jewel Companies, Inc. v. Pay Less Drug Stores Northwest,
Inc., 510 F. Supp. 1006 (N.D. Cal.
No. C03-2523-CRB - 22 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
1981)], he has no right to disregard the Partnership Agreement provisions that
govern votes of the limited partners, to violate the securities laws, to
wrongfully interfere with Metric's contractual relationship with its limited
partners or to enlist those partners to join him in committing a breach of
fiduciary duty to minority interests. Nelson thus will suffer little or no
cognizable "harm" from merely being ordered to comply with the Agreement and the
law. See Studebaker Corp. v. Gittlin, 360 F. 2d 692, 696 (2d Cir. 1966). Indeed,
forcing Nelson to comply now will benefit him and all other interested persons
by eliminating the flaws in his invalid offer, while permitting Metric's unit
holders to make a free and informed choice should Nelson submit a proper offer
to them in accordance with Metric's Partnership Agreement and the law.
E. NELSON'S VIOLATIONS OF CALIFORNIA LAW ALSO WARRANT A TRO
Although the Court need not go further, there is little doubt
that Nelson's offer and solicitation are also tortious violations of California
law and are causing irreparable harm. Nelson's conduct is a breach of his
fiduciary duty and aiding and abetting the breach of fiduciary duty by Metric
unit holders. Had Nelson attempted to implement his proposed settlement once he
obtained control, his self-dealing would easily be struck down as a breach of
his management fiduciary duties. As noted, Nelson essentially admits as much and
asks for a bare majority of Metric's unit holders to approve his proposals as a
condition to cash out their shares. But unit holders who choose to cash out have
little incentive to protect the Partnership and remaining minority interests and
thus may not give "preapproval" to a self-dealing incoming director's breach of
fiduciary duty.
Setting forth a broad fiduciary duty protection, California
law provides that in any transaction where control of the corporation is
material, the conduct of directors and shareholders is governed by a
comprehensive requirement of "good faith and inherent fairness" to the minority.
Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 1001 (1969); see also Fisher v.
Pennsylvania Life Co., 69 Cal. App. 3d 506 (1977). As the California Supreme
Court explained: "[T]he burden is
No. C03-2523-CRB - 23 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
on the director or stockholder not only to prove the good faith of the
transaction but also to show its inherent fairness from the viewpoint of the
corporation . . . . The essence of the test is whether or not under all the
circumstances the transaction carries the earmarks of an arm's length bargain.
If it does not, equity will set it aside." Jones, 1 Cal. 3d at 108.
Here, however, Nelson's offer has none of the "earmarks of an
arm's length bargain." If he does not obtain an appellate reversal of his zero
damages judgment against Metric, there would be no basis for Metric to pay
anything to settle the lawsuit, much less pay $10 million. As a general rule,
appellate reversals are the rare exception, and not the rule--particularly after
a trial, as Nelson obtained in Tennessee. The number of $0 damages judgments
following a trial that turn into $10 million awards thanks to an appeal are even
rarer. Apart from Nelson's deception as to what he is offering, the only reason
any rational unit holder would vote for this deal would be to avoid Nelson's
intent to destroy the value of the non-tendering units and his threat to delay
any cash distribution on those units for years. Given the broad scope of
California's fiduciary duty law, such coerced tenders cannot suffice to validate
a self-dealing transaction that would never fly if Nelson had attempted it after
obtaining control.
IV CONCLUSION
The Court should issue an immediate TRO restraining Nelson
from any further action in support of his invalid tender offer and consent
solicitations and should set the matter for
No. C03-2523-CRB - 24 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO And
OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
a preliminary injunction hearing within 10 days of the TRO (per Rule 65(b).
DATED: June 2, 2003.
REED SMITH CROSBY HEAFEY LLP
By /s/ Kenneth J. Philpot
----------------------------------
Kenneth J. Philpot
Attorneys for Plaintiff
Metric Growth Suite Investors, L.P.
No. C03-2523-CRB - 25 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
TABLE OF CONTENTS
(CONTINUED)
PAGE
I INTRODUCTION......................................................................................................... 2
II FACTUAL BACKGROUND.................................................................................................. 5
A. Nelson Wages A 10-Year Losing Litigation Battle Against Metric.................................... 5
B. To Fund His Litigation Vendettas And To Reverse His In-Court
Results, Nelson Violates The Provisions In Metric's
Partnership Agreement That Govern Votes Of The Limited
Partners And Presents Its Limited Partners With An Invalid,
Misleading And Coercive Tender Offer.............................................................. 8
1. Nelson's Violations Of The Partnership Agreement........................................ 8
2. Nelson Submits Misleading And Coercive Offer And
Solicitations To Use Metric's Own Assets To
"Purchase" For Nelson Control Of Metric So That
He Can Cause Metric To Award Himself A Generous
Litigation Settlement................................................................... 9
C. Metric Objects To Nelson's Attempted End-Run On The Partnership
Agreement And Gives Him Notice That It Will Seek An Injunction
If He Does Not Cure The Violations; Nelson Refuses, So Metric
Gives Notice Of This Application.................................................................. 11
III LEGAL ANALYSIs..................................................................................................... 12
A. Metric's Claim That Nelson's Offer Violates Metric's Partnership
Agreement Establishes A Likelihood Of Success And Irreparable
Harm.............................................................................................. 13
1. Nelson's Failure To Follow The Agreement's Voting Procedure
Is A Crystal Clear Violation That Provides A Settled Basis
For A TRO............................................................................... 13
2. Nelson's Proposed Consents Also Violate The Partnership
Agreement Provisions That Prohibit A Limited Partner
Vote To "Approve" A Self-Dealing Transaction............................................ 15
B. Metric's Claims That Nelson Has Violated The Disclosure Requirements
Of The Securities Laws Also Establishes A Likelihood Of Success And
Irreparable Harm.................................................................................. 16
1. Violation Of The Securities Laws Causes Irreparable Harm To
A Company And Its Unit Holders.......................................................... 16
2. Nelson's Disclosures Violate The Securities Laws And Are
Causing Continuing Irreparable Harm.................................................... 18
C. Enjoining Nelson Now Is Preferable To Permitting His Tainted Offer To
Proceed.......................................................................................... 23
- i -
Mem. Of Points And Authorities In Support Of Ex Parte Application For Tro
And Osc Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
TABLE OF CONTENTS
(CONTINUED)
PAGE
D. The Harm To Nelson In Merely Requiring Him To Follow The Law And
Metric's Partnership Agreement Is Minimal When Compared To Metric's
Injury............................................................................................ 23
E. Nelson's Violations Of California Law Also Warrant A TRO.......................................... 24
IV CONCLUSION.......................................................................................................... 25
- ii -
Mem. Of Points And Authorities In Support Of Ex Parte Application For Tro
And Osc Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
TABLE OF AUTHORITIES
(CONTINUED)
PAGE(S)
CASES
Applied Digital Data Systems v. Milgo Electronic,
425 F. Supp. 1145 (S.D.N.Y. 1977) ........................................................... 15
Berman v. Gerber Products Co.,
454 F. Supp. 1310 (W. D. Mich. 1978) ........................................................ 15, 19
C.A. Cavendes, S. Sociedad Finaciera v. Florida Nat. Banks of Fla.,
556 F. Supp. 254 (M. D. Fla. 1982) .......................................................... 12
Calumet Industries v. MacClure,
464 F. Supp. 19 (N.D. Ill. 1978) ............................................................ 22
Consolidated Gold Fields PLC v. Minorco, S.A.,
871 F.2d 252 (2d Cir. 1989) ................................................................. 12
Eisenberg v. Chicago Miwaukee Corp.,
537 A.2d 1051 (Del. Ch. 1987) ............................................................... 17
Fisher v. Pennsylvania Life Co.,
69 Cal. App. 3d 506 (1977) .................................................................. 23
GP Credit Co., LLC v. Metric Partners Growth Suite Investors, L.P. et al.,
Superior Court of California, San Francisco Co.,
No. CGC-02-403301 ........................................................................... 6
General Aircraft Corp. v. Lampert,
556 F.2d 90 (1st Cir. 1977) ................................................................. 16
GoTo.com, Inc. v. Walt Disney Co.,
202 F.3d 1199 (9th Cir. 2000) ............................................................... 11
I ; see also Diceon Electronics, Inc. v. Calvary Partners, L.P.,
772 F. Supp. 859 (D. Del. 1991) ............................................................. 16
Jewel Companies, Inc. v. Pay Less Drug Stores Northwest, Inc.,
510 F. Supp. 1006 (N.D. Cal. 1981)] ........................................................ 22
Jones v. H.F. Ahmanson & Co.,
1 Cal. 3d 93 (1969) ......................................................................... 23, 24
Kaufman v. Cooper Companies, Inc.,
719 F. Supp. 174 (S.D.N.Y. 1989) ............................................................ 16, 17, 22
Koppers Co. v. American Express Co.,
689 F. Supp. 1371 (W. D. Pa. 1988) .......................................................... 13, 16, 18, 19, 21
Life Investors, Inc. v. AGO Holding, N.V.,
Fed. Sec. L. Rep. (CCH) 98 (8th Cir. 1981) .................................................. 19
- iii -
Mem. Of Points And Authorities In Support Of Ex Parte Application For Tro
And Osc Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
TABLE OF CONTENTS
(CONTINUED)
PAGE(S)
Marathon Oil v. Mobil Corp.,
35o F. Supp. 315 (N. D. Ohio) aff'd 669 F.2d 378 (6th Cir. 1981) ............................ 11
Metric Partners Growth Suite Investors, L.P. v. Nashville Lodging Co. et al.,
Chancery Court for Davidson Co., Tennessee,
No. 96-1405-III ............................................................................. 6
Metric Partners Growth Suite Investors, L.P. v. Nelson,
Superior Court of California, San Francisco Co.,
No. 928065 .................................................................................. 6
Mills v. Electric Auto-Lite Co.,
396 U.S. 375 (1970) ......................................................................... 11, 16
Nashville Lodging Co. v. Metric Partners Growth Suite Investors, L.P.,
Chancery Court for Davidson Co., Tennessee,
No. 94-1911-I ............................................................................... 6
Nashville Lodging Co. v. Metric Partners Growth Suite Investors, L.P. et al.,
Circuit Court, State of Wisconsin,
No. 94CV001212 (inactive) ................................................................... 6
Nelson and Nashville Lodging Co. v. Metric Realty et al.,
Chancery Court for Davidson Co., Tennessee,
No. 97-2189-III ............................................................................. 6
Nelson v. Metric Realty,
2002 Tenn. App. LEXIS 698 ................................................................... 4
Orlando Residence, Ltd. v. Nashville Lodging Co.,
Tennessee Chancery Ct, Davidson Co.,
No. 92-3086-III.............................................................................. 7
Pabst Brewing Co. v. Kalmanovitz,
551 F. Supp. 882 (D. De. 1982) .............................................................. 18
Pennwalt Corp. v. Centaur Partners,
710 F. Supp. 111 (E. D. Pa. 1989) ........................................................... 12
Riggs Nat'l Bank v. Allbritton,
561 F. Supp. 164 (D.D.C. 1981) .............................................................. 16, 19
Rodeo Collection, Ltd. v. West Seventh,
812 F.2d 1215 (9th Cir. 1987) ............................................................... 11
Ronson Corp. v. Liquifin Atkiegesellschaft,
483 F.2d 846 (3rd Cir. 1973) ................................................................ 13
Santa Fe Industries, Inc. v. Green,
430 U.S. 462 (1977) ......................................................................... 16
- iv -
Mem. Of Points And Authorities In Support Of Ex Parte Application For Tro
And Osc Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
TABLE OF CONTENTS
(CONTINUED)
PAGE(S)
Sonesta International Hotels Corp. v. Wellington Associates,
483 F.2d 247 (2d Cir. 1970) ................................................................. 12
Studebaker Corp. v. Gittlin,
360 F.2d 692 (2d Cir. 1966) ................................................................. 23
TSC Industries, Inc. v. Northway, Inc.,
426 U.S. 438 (1976) ......................................................................... 15
Wininger v. SI Management L.P.,
32 F. Supp. 2d 1144 (N. D. Cal. 1997) ....................................................... 11
STATUTES
California Code of Civil Procedure section 527(c) .................................................. 11
Fed. R. Civ. Proc. 65(b) ........................................................................... 11
SEC Rule 14a-9 ..................................................................................... 15
Williams Act, 15 U.S.C.Section 78n(a), (d)-(e) ..................................................... 15
- v -
Mem. Of Points And Authorities In Support Of Ex Parte Application For Tro
And Osc Why A Preliminary Injunction Should Not Issue
REED SMITH CROSBY HEAFEY LLP
A limited liability partnership formed in the State of Delaware. "Reed Smith"
and "Reed Smith Crosby Heafey LLP" refer to Reed Smith LLP and related entities.
WARNING: This section retains the original formatting,
including headers and footers, of the main document. If you delete the section
break above this message, any special formatting, including headers and footers
for the Table of Contents/Authorities section will be lost.
If you delete the section break above the Table of
Contents/Authorities, you will overwrite the headers and footers of the main
document with Table of Contents/Authorities headers and footers.
To delete the Table of Contents/Authorities, begin your
selection at the section break above the TOC/TOA section and continue through
the end of this message.
No C03-2523-CRB - 1 -
Mem. Of Points And Authorities In Support Of Ex Parte Application For TRO
And OSC Why A Preliminary Injunction Should Not Issue