ROBERT A. MACHLEDER
69-37 Fleet
Street
Forest Hills, NY
11375
February,
2013
Peter L. Malkin,
Chairman
Malkin Holdings
LLC
60
East 42ndStreet
New
York, NY 10165
Re:
Empire State Realty Trust
“Voluntary
Overrides”
Dear Peter:
I am writing as a participant in ESBAssociates (and as your former partner in the
Wien law firm) who in 1991 consented to what are now being referred to as the
“voluntary overrides” to note my strenuous objection to the inclusion of such
“overrides” in the consolidation/third party project as you have designed it and
for which Malkin Holdings is now seeking participant approval.
If you succeed in getting the requisite approval the “voluntary overrides” will be
triggered and will result in (i) compensation to the “Malkin Holdings group”
amounting to more than $300 million in the overall project and, on an individual
basis affecting participants in Associates who personally or whose predecessor
consented to such “overrides” $34,870 for each full unit, (ii) a 10% truncation
of consenting participants’ equity ownership interests, (iii) a loss not only of
the equity value of the severed interests but of all future allocable
distributions and appurtenant voting rights to the severed interests, and (iv)
a reallocation of those severed interests to the Malkin Holdings group in the
form of fixed equities (stock and/or operating partnership
units).
From the frequency with which you have acknowledged this subject in your series of
letters to participants and in the conference call you conducted with Tony, it
is evident that many participants have questioned and/or objected to this aspect
of the pending project. In my conversations with others I have consistently, without exception,
heard objections.
I
disagree with your contention that your project is a “capital transaction” that
triggers the revenue sharing program for which consent was solicited in 1991. I
further believe that your conversion of a contingent interest into an asset based ownership
interest is entirely without justification. What you now propose was neither
intended nor contemplated by myself and others in 1991, and the solicitation
documents pursuant to which we gave our consent do not support it.
In my opinion your presentation in the prospectus, your explanations and
justifications in letters and in your investor phone conference, are in
error.
If
you feel as strongly about your position as I do about mine, and if you maintain
that there will be no change in the existing format of the prospectus, I expect
to share my point of view with the participants at large and with the SEC. As a
courtesy to you I will not do so until you have had an opportunity to review and
consider the analysis and the recommendations that follow.
Twenty two years have passed since I and the vast
majority of those who consented acted (some 81% consented to your 1991
request). It is likely that
recollections of the precise terms of its solicitation have dimmed.
Moreover, in the intervening years many present participants acquired
their interest by inheritance, assignment, or in trust and are unaware of the
origin and the terms under which the grant of consent that binds their interest
was given. I am certain that you are thoroughly familiar with the documentation
but I’ve enclosed for the benefit of others an Exhibit which contains the
relevant pages from the original solicitation to provide the context in which my
objection arises. Each of us, as appropriate, may refresh a faded recollection
or form a fresh appreciation of the issue in reaching a conclusion as to whether
your present position is or is not
tenable.
In
summary, I believe that your inclusion of overrides to compensate the “Malkin
Holdings group”,
·
does violence to the
understanding, the intent, the spirit and the express text of the 1991 consent
solicitation;
·
constitutes a misappropriation of 10% of each consenting
participant’s equity ownership interest - seizing $34,870 (in exchange
value) of each full ownership unit (Prospectus, p.
263);
·
constitutes a misappropriation of each consenting participant’s
right to applicable futuredistributions for so long as the
participant and the participant’s heirs and assigns continue to hold their now
truncated interest (Ibid., p. 65 footnote
(1));
·
creates a hybrid equity interest with appurtenant
voting rights misappropriated from consenters’ interests, unjustifiably
augmenting the Malkin Holdings group’s voting power while diluting not just the
voting rights of consenting participants but also diluting the voting strength
of the entire participant body, consenting and non-consenting participants
alike; and
·
violates the predicate upon which consents in 1991 were given
individually and voluntarily -
namely, that no participant’s consent to an “override” could be affected by the
decision of any other participant - by now giving the collective body of
participants the power to trigger the “override”, against my will and the will
of others, by voting in favor of the proposals set forth in your
prospectus.
As
you have crafted the consolidation program and describe it in the prospectus,
“The Malkin Holdings
group will receive 73,078,153 shares of Class A common stock, Class B
common stock and operating partnership units having an exchange value
of $730,781,533, which they will receive in accordance with the
allocation of exchange value based on the Appraisal by the independent
valuer. The amounts allocated to
the Malkin Holdings group consist of: their interests as participants which will
be allocated to them on the same basis as other participants; their interests
as holders of override interests which will be allocated to them in accordance
with the subject LLCs’ and private entities’ organizational documents; and
their interests in the management companies... .”(Prospectus,
p. 55; see also p. 104)(emphasis in bold-text
added)
While the emphasized“override” language is ambiguous and
would appear to apply to the non-voluntary overrides adopted in the original
organizational documents (e.g., the 6% override on extra distributions to
participants in Associates occasioned by the operating lessee’s payments of
overage rent), the charts make clear that the reference is to the “voluntary
overrides” which “voluntary overrides”amount to $304,352,372, or
approximately 41.6% of the Malkin Holdings group’s compensation in the
overall project. (Ibid., pp. 37-38; and see footnote (2) “[T]he override
interests included in the table represent a voluntary capital override, which
was voluntarily agreed to by certain participants.”)
In the
case of Associates, the Malkin Holdings group will receive $182, 625,289 based
on the exchange value. Of that
amount, $108,143,382is attributable to the “voluntary overrides”
which accounts for 59.2%of the Malkin Holdings group’s compensation from
Associates (Ibid., p. 37 first column, and see pp. 88, 267)[1]/ and almost 15% of the
Malkin Holding group’s package that it claims in equity ownership interests in
the overall consolidation entity.
These “voluntary overrides”have been transformed, as
never intended, into equity ownership interests that have been carved out of the
equity interests of consenting participants and transferred to the Malkin
Holdings group. Referring to the
participants, the prospectus reads:
“You will receive a
portion of the operating partnership units and common stock allocated to your
subject LLC in accordance with your election and with our percentage interest in
the subject LLC and the subject LLC’s organizational documents, after taking
into account the allocations in respect of the supervisor’s override
interests.”(Ibid., p. 5)(emphasis in
bold-text added)
The Malkin Holdings
Contention
You
describe the “voluntary override” as
follows:
“Voluntary capital
transaction override (previously granted) represents a voluntary capital
override agreed to by approximately 94% of the participants and documented
individually with each participant who granted the override, which provides the
supervisor with 10% of the distribution of capital proceeds otherwise payable
to participants that have agreed to the voluntary capital override program
after they have received a return of their original investment.
The supervisor will receive distributions on the voluntary capital
overrides with respect to the consideration from the consolidation, because such
consideration constitutes capital proceeds. Assuming the enterprise value
determined in connection with the IPO were the same as the aggregate exchange
value, such overrides would comprise approximately 9.14% of the economic value
of Empire State Building Associates L.L.C. These voluntary capital overrides were
solicited pursuant to consent solicitation statements dated September 13, 1991,
September 14, 2001 and June 9, 2008.” (Ibid., p. 65 footnote
(1))
In
my opinion this does not adequately or properly describe the essence of the
grants of consent. I believe it is
misleading.
Repeatedly you have asserted that the contingent event
that now triggers the “voluntary overrides” is the creation of “a capital
transaction” in the form of the proposed consolidation.
Thus, in the Q & A session you conducted with Tony in the recorded
conference call to which Associate’s participants were invited, you addressed
“the most commonly asked questions” submitted by participants and justified your
entitlement to“voluntary overrides” as follows:
“Peter
Malkin: The next question: “What is the Malkin’s entitlement to these override
interests?”
“The
Prospectus Consent Solicitation Statement points out that the overrides are
written contracts entered into by you, the family member from whom you inherited
your interest or the party from whom you acquired your interest when the
investment was made or at some point, thereafter. Every one of these agreements
is available for inspection.
“The Malkins are
entitled to distributions on the override interests out of the proceeds from a
capital transaction. As the REIT
will acquire each building in which you are a participant, the proposed
consolidation is a capital transaction. The proposed consolidation represents a
transfer to a new entity with substantial additional assets, substantial new
investors and a new governance structure; in no way, a continuation of the
prior entities for the same investors.” (Transcript
filed with the SEC, January 30, 2013) (emphasis in bold-text
added)
The
proposed project bears not the vaguest resemblance to the trigger events
contemplated, intended, understood and embodied in the text of the
1991 “Voluntary Compensation
Program”.
Further, you wrote in your January 30, 2013 letter to
participants attacking as “false” various allegations in a motion objecting to
the proposed class action settlement that is now being considered by the
court:
“Their motion alleges the Malkins are improperly
monetizing the future value of
overrides.
·
This is
false.
·
All overrides were applied
based on written agreements and signed investor consents, and values were
determined in accordance with such agreements and consents based on valuations
by Duff & Phelps, the independent
valuer.”
I
regard this rebuttal to be inaccurate, misleading and in fact unresponsive to
the issue raised by the motion.
You have indeed “monetized,” “equitized,” “capitalized” (all of these
transitive verbs employed by the financial industry would apply) a contingent
interest in a specific distribution by converting that contingent right into a
fixed ownership asset in the form of stock and/or operating partnership units.
This was never contemplated, intended, understood by myself and other consenting
participants, nor was it provided for in the documentation of the 1991
“Voluntary Compensation Program”.
The
Facts
The
enclosed Exhibit includes the 4-page September 13, 1991consent solicitation
letter you signed, the consent form, and the relevant portions of the Statement
accompanying your letter in which were described two proposals for which
consents were being solicited: a potential purchase from Prudential of the land
and fee title to the Building (which purchase never materialized and was
rendered moot), and the “Voluntary Compensation
Program”.
Your
solicitation letter sets out the reason for the voluntary program: namely, that
Associates’ governing agreement does not provide for the supervisor to share in
the net proceeds to Associates from a sale or a financing of the
Empire State Building: also, but not here relevant, that the supervisor does not
share in certain reductions of the rent payable to the fee owner under the
Master Lease.
The
request proceeds to identify sale and financing of the property
owned by Associates as the events that would trigger compensation to the
supervisor in an amount equal to 10% of “the net proceeds ...
distributed” to each participant after the participant first received the
return of his/her original capital
investment.
“In
light of the success of Associates’ investment, we are requesting that each
Participant, individually and voluntarily, agrees as
follows:
(i) in the event of a sale or financing of any interest of Associates in
the Master Lease or in the Empire State Building or the land thereunder, the net
proceeds be distributed (a) to each Participant, and amount cumulatively to the
Participant’s original, or his predecessor in interest’s original, capital
contribution in Associates and (b) any excess, 90% to the Participants and 10%
to WM&B;” (emphasis as it appears in
the original document)( Exhibit, Solicitation letter, p.
2)
Nowhere in your solicitation letter does the phrase
“capital transaction” appear. Nowhere in the consent form does the phrase
“capital transaction” appear.
In
the Statement accompanying your solicitation letter the same formulation just
quoted from your solicitation letter is restated verbatim at page
3.
It
is not until pages 21, 22 and 23 of the 32-page Statement that the phrase
“capital transaction” appears, and it makes its appearance in the following
passages:
“As noted under
‘Modification of Compensation to Wien, Malkin & Bettex,’ WM&B is
entitled to receive certain supervisory fees and additional compensation, but
not to share in net proceeds from any sale by Associates of an interest in the
Empire State Building or from any mortgage financing or similar capital
transaction, e.g., condemnation (collectively, ‘Capital Transactions’) .. .”
(Exhibit, Statement, p.
21)
*
*
*
“The
Agents ... are requesting that each Participant, on an individual and
voluntary basis, execute the Authorization section of the form of
Consent and Authorization which is a part of these materials.
By executing such Authorization section, the Participant will enter into
an agreement with WM&B as follows:
1. The Participant will pay to WM&B (a) 10% of the Net Proceeds from
any Capital Transaction after a return to the Participant of such Participant’s
Remaining Cash Investment; ... .”
(Emphasis as set forth in the original document) (Ibid., p.
22)
*
* *
“As
used herein, the terms: ‘Capital Transaction’ shall mean any one or more of the
following transactions: (I) the original incurrence or refinancing of any
indebtedness of Associates or any joint venture in which Associates has an
interest, (ii) the sale, exchange, condemnation (or similar eminent domain
taking), casualty or other disposition of all or any substantial part of the
Property, the Master Lease or Associates’ interest in the Property or the Master
Lease held through any joint venture in which Associates has an interest, (iii)
the liquidation and dissolution of Associates or (iv) any similar transaction or
event, the proceeds of which are deemed attributable to capital in accordance
with generally accepted tax or accounting principles.” (Ibid.,
p. 23)
My
Contention
First, the rules of
construction. The elementary rules of
construction apply. The consent solicitation, consent form and accompanying
Statement were drafted by the supervisor, not by the participants.
By and large the participants are non-lawyers. The terms of the consent
were not negotiated by those whose consents were solicited or by those who
consented. Accordingly, by the applicable rules of construction, the terms of
the consent will be strictly and narrowly construed; ambiguity, vagueness and
uncertainty will be construed against the supervisor as drafter of the
documents; and the meaning of the solicitation will be found in the common
understanding of the average investor.
Second, the trigger
elements. The transactions
consistently referred to in your solicitation letter as trigger events (and
again in the opening pages of the Statement) were “sale” and
“mortgage financing”. The
Statement, in a subsequent refinement, adverted to “similar”
events such as, condemnation and casualty insurance proceeds. In every event
there are three essential common attributes. And all three of those attributes are
lacking in your proposed consolidation program. The essential attributes
are:
(a) Proceeds distributed to the participants from a transaction.
In other words, compensation to the supervisor is linked to and measured by the
immediate distribution to the participants of net proceeds
produced by a specific single transaction.
“Proceeds” appears not only in every reference to the sharing of
compensation but is defined in detail at page 23 of the Statement. In your proposed consolidation there are no
“proceeds” as defined in the 1991 solicitation that will be distributed to
participants.
(b) Specific relationship to the Empire State Building. The
solicitation described a transaction discretely involving Associates’ property
interest in the Empire State Building, the proceeds of which were specifically
and identifiably related exclusively to such property and its value.
The solicitation did not contemplate or encompass, nor was it understood
by consenting participants, that the trigger event might entail the merger of
Associates’ property and the blending of
its value with a potpourri of other disparate and unrelated properties
(which includes an undeveloped piece of land and stand alone retail
spaces).
( c) Arms length transaction. In each of the instances described
in the solicitation the transaction is at arms length with an unrelated
party:
(i) a
buyer in the case of a sale;
(ii)
a mortgage lender in the case of a mortgage financing;
(iii) the
government in the case of a partial or total taking by eminent domain;
and
(iv) an
insurer in the case of a property loss
recovery.
Your
proposed consolidation does not involve an arms length transaction and there is
no unrelated party. The entire project was designed by Malkin Holdings, will be
assembled by Malkin Holdings and will be controlled by Malkin Holdings. The transaction is a transfer from one
Malkin Holdings controlled entity to another Malkin Holdings controlled entity.
Malkin Holdings is fraught with an array of conflicts of interest unprecedented
in number and unparalleled in significance that run for pages in the prospectus.
Those conflicts are compounded in the instant situation by the Malkin Holdings
group’s claim to the “overrides”.
In
sum, there is no distribution to consenting participants of the net
proceeds resulting from a transaction involving an unaffiliated party which
proceeds are exclusively identifiable to Associates’ interest in the Empire
State Building.Consequently, the voluntary compensation program, i.e.,
the “voluntary overrides”, is not
triggered.
Third, their can be no
divestiture of an ownership interest. Your
1991 solicitation was a request for compensation sharing, not for a partial
divestiture and reallocation of a participant’s equity ownership interest. The documentation expressly refers to a
“Voluntary Compensation Program”wherein the consenting participant parts with
10% of distributed proceeds of a capital transaction. But it does not apply only
to one transaction, it could apply to any number of successive transactions.
Thus, the Statement says that“‘Capital Transaction’ shall mean any one or
more of the following transactions... .” (Ibid., p. 23)(emphasis in
bold-text added). This statement
alone is of critical significance. For example, if there were a series of
mortgage financings that resulted in distributions of mortgage proceeds to the
participants, there would be a 90/10 sharing of mortgage proceeds with the
supervisor on each such occasion. But the consenting participant would always
retain 100% of his/her ownership interest in Associates. Or, posit a mortgage
financing with distributable proceeds followed thereafter by a partial
condemnation (e.g., the government exercises its power of eminent domain to take
the broadcasting tower for national security purposes and such taking is found
by the courts to be a valid exercise of such power) resulting in a distributable
condemnation award. The distributable proceeds of both events - mortgage
proceeds and condemnation award - would be shared 90/10 by the consenting
participants with the supervisor. Again, the consenting participants would
retain 100% of their equity ownership interests in Associates.
Such is not the case with your consolidation “capital transaction”. You
purport to have the right to acquire 10% of the “consenting” participants’
ownership interests and convey such divested equity interests to the Malkin
Holdings group in the form of capital assets (stock and/or OPUs). If the
“capital transaction” concept as defined above were to operate in accord with
your interpretation it would
require that in each of the hypothetical successive transactions the consenting
participants would have their ownership interests whittled away in 10%
increments upon the occurrence of each such event and that truncated portion of
the participants’ equity interests would accrete to the benefit of the
supervisor. If this seems an absurd result, it is. But it follows from your
interpretation as to how the voluntary consents apply in the instant proposed
consolidation. Your inclusion of
“overrides”, as woven into the compensation structure of the prospectus,
violates the spirt, the common understanding, and the precise text of the 1991
solicitation.
Fourth, “overrides” are
not capital assets, have no right to earn distributions, and have no voting
rights.
The establishment of “overrides” never envisioned, never provided for and
never allowed that “overrides” gave the supervisor ownership interests with the
right to receive future distributions and appurtenant voting rights. Neither the
non-voluntary overrides that originate in the founding agreements nor the
voluntary overrides created by subsequent voluntary participant consents granted
a contingent right by which the supervisor could acquire ownership interests.
Nor was it ever intended that the supervisor should have such rights by reason
of its sharing arrangements with participants. Indeed, “overrides” always were
and still remain contingent rights that materialize only on the occasions of
specifically designated distributions.
And the override attaches only to that specific cash distribution. The
structure of your consolidation/third party transaction, however, capitalizes
contingencies and creates asset based interests (in the case of both the
non-voluntary and the voluntary overrides). It awards to the Malkin Holdings
group (a) the right to receive on a continuing basis all distributions allocable
to the severed portion of what had been the participants equity, and (b) voting
rights appurtenant to the receipt of stock (and potential voting rights with
respect to OPUs that can be converted into stock).
Participants should be aware that under the terms of your present
proposals in the prospectus,
participants subject to the “override” will lose not only 10% of their
ownership interests, with an exchange value for each full unit of $34,870, but
will lose the right to receive future distributions attributable to those lost
shares as well as their appurtenant voting rights.
This is an improper and indefensible confiscation of ownership rights in
contravention of all understandings and
expectations.
Fifth, the basic
concept of 1991 solicitation was set forth in the solicitation letter you
signed. The refinements in the
Statement accompanying your solicitation letter, were just that - refinements.
They did not alter, transform or materially expand the circumstances under which
voluntary consents were intended to operate or were understood to operate. Facile recitation of the phrase
“capital transaction” without any substantive analytic discussion of that term
and how it relates to the narrative and the specifically enumerated contingent
conditions in your letter (as well as in the Statement), drives the conclusion
that you can not justify your position.
Your letter did not say “each Participant, individually and
voluntarily, agrees as follows: (i) in the event of a capital
transaction such as a sale or financing ... .” Nor did the Statement read
that way. As any reading of the
text of your letter together with
the Statement reveals, the phrase “capital transaction” was inserted and
employed as a convenient short-hand descriptive for a narrow band of identified
transactions. It was not in itself a substantive contingent
eventor the substantive event. Nor was it an elastic bungee
cord upon which a semantic gymnast could spring to any contrived “capital”
transaction the imagination could conjure and hold it to be encompassed by the
text. I believe my recollection is
correct, and if so it is interesting to note, that initially your expenditures
for “tax and financial services” in connection with putting together your
consolidation project were shown for more than a year in the financial
statements as ordinary expenditures but subsequently you recharacterized those
expenditures as“capital expenditures.”
Sixth, the instant
solicitation of consents to the consolidation/third party transaction proposals
deprives the voluntary consenters of the assurance they were given that their
decisions were individual and voluntary.
As the documents in the
accompanying Exhibit shows, the phrases “individually and
voluntarily”and “individual and
voluntary” were always set forth italicized, underscored and in bold
text. The point was to emphasize that no other participant or body of
participants could influence or determine the outcome of one’s personal
decision. That assurance has now
been compromised. By integrating within an extremely complex set of proposals a
presumption that the voluntary consents are triggered, and triggered in ways
that substantially and materially reduce the ownership interests of the
consenting participants, those consenting participants who, as I, strenuously
disagree with this presumption, face the consequence that we will be bound by
decisions made by other participants who you have been urging to vote in favor
of those proposals.
Finally, I
and many others who gave consent in 1991 did so out of respect for Mr. Wien who
had passed away only three years before and in appreciation of his having
created the investment opportunity and nurtured it for almost 30 years. It was a
generous and genuine expression of gratitude. I consented without hesitation or
reservation. Participants who signed a consent form gave a gift certificate that
had been drafted with very well understood and defined parameters.
Now it is being waved at us as if we signed a blank check. The terms of
the voluntary compensation program have been distorted and conflated beyond
recognition. That voluntary
program neither intended nor contemplated the instant proposals, neither was it
designed or understood to embrace a project such as the participants now have
been asked to approve.
Conclusion and
Recommendations
1. I
believe that review and analysis of the creation of the “voluntary overrides”
juxtaposed with their intended
inclusion in your proposed project casts in extreme doubt the legitimacy
of such treatment. The“overrides” should be removed entirely from the format of
the proposed consolidation/third party transaction proposals and the prospectus
and consent forms should be amended
accordingly.
2. I fully
understand that Malkin Holdings has an interest in the retention and exercise of
its contingent interests. I
appreciate that Malkin Holdings feels that it is entitled to some special
recognition for its services. I
suggest that the issue of the voluntary consents be dealt with in the same
manner as the “voluntary pro rata reimbursement program for expenses of legal
proceedings with former property manager and leasing agent.”
Accordingly, the voluntary sharing of compensation with Malkin Holdings
on a 90/10 basis should be presented to the participants by amendment to the
prospectus and by revision of the consent form so that every participant now is
informed of the terms and effect of that voluntary program and has an
opportunity to decide on a truly individual and voluntary
basis whether or not to consent at this
time.
3. In
addressing the participants at large I would urge in light of the import of this
issue that they
(a) examine and reflect on this matter and reach their own conclusions as
to the propriety of the treatment and inclusion of
“overrides” as asset based interests in the consolidation,
(b) withhold their consents to the pending proposals and withdraw such
consents as may have been given if they agree with the explanation of my
objection, until this issue has been amicably, fully and satisfactorily resolved,
( c) notify the Securities & Exchange Commission if they feel this
issue merits redress by the regulatory agency,
(d) write to Malkin Holdings to express their opinion,
and
(e) opt out of the pending consolidated class actions and proposed class
action settlement upon any receipt of notice that the court has certified the
class and preliminarily approved the settlement, it being my opinion that the
proposed settlement does nothing to address the gravity and dimensions of this
issue (and many other issues).
4. I would
urge the Securities & Exchange Commission to review these objections and
take such action as is warranted, including adoption and implementation of
recommendations “1" and
“2".
Sincerely,
Robert A.
Machleder
cc:
Participants in Empire State Building
Associates
Thomas Kluck,
Esq. and Angela McHale, Esq.
Securities
& Exchange Commission
100 F Street
NE
Mail Stop 2010
Washington D.C.
20549
with
enclosure
[1]/ In
the two other publicly registered entities, 60 East 42nd St.
Associates and 250 West 57th St. Associates, the “voluntary
overrides” granted by their participants account for additional compensation
claimed by the Malkin Holdings group in excess of $43 million. (Ibid., p.
85)
