UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
SCHEDULE
14A
(RULE
14a-101)
SCHEDULE
14A INFORMATION
Consent
Statement Pursuant To Section 14(A) of the Securities
Exchange
Act of 1934 (Amendment No. )
Filed
by
the Registrant [X]
Filed
by
a Party other than the Registrant [ ]
Check
the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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Definitive
Proxy Statement
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x
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Definitive
Additional Materials
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Soliciting
Material Pursuant to § 240.14a-12
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Hartman
Commercial Properties REIT
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(Name
of Registrant as Specified In Its Charter)
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Allen
R. Hartman
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Hartman
Management, L.P.
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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(1)
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of each class of securities to which transaction applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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maximum aggregate value of transaction:
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December
1, 2006
Dear
Fellow Common Shareholder:
We
are
writing today to keep you informed of the latest developments with Hartman
Commercial Properties REIT (“The Hartman REIT” or the “Company”), provide you
with a copy of our preliminary consent materials and a lawsuit that we
have
filed against the Company (such lawsuit is referenced in our consent materials)
and provide you with an update on certain procedural matters that will
be our
focus over the next two months.
On
November 29, Allen R. Hartman and Hartman Management, LP filed preliminary
consent solicitation materials with the Securities and Exchange Commission
(the
“SEC”) to remove four current members of the Board of Trustees of the Company
and replace those members with six of our own nominees (also filling two
existing vacancies). Upon approval by the SEC of our consent materials
in the
next few weeks, definitive consent materials, including a WHITE consent
card,
will be mailed to all shareholders asking for your support for me and my
candidates for the Board of the Company and the removal of existing board
members.
At
this time, we are not requesting your vote or consent. We
will request your consent at a later date upon approval of our materials
by the
SEC.
We will
need your support and your vote participation upon mailing of our definitive
consent materials in the near future. We fully intend to make our case
to all
shareholders during the next few weeks when the SEC review is completed.
In the
meantime, we ask you to review the enclosed preliminary consent materials
and
the lawsuit to gain an understanding of our position with respect to the
current
management of The Hartman REIT. Also, we ask you to be prepared for our
next
mailing and take no action with respect to any materials or requests you
may
receive from the existing Board of Trustees and management of the
Company.
Upon
clearance of our materials, we will need your support and your vote
participation. We urge you to read the definitive consent solicitation
statement
when it is available because it contains important information. Information
about Mr. Hartman and Hartman Management, LP is set forth in the preliminary
consent statement. You can obtain the consent solicitation statement, and
any
other relevant documents, for free at the SEC web site www.sec.gov.
As
always, your cooperation and support is greatly appreciated. We will keep
you
posted of our progress with our solicitation and look forward to communicating
with you in the coming weeks.
Sincerely,
/s/
Allen
R. Hartman
Allen
R.
Hartman
Hartman
Management
1450
West Sam Houston Parkway North, Suite 100, Houston, Texas 77043 713-467-2222
Main 713-973-8912 Fax
CAUSE
NO. 2006-63041
HARTMAN
COMMERCIAL PROPERTIES § IN
THE DISTRICT COURT
OF
REIT
and HARTMAN REIT OPERATING
§
PARTNERSHIP,
L.P., §
§
Plaintiffs
and Counterclaim
Defendants §
§
vs.
§
§
ALLEN
R. HARTMAN and
HARTMAN
§
HARRIS
COUNTY, TEXAS
MANAGEMENT,
L.P.,
§
§
Defendants
and Counterclaim
Plaintiffs,
§
§
vs.
§
§
James
C. Mastandrea, Chand
Vyas,
§
Jack
L. Mahaffey, Chris A.
Minton,
§
and
John J.
Dee
§
§
Counterclaim
Defendants.
§
333rd
JUDICIAL DISTRICT
DEFENDANTS
ALLEN R. HARTMAN AND HARTMAN
MANAGEMENT,
L.P.’S ORIGINAL COUNTERCLAIM AND
SUPPLEMENTAL
ANSWER
TO
THE HONORABLE COURT:
Defendants’,
Allen R. Hartman (“Hartman”) and Hartman Management, L.P. (“Hartman Management”)
file this, their Original Counterclaim complaining of Plaintiffs, Hartman
Commercial Properties REIT (the “REIT”) and Hartman REIT Operating Partnership,
L.P. (the “Operating Partnership”) and James C. Mastandrea, Chand Vyas, Jack L.
Mahaffey, and Chris A. Minton, as members of the Board of Trustees of the
REIT,
and John J. Dee, as Chief Operating Officer, jointly and severally, as
Counterclaim Defendants, (the “Counterclaim Defendants”) and would respectfully
show the Court as follows:
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 1
I.
DISCOVERY
CONTROL PLAN
Discovery
is intended to be conducted pursuant to Discovery Level (2).
II.
PARTIES
AND SERVICE
1.
Plaintiff
and Counterclaim Defendant Hartman Commercial Properties REIT is a Maryland
real
estate investment trust formed under the Maryland REIT law with offices located
in Houston, Texas and may be served with process by serving its attorney
of
record in accordance with the Texas Rule of Civil Procedure.
2.
Plaintiff
and Counterclaim Defendant Hartman REIT Operating Partnership, L.P. is a
Delaware limited partnership with offices located in Houston, Texas and may
be
served with process by serving its attorney of record in accordance with
the
Texas Rule of Civil Procedure.
3.
Defendant
and Counterclaim Plaintiff Allen R. Hartman is a resident of Houston Texas
and
has previously been served with process and appeared in this
action.
4.
Defendant
and Counterclaim Plaintiff Hartman Management, L.P. is a Texas limited
partnership with offices located in Houston, Texas, and has previously been
served with process and appeared in this action.
5.
Counterclaim
Defendant James C. Mastandrea is an individual and a resident of Cleveland,
Ohio. Pursuant to Tex. Civ. Prac. & Rem. Code § 17.043, he may be served
with process by serving the person in charge, at the time of service, of
any
business in which the non-resident is engaged in the State of Texas. Therefore,
service of process may be effectuated by serving James C. Mastandrea, or
the
person in charge at the time of service, at the REIT’s principal place of
business located at Hartman Commercial Properties REIT, 1450 W. Sam Houston
Toll
Road N, Suite 110 and 111, Houston, Harris County, Texas 77043.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 2
6. Counterclaim Defendant John J. Dee is an individual and a resident of Cleveland, Ohio. Pursuant to Tex. Civ. Prac. & Rem. Code § 17.043, he may be served with process by serving the person in charge, at the time of service, of any business in which the non-resident is engaged in the State of Texas. Therefore, service of process may be effectuated by serving John Dee, or the person in charge at the time of service, at the REIT’s principal place of business located at Hartman Commercial Properties REIT, 1450 W. Sam Houston Toll Road N, Suite 110 and 111, Houston, Harris County, Texas 77043.
7.
Counterclaim
Defendant Chand Vyas is an individual and a resident of St. Louis, Missouri.
Pursuant to Tex. Civ. Prac. & Rem. Code § 17.043, he may be served with
process by serving the person in charge, at the time of service, of any business
in which the non-resident is engaged in the State of Texas. Therefore, service
of process may be effectuated by serving James C. Mastandrea, President and
CEO
of the REIT, or the person in charge at the time of service, at the REIT’s
principal place of business located at Hartman Commercial Properties REIT,
1450
W. Sam Houston Toll Road N, Suite 110 and 111, Houston, Harris County, Texas
77043.
8.
Counterclaim
Defendant Jack L. Mahaffey is an individual and a resident of Houston, Texas.
He
may be served with process at his place of business, Hartman Commercial
Properties REIT, 1450 W. Sam Houston Toll Road N, Suite 110 and 111, Houston,
Harris County, Texas 77043 or at his home, 10 Champion’s Bend Circle, Houston,
Harris County, Texas 77069.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 3
9. Counterclaim Defendant Chris A. Minton is an individual and resident of Alvin Texas. He may be served with process at his place of business, Hartman Commercial Properties REIT, 1450 W. Sam Houston Toll Road N, Suite 110 and 111, Houston, Texas 77043 or at his home 3600 West South Street, Alvin, Brazoria County, Texas 77511.
IV.
JURISDICTION
AND VENUE
10.
Pursuant
to Tex. Civ. Prac. & Rem. Code § 17.041 et
seq.,
the Court has jurisdiction over the non-resident Counterclaim Defendants
because
they have transacted business in the State of Texas and the causes of action
complained of herein arise out of and relate to their purposeful contact
with
the State of Texas.
11.
Pursuant
to Tex. Civ. Prac. & Rem. Code § 15.062, venue is proper in this Court
because venue of the main action establishes venue of counterclaims, cross
claims, or third-party claims properly joined because the claims arise out
of
the same transaction, occurrence or series of transactions or occurrences
as the
subject matter of the Plaintiffs’ claims against the original Defendants.
V.
FACTUAL
BACKGROUND
A.
Allen
R. Hartman’s Proven Experience.
12.
Mr.
Hartman has over 30 years of experience in the commercial real estate industry.
In 1983, Mr. Hartman formed Hartman Investment Properties (a Texas sole
proprietorship) to develop, acquire, manage, and lease commercial real estate
ventures. Since 1984, Mr. Hartman, has created and managed as general partner,
18 private limited and general partnerships invested in commercial real estate
in Houston, San Antonio and Dallas, Texas.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 4
13. In 1998, Mr. Hartman founded the Hartman REIT and, until recently, served as its president, secretary and chairman of the Board of Trustees (the “Board”).
14.
Mr.
Hartman is also the sole limited partner of Hartman Management, as well as
the
president, secretary, manager and sole member of the general partner of Hartman
Management. Until recently, Hartman Management provided advisory and property
management services to the Hartman REIT pursuant to an Advisory Agreement
dated
as of August 31, 2004 (the “Advisory Agreement”) and a Property Management
Agreement dated as of September 1, 2004 (the “Management Agreement”). Both of
these agreements, in their entirety, were approved by the REIT by and through
its Board.1
B. The
Need for an Accounting.
15.
In
September 2004, the REIT commenced a continuous offering, registered with
the
Securities and Exchange Commission (the “SEC”), of up to 10 million common
shares of beneficial interest in the REIT. Up until July 20, 2006, the Board
allowed the proceeds of the offering to be used by Hartman Management to
acquire
additional real property for the REIT.
16.
Curiously,
and in Defendants’ view, in furtherance of the civil conspiracy herein alleged,
the Board passed a resolution that all proceeds from this offering be placed
under the control of an Investment Committee composed of the independent
Trustees.
17.
To
date no acquisitions have been made. Therefore, at this time, an accounting
is
necessary to ensure that these proceeds have not been diverted to pay the
exorbitant salaries the Mastandrea team has commanded in the past or used
to
fund this potentially enormously expensive litigation.
1
Paragraph 12(a)(ii) of the Advisory Agreement sets forth the REIT’s
representation and warranty, to wit: “The Company’s execution, delivery and
performance of this Agreement has been duly authorized. This Agreement
constitutes the valid and binding obligation of the Company, enforceable
against
the Company in accordance with its terms. . . .” Advisory Agreement, paragraph
12(a)(ii).
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 5
C.
The
Roots of the Nefarious Civil Conspiracy.
18.
On
August 11, 2005, the Board formed a special committee to investigate an initial
public offering (“IPO”) of the REIT’s common shares in order to fund the
expansion of the REIT through further acquisitions. In connection with the
possible IPO, the REIT retained RBC Capital Markets (“RBC”) as its investment
banker. RBC advised the REIT what it would receive better pricing, and the
IPO
would be more likely to succeed, if the REIT were to acquire Hartman Management.
The special committee thus began its attempts to value the acquisition of
Hartman Management.
19.
Hartman
Management’s initial offer to sell itself was at a price of approximately $10
million dollars. This amount was based on the fact that Hartman Management
served as both a real estate and finance company, having raised funds as
well as
acquiring and managing real estate. Therefore, Mr. Hartman deserved to be
compensated for that successful, ongoing activity. The valuation also took
into
consideration the intrinsic value of the revenue stream, on which customarily
a
multiple of 1 to 2.5 was used. Mr. Hartman used a multiple of 2. Mr. Hartman
also based the valuation on comparable sales. Finally, the valuation considered
the company’s various assets, cash, receivables, other working capital,
furniture and fixtures, computer systems and networks, software licenses
and
historical databases, an assembled and experienced workforce, the customer
and
tenant databases, including tenant prospects and contract rights with vendors,
and goodwill associated with the “Hartman” name.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 6
20.
The
special committee reviewed the financial statements of Hartman Management,
as
well as other information regarding comparable transactions. The special
committee determined that Hartman Management’s only value to the REIT was for
the work force in place, plus whatever book value existed in liquid form.
Accordingly, the special committee made a counteroffer of $1.65 million in
cash,
plus a commitment to grant restricted stock in the amount of $1 million dollars
to key employees of Hartman Management. However, the Board cleverly omitted
from
its minutes a material fact of which they were well aware. Paragraph 8(e)
of the
Advisory Agreement provided that if the REIT shares were listed on a national
securities exchange or quoted on the Nasdaq National Market System, Hartman
Management would be entitled to receive a Subordinated Incentive Fee (“Incentive
Fee”). The Incentive Fee is an amount equal to 15.0% of the amount by which (i)
the market value of the outstanding REIT shares, measured by taking the average
closing price or average of bid and asked price, over a period of 30 days
during
which the shares are traded, with such period beginning 180 days after the
listing (the “Market Value”, plus the total of all distributions paid to
shareholders from the REIT’s inception until the date the Market Value is
determined, exceed (ii) the sum of (A) 100% of invested capital and (B) the
total distributions required to be paid to the shareholders in order to pay
the
shareholders’7% return from inception through the date the Market Value is
determined. The
Board knew that the right to receive the Incentive Fee was Hartman Management’s
most valuable asset - - it effectively increased Hartman Management’s valuation
by eight-fold.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 7
21. Hartman Management, after due consideration, rejected the special committee’s counteroffer and requested that the special committee reconsider his initial offer. The special committee responded with an offer consisting of a $1.65 million dollar payment to Hartman Management plus a contingent payment of up to $8.35 million dollars, dependent upon the REIT achieving a 10% compounded annual growth rate in funds from operations (“FFO”) per share over a four year period. This problem with this proposal was that it was a well-known fact (and one that was easily verifiable by reference to comparable REIT growth rates) in the REIT industry that REITs did not usually achieve a 10% compounded annual growth rate. Thus, it appeared to Mr. Hartman that by countering with an offer based on an unrealistic and unachievable growth rate, the special committee was not negotiating in good faith. As such, Hartman Management had no choice but to reject this offer. Hartman Management then proposed a compromise offer consisting of the $1.65 million dollar payment and a contingent payment dependent upon the REIT achieving a 5% compounded annual growth rate in FFO per share over a four year period. Importantly, these numbers had already been considered by RBC in connection with its valuation models and RBC had agreed that a 5% growth rate was reasonable and sufficient to attract new investors in the planned IPO. Inexplicably, the special committee informed Hartman Management that it was discontinuing further discussions.
22.
At
this juncture, it should have been readily apparent to attorney John Good
(the
attorney with Bass, Berry & Sims PLC that was originally engaged in August
2005 by Mr. Hartman to represent Hartman Management and the REIT in the initial
public offering) that a dispute had arisen between Hartman Management and
the
REIT and he could no longer continue to represent both parties. Rules of
professional conduct require a lawyer who finds himself in a conflict of
interest situation to fully disclose the conflict and obtain informed, written
consent of both sides before continuing his dual representation. Barring
that,
the lawyer is required to withdraw. Mr.
Good did nothing.
Instead, unilaterally and without obtaining Mr. Hartman’s consent or otherwise
informing him, he chose to continue to represent the REIT, thereby violating
his
fiduciary duties and his duty of loyalty and candor.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 8
23. The special committee proposed engaging an “independent” third party to obtain an appraisal of Hartman Management. Initially, Mr. Hartman agreed to this proposal. The REIT submitted Gary Wunderlich, of Wunderlich Securities, as a qualified “independent” appraiser. However, on April 21, 2006, Mr. Hartman received an invoice from John Good. Upon reviewing the invoice, Mr. Good’s decision to represent the REIT became patently clear to Mr. Hartman as the invoice described hour upon hour of conversation with the “independent” appraiser and with the special committee - - conversations from which Mr. Hartman had been purposefully excluded. It was readily apparent that Mr. Good had far exceeded the terms of his original engagement and had instead over a period of six months, with the RBC and members of the special committee, systematically conditioned the “independent” appraiser.
24.
As
a result, Mr. Hartman proposed that a second independent appraisal be obtained,
and, if there existed a material discrepancy between the first two appraisals,
the parties obtain a third independent appraisal. Not surprisingly, the special
committee rejected this proposal. As the facts set forth in this Counterclaim
will demonstrate, the Board rejected Mr. Hartman’s proposal because the members
had already agreed to pursue an alternative strategy - one which would deliver
the desired result (acquisition of Hartman Management) far more economically.
Simply put, the Board, secretly hatched a plan to steal Hartman Management
from
Mr. Hartman, without paying a penny.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 9
25. After months of discussions, during which at all relevant times the Counterclaim Defendants were perfecting their conspiracy, and in violation of its fiduciary duties to the REIT, the special committee informed Hartman Management that it was discontinuing further discussions.
D. Actions
of the Board Resulting in REIT Liability.
26.
The
Advisory Agreement was set to expire by its own terms on September 30, 2006,
On
September 29, 2006, the day before the Advisory Agreement was set to expire
(the
Termination Date), Hartman Management sent a letter to the Board reminding
the
Board that as provided by paragraph 16(a) of the Advisory Agreement, after
the
Termination Date, the REIT was obligated to pay: (i) all unpaid reimbursements
of expenses and all earned but unpaid fees payable to the advisor, and (ii)
the
Subordinated Performance Fee Due Upon Termination (the “Performance Fee”)( the
Performance Fee is a fee equal to (1) 15% of the amount, if any, by which
(a)
the Appraised Value of the [REIT’s] Properties at the Termination Date, less
amounts of all indebtedness secured by the [REIT’s] Properties, plus total
Distributions through the Termination Date exceeds (b) the sum of Invested
Capital, plus Distributions attributable to Net Sales proceeds, plus total
Distributions required to be made to the Shareholders in order to pay the
Shareholders’ 7% Return from inception through the termination date less (2) any
prior payment to the Advisor of a Subordinated Share of Net Sales Proceeds).
Though Hartman Management desired to continue to operate under the terms
and
conditions of the Advisory Agreement as it had since the REIT’s inception, Mr.
Hartman knew that he needed to provide the Board with any facts that could
be
construed as material to the Board’s decision about whether to renew the
Advisory Agreement or not. Therefore, in the letter, he disclosed the
approximate amount of the Performance Fee. As part and parcel of its ongoing
conspiracy, the Board elected to allow the Advisory Agreement to expire by
its
own terms. Its decision was made despite the fact allowing the Advisory
Agreement to terminate triggered the Performance Fee clause and resulted
in the
REIT incurring the obligation and liability to pay the Performance Fee.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 10
27. Despite the fact that the terms of the Advisory Agreement expressly stated that the Performance Fee was due within thirty days after the termination date, the REIT has wholly failed to tender payment, electing instead to breach the contract.
E. James
C. Mastandrea’s Legacy of Personally Lucrative,
But
Failed, Business Strategies.
1. The
First Union REIT Debacle
28.
Under
Mr. Mastandrea’s management, First Union’s stock price was lower at the end of
his employment than it was on the day he signed his lucrative employment
contract ($10 ½ at the close on 7/19/93). The company’s dividend declined 39%
under his stewardship. By comparison, the S&P 500 Index more than doubled
(up 145%) during the same period. Meanwhile comparable REITs enjoyed
extraordinary returns, Starwood Hotels & Resorts rose 544% and Patriot
American Hospitality rose 362%. A shareholder letter detailing Mr. Mastandrea’s
performance as First Union’s Chairman, CEO and President is attached hereto as
Exhibit A.
29.
In
the dissident shareholders’ proxy materials, in a section styled “Mr.
Mastandrea Has Personally Benefited at the Expense of First Union
Shareholders,”
it was stated that by receipt of significant option grants, restricted stock
awards, “golden parachutes” and Company-paid memberships in several exclusive
Cleveland social clubs, Mr. Mastandrea personally benefited at the expense
of
the First Union shareholders. For example, even though First Union’s performance
declined from 1993 to 1998, Mr. Mastandrea collected a $50,000 annual salary
increase (to $250,000) and an increase in his bonus equal to 25%
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 11
on an annualized basis ($110,610). At the same time, he received the following: (i) options to purchase 162,500 shares (potential estimated market value of $1,407,861); (ii) a reward of 112,500 shares of restricted stock under the [c]ompany’s Long Term Incentive Performance Plan (worth $$717,188 and comprising 53.3% of all grants that year); (iii) a “golden parachute” that requires the [c]ompany, in certain circumstances, to continue to pay his base salary and bonus and provides benefits, including pension contributions and vesting of options, for a period of three years after Mr. Mastandrea is no longer employed by the [c]ompany, and in certain circumstances such as the termination of Mr. Mastandrea without cause after a change in control of the [c]ompany (as defined), the base salary, bonus and benefits otherwise payable over the three-year period become immediately due and payable by the [c]ompany in a lump sum; (iv) [c]ompany paid memberships in several exclusive Cleveland social clubs; and (v) a $2.5 million split-dollar life insurance policy, all the premiums on which are paid by the [c]ompany during his employment and on which the [c]ompany must continue to pay premiums, in certain circumstances, even after he is no longer employed by the [c]ompany.
30.
Mr.
Mastandrea directed First Union to commence litigation against the REIT’s
largest shareholder, alleging, among other things, that the named defendants
conspired to take control of First Union, violated fiduciary duties to other
First Union shareholders and benefited themselves at the expense of other
shareholders. Sound familiar? This action proved both fruitless and enormously
expensive. A true and correct copy of the Judgment Entry Regarding Plaintiff’s
Motion for Preliminary Injunction that describes the suit in detail is attached
hereto as Exhibit B.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 12
31. Mr. Mastandrea was eventually ousted by disgruntled shareholders of First Union Real Estate Equity and Mortgage Investments for reasons set forth in Schedule 14A Information filed with the Securities and Exchange Commission:
Mr.
Mastandrea continued to waste First Union’s “shareholder dollars on a senseless
lawsuit. [In the First Union case, Mr. Mastandrea secretly taped a conversation
between First Union’s lawyer and a third party. Ordering that the tape was a
“secret tape”, a federal magistrate said, that ‘[i]f
a party behaves unethically or unprofessionally” it is not entitled to keep the
material]. . . . First Union ‘selectively forgets to mention that the stock
price of other REITs has increased, unlike the company [i.e. First Union].
Moreover, the Company’s dividend was cut, all while salaries, benefits and other
expenses have gone in the opposite direction.’
32.
Ultimately,
the charges for the First Union proxy fight that ensued were estimated to
be
about $17.5 million dollars, encompassing more than $6 million dollars in
proxy
fees and expenses. Other expenses incurred by the First Union REIT included
a
$3.4 million dollar severance package for Mr. Mastandrea and the $5 million
dollar cost of lifting the restraints on the restricted shares following
the
change in control.
2. The
Eagle’s Wings Aviation Corporation Bankruptcy
33.
Mr.
Mastandrea’s next undertaking was equally disastrous. Eagle’s Wings Aviation
Corporation, was an aviation services business, where Mr. Mastandrea served
as
Chief Executive Officer. Eagle’s Wings was placed in receivership after
defaulting on more than $1.8 million in loans by a Cuyahoga County Court
Judge
in September , 2001. The company filed bankruptcy in March, 2002.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 13
3. The Paragon Train Wreck
34.
Paragon’s
website, http://prgreit.com/,
describes Mr. Mastandrea’s most recent employer as follows:
[Paragon
is an]. . . American Stock Exchange-listed real estate company focused on
acquiring, owning
and operating multi-family and commercial properties. Headquartered in
Cleveland, Ohio, the company is driven by a value-added business plan . .
..
35.
This
statement is materially false and misleading. On September 20, 2005, under
Mr. Mastandrea’s stewardship, Paragon was notified by the American Stock
Exchange (“Amex”) that it was not in compliance with the continued listing
requirements of Section 1003(a)(iii) of the Amex Company Guide due to
shareholders’ equity of less than $6.0 million and losses from continuing
operations and net losses in its five most recent years. On or about January
27,
2006, Paragon was de-listed from the Amex.
36.
Other
press releases and certain SEC filings indicate that Paragon filed a
registration statement (SEC File No. 333-129219) in October 2005 to raise
$100
million in public equity. On January 20, 2006, approximately three months
later,
without selling any securities, Paragon’s registration statement was withdrawn.
37.
Paragon’s
failure as a public company is further evidenced in an April 12, 2006, press
release regarding Messrs. Mastandrea and John J. Dee (whom Mr. Mastandrea
has
chosen to act as the REIT’s chief operating officer while still employed by
Paragon):
While
Paragon is still trading on the Over-the-Counter securities market, we are
looking for alternatives for the company.
38.
On
information and belief, Mr. Mastandrea found just such an alternative in
Hartman
Management and the Hartman REIT.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 14
39. Paragon’s Form 10-QSB, for the quarterly period ended September 30, 2006, indicates losses of $(341,144) and $(858,999) for the nine month period ending September 30, 2006 and 2005, respectively. However, Note 3, “Going Concern”, to Paragon’s Form 10-QSB, for the same period, sets the stage for the unfolding conspiracy:
Three
independent trustees signed subscription agreements to purchase 125,000 Class
C
Convertible Preferred Shares for an aggregate contribution of $500,000 cash
to
maintain the Company as a corporate shell current
in its SEC filings so that it may be used in the future for real estate deals
or
sold to another company. During the third quarter of 2006, the Company received
the first quarterly installment of $125,000 from three trustees [including
Mr.
Mastandrea] for payment of Class C Convertible Preferred Shares. . . .
Failure
to obtain external sources of capital and complete a transaction will materially
and adversely affect the Company’s ability to continue
operations.
(Emphasis added.)
40.
As
exhibits filed with the Form 10-QSB indicate, Messrs Mastandrea and Dee have
engaged in a slick series of transactions that, on information and belief,
have
not been fully disclosed to the other Paragon Trustees, the Paragon
shareholders, or the SEC, and which smack of self-dealing. Mr. Mastandrea
was
elected to the Board of Hartman REIT in the summer of 2006. As of the date
of
the Form 10-QSB filing, Messrs. Mastandrea and Dee had already run Paragon
into
the ground and allowed it to be de-listed. Inexplicably, the recitals of
the
Amendment to Additional Contribution Agreement state that “The Trust seeks to
continue the leadership, experience, talent, and relationships of the Trustees”.
The reason Messrs. Mastandrea and Dee wanted to maintain Paragon as a corporate
shell was so that they could direct the reverse-merger of the Hartman REIT
into
the shell. The reason that they issued Class C Convertible Preferred Shares
to
themselves was
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 15
not to compensate them, but to enrich them when the reverse-merger took place. This fact is evident from the terms of the vesting of these Class C Convertible Preferred shares in the Restricted Share Agreement. Paragraph 3 provides that the two-year holding period would be removed and the shares would fully vest upon the latest to occur of a) a public offering by the Company sufficient to liquidate the Restricted Shares, or b) an exchange of the Company’s existing shares for new shares. Under this provision, the shares will vest as soon as the reverse-merger is completed. The enrichment of Messrs. Mastandrea and Dee in this manner will be at the expense of the REIT shareholders and will have taken place without disclosure to them, or consent from them. Attached hereto as Exhibit C-1, C-2 and C-3 are the Stock Subscription Agreement, the Restricted Share Agreement and the Amendment to the Additional Contribution Agreement filed with the SEC.
VI.
CAUSES
OF ACTION
A. Count
One: Breach of Contract.
41.
Defendant
Hartman and Hartman Management incorporate the above numbered paragraphs
as if
fully set forth herein.
42.
The
Advisory Agreement and the Management Agreement were valid and enforceable
contracts, the terms and conditions of which were previously approved by
the
Board. Mr. Hartman and Hartman Management fully performed their obligations
under these contracts. The Counterclaim Defendants have breached the Advisory
Agreement by improperly terminating the contract and failing to pay Hartman
Management the Performance Fee as provided in the Advisory Agreement. This
breach has proximately caused injury to Allen R. Hartman and Hartman Management
for which the Counterclaim Defendants are liable, jointly and severally,
in
their capacity as Board members.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 16
B. Count Two: In the Alternative, Tortious Interference with
Prospective
Relations.
43.
Defendant
Hartman and Hartman Management incorporate the above numbered paragraphs
as if
fully set forth herein.
44.
There
was a reasonable probability that these Defendants would enter into business
relationships by means of further acquisitions. The Counterclaim Defendants
intentionally interfered with Hartman’s Management’s ability to pay down any
debt or make any acquisitions when they sequestered the funds from the
continuous offering. Their conduct was independently tortious and unlawful
and
was a proximate cause of Mr. Hartman and Hartman Management’s injury. As a
result, they sustained actual damages for which these Counterclaim Defendants,
jointly and severally, are liable.
C. Count
Three: Intentional
Infliction of Emotional Distress.
45.
Defendant
Hartman and Hartman Management incorporate the above numbered paragraphs
as if
fully set forth herein.
46.
The
Counterclaim Defendants’ conduct in ousting Mr. Hartman from the company he
founded was intentional and/or reckless, extreme and outrageous, and proximately
caused Mr. Hartman severe emotional distress for which the Counterclaim
Defendants are liable.
47.
The
conduct of the Counterclaim Defendants in attempting to steal Hartman Management
and deprive him of fair compensation for his life’s work was extreme, outrageous
and morally culpable and entitle Mr. Hartman and Hartman Management to an
award
of exemplary damages, for which they specifically plead.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 17
D. Count Four: Civil Conspiracy.
48.
Hartman
and Hartman Management incorporate the above numbered paragraphs as if fully
set
forth herein.
49.
The
Counterclaim Defendants were members of a combination of persons who had
a
meeting of the minds, the object of which was to accomplish an unlawful purpose,
or a lawful purpose by unlawful means. The ouster of Mr. Hartman from the
company he founded constituted the overt act in furtherance of their plan
and he
suffered injury as a proximate result of the wrongful act for which the
Counterclaim Defendants are liable.
E. Count
Five: Accounting.
50.
Hartman
and Hartman Management incorporate the above numbered paragraphs as if fully
set
forth herein.
51.
No
acquisitions have been made with the proceeds from the continuous offering
and
no debt has been paid down. Therefore, at this time, these Defendants demand
an
accounting to ensure that these proceeds have not been diverted to pay the
exorbitant salaries the Mastandrea team has commanded in the past, or used
to
fund this potentially enormously expensive litigation.
VII.
SUPPLEMENTAL
ANSWER
A. The
Real Facts Behind the Plaintiffs’ Breach of Fiduciary
Duty
Cause
of Action.
52.
Under
paragraph 3(k) of the Advisory Agreement, Hartman Management had the duty
to (i)
locate, analyze and select potential investments in [properties], (ii) structure
and negotiate the terms and conditions of transactions pursuant to which
investment in [properties] would be made; (iii) make investments in [properties]
on behalf of the [REIT] . . . in compliance with the investment objectives
and
policies of the [REIT]; (iv) arrange for financing and refinancing and make
other changes in the asset or capital structure of, and dispose of, reinvest
the
proceeds from the sale of, or otherwise deal with the investments in,
[property]; . . .. These duties were to be performed subject to paragraph
3(l)
(which provided that prior approval of the Board was obtained for any and
all
investments in
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 18
properties and financing acquired in connection with the investments) and paragraph 4 of the Advisory Agreement (which allowed the Board, upon the giving of proper notice, to modify or revoke the authority or approvals set forth in paragraph 3, provided however, that such action would not apply to investment transactions to which the Hartman Management had committed the REIT prior to the date of receipt of the aforementioned notice).
53.
On
February 28, 2006, the Board decided to ask John Good (the attorney with
Bass,
Berry & Sims PLC that was originally engaged in August 2005 by Mr. Hartman
to represent Hartman Management and the REIT in an initial public offering)
to
undertake an investigation regarding an allegation, from an unidentified
source,
that John Crossin, the Director of Acquisitions of Hartman Management, had
received commissions as a result of five acquisitions he negotiated on behalf
of
the REIT. The purpose of allowing Mr. Crossin to receive commissions was
to
supplement his salary paid by Hartman Management in order compensate him
commensurate with individuals with similar responsibilities and duties in
the
market, in order to retain him as an employee. This action was taken pursuant
to
provisions of the Advisory Agreement which provided, among other things,
that
each time Mr. Crossin’s efforts, including, but not limited to, investigation,
due diligence, negotiation, and closing services, resulted in the acquisition
of
a property for the REIT by Hartman Management, Hartman Management was authorized
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 19
to pay an Acquisition Fee to Mr. Crossin. Paragraph 1 of the Advisory Agreement defines Acquisition Fees as:
Any
and all fees and commissions, exclusive of Acquisition Expenses, paid by any
person to any other Person (including any fees or commission paid by or to
any
Affiliate of the Company or the Advisor) in connection with purchase,
development or construction of any Property, including, without limitation,
real
estate commissions, acquisition fees, finder’s fess, selection fees,
nonrecurring management fees, consulting fees, loan fees, points, or any
other
fees or commissions of a similar nature.
As
the Board had previously approved the Advisory Agreement that provided for
payment of the Acquisition Fee in the first place and had approved the five
specific acquisitions, Mr. Hartman and Hartman Management saw no reason to
make
an issue of what was, in effect, an authorized payment to Mr.
Crossin.2
It
should also be pointed out that this type of arrangement was typical and
commonplace in the industry; as such, Mr. Crossin did not receive any special
or
extraordinary treatment. At
all relevant times, Mr. Crossin was a licensed real estate broker, which
entitled him to receive a portion of any real estate commission paid by the
seller of the real estate as compensation for efforts.
54.
In
or about August, 2006, Mr. Hartman was contacted by a shareholder, who owned
and
operated a restaurant in Fredericksburg, Texas. He explained to Mr. Hartman
that
he owned approximately 30,989 shares in the Hartman REIT. The investor told
Mr.
Hartman that, despite the fact that he had received the total
2 It
is worth noting that Mr. Crossin, a licensed real estate broker, could
have
commanded the standard one-half of 4-5%.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 20
amount
of his original investment back in the form of cash flow over the time he
had
held the shares, his restaurant business had recently fallen on hard times.
He
told Mr. Hartman that given his financial condition, he wanted to sell his
shares. The investor explained to Mr. Hartman that he understood the REIT
was
currently selling shares for $10.00 per share in the context of its continuous
offering. Rather than harm the REIT by selling the shares on the open market
at
a discount (a price lower than the $10.00 per share price set forth in the
offering), he offered Mr. Hartman the opportunity to purchase the shares
in a
private transaction, at 86% of his original purchase price. Though the investor
had offered to sell his shares for $100,000, Mr. Hartman offered to purchase
the
shares for $150,000. On September 8, 2006, in a private transaction duly
disclosed to the SEC, Mr. Hartman purchased the shares.
55.
Hartman
Management was also authorized, under paragraph 3.1(f)(ii) of the Property
Management Agreement, to settle, compromise, and release actions or suits,
to
recover rents and other sums due and to evict tenants and recover possession
of
properties in the name of the REIT, provided it obtained the REIT’s
authorization. In accordance with this provision, on September 18, 2006,
Hartman
Management sent a letter to the Board requesting approval of the repurchase
of
REIT shares held by LEW Investments, L.P. in order to effectuate a tentative
settlement (authorized by the aforementioned paragraph) negotiated by Hartman
Management. Hartman Management urged the Board to repurchase the shares to
avoid
the addition of the REIT as a party. The Board, without undertaking any
investigation or requesting further information regarding the threatened
action,
disagreed with the recommendation and rejected the repurchase.
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 21
56.
On
the same day, Hartman Management sent a second letter to the Board to apprise
it
of the fact that three REIT shareholders had threatened to file complaints
with
the SEC and NASD unless their shares were repurchased by the REIT at the
market
price of $10.00 per share (the number of shares were 5,189.015, 2,412.893
and
5,873.963, totaling a payment of $134,758.71). Again, the Board disagreed
with
the recommendation and rejected the repurchase without undertaking any
investigation or requesting further information regarding the threatened
action.
PRAYER
FOR RELIEF
Mr.
Hartman and Hartman Management respectfully pray that the Counterclaim
Defendants be cited to appear and answer herein as required by law and that,
upon final trial, they:
1. be
awarded actual and consequential and exemplary damages to which they prove
themselves entitled;
2. attorneys’
fees as permitted by statute;
3. recoverable
costs; and
4. pre-
and postjudgment interest; and
5. such
other and further relief, whether in law or in equity, as they may show itself
to be justly entitled.
Respectfully
submitted,
__________________________________________
PATRICIA
RILEY JORDAAN
SBN:
00784842
2911
Turtle Creek Blvd., Suite 300
Dallas,
Texas 75219
Telephone:
(972) 291-0705
Facsimile:
(972) 291-0715
patricia@jordaanlaw.com
ATTORNEY
FOR ALLEN R. HARTMAN AND
HARTMAN
MANAGEMENT
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 22
Certificate
of Service
This
is to certify that a true and correct copy of the above and foregoing has
been
delivered via facsimile, U.S. Postal Service, Hand-Delivery or e-mail to
all
parties and counsel of record this 28th
day of November, 2006.
__________________________________________
Patricia
Riley Jordaan
DEFENDANT
ALLEN R. HARTMAN AND HARTMAN MANAGEMENT, L.P.’S
ORIGINAL
COUNTERCLAIM AND SUPPLEMENTAL ANSWER -
Page 23
Exhibit A
GOTHAM PARTNERS, L.P.
110 East 42nd Street, 18th Fl.
New York, NY 10017
(212) 286-0300
May 8, 1998
Dear Shareholder:
Ever since Gotham presented its shareholder proposals to First Union,
the Board of Trustees and the Company's management have stopped at nothing
to prevent shareholders from considering our proposals at the upcoming
special meeting.
. Management and the Board of Trustees have attempted unsuccessfully to
deny you the right to vote for an alternative board slate by bringing
State and Federal litigation against Gotham.
. Management and the Board of Trustees have presided over the
destruction of shareholder value and have missed enormous
opportunities because of their stubborn unwillingness to consider a
sale or merger of the Company until the value of the Company's
paired-share structure was rendered worthless.
. Management and the Board of Trustees' actions have led to a dramatic
decline in the Company's fundamental economic performance.
. Management and the Board of Trustees, realizing that their time at the
helm was likely to come to an end, put in force golden parachutes
which will award millions of dollars to senior management in the event
Gotham is successful and the Board does not approve Gotham's nominees.
IS THIS THE MANAGEMENT TEAM AND BOARD OF TRUSTEES THAT YOU WANT TO
REPRESENT YOUR INTERESTS?
We believe First Union shareholders deserve better. By signing and
returning the enclosed White and Blue proxy card, you can help Gotham and
its nominees bring dynamic leadership and a brighter future to First Union.
MANAGEMENT'S RECORD TO DATE
1. Five Years of Woeful Performance
First and foremost is the woeful performance of the Company's existing
management, led by the current Chairman, President and CEO, James
Mastandrea. First Union's stock price is actually lower today ($10 3/8 at
the close on 5/7/98) than it was on the day Mr. Mastandrea signed his
extremely lucrative employment contract ($10 1/2 at the close on 7/19/93).
By comparison, the S&P 500 Index has more than doubled (up 145%) during
this period. Even more glaring is the outperformance of the other
paired-share REITs during this period. The stock price of Starwood Hotels &
Resorts has risen 544%. The stock price of Patriot American Hospitality has
risen 362%. Don't think Mr. Mastandrea has made up for this lack of stock
price performance through dividend growth - the Company's dividend has
actually declined 39% during Mr. Mastandrea's tenure.
<PAGE>
2. Current Management Never Took Advantage of the Company's Paired-Share
Structure. The Cost to Shareholders is Potentially Hundreds of Millions of
Dollars.
The Board of Directors of every other paired-share REIT, when they
became aware of the potential value of the paired-share structure, did the
right thing. They hired a well-regarded investment bank and sought
proposals from potential merger partners, creating tremendous value for
shareholders. To give you one example, Santa Anita Realty Company
shareholders received a more than $200 million premium to the value of the
company's net assets for their paired-share structure. Before First Union's
three dilutive equity offerings, that $200 million would have meant an
$11.00 premium to shareholders on top of the Company's net asset value,
which at the time we estimated to be approximately $10 per share.
Today legislation was approved in the Senate that if enacted would
substantially limit the utility of the paired-share structure. As a result,
it is probably too late to realize significant value from the structure.
Gotham is incredulous that this opportunity has slipped through the fingers
of the Company's leadership, and believes that the current board and
management must be held accountable.
3. Recently Announced 1st Qtr. Results Show a Continuation of Poor
Performance
The Company's First Quarter 1998 Funds From Operations (FFO) declined
50% when compared with the same period last year. Management blamed the
decline on the proxy fight with Gotham. Even excluding the proxy costs,
however, FFO declined 35% when comparing the quarterly results. We believe
it is unlikely for this trend to improve with Mr. Mastandrea in charge.
One notable issue made public in First Union's results was that the
manufacturing division of the Company's parking subsidiary lost nearly
$1,000,000 in the first quarter. For a business that had revenues of
approximately $5,000,000 last year, this is an extraordinarily large
number. When questioned about this loss on a recent Company conference
call, management acknowledged that they know little about managing an
equipment business. The Company later was forced to disclose that the CEO
of the manufacturing subsidiary was Russell Gifford, a Trustee of the
Company and head of the Company's "independent special committee." Mr.
Gifford was forced to step down from this role when his involvement was
publicly disclosed.
4. More of the Same Tired Plans for the Future
What is current management's plan? It seems from the Company's public
statements that current management believes it can keep on purchasing and
managing parking lots despite the tax law change. Management has indicated
that it expects it can get a "carve out" from Congress, allowing First
Union to continue to make parking asset and management acquisitions. We
believe it is unlikely that First Union will get any such special
exemption. While we believe that the selected purchase of parking lots and
parking companies can be good acquisitions for a properly structured REIT
and management company working together, First Union management's history
of overpayment and poor execution is likely only to lead to further
shareholder value destruction.
<PAGE>
5. Management Will Stop at Nothing to Preserve Their Lucrative Employment
Management has made clear that it will do everything possible to
maintain their employment regardless of the cost to shareholders. In a
lawsuit brought against Gotham in Ohio state court, the Company attempted
to take away Gotham's right to make a shareholder proposal, its right to
receive dividends, and its right to vote its shares. If First Union had
been successful in their litigation, you would have no alternative to
management's slate and proposals.
Even the Ohio court, which denied the Company's attempt to enjoin
Gotham from presenting its proposal and nominations to the shareholders,
recognized that senior management's efforts against Gotham were primarily
motivated by a desire to keep their jobs. In the ruling against the
Company, the court made the following statement:
. . . the efforts of First Union's management following Gotham's
July 14, 1997 letter were primarily motivated by a desire to
derail Gotham's efforts to change the Company's course and
replace top management. First Union's management's efforts to
disenfranchise Gotham do not appear to be designed to protect
First Union's REIT status but rather management.
And, just in case the litigation did not work, senior management has
obtained lucrative compensation agreements or modifications to existing
agreements. For instance, changes to Mr. Mastandrea's compensation package
enacted approximately one week before the trial court issued its ruling
against First Union could potentially cost the Company, in the event it is
sold, an additional $8 Million.
GOTHAM HAS PROPOSED A BUSINESS PLAN
CAREFULLY DESIGNED TO REVITALIZE THE COMPANY
We have presented in our proxy statement a detailed business plan for
the Company that we believe will maximize value for all shareholders. Some
of the highlights of our plan are as follows:
. Replace current senior management with capable, intelligent, and
entrepreneurial managers with substantial real estate investment and
operating experience as well as an extensive background in the capital
markets, including public and private equity investing.
. Create a compensation system that aligns management with shareholders.
Senior-level management will be compensated based on their
contribution to improvements in the Company's per-share economic
performance in contrast to the current system which gives management
incentives to increase the total number of shares outstanding and
total FFO without regard to the dilution caused to shareholders.
. Change the Company's corporate structure to permit shareholders to
participate in the purchase of real estate and operating businesses
even if the proposed paired-share legislation becomes law.
<PAGE>
. Acquire private family real estate businesses at sensible prices
through carefully structured acquisitions which offer sellers tax-free
execution, employment for members of their existing management team,
and the benefits associated with share ownership in a Company run for
the benefit of its owners.
. Partner with entrepreneurs who control real estate and
real-estate-intensive operating businesses. Acquire their assets for
UPREIT or stock consideration and form exclusive joint venture
arrangements to pursue future business opportunities taking advantage
of these entrepreneurs' skills and local market knowledge.
Our plan, which is more fully presented in our Proxy Statement, contains
other details on pages four to eight. We encourage you to read our proxy
statement for a more complete description of our proposal.
VOTE TODAY FOR GOTHAM AND AGAINST THE CURRENT BOARD BY COMPLETING, SIGNING
AND DATING THE ENCLOSED WHITE AND BLUE PROXY CARD. VOTE IN FAVOR OF
GOTHAM'S PROPOSAL AND NOMINEES AND VOTE AGAINST THE COMPANY'S PROPOSAL.
Above, we have expressed our views regarding Management and the
Board's performance and our plans for the future. If you have any
questions, please feel free to call us at (212) 286-0300. Ask for Bill
Ackman or David Berkowitz. If you have any questions regarding the voting
of your proxies, please call our proxy solicitor, Beacon Hill Partners, at
(800) 755-5001.
Sincerely,
GOTHAM PARTNERS, L.P.
Exhibit B
Case No.: 347063
FIRST UNION REAL ESTATE ) IN THE COURT OF COMMON PLEAS
EQUITY AND MORTGAGE )
INVESTMENTS, )
Plaintiffs, ) STATE OF OHIO
)
vs. )
)
GOTHAM PARTNERS, L.P., et al., )
)
Defendants )
JUDGMENT ENTRY REGARDING PLAINTIFF'S MOTION FOR
PRELIMINARY INJUNCTION
TIMOTHY J. MCGINTY, J:
----------------------
On JANUARY 16, 1998, the plaintiff herein, First Union Real Estate
Equity and Mortgage Investments ("FIRST UNION"), a publicly traded real
estate investment trust ("REIT") organized pursuant to Ohio law, filed its
complaint for preliminary injunction, permanent injunction and declaratory
relief. The defendants, Gotham Partners, L.P. and Gotham Partners II, L.P.,
limited partnerships organized pursuant to New York law and shareholders of
First Union ("GOTHAM"), filed an answer and counterclaim. The issues addressed
herein pertain exclusively to plaintiff's request for preliminary injunction.
The parties have ably presented their positions in a full evidentiary hearing
and have thoroughly briefed the issues. Both sides have been effectively
represented in two weeks of hearings by highly qualified and experienced counsel
from prestigious law firms.
Pursuant to Ohio Civil Rule 65 and case law expounding its application, the
court's considerations are appropriately focused on the following issues:
1) The likelihood of the movant's success on the merits;
2) Whether there is an adequate remedy at law;
3) Will there be irreparable harm if the injunction is not granted;
4) What injury to the parties and others will be caused by the granting of the
injunction;
5) The public interest that will be served by the granting of the injunctive
relief; and
6) Whether the injunctive relief sought is for the purpose of maintaining the
status quo pending trial on the merits. Diamond Co. v. Gentry Acquisition Corp.
(1988), 48 Ohio Misc. 2d 1, 2 (Cuy. Co. Ct. C. P. 1988).
By making application for injunctive relief -- an extraordinary remedy, Lykins
v. Dayton Motorcycle Club (1972), 33 Ohio App. 2d 269, 269 -- plaintiff has
assumed the burden of establishing by clear and convincing evidence that it is
entitled to such relief. Diamond at 2, citing Southern Ohio Bank v. Southern
Ohio Savings Assn. (1976), 51 Ohio App. 2d 67, 69. As such, plaintiff's burden
of proof to establish the above enumerated issues is "A DEGREE OF EVIDENCE . . .
THAT IS LESS THAN THE DEGREE REQUIRED IN A CRIMINAL CASE BUT MORE THAN THAT
REQUIRED IN AN ORDINARY CIVIL ACTION." Id., citing Household Finance Corp. v.
Altenberg (1966), 5 Ohio St. 2d 190.
<PAGE>
In its motion for preliminary injunction, plaintiff correctly states that
defendants agreed to be bound by the terms of First Union's Declaration of Trust
and By-Laws when they purchased First Union shares. Plaintiff claims that
defendants have breached the contractual obligations that it owes to First Union
and its other shareholders. Gotham's alleged breaches have occurred as a result
of: a) Gotham's proposal to increase the size of First Union's Board of Trustees
and the nomination of a slate of candidates for consideration; b) Gotham's
failure to disclose information requested by First Union; and c) Gotham's
nomination of persons for election to First Union's Board.
Before engaging in a substantive analysis pursuant to Judge James J. McMonagle's
noted Diamond opinion, and to provide the necessary chronology of events, the
parties' history must be reviewed. Currently controlling an approximate $30
million investment in First Union stock, Gotham made its first acquisition of
First Union shares in November 1996. In early to mid June 1997, Gotham, as
required by The Securities Exchange Act of 1934, filed a Schedule 13D with the
Securities and Exchange Commission (the "SEC") disclosing its beneficial
ownership of greater than 5% of the outstanding shares of First Union. 15 U.S.C.
ss. 78m(d). The 13D disclosed other information including that William A. Ackman
and David P. Berkowitz manage Gotham's affairs and the affairs of Gotham's
general partner, Section H Partners, L.P. through two corporations -- Karenina
Corp. and DPB Corp. -- which are the sole general partners of Section H
Partners, L.P.
The 13D further supplied that none of the aforementioned entities that
constitute "GOTHAM" is a party "TO ANY CONTRACT, ARRANGEMENT, UNDERSTANDING OR
RELATIONSHIP WITH RESPECT TO ANY SECURITIES OF [FIRST UNION]" with any other
person or entity. No formal request for further information regarding ownership
was made by First Union at that time.
Dissatisfied with recent decisions of First Union's management, and uncertain of
its ability to maximize its REIT status, Gotham sent a letter to First Union's
Board of Trustees and the Board of Directors of First Union Management, Inc.,
First Union's affiliated management company. The letter, dated JULY 14, 1997,
while openly critical of First Union's management, provided information
regarding accepted alternative management techniques and issued an invitation
for discussion with Gotham. The letter, written by Gotham managing partner,
William A. Ackman, and sent to First Union CEO James C. Mastandrea and First
Union's Trustees was very frank and specifically outlined Gotham's plans and why
they had invested in First Union:
We believe the company has significant unrealized equity appreciation potential
which is unlikely to be realized under the Company's current leadership . . . We
believe it is similarly appropriate for the Board to assess whether existing
management possesses the skills required to implement the Company's intended
strategic plan.
Gotham's letter outlined in detail their four primary reasons for concern
regarding their investment in First Union: I. "MANAGEMENT APPEARS TO HAVE BEEN
UNAWARE OF THE COMPANY'S CORPORATE STRUCTURE"; II. "OVERPAYMENT FOR IMPERIAL
PARKING ACQUISITION"; III. Management has diluted shareholders with poorly
executed equity offerings"; and IV. "MANAGEMENT LACKS THE REQUISITE BACKGROUND
AND EXPERIENCE." Mr. Ackman then urged the First Union Board of Trustees to
consider value maximizing strategies that other pair-share REITs had used with
success. He then accused First's CEO of being, "UNWILLING TO CONSIDER ANY
PROPOSAL TO THE COMPANY WHICH DOES NOT ALLOW HIM TO REMAIN IN CONTROL OF FUR
[FIRST UNION REAL ESTATE]." Mr. Ackman then concluded his nine-page letter by
urging the Board to unlock the tremendous potential value of the Company, "BY
REPLACING MANAGEMENT WITH NEW LEADERSHIP THAT IS COMMITTED TO UTILIZING THE
STAPLE-STOCK STRUCTURE IN AN EFFECTIVE AND VALUE ENHANCING MANNER, HAS RELEVANT,
CREDIBLE EXPERIENCE AND VIEWS SHAREHOLDERS AS AN IMPORTANT CONSTITUENCY, NOT AS
AN ADVERSARY."
First Union management was unwilling to accept Gotham's invitations to meet for
a discussion to address its concerns. JULY 23, 1997 letter from Gotham to Mr.
Mastandrea, CEO; and JULY 15, 1997 First Union press release stating that
Gotham's proposal "SERVES [GOTHAM'S] OWN SHORT TERM PURPOSES" and further
suggesting the Gotham partnerships to be "SHORT-TERM PLAYERS . . . IN IT FOR A
QUICK PROFIT"). The record reflects that Gotham's letters did however prompt
action within First Union management.
First Union's Board of Trustees met on AUGUST 12, 1997. Gotham's July 14 letter
was a topic of discussion at the meeting and First Union decided to demand
certain ownership information of Gotham. First Union states the requests for
information were motivated by a desire to protect its REIT status. Gotham
attributes First Union's actions to management's protective tactics which result
from Gotham's call for replacement of management in Gotham's JULY 14, 1997
letter to the Board. First Union's position is unsupported by the minutes of the
meeting, while First Union Trustee Mr. Conway testified upon deposition that
Gotham's July 14 letter was the catalyst for the request. (Conway Dep. at
17:23-18:15.)
Following the Board's decision to inquire as to Gotham's ownership, on AUGUST
20, 1997, CEO James Mastandrea requested as follows:
[K]indly describe in writing the nature of all such actual, "CONSTRUCTIVE" (as
defined under the Internal Revenue Code) and "BENEFICIAL" (as defined under
Section 13(d) of the Securities Act of 1934) ownership of First Union securities
by [Mr. Berkowicz] . . . , Mr. Ackman, and by any and all Gotham entities,
affiliates and group members. In addition, we are requesting that you provide
detailed information about the legal status, structure and ownership of each
entity, affiliate and group member.
The request for actual and constructive ownership information is consistent with
Section 11.7(FN1) of the Declaration of Trust but redundant as regards
beneficial ownership information which had been provided pursuant to Gotham's
13D filings. The letter also referenced Article 6, Section 6(c) of the
By-Laws(FN2).
<PAGE>
[FN] 1 Section 11.7. Information on Share Ownership Every Beneficiary shall be
obligated to furnish to the Trustees upon demand a written statement disclosing
the actual and constructive (as the terms "ACTUAL" and "CONSTRUCTIVE" are
defined for purposes of the "REAL ESTATE INVESTMENT TRUST" provisions in the
Internal Revenue Code and the regulations proposed or in effect thereunder)
ownership of the shares registered in the name of such Beneficiary. A list of
the Beneficiaries failing or refusing to comply in whole or in part with a
demand of the Trustees for such written statement shall be maintained by the
Trustees as part of the records of the Trust. The Trustees may establish such
requirements as to furnishing of information as to actual or constructive
ownership of shares as they may from time to time deem advisable and may, under
provision in the By-Laws, condition the issuance of certificates and
registration of ownership of shares in the name of any person upon the
furnishing of such information and on such information showing that issuance of
the certificate and registration of such person as a Beneficiary will not, in
the opinion of counsel for the Trust, result in the Trust becoming disqualified
for taxation as a real estate investment trust under the Internal Revenue Code.
2 Section 6. Restrictions on Issuance and Transfer of Securities. c) Ownership
of Securities is conditional upon the owner or prospective owner having provided
to the Trust definitive written information respecting his ownership of
Securities. Failure to provide such information, upon reasonable request shall
result in the Securities so owned being treated as Excess Securities pursuant to
Paragraph b) for so long as such failure continues.
On SEPTEMBER 8, 1997, Gotham replied to the Board's August 20 request by parsing
out, as requested, Gotham's and Gotham II's actual and constructive ownership of
First Union shares and specifically denied that Gotham's management
individually, or through any entity controlled by them, actually, constructively
or beneficially owned any other equity interests in First Union. (PX7).
Information to the same effect as above stated was also filed with the SEC as an
amendment to Gotham's 13(D). (DX13B) Three days after making this response to
First Union the Trust declared a third quarter dividend, payment of which was
received by Gotham on OCTOBER 30, 1997.
Seeking yet greater ownership information, CEO Mastandrea wrote to Gotham on
OCTOBER 7, 1997: "In particular, you are obligated to provide the names of each
and every member of Gotham I and Gotham II, as well as each and every member of
other entities who own First Union stock . . . "
Heretofore unable to satisfy First Union's demands for Gotham's ownership
information through his responses, William A. Ackman, a Gotham managing partner,
called CEO Mastandrea offering cooperation if the CEO would explain the nature
of the information needed and, for the third time, requested to meet with First
Union representatives. According to Mr. Ackman's testimony, it was agreed that
the unsatisfied technical details regarding ownership could be resolved through
both entities counsel. Further, counsel for First Union and Gotham conferred and
agreed that Mr. Mastandrea and Mr. Ackman would meet on DECEMBER 29, 1997 -- Mr.
Mastandrea's first available date -- five and one half months after Gotham's
initial request for such a meeting.
<PAGE>
From late November to JANUARY 1, 1998, little transpired between the parties as
to ownership interest. However, events of significance occurred in the form of a
fourth quarter dividend declaration and Mr. Mastandrea's late-December
cancellation of Gotham's long sought meeting with First Union. No alternative
date for meeting was proposed by Mr. Mastandrea. Gotham's Ackman testified that
he had grown suspicious of Mr. Mastandrea's actual intentions and had used the
month to prepare, with his attorneys, contingency plans in the event that First
Union's CEO was stalling for time and attempting to get past the last possible
date to submit a proposal for presentation at the next annual meeting.
First Union's annual meeting was set for APRIL 14, 1998, with the final date for
shareholder proposals for vote set for January 8. On January 8, Gotham
hand-delivered the notice which lies at the heart of this dispute. The Notice,
in brief, proposes to: 1) nominate three candidates for election to Board seats
whose terms are expiring in 1998; 2) expand the Board by creating six new seats;
and 3) nominate candidates to fill the proposed new positions. The Notice
provided further information as required by First Union's advanced notice
provision. (See, By-Laws Article 1, ss. 7.) The Notice included a request that
"ANY QUESTIONS CONCERNING [THE] NOTICE OR ANY RELATED LEGAL MATTERS BE ADDRESSED
TO GOTHAM'S COUNSEL."
Gotham's JANUARY 8, 1998 proposal not only threatened First Union's existing
management structure, but if passed, would likely result in its ouster. To
contest the validity of Gotham's Notice, First Union mounted a double-pronged
attack on JANUARY 16, 1998. First, it sent Gotham a letter stating that its
Notice was deficient for reasons identified and unidentified, curable and
noncurable. A volley of letters ensued between the parties' attorneys with
Gotham asserting its compliance, attempting to satisfy First Union by providing
greater and greater levels of information and requesting "IMMEDIATE NOTICE" if
the First Union continued to deem the Notice unsatisfactory.
On JANUARY 20, 1998, First Union's Secretary Paul Levin wrote that Gotham's
Notice "CONTINUES TO BE DEFICIENT IN NOT IDENTIFYING LIMITED PARTNERS AND OTHER
BENEFICIARIES AND BENEFICIAL OWNERS WHO SUPPORT GOTHAM'S PROPOSAL AND
NOMINATIONS." (See, PX12.) Gotham reiterated its position that its Notice was
satisfactory, that First Union's notice of deficiencies was flawed, stated that,
"AS OF THE DATE OF THE NOTICE AND AS OF [JANUARY 21], GOTHAM HAS NO KNOWLEDGE OF
ANY BENEFICIARY OR BENEFICIAL OWNER OF ANY SHARES, OTHER THAN THE SHARES
BENEFICIALLY OWNED BY GOTHAM AND GOTHAM II . . . THAT IS KNOWN TO BE SUPPORTING
ITS NOMINATIONS OR PROPOSAL" and requested immediate notification of deficiency
and additional time to cure. (See, PX13.) In the second prong of its attack and
by decision of the Board, First Union filed the within action seeking: a) a
determination that Gotham's approximate 2,500,000 shares are excess and not
entitled to vote; and b) a determination that Gotham's Notice and proposal was a
nullity.
<PAGE>
The relationship between First Union and Gotham is governed by First Union's
Declaration of Trust and By-Laws. First Union claims that Gotham has breached
its obligations to the Trust and seeks a determination by this court that would
totally disenfranchise Gotham of its two and one half million shares thereby
rendering its investment powerless in the upcoming annual meeting. Hence, the
issues presented by First Union in its complaint center on the interpretation of
the Declaration of Trust as a contract. Berry v. McCourt (1965), 1 Ohio App.2d
172, 172 (Franklin Cty. App.).
First Union maintains that Article VI, ss. 6(c) of its By-Laws "AUTOMATICALLY"
renders Gotham's shares as "EXCESS SECURITIES" thereby stripping Gotham of its
proposal and voting rights for the upcoming annual meeting. Article VI, ss. 6(c)
provides:
Ownership of Securities is conditional upon the owner or prospective owner
having provided to the Trust definitive written information respecting his
ownership of Securities. Failure to provide such information, upon reasonable
request shall result in the Securities so owned being treated as Excess
Securities pursuant to Paragraph b) for so long as such failure continues.
Plaintiff claims that it was Gotham's failure to provide ownership information
that automatically triggered this provision. Plaintiff's proof centers on: 1) a
need to abide by ownership limitations imposed by the Internal Revenue Code in
order to maintain its REIT status; 2) First Union's interpretation of Article
VI, ss. 6(c); and 3) a series of letters specific as to the nature of the
information sought but vague as to its actual object.
With regard to First Union's need to abide by ownership limitations, plaintiff
has failed to establish that Gotham has ever owned 9.8% -- the amount necessary
to trigger Article VI, ss. 6 -- of First Union shares. And, if it did own more
than 9.8%, only that percentage that exceeded 9.8% would be excess shares.
Plaintiff's second and third theories of the applicability of the Excess
Securities provision are inconsistent and disingenuous. First Union initially
argues that because Gotham failed to provide "CERTAIN" ownership information,
the Excess Securities provision applies automatically. Not only is such an
interpretation completely contrary to First Union's treatment of the provision
(see, PX15, FEBRUARY 2, 1998 letter from Secretary Levin to Gotham, "[T]HE BOARD
OF TRUSTEES . . . HAS DETERMINED THAT SECURITIES OF FIRST UNION CLAIMED TO BE
OWNED BY YOU CONSTITUTE 'EXCESS SECURITIES'" (emphasis added)), it also flies in
the face of First Union's treatment of other shareholders who are perhaps less
aggressive and threatening to management. (PX35, JANUARY 16, 1998 letters from
Secretary Levin to certain shareholders, in which Levin maintains that the Board
has "BROAD AUTHORITY ... TO TAKE REMEDIAL ACTION" if a shareholder fails to
provide ownership information, including determining that the shares are "EXCESS
SECURITIES.")(emphasis added.) Neither Apollo L.P. or Franklin L.P., both owners
of greater than 5% of First Union, were sent the demands for more specific
ownership information pertaining to their limited partners as was sent to
Gotham. But then, neither Apollo nor Franklin had sent the First Union Board a
letter calling for the replacement of existing management.
<PAGE>
Further, the language of Article VI, ss. 6(c) fails to support a finding that
application of the provision is automatic: "Failure to provide such information,
upon reasonable request shall result in the Securities so owned being treated as
Excess Securities . . . " Where language employed in a contract is clear and
unambiguous on its face, a court may not resort to rules of construction to
ascertain the meaning of the words used. Kelly v. Medical Life Ins. Co. (1987),
31 Ohio St.3d 130, 132. It is a maxim of contract interpretation that words be
given their plain meaning. It is NOT reasonable to interpret as automatic
language that on its face requires the Trust to initiate a request. The request
of the information is a precursor to its application as it is the ultimate
sanction (i.e., classification as "EXCESS" and disenfranchisement).
First Union's third and fourth rationale -- that because Gotham failed to supply
information regarding its limited partners the "EXCESS SECURITIES" provision
applies -- is equally unpersuasive. First, Article VI, ss. 6(c) requires
submission of "DEFINITIVE WRITTEN INFORMATION" upon reasonable request. The
Declaration and By-Laws do not indicate the nature and quality of the
information necessary to satisfy the provision. However, the exhibits discussed
in the chronology, supra, support Gotham's provision of actual, constructive and
beneficial ownership information. They further establish that First Union's
first request for Gotham to identify its Limited Partners came on JANUARY 20,
1998, four days after the filing of the Complaint herein. Prior to that request,
First Union consistently asserted that it was seeking ownership information but
did not specifically indicate that Gotham's response was insufficient for lack
of a list of its limited partners.
First Union's complaint included a second assertion that Gotham's Notice and
proposal violated the following provisions of the Declaration of Trust and
By-Laws: 1) Decl ss. 8.1 provisions for a staggered board; 2) Article 1, ss. 7
provisions for advanced notice information; and 3) Article V1, ss. 6(c), "EXCESS
Securities."
First Union's Board of Trustees is currently comprised of nine individuals
representing three classes (Class 1, Class II and Class III) of three trustees
each. Gotham seeks to take advantage of Decl. ss. 8.1 by increasing the Board to
the maximum capacity of trustees -- 15 -- allowed thereunder. First Union argues
that Gotham is attempting to "PACK" the Board to secure control for itself.
Regardless of their motive, the Declaration expressly authorizes that, "[T]HE
NUMBER OF TRUSTEES SHALL BE NOT LESS THAN THREE NOR MORE THAN FIFTEEN." First
Union offers a 1984 proxy statement in support of its claim that First Union and
its shareholders had "OVERWHELMINGLY APPROVED THE STAGGERED BOARD" with the
intention of preventing "AN OWNER OF A MINORITY INTEREST GAIN[ING] CONTROL OF
THE TRUST THROUGH A PROXY FIGHT WITH A BARE MAJORITY OF SHAREHOLDER votes."
(See, First Union's Memorandum in Support of . . . Motion for Preliminary
Injunction, Tab C.) First Union has failed to address why the shareholders
allowed the Declaration to continue to contain an express provision allowing the
Board to be expanded at a single annual meeting; See, Decl. ss. 8.1; see also,
DiEleuterio v. Cavaliers of Del., Inc. (Del.Ch.Feb. 9, 1987), 1987 WL 6338; and
Larkin v. Baltimore Bancorp (D. Md. 1991), 769 F. Supp. 919, 934. Nor has First
Union dispelled Gotham's contention that by creating two new seats in each of
the three classes, there is no violation of the provision for a staggered board.
<PAGE>
Plaintiff's second argument, that Gotham failed to comply with the advanced
notice procedures required under Article 1, ss. 7, would require plaintiff to
establish that 1) they gave Gotham notice of the deficiencies of their Notice
and 2) that they allowed Gotham an opportunity to cure. First Union's letter of
JANUARY 16, 1998 fails to establish that First Union gave Gotham notice of the
alleged deficiencies since it vaguely references "NONCURABLE" problems. Further,
plaintiff chose to file this action as opposed to allowing Gotham the
opportunity to cure.
With regard to First Union's third argument that the "EXCESS SECURITIES"
provision nullifies the proposal, the court declines further discussion of it as
the issue was thoroughly discussed above.
For the foregoing reasons the court finds that the plaintiff probably cannot
demonstrate by clear and convincing evidence that Gotham violated the
Declaration of Trust and By-Laws for failing to provide ownership information or
for filing a deficient Notice of proposal. The six requirements of Diamond,
supra, are conjunctive.
As First Union has failed to establish its likelihood of success on the merits,
it is unnecessary to consider the remaining five issues. First Union's attempts
to preclude the inevitable proxy contest and possible take over of its current
Board and fear of change in management are understandable; however, actions that
would deprive a shareholder of exercising rights to a $30 million investment
while also depriving other shareholders of the ability to consider valid options
are unlikely to satisfy Diamond's fifth requirement that the public interest
also be served.
Gotham appears to have made reasonable attempts to comply with all of
First Union's demands for information. There is no credible evidence that Gotham
then or now endangered First Union's REIT status. It also appears that this
issue, like the others raised by First Union, are simply pretextual. The
evidence shows that First Union's demand for information exceeded the
requirements of the Internal Revenue Code, its Declaration of Trust and By-Laws.
The evidence adduced at this hearing demonstrated that the efforts of First
Union's management following Gotham's JULY 14, 1997 letter were primarily
motivated by a desire to derail Gotham's efforts to change the Company's course
and replace top management. First Union's management's efforts to disenfranchise
Gotham do not appear to be designed to protect First Union's REIT status but
rather management. All the shareholders should have a fair opportunity to decide
the direction of their corporation at the APRIL 14, 1998 annual meeting.
First Union's Motion for Preliminary Injunction is DENIED.
IT IS SO ORDERED.
/s/ TIMOTHY J. MCGINTY
----------------------------
TIMOTHY J. MCGINTY, JUDGE
DATE: MARCH 27, 1998
Exhibit C-1
Stock
Subscription Agreement
This
Stock Subscription Agreement (this
“Agreement”) is entered into by and between James C. Mastandrea (“Investor”) and
Paragon Real Estate Equity and Investment Trust, a Maryland trust (the
“Company”), as of September 29, 2006.
1. Sale and
Purchase of
Shares. Subject to the terms and conditions set forth in this Agreement,
the
Company hereby sells to Investor, and Investor hereby purchases from the
Company
for investment, 44,444 shares of the Company’s Class C convertible
preferred shares of beneficial interest, $0.01 par value per share (“Stock”),
issuable upon the Company’s receipt of the signed Agreement. As consideration
for the purchase of Stock, Investor hereby agrees to pay to the Company
the sum
of $200,000 (the “Purchase Price”) in the form of services as an officer for the
two-year period beginning September 29, 2006 and ending September 29,
2008. The shares of Stock being purchased by Investor are referred to as
the
“Subscription Shares.” The Subscription Shares will be subject to forfeiture and
restricted from being sold by Investor until the later to occur of:
(i) a
public offering by the Company sufficient to liquidate the
Subscription Shares,
(ii) an exchange of the Company’s existing shares for new shares, and
(iii) September 29, 2008.
(ii) an exchange of the Company’s existing shares for new shares, and
(iii) September 29, 2008.
2. Representation
and Warranty
of the Company. The Company represents and warrants to Investor that the
Subscription Shares, when issued, will be duly authorized and validly issued
by
the Company, but not fully paid and nonassessable until the Company receives
the
Purchase Price from Investor in the form of services as an officer for
the
two-year period.
3. Representations
and
Warranties of Investor. Investor understands that the sale of Subscription
Shares is intended to be exempt from registration under the Securities
Act of
1933, as amended (the “Securities Act”), by virtue of Sections 3(b) and 4(2) of
the Securities Act, and Investor represents and warrants that:
(a) Investor
has been advised that the Subscription Shares have not been registered
under the
Securities Act and, therefore, cannot be resold unless they are registered
under
the Securities Act or unless an exemption from registration is available
and the
certificates representing the subscription shares will be legended accordingly.
Investor is aware that there is a limited market for the resale of the
Subscription Shares, and that he may be required to hold the Subscription
Shares
indefinitely. Investor is purchasing the Subscription Shares for his own
account
for investment and not with a view to, or for resale in connection with,
the
distribution thereof, and Investor has no present intention of distributing
or
reselling the Subscription Shares. Investor represents and warrants that
he has
such knowledge and experience in financial and business matters that he
is
capable of evaluating the merits and risks of such investment and is able
to
bear the economic risk of such investment.
(b) In
addition to any other legends required by any agreement or otherwise, the
certificates representing Subscription Shares shall be conspicuously endorsed
in
substantially the following form:
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A PRIVATE PLACEMENT,
WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”).
NO TRANSFER OF SUCH SECURITIES MAY BE MADE ON THE BOOKS OF THE ISSUER,
UNLESS
ACCOMPANIED BY AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, THAT SUCH
TRANSFER MAY PROPERLY BE MADE WITHOUT REGISTRATION UNDER THE ACT OR THAT
SUCH
SECURITIES HAVE BEEN SO REGISTERED UNDER A REGISTRATION STATEMENT WHICH
IS IN
EFFECT AT THE DATE OF SUCH TRANSFER. IN ADDITION, THE SECURITIES REPRESENTED
BY
THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER PURSUANT TO A
SUBSCRIPTION AGREEMENT DATED
SEPTEMBER 29, 2006.
SEPTEMBER 29, 2006.
(c) Investor
is an “accredited investor” as such term is defined in Rule 501(a) of
Regulation D of the Securities Act.
(d) This
Stock Subscription Agreement has been duly executed and delivered by Investor
and constitutes Investor’s legal, valid and binding obligation, enforceable in
accordance with its terms. If Investor is terminated prior to August 31,
2008, Investor will return a proportionate number of Subscription Shares.
If
Investor dies prior to August 31, 2008, the Investor’s estate will not be
required to return any Subscription Shares and the restrictions will no
longer
apply.
(e) Investor
is a member of the board of trustees of the Company, has made a complete
and
thorough investigation of the affairs and prospects of the Company and
has had a
reasonable opportunity to ask questions of and receive answers from a person
or
persons acting on behalf of the Company concerning this investment, and
all such
questions have been answered to the full satisfaction of Investor.
(f) Investor
acknowledges that the Company is entering into this Agreement in reliance
upon
Investor’s representations and warranties in this Agreement.
4. Covenants
and
Representations to Survive Delivery; Assignment. All covenants, agreements,
representations and warranties made in this Agreement will survive the
delivery
to Investor of the Subscription Shares and payment therefore and,
notwithstanding any investigation previously or in the future made by Investor
or on Investor’s behalf, shall continue in full force and effect. Investor may
not assign any of his rights hereunder. Whenever in this Agreement any
of the
parties hereto is referred to, such reference shall be deemed to include
the
heirs, successors and permitted assigns of such party, and all covenants,
promises and agreements in this Agreement by or on behalf of the Company,
or by
or on behalf of Investor, shall bind and inure to the benefit of the heirs,
successors and permitted assigns of such party hereto.
2
5. Governing
Law;
Amendments. This Stock Subscription Agreement shall be construed and
enforced in accordance with the domestic substantive laws of the State
of
Ohiowithout giving effect to any choice or conflict of laws provision or
rule
that would cause the application of the domestic substantive laws of any
other
state. This Agreement cannot be changed orally, and can be changed only
by an
instrument in writing signed by the party against whom enforcement of such
change is sought.
In
Witness Whereof,
the parties have executed this
Agreement as of the date written above.
Paragon
Real Estate Equity and Investment
Trust
|
Signed:
|
/s/ Daryl J. Carter
|
|||
|
|
Organization and Compensation Committee | |||
|
|
||||
|
Signed:
|
/s/ James C. Mastandrea | |||
|
|
||||
|
|
By James C. Mastandrea |
3
Exhibit C-2
RESTRICTED
SHARE AGREEMENT
The parties,
PARAGON
REAL ESTATE EQUITY AND INVESTMENT TRUST, a Maryland real estate investment
trust
(the “Trust”), and
(“Trustee”) agree to enter into this restricted share agreement (“Agreement”),
made at Cleveland, Ohio, this 29th day of September, 2006.
WITNESSETH:
WHEREAS:
The
Trust is
a publicly traded real estate company;
WHEREAS:
The
Trust
desires to substantially grow the asset base, net operating income, funds
from
operations, net value, and share value of the Trust;
WHEREAS:
The
Trust
seeks to retain the leadership experience, talent, and relationship of
the
Trustee;
WHEREAS:
The
Trustee
is a trustee of the Trust and intends to remain as a trustee until not
re-elected;
WHEREAS:
The
Trust and
the Trustee desire to enter into this Agreement;
NOW,
THEREFORE, the
Trust and the Trustee have agreed to be bound by the terms and conditions
of
this Agreement:
1) GRANTING
OF
RESTRICTED SHARES. The Trust will issue to the Trustee a total of
12,500 restricted shares of the Trust’s Class C Convertible Preferred
Shares (“Restricted Shares”) for his services as a trustee of the Trust for the
period beginning as of the date of this Agreement through September 29,
2008.
2) RESTRICTIONS
ON THE SHARES. In accordance with the terms of the certificate of
designation of the Restricted Shares, the holder of any Restricted Shares
will
at all times be entitled to vote the Restricted Shares and to receive any
dividends declared on the Trust’s Class C Convertible Preferred Shares. In
addition, the holder of any Restricted Shares may transfer the shares to
any
affiliate of the Trustee subject to the forfeiture and other provisions
of this
Agreement. However, the holder of any Restricted Shares may not otherwise
transfer, sell, assign or dispose of any of the Restricted Shares until
they
have vested as provided for in this Agreement; provided further, that
notwithstanding whether or not some or all of the Restricted Shares have
vested
as provided for in this Agreement, the holder of any Restricted Shares
may not
transfer or sell any of the Restricted Shares until the second anniversary
of
the date of this Agreement. The term “affiliate” shall have the meaning ascribed
to it in Rule 12b-2 promulgated by the Securities and Exchange Commission.
3) VESTING
OF
RESTRICTED SHARES. The Restricted Shares will vest upon the latest to
occur of:
(a) a public offering
by the
Company sufficient to liquidate the Restricted Shares,
(b) an exchange of
the Company’s
existing shares for new shares, and
(c) September 29, 2008.
The vesting schedule
shall not be affected if the Trustee dies. The holder of the Restricted
Shares
will automatically and without notice be forfeited and cease to have any
right,
title or interest to any of the Restricted Shares that remain subject to
forfeiture immediately if the Trustee resigns from being a member of the
Board
of Trustees of the Trust prior to
September 29, 2008.
September 29, 2008.
4)
TAXES. Under the general rule of Section 83 of the Internal
Revenue Code (the “Code”), the Trustee will not be treated as receiving the
Restricted Shares until such time as he becomes substantially vested in
the
Restricted Shares. The Trustee will become substantially vested in the
Restricted Shares upon the occurrence of the latest event described in
Section 3 above. At that time, he will be taxed on the value of the
Restricted Shares as ordinary compensation income. As an exception to this
rule,
Section 83 of the Code permits the Trustee to elect to be taxed on the
value of the Restricted Shares as of the date of the grant of the Restricted
Shares. The §83(b) election must be filed by the Trustee within 30 days of
the grant of the Restricted Shares. The filing must be made with the Internal
Revenue Service Center with which the Trustee files his federal income
tax
returns and a copy of the election must be submitted with his income tax
return
for the taxable year in which he receives the Restricted Shares and to
the
Trust.
5)
REPRESENTATIONS OF THE TRUSTEE. The Trustee understands that the
issuance of the Restricted Shares is intended to be exempt from registration
under the Securities Act by virtue of §4(2) and represents and warrants that:
(i) he is aware that the Restricted Shares are not registered under the
Securities Act or the securities or “blue sky” laws of any state or
jurisdiction; (ii) he understands that the Restricted Shares cannot be
resold unless they are registered under the Securities Act or unless an
exemption from registration is available and represents that he is acquiring
the
Restricted Shares for investment and not for immediate resale; and (iii) he
acknowledges that the Restricted Shares will be treated as taxable income
to him
under the Code.
7)
MISCELLANEOUS. This Agreement may only be modified, waived, or
discharged if approved by the Board and agreed to in writing and signed
by the
Trustee and the Trust. This Agreement shall inure to the benefit of the
Trustee
and his heirs and legal representatives. No waiver by any party hereto
at any
time of any breach by the other party of, or compliance with, any condition
or
provision of this Agreement to be performed by such other party shall be
deemed
a waiver of similar or dissimilar provisions or conditions at the same
time or
at any prior or subsequent time. No agreement or representation, oral or
otherwise, expressed or implied,
2
with respect
to the
subject matter hereof, has been made by any of the parties which is not
set
forth expressly in this Agreement. This Agreement shall be governed by
and
construed in accordance with the laws of the State of Ohio. In the event
legal
action is instituted to enforce any provision of this Agreement, each party
shall pay its own cost and expense thereof. This Agreement constitutes
the
entire agreement between the parties with the subject matter hereof and
all
prior negotiations, discussions, and agreements on that subject matter
are
hereby superseded. This Agreement may be executed in one or more counterparts,
any one of which need not contain the signatures of more than one party,
but all
such counterparts taken together, when executed and delivered, will constitute
one and the same instrument.
8) NO
PERSONAL
LIABILITY. Notwithstanding anything herein to the contrary, this
Agreement is made and executed on behalf of the Trust, a real estate investment
trust organized under the laws of the State of Maryland, by its officers
thereof
on behalf of the trustees thereof, and none of the trustees or any additional
or
successor trustees hereinafter appointed, nor any beneficiary, officer,
employee
or agent of the Trust will have any liability hereunder in his personal
or
individual capacity, but, instead, all parties will look solely to the
property
and assets of the Trust for satisfaction of claims of any nature arising
under
or in connection with this Agreement.
IN WITNESS
WHEREOF, this Agreement has been signed by the Trust and the Trustee as
of the date first above written.
PARAGON REAL
ESTATE
EQUITY AND INVESTMENT TRUST
|
By:
|
/s/ James C. Mastandrea
|
|||
|
|
The Board of Trustees |
|
Name:
|
||||
|
Title:
|
Trustee | |||
3
Exhibit C-3
AMENDMENT
TO
ADDITIONAL CONTRIBUTION AGREEMENT
BETWEEN
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
AND
MEMBERS OF THE BOARD OF TRUSTEES
TO
ADDITIONAL CONTRIBUTION AGREEMENT
BETWEEN
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
AND
MEMBERS OF THE BOARD OF TRUSTEES
The parties,
Paragon
Real Estate Equity and Investment Trust, a Maryland business trust (formerly,
Stonehaven Realty Trust, the “Trust”); the members of the Board of Trustees (the
“Trustees”), and each of the individual Trustees (a “Trustee”) presently Daryl
J. Carter (“Carter”), John J. Dee (“Dee”), Daniel G. DeVos (“DeVos”), Paul T.
Lambert (“Lambert”), James C. Mastandrea (“Mastandrea”), and Michael T. Oliver
(“Oliver”); and Paragon Real Estate Development, LLC (“Paragon Development”);
agree to amend the Additional Contribution Agreement dated March 4th,
2003 (“Agreement”), made at Cleveland, Ohio, this 29th day of
September, 2006 (“Amendment”), between and the Trust and the Trustees.
WITNESSETH:
WHEREAS:
The
Trust is
a public traded real estate company;
WHEREAS:
The
Trust
desires to substantially grow the asset base, net operating income, funds
from
operation, net value, and the share value of the Trust;
WHEREAS:
The
Trust
seeks to continue the leadership experience, talent, and relationships
of the
Trustees;
WHEREAS:
The
Trustees
intend to find deals to contribute to the Trust;
WHEREAS:
The
Trust,
the Trustees, Mastandrea and Dee individually and as Trustees, and Paragon
Development desire to amend this Agreement; and
WHEREAS:
Capitalized
terms not otherwise defined in this Amendment will have meanings assigned
to
them in the Agreement;
NOW,
THEREFORE, the Trust, the Trustees, Mastandrea and Dee
individually and as Trustees, and Paragon Development have agreed to be
bound by
the following amendments to the terms and conditions of the Agreement:
| 1) | PARTICIPATION BY TRUSTEES IN THE AGREEMENT. The Trustees will participate in the Sponsor’s Equity and the Common Shares will be allocated to the individual Trustee who procures a Real Estate Transaction for the Trust. |
| 2) | MASTANDREA AND DEE. Mastandrea and Dee will continue to participate in the Sponsor’s Equity and the Common Shares will be allocated to Paragon Development only if Mastandrea and Dee, either as officers of the Trust or as Trustees of the Trust, procure a Real Estate Transaction for the Trust. Mastandrea and Dee will not receive any Sponsor’s Equity or Common Shares for a Real Estate Transaction procured by another Trustee. | ||
| 3) | ALLOCATION AND FORMULA FOR EARNING COMMON SHARES. The following phrase will be added to the Agreement, at the end of the first paragraph of the first numbered section for clarification: |
“(iii)
and then, from the result, deducting the acquisition price of the Real
Estate
Transaction.”
IN WITNESS
WHEREOF, this Agreement has been signed by the parties, as of the date
first above written.
PARAGON REAL
ESTATE
EQUITY AND INVESTMENT TRUST
|
By:
Title: |
/s/ James C. Mastandrea
|
|||
|
|
Chairman of the Board of Trustees | |||
|
|
||||
|
|
/s/ Daryl J. Carter | |||
|
|
||||
|
|
DARYL J. CARTER, Trustee | |||
|
|
||||
|
|
/s/ John J. Dee | |||
|
|
||||
|
|
JOHN J. DEE, Individually, and as a Trustee, and for | |||
|
|
PARAGON REAL ESTATE DEVELOPMENT, LLC | |||
|
|
||||
|
|
/s/ Daniel G. DeVos | |||
|
|
||||
|
|
DANIEL G. DEVOS, Trustee | |||
|
|
||||
|
|
/s/ Paul T. Lambert | |||
|
|
||||
|
|
PAUL T. LAMBERT, Trustee | |||
|
|
||||
|
|
/s/ James C. Mastandrea | |||
|
|
||||
|
|
JAMES C. MASTANDREA, Individually, as a Trustee, and for | |||
|
|
PARAGON REAL ESTATE DEVELOPMENT, LLC | |||
|
|
||||
|
|
/s/ Michael T. Oliver | |||
|
|
||||
|
|
MICHAEL T. OLIVER, Trustee |
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