Apple REIT Ten Can’t Dodge Claims Over $1.3B Merger

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By Michael Greene

Nov. 2 — Apple REIT Ten Inc.'s merger with Apple Hospitality REIT Inc. can be challenged by an investor who held shares in both companies, a federal judge said( Quinn v. Knight , 2016 BL 364504, E.D. Va., No. 3:16-cv-610, 11/1/16 ).

The investor, James Quinn, can bring a derivative action on behalf of Apple Ten, the U.S. District Court for the Eastern District of Virginia ruled Nov. 1.

Judge John A. Gibney Jr. said the court couldn’t find any authority stating that stock ownership in both sides of a merger prevents a shareholder such as Quinn from bringing a derivative action.

A shareholder derivative lawsuit is one brought by a shareholder on the corporation’s behalf, typically against an officer or director.

The court also determined that Quinn could sufficiently represent the interests of Apple Ten despite owning more Apple Hospitality stock than Apple Ten stock prior to the merger.

“Quinn’s economic interests do not create conflicting economic antagonisms which prevent him from adequately representing the interests of Apple Ten,” Gibney said.

‘Fully Informed’ Shareholders?

Apple Hospitality, a Richmond, Va.-based real estate investment trust (REIT), acquired Apple Ten in September for cash and stock.

In his lawsuit, Quinn claimed that transaction was riddled by conflicts. He said that deal was pushed through by officers and directors of the companies who stood to gain millions of dollars in special compensation.

The $1.28 billion merger—which created a combined entity that owns a portfolio of 236 upscale, select service hotels—was approved by a majority of shareholders of both companies.

Under Virginia law, shareholder ratification of a merger can prevent shareholders from challenging a transaction.

However, the federal court in addressing an issue that hasn’t been considered by the Virginia Supreme Court, determined that shareholders must be “fully informed” about a transaction in order for the ratification defense to apply.

Apply the Delaware ruling, the court found that Quinn had adequately alleged that shareholders weren’t provided complete information about deal and the defendants’ financial interests.

The court in reaching its ruling cited the Delaware Supreme Court’s 2015 ruling Corwin v. KKR Financial Holdings LLC, 2015 BL 323544.

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

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