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CAPITAL REALTY INVESTORS TAX EXEMPT FUND L.P. v. D

October 15, 1996

CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP, et al., Plaintiffs, against DOMINIUM TAX EXEMPT FUND L.L.P., et al., Defendants.


The opinion of the court was delivered by: KAPLAN

 LEWIS A. KAPLAN, District Judge.

 Plaintiffs Capital Realty Investors Tax Exempt Limited Partnership and Capital Realty Investors Tax Exempt Fund III Limited Partnership (the "Funds") are publicly traded real estate limited partnerships. They are parties to merger agreements with affiliates of plaintiff Capital Apartment Properties, Inc. ("CAPREIT") and they have been soliciting proxies since September 23, 1996 for approval of the mergers at security holder meetings scheduled for October 29, 1996.

 Defendant Dominium Tax Exempt Fund L.L.P. ("Dominium"), a thus far unsuccessful contestant for control of the Funds, is seeking to defeat the proposed mergers in order to preserve the possibility that it will make a bid of its own. Plaintiffs claim that it has violated the proxy rules in doing so and move for a preliminary injunction.

 Facts

 Background

 The Funds' involvement with Dominium and the current lawsuit are but the latest chapter in a long saga, much of the background of which is described in two opinions in a prior lawsuit. Capital Real Estate Investors Tax Exempt Limited Partnership v. Schwartzberg, 917 F. Supp. 1050 (" CRITEF I "), and 929 F. Supp. 105 (" CRITEF II ") (S.D.N.Y. 1996). Briefly stated, the Funds have been trying to merge with CAPREIT affiliates for many months. They have met a number of obstacles along the way including a dispute with Martin Schwartzberg, a former partner of the principals of the Funds' general partners, *fn1" and extensive class action litigation in the Delaware Court of Chancery. The proposal now on the table calls for an aggregate merger price of $ 162.3 million, which would net $ 160.7 million for the Funds' security holders.

 During much of the past year, Dominium has explored the possibility of acquiring the Funds. In June and July 1996, it indicated an interest in mergers for aggregate net consideration to the Funds' security holders of $ 165.3 million. In August, however, it acknowledged that it was not in a position to provide evidence of its ability to finance or finalize its proposals. As far as the record discloses, its ability to do so is no better today than it was in August.

 There is little doubt that Dominium is seeking to delay or defeat the proposed mergers in the hope that it somehow will obtain the wherewithal to acquire control of the Funds or that it will make such a nuisance of itself that CAPREIT or the Funds will pay it to go away. Much more could be said concerning the complex background of this action. At this point, however, there is no need for a more extensive discussion save for a description of the particular Dominium communications and the preliminary proxy statement that are the foci of this motion.

 The Dominium Solicitations

 The September 27 Letter

 On September 27, 1996, prior to filing preliminary proxy materials with the Securities and Exchange Commission ("SEC"), Dominium sent a letter to holders of the Funds' securities (the "First Letter") urging them to withhold proxies on the mergers pending recommendations by Dominium that it said would follow shortly:

 
"We urge you not to take any action [on the Funds' request for proxies] until you have received and carefully considered the recommendations we will be sending you shortly.
 
"We are an established real estate company which feels that the proposed merger as currently structured does not maximize BAC Holder*fn2" ] value. In order to do so, we believe an open, fair and competitive environment needs to exist. We would like to participate in such a process and provide alternatives which we believe can deliver greater value to all.
 
* * *
 
"We believe there are alternatives which are superior to the proposed merger and we will shortly be sending you additional materials which will detail these alternatives."

 The Letter did not disclose Dominium's previous attempts to acquire the Funds or its prior inability to obtain financing. Nor did it disclose that its own previous unfinanced -- and therefore unsuccessful -- proposal would have yielded BAC holders $ 165.3 million as compared with the $ 160.7 million proposed by CAPREIT.

 The October 1 Press Release

 On October 1, 1996, Dominium issued a press release announcing that it had filed preliminary proxy materials with the SEC. It went on to make negative comments about the proposed mergers and stated:

 
"The holders will only receive the true value of their investment through an open, fair and competitive process, a process which the general partners have vigorously resisted.
 
"* * * CAPREIT's offer provides the security holders with approximately $ 160 million, a price which Dominium believes is grossly inadequate." (Internal quotation marks omitted)

 The press release, like the First Letter, did not disclose the reason for Dominium's interest in the situation or its prior actions. Nor did it disclose that the $ 160 million merger price (actually a net of $ 160.7 million) that it characterized as "grossly inadequate" was only $ 4.6 million, or 2.8 percent, less than the ...


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