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May 2, 2000


The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.


Battles for corporate control during the 1970's and `80's frequently included lawsuits by takeover targets claiming that potential aggressors had violated Section 13(d) of the Securities Exchange Act of 1934*fn1 (the "Exchange Act") by failing accurately to disclose the motives for their purchases of the targets' shares and the membership of alleged groups of allies working together to achieve the common goal of taking over the target. For reasons that need not be detailed here, such actions have become rare. But this case brings to mind Yogi Berra's immortal line, "This is deja vu all over again."

Here, plaintiff Hallwood Realty Partners, L.P. ("Hallwood"), a publicly traded real estate investment trust, charges that defendants Gotham Partners, L.P. and Gotham Partners III, L.P. (collectively, "Gotham") have acquired a 14.82 percent interest in Hallwood pursuant to a plan to take control of and fundamentally change or liquidate Hallwood, that the defendants together hold about 40 percent of Hallwood and are acting secretly as a group to accomplish this end, and that all of the defendants have violated Section 13(d) in a variety of respects. They claim also that defendants have triggered Hallwood's "poison pill" and seek declaratory relief as well as a broad injunction requiring defendants to, inter alia, divest their Hallwood units and make corrective disclosures. The matter is before the Court on motions to dismiss the complaint and for other relief.*fn2



Hallwood is a limited partnership that acquires, owns and operates commercial real estate in the United States. Its units are traded on the American Stock Exchange

Defendants Gotham Partners, L.P. and Gotham Partners III, L.P. both are limited partnerships based in New York. Defendants Private Management Group, Inc. ("PMG") and EFO Realty, Inc. ("EFO") are California and Texas corporations, respectively. Gotham, PMG and EFO all are investment companies that invest in real estate-related businesses. Defendant Interstate Properties is a New Jersey-based general partnership of which defendant Stephen Roth is a general partner. It is in the real estate business.

Gotham's Purchases of Hallwood Units and the Delaware Litigation

Gotham began purchasing Hallwood units in the open market in or about 1995. In December 1995, after accumulating more than 5 percent of the outstanding units, it filed a Schedule 13D with the Securities and Exchange Commission (the "SEC") in which it stated that it had acquired the units "for investment purposes." It continued buying and amending its Schedule 13D over the ensuing ten months, amassing 14.82 percent of the units by October 1996. Throughout this period, its Schedule 13D consistently stated that the acquisitions were for investment purposes. For a considerable period, Gotham disclosed no plans or purposes in making the purchases apart from indicating that it would evaluate the investment from time to time and might buy or sell Hallwood units in the future. In June 1997, however, Gotham amended its filing to reveal that it would seek to remove Hallwood's general partner.

In 1997, Gotham sued Hallwood and certain of its affiliates, officers and directors in the Delaware Chancery Court. It alleges breaches of fiduciary duty, breaches of the partnership agreement, and other claims. The case remains pending.

Other Purchasers of Hallwood Units

Gotham and PMG were not alone. In November 1998, Interstate filed a Schedule 13D disclosing that it had acquired 5.7 percent of the outstanding units. In its latest filing, it disclosed ownership of a total of 8 percent of Hallwood. At no time, however, did it disclose any arrangement or understanding it may have had with any other unit holder concerning any plan or purpose to act in concert with such other holder to change or influence the control of Hallwood. Moreover, its general partner, Stephen Roth, allegedly has acquired, directly or indirectly, beneficial ownership of an additional 5.5 percent of the units.*fn4

Finally, EFO allegedly has acquired, directly or indirectly, at least 2 percent of Hallwood's units, although it has filed no schedules under Section 13(d).

The Group Allegations

The complaint alleges that Gotham has been planning a takeover of Hallwood from the beginning and that its accumulation of Hallwood units, the Delaware lawsuit against its management, and the solicitation of allies all are parts of its campaign.*fn5 It asserts that all of the defendants "have formed a group with the express plan and purpose of acquiring control of Hallwood and substantially altering Hallwood's business and operations."*fn6 These allegations rest on a number of subsidiary premises.

First, the complaint contends that Gotham has acted here pursuant to a modus operandi that it has followed in the past. It asserts that an article in the summer 1999 issue of M&A Journal, entitled The Ugly Battle to the Death for the Last Paired-Share REIT, revealed that Gotham previously took control of another company, First Union, by initially accumulating First Union shares, then suing First Union and its management, and then collaborating with other First Union shareholders to accomplish the takeover.*fn7 The article, which is an exhibit to Gotham's motion papers, suggests that Gotham schemed to take over First Union without paying a control premium and violated Section 13(d) of the Exchange Act in doing so by, among other things, forming a group with other investment companies to effect the takeover without making the required disclosures.*fn8

Second, Hallwood points out that there is a substantial reason for one seeking control to act covertly with a group. Hallwood has a rights plan, or poison pill, that would be triggered if any one unit holder, or group acting in concert, acquired beneficial ownership of more than 15 percent of the units. If the pill were triggered, the value of the units would be significantly diluted.*fn9 Thus, it would be to the advantage of Gotham or anyone else seeking control to limit its disclosed beneficial interest in Hallwood units to less than 15 percent — as Gotham has done — while covertly acting together with other similarly minded investors.*fn10

Third, Hallwood asserts that PMG and Interstate have been actively involved in prior investments with Gotham or its principals, that principals of Gotham have long-standing personal relationships with Interstate's Roth, that William A. Ackman and other Gotham principals have communicated repeatedly with PMG and Interstate in order to entice them into buying significant stakes in Hallwood, and that the PMG and Interstate purchases were part of that effort.*fn11 They allege similar circumstances involving EFO, whose principals, including Christopher Mahowald, knew Gotham, had extensive discussions with Gotham and PMG concerning Gotham's plans for Hallwood in the event of a successful takeover, and which ultimately decided to join the group.*fn12 Indeed, EFO is alleged to have prepared and distributed an Investment Recommendation touting investment in Hallwood and seeking to enlist others to join the Gotham-led takeover.*fn13

The complaint asserts that "all defendants have agreed that after a takeover, they should act quickly to realize the net asset value of Hallwood by liquidating Hallwood's real estate holdings, selling Hallwood as a whole to another real estate operating company or inserting new management to recapitalize the Company. . . ."*fn14 Hallwood maintains that the alleged Gotham group now controls ...

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