Am posting the whole article as some might nave a WSJ sub.
Some preferred shareholders in hotel owner Equity Inns were hoping that a $2.2 billion acquisition by a Goldman Sachs Group Inc. GS +1.03% real-estate fund would mean a nice payout alongside the common stockholders, who got a hefty premium.
Instead the value of the preferred shares has plunged. Goldman says that is because the preferred shareholders didn’t read the small print. The investors say it is because the company and Goldman overstepped their authority.
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At the heart of the dispute is a reorganization from the 2007 acquisition. Equity Inns exchanged the publicly traded preferred shares for unlisted ones. Preferred shares get preference over common shares in a liquidation but they usually lack voting rights.
The company also stopped filing financial reports and a few months later, it suspended the dividend paid to preferred shareholders.
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Preferred shares were trading above $25 at the time of the merger’s announcement and fell as low as 5 cents each in 2009. Now they’re worth around $9 each.
A Goldman spokeswoman said the risk was spelled out in the company’s preferred shareholders’ prospectus. The documents say that these investors could lose their “protection in the event of a highly leveraged or other transaction, including a merger” or sale that “might adversely affect” the preferred shareholders.
Preferred shareholders, however, are crying foul. They say that the hotel company had no authority to convert publicly listed preferred shares to unlisted preferred shares that are worth less because of their illiquidity.
They’re also unhappy because a Goldman affiliate purchased two million preferred shares last year when the shares were trading on the OTC Bulletin Board at around $4 per share. They say that is not fair because Goldman has better access to the company’s financial information than they do. Goldman declined to comment on those shareholder complaints.
“When shareholders need to sell, the only buyers are the corporate insiders who know what is actually happening inside the company,” Georgetown University finance professor James Angel, a preferred shareholder, wrote to the Securities and Exchange Commission.
The issue has heated up in recent weeks because the SEC, at the hotel company’s request, is considering whether to instruct the hotel company to start filing financial reports for the benefit of the preferred shareholders. An SEC spokeswoman declined to comment on the status of the case.
The dust-up is the latest example of the hazards that sometimes face preferred shareholders. They typically get paid before common shareholders when things go wrong. But they can find themselves stuck when things go right and the company attracts a new owner.
In 2009, after private-equity firm Green Courte Partners acquired American Land Lease Inc., a manager of residential land-lease properties, it stopped providing financial information to the preferred shareholders. DRA Advisors suspended the preferred shareholders’ dividend after taking over CRT Properties Inc., which owned 137 office buildings, in 2005. The companies didn’t respond to requests for comment Wednesday.
In the case of Equity Inns, some shareholders acknowledge they should have paid closer attention to the reorganization. “Most of the shareholders were inert,” Mr. Angel says. “As long as we’re being paid dividends, what’s there really to worry about?”
Based in Germantown, Tenn., Equity Inns was founded in 1993 and grew to become the third-largest U.S. hotel real-estate investment trust. With about 130 properties in 35 states, it owned a mix of extended-stay and select-service hotels carrying names such as Marriott Courtyard and Residence Inn.
The REIT issued a series of preferred shares to raise money for acquiring many of these hotels, and at one point the preferred shares accounted for about a third of the company’s total shareholder equity.
In June 2007, one of Goldman’s Whitehall funds agreed to acquire the company, offering common stockholders 19% more than the share price at the time. A few weeks later, Equity Inns said the preferred shares, which traded on the New York Stock Exchange, were being swapped for unlisted preferred stock in the new company.
Some preferred shareholders sued in Tennessee court in 2007, claiming the board breached its fiduciary duty to the preferred holders by causing their shares to fall in value. They weren’t able to block the acquisition. But in April, a Memphis court approved a class-action status for the lawsuit. The company said it believed the lawsuits were without merit.
The company has argued that it doesn’t need to submit financial reports to the SEC partly because there is a “limited trading interest in the Company’s preferred stock.”
This frustrates the preferred shareholders who claim that the limited trading is largely because the company makes it so difficult for the public to obtain financial information. For preferred holders to get data, they have to make a written request, pay a small fee and agree that all company information remain confidential.
Those conditions discourage outsiders from buying shares in a company where basic financial information is unattainable, “either independently or from a shareholder interested in selling,” Charles Reaves, an attorney who represents a preferred owner, wrote to the SEC.
The hotel company also has told the SEC that it shouldn’t have to file financial reports because the company has fewer than 300 shareholders. That falls below the usual SEC threshold for public filings.
One of the preferred shareholders is responding by creating 300 separate trusts to hold his preferred shares. He argues that should qualify the company for reporting.
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