A group of investors in three non-listed real estate investment trusts sponsored and advised by affiliates of David Lichtenstein’s The Lightstone Group LLC have filed a class-action lawsuit in New Jersey federal court, alleging they and potentially thousands of other investors were misled into approving charter amendments that blocked the liquidation of their investments.
The suit, filed against Lightstone Value Plus REIT I, II, and III; their external advisers Lightstone Value Plus REIT LLC, Lightstone Value Plus REIT II LLC, and Lightstone Value Plus REIT III LLC; and their 2022 directors Yehuda I. Angster, Howard E. Friedman, Alan Retkinski, George R. Whittemore, and Lichtenstein claims the REITs failed to disclose crucial information about the proposed amendments.
The investors argue that the amendments, which granted the REITs more power to indemnify officers and directors, were pushed through with incomplete and misleading proxy statements. These amendments, they claim, have effectively prevented them from realizing the value of their investments.
The lawsuit seeks damages for breach of fiduciary duty and breach of contract.
As previously reported by The DI Wire, the charter amendments pursued in fall 2022 included eliminating durational provisions that require the Lightstone REITs to seek a listing on a national stock exchange by their respective eighth or 10th (in the case of Lightstone II) anniversaries of the termination of their respective public offerings, or otherwise seek liquidation. The Lightstone REITs’ respective boards of directors noted that elimination of the deadline to liquidate and dissolve the programs was advisable to allow flexibility in pursuit of liquidity to stockholders.
According to SEC filings, the changes affecting shareholder rights that were rescinded by the 2023 charter amendments also included:
- Eliminating fiduciary duties that the boards owe to the Lightstone REITs and shareholders, and the directors’ fiduciary duties to supervise the relationships of the Lightstone REITs and their external advisers;
- Eliminating certain protections in the event of a roll-up transaction, including appraisal rights for shareholders, and the ability to retain securities in their previous entity or receive cash in lieu of securities in another entity;
- Eliminating quorum requirements of at least 50% of all votes entitled to be cast at a stockholder meeting, and permitting reduction of the votes required for quorum to as little as 33% of votes entitled to be cast;
- Replacing provisions permitting any shareholder to receive a shareholder list for non-commercial purposes with a requirement that, to receive a copy of the shareholder list, a shareholder must have owned at least 5% of the outstanding stock of any class of shares for six months or more; and
- Expanding each REIT’s ability to exculpate and indemnify officer and directors, and advance defense expenses in the case of litigation, to the maximum extent permitted by Maryland law.
According to the complaint, investors said the 2022 filings were particularly misleading because they “omitted material facts concerning [Lichtenstein’s] direct financial interest in continuing the Lightstone REITs’ duration indefinitely, in order to monetize his own subordinated equity investment in each of the Lightstone REITs… [The equity], potentially worth $59.8 million or more, would have been worthless if the Lightstone REITs had liquidated during 2024-25 (as was required by the pre-amendment charters of REITs II and REIT III).”
The Lightstone Value Plus REIT I shareholders voted to approve the charter amendments in December 2022 without knowing about this conflict of interest, they said. The shareholders of the other REITs voted to approve the charter amendments in January 2023, according to the complaint.
The shareholders alleged that, due to the charter amendments, “the net asset value of the Lightstone REITs have languished,” and Lichtenstein collected more than $7 million in management fees in 2023.
The REIT directors also aren’t interested in liquidation, the investors claimed. Each of the Lightstone REITs stated in their respective 2023 annual report on Form 10-K: “We may seek to list our common shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our common shares at this time.”
Plaintiffs in the lawsuit seek the following relief: class action certification; rescission and unwinding of the 2023 charter amendments; a declaration that the directors breached their fiduciary duties to the plaintiffs and class; a declaration that defendants breached the terms of their charters and violated the implied duty of good faith and fair dealing; compensatory damages in an unspecified amount; costs, attorneys’ fees, experts’ fees; and other equitable relief.
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