Gotham Golf merger hits snag in court

Golf Course News, Jan 2003 by Rice, Derek

NEW YORK - The long-- planned and now shareholder-approved merger between First Union Real Estate Equity and Mortgage and Hershey, Pa.-based Gotham Golf Corp. hit a snag in early December when the New York Supreme Court for New York County granted an injunction blocking the transaction.

At issue is compensation for preferred shareholders vs. that for common shareholders. One preferred shareholder, George Kimeldorf, filed a lawsuit in April seeking class-action status.

Under the original plan, First Union shareholders who opted to receive all cash for their common shares would be paid $2.33 a share. Those who opted to receive cash and an interest in a note would receive $1.98 and 1/174th of a note with face value of $100.

The problem with that deal, Kimeldorf claimed, is that there is no distinction between common and preferred shareholders. Preferred shareholders are those who made a $25 per share investment in the company in 1996. Kimeldorf and others claim the company must redeem that initial investment.

In an attempt to salvage the merger, Gotham offered an olive branch of sorts to preferred First Union shareholders by pledging $25 million in collateral for any damages from the pending lawsuit. The money would be put in an escrow account, which would be subject to completion of a definitive agreement.

The amended merger plan also called for preferred First Union shareholders to receive $2.50 in total compensation for each share, less an amount from ongoing litigation costs. They would also receive preferred shares in Gotham Golf, which would have the same $25 face value.

Common shareholders, on the other hand would receive $2.13 a share, which is less than the $2.33 they approved at a special meeting during the last week in November.

In a related move intended to complete the merger, Gotham Golf chairman William Ackman stepped down as chairman of First Union's board of trustees, a position he has held since 1998.

In a statement, Ackman said his resignation accomplished several goals, including the appearance of conflict of interest.

"My resignation will make clear to First Union shareholders and the investing public ... that the decisions of First Union with respect to the proposed transaction are made by a board of trustees that is completely independent of Gotham Partners or me," he said.

At press time, Ackman was unavailable for comment.