Wednesday, September 7, 2016

More on the Sordid Tale of the Global Net Lease and ARC Global Trust II Merger

By Craig McCann and Regina Meng

On August 11, 2016 we wrote about the recently announced merger of Global Net Lease, Inc. (GNL) and American Realty Capital Global Trust II (ARC Global Trust II). See Sacha Baron Cohen and Nicholas Schorsch – Masters of the House! ARC Global Trust II's 8-K announcing the merger and merger agreement can be downloaded here.

Global Net Lease had been non-traded REIT ARC Global Trust Inc. but began trading on the NYSE under the ticker GNL on June 2, 2015. Our full June 5, 2015 blog post on ARC Global Trust / GNL can be downloaded here.

In total, Thenardier and the brokerage firms selling just these two of his American Realty Capital products have cost investors $684 million - $587 million as a result of ARC Global Trust / GNL and $97 million as a result of ARC Global Trust II.

NASAA’s Vanishing Roll-up Protection

Non-traded REITs are required by state securities regulators to include language that closely tracks the 2007 North American Securities Administrators Association’s Statement of Policy Regarding Real Estate Investment Trusts (available here) in their bylaws. NASAA guidelines protect shareholders in REITs which have not been trading for at least 12 months before being rolled-up.

Non-traded REIT shareholders need protection because, unlike traded REIT shareholders, they can’t observe thickly traded market transaction prices when assessing the value of their shares. Also, non-traded REIT shareholders can’t rely on the market for corporate control to bid up the merger consideration if risk arbitrageurs determine the value offered is too low. This need is especially pronounced when, as is often the case in suspect acquisitions skirting the roll-up protections, the acquiring traded REIT is affiliated with the acquired non-traded REIT through the Sponsor.

The protections afforded by the NASAA guidelines include the requirement or a contemporaneous independent appraisal of the non-traded REIT and the option for the non-traded REIT investors who vote against a proposed roll-up to receive their pro rata share of the appraised value.

Last year we wrote about how ARC and Cole Capital used a form for correcting typos to remove the roll-up protections it granted investors. See Nicholas Schorsch Cheated Investors in Recent Nontraded REIT Mergers. Despite promising NASAA and investors to provide shareholder protections, these two sponsors eliminated them so the Sponsors could push through abusive mergers.

ARC Global Trust II Abandon’s Shareholder Protection From Abuse by ARC in a Rollup

On April 29, 2016, just 4 months before the merger announcement, ARC Global Trust II tried to delete the roll-up provision altogether because it said the provision was ambiguous and might define a transaction in which its securities had not been listed for 12 months as a roll-up and thus implicate dissenter appraisal rights. The board of directors of Global II proposed to remove the provision completely from the company’s bylaw, saying that the roll-up provisions “may limit the ability to engage in a transaction involving our securities if our securities have not been listed on a national securities exchange for at least 12 months among other substantive transactional requirements.”

--See ARC Global Trust II’s Notice of Annual Meeting of Stockholders at page 40.
Of course, there is no ambiguity in NASAA’s roll-up protection requirement. Global Trust II had used Thenardier’s post January 2012 sleight-of-hand roll-up protection language to avoid providing roll-up protection to investor. Still Global Trust II thought it might still be required to act in its shareholders’ interests and so tried to remove any doubt by deleting the provision altogether.

The proposal, along with other proposals, is later withdrawn by the company after a meeting of a special committee comprised entirely of independent directors. See ARC Global Trust II’s Supplemental Proxy Information.

At page 22 of the Merger Agreement, ARC Global Trust II tells its objecting shareholders they have no rights.



Of course, ARC Global Trust II knows this perfidy should prompt remedial action and so it slipped into its bylaws with the merger announcement a forum selection amendment requiring any derivative action be brought in Maryland courts.

See August 5, 2016 Amendment No. 1 to Bylaws


Of course, Thenardiers don’t have a conscience and can’t be shamed into treating other people fairly or even legally. Someone should be looking into this. In the meantime, we’ll be back shortly with some information on Mr. Schorsch’s independent directors who approved this mess.

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