REIT Bid Triggers
A Shareholder Suit

Shareholders of an unusual real-estate investment fund are suing the fund's founder, claiming that the fund failed to disclose a takeover offer, and instead paid $175 million for a group of companies he controlled.

Under the terms of the takeover offer, shareholders would have received higher payouts if the fund didn't buy the companies from the founder.

Leo Wells III, the 63-year-old founder of Wells Real Estate Funds, based in Norcross, Ga., personally received roughly $161 million of the $175 million purchase price as the predominant owner of the companies, which had been paid millions in management fees by the fund, Wells Real Estate Investment Trust.

Meanwhile, the would-be acquirer of the fund has launched a tender offer for roughly 10% of the fund's shares, giving its shareholders until today to tender their shares.

The controversy involves one of the quirkiest corners of the booming commercial real-estate industry. Wells Real Estate Investment Trust is a real-estate investment trust that acts just like the REITs that have been hugely popular with investors -- it takes investor money and buys office buildings and the like, then pays out the income they generate to its shareholders.

The key distinction is Wells's shares aren't listed on a stock exchange. Instead, investors can only sell the shares back to the fund. The fund now owns about 80 office buildings in 23 states that are valued at about $4.1 billion, according to Standard & Poor's Ratings Services.

In essence, shareholders own Wells Real Estate Investment Trust while the management companies were owned primarily by Mr. Wells.

Company officials declined to be interviewed, citing a quiet period for fund raising. Mr. Wells, through a spokesman, declined to comment. But a company spokesman said in regard to the lawsuit: "The REIT's board has proceeded very diligently and the stockholders were kept informed of all relevant information." He added that the lawsuit had no merit.

Wells's funds have been controversial because they are heavily marketed by brokers who earn high fees for selling the shares, though the funds have generally lived up to their billing as relatively safe, income-producing investments. The funds typically have a 10-year life. Wells REIT, Mr. Wells's first, was launched in 1997 with the promise that it would be liquidated or listed on a stock exchange by Jan. 30, 2008. With the deadline approaching, Mr. Wells has been preparing the fund for an initial public offering.

On April 11, shareholders of Wells REIT were asked to approve the acquisition of a group of Mr. Wells's management companies, which had handled the buying, selling and managing of Wells REIT properties. The REIT's directors said this "internalization" would maximize shareholder value and make Wells REIT more attractive in an IPO. Shareholders approved the plan, paving the way for Wells REIT to pay $175 million in Wells REIT stock, at $8.95 per share, to buy the management companies. Mr. Wells himself received the lion's share of the stock in the transaction -- about $161 million worth, according to the shareholder lawsuit.

Mr. Wells's potential payoff was disclosed to shareholders and he recused himself from the decision by the fund's directors about whether to acquire his companies. What Wells REIT directors didn't disclose was that at least one potential suitor offered to buy Wells REIT, and the offer would have been more lucrative to Wells shareholders if the fund didn't buy Mr. Wells's management companies.

That buyout offer came earlier this year from Lexington Realty Trust, a publicly traded REIT, which offered to buy Wells REIT for one of two prices, depending on whether Wells REIT bought out Mr. Wells's companies. If Wells REIT didn't buy Mr. Wells's companies, the offer was $9.45 a share; if it did buy the companies, the offer was $9.07 a share. The latter offer was lower because there would be more shares outstanding if Wells REIT bought the management companies.

Wells REIT directors rebuffed Lexington's offer and didn't tell shareholders about it.

"It's hard to conceive of something that's more important to tell them," said Lawrence Sucharow, of New York-based Labaton, Sucharow & Rudoff LLP, one of the attorneys representing plaintiffs in a shareholder lawsuit filed in U.S. District court in Maryland. (Labaton, Sucharow is joined by Chimicles & Tikellis LLP as lead counsel in the case, which has been transferred to the U.S. District Court in the Northern District of Georgia.) In addition to Mr. Wells, the lawsuit names Wells REIT, the management companies, and Wells REIT directors as defendants.

In court filings, Wells REIT said Lexington's offer was "too insubstantial to pursue." The allegations come at a time in which, the Delaware Court of Chancery, which holds broad sway in corporate law, has been critical of companies that failed to disclose incentives to company managements that may effect their position on a deal.

In a recent letter to Wells REIT shareholders that was filed with the Securities and Exchange Commission, Lexington said that Wells REIT directors never requested more specific information regarding Lexington's financing. "Your attempt to discount the quality of our proposal due to your own failure to take the most meager steps to create an informed business judgment with respect thereto is unconscionable," wrote Michael Ashner, the chief executive of Lex-Win Acquisition LLC, the joint venture that Lexington created to do the tender offer.

Lex-Win disclosed Lexington's original buyout offer when it made a tender offer to purchase as many as 45 million Wells REIT shares on May 25. Wells REIT shareholders have until 5 p.m. today to decide whether to sell their shares at a price of $9.30 per share.

Regardless how that vote turns out, Wells REIT shareholders could benefit from the company's planned IPO, which will allow them to sell their shares on the market. But if Wells REIT doesn't meet the IPO deadline, and liquidates instead, then it is unclear how Wells REIT shareholders benefited from paying $175 million for the management companies.

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