The Rouse Co. and the Chicago mall developer that hopes to acquire it have gone to court to block heirs of the late billionaire Howard Hughes from disrupting the acquisition.
The filing in Delaware Chancery Court on Tuesday is part of a dispute that erupted last month when the Hughes heirs became worried about their financial stake in Rouse now that the Columbia company plans to sell itself for $7.2 billion in cash to General Growth Properties Inc.
In a statement, Rouse said it does not think the disagreement will affect the timing of the deal, which is expected to close by year-end. It said Rouse and General Growth went to court to "minimize any uncertainty and any risk of delay."
At issue are allegations by David G. Elkins, Platt W. Davis III, Kenneth E. Studdard and other heirs of Hughes, the reclusive movie, casino and real estate mogul. They have said the deal with General Growth may violate an agreement in place since 1996, when Rouse acquired the Hughes Corp. to gain its valuable real estate portfolio in Las Vegas.
At the time, the heirs had about 24,000 acres of land, mainly in Nevada and California, that they inherited when Hughes died in 1976. Hughes Corp. and Rouse could not agree on how to value the land, according to the court documents, which Rouse filed with the Securities and Exchange Commission yesterday.
The disagreement threatened the acquisition of Hughes, according to the filing. So the two companies fashioned an "earn-out" arrangement allowing Rouse and the Hughes heirs to share proceeds generated by land sales as they happened. Any unsold land would be appraised at certain dates, the SEC filing said.
Once the value of these land sales is tabulated, the heirs are to receive Rouse stock equal to that value through 2009. The distributions are made twice a year.
Under the agreement, Rouse is banned from consolidating or merging with a company that will not honor the arrangement. The sticking point for the Hughes heirs is how General Growth Properties plans to abide by these terms.
Rouse has maintained that one of the reasons General Growth was an attractive buyer is that it agreed to all the terms of its agreement with the heirs.
But yesterday's SEC filing included an e-mail from one of the heirs, David G. Elkins, in which he expressed doubts. In the e-mail sent Oct. 15, Elkins said he and other heirs contacted lawyers to review the proposed deal and "regrettably reached the conclusion that the proposed merger is a Prohibited Transaction" because it would leave the heirs worse off than under the deal they negotiated with Rouse.
Elkins wrote that he and the other heirs "will have no choice but to evaluate all of the rights and remedies" available to them if General Growth did not agree by yesterday to terms including an indemnity agreement that protects the heirs from any adverse tax consequences of the merger.
In response, General Growth on Tuesday delivered an agreement to the heirs in which it said it would perform "in the same manner and to the same extent that Rouse would be required to perform," according to a Rouse statement.
General Growth also agreed to indemnify and "hold harmless" the heirs against losses arising from any breach by General Growth, the statement said.
Rouse and General Growth asked the Delaware court to declare that the merger is not a prohibited transaction. The companies declined to comment beyond the statement Rouse issued.