Empire State Clears a Hurdle to IPO

By CRAIG KARMIN

A New York judge on Tuesday removed a potential obstacle to a plan for selling the Empire State Building as part of a giant public offering, ruling that a share-buyout provision in the plan doesn't violate the law.

The ruling comes as the Malkins, the New York real-estate family that controls the building and is spearheading the IPO plan, have been edging closer to obtaining the votes needed from the skyscraper's owners who must approve the public offering. The family has proposed combining the building with 18 other properties into a real-estate investment trust, called Empire State Realty Trust. The offering is looking to raise $1 billion, which would make it the second largest IPO ever for a U.S.-based REIT, according to data provider Dealogic.

The Malkins need 80% of the shares held by the Empire State Building's 2,800 owners to vote in favor of the plan. In April, the family indicated the plan had "yes" votes from 75%.

"We are pleased by the court's ruling and are proceeding with our solicitation with the intention of closing as soon as we reach the approval threshold," a Malkin spokeswoman said in a statement.

Critics of the IPO plan say it shortchanges other owners in favor of the Malkins, and warn the new REIT could be subject to the whims of the stock market.

Supporters say it would provide liquid shares for those who want to cash out, and replace an antiquated ownership structure created half a century ago.

The case before the court involved a buyback clause that could be enacted if the Malkins plan gets above the 80% threshold. Under the clause, the Malkins would have the right to buy out any owners who voted "no" for $100, unless they reversed their votes. Most of the units are worth about $323,000, according to the IPO prospectus.

A group of investors argued the provision violated limited liability company law, but Justice O. Peter Sherwood of the New York County Supreme Court ruled that the 2,800 owners weren't LLC members and therefore weren't protected by the law, according to court documents.

Stephen Meister, an attorney for the investors who brought the case, couldn't be reached Tuesday. On Monday he said he planned to appeal the decision if the investors lost.

Previously, Mr. Meister said that if the court ruled that the buyout provision was illegal, that ruling could nullify the IPO vote and possibly require the process to start again. It was unclear what, if any, impact an appeal would have on a possible IPO if the Malkins got the votes needed and went ahead with the plan.

Richard Edelman, a critic of the Malkins' proposal, wasn't part of the group that challenged the provision but he said the investors who brought the case hoped to win on appeal. He said the Malkins hadn't secured the necessary votes. "The answer is still: 'No to the REIT,'" he said.

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