Global Net Lease, Inc. v. Blackwells Capital LLC

Background

Global Net Lease, Inc. and The Necessity Retail REIT, Inc. sued Blackwells Capital LLC, Blackwells Onshore I LLC, Related Fund Management LLC, Jason Aintabi, Richard O’Toole, and Jim Lozier under Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9. The Necessity Retail REIT filed a separate complaint, and the cases were consolidated for all purposes.

Blackwells had filed materials with the Securities and Exchange Commission stating that it would seek shareholder votes for O’Toole and Lozier to join each company’s board. Blackwells also advocated terminating the companies’ management agreements with AR Global and replacing AR Global with a more cost-effective manager.

The plaintiffs claimed that the proxy materials failed to disclose a supposed joint venture or other agreement between Blackwells and Related. They alleged that the arrangement involved replacing AR Global with Related or a Related affiliate and could result in Blackwells receiving part of future advisory fees. The plaintiffs relied on communications discussing Related possibly becoming manager, an executed May 2022 agreement between Blackwells and a Related entity concerning real-estate-investment-trust opportunities, and an unsigned April 2023 draft agreement concerning an investment vehicle that would manage shares in Global Net Lease.

Legal standard

A preliminary injunction is an extraordinary remedy. The moving party generally must show a likelihood of success on the merits, likely irreparable harm without an injunction, a favorable balance of hardships, and that the public interest would not be harmed. Alternatively, under Second Circuit law, the party may show sufficiently serious questions going to the merits, a balance of hardships that strongly favors it, and irreparable harm.

For a Section 14(a) and Rule 14a-9 claim, the plaintiffs had to show that the proxy materials contained a materially false or misleading statement or omitted a material fact, that the conduct involved knowing, reckless, or negligent behavior, and that the proxy solicitation was an essential link in the proposed corporate action. An omitted fact is material when there is a substantial likelihood that a reasonable shareholder would consider it important when deciding how to vote.

Court’s analysis

The court assumed, without deciding, that the plaintiffs had shown irreparable harm. It nevertheless held that they had not shown a likelihood of success or a sufficiently serious question on the merits.

Alleged joint venture. The plaintiffs’ original theory was that Blackwells and Related had formed a joint venture to replace each company’s investment advisor with Related or an affiliate. The court found that discovery had not uncovered such an arrangement. The evidence showed, at most, discussions about Related serving as the new manager, but the idea was never finalized in writing or through a mutual understanding. The court also declined to rely on the unsigned April 2023 draft as proof of an existing agreement. In addition, that draft did not refer to a plan for Related to manage Global Net Lease and did not refer to The Necessity Retail REIT.

The plaintiffs alternatively argued that the May 2022 agreement itself should have been disclosed because the proxy materials stated that no participant had a contract, arrangement, or understanding concerning either company’s securities. The court rejected that argument. The agreement did not refer to either company, and the plaintiffs had not shown that it concerned their securities or a future transaction involving them. The court also found that a reasonable shareholder would not have viewed disclosure of that agreement as significantly changing the overall information available. The proxy materials already identified Blackwells, Related, Aintabi, Lozier, and O’Toole as participants working toward removing AR Global and placing the nominees on the boards.

The court further explained that, when material facts are disclosed, proxy contestants generally do not have to disclose every step in their internal discussions or every motivation for conducting the contest. The plaintiffs therefore had not shown that the alleged failure to disclose the May 2022 agreement was material.

Plan to replace AR Global. The plaintiffs also argued that defendants should have disclosed a plan to install Related as each company’s external advisor because defendants allegedly could earn management fees if the proxy contest succeeded. The court found that the evidence did not establish such an agreement. Related had apparently considered the idea but ultimately rejected serving as external manager for either company. The plaintiffs’ belief that there was no other rational explanation for the proxy contest was speculation and did not establish an agreement.

The plaintiffs also raised, for the first time during oral argument, an argument concerning O’Toole’s alleged equity interest in a Related subsidiary. The court found that the press releases already disclosed that O’Toole was an executive vice president at Related and that the additional information would not materially change the information available to reasonable shareholders.

Disposition

The court held that the plaintiffs had not identified a material omission and were unlikely to succeed on their Section 14(a) and Rule 14a-9 claims. They also had not shown sufficiently serious questions going to the merits. Because that required element for preliminary relief was missing, the court did not reach the remaining injunction factors. The court denied the plaintiffs’ motion for a preliminary injunction and directed the clerk to close the motion.