Emeritus Sues Over Stake in Costa Mesa’s ARV

Emeritus Corp. filed suit Tuesday in an effort to prevent an affiliate of New York investment house Lazard Freres & Co. from taking a 39% stake in ARV Assisted Living Inc., the Costa Mesa company Emeritus is seeking to buy.

The lawsuit, filed in Orange County Superior Court, alleges that ARV’s board had no valid business reason to redeem the $60 million in convertible notes for ARV common stock, except to bolster the voting power of its ally, Lazard Freres, in an upcoming proxy contest.

The conversion would give Lazard 6.2 million shares of ARV common stock.

On Jan. 28, ARV shareholders will decide on an Emeritus proposal to remove ARV’s board in favor of an Emeritus-nominated slate. Emeritus launched the proxy battle Nov. 25, after ARV, in mid-October, spurned Emeritus’ $16.50-a-share all-cash proposal to buy the company.

At the time of the Emeritus offer, ARV already had accepted an offer from Lazard Freres to purchase nearly 50% of ARV for $14 a share. A day after the Emeritus offer was rejected, ARV Chairman and Chief Executive Gary Davidson resigned. According to regulatory filings, Davidson thought the Emeritus proposal warranted a closer look.

On Oct. 31, ARV and Lazard Freres replaced the $14-a-share offer with the $60-million convertible-note issuance, which didn’t require shareholder approval.

The notes were convertible at $17.25 a share, which appeared to represent a higher price than the Emeritus proposal.

But a redemption premium written into the deal reduces the effective conversion price to $14--the same price as the original Lazard Freres offer and a significant discount to the $16.50-a-share Emeritus bid.

ARV provides communities for elderly residents who need assistance.