EHT unitholders file lawsuit against manager's board, claiming shortfalls in disclosure

Singapore

TWO investors of the beleaguered Eagle Hospitality Trust (EHT) are suing six of its manager's former and current directors for failing to make material disclosures from the time the stapled securities were offered to when the trust collapsed in or around March 2020.

Ajeet Gobindram Vaswani, a retiree, is claiming US$1.55 million for the 2,632,000 stapled securities he holds in EHT; Viresh Ajeet Vaswani, an entrepreneur, is claiming US$305,000 for his 448,000 units.

The father-son pair, believed to be among the more significant investors in the trust, filed their statement of claim before Singapore's High Court on April 26. (see amendment note)

The six defendants include the trust's chief executive officer and president Salvatore Gregory Takoushian, lead independent director Davy Lau, and independent non-executive directors Carl Gabriel Florian Stubbe, Tarun Kataria, Kelvin Tan and Ng Kheng Choo.

All six were arrested last October on "reasonable suspicion" that disclosure requirements may have been breached. They were later released on bail. Mr Lau, Mr Kataria, and Mr Tan subsequently resigned from the firm's board.

Ms Ng had resigned prior to the arrests in March 2020, while Mr Stubbe was removed from directorship in August 2020.

The stapled group comprises Eagle Hospitality Real Estate Investment Trust (EH-Reit) and Eagle Hospitality Business Trust. EHT's initial portfolio included 18 hotel properties in the United States, with a total of 5,420 rooms and an aggregate valuation of approximately US$1.27 billion.

EHT filed for Chapter 11 bankruptcy in the United States Bankruptcy Court in January 2021. The Singapore High Court in March issued a winding up order against Eagle Hospitality Reit Management, the previous manager of EH-Reit.

Trading in EHT has been suspended since March 2020, after the Bank of America issued its managers with a demand for immediate repayment of a US$341 million loan.

One chief allegation in the plaintiffs' case centres on the failure of the master lessees to pay security deposits totalling US$43.7 million as well as monthly rentals on time.

As directors, the six defendants would have been informed and/or consulted, and would have thereafter approved any extensions to make payment. But these matters were not disclosed promptly, or at all, until trading was halted on March 19, argued the plaintiffs, who are represented by Paul Tan of Clifford Chance Asia.

Given that a significant part of the trust's valuation, financial viability and stability rested on the timely receipt of the security deposits, these would have been material information relevant to investors' and securityholders' decisions to invest in additional units and/or retain their existing stakeholding, they argued.

In this case, the master lessee was a company owned by EHT's sponsor Urban Commons, a Los Angeles-based property investor and developer. Urban Commons was in turn owned by Howard Wu and Taylor Woods.

EHT units had in March received a go-ahead from a US court to investigate Mr Wu and Mr Woods, on the grounds that they allegedly bear the most responsibility for the trust's financial woes.

The plaintiffs in the Singapore suit also allege that the trust's prospectus and product highlights sheet contain inaccurate information and non-disclosures. For instance, they claim historical financial information concerning ASAP Holdings, which sold EHT's sponsor six of the 18 hotels that formed its initial portfolio, was not disclosed.

There was incomplete or inaccurate disclosure of potential conflicts of interest involving Mr Stubbe who, while serving as an independent director reviewing a valuation report by Jones Lang LaSalle Americas (JLLA), was also negotiating senior employment with Jones Lang LaSalle Property Consultants (JLLPC), the plaintiffs also claimed.

Both JLLA and JLLPC are subsidiaries of global real-estate services company Jones Lang LaSalle Inc. JLLA was the independent market research consultant for the IPO.

The plaintiffs also alleged that the directors either knew or should have known of other "material information", such as the resignation of a senior finance personnel, non-disturbance agreements that the master lessors (subsidiaries of EH-Reit) had entered into, the manager's failure to maintain minimum capital and financial resources, and other defaults and liabilities. However, these were either not disclosed or not promptly disclosed, the plaintiffs claimed.

These failures were "compounded" by a series of announcements on the Singapore Exchange (SGX) which "portrayed the trust's performance positively and sought to assure investors and securityholders".

The directors had approved and allowed these announcements to be published despite their omission of material information, resulting in false, inaccurate and misleading statements, the plaintiffs alleged.

The plaintiffs relied on the defendants' contraventions to purchase or subscribe to the securities, or continued to hold on to them throughout the material period, and have thus suffered losses because of the trading halt and likely insolvency of the trust, they argued.

In their defences filed on June 11, the six defendants denied the claims. The trust's chief executive Mr Takoushian argued that the prospectus had "expressly highlighted various risks associated with any investments into EHT". It also specifically highlighted that there is no assurance that distributions would be as forecast, and that EHT would have sufficient distributable or realised profits, or surplus in any future period, to make dividend payments, he said. He is represented by Drew & Napier's Wendell Wong.

Ms Ng, represented by Daniel Chia of Morgan Lewis Stamford, said both the plaintiffs are "sophisticated and accredited investors who are deemed to be better informed and have access to better resources to protect their own interests".

She also argued that they "did not exhibit reasonable investor behaviour" by increasing their investments in the stapled securities over the period of October 2019 and February 2020 when the trust, Reit manager and sponsor were "facing increasing negative backlash from the media and the SGX".

The defendants also sought to distance their directorships from the day-to-day affairs of the trust. Mr Takoushian, for instance, said he recognised his "inexperience" listing and managing a Reit, and thus "ensured that he would be assisted by a board of independent directors comprising seasoned and experienced business professionals with the relevant knowledge and experience serving in listed Singapore Reits".

He also argued that as the Reit manager's directors, the defendants do not owe any duties to the stapled securityholders in their personal capacities.

The said independent directors, who are also his co-defendants, in turn argued that they "were not engaged in, and were not expected to engage in, the day-to-day management and operations of the Reit manager and the affairs of the trust". They claimed they had instead relied on representations and assurances made by the management, including Mr Takoushian, Howard Wu and Taylor Woods.

Mr Lau, Mr Stubbe, Mr Kataria and Mr Tan are represented by Murali Pillai of Rajah & Tann.

Ms Ng, on the other hand, argued that some of the plaintiffs' claims deal with matters that predate her appointment to EHT's board in October 2019.

Amendment note: An earlier version of the story reported that the plaintiffs are the second and third-largest investors in the trust. This is not accurate. The article has been amended to reflect this change.