Monday, February 09, 2009

Judge dismisses lawsuit blocking NYU's absorption of Polytechnic University, disregards evidence of merger

When's a merger not a merger?

When it's an affiliation.

That dodge is the key to the successful absorption begun by New York University of the Brooklyn-based engineering school Polytechnic University, now known as Polytechnic Institute of NYU, which occupies a MetroTech campus co-developed with Forest City Ratner.

The deal, which brings Poly the not insignificant but hard-to-quantify benefits of association with the larger university, costs NYU (at first) just a $50 million loan for an engineering school with valuable downtown Brooklyn real estate and whose net worth is $250-$450 million.

That dodge allowed an Albany judge to dismiss a lawsuit filed by dissident Poly alumni trying to annul the deal.

But it doesn't really hold up.

Why? Because documents tell a different story. While NYU and Poly now may deem the deal an affiliation, which is how it was presented to the state Board of Regents, it is for all intents and purposes a merger, which is how it was commonly described in the press.

Indeed, that's how Poly described it for months (see Merger Central web page at right, courtesy of the Internet Archive, and click on all documents to enlarge). The web site once designated as www.poly.edu/mergercentral now resolves to www.poly.edu/affiliation/.

So, while the judge, reading documents literally, could call it an affiliation, other documents plainly belie that.

Charges sidestepped

The lawsuit, filed in September by seven dissident alumni and a committee of alumni, protested the State Board of Regents’ approval in June of the deal. It was rejected in a January 30 decision by a state Supreme Court justice in Albany.

Judge Richard M. Platkin’s ruling sidesteps some of the most pointed charges in the lawsuit, such as that the defendant Polytechnic Board “did not obtain an appraisal to establish the value of the real estate, air rights and other assets it sought and approved to convey to NYU by such merger, in breach of its fiduciary duty.”

A representative of the plaintiffs told me no decision had been made as to an appeal.

“The so-called ‘affiliation,’ which upon information and belief is a disguised merger/consolidation undertaken by the Board of Trustees of Polytechnic University and sanctioned by the Regents, circumvents and violates such necessary review by the Attorney General and the Supreme Court,” the lawsuit charged.

(Indeed, as the graphic at right from the Poly web site circa early 2008 suggests, the university was using the term "merger.")

Summary of case

Platkin’s summary:
On October 10, 2007, a non-binding MOU [Memorandum of Understanding] was approved by a super-majority vote of the Board of Trustees. This MOU became the framework of the “Polytechnic University-New York University Affiliation and Proposed Consolidation Agreement” (”Affiliation Agreement”), referred to by plaintiffs/petitioners as the “Definitive Agreement.”

Under the Affiliation Agreement, Polytechnic agreed to change from a Type B non-member corporation... with NYU becoming the sole member of Polytechnic. However, Polytechnic would remain a separate Regents-chartered corporation and retain control over its assets, including endowment funds, real property, and intellectual property.

In connection with the Affiliation Agreement, NYU agreed to loan Polytechnic the sum of $50,000,000 over five years, the maximum affiliation period contemplated under the agreement before a merger or consolidation of the two institutions. The loan is secured by certain “air rights” assets owned by Polytechnic. No payment of principal is due until the air rights are sold or until the institutions consolidate, in which case no repayment would be required.


(I had not previously reported that no repayment would be required, so it is technically not a "no money down" acquisition, but rather a "low money down" one. The air rights are subject to a letter of intent signed with Forest City Ratner.)

A future consolidation, the decision notes, is defined as “the merger of Polytechnic with and into NYU.” In other words, it hasn't really happened yet, even if it seems irrevocably on track. Poly, with about 3300 students, would be fully consolidated into the 40,000-student NYU, as its board changes over five years. But NYU already controls the Poly board and administration, as the "sole member" of Polytechnic.

No standing to sue?

Platkin, rather than getting to the heart of the charges, concludes that they shouldn't have been brought in the first first place. He concludes that neither concerned alumni, current or putative adjunct faculty, nor a committee of alumni have standing to bring the lawsuit.

Why? They must show, he writes, that they would suffer direct harm different from the public at large, and the donation of time, money, and effort to an enterprises is not an interest.

That raises a question: Who--other than, perhaps, those still currently on the board--would have standing to represent the second-oldest independent engineering institution in the United States?

Platkin concludes that one plaintiff, a former Advisory Trusteee, did not suffer an injury because his position was to expire in October 2008 and the Poly bylaws permit repeal of a provision by a two-thirds vote.

Even if standing, no violations

Platkin goes on to put the nail in the coffin, concluding that, even if the plaintiffs had standing to go forward, their claimed violations of the state's Non-Profit Corporation Law (N-CPL) were invalid.

To do so, the judge examines only at the deal recently completed, not at its impact along the line, writing:
The undisputed documentary evidence in this case demonstrates that the transaction at issue does not involve the “sale, lease, exchange or other disposition of all, or substantially all, the assets of [Polytechnic].” Rather, the record is clear that Polytechnic remains in existence as a separate not-for-profit educational corporation and continues to exercise full ownership and control of its assets.

Even though NYU would fully control the Poly board and assets after five years, he writes, judicial precedent says that a change in membership in connection with an affiliation agreement is not the functional equivalent of a transfer of assets, Platkin writes. Rather, that future transfer would be subject to judicial review.

Of course, by that time, the "done deal" would be fully cooked.

Poly’s “Merger Central” web site obscured the financial issue. An FAQ sounded definitive, as I wrote, since it stated, "The real estate development rights will reside with the Polytechnic Institute of NYU.”

However, the FAQ addressed only “the interim state wherein Polytechnic becomes a corporate entity—the Polytechnic Institute of NYU.” It didn't speak to what would happen after the interim state.

Arbitrary and capricious?

Was the Poly board’s action arbitrary and capricious because it violated a previous 2/1/05 resolution not to negotiate with NYU? No, writes Platkin:
It is clear that the Board of Trustees resolved only that “all discussions with New York University relating to its proposal for merger and/or consolidations shall immediately cease and be discontinued” (emphasis added). By its terms, the resolution does not speak to discussions relating to future proposals.

Platkin does not address the charge, made in former Polytechnic University Alumni Association President George Likourezos’ affidavit (PDF), that Poly President Jerry Hultin and several board members secretly met to negotiate the agreement for nearly a year, without the full knowledge of the entire board.

Was the Board of Regents’ action arbitrary and capricious? No, writes Platkin:
In this case, the administrative record demonstrates that the Office of Higher Education, an arm of the Board of Regents, conducted a full and thorough investigation into the Affiliation Agreement and the corresponding charter amendments.

There's evidence, however, that the office did not address a report by state Senator Kenneth LaValle, the chairman of the State Senate Committee on Higher Education, which raised some serious questions about the deal, stating that in three instances the board did not act with the duty of care and/or loyalty required by a fiduciary, notably negotiations conducted in secret, the exclusion of dissident board members from working committees, and the failure to update a three-year-old appraisal of the university's valuable property in Downtown Brooklyn's MetroTech Center.

(LaValle, oddly enough, released the report without an accompanying press release or comment. And the New York Times, which last March had quoted LaValle as saying he thought it “presumptive" of the board to vote without waiting for the report, has never followed up on the Poly story, perhaps in part because the reporter then covering higher education left the newspaper.)

Disposition of assets

Did the Poly board breach its fiduciary duty? No, writes Platkin:
And plaintiffs/petitioners’ claim that the Board of Trustees was required to obtain an appraisal of Polytechnic’s assets before entered [sic] into the Affiliation Agreement is premised on their flawed contention that such an agreement constitutions a disposition of Polytechnic’s assets.

As noted, LaValle had a problem with the failure to obtain an appraisal.

In an affidavit, Likourezos, an attorney, then president of the alumni association and an Advisory Trustee from 7/1/06 to 7/1/08, contended that the Board of Regents cannot approve charter amendments have the legal effect of transferring “de facto ownership.” He noted that the Poly board had set up a "Merger Advisory Committee" and otherwise treated the deal as a merger.

He asserted that, after prompting LaValle’s investigation, he suffered retaliation by Poly, including not receiving an invitation to attend a convocation ceremony, despite his status as an alumni leader.

Value of real estate

Likourezos also noted that a 1/30/08 memorandum (attached as an exhibit to Likourezos' affidavit) drafted by three dissident trustees stated the total value of Poly’s real estate assets at $424 million.

(That values the developable square footage at $200 per square foot, which may be high, given that a real estate professional I quoted last year said it might be worth $75-$100/sf. At $100/sf, the assets would be worth $212 million. Then again, a January 2005 appraisal valued Poly property at $213 million, according to LaValle's report, and real estate had skyrocketed between 2005 and 2008.)

Given an endowment of $130 million and liabilities estimated at $100 million, Likourezos suggested a "conservative net asset value of $454 million," noting that he'd told the trustees that an appraisal would have confirmed a net asset value exceeding $350 million. (Even if the value per square foot were $100, the net asset value would be nearly $250 million.)

However, he wrote:
Chairman [Craig] Matthews, without having performed an appraisal of the real estate assets, informed respondent Board members in the Board’s October 2007 meeting that the University has a net asset value of negative $33 million.
(Emphasis in original)

What NYU got

In that 1/30/08 memo to the Poly board, three dissident trustees called for a reconsideration of the concept and terms of a merger, suggesting that Poly was in a far stronger position than the board acknowledged. They wrote:
Poly offers NYU a turnkey engineering university, complete with 137 full-time faculty, 2900 students, 50 academic programs, significant real estate and facilities, 30,000 living alumni, $134 million endowment to support ongoing operations, and an established reputation of 153 years. More than 200 Poly graduates are CEOs; 5 are university presidents; and 3 are Nobel Laureates. Acquiring Poly obviates the need for NYU to spend a minimum of $400 million and 5-10 years to start its own school.

The memo, which I had not seen until last week, made explicit connection--as I had--between NYU's plan to add 6 million square feet of space and the opportunity Poly presented, with 1.3 million square feet of zoned floor area and significant additional air rights for expansion.


The memo further pointed out "a significant discrepancy" between the deal terms proposed to Poly in August 2007 and the deal as it stood, noting that Poly no longer would control its board, endowment, real estate, student socioeconomic demographic, and more. The memo called for a "closed vote" of Poly's faculty, as had been conducted four years previously--but that didn't happen.

Word game

Likourezos wrote:
In the present set of facts, respondents/defendants have commandeered the term “affiliation”, which is commonly used to describe collaborations/arrangements between institutions, in order to use it to hide the true nature and effect of the transaction with NYU as a merger/consolidation. Conversely, they also commandeer the term “ownership,” which normally means possession and control of an object, in order ot use it to hide the true nature and effect of the transaction by asserting falsely, on the basis of an agreement which they have not provided to this Court, that NYU has no “ownership” of Polytechnic’s assets. Despite this attempt to now change for legal expediency purposes the true nature of the transaction, the record indisputably shows, that respondent Board of Trustees at its October 9-10, 2007 meeting, in which I was present, debated and voted to approve a Memorandum of Understanding to move forward with a merger agreement--not an affiliation agreement.

He quoted Chairman Matthews as saying, “I should say at the outset that while we are calling this a merger in the sense that we are integrating two universities... it is an acquisition in a legal and financial sense with no remuneration for our assets or goodwill.”

Poly's response

Polytechnic last June did respond to LaValle's three conclusions, noting that it was "not a detailed rebuttal of the Senator’s Report." 


For example, the response noted that Poly would remain the owner of its real estate after the "Affiliation," that the board "had access to detailed, expert analysis of the substantial cost of renovation of Polytechnic’s buildings and was aware that the Brooklyn real estate market was softening," and the board "was fully aware that Polytechnic’s short-term and long-term financial distress went much deeper than the value of its real estate."

The real estate market was indeed softening. But the evidence still suggests that NYU got a very good deal--a merger on its preferred terms.

1 comment:

  1. who has standing? Since these are both not for profits, the NY State Attorney General has standing. I think the Judge was wrong on the standing issue. If a trustee(albeit one who is outgoing) has no standing no one could ever sue a University for a decision it makes. I bet if there is an appeal that part of the decision will be reversed. However courts don't like to get involved in these type of disputes. They try to stay out of anything doing with Academia...and will just leave it to the business judgment rule. Only if something goes wrong do they look back at it.

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