Sam Zell’s Equity Residential may now
force Lehman to pay more for Archstone.

CHICAGO-A judge his afternoon has ruled that Lehman Bros. cannot block two banks that own the majority interest in Archstone from selling their shares in the Denver-based multifamily company, according to a Reuters story. Locally based Equity Residential seeks to acquire at least 26.5% of Archstone, but Lehman filed a lawsuit, as part of its Chapter 11 bankruptcy, to block Equity from taking any share of the company.

Equity had offered $1.3 billion for the 26.5% interest in Archstone. However, Lehman, which owns 47% of Archstone, doesn’t want Equity, a main apartment competitor, to join the ownership structure. Lehman has first refusal rights to block any sale by Bank of America and Barclays Bank, but Lehman would have to match any Equity offer.

Lehman sued to stop the sale process, but this afternoon Judge James Peck of the US Bankruptcy Court ruled that Lehman can exercise its right of first refusal by making a competing bid for the remaining interest, but cannot block the sale. This sets up a potential bidding war between Equity and Lehman, according to the Reuters story, which can be accessed here.

In asking for the injunction, Lehman had said in its court filings that there have been certain material breaches of the Archstone agreements.” The company says in its court motion that the banks “failed to include all material terms of the transfers.” Lehman said in the motion, and in its SEC filing, that it has not been provided documents and information agreed to be provided by both parties if a sale was to be made. In the motion, Lehman also asked the judge to force the banks to produce these documents. In the motion and in the Lehman SEC filing, the company claims that it does not believe Equity’s offer values Archstone correctly.

Equity and the banks, in the court answers and in Equity’s SEC filings, maintain that Lehman has been given more information than is required by contract. “At base, plaintiffs simply don’t like the fact that defendants have chosen to sell 50% of their interests in the Archstone Entities to a competitor,” the banks said in their court-filed answer.

Archstone has 48,922 apartment units, including 14,000 in Germany. Equity owns or has investments in 417 properties in 15 states and Washington, DC. The company has said it would fund the purchase through cash, debt, sales and its $1.2 billion revolving credit facility.