The group, invested in IRG Master Holdings for as long as 16 years, says the merger would move nearly $3B in industrial real estate into a new publicly traded entity, placing those assets beyond the reach of an ongoing private arbitration in which they are seeking millions in damages.

With the arbitration trial not set until 2027 and the merger slated to close in 2026, the investors contend the timing would effectively gut any future award, leaving them with little recourse after years of failed attempts to exit the venture. 

Industrial Realty Group is a private landlord and investor valued at over $4B that has a handful of subsidiaries, including Industrial Realty Group, which owns approximately 200 industrial properties across the country and intends to combine with Sachem Capital. Sachem is a mortgage REIT that had $470M in existing assets when the merger was announced in May. 

The IRGMH investors are hoping to pause the closing of the reverse merger until the ongoing private arbitration can be resolved. The investors suing IRGMH in court are the same investors involved in the private arbitration, which concerns their alleged difficulty redeeming their investments. 

Through the arbitration, they are seeking damages in excess of $350M and the establishment of a constructive trust for their funds, profits and proceeds under IRGMH control. A constructive trust is a mechanism used by courts in situations where wrongdoing, such as breach of contract or fraud, has occurred or is expected to occur. 

The arbitration has a trial scheduled for April or May 2027. The Sachem-IRG merger is scheduled to close by the end of 2026, the companies said in May. 

The investors argue that if the merger is complete before the arbitration is resolved, any award they receive from the private resolution would be substantially smaller because the most valuable assets IRG owns would already have been moved into a new, publicly traded entity untouchable by the arbitration. 

Without the intervention they are suing for, the investors argue “the Sachem Transaction will render any award in the Arbitration virtually meaningless,” according to the complaint, filed in Los Angeles County Superior Court. 

Under the terms of the merger, IRG would contribute 98 industrial assets from its 200-asset portfolio valued at $2.9B to the new REIT, according to a release from the partnership. IRG alone has a total asset value of more than $4.4B and total equity value of approximately $2.7B, according to the complaint. 

Attorneys for IRGMH and a representative for Sachem Capital didn't respond to a request for comment. A representative for IRG President and founder Stuart Lichter, who is named in the suit, couldn’t be reached. 

Last week, a judge denied the plaintiffs’ request to move faster than usual on court proceedings. The next court hearing is scheduled for February.

Reverse mergers allow for a previously private company to join with a publicly listed one to gain access to the public market. However, they don’t require the private company to jump through all the hoops required of a company making an initial public offering. 

This process of combining is different from special purpose acquisition companies, another mechanism to access the public market that was very popular around the pandemic. In 2020, investors poured a record $83B into SPACs. By midyear 2021, that record had been broken, with more than $103B invested. The format, which uses a shell company that will eventually go public to buy another company, has since fallen out of favor.

These so-called blank check companies require select Securities and Exchange Commission review and came under additional scrutiny after a wave of intense popularity due to concerns about overly optimistic earnings estimates.

The rigorous process with the SEC that companies must undergo to become public doesn’t apply to these mergers because the combining company is already public, said Jeffery Eilander, a commercial litigation specialist and co-managing partner at Schlam, Stone & Dolan, speaking generally about reverse mergers.

While the public company in the reverse merger equation is required to report the move to the SEC in a filing, there are no registration requirements under the Securities Act of 1933 as there would be for an IPO, according to the SEC.

“You're trying to get access to the market without going through what you really need to, to have access to the market,” Eilander said. “The whole point of the market is to give investors protection, and this bypasses the protection.”