An arbitration panel ruling on a dispute between CommonWealth REIT (CWH) and investors seeking to oust its board found that the shareholder effort to remove trustees was invalid, while also determining a new vote can proceed.
Corvex Management LP and Related Cos., which bought CommonWealth shares earlier this year, began a campaign in April to remove the company’s board of trustees, claiming conflicts of interest and mismanagement. They said in June that they gained support from holders of more than 70 percent of the shares. CommonWealth said the vote was invalid under its bylaws.
The arbitration panel found the consent solicitation to remove the trustees “was not properly conducted and cannot be validated,” Newton, Massachusetts-based CommonWealth said in a statement late yesterday. While Corvex and Related acted too soon before a ruling on the validity of the bylaws, they are entitled to start a new effort to remove the board under guidelines established by the panel, according to the ruling.
“No party may take any action that is intended or designed to impede or frustrate, or that has the effect of impeding or frustrating, the new solicitation process established herein,” the panel said in the ruling.
CommonWealth shares rose 3.1 percent to $23.95 today. They’re up 51 percent this year.
The arbitrators found that CommonWealth’s bylaws “erect a complex wall of procedural hurdles to any consent solicitation,” Corvex and Related said in a separate statement. The bylaws had included a rule adopted in March that shareholders must own at least 3 percent of the stock for a minimum of three years before trying to remove the board. The arbitration panel found in August that that rule was invalid.
Corvex and Related will “expeditiously notify CommonWealth, its trustees and the arbitration panel of their intent to pursue a new solicitation and promptly file a preliminary consent solicitation statement with the SEC,” they said in the statement.
“The market thinks they’re going to buy out the company,” Rich Moore, an analyst at RBC Capital Markets, said in a telephone interview. “That’s why the stock is up today. The question I have is, is that what they really want to do?”
If a shareholder vote on the board moves ahead, Corvex and Related are going to have to convince investors that siding with them would increase the stock price substantially, said Moore, based in Solon, Ohio.
The investors have argued that the ownership of an external management firm, REIT Management & Research LLC, by CommonWealth President Adam Portnoy and his father Barry, a company founder, has led to conflicts of interest and underperformance at the real estate investment trust. Both Portnoys sit on the REIT’s five-member board and are owners of the external management company.
CommonWealth has denied Corvex and Related’s claims of conflicts of interest and has said it is focusing on buying office buildings in U.S. downtowns and selling suburban properties to boost shareholder value. The REIT in September announced changes to improve its corporate governance after conversations with investors who said they wanted RMR’s financial incentives to be more aligned with shareholders.
Adam Portnoy said the company is confident that shareholders will support the board.
“We’re not sure what’s left for people to criticize the company for at this point,” Portnoy said in a telephone interview today. “We’ve largely addressed many, if not all the concerns that have been leveled against us in the winter and spring of last year.”
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