Activist investor Keith Meister and Related Cos., who together own 9.8 percent of CommonWealth REIT, sued the company after it rejected their objections to a planned offering of 27 million new shares.
The plaintiffs claimed breach of fiduciary duty and are asking for an injunction to stop the share sale, according to a court filing today in Maryland state court in Baltimore. CommonWealth said it plans to issue 27 million shares and use the $450 million in proceeds to pay off debt, it said on Feb. 25. Corvex and Related are demanding that CommonWealth suspend the offering and consider a proposal to buy the company at $25 a share.
CommonWealth said today that it will proceed with the offering. Meister and Related said they are prepared to call a shareholder vote to oust the REIT’s board of trustees, according to their statement.
“CWH has refused to meet with Corvex and Related, a further example of their disregard for their fiduciary duty, and instead continue to pursue their shareholder value-destroying conduct,” the companies said in a statement.
The Newton, Massachusetts-based real estate investment trust said that, “the best interests of CommonWealth will be served by CommonWealth continuing the common share offering and debt tender offer previously announced.”
Meister and Related said yesterday that they are prepared to make a bid of $25 a share, or $2.1 billion, for the company. Today, they said the $25 per share offering could be reduced if CommonWealth proceeds with the share offering.
Issuing 27 million additional shares will dilute CommonWealth’s outstanding stock by more than 30 percent, according to data compiled by Bloomberg, lowering the dividends paid to shareholders. REITs, whose primary income streams are from real estate, are required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders in the form of dividends. In exchange they pay little or no income tax.
Shares of CommonWealth jumped 54 percent yesterday, the most since at least 1986, after Corvex and Related challenged the offering. The stock fell $1.69, or 6.9 percent, to $22.71 at 1:06 p.m. in New York Stock Exchange trading.
If the company doesn’t cancel the share offering, Corvex and Related may try to replace members of the board, including CommonWealth President Adam Portnoy and his father, Chairman Barry Portnoy, according to a regulatory filing yesterday.
The case is Corvex v. CommonWealth REIT, Circuit Court for Baltimore City (Maryland)