CommonWealth REIT Judge Urged to Void Board Tenure Rules

Changes to the bylaws of CommonWealth REIT make a vote to remove its trustees almost impossible, a lawyer for investors trying to oust the board told a Maryland judge, urging her to throw out the provisions.

The amendments “give complete, unfettered control to the board” and would “stop in its tracks” a vote by shareholders on replacing the trustees, Adam Offenhartz, an attorney for Corvex Management LP and Related Cos., told Judge Audrey J.S. Carrion. The companies sued CommonWealth to void 2009 and 2013 bylaw changes restricting who can vote to remove a trustee.

Carrion, in a hearing today in Baltimore, said she will rule next week on the bylaws and on a request by Corvex and Related to halt arbitration of issues raised in their lawsuit.

The fight over the bylaws is part of a suit brought by activist investor Keith Meister’s Corvex, and Related, led by chief executive officer Jeff Blau, to stop the sale of 27 million new shares because of the dilution it would cause. The suit followed the board’s rejection of a $27 a share bid for the company by the two, who together controlled 9.8 percent of Commonwealth.

CommonWealth’s sale of 30 million shares settled on March 5, according to data compiled by Bloomberg. The offering priced on Feb. 27 at $19 a share.

Minimum Holding

CommonWealth, based in Newton, Massachusetts, changed its bylaws on March 1 to make it harder for an investor to replace board members. A shareholder or group of investors must own 3 percent of the company for at least three years before taking action to remove a trustee, according to a regulatory filing.

Before March 1, no more than two shareholders had a reported holding that fulfilled the requirements of the amendment, Corvex and Related said in an amended complaint.

Robert Saunders, an attorney for the trustees, argued today that the board was entitled to make the changes because of the latitude granted in the bylaws.

Corvex and Related can’t “succeed in this motion without convincing you that ‘may’ means ‘shall’ and it doesn’t,” Saunders told the judge.

The companies, both based in New York, made a consent solicitation filing with the Securities and Exchange Commission on April 10, a step to obtain shareholder permission to remove CommonWealth’s board.

Shareholder Votes

Offenhartz said the investment companies have sent out ballots and have gathered support from shareholders controlling “more than 40 percent” of the outstanding shares in less than two weeks. They need 66 percent to replace board members.

Saunders dismissed the results as invalid.

CommonWealth is undervalued because of a “misalignment of incentives” between the REIT and its external management, according to the lawsuit.

Related and Meister accused CommonWealth of breaching its fiduciary duty by “self-interested conduct that has sacrificed and continues to sacrifice CommonWealth shareholder value” for the benefit of the company’s trustees and external manager, Reit Management & Research LLC.

CommonWealth’s five-member board of trustees includes President Adam Portnoy and his father, Barry Portnoy, a company founder. They also own Reit Management & Research.

CommonWealth filed for arbitration as provided in its bylaws shortly after the investors filed suit on Feb. 27.

Invalid Arbitration

The arbitration is invalid because Maryland law requires that shareholders agree to it, Offenhartz said.

“We have not expressly assented to an arbitration provision,” he said.

He warned Carrion that “Maryland courts and other state courts would lose their primacy, their ability opine on their own state’s corporate law” if the arbitration is allowed to proceed.

Saunders said shareholders agree to be bound by arbitration as a condition of owning CommonWealth stock.

Corvex and Related are trying “to pick and choose” which bylaws they’ll be bound by, he said.

The case is Corvex v. CommonWealth REIT, 24C13001111, Circuit Court of Maryland, Baltimore City.

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