May 8 (Bloomberg) -- CommonWealth REIT’s dispute with shareholders over company bylaws and alleged wrongdoing by its board must be resolved through arbitration, a Maryland judge ruled.
The judge, handing a defeat today to activist investor Keith Meister and others seeking to replace the real estate firm’s trustees, said board has authority to craft bylaws that require shareholder conflicts to be settled through an arbitration process.
“It is not for this court to question the intent of the Maryland legislature in its decision to enact REIT law provisions that permit such action by REIT trustees,” Baltimore City Circuit Judge Audrey J.S. Carrion wrote, rejecting the plaintiffs’ bid halt the arbitration.
Corvex Management LP, headed Meister, and Related Cos., led by chief executive officer Jeff Blau, sued CommonWealth in February. They claimed that an overlap in board membership and the ownership of an external management firm, REIT Management & Research LLC, led to conflicts of interest that wasted corporate assets.
An amended complaint also challenged changes to the company’s bylaws that limited the number of shareholders who could participate in board removal efforts.
Corvex and Related filed the suit on Feb. 27 in a failed bid to stop a sale of new shares they claimed would dilute their holdings. The board rejected an offer of $27 a share for the company by Corvex and Related, 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.
The real estate company filed for arbitration, as allowed by its bylaws, shortly after the investors sued.
Attorneys for Corvex and Related objected to arbitration, telling Carrion at a hearing last week that the process is stacked against shareholders.
“While we respectfully disagree with the Court’s decision, the facts remain the same -- CommonWealth’s bylaw changes and other actions are illegal, unenforceable and solely designed to entrench the board and thwart the will of its shareholders,” Joanna Rose, a spokeswoman for Corvex and Related said in an e-mailed statement. “This decision was on only a procedural issue, and we look forward to a favorable substantive outcome for all shareholders.”
CommonWealth, based in Newton, Massachusetts, issued a statement acknowledging the decision and declining to comment further.
The ruling is a victory for CommonWealth president Adam Portnoy and his father, Barry Portnoy, a company founder, who are the subjects of the plaintiffs’ conflict of interest allegations.
The two men sit on CommonWealth’s five-member board of trustees and are owners of REIT Management and Research, according to the complaint.
Corvex and Related, both based in New York, made a consent solicitation filing with the Securities and Exchange Commission on April 10, a step toward seeking shareholder approval to remove CommonWealth’s board.
The 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, Adam Offenhartz, an attorney for the plaintiffs said at last week’s hearing. They need 66 percent to replace board members.
A CommonWealth attorney dismissed the results as invalid.
Rose said Carrion’s ruling won’t halt efforts to remove the CommonWealth board.
“We are continuing our consent solicitation efforts to remove all current trustees and provide shareholders a clear path forward to effect change and realize shareholder value,” she said in her statement.
The companies are “reviewing all of our options” regarding a possible appeal of Carrion’s decision, Rose said.
The case is Corvex v. CommonWealth REIT, 24C13001111, Circuit Court of Maryland (Baltimore City).
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