CommonWealth Gains After Arbitrators Rule Against Bylaw

CommonWealth REIT rose the most since February after an arbitration panel struck down a provision making it more difficult for stockholders to remove the company’s board of trustees.

A bylaw adopted in March requiring shareholders to own at least 3 percent of the stock for a minimum of three years before trying to remove the board is invalid, the panel found. Corvex Management LP and Related Cos., which began buying shares earlier this year and own about 9.6 percent of the company, sought to void that rule as they began a campaign to remove the trustees, claiming conflicts of interest and mismanagement.

While the arbitrators also denied a request by the investors to set an expedited shareholder meeting to elect a new board, the decision on the bylaw is perceived as “very favorable” to Corvex and Related, John Guinee, an analyst with Stifel Nicolaus & Co., wrote in a note today. The companies began seeking votes in April to oust the trustees and said they gained support from holders of more than 70 percent of the shares. CommonWealth, based in Newton, Massachusetts, has said the effort was invalid under its bylaws.

“The market is reading this as a win for Corvex and Related,” Rich Moore, an analyst at RBC Capital Markets in Solon, Ohio, said in a telephone interview.

CommonWealth rose 6 percent to $25.38, the biggest advance since Feb. 28. The shares have jumped 60 percent this year.

October Hearing

Corvex and Related sought an order declaring that its consent solicitation is proper and that CommonWealth should convene a special meeting of shareholders, which was denied by the arbitration panel, CommonWealth said in a statement today. The arbitrators scheduled a hearing for further consideration of the issues to begin on Oct. 7, the REIT said.

The three-member panel ruled that the trustees “may not adopt either a minimum ownership threshold or a minimum holding period which operating either separately or together substantially impairs the right of shareholders to proceed with a consent solicitation by making the obtaining of a record date on a consent solicitation unreasonably difficult to achieve,” according to a filing from Corvex.

Previous bylaws requiring that holders own at least $2,000 of stock for at least one year remain in effect pending a further order, CommonWealth said. The panel made no determination on whether those limits were valid or not, according to the filing.

Prior Precedent

Ousting the board will still be difficult, Moore said.

“This isn’t the first time it’s been tried,” Moore said. “There’s a lot of precedent out there that says this isn’t going to work.”

There are other hurdles for the investors. CommonWealth claims that no trustee can be removed from the board “without cause,” which it says makes Corvex and Related’s consent solicitation invalid, according to a June 20 regulatory filing.

Commonwealth’s bylaws also require any shareholder seeking to nominate individuals to the board to provide advance notice to the company that contains specified information, including its holdings, affiliates and its purposes, according to the filing. CommonWealth said that the investors had not made “any good faith attempt to comply” with those requirements.

“We look forward to continuing through the arbitration process and to a full hearing on these matters,” CommonWealth said in a statement today. “We are confident that when all of the evidence is presented to the arbitration panel, the invalidity of the Corvex/Related consent solicitation will be established.”

External Management

Corvex and Related have argued that the ownership of an external management firm, REIT Management & Research LLC, by company President Adam Portnoy and his father Barry, a company founder, has led to conflicts of interest and underperformance at CommonWealth. Both Portnoys sit on the REIT’s five-member board and are owners of the external management company.

CommonWealth spent between $8 million and $9 million in legal and consulting fees in the second quarter related to the Corvex and Related case as well as “copycat litigation from others repeating various false charges made by Corvex and Related,” Adam Portnoy said yesterday on a conference call with analysts after the company issued second-quarter results. “We now have cases pending in three different courts and an arbitration proceeding.”

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