CommonWealth REIT (CWH:US)’s largest investors (CWH:US), Corvex Management LP and Related Cos., are seeking to remove its board after unsuccessfully challenging a stock offering by the real estate investment trust earlier this month.
Keith Meister’s Corvex and Related, led by Chief Executive Officer Jeff Blau, filed documents with the Securities and Exchange Commission asking shareholders to consent to the board’s removal, the companies said today in a statement. They hired Deutsche Bank AG as their adviser and intend to work with the lender on any financing required for their effort.
A “misalignment of incentives” between the Newton, Massachusetts-based REIT and its external management has driven down the value of the stock, the New York-based investors said in a Feb. 26 letter to the board. They sued to stop an offering of 34.5 million shares that was completed last week because of the dilution it would cause. The two companies, which disclosed their investment last month, own a stake of about 8.6 percent, according to a regulatory filing today.
To fend off Corvex and Related, CommonWealth changed its bylaws on March 1 to make it harder for an investor to replace board (CWH:US) 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.
CommonWealth’s charter permits holders of two-thirds of the outstanding shares to remove trustees by written consent, Corvex and Related said in the statement. The board would then have to call a special shareholders’ meeting to elect its successors.
“In our view and that of our lawyers, any bylaw amendment that tries to make an end-run around this clear right is simply unenforceable,” Meister and Blau said in today’s statement. “We are confident that ultimately they cannot get around the simple fact that CWH’s charter gives all shareholders the ability to remove the board by means of written consent with a two-thirds vote.”
Corvex and Related are arranging financing because removing the board would constitute a “change of control” and trigger a default under CommonWealth’s credit agreement, according to a regulatory filing today.
The investors gained an ally today when Perry Corp., a New York-based hedge-fund firm run by Richard Perry, disclosed a 6.5 million-share, or 5.5 percent, stake in CommonWealth, according to a regulatory filing. Perry supports the views of Corvex and Related and said “proper corporate governance is critical to unlocking the inherent value” of CommonWealth’s assets.
CommonWealth gained 1.2 percent to $22 today. The company, in a statement, urged shareholders to take no action and said its board will evaluate the filings.
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 LLC, or RMR, the external management company for the REIT.
CommonWealth last week sold 34.5 million shares at $19 each, resulting in net proceeds of about $628 million, after a judge rejected the bid by Corvex and Related to stop the offering. The investors estimate the company’s real estate assets are worth about $40 a share.
Corvex and Related cited the equity offering in today’s filing as an example of a board policy that reduces value for shareholders by diluting their holdings. They also claimed that the board buys properties at a high valuation to maximize management fees for RMR.
John Guinee, an analyst at Stifel Nicolaus & Co. in Baltimore, expects the investors to ultimately be successful because of a “one, two, three punch” of legal action, the consent solicitation and a potential fully financed offer to buy the company in the low $20-per-share range.
“This is a slow process,” Guinee said in a telephone interview. Corvex and Related will win because “the RMR management is just so egregiously bad.”
Meister, a onetime Carl Icahn protege, has been active in pressuring companies to make moves that increase value for stockholders. In August, he disclosed a stake in food producer Ralcorp Holdings Inc. and three months later the company agreed to sell itself to rival ConAgra Foods Inc. (CAG:US) Related, whose chairman is billionaire Stephen Ross, is the developer of properties including New York’s Time Warner Center.
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