Institutional Shareholder Services recommended that investors in CommonWealth REIT (CWH:US) vote to remove the entire board, according to Corvex Management LP and Related Cos., which are leading an effort to replace the trustees.
The shareholder-advisory firm said removal is warranted because of “dismal” investor returns, underperformance tied to CommonWealth’s external management structure and certain corporate governance provisions, Corvex and Related said in a statement today.
Corvex, founded by activist investor Keith Meister, and Related, a New York-based property developer, are soliciting votes to remove the trustees, claiming that an overlap in board membership and the ownership of an external management firm has led to conflicts of interest and mismanagement at the real estate investment trust. CommonWealth, based in Newton, Massachusetts, has said it is better off with its current structure and its shares will rise as it focuses on its strategy of owning downtown office buildings.
“A successful remove vote will create a clear path for shareholders to nominate truly independent and accountable trustees who are committed to the future success of CommonWealth for the long-term benefit of all shareholders,” Meister and Jeff Blau, chief executive officer of Related, said in the statement.
CommonWealth says the solicitation to remove the board isn’t valid because the shareholders (CWH:US) don’t meet the qualifications under the REIT’s bylaws. The dispute with Corvex and Related, its second-biggest investors, is in arbitration.
The ISS recommendation was premature because “no valid record date has been set and the Corvex/Related activities do not constitute a valid consent solicitation,” CommonWealth said in a statement. “The company is also disappointed that ISS issued this report before it is appropriate to do so because it will likely cause confusion among CommonWealth shareholders.”
The REIT reiterated that stockholders should take no action on the solicitation.
Marcato Capital Management LLC, owner of about 3.1 percent of CommonWealth’s shares, said today that it supports the Corvex group’s efforts.
“Changing the external management structure and removing the conflicted board that enables the company’s flawed corporate governance practices are critical to allow investors to realize the full value of their investment,” San Francisco-based Marcato said in a letter to the REIT’s independent trustees.
CommonWealth’s president, Adam Portnoy, and his father, Barry, a company founder, sit on its five-member board (CWH:US) and are owners of the external management firm, Reit Management & Research LLC.
The board has “demonstrated much greater creativity in entrenching itself, and hardening the bunker in anticipation of even a legitimate shareholder challenge,” ISS said in the report, dated yesterday. “For shareholders considering their options in this consent solicitation, there is no percentage in doubling down on that bet. The far more promising alternative appears to be, instead, to consent to the dissident proposal to remove all incumbent directors, and retake control of their company.”
CommonWealth’s credit rating on June 10 was lowered to junk by Standard & Poor’s, which cited concerns about the ability of management “to improve the competitive positioning of its office portfolio given weak office market conditions.” The REIT was downgraded to BB+ from BBB-.
Shares of CommonWealth rose 3.3 percent to $21.34 at the close of New York trading.
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