Bruising Battle

If you liked the drama between American Realty Capital Properties and Cole Credit Property Trust III, you'll love this Bloomberg story on the battle for CommonWealth REIT (CWH).  Two outside investors, Corvex Management and Related Management, are attempting to takeover control of the externally advised REIT.  CommonWealth and its management are doing everything they can to thwart the unwanted solicitation. 

Corvex and Related have offered $24.50 for the company, and say its assets are worth over $40, but are constrained by CommonWealth's corporate structure and poor management.  CommonWealth's stock is trading around $20 per share, and was well below $18 per share before the offer.  CommonWealth has rejected the offers using techiques like these:

Stiff takeover defenses awaited the investors. CommonWealth’s poison pill limits investors to holding no more than 10 percent of shares, which caused the activists to cap their stake at 9.8 percent. They now own 9.2 percent. The Dead Hand provides that only board members who approved the poison pill can revoke it.

CommonWealth also has a staggered five-member board, so that different directors, also known as trustees, are up for re-election every year. That requires hostile bidders to seek a two-thirds vote to oust all the directors at once in what’s known as a consent solicitation. Adam and Barry Portnoy are two of the board’s five trustees.

After the offer CommonWealth added these hurdles:

The board adopted a rule requiring that shareholders own 3 percent of the stock for three years before they could initiate a vote to replace directors. That was up from a threshold of $2,000 in stock and just one-year ownership. And it said that its bylaws require that any disputes be settled by arbitration, not in court. 

Meanwhile, after the Meister bid the Portnoys also tried to clarify Maryland law to make it tougher to remove board members, according to a company statement April 15. They lobbied legislators to require that shareholders prove cause to oust a director. While lawmakers didn’t act on the measure, the company said it is interpreting Maryland law to require that directors can only be removed for cause. 

And this is my favorite move:

CommonWealth’s efforts to protects its directors surfaced again this week when the firm ignored a May 14 shareholder vote not to re-elect director Joseph Morea, who was backed by less than 50 percent of the shares. A day after the annual meeting CommonWealth asked Morea to fill the vacancy created by his own resignation, which he accepted. 

I know nothing about CommonWealth, but this is an ugly situation.  One positive point for investors is that CommonWealth's shares are liquid so they can sell their shares.