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Shareholder democracy is a messy, detailed, expensive and time consuming business. But it is also something that is very necessary, even though the ownership theory that underlies it is something often more honoured in the breach than in its observance.
The case of CommonWealth REIT, the New York Stock Exchange listed real estate investment trust based in Newton Massachusetts is a good example, where a lengthy proxy battle that commenced in February of 2013 now seems to be slowly grinding to its final dénouement.
CommonWealth REIT is a large, nationwide office real estate investment trust. It owns about US$6.8 billion of properties located all across America, and also in Australia. Listed on the New York Stock Exchange (CWH), CommonWealth currently has a market capitalization of about US$3.2 billion currently.
Unusually for such a large entity CommonWealth is currently managed by an outside property management company, Reit Management & Research (RMR). RMR is owned by Barry Portnoy and his son Adam, the father and son team that also control the Board of Trustees of CommonWealth as its two Managing Trustees. Over the years it seems RMR has withdrawn hundreds of millions of dollars in management fees from CommonWealth even as its shares have performed relatively poorly in the mean time.
This upset a lot of shareholders, but still needed somebody to champion the cause of change in order to get something done. Accordingly in February 2013 Keith Meister of Corvex Capital and Jeff Blau of The Related Companies bought close to 10% of the shares of CommonWealth and began a proxy consent solicitation to replace the entire existing Board of Trustees with their own slate in order to make wholesale changes that they believed were necessary.
Legal filings were made, presentations of their position were publicized in open letters to shareholders and the Portnoys made their own detailed rebuttals of the arguments.
When a vote was finally held in June of last year Corvex and Related received a 70% vote for change, which crossed the 65% threshold required to prevail. However this was overturned by an official Arbitration panel on procedural grounds in November. In its ruling the Arbitration panel also stated, though, “there is no question that CWH’s Bylaws… erect a complex wall of procedural hurdles to any consent solicitation.” Accordingly, at the same time the panel then gave approval for a new vote to be taken with clear, simple guidelines for how this time the vote should be conducted.
A deadline of March 20th, 2014 was set by the panel for the activist investors to bring their campaign to a conclusion. At the same time, however, the potential for further obstructive tactics by the existing management at CommonWealth effectively became completely preempted, and the stage is therefore now set for resolution one way or another.
So getting back now to the nitty gritty details of shareholder democracy for the formal record, just on Friday, Corvex and Related announced that they had delivered to CommonWealth a formal request for a record date for the consent solicitation to remove the entire Board of Trustees which they had earlier also filed with the SEC.
In the elegant pirouettes of legal process that go on, earlier too last week CommonWealth themselves announced such a record date of February 18, 2014, conditional on their receipt of the record date request that Corvex and Related have now delivered.
Since a vote will now be taken within 30 calendar days from the record date the result will be known within the Arbitrators’ stipulated March 20th, 2014 deadline – which is why they set such a deadline in the first place, in order to hurry things up.
Once the vote is taken CommonWealth will have 5 business days to count and certify the vote. If the consent solicitation succeeds then CommonWealth is obliged to call a Special Meeting of its shareholders, within 10 to 60 calendar days, to elect a new Board of Trustees. Accordingly Corvex and Related must win both votes to gain control and install their slate including Mr. Zell, but if they do win the first vote the second one should be deemed to be probable as well.
So that takes care of the formal process side of things from the legal constitutional perspective. For the rest, in order to win the upcoming vote, and keep the constituency they succeeded in pulling together last June intact, Corvex and Related have to continue maintain their public relations battle at full strength all the way to the conclusion.
They have set up an official web site too for the purpose to help in that process, and also to explain to people how to vote. The two activist investors have also now brought on board heavyweight real estate investor Sam Zell, as their choice for future Chairman of the venture, if they should succeed.
Finally, in order to persuade shareholders of their case Corvex and Related put together an updated presentation presenting the essence of their case for change. Barry and Adam Portnoy will no doubt make their own case to their shareholders as well, in the mean time, so that the vote should this time at last be clear and decisive.
To show the power of a picture though, here is the relatively simple chart Corvex and Related put together as of Friday. It illustrates the sixteen year ogive of RMR’s management fees compared to what are claimed to be total investment returns (capital appreciation plus distributions on an annualized basis), both of CommonWealth itself – CWH is there at the bottom in blue – and the three property trusts which Sam Zell himself has managed (one of which was sold in 2007). This kind of analytical comparison is something CommonWealth’s voting constituencies, who are mostly institutional shareholders themselves, may understand all too clearly.
So now may the best arguments win. That is what shareholder democracy is supposed to be about after all, and here is a very good example of it at work, and perhaps quite a rare one at that.