CommonWealth REIT Resurrects a Fallen Director

By Kyle Whisler, Takeover Defense Analyst

At its annual meeting of shareholders last week, the board of CommonWealth REIT (NYSE: CWH) sank to a new low, explicitly demonstrating that the company has little interest in the rights of their shareholders. For the past few months, the company has been involved in a tumultuous takeover fight with certain activist shareholders, namely Keith Meister’s Corvex Management LLC (Corvex) and Jeff Blau’s, Related Fund Management LLC (Related).

In April, CommonWealth blocked a proxy contest attempt by shareholders to remove the entire board of directors. While the initial action by shareholders looked promising, CommonWealth’s board unilaterally amended the company charter and bylaws to align with Maryland State statutes, resulting in stricter requirements for the removal of directors. In addition to the supermajority vote threshold that was already in place, shareholders must now show cause when attempting to remove any director. So, unless CommonWealth’s board can be shown to be criminally negligent, it looks like shareholders are stuck with the leadership they have.

To make matters worse, the CommonWealth’s poison pill contains a “dead hand” provision which states that the original directors who put the pill into place must approve the pill’s removal. As the document was initiated in 2004, early expiration of its terms is no longer possible as several of the directors have long since retired from the company. Shareholders must now wait until October of 2014 before attempting to acquire more than 10% of the company’s shares, making any further takeover through increased ownership impossible.

Meanwhile, Corvex and Related have been engaged in litigation with CommonWealth in the Maryland Courts, claiming that the company misled investors with regard to its future financial prospects. This legal battle, coupled with Corvex and Related’s failed proxy contest, indicate that certain shareholders at CommonWealth are extremely unhappy with the company’s leadership. While this season’s proxy battle may be over, the war for company control is likely to continue for many more months.

And most recently, at the company’s annual meeting on May 14, shareholders voted out CommonWealth director Joseph L. Morea. Despite Mr. Morea receiving only 21% of the vote—no other director received less support in 2012 or 2013—and his subsequent resignation, CommonWealth issued the following statement: “the Board of Trustees requested that Mr. Morea accept appointment to the vacancy created by his resignation.” In an act of corporate black art, CommonWealth immediately reanimated the defeated Morea and reappointed their fallen colleague back to the board of directors. Such flagrant indifference for clear shareholder intent has to make one wonder why the company bothered holding an election at all.

GMI Ratings currently ranks CommonWealth REIT a “D” in Ownership & Control. The combination and use of poison pills, director removal restrictions, business combinations, and controlling share thresholds has left the company’s shareholders with little means to enact change in the company. CommonWealth investors have seen steady decline in share value since 2010 and these recent events do not provide much hope for a leadership change or an increase in shareholder control anytime soon. In addition to adopting new takeover defenses, further entrenching its board, and utilizing the rarely used “dead hand” poison pill tactic, CommonWealth has now shown a complete disregard for shareholder rights.