Real Estate Investment Trust Board Removed by Shareholders in Arbitration

June 20, 2014

In a victory for Analysis Group clients Corvex Management, a hedge fund, and Related Fund Management, a real estate investment fund, the board of trustees of CommonWealth REIT, a real estate investment trust, was removed by an overwhelming majority of its shareholders. Unlike most equity REITs, CommonWealth is externally managed by Reit Management & Research LLC, which is owned by the two managing trustees of CommonWealth's board. Claiming self-dealing and attributing the REIT's underperformance to the board members' mismanagement, Corvex and Related conducted a consent solicitation seeking removal of the board. The consent solicitation was approved by more than two-thirds of the REIT's shareholders but was blocked by the board; the matter then went into arbitration. After a two-week hearing, the arbitration panel ruled that the consent solicitation was not valid but sided with our client, opining that CommonWealth's board was subject to removal without cause (notwithstanding CommonWealth's claim to the contrary), and that a new consent solicitation could be run. The panel also ruled in our clients' favor on the length of time that was permissible for the board to set the record date and to review the results of the consent solicitation. The panel limited the informational burdens that the board sought to impose on Corvex and Related. In February and March 2014, Corvex and Related ran the new consent solicitation permitted by the panel's order, and CommonWealth's shareholders voted by an overwhelming supermajority to oust the board.

Working with attorneys from Gibson Dunn, an Analysis Group team led by President and CEO Martha Samuelson and Vice President Samuel Weglein supported several experts in the arbitration: Professor Guhan Subramanian, an authority on corporate governance, opined that Maryland law does not preclude removal of CommonWealth's board without cause and that the board's actions were not in the interest of the shareholders; Professor Edward Rock addressed the structure of CommonWealth's share ownership and opined on corporate governance issues; Dean Glenn Hubbard assessed the underperformance of the REIT and the quality of its management; and Mark Harnett, an expert in proxy voting, discussed the reasonableness of time periods associated with the consent solicitation process. Other members of the Analysis Group team included Vice Presidents Mike Nguyen and Orlando Visbal, Managers Peter Rybolt and Jason Gilbody, and Associate John Drum.