On February 28, 2013, Chimicles & Tikellis LLP initiated a shareholder derivative and class action in the U.S. District Court for the District of Massachusetts in Boston, Mass., before the Honorable Denise J. Casper with the caption Delaware County Employees Retirement Fund v. Barry M. Portnoy, et al., under Case No. 1:13-cv-10405 (“Civil Action”). The Litigation was brought on behalf of Massachusetts-based CommonWealth REIT (“CWH”) and its shareholders against its co-founder Barry Portnoy and his son Adam Portnoy (“Portnoys”), and their wholly-owned entity Reit Management & Research, LLC (“RMR”), and certain other former and current officers and trustees of CWH (collectively, “Defendants”).
In its 65-page Complaint (which can be accessed below), Plaintiff alleges a long history of management abuse, self-dealing, and waste which resulted in various breaches of fiduciary duties owed by Defendants to CWH, including the transfer of CWH’s best properties to other REITs formed and controlled by RMR for the benefit of the Portnoys. By diverting key assets, RMR and the Portnoys were able to borrow and raise more capital, acquire more properties and earn more management fees from the other REITs controlled by RMR. The Board has long known of the persistent abuses of power and self-dealing by the Portnoys and RMR, which is CWH’s external manager. However, instead of protecting CWH and its shareholders, the Board adopted a bylaw purporting to require that all shareholder grievances be arbitrated. Plaintiff will ask for damages and seek to enjoin Defendants from any further self-dealing and mismanagement, including enjoining a recently-announced 27 million share Equity Offering and Tender Offer, as well as any attempt by Defendants to enforce the oppressive arbitration clause in CWH’s bylaws.
On March 1, 2013, Chimicles & Tikellis filed for a temporary restraining order (“TRO”) on behalf of CommonWealth REIT to stop its management from completing an Equity Offering and Tender Offer. On March 4, 2013, the District Court for the District of Massachusetts denied Plaintiff’s TRO motion as well as a separate TRO motion filed by shareholders Related Fund Management, LLC and Corvex Management LP (“Corvex-Related”).
On March 13, 2013, Corvex-Related announced that they would solicit shareholders to act by written consent to effect the removal of the entire board of trustees of CWH. On June 21, 2013, Corvex-Related announced that they secured the requisite number of shareholder consents needed to remove the entire CWH Board of Trustees. However, the Board of Trustees refused to accept the results and initiated an arbitration proceeding before the American Arbitration Association seeking to invalidate the consent solicitation (the “Arbitration”).
Following a July 26, 2013 hearing before the three-member arbitration panel (the “Panel”), the Panel invalidated the CWH bylaw amendment that imposed an unreasonable three year holding period and 3% ownership restriction on shareholders seeking a record date for a consent solicitation. Specifically, the arbitration panel held:
[W]hile some holding period and some minimum threshold ownership level either singularly or in combination can be set in the bylaws as a condition to a shareholder or shareholders obtaining a record date for a consent solicitation, the Trustees may not adopt either a minimum ownership threshold or a minimum holding period which operating either separately or together substantially impairs the right of shareholders to proceed with a consent solicitation by making the obtaining of a record date on a consent solicitation unreasonably difficult to achieve. The Panel has determined that the 3 + 3 bylaws exceed this standard as a matter of law. . . .
Following a two-week long evidentiary hearing that commenced on October 7, 2013, the Panel issued an interim order on November 18, 2013, striking numerous bylaw provisions and holding that there is no question that Trustees erected a complex wall of procedural hurdles to any consent solicit and that shareholders were “frustrated by the Bylaw barriers.” The Panel also provided a process for Corvex-Related to initiate a new consent solicitation seeking removal of the Board of Trustees. Regular updates are provided on the Corvex-Related website at http://www.shareholdersforcommonwealth.com.
With respect to the Civil Action, Defendants have asserted that shareholders must engage in a cost prohibitive arbitration before the American Arbitration Association pursuant to Section 16 of CWH’s Bylaws (the “Arbitration Bylaw”). However, Plaintiffs contend that the Arbitration Bylaw is void as a matter of law for numerous reasons, including that the Bylaw is unreasonable under Maryland law and a product of self-dealing adopted by the Board in order to insulate themselves from any liability for their misconduct. On November 20, 2013, the District Court for the District of Massachusetts held a hearing in the Civil Action on the validity of the arbitration clause and the parties await a ruling.