Activists Prevail in Campaign to Oust REIT’s Board

For more than a year, an activist hedge fund and a prominent real estate developer have pressed for change at a stodgy real estate investment trust.

And for more than a year, the father-and-son team that controlled CommonWealth REIT fended off these dissidents.

But on Tuesday, the hedge fund, Corvex Management, and the developer, Related Fund Management, which together own 9.6 percent of CommonWealth’s shares, announced a hard-fought victory. Shareholders representing more than 81 percent of the company’s outstanding stock voted to replace the entire board as part of a consent solicitation process.

The vote sets in motion a process that will almost certainly result in the ouster of Barry M. Portnoy and his son, Adam D. Portnoy, who control CommonWealth, along with a management company that receives lucrative fees to operate the properties owned by CommonWealth.

The Portnoys were paid $77.3 million in 2012, up from $59.7 million in 2007. CommonWealth’s stock, meanwhile, had declined 68 percent in the five years before Corvex and Related showed up.

Those seemingly excessive fees, and other concerns about poor corporate governance, are what inspired Corvex and Related to begin their campaign, pledging to “maximize value” for all shareholders, not just the Portnoys.

“The shareholders have exercised their rights and we look forward to working with the trustees in the coming days to arrange for an orderly transition process that best protects the interests of all shareholders,” Keith Meister, the founder of Corvex and a former protege of Carl Icahn, and Jeff T. Blau, chief executive of Related, said in a joint statement. “We will immediately reach out to the trustees to begin these discussions.”

Results of the consent solicitation process came two days before a Thursday deadline by which Corvex and Related needed to persuade at least two-thirds of shareholders to oust the current board.

And there is reason for shareholders to believe change is coming. In previous comments to The New York Times, the Portnoys  suggested they would not stand in the way of the process. “CommonWealth will comply with the requirements of the declaration of trust and the panel order,” the company said last month, indicating it would allow for the replacement of its board.

The company will call a special meeting in the coming months, the current board will step down, and shareholders will presumably vote in the directors nominated by Corvex and Related.

That slate was updated last month to include the billionaire real estate mogul Sam Zell, a move designed to give shareholders confidence in the bona fides of the team taking over CommonWealth. It also includes David Helfand, a co-president of Mr. Zell’s private investment firm, who is the presumptive chief executive of CommonWealth under the new board.

Though the Portnoys indicated it would go along with the wishes of shareholders, they have mounted a fierce defense over the last year, advised by lawyers at Skadden, Arps, Slate, Meagher & Flom. Among other tactics, they have opted in to an obscure Maryland statute that prevents board members from being removed for cause and issued new shares to buy back debt in a move that Corvex and Related said was intentionally diluting their positions.

When Corvex and Related called for a vote on directors last year, 70 percent of shareholders voted to oust the board. But the Portnoys were able to invalidate that vote on technicalities.

In October, however, a Delaware judge said a binding vote could proceed, paving the way for Tuesday’s results.

Corvex and Related declined to comment beyond their statement. CommonWealth and Skadden did not immediately respond to requests for comment.