A Newton real estate company was allowed to proceed with a stock sale Tuesday despite objections from activist investors who have accused the company’s trustees of issuing shares to allies in order to block management changes.
The ruling by a US District Court judge in Boston marks the first stage of what is expected to be a long fight over control of CommonWealth REIT, as investors have launched multiple lawsuits accusing company managers of manipulating operations to enrich themselves at the expense of shareholders.
CommonWealth, managed by Barry Portnoy and his son, Adam, sold 34.5 million shares of the company Tuesday for $627 million. As of Dec. 31, the firm owned about $7.3 billion worth of commercial and industrial real estate across the United States and abroad, including properties in Massachusetts.
Shareholders Related Cos. and Corvex Management sought to block the issue of new stock, contending that the Portnoys engineered the sale to “friends” and other investors who would block the dissidents’ efforts to buy CommonWealth outright or take control of its board.
Corvex and Related, which hold 9.8 percent of CommonWealth’s stock, offered to pay $27 per share, while CommonWealth’s managers sold the shares Tuesday for about $19. Lawyers for the investors asserted that the sole purpose of the offering was to dilute the power of existing shareholders, making it difficult for them to remove CommonWealth’s trustees.
But US District Court Judge Denise Casper refused to block the sale late Monday, saying that Corvex, Related, and others had failed to prove that CommonWealth’s managers were acting in bad faith by issuing the new stock.
CommonWealth’s lawyers asserted that the stock sale had been in the works for months to stabilize the company’s debt and prevent a possible credit downgrade that would increase its borrowing costs.
In a declaration filed with the court, Adam Portnoy denied that the sale was orchestrated to preempt management changes sought by Corvex and Related, saying he did not know of the companies’ efforts until after he began arranging the sale last month.
“The equity offering . . . was undertaken to further CommonWealth’s business plan” to divest suburban and industrial buildings and focus its investments on office buildings in urban business districts, Portnoy stated.
CommonWealth shares closed Tuesday at $23.12, down 3.26 percent.
In a regulatory filing yesterday, Corvex and Related indicated they will continue to pursue additional claims that CommonWealth and the Portnoys have misled and defrauded its investors, and acted to benefit themselves to the detriment of shareholders, among other claims.
A separate plaintiff, the Delaware County Employees Retirement Fund of Pennsylvania, has alleged the Portnoys defrauded investors by using a separate company they own to manage CommonWealth’s properties, allowing them to collect tens of millions in fees. It also alleged that the Portnoys and other trustees approved the creation of spinoff companies to control valuable properties that further increased fees paid to the Portnoys’ company, called Research LLC.
In its complaint, the retirement fund wrote that CommonWealth’s board of trustees “did not implement any process to determine whether [or to ensure that] the self-dealing spin-off transactions were fair or in the best interests of CommonWealth, nor did they demonstrate any reasonable business objective for transferring properties to the spin-offs, much less maximize shareholder value.”
In his declaration, Adam Portnoy called the statements about Research LLC false and malicious.
“There is nothing improper or even unusual about the relationship,” he stated, adding that fees collected by Research LLC are used to pay its operating expenses, including the salaries of its more than 800 employees.