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The Deal: CommonWealth Swallows Poison Pill

NEW YORK ( TheStreet) -- CommonWealth REIT (CWH) on Monday, Sept. 23, pledged to revamp its board, scrap its poison pill and change the way its management company is paid in an attempt to resolve an ongoing dispute with dissident shareholders.

Newton, Mass.-based CommonWealth said that beginning next year business management fees paid to REIT Management & Research would be paid in CommonWealth shares instead of cash. The REIT also intends to tie RMR annual incentive payments to total returns on shares instead of being tied to funds from operations.

CommonWealth also said it intends to increase the size of its board from five and increase the number of independent trustees from 60% of the board to at least 75%. CommonWealth said its board has retained Korn/Ferry International to seek out potential independent trustees.

The announcements follow a campaign by investors Corvex Management and Related Fund Management LLC, who together own about 9.6% of CommonWealth's shares, to overhaul CommonWealth's relationship with its external management company and improve corporate governance.

Chief among the activists' complaint was that because CommonWealth and RMR had interlocking management and corporate boards decisions about the real estate portfolio were made to keep RMR property management fees up, rather than selling off property or making other changes that might benefit the REIT.

Disputes between CommonWealth and the investors are in arbitration. The dissidents last month notched a small victory when the arbitration panel struck down a provision that would make replacing CommonWealth's board more difficult. Arbitration hearings on other related matters are scheduled to begin on Oct. 7.

The investors had no immediate response to CommonWealth's changes, but the REIT said the new policies follow several weeks of "numerous conversations with shareholders" about the way it operates.

But Corvex and Related in a statement said the reforms "lack substance and constitute mere window dressing" by the board. "Shareholders should note that these "to-be proposed" governance changes contain widespread caveats and would not even be considered, if ever, until after the arbitration is expected to be completed," the investors said, adding that they "remain confident" they will be successful in arbitration.

"A persistent theme of our recent conversations with shareholders has been that CommonWealth should further align RMR's financial incentives with the returns realized by shareholders and enhance its governance," CommonWealth's independent trustees said in a statement. "The changes announced today are intended to address these concerns, while allowing CWH shareholders to continue receiving high-quality management services at or below average costs."

CommonWealth said its board is also recommending that once the shareholder dispute is resolved all trustees be subject to annual re-election instead of staggered three-year terms. The board also said it would accelerate the expiration of CommonWealth's shareholder rights plan, or so-called poison pill, from Oct. 17, 2014, to a date soon after resolution of the disputes with Corvex and Related.

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