Magazine article Real Estate Issues

Focus on Reits

Magazine article Real Estate Issues

Focus on Reits

Article excerpt

CRITICISM OF REITs GOES TOO FAR -- SELLING OUT OR MERGING ISN'T ALWAYS BEST FOR SHAREHOLDERS

One of the latest fashions in the popular REIT press is to bash indiscriminately the management and directors of REITs that seek to remain independent or explore alternatives in the face of a potential merger or other strategic transaction. A recent REIT M&A transaction, for example, drew comments from one analyst to the effect that "it is very rare to be associated with a REIT management team that holds its responsibilities to shareholders in such high regard" and, in similar vein, a statement from a different commentator that "doing the right thing for [REIT] shareholders shouldn't be noteworthy, but it is." Similarly, REITs' adoption of shareholder rights plans (so-called "poison pills"), common in the rest of corporate America, has prompted some REIT commentators to argue that the credibility of the REIT industry is being damaged by the adoption of "unnecessary" and "anti-shareholder" measures.

These attacks go too far. They are based on a flawed perception that any resistance to a sale of the company is not in the best interests of shareholders. In reality, the ability to resist and negotiate can often be advantageous to the shareholders, and a sale -- even at a seemingly attractive price -- can mean a less favorable result for shareholders than pursuing the REIT's long-term strategic objectives.

An analysis of the impact of rights plans is instructive. Rights plans protect against takeover abuses, give companies and their shareholders and boards of directors breathing room in which to make decisions on potential takeovers, and strengthen the ability of the board of directors of a target to fulfill its fiduciary duties. Studies have shown, over and over again, that "poison pills ... are reliably associated with higher takeover premiums for selling shareholders, both unconditionally and conditional on a successful takeover ... Antitakeover measures increase the bargaining position of target firms, but they do not prevent many transactions." [1] As a result, rights plans have become a familiar part of the landscape in corporate America, having been adopted by over 2,300 public companies, including at least 45 percent of the Fortune 500 Companies. …

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