September 07, 2006
REITs Are Not Takeover Proof – The Public Storage/Shurgard Case Study
August 23. 2006
We have been saying for some time, most recently in our memo from last August (copy attached), that REITs are not takeover proof, myth and legend notwithstanding. The closing yesterday of Public Storage’s successful takeover of Shurgard makes the case more eloquently - and decisively - and should finally put to rest any lingering misconceptions about whether it is possible to acquire a REIT on an unsolicited basis.
Public Storage had privately approached Shurgard several times to discuss a potential business combination and was repeatedly rebuffed. Most recently, in July 2005, Public Storage proposed a stock-for-stock combination at a significant premium to market prices. Although this proposal was also quickly rejected as inadequate by the Shurgard board, Public Storage did not back down. Public Storage made its proposal public, and pressed its case to the Shurgard shareholders though one-on-one meetings and through press releases and public statements. Ultimately, the resulting shareholder pressure and compelling logic of the combination led the Shurgard board to announce that it was exploring strategic alternatives. In the end, Shurgard’s exploration process culminated in a merger with Public Storage, which valued Shurgard at about $5.5 billion. The transaction provided Shurgard shareholders a 39 percent premium to Shurgard’s undisturbed stock price plus the opportunity to benefit from the upside potential of the combined company.
The Public Storage/Shurgard transaction is indicative of larger trends in the REIT market. The extraordinary liquidity in the real estate capital markets, combined with the differential between private and public market values and the low interest rate environment, among other factors have brought an increase in the frequency and seriousness of unsolicited proposals, hedge fund activity, private equity club deals for large targets, and topping bids after announced deals. The attempts to derail the sale of Town & Country, even though unsuccessful, illustrated that even REITs that are committed to announced transactions are not immune to takeover attempts. REITs are increasingly being subjected to the same dynamics and pressures that exist in the broader market for corporate control.
REIT management and boards of directors are well advised to study the market environment in which they now operate, to engage in advance planning and takeover preparedness reviews in order to be able to respond rapidly and appropriately as circumstances may dictate, and to pay careful attention to deal protection measures in friendly transactions.
David M. Einhorn
Adam O. Emmerich
Trevor S. Norwitz
David E. Shapiro
REITs Are Not Takeover Proof
August 18, 2005
A popular misconception is that REITs are by their nature “takeover proof.” This is simply not the case. Although REITs have a number of defenses at their disposal, as we have long pointed out there is nothing inherent in the REIT structure that makes REITs any less vulnerable to unsolicited offers than other public companies. As with publicly traded corporations generally, REITs and their boards of directors must be well-briefed on the M&A market, plan carefully for the possibility of an unsolicited takeover approach, and be prepared to respond with flexibility, realism and creativity to the unexpected.
Extrapolation from the very few instances in which REITs have been the subject of unsuccessful takeover bids is not a good predictive tool. The sample is too small and involves a variety of special situations and circumstances. Recent successful REIT takeover defenses hinged not on REIT-specific issues but rather on the opposition of a significant number of shareholders to an inadequate bid, shareholder preference for an alternative transaction or other unique circumstances. The broader universe of public companies that have experienced unsolicited bids is a better framework for understanding current takeover dynamics. The lesson from that broader universe is that few companies are takeover proof; boards must be prepared for the eventuality of a possible takeover approach; and be realistic and well-advised about the legal and market realities of unsolicited bids.
REITs generally have so-called “ownership limitations” or “excess share” provisions in their charters designed to preserve their tax benefits. If properly implemented these provisions can and generally do serve as a form of takeover defense. Indeed, some state statutes validate such charter ownership provisions, including for non-tax purposes, and some REITs have specifically disclosed that such provisions may be used for anti-takeover purposes. However, excess share provisions are largely untested as anti-takeover defenses and may be inherently vulnerable because of their grounding in the tax code or the specific manner in which they are drafted. Indeed, some ownership limitation provisions even require a board to exempt an acquirer who so requests unless the board makes a determination that the exemption would jeopardize REIT qualification. The bottom line is that ownership limitation provisions - even when specifically authorized by statute or designed for anti-takeover purposes - are unlikely to be more powerful or robust than other common takeover defenses such as a rights plan and may often be less so. It would be unwise to assume that such provisions or REIT status more generally will provide immunity from the normal operation of the market for corporate control, particularly in the context of non-coercive, fully financed offers.
When an unsolicited takeover approach is received, directors of REITs and other target corporations have a central role in evaluating any proposed transaction and the alternatives available to the corporation. The role is an active one, however, and not one that can be premised on anything other than a clear-eyed view of the realities today facing public companies - including REITs - in the takeover context. These include importantly the current attitudes of the large institutional shareholders, and the willingness of shareholders to act aggressively with respect to boards of directors, at annual meetings and between annual meetings. Absent special circumstances, inside ownership or show-stopper defenses, a board which is faced with a bona fide transaction, proposed by a determined suitor and desired by shareholders, but which offers no alternative transaction or corporate transformation, will come under intense pressure.
Failure of publicly traded corporations to prepare for a takeover attempt exposes the company and reduces the company’s ability to control its own destiny. Boards of both potential targets and acquirers need to assemble a team of trusted advisors, plan in advance for possible takeovers, and be realistic about the legal and market dynamics for widely held REITs.
David M. Einhorn
Adam O. Emmerich
David E. Shapiro
David B. Silva