Thursday, June 13, 2013

Corvex Management LP v. Commonwealth REIT (Cir. Ct. Balto. City)

Filed: May 8, 2013
Opinion by Judge Audrey J.S. Carrion

Shareholders seeking a hostile takeover of a publicly traded REIT are bound to arbitrate their disputes with the REIT and its board of trustees under a bilateral agreement to arbitrate stated in the REIT’s bylaws.  Plaintiff's Petition to Stay Arbitration was denied.

Plaintiffs are New York investment firms each holding approximately 4.90% of the publicly traded stock of the Defendant REIT, organized in Maryland.  Plaintiffs brought suit in the Circuit Court for Baltimore City alleging breaches of fiduciary duty when the Defendant REIT and its board of trustees opposed Plaintiffs’ unsolicited hostile takeover bid.  Defendants responded by filing to initiate arbitration under provisions for arbitration stated in the Defendant REIT’s bylaws. Plaintiff’s countered with a petition to the Circuit Court to stay the arbitration. The Court considered the petition after first denying an emergency motion for a temporary stay of arbitration.

Neither party disputed the fact that it is within the province of the Court to determine whether the dispute should remain before the Circuit Court or be stayed pending arbitration.  Under the Maryland Uniform Arbitration Act (MUAA), “[i]f a party denies the existence of the arbitration agreement, he may petition the court to stay . . . arbitration proceedings.” Md. Code Ann., Cts. & Jud. Proc. §3-208(a).  If a court finds that the existence of a valid and enforceable arbitration agreement is in substantial dispute, the court must try the issue promptly and order a stay if it finds for the petitioner.  If the court finds that a valid and enforceable arbitration agreement exists, the court must order the parties to proceed with arbitration. 

Noting without analysis that the parties did not contest that both the MUAA and the Federal Arbitration Act (FAA) applied in this case, the Court found that Maryland and Delaware state courts and federal courts generally have expressed a policy strongly in favor of arbitration.  The Court noted authority argued by Plaintiffs, includingNoohi v. Toll Bros. Inc.,  708 F.3d 599, 611 n.6 (4th Cir. 2013), and Kirleis v. Dickie, McCamey & Chilcote, P.C., 560 F.3d 156, 160 (3rd Cir. 2009), to the effect that in first deciding whether the parties have entered into an agreement to arbitrate ordinary state-law principles of the formation of contracts should apply without any presumption in favor of arbitration.  However, the Court essentially distinguished those cases. The Court noted that the footnote reference in Noohiconcerned an ambiguity as to which persons were bound by the arbitration agreement and Kirleis also applied to a determination of who is bound to arbitrate in sense of comprehending being bound and manifesting some asset to be bound. Recognizing that the federal policy favoring arbitration “does not extend to situations in which the identity of the parties who have agreed to arbitrate is unclear, McCarthy v. Azure, 22 F.3d 351, 355 (1st Cir. 1994), the Court reasoned that there is a difference between realizing that one is party to an agreement, yet refusing to consent to it, and failing to comprehend that an agreement to which one is subject to exists altogether. Plaintiffs in this case had constructive knowledge, and, in fact, actual knowledge, that they were a party to an arbitration agreement written into the Defendant REIT’s bylaws.  The Court concluded that this case was distinguishable from Noohi and examined the arbitration issue keeping in mind that both state and federal law cast a favorable light on arbitration.

On the merits, Plaintiffs were sophisticated parties, two of the largest shareholders of the REIT and the terms of the arbitration agreement contained in the bylaws were clear in requiring shareholders to arbitrate disputes under a broad, all encompassing clause. The Plaintiffs’ assent to the arbitration agreement was established under Maryland law by their prior constructive knowledge of the REIT’s bylaws, based on stock certificate legends stating they would be bound to the bylaw terms, and actual knowledge evident from the complaint the Plaintiffs filed at the time they acquired more than 5% of a voting class of the REIT stock, which sought a judicial declaration that the bylaw agreement to arbitrate was unenforceable.

Finally, the Court reasoned the REIT’s bylaws were not invalid or unenforceable for lack of consideration because both parties agreed to arbitrate and Plaintiffs voluntarily purchased the Defendant REIT’s stock while knowing of the arbitration agreement. Holding that mutuality of consideration existed, the Court dismissed Plaintiffs’ argument that the arbitration agreement was one sided or illusory even though Defendants could amend the bylaws because the Defendants’ power to amend the bylaws was rooted in the declaration of trust and Maryland REIT law, not within the “four corners” of the bylaws themselves. Under Cheek v. United Healthcare, 378 Md. 139, 155, 835 A.2d 656 (2003), Maryland courts are not permitted, when assessing the enforceability of an arbitration agreement, to go beyond the confines of the arbitration agreement itself to examine the larger contract in which it is found.

The full opinion is available in PDF.


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