May 1, Bethesda. In its first test of the 2015 shareholder season, shareholders of RLJ lodging enthusiastically endorsed granting shareholders the right to amend bylaws. UNITE HERE submitted this proposal among over a dozen proposals brought forward this year as part of a wide-ranging effort to improve corporate governance standards at publicly traded lodging REITs. According to preliminary vote totals announced at the meeting over 67% of RLJ Lodging shares voted “yes” for this proposal.
During three years of engagement with lodging REITs over issues of shareholder rights and corporate governance, UNITE HERE has seen seven lodging REITs opt out of provisions of Maryland’s Unsolicited Takeover Act (MUTA), as well as ten further company-specific improvements to shareholder rights.
In the course of this work, a new challenge emerged. Without the right to initiate bylaw amendments (a right shareholders of Maryland-incorporated REITs do not have by statute), shareholder reforms can take years to achieve, and can be unilaterally undone by boards. At Hospitality Properties Trust (HPT), for example, shareholders had to vote in support of board declassification six consecutive years before it was implemented.
The ability to efficiently make lasting improvements to corporate governance is particularly important in a cyclical industry. At the peak of the last hotel cycle, many REITs were taken private at substantial premiums; those who weren’t lost as much as 90% of their share value, and have in general not recovered to their previous peak prices. The U.S. hotel industry is in its sixth consecutive year of improving fundamentals.
The right to amend bylaws is more common among other types of listed lodging companies: Marriott, Hyatt, Hilton, Morgans Hotel Group, La Quinta and Wyndham Worldwide (organized as c-corps) all allow shareholders to initiate bylaw amendments with voting thresholds ranging between 50+1% to 80% of shares outstanding.
Earlier this year, Sunstone Hotel Investors established the right of shareholders to make binding bylaw amendments. We hope that the right to amend bylaws – the right to make efficient and lasting improvements to corporate governance – becomes an industry standard at lodging REITs, much as opting out of the Maryland Unsolicited Takeovers Act has become. Shareholders at several REITs, including Diamondrock Hotels & Resorts (DRH) and Host Hotels & Resorts (HST), will have the opportunity to vote on this proposal over the next several weeks.