Why Is Land & Buildings Asking, Not Demanding a Change in Strategy at Aimco (AIV)?

Disclaimers: https://www.transactionaldelights.com/disclaimers

Aimco (NYSE: AIV) is a REIT that owns and operates a portfolio of apartments. How are apartments doing? Well, Jonathan Litt said a couple of weeks ago that “Blackstone, KKR & Starwood are all on the hunt to buy apartments.”  So, what has Aimco been up to?  In September, Aimco announced that it was planning a spin that would lead to two publicly traded companies: a pure play apartment investment company and a company focused on developing apartment communities. Notably, Aimco’s charter doesn’t require a vote from its shareholders to approve the spin[1].

L&B was not delighted by the announcement of the transaction, stating that the proposed spin would not close Aimco’s discount to NAV when compared with Aimco’s peers. Despite starting with a short position[2], L&B became a 1.4% holder and decided to make use of its shareholder rights with respect to the transaction.

Accordingly, L&B launched a consent solicitation to call a special meeting for shareholders to vote on the transaction. But, even if L&B is successful in getting the votes to call the special meeting and getting the approval of shareholders to prohibit Aimco from proceeding with the transaction, Aimco is under no obligation to follow the results of the voting. Since L&B’s proposal is precatory, it would merely provide “an opportunity for shareholders to voice their concerns”. Why is L&B asking then and not demanding[3]? There are many answers to that[4], and one of them is that Aimco is incorporated in Maryland.

Maryland law is where shareholder rights go to die. Ok, that’s a bit of hyperbole, but compared with Delaware, Maryland is regarded as shareholder unfriendly. One of the things that shareholders dislike is, if a company incorporated in Maryland has certain qualifications[5] then it can utilize certain takeover defenses under Maryland’s unsolicited takeover provisions. These defenses are primarily used to upset shareholder action taken outside of an annual meeting process.[6] One of the provisions even allows Aimco to raise the special meeting threshold from 25% of the shares outstanding to a majority of the shares outstanding. In addition, there’s no lag between decision and action - a board can adopt them through a board resolution, so Aimco would not have to rely on amending any of its governing documents[7].

So, why isn’t Aimco tapping into Maryland’s unsolicited takeover provision and raising the threshold for shareholders calling an annual meeting from 25% to a majority?  Well, one reason is that doing so would create the appearance of entrenchment by Aimco’s board. Just because you can do something from a legal perspective, doesn’t mean that you should do it. It’s a careful balance of corporate governance in appealing to your institutional shareholders, and takeover defense in combating your hostile shareholders[8]. And hopefully, Aimco reached out to its top shareholders to get a pulse on how they might view a spin. Viewed under that light, L&B’s initial ask could also be a feint to upset that careful balance[9] and not just a legitimate request for a shareholder vote, depending on how Aimco responds.

L&B’s first step is also not as aggressive because the timing is not right for a director contest. The 2021 annual meeting will not take place until late April (or later). Those Maryland provisions previously mentioned? Only one would have significance in a traditional battle at the annual meeting – the classification of the board[10], and even that action might not be that big of a deal. Accordingly, from one perspective it makes sense for L&B to wait to use its gun and see if Aimco makes any governance missteps. A director contest at an annual meeting could serve as a referendum on the spin and be a strong motivation for shareholders. But, if L&B really does not like the transaction (to put it into perspective, the spun off company would constitute 10% of Aimco’s assets), getting directors ex-post might be a small consolation. 

Irrespective of L&B’s strategy, Aimco has not yet stepped into that potential trap and instead has chosen to combat the consent solicitation with a consent revocation to fight L&B off from getting to 25%[11]. With a ~$5 billion market cap, Aimco does have significant institutional investors and perception is important with that permanent capital. So, with all that said and done now let’s watch the white papers fly. Stay tuned.

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[1] Section 3-105 of Maryland’s corporation law requires shareholder approval for a distribution/transfer of all or substantially all of the corporation’s assets, but the spin does not involve all or substantially all of the assets, only 10% of Aimco’s gross asset value.  And even if it was substantially all, there’s nothing in Aimco’s governing docs requiring the vote.

[2] At least as measured over the last two years. Remember the questions regarding Starboard’s position at BMY?

[3] By demanding, I mean seeking a change at the board level.

[4] I mean, I think there are, but I’m not L&B, nor am I advising them so this is all just speculation.  

[5] It must be a public company and have at least three independent directors.

[6] Possible defenses include adopting a classified board, requiring a 2/3rds vote to remove directors, requiring that directors be removed only for cause, restricting the ability of shareholders to set the number of directors on the board, and requiring that vacancies be filled only by the remaining directors.

[7] Aimco hasn’t opted out of MUTA in its governing docs, so there are no restrictions on the board from adopting a MUTA-related resolution.

[8] It becomes even more complicated when those institutional shareholders are the one driving the hostile shareholders to action.

[9] From an activist’s perspective, it makes sense to start with small asks.

[10] Splitting the board up into classes so that an activist could never take over a majority of the board at a single annual meeting and would have to launch successive contests. But, L&B is pretty resilient – look at how many times they went at Taubman. And L&B probably doesn’t even want a majority of the Board. 

[11] If L&B gets to 25% of the outstanding, that’s a high enough percentage that it should convince Aimco that there’s a very good chance it loses the precatory vote if it is based on a majority of votes cast (the standard chosen, cast vs. outstanding could have a big impact on that).