Elliott's Taubman Centers Tactics May Require Crossing Vanguard

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(Bloomberg Gadfly) -- Mall owners sure are in vogue with activists.

Paul Singer's Elliott Management Corp. confirmed late Tuesday that it has amassed a stake in Taubman Centers Inc., joining Jonathan Litt's Land & Buildings Investment Management LLC as an activist pushing for change at the $3.4 billion company. That's after Dan Loeb's Third Point LLC and Jeff Smith's Starboard Value LP each recently revealed stakes in Taubman's larger rival, Macerich Co.

Activists, known for pouncing on undervalued companies, are likely drawn to these two real estate investment trusts in particular because they've been beaten down amid fears of a so-called "retail apocalypse". But a closer look shows that high-end malls are still performing strongly, in part because they've tweaked their tenant lists to become less reliant on flailing apparel chains. 

For activist investors especially, the best possible scenario involves the sale of their targets to potential buyers. Simon Property Group Inc., for example, previously attempted to buy both companies and tops the list of potential acquirers. In Elliott's case, the fact that the firm has its own private equity arm means it has the ability to make an offer for Taubman, which counts Beverly Center in Los Angeles among its high-end mall portfolio. 

The wrinkle when it comes to Taubman, though, is that any bid can be thwarted by its founding family, which through its ownership of a class of preferred stock has voting power of roughly 30 percent -- basically enough to block a deal.

Already, Land & Buildings is in litigation with the company, alleging that it breached its contract with shareholders by allowing the family to corral that stake, since it exceeds the company's established ownership limit of 8.23 percent. I'm no lawyer, but that seems like a reasonable claim, especially since Taubman's charter specifies that changes in the ownership limits can't be made by the board of directors and would require the affirmative vote of at least two-thirds of owners of the company's voting stock.

Like Land & Buildings, Elliott may need to tackle litigation, but there's a different thread it can pull. To pave the way for a Taubman takeover either by a third party or itself, Elliott could claim Taubman's board breached its fiduciary duty by allowing not only the Taubman family, but Vanguard and BlackRock to lift their stakes above the charter-determined limits of 8.23 percent -- or 9.9 percent for pass-through entities. Elliott -- which is accustomed to contentious situations -- may feel more comfortable pursuing such a move, or at least moreso than Land & Buildings, which seems acutely aware that it must the sector's large index investors on side.  

Such legislation would hit three birds with one stone: Currently, Vanguard and BlackRock's stakes are 15.7 percent and 10.7 percent, respectively, according to recent filings. So if the duo and the Taubman family were forced to trim their stakes, they would no longer have enough combined influence to block a takeover and diluted influence in any future proxy battles.

To be sure, it still isn't clear what Elliott's modus operandi is in this situation. Regardless, its presence bolsters the likelihood for change.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

  1. In an New York Times op-ed over the summer, Litt acknowledged the importance of passive funds in activist campaigns, saying "Because of the sizable investment that index funds like State Street, Vanguard and BlackRock now have in so many companies, they often essentially become the swing votes in proxy fights, determining whether an activist’s nominees or the company’s nominees get elected to the board."

©2017 Bloomberg L.P.

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