The Thomas Group Delivers Open Letter To Five Star Shareholders
The full text of the letter follows:
Fellow Shareholders:
We are writing to you to express our deep concerns regarding the improper manner in which the misaligned Board of Directors (the "Board") of
- The Portnoy Tender Offer is grossly undervalued, fraught with deep conflicts of interest, and fails to provide full and fair value to Five Star shareholders.
- The purpose of the Portnoy Tender Offer is to enrich the Portnoys and to increase
B. Portnoy's effective control over the Company at the expense of Five Star shareholders.
With fairness as the only natural guiding principle, any reasonable person would question why Five Star's purported "Independent Directors"1 have unilaterally elected to provide one of their Managing Directors the exclusive rights to a bid process not open to others. In fact, these "Independent Directors" have intentionally precluded us from proceeding with a competing offer that would provide shareholders a 15% cash premium to the Portnoy Tender Offer. The Independent Directors have provided little to no explanation of how choosing the interests of their Managing Director over the best interests of shareholders is consistent with their fiduciary duties. This is likely because they have no good reason other than seeking to further their own personal interests and those of their controlling Managing Director.
Through the Independent Directors' unfortunate actions, shareholders now urgently stand at a crossroads critical to the future of Five Star, as Managing Director
Let us explain.
Although the list is endless, we have narrowed our discussion to six reasons why we believe you should reject the Portnoy Tender Offer.
1) The Portnoy Tender Offer is Grossly Undervalued
Just eleven months ago,
2) A Non-Competitive and Unfair Process
Last month, in our response to the Portnoy Tender Offer, the Five Star Independent Directors effectively denied our right to concurrently offer shareholders an alternative tender option even though it was priced at
The Independent Directors have provided the Portnoys with a unilateral opportunity to take effective control of the Company without a competitive process and without paying a control premium. We believe this is a direct result of their unfailing allegiance to the Portnoys given the cobweb of interrelationships that has created an inherently conflicted governance structure.
If successful, the Portnoy Tender Offer will further increase and secure
3) Pro-rata Risk
Tendering your shares, which the Portnoys will purchase on a pro-rata basis, is tantamount to giving-up effective control of your Company to the Portnoys and to a Portnoys-beholden Board whose actions have already placed us all in the unfortunate situation we now find ourselves.
4) Consideration of Alternatives
If one feels pressured to hit the tender button as the only alternative, we urge you to reconsider! The Independent Directors have responsibilities and owe duties to all shareholders. Our rejection would serve as a referendum that the status quo is clearly untenable and a hopeful call to action for the Board to seriously evaluate how to transform Five Star into an industry leader.
5) Election of New Independent Director
Retaining your shares maintains your right to vote and importantly, your right to elect directors that will protect your best interests. Last week, we nominated
6) Envisioning a Better Future
An overwhelming rejection by shareholders of the Portnoy Tender Offer would demonstrate to the Board and
Why are we invested in Five Star?
Simply stated, we believe Five Star can become an industry leader. However the Portnoys try to distort our intent, they would be hard-pressed to understand what drives us. We began the senior living portion of our business in 1989 and now own and operate over two thousand senior living residences, which are centered on a deeply engrained value system committed to the seniors we serve. As identical twins, and whose business interests are purposely and identically aligned, we each can easily say that we awake each morning thinking what we can do for each other; that simple principle extends to how we think about the seniors we serve, the associates who serve them and the partners who have invested with us over these years. Believing that Five Star could become one of the best-in-class operators of the senior living business, we began investing in the Company in 2012.
Regrettably, Five Star's Independent Directors appear to be ignoring their fiduciary duties to the detriment of the shareholders they are charged with representing and, in our view, have breached these duties by exclusively permitting their Managing Director to buy-out shareholders at a woefully inadequate price.
There are far better alternatives available to maximize value for Five Star shareholders. Below is a further examination of the six reasons mentioned above to reject the Portnoy Tender Offer.
1) The Portnoy Tender Offer is Grossly Undervalued
On
To provide the capital required to execute on this strategy, we offered to acquire the senior living assets wholly owned by Five Star. These assets represented only 10% of Five Star's senior communities. The result of that offer, or for that matter any subsequent offer that would have been generated in a bidding process, which we would have of course expected, would have provided proceeds equivalent to more than twice the Portnoy Tender Offer of
In our meeting,
If the Portnoy Tender Offer is successful,
2) A Non-Competitive and Unfair Process
As major shareholders of Five Star, we have some clear observations of recent events and decisions that have occurred. Based on the resounding, unsolicited support of our fellow shareholders who have contacted us, we know that our concerns are shared among a significant portion of Five Star's ownership.
Personally, we are mystified that Five Star's Independent Directors jeopardized their fiduciary responsibilities by allowing their Managing Director to negotiate an exclusive ownership exemption under Five Star's Charter. This decision granted the Portnoys the singular right to make a material tender offer for effective control of the Company at a price of
3) Pro-rata Risk
If the Portnoy Tender Offer is successful, shareholders will have relinquished control of their remaining shares to ABP for at least 10 years. Legitimate risks previously disclosed by Five Star include:
- Effect on Trading Volume and Liquidity of Five Star Common Stock. The number of outstanding shares owned by Five Star shareholders other than ABP would decline, thereby reducing the number of shares that might otherwise trade publicly and in turn, could reduce trading liquidity and increase the volatility of Five Star's share price in the market. In addition, as specifically stated by Five Star in its SC 14D9, "this reduction could impact the Company's ability to raise capital on an expedited basis, as well as limit the Company's ability to raise capital that might adversely impact the Company's future usage of net operating losses."
- Concentration of Control. ABP would beneficially own a significant percentage of Five Star's outstanding shares, which, according to Five Star, "may enable [ABP] to have significant influence on matters requiring stockholder approval, including the election of directors, amendments to the Company's charter and bylaws and significant transactions, such as purchases or sales of assets, mergers and other business combinations. This concentration of ownership may discourage acquisitions by others of a significant stake in the Company and may deter, delay or prevent a change in control of the Company or unsolicited acquisition proposals that other stockholders of the Company may consider favorable. It may also inhibit efforts by other stockholders of the Company to change the direction or management of the Company or the Board." (emphasis added)
4) Consideration of Alternatives
Since our initial investment in 2012, we have neither seen nor heard the strategic plan for turning Five Star's declining value around. To our knowledge, we are the only party who has presented a strategic plan to increase shareholder value.
Reasoned thinking should lead shareholders to soundly decline the Portnoy Tender Offer and instead, to maintain hope and have patience, as alternatives should provide more significant financial outcomes. Importantly, if shareholders reject the Portnoy Tender Offer, we believe it would be incumbent upon the Board to listen to the will of its shareholders and implement a turnaround plan for the Company.
5) Election of New Independent Director
The Company's onerous Bylaw requirements, which we note only the Board can amend, to nominate an individual for election to the Board require a shareholder to continuously own at least 3% of the outstanding shares for a minimum of three years. In order to meet this requirement, we have patiently held a sizable ownership stake since 2012.
Having now fulfilled the three-year requirement, we recently nominated
We believe
6) Envisioning a Better Future
We believe the inherent value of Five Star is not reflected in its stock price and that significant value can be unlocked given the obvious demographic changes occurring throughout the next 30 years and favorable industry dynamics currently available to the Company. In fact, we believe this discounted valuation likely reflects a combination of the market's concerns about the Company's deterioration under the watch of its entrenched, insular and conflicted Board as well as the market's failure to ascribe appropriate value to Five Star's numerous positive attributes. Five Star has an attractive, geographically diverse portfolio as well as a strong presence in the industry as one of the largest operators in the sector.
Unfortunately, Five Star's disastrous corporate governance is, in our view, the single greatest barrier preventing the Company from achieving sustainable shareholder value. With the right governance structure in place, we believe Five Star can become a best-in-class senior housing leader with a market capitalization that reflects its true value.
It is indeed perplexing that the Board does not see the economic possibilities in decreasing leverage, reinvesting strategically in areas that provide double digit returns, increasing cash flow, all the while actually firming up the lease coverage on Five Star's existing leases, which we believe would make the Company a stronger partner who is truly building economic value for its lessors, including SNH and its subsidiaries. Moreover, if Five Star were to execute upon these opportunities and demonstrate a deep commitment to its customers and associates, we believe the Company would be recognized as one of the best lease operators in the nation.
The Portnoy Tender Offer is not the best option for the Company or its shareholders. Help us put pressure on the Board and the Portnoys by rejecting their efforts to buy-out shareholders at what we believe to be a woefully inadequate price. There are better alternatives to maximize value for shareholders, including by instilling accountability on the Board through the election of independent candidates nominated by unaffiliated shareholders.
As important as these reasons are for not tendering, perhaps the largest opportunity for upside value is changing Five Star's woeful lack of board independence and poor corporate governance.
The current, elaborate web of conflicting relationships among the Portnoys, Five Star external manager RMR LCC and its affiliated entities (collectively, "RMR"), SNH, other Five Star directors and officers, and third parties represents, in our view, disenfranchisement at its core. In addition to the overlapping Board positions reflected in Exhibit B of this letter, consider the following: 2
RMR Conflicts
B. Portnoy is a Managing Director, officer and controlling shareholder ofRMR Group Inc. ("RMR Inc. "), the controlling shareholder ofRMR LLC , and Chairman ofRMR LLC .
- A. Portnoy is the President and CEO of RMR LLC and a Managing Director, President and CEO of RMR Inc.
RMR LLC provides management services to both Five Star and SNH.
- A majority of Five Star's Independent Directors serve as independent directors or independent trustees of other companies to which
RMR LLC or its affiliates provide management services.
- Five Star President and CEO
Bruce Mackey and Treasurer and CFORichard Doyle are officers and employees ofRMR LLC .
Mr. Doyle was formerly SNH's treasurer and CFO.
SNH Conflicts
- SNH is Five Star's largest shareholder and has entered into numerous lease and management agreements with Five Star.
B. Portnoy and A. Portnoy are managing trustees of SNH.
- Five Star Corporate Secretary
Jennifer Clark is also SNH's Secretary.
- Five Star manages a portion of a senior living community for
D&R Yonkers LLC , which is owned by SNH's President andCFO and Five Star's Treasurer and CFO.
Other Conflicts
- Five Star,
ABP Trust , SNH and four other companies to which RMR LLC provides management services currently own AIC, anIndiana insurance company. RMR LLC provides management and administrative services to AIC. All of the Company's directors and all of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC.
B. Portnoy was formerly a Partner and served as Chairman of the law firm Sullivan & Worcester ("S&W"), which now serves as Five Star's Corporate Counsel. Five Star Vice President and General CounselKatie Dillon , Corporate SecretaryJ. Clark and Independent DirectorB. Gilmore previously worked at S&W.
Aside from these deeply concerning relationships, we believe
How can
We believe these troubling conflicts can be easily eliminated. By electing a highly qualified, truly independent director who understands his fiduciary responsibilities to shareholders, we can begin to instill accountability and lead Five Star toward a path of growth. Rejecting the Portnoy Tender Offer is the first, and most crucial, step along this path.
Corporate Governance
We find it deeply troubling that
Given the Independent Directors' ties to the Portnoys, together with their effective rejection of our higher tender offer of
How could Five Star's Independent Directors approve ownership waivers in order to clear way for the Portnoy Tender Offer yet reject our requests for similar waivers in order to commence a competing tender offer, which clearly represented a premium over the Portnoy Tender Offer? In a true corporate democracy, a well-functioning, independent board would encourage and entertain all offers and seek to create a bidding process so that shareholders receive the most value for their investment.
We also seriously question how the Board could approve lease agreements with SNH and its subsidiaries that contain entrenchment-serving provisions that threaten shareholders' purported right to nominate director candidates for election at annual meetings. Under the various lease agreements, a change in control is triggered upon the election of just one individual to the Board, thereby triggering a default under such lease agreements.
It appears to us that the Independent Directors have chosen to protect the Portnoys' interests rather than the interests of Five Star shareholders. We believe this not only represents shareholder disenfranchisement, but is also a breach of the Board's fiduciary duties to shareholders.
Institutional Shareholder Services ("ISS"), a leading proxy voting advisory firm, appears to share our concerns with Five Star's egregious governance structure. With "10" being the worst possible grade, ISS issued the Company an abysmal governance QuickScore of "9" in its 2016 report and a "10" in its 2015 and 2014 reports, indicating severe concerns with Five Star's corporate governance regime.
ISS also raised concerns with the lack of independence on the Board in each of its 2016, 2015 and 2014 reports and has repeatedly raised concerns with
Conclusion
Let your rejection of the Portnoy Tender Offer serve as a referendum that the status quo will no longer be tolerated. At some point, as a reasonable person, one has to finally say "enough is enough."
If we do not act now by rejecting the Portnoy Tender Offer,
Again, we believe there are better alternatives available for shareholders to maximize the value of their investment. With the right governance structure in place, we believe Five Star can become a best-in-class senior housing leader. It is time for accountability at
Our nomination of
It is imperative that we, as shareholders, the true owners of the Company, take control over the future of our investment by rejecting the Portnoy Tender Offer. Do not let the Portnoys usurp the opportunities available to maximize the value of your investment. The future of Five Star is in our hands.
As one of the largest shareholders of Five Star, our interests are directly aligned with yours. Together, we can help make Five Star what it should be, a best-in-class operator creating sustainable shareholder value.
Best Regards,
Exhibit A
During the nomination process,
If elected to the Board at the 2017 Annual Meeting, I will act in accordance with my fiduciary duties as a director on all matters that come before the Board and will work with the other members of the Board to take those steps that we deem are necessary or advisable to identify and unlock opportunities to drive shareholder value. Additionally, if elected, I am committed to act in the best interests of all of the Company's shareholders."
Exhibit B
RMR Cobweb
Investor Contact:
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
THE THOMAS GROUP STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE
The participants in the proxy solicitation are
1 Independent Directors include:
2 Based on publicly available information, including the Company's
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