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CCA Excludes Shareholder Resolution Requiring Company to Fully Disclose Information about REIT Conversion

Previously, PLN reported that both Corrections Corporation of America (CCA) and GEO Group, the nation’s two largest private prison companies, were converting their corporate structure into real estate investment trusts (REITs), primarily to benefit from the tax advantages that REITs provide. [See: PLN, Jan. 2013, p.42].

Among other requirements, a REIT must distribute 90% of its taxable income to shareholders; consequently, the company pays no federal tax on its income and the tax burden is shifted to shareholders. CCA indicated that its initial REIT distribution would be made in stock (up to 80%) and cash (up to 20%).

PLN managing editor Alex Friedmann, who also serves as president of the Private Corrections Institute (PCI), a non-profit organization that opposes prison privatization, filed a shareholder resolution with CCA to require the company’s Board of Directors to issue a report to shareholders addressing the following specific points relative to the company’s REIT conversion:

1. Any known disadvantages to stockholders, and/or advantages to the company, should the company elect to make required REIT distributions primarily in the form of stock rather than cash;

2. The extent to which the Board has taken into account the company’s prior conversion to a REIT in 1999 and the outcome of same;

3. The extent to which the Board has taken into account shareholder lawsuits related to the company’s prior conversion to a REIT and the outcome of same; and

4. How the company plans on an ongoing basis to comply with, and monitor compliance with, IRS rules governing REITs – including the limitation on REIT assets that can be held in non-qualifying securities or stock of taxable REIT subsidiaries – and the federal tax implications of same for the company.

With respect to the second and third points, the resolution’s supporting statement noted that CCA previously had converted to a REIT with disastrous results for shareholder value. [See: PLN, Nov. 1999, p.13; June 1999, p.11; Aug. 1998, p.3].

“Following the Company’s conversion to a REIT in 1999 by merging with Prison Realty Trust, the Company’s stock price dropped from over $60.00/share to under $1.00/share. Consequently, the Company instituted a 1-for-10 reverse stock split to prevent it from being delisted from the NYSE [New York Stock Exchange], and later reversed its REIT conversion.”

Additionally, according to the supporting statement, “Shareholders filed lawsuits against the Company and Prison Realty Trust over the prior REIT conversion. The suits alleged that the companies and various officers and directors had concealed material information from shareholders, and made false and misleading statements. The Company settled the lawsuits for approximately $104 million in stock and cash.” [See: PLN, July 2000, p.1].

CCA filed a no-action letter with the Securities and Exchange Commission (SEC) on January 15, 2013, seeking to exclude Friedmann’s shareholder resolution from the company’s proxy materials. He submitted a response and CCA then filed a 101-page supplement on March 4 that included a copy of its recently-released Form 10-K, which provides an annual summary of a company’s activities and performance.

On March 18, 2013, the SEC ruled in favor of CCA on its no-action letter seeking to exclude the resolution from its proxy materials in advance of the company’s next shareholders meeting.

“CCA really, really didn’t want this resolution to be presented to shareholders,” said Friedmann. “This is in spite of the fact that in its press releases and SEC filings, including its Form 10-K, CCA did not inform stockholders about the company’s prior REIT conversion which resulted in a precipitous drop in stock price, a reverse stock split and shareholder lawsuits.

“One would think, if CCA’s Board was concerned about the interests of stockholders, it would want to fully disclose material information about the company’s prior disastrous foray into REIT territory. The Board’s unanimous decision to seek to exclude the resolution, which ultimately proved successful, speaks volumes.”

The SEC, in concurring that CCA may exclude the shareholder resolution, found that the proposed resolution “relates to plans ‘to comply with, and monitor compliance with, IRS rules governing REITs.’ Proposals that concern a company’s legal compliance program are generally excludable....” The SEC did not address other arguments advanced by Friedmann and CCA for and against the resolution, respectively.

“Should CCA’s REIT conversion turn out badly, as did the company’s first attempt to become a REIT, the company and its Board cannot claim they were unaware that they should have fully informed shareholders about CCA’s history with respect to REITs,” Friedmann stated.

CCA is in the process of finalizing its REIT conversion, and shareholders will vote on changes to the company’s charter related to REIT requirements at CCA’s next annual meeting to be held in Nashville, Tennessee in May.

The market has looked favorably on CCA’s conversion to a REIT, with the company’s stock price increasing from $36.67 in early January 2013, when CCA announced it had completed internal restructuring to become a REIT, to over $38.30 in late March as this issue of PLN goes to press.

Sources: PCI press release, Nashville Post,

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