REITs Mergers and Acquisitions

by

David M. Einhorn Member of the New York Bar

Adam O. Emmerich Member of the New York Bar

Robin Panovka Member of the New York and Georgia Bars

2006

Law Journal Press 105 Madison Avenue New York, New York 10016 www.lawc atalog.com

Reproduced with the permission of the publisher an d copyright holder from Chapter 4 in REITs: Mergers and Acquisitions by David M. Ei nhorn, Adam O. Emmerich, and Robin Panovka. Published by Law Journal Press, a division of ALM. Copyright ALM Properties, Inc. All rights reserved. Copies of the complete work may be ordered from Law Journal Press, Book Fulfillment Department, 105 Madison Av enue, New York, New York 10016 or at www.lawcatalog.com or by calling 800 -603 -6571.

W/1182086v1 CHAPTER 4

Selling a REIT

Chapter Contents

§ 4.01 Deciding to Sell [1] When to Sell [2] Whom to Consult [3] Takeover Preparedness § 4.02 Legal Considerations [1] Directors’ Fiduciary Duties [2] The Importance of Informed, Good -Faith Dec i- sio n Making [3] The Use of a Special Committee [4] Applicable State Statutory Prov isions [a] Delaware [b] Maryland [5] Antitrust Laws [6] Applicable Stock Exchange Requirements § 4.03 The Auction Process [1] Preparing to Sell [a] Due Diligence [b] Confiden tiality Agreements [c] Letters of Intent [2] Techniques for a Public Sale [a] Closed Auction [b] Market Check [c] Costs of an Auction Process [3] Valuing Stock Considerations in Acquisition Proposals [a] Short - and Long -Term Values [b] Stock Options [c] So cial Issues and Other Constituencies [4] Protecting the Deal [a] No -Shop and Window -Shop Provisions [b] Termination Provisions and Fiduciary Outs [c] Stock Options and Break -Up Fees [d] Cash Put Provisions 4-01 Selling a REIT RE ITs

[e] Manag ement/Stockholder Voting Lockups [5] Pre emptive Bids and Attempts to Derail a Pro c- ess [6] Timing [a] Sequence of Events [b] Board Deliberations and Decisions [c] Federal Laws and Reg ulations § 4.04 Confidentiality [1] Secrets and Leaks [2] Duty to Disclose § 4.05 The Role of Advisors [1] Fin ancial Fairness Opinions [2] Advice of Legal Counsel § 4.06 The Art of Running and Wi nning an Auction

§ 4.01 Deciding to Sell A change of control transaction is one of the most significant events in the life of a REIT or any other public corporation. The consider a- tions in deciding whether on what basis to sell or merge a company are many and varied, ranging from strategic plans to securities and tax laws to social issues. Once the board reaches the decision to sell (which can often be irrevocable as a pra ctical, if not a legal, matter), a number of other decisions must be reached as well. This Chapter f o- cuses on the auction process, in which a target REIT contacts a number of potential buyers in an attempt to negotiate the best deal for its shareholders.

[1] —When to Sell The question of when to sell a REIT must center on consideration of how the REIT can expect to maximize its long -term stockholder value, and the obstacles that stand in the way. The board should eval uate the strategic value of the REIT’s a ssets as well as the REIT’s ability to maximize shareholder value through the performance of its portfolio. The board must also consider the relative positions of the REIT’s competitors and the value placed on the REIT’s assets by pr ivate sources of capita l. If a competitor has the capacity to use operating efficiencies to derive greater value from the REIT’s assets than the 4-01 Selling a REIT RE ITs

REIT itself is able to do, for example, then a merger transa ction might be a beneficial result for all parties. Similarly, if the priv ate markets value the REIT’s assets well above the REIT’s share price and it is difficult for the board to envision the share price catching up, then a sale of the REIT to a real estate opportunity fund, pension fund or other private investor might be the best outcome for the sharehol ders. Typically, a good time to seek a sale of a REIT is when the board believes that the stock is undervalued by the market relative to either its “true” value or the value that a merger partner or private acquiror would place upon the assets. If the board does not see likely prospects for improving its share price without an extraordinary transaction, it may conclude that shareholders will be better off receiving a merger premium from a buyer. It then becomes the board’s duty to seek the best deal for the shareholders. This does not necessarily mean the best immediate price, as every potential transaction will have unique a d- vantages and disadvantages, particularly where equity consideration is involved, and “best” may be a very different matter in the short - and long -term. Some other factors that the board should consider are the likelihood of consummation, financing and regulatory approval risks, the form of consideration, social issues, and employee benefits issues. Developing a strong consensus in the boardroom is an essential component of a successful sale strategy. Especially in the current env i- ro nment, which is focused heavily on good governance and well - documented decision making, boards of directors will rely on ma n- agemen t to help create a balanced assessment of the pote ntial risks and rewards of a given strategy versus alternative available strategies, i n- cluding a careful risk assessment of significant strategic acquisitions or sales transactions. The Sarbanes -Oxley Act a nd other more recent governance r eforms have not changed the fundamental role of the board of directors in dealing with strat egic considerations such as a merger or acquis ition transaction. 1

[2] —Whom to Consult It is essential for the board and management to understand clearly the legal framework and duties involved in the sale process. Legal counsel should advise the board of its duties at all stages of the pro c- ess, assist in preparing documents and drafting preliminary agreements

1 See Martin Lipton, Memorandum, Mergers and Acquisitions 2004 (on file with authors). 4-01 Selling a REIT RE ITs such as confidentiality agreements, and advise as to the creation of an appr opriate record that will enable directors to have the protection of the business judgment rule. The goal, other than establishing an o r- derly process, should be to ensure that, if the ultimate transaction (or lack thereof) is challenged, a court has a substantial basis for dete r- mi ning that the board acted in an informed, deliberate manner and that the directors making key decisions were not perso nally interested in the transaction. Investment bankers are th e other essential group of outside advisors that the target board should consult early in the process. Typically, investment bankers take the lead in conducting a market check and assisting the board in creating a list of potential bidders who should be in vited to join the auction process. These financial advisors, who are expected to provide a fairness opinion once the terms of a deal are agreed to by the negotiators, will help the target board determine a range of acceptable prices for the shareholders. T hey will use REIT - specific information and details of comparable transactions as well as their knowledge of the industry and the market to conduct this anal y- sis.

[3] —Takeover Preparedness Prior to deciding to sell, a REIT’s board should ensure that the d i- rectors, rather than the suitors or predators who present acquisition proposals, have the ability to retain control over the process and its outcome. The best way for a REIT to position itself prior to an auction process (and, for negotiating a transaction in general, whether or not solicited) is to have in place structural takeover defenses that require bidders to negotiate directly with the board. A REIT that judiciously employs advance takeover measures can improve its ability to deter coercive or inadeq uate bids or secure a high premium in the event of a sale of control of the corporation. 2

2 See Chapter 7 infra for a discussion of advance takeover defenses. 4-02 Selling a REIT REITs

§ 4.02 Legal Considerations

[1] —Directors’ Fiduciary Duties In both Maryland and Delaware, it is firmly established that the d e- cisions made by directors in determi ning how to sell control of a company are protected by the business judgment rule. Maryland co r- poration law explicitly states that “[a]n act of a director relating to or affecting an acquisition or a potential acquisition of control of a corp o- ration may no t be subject to a higher duty or greater scrutiny than is applied to any other act of a director,” 1 while the law in Delaware has been cemented by over two decades of court decisions. In cases since Revlon Inc. v. MacAndrews & Forbes Holdings, Inc. (Revlon ), Delaware courts have recognized that disinte rested board decisions regarding how to sell control of a company are protected by the business judgment rule. 2 (It is worth noting that the term “change of control” in the transaction context is somewhat a te rm of art. Delaware does not find a change of control in a typical stock -for -stock merger of two pu blic companies in which the target’s shareholders receive shares of an issuer that does not have a controlling person or group.) In Mills Acquisition Co. v. Macmillan, Inc., the Delaware S u- preme Court stated that “[i]n the absence of self -interest, and upon meeting the enhanced duty mandated by Unocal , the actions of an i n- dependent board of directors in designing and co nducting a corporate auction are protect ed by the business judgment rule.” 3 The court co n-

1 See Md. Code Ann. Corps. & Ass'sn § 2 -405.1(f). 2 Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (Revlon ) In Revlon , the Delaware Supreme Court defined the directors’ duty in a sale of control context as achieving the highest value reasonably available for stockhol d- ers. 506 A.2d at 182. Though Revlon requires that enhanced scrutiny be applied to a board’s decisi on to approve a sale -of -control transaction or a break -up of the co m- pany, Revlon does not mandate any specific means for directors to fulfill that duty, and the board has reasonable latitude in determining the method of sale most likely to produce the high est value for the stockholders. See discussion of Revlon in § 3.02[4] supra. 3 Mills Acquisition Co. v. Macmillan, Inc ., 559 A.2d 1261, 1287 (Del. 1989) (Macmillan ). (Citations omitted.) The 1985 Delaware case of Unocal Corp. v. Mesa Petroleum Co. (Unocal ), held that directors who unilaterally adopt defensive mea s- ures in reaction to a perceived threat carry the burden of proving that their process and conduct satisfy the following two -pronged standard instead of benefitting from the presumption attending th e traditional business judgment rule: (footnote continued) 4-02 Selling a REIT REITs tinued, “like any other business decision, the board has a duty in the design and conduct of an auction to act in ‘the best interests of the corporation and its shareholders.’” 4 The decision as to which proc ess will produce the best value reasonably available to stockholders is, therefore, within the business judgment rubric, provided that a board or special committee evaluating the proposed transaction is not a f- fected by self -interest and is well -informed as to the process. Delaware courts have stressed that directors must pursue the sale of a company, particularly the maximization of shareholder value, with diligence. Whether a REIT holds an auction or negotiates a sale tran s- action, the board approving any s ale of control must be fully informed throughout the process of the nature of the transaction and the other options available to it. That is not to say that a board must always seek out those other options. The Delaware Court of Chancery found that a board of directors did not violate its Revlon duties by not approaching a known interested party who might have offered more when that party had made a strategic decision not to deal with the company’s board. 5 Ultimately, the process to be pursued is a matter o f judgment. A principal difficulty in any auction process is that the true “value” of a bid, which must take into account not only the price to be paid but

(footnote continued) • first, the board must show that it had “reasonable grounds for believing that a danger to corporate policy and effectiveness existed,” which may be shown by the directors’ good faith and reasonable investigation; and

• second, the board must show that the defensive measure chosen was “reasonable in relation to the threat posed,” which may be demonstrated by the objective reasonableness of the course chosen.

Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) ( Unocal ). If the directors can establish both prongs of the Unocal test, their actions receive the protections of the business judgment rule. Although, in comparison to the business judgment rule, the Unocal standard permits a court to examine more closel y a board’s actions in responding to an unsolicited offer, the Delaware Supreme Court’s reversal of the Chancery Court’s injunction in the case of Unitrin, Inc. v. American General Corp., reaffirmed Delaware case law granting a board reasonable latitude in this co n- text. See Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995) (Unitrin ). 4 Mills Acquisition Co. v. Macmillan, Inc ., 559 A.2d 1261, 1287 (Del. 1989) (Macmillan ). (Citations omitted.) 5 See Golden Cycle, LLC v. Allan, C.A. No. 16301, 1998 Del. Ch. LEXIS 237 (Dec. 10, 1998). 4-02 Selling a REIT REITs

also the likelihood of consummation and the related financing and regulatory approval risks, may be difficult to discern from a written proposal. The target will have to use its own diligence efforts as well as discussions with representatives of the bidder to determine the n a- ture of those risks before approving a definitive agreement with a particular b idder. It is important to note that, even in the change of control context, a board retains a good deal of authority to determine the best value re a- sonably available to stockholders. 6 Difficulties may arise in valuing stock and other consideration; 7 the re lated board decisions require the exercise of informed judgment. In addition, other factors may lead a board to conclude that a particular offer, although “higher” in terms of price, is substantially less likely to be consummated. Directors “should analyze the entire situation and evaluate in a disciplined manner the consideration being offered. Where stock or other noncash consider a- tion is involved, the board should try to quantify its value, if feasible, to achieve an objective comparison of the alternati ves.” 8 The Del a- ware Supreme Court has stated that a board may assess a variety of additional practical considerations, including an offer’s “fairness and feasibility; the proposed or actual financing for the offer, and the co n- sequences of that financing; q uestions of illegality; . . . the risk of non - consummation; . . . the bidder’s identity, prior background and other business venture experiences; and the bidder’s business plans for the corporation and their effects on stockholder interests.” 9 In the conte xt of two all -cash bids, the Delaware Chancery Court upheld the board’s choice of a bid that was “fully financed, fully investigated and able to close” promptly over a nominally higher yet more uncertain compe t-

6 Maryland law permits a corporation to include in its charter a provision permi t- ting the board of directors, in considering a potential acquisition, to consider the interests of an expanded constituency, including not only stockholders but also e m- ployees, suppliers, customers and creditors of the corporation as well as the communities in which the corporation’s offices or other facilities are located. See Md. Code Ann. Corps. & Ass'sn § 2 -104.1(b)(9). 7 See discuss ion in § 4.03[3] infra . 8 Paramount Communications, Inc. v. QVC Network, Inc ., 637 A.2d 34, 44 (Del. 1994). 9 Mills Acquisition Co. v. Macmillan, Inc., N. 3 supra , 559 A.2d at 1282 n.29. 4-02 Selling a REIT REITs ing offer. 10 Such concerns, however, must be e venly applied when evaluating competing bids for the sale of control. In re Toys “R” US, Inc., Shareholder Litigation (Toys ), a 2005 Delaware Chancery Court decision, touches on many aspects of the law governing the sale of public companies. 11 In Toys , the court strongly endorsed the principle that well -advised boards have wide latitude in structuring sale processes. The opinion also provides e x- press judicial guidance on a number of practical issues that have arisen in the current deal climate that have not been addressed recently by the Delaware courts, including the legal status of deal -protection measures. The court’s noteworthy holdings included, among other things, (1) the dismissal of the plaintiffs’ challenges that a 3.75% break -up fee and a matching right unreasonably deterred additional bids, (2) a p- proval of the board’s decision to permit two of the competing private equity firms in the deal to “club” together, thus potentially reducing the number of competing bidders in later rounds, (3) the dismiss al of allegations of a conflict of interest on the part of the CEO arising out of his stock and option holdings, and (4) the dismissal of claims that the board’s financial advisor’s advice was tainted under the terms of its engagement letter, which provide d for greater fees in the event of a sale of the whole company versus some smaller transaction. 12 The court’s opinion, which deals with many questions that arise in the course of competitive bidding situations involving cash offers, rea f- firmed the business judgment rule’s long -held tradition that courts will not second -guess well -informed, good faith decisions that need to be made to bring a sale process to successful conclusion.

[2] —The Importance of Informed, Good -Faith Decision Ma k- ing Whether REIT direct ors are entitled to the traditional business judgment standard or are in the realm of enhanced scrutiny in conne c- tion with their decision to enter into a business combination

10 Golden Cycle, LLC v. Allan, C.A. No. 16301, 1998 Del. Ch. LEXIS 23 7 at *49 (Dec. 10, 1998). Accord, In re The MONY Group Inc. Shareholder Litigation, 852 A.2d 9, 15 (Del. Ch. Feb. 17, 2004). 11 In re Toys “R” US, Inc., Shareholder Litigation, 877 A.2d 975 (Del. Ch. 2005) (Toys ). 12 See id. 4-02 Selling a REIT REITs

transaction, directors who act without adequate information or without active inv olvement in the decision to approve a merger will have diff i- culty defending the transaction in court. It is crucial for directors to be active participants in the decision -making process and remain fully informed throughout that process. 13 Failure to do so may enable a plaintiff to rebut the presumption inherent in the traditional business judgment rule and win a duty of care claim in cases where the trad i- tional business judgment rule otherwise would have applied. Similarly, failure to assume an active role and remain fully informed may prevent directors from sustaining their burden of proof in cases where an enhanced scrutiny standard is applicable. A board should carefully document the basis for its decisions b e- cause a central inquiry is whether the board acted on an informed basis. The Delaware Supreme Court in Paramount Communications, Inc. v. Time, Inc., albeit in the context of a Unocal standard, 14 di s- cussed at length the extensive participation of Time’s board in the decision of whether to seek a merge r partner, the identification of i m- portant factors to be considered in evaluating any potential merger and the initial decision to seek a merger with Warner Communications, as well as the board’s active involvement after Paramount first appeared with a com peting bid. 15 In finding the first prong of Unocal satisfied, the Court also noted that “[t]he evidence supporting this finding [that Time was not inadequately informed as to Paramount’s bid when it failed to negotiate with Paramount] is materially enhance d by the fact that twelve of Time’s sixteen board members were outside indepen d- ent directors.” 16 Although the court ultimately accorded great deference to the board’s decisions, it did so only after extended di s- cussion of the board’s active engagement thro ughout the process. Accordingly, the importance of informed, independent board decision making cannot be overstated. In contrast, in Paramount Communications, Inc. v. QVC Network, Inc., the Delaware Supreme Court found that the board breached its fiduciary duties by choosing to remain uninformed of the terms and conditions of a competing tender offer and second -step stock merger.

13 See Paramount Communication s, Inc. v. Time, Inc ., 571 A.2d 1140, 1153 -1154 (Del. 1989). 14 See discussion in N. 2 supra . 15 Paramount Communications, Inc. v. Time, Inc., N. 13 supra, 571 A.2d at 1143 -1146. 16 Id., 571 A.2d at 1154. 4-02 Selling a REIT REITs

The court held that the obligations of the Paramount directors included the duties “to obtain, and act with due care on, all mate rial information reasonably available, including information necessary to compare the two offers to determine which of these transactions, or an alternative course of action, would provide the best value reasonably available to the stockholders” and “to ne gotiate actively and in good faith with both Viacom and QVC to that end.” 17 The statement that the directors’ duties include a duty to negotiate should be understood in the context of the directors’ prior commitment to a change of control transaction with Viacom.

[3] —The Use of a Sp ecial Committee When Revlon duties apply, 18 a board’s conduct will be evaluated by review of both its process and its result. As a consequence, a board engaging in a change of control transaction must establish basic pr o- cedures to preserve the integrity of its evaluation of the options that may arise. One critical element is ensuring that only disinterested d i- rectors evaluate and vote on the proposed transaction. In the REIT context, there are a number of potential conflicts of i nterest between unitholders and shareholders; 19 a special committee is an effective way to address these concerns. Chapter 3 discusses situations in which a special committee should be formed and the workings of a special committee in the takeover context. 20

[4] —Applicable State Statutory Requirements Delaware and Maryland have similar statutory provisions relating to mergers and merger agreements. As discussed in greater detail b e- low, both require board approval for the constituent companies, both permit a merger agreement to require a target stockholder vote no t- withstanding a target board’s change of recommendation, and both permit short -form mergers. A significant difference is that Delaware requires a majority vote of the target’s stockholders to approv e a

17 Paramount Communications, Inc. v. QVC Network, I nc ., 637 A.2d 34, 48 (Del. 1994); Paramount Communications, Inc. v. QVC Network, Inc ., Consol. C.A. Nos. 427, 428, 1993 Del. LEXIS 440 at *7 -8 (Dec. 9, 1993). 18 See discussion in N. 1 supra . 19 See Chapter 3 supra. 20 Id. 4-02 Selling a REIT REITs

merger agreement, 21 while Maryland requires a two -thirds vote. 22 Both Delaware and Maryland have business combination statutes pr o- hibi ting mergers between a company and an interested stockholder, but these statutes typically are irrelevant for REITs as the thresholds for becoming an “interested stockholder” are above the 9.8% thres h- old of excess share provisions common in REIT charters. 23 In addition to the requirements described below, both Delaware and Maryland require shareholder approval of any ame ndment to the ce r- tificate of incorporation of the acquiring company. 24 An amendment to the certificate of incorporation is not always necessary but may be sought if, for example, the consideration to be paid to target stoc k- holders consists of stock in exce ss of the acquiror’s authorized but unissued shares, or if the acquiror has agreed to change its name.

[a] —Delaware Delaware law specifies the steps necessary for approval of a merger by the board and stockholders. First, the target board and the acquiror board must approve the merger agreement and declare the merger “advisable.” 25 The “advisable” determination mirrors the statutory requirement regarding board approval of charter amendments. 26 This requirement is consistent with Delaware case law regarding directors’ duties of loyalty and care in connection with approval of extraordinary transactions. Once approved by the boards of directors, the merger agreement must be approved by a majority vote of the outstanding stock entitled to vote at an annual or s pecial meeting of each company. 27 No class

21 8 Del. Code Ann. § 251(c). 22 Md. Code Ann. Corps. & Ass'sn § 3 -105(e) (General); § 8 -501.1(g) (REITs). 23 Delaware: 8 Del. Code Ann. § 203 (15% threshold). Maryland: Md. Code Ann. Corps. & Ass'sn §§ 3 -601, 3 -602 (10% threshold). For discussions of excess share provisions, see: § 2.03 supra and § 7.02 infra . 24 Delaware: 8 Del. Code Ann. § 242. Maryland: Md. Code Ann. Corps. & Ass'sn § 2.604. 25 8 Del. Code Ann. § 251(b). 26 See 8 Del. Code Ann. § 242(b)(1). 27 8 Del. Code Ann. § 251(c). Approval by the stockholders of the acqu iring co m- pany is not required if (1) the agreement of merger does not amend the certificate of incorporation of the acquiring company; (2) each share of stock outstanding immed i- ately prior to the effective date of the merger is to be an identical outstandi ng or treasury share of the surviving corporation after the effective date of the merger; and (footnote continued) 4-02 Selling a REIT REITs vote is required unless provided for in the certificate of incorporation. The merger agreement may provide for the board of directors of either company to terminate the agreement, notwithstanding stockholder a p- pro val of the agreement, any time before the effective time of the merger. 28 Delaware law states that a corporation may provide in a merger agreement that the agreement must be submitted to stockholders even if the board, having deemed the merger agreement a dvisable at the time of execution, subsequently changes its recommendation. 29 This 1998 statutory amendment clarifies dicta in certain Delaware cases that could be read to prohibit a board from submitting for stockholder approval a merger agreement no long er recommended by the board. A board that desires to include such a contractual provision must car e- fully consider whether, regardless of the nature of the changed circumstances, a merger agreement should be submitted for stoc k- holder approval over the disap proval (or neutrality) of the board. Delaware offers a “short -form” merger, which permits a corpor a- tion to merge into another corporation (or a subsidiary of a corporation) that owns at least 90% of the outstanding shares of each class of the stock that w ould otherwise be entitled to vote on the merger. No action by stockholders of either corporation is required, and only the board of the parent company must approve the merger. At least one of the corporations involved must be a Delaware corpor a- tion. 30

(footnote continued) (3) either (i) no shares of common stock of the surviving corporation and no shares, securities or obligations convertible into such stock are to be issued or del ivered under the plan of merger or (ii) the sum of (A) the authorized and unissued shares or the treasury shares of common stock of the surviving corporation to be issued or delivered under the plan of merger, plus (B) those initially issuable upon convers ion of any other shares, securities or obligations to be issued or delivered under such plan, does not exceed 20% of the shares of common stock of the corporation outstanding imm e- diately prior to the effective date of the merger. 8 Del. Code Ann. § 251(f). 28 8 Del. Code Ann. § 251(d). 29 In 2003, this provision was moved from Section 251(c) to Section 146 of the Delaware General Corporation Law, to clarify that the rule is not limited to mergers and permits directors to authorize the corporation to agree with another person to submit any matter to stockholders, but reserve the ability to change that recommend a- tion. See 8 Del. Code Ann. § 146. 30 8 Del. Code Ann. § 253. 4-02 Selling a REIT REITs

[b]—Maryland In Maryland, the first step in a merger transaction is the adoption by each corporation’s board of directors of a resolution declaring that the proposed transaction is advisable and that it is to be submitted to the stockholders for a vote. 31 No tice must then be provided to the stoc k- holders of each corporation, and the merger must be approved by two - thirds of all shares or of each class entitled to vote on the matter (or less if the charter so provides, but not less than a majority). 32 The ge n- era l rule for corporations applies to REITs as well. 33 Like Delaware, Maryland permits a merger agreement to include a provision requiring the agreement to be submitted to the stockholders for approval, even if the board of directors determines, at any time a fter having declared the proposed transaction advisable, that the proposed transaction is no longer advisable and either makes no recommendation to the stoc k- holders or recommends that the stockholders reject the proposed transaction. 34 Maryland corporatio n law contains a short -form merger provision similar to that of Delaware. The merger of a 90% or more owned su b- sidiary corporation into its parent corporation may be effected by means of approval of the board of directors of each Maryland corpor a- tion that is party to the agreement, without stockholder vote, if (1) the charter of the successor is not amended in the merger other than the corporation’s name or the par value of its stock; and (2) the co ntract rights of any stock of the successor issued in the m erger in exchange for stock of the other corporation participating in the merger are ide n- tical to the contract rights of the stock for which the stock of the

31 Md. Code Ann. Corps. & Ass'sn §§ 3 -102, 3 -105(b). 32 Md. Code Ann. Corps. & Ass'sn §§ 2 -104(a)(5), 2 -506(b), 3 -105(c), 3 -105(e). Approval by the stockholders of the acquiring corporation is not required if (1) (a) the merger does not (i) reclassify or change the terms of any class or series of stock that is outstanding immediately before t he merger becomes effective or (ii) otherwise amend its charter, and (b) the number of its shares of stock of such class or series outstanding immediately after the effective time of the merger does not increase by more than 20% of the number of its shares of the class or series of stock that is outstanding i m- mediately before the merger becomes effective; or (2) there is no stock outstanding or subscribed for and entitled to be voted on the merger. Md. Code Ann. Corps. & Ass'sn § 3 -105(a)(5). 33 Md. Code A nn. Corps. & Ass'sn §§ 8 -202(c), 8 -501.1(g). 34 Md. Code Ann. Corps. & Ass'sn § 3 -105(d). 4-02 Selling a REIT REITs successor was exchanged. 35 If a foreign corporation is a party to the agreement, it must be approv ed by the corporation in the manner r e- quired by its jurisdiction of domicile. 36 Maryland permits a proposed merger to be abandoned before the effective date either (1) if the articles of merger so provide, by a m a- jority vote of the entire board of directo rs of any corporation that is a party to the merger, or (2) unless the articles of merger provide othe r- wise, by a majority vote of the entire board of directors of each Maryland corporation that is a party to the merger. 37 Maryland, like Delaware, authori zes the merger of a domestic co r- poration with corporations of other states or jurisdictions. 38 Maryland expressly authorizes the merger of a domestic corporation with corp o- rations from foreign countries. 39

[5] —Antitrust Laws The requirements of the Hart -Sc ott -Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), 40 traditionally have had little relevance for REIT mergers. However, as the real estate industry b e- comes more concentrated and REITs continue to be integrated into non -REIT enterprise s, the antitrust laws will become an important consideration in planning and consummating REIT mergers and a c- quisitions. 41

[6] —Applicable Stock Exchange Requirements The New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) have very similar rules requiring shareholder a p- proval with respect to certain acquisition transactions. Both the NYSE and Nasdaq require shareholder approval of the issuance of stock or convertible securities that will result in an increase in the number of outstanding com mon stock or voting power of at least 20% of the

35 Md. Code Ann. Corps. & Ass'sn § 3 -106. 36 Id. 37 Md. Code Ann. Corps. & Ass'sn § 3 -108. 38 Delaware: 8 Del. Code Ann. § 252. Maryland: Md. Code Ann. Corps. & A ss'sn §§ 3 -102(a)(2), 3 -105. 39 Md. Code Ann. Corps. & Ass'sn §§ 3 -102(a)(2), 3 -105, 3 -161(b). 40 See 15 U.S.C. § 18a. 41 See Chapter 12 infra for a detailed discussion of these requirements. 4-02 Selling a REIT REITs

stock or voting power on a pre -transaction basis. 42 The rules techn i- cally require that shareholders approve the issuance of the stock to be issued in the transaction, so there is no need for action if the RE IT has sufficient treasury stock that has already been listed, issued and rea c- quired. The level of approval required by the NYSE is a majority of the voting shares, provided that a majority of the outstanding shares vote. The level of approval required by Nasdaq is a majority of votes cast, with the presence of a quorum as provided in the REIT’s bylaws, but in any event no less than one -third of the outstanding shares.

42 NYSE Listed Company Manual § 312.03; Nasdaq Marketplace Ru les § 4350(i). In addition, both the NYSE and Nasdaq require shareholder approval in certain r e- lated -party transactions and when the issuance of stock will result in a change of control of the issuer. 4-03 Selling a REIT REITs

§ 4.03 The Auction Pro cess

[1] —Preparing to Sell An important aspect of preparing to se ll a REIT is the collection, organization, and sharing of business information. The ma nagers of the sale process must decide whether to contact and make information available only to a few key potential buyers, or to communicate openly the board’s intentio n to seek a sale. A limited process provides greater confidentiality, limits the time commitment of management and minimizes the detrimental effect on the REIT if the process is terminated without a sale. However, a more public process minimizes the risk o f overlooking a potential acquiror. This Section addresses some of the i ssues involved in the information collection and sharing aspects of an auction process.

[a] —Due Diligence Due diligence is conducted by parties on both sides of a merger transaction. Typically, in an auction process, the bidders’ due dil i- gence is much more extensive than that of the seller; the seller primarily wishes to assure itself that a prospective buyer has sufficient funds to complete the merger and no prior covenants or injunct ions that would restrict it from doing so. While the most important business information is typically e x- changed and discussed by members of management, it is cu stomary for attorneys representing prospective acquirors to review certain key business documen ts of the target REIT. These are gathered in a “data room,” often at the offices of the target’s legal counsel or in online “virtual” data rooms, and typically include:

• corporate organizational documents, • REIT qualification documentation, • tax returns and tax basis information for properties, • title reports and underlying documents, • properties operations information, • major leases and other significant contracts, • insurance policies, • intellectual property information, • debt -related agreements, • joint venture and partnership agreements, • standard leases and other form contracts, 4-03 Selling a REIT REITs

• employee benefit program materials, • litigation documents, • government and regulatory filings and correspondence, • environmental studies and assessments, and, last but ce r- tainly not le ast, • historical and projected financial operating information and other financial information. 1

In the REIT context, the prospective buyers’ real estate counsel will be particularly interested in seeing evidence that the target does, in fact, own the pro perties it claims to own, and that the properties are in good condition. Due diligence is the bi dder’s opportunity to find out as much as possible about the target beyond the information available in public filings and to satisfy itself that the informatio n it has gleaned from public filings is correct. 2 In an auction setting, the target should dictate the amount of time that each bidder may spend in the data room so that the process will not get bogged down by excessive document r eview. Particularly when t he target is a public REIT, there should not be a great need for time -consuming due diligence on the part of the bidders. The Sarbanes -Oxley Act of 2002 has added another layer of pote n- tial issues that bidders must investigate. 3 For example, a prospective acquiror likely will request and review documents relating to any loans by the target to its officers or directors, any off -balance sheet arrangements, any significant deficiencies in the REIT’s internal co n- trol over financial reports, and any whi stleblow er complaints. 4

[b] —Confidentiality Agreements With the exchange of sensitive business and financial information comes a risk of public disclosure. It is imperative that each bidder sign a confidentiality agreement before any sensitive confidential inform a-

1 For an excellent example of a due diligence checklist , see Kling and Nugent, 1 Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 8.03 (Law Jou r- nal Press 1992). 2 See Chapter 5 infra for a discussion of how due diligence relates to certain prov i- sions of the merger agreement. 3 Pub. L. No. 10 7-204, 116 Stat. 745 (2002) (codified in scattered sections of 11, 15, 18, 28 and 29 U.S.C.). 4 See Kling and Nugent, N. 1 supra , at § 8.04[4][b]. 4-03 Selling a REIT REITs tion is provided. The confidentiality agreement generally prohibits a bidder from publicly disclosing the terms of the bidder’s acquisition proposal or the fact that the target is in negotiations with the bidder. In addition, the confidentiality agreemen t typically defines what co n- stitutes confidential evaluation material, restricts the recipient’s use of the confidential information, and prohibits the recipient from disclo s- ing the information publicly for a specified period of time, u nless required by la w. 5 Confidential information generally includes the wri t- ten materials prepared and shared by the target or its represent atives and any other nonpublic information that may be conveyed by repr e- sentatives of the target in meetings with or presentations to th e bidder. Confidential information also will include the documents and notes created by the bidder’s representatives from confidential info rmation disclosed during the auction process, and the agre ement will require the bidder to return any copies of confi dential material and destroy its own notes relating to the confidential information if neg otiations are terminated. Two additional issues in a confidentiality agreement are, first, which of the bidder’s representatives will be permitted to r eceive the con fidential information, and second, how long will the obligations contained in the agreement survive. The outcomes of these negoti a- tions depend largely on the contours of the specific situations. For example, the bidder will need to share conf idential infor mation with any sources of financing (and will need to ensure ahead of time that the obligations of the confidentiality agreement are acceptable to them). The durations of confidentiality obligations will vary according to the nature of the inform ation dis closed; factors include the number of years for which projected financials are created or the time horizon of specific plans and ventures that are described. Fundamentally, the

5 Typically not included in the definition of “confidential information” are: (1) i n- formation that becomes publicly available other than by disclosure by the bidder; (2) information available to or in the possession of the bidder on a nonconfidential basis prior to disclosure in the auction process; and (3) info rmation received by the bidder from a third party not bound by a confidentiality agreement with respect to such i n- formation. See Kling & Nugent, N. 1 supra, at § 9.02. The drafting of the “except as required by law” provision of the confidentiality agreement can be a tricky issue. The outcomes range fro m very lenient —e.g., the bidder may unilaterally disclose the confidential information if its counsel advises that the disclosure is required by law —to the very stringent —e.g., the bidder must provide advance notice to the target and may not disclose confi dential information unilaterally unless it stands liable for contempt ot herwise. See id. 4-03 Selling a REIT REITs

target must require the bidders to hold information confidential until its disc losure can no longer be detrimental to the target. A public REIT may wish to include a standstill provision in the confidentiality agreement. Standstill agreements take a variety of forms; typically, they prohibit the potential acquiror from (1) purcha s- in g or offering to purchase the target REIT’s stock or material assets, (2) attempting to influence or control management, (3) negotiating or agreeing with any other party to attempt to do so, or (4) seeking any modification or waiver of its obligations unde r the agre ement. The duration of a standstill provision is generally one to three years. The concern is that a bidder may use confidential inform ation it receives in negotiations to later initiate a share accumulation program or take other actions with the intention of pursuing a hostile acquis ition. 6 Conversely, the bidders in an auction process may be concerned that the confidentiality agreements will prevent them from discussing the auction and the target REIT with each other. The target will be keen to prevent exactly that and must draft the confidentiality agre e- ments accordingly, particularly if it is concerned about bidder collusion. 7 Courts have permitted target companies to refuse to pr o- vide confidential information to parties who refuse to sign con fidentiality agreements similar in form and substance to agre e- ments signed by other parties receiving information from the target. 8

6 See: Kling and Nugent, 1 Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 9.04 (Law Journal Press 1992); Zinski, “Mergers and Acquisitions of Fina ncial Institutions: A Primer on Deal Points,” 119 Banking L.J. 311, 316 -317 (2002). 7 Outside the auction context, a prospective acquiror may wish to include an e x- clusivity covenant (typically forty -five to 120 days) in the confidentia lity agreement. In t he auction context, this would not be permitted, and even outside of the auction context, an exclusivity agreement can raise serious fiduciary duty concerns for the target board. See Zinski, “Mergers and Acquisitions of Financial Institutions: A Primer on Deal Points,” 119 Banking L.J. 311, 317 (2002). 8 See: Second Circuit: Samjens Partners I v. Bur lington Industries, Inc., 663 F. Supp. 614, 625 (S.D.N.Y. 1987) (holding that target was entitled to request that the raider, like all other interested bidders, sign a confidentiality agreement). State Courts: Delaware: In re J.P. Stevens & Co. Shareholders Litigation, 542 A.2d 770, 784 (Del. Ch. 1988) (where nonpublic information was offered to all b idders on the cond i- tion that they sign a confidentiality agreement containing a standstill, a bidder had no equitable grounds to complain that it was denied fair a ccess to the information). (footnote continued) 4-03 Selling a REIT REITs

It is customary for a confidentiality agreement to include a prov i- sion stating that money damages are not a sufficient reme dy for a breach of the agreement and that each party will be entitled to specific performance or injunctive relief as a remedy.

[c] —Letters of Intent After the due diligence period is over, it is typical in an auction context for the target to set a deadl ine for submission of draft merger agreements or markups of the seller’s draft. Outside the auction co n- text, parties may wish to agree on a term sheet or letter of intent before negotiating full -blown agreements; however, even without a compet i- tive bidding process, going directly to the definitive agreement is usually a better way to determine quickly whether a deal is reachable. Negotiation of a term sheet or letter of intent may be a protracted process, and, because term sheets are often nonbinding and su mmary in description, key issues end up being negotiated all over again du r- ing the drafting of the definitive agreement. 9 Signing a letter of intent (and, in some cases, even a term sheet) can create complex issues relating to disclosure requirements and e nforc e- able contract obligations. Though there may be no disclosure obligation under the federal securities laws if no insider is trading in target or acquiror stock and there is a valid business reason for the nondisclosure, nonetheless, as a practical mat ter, parties to a letter of intent who do not publicly disclose the existence of the agreement may be at greater risk of liability to third parties who buy or sell stock in the market without knowledge of the pending transaction. This risk is lessened if t he negotiating parties omit disclosing negotiations that are taking place without a written memorialization of terms. 10 Fu r-

(footnote continued) See also, Lederman and Silk, “Representing a Public Company in a L everaged Buyout Transaction and Restructuring Alternatives,” in Corporate R estructurings 1990 B4 -6919 , p.41 (685 PLI/Corp. Law and Practice Apr. 2, 1990). 9 See Zinski, “Mergers and Acquisitions of Financial Institutions: A Primer on Deal Points,” 119 Ban king L.J. 311, 317 (2002) for a discussion of neg otiations of preliminary deal terms. 10 See Kling and Nugent, 1 Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 6.01 (Law Journal Press 1992). Federal securities laws require that a publi c company disclose promptly its entry into a material definitive agreement other than in the ordinary course of business. See Item 1.01 of Form 8 -K of the Securities Exchange Act of 1934. Regardless of whether a letter of intent is executed, prelim i- (footnote continued) 4-03 Selling a REIT REITs

thermore, there is a large body of case law on when and to what extent a term sheet or letter of intent constitutes a binding agreeme nt. 11 When parties wish to record their agreements but still keep their o p- tions open, the document should state clearly that it is a no nbinding expre ssion of understanding. One concrete benefit offered by the execution of a definitive term sheet or letter of intent is that it permits the parties to make an antitrust filing and thereby start the waiting period clock. As previously di s- cussed, the HSR Act requires a thirty -day waiting period between initial filing and consummation of a transaction. 12 The fili ng requires submission of a definitive agre ement or a letter of intent. Filing an agreement will, however, be evidence in a court that the parties i n- tended to be bound by the terms of the letter of intent, even if all of the terms have not been fleshed out as they must be in a definitive agre e- ment. 13

[2] —Techniques for a Public Sale

[a] —Closed Auction In a “closed” auction, prospective acquirors are asked to make a sealed bid for a REIT by a fixed deadline. A REIT, usually with the assistance of an investme nt banker, will prepare a descriptive mem o- randum that is circulated to prospective bidders. Prior to the bidding, a company typically will send a draft contract and related document a- tion to multiple parties. Interested bi dders are allowed to engage in due diligence and then submit their bids, together with any comments on the draft contract. A closed auction often has more than one round and may involve simultaneous negotiations with more than one bi d- der. A significant advantage of a closed auction is that it can be effe c- tive even if there is only one bidder. A bidder has no way to know

(footnote continued) nary ne gotiations may, in some cases, be material for disclosure purposes. See Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). 11 See Kling and Nugent, 1 Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 6.03 (Law Jou rnal Press 1992) for a detailed discussion of case law on this topic. 12 See § 12.02[2] infra for a discussion of the HSR Act’s requirements. 13 See Kling and Nugent, N. 11 supra, at § 6.01. 4-03 Selling a REIT REITs whether there are other bidders, and can be expected to put forward its best bid, particularly if the process is structured to involve only a si n- gle round. In addition, the seller in a closed auction can negotiate with bidders to try to elicit higher bids. It is difficult to conduct a closed auction with rumors of a sale leaking into the marketplace. As a result, many public companies conduct a closed auction only after they have announced an intention to seek a sale of the REIT.

[b] —Market Check A common technique for selling a public REIT is a “market check.” There are essentially two types of market checks. The first is a pre - agreement market check where, prior to signing a n agreement, a REIT attempts (usually through its financial adv isors) to identify interested acquirors and the best deal without initiating a formal closed auction. A pre -agreement market check may develop either where a REIT has attempted to attract bidde rs or other publicity has indicated that the REIT is seeking an acquiror or is the subject of an acquisition pr o- posal (i.e., is “in play”). With the second type of market check —a post -agreement market check —there generally is no auction of the REIT before a merger agreement is signed. Instead, a transaction is agreed to, subject to public announcement of the transaction and a fair opportunity for other bidders to make competing offers. 14 An advantage of a post -agreement market check is that it ensures that the seller may secure the offer put forth by the first bidder while leaving the seller open to pursue higher offers. Typically, acquirors will seek to limit the market check and will n egotiate for so -called “bust -up” or “break -up” fees in the event that t he initial transaction is not consummated due to the emergence of another bidder. Further, some potential competing bidders may be reluctant to interfere with a transaction that has been publicly announced. The effectiveness of a post -agreement market chec k depends on the ability of bidders to have a fair opportunity to make topping bids. A transaction that is “locked up” because of stock or asset options or proxies from large stockholders, or that is otherwise structured to deter

14 See, e.g., In re The MONY Group Inc. Shareholder Litigation, 8 52 A.2d 9 (Del. Ch. Feb. 17, 2004) (denying shareholder plaintiffs’ request for injun ctive relief based on allegations that the MONY board of directors, having decided to put the company up for sale, failed to fulfill its fiduciary duties by foregoing an a uction in favor of entering into a merger agreement with a single bidder and allowing for a post -signing market check). 4-03 Selling a REIT REITs

third -party interest, may well have the effect those devices are i n- tended to cause, and the market check will be of little value. 15 For a post -agreement market check to be effective, bidders must be aware of the opportunity to bid, have sufficient information and time to make a bid , and not be deterred by exorbitant break -up fees or lockups given to the first bidder. Although a market check has never been explicitly required by the Delaware courts, it can allow the market to validate a board’s decision to accept a buyout proposal a nd help establish the board’s fulfillment of its Revlon duties. 16

[c] —Costs of the Auction Process The costs of the auction process include both direct and indirect costs. Direct costs can be significant and will include advisor fees such as fees paid to bankers, lawyers, and accountants, the costs of preparing a data room and fees relating to the solicit ation of proxies. 17 Indirect costs, which can have a long -term impact, include reput a- tional harm, as a REIT that fails to sell i tself after announcing an auction can be seen as “damaged goods.” 18 The negative impact of a failed auction may also result in a downturn in share price, loss of key employees, and uncertainty.

[3] —Valuing Stock Considerations in Acquisition Proposals The value of the consideratio n offered in a proposed transaction is a significant element in a board’s decision whether to r eject or accept an offer. Even with diligence, the evaluation of a stock merger, regardless of whether it involves a sale of control, can be quite complex. Dire c-

15 See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 369 (Del. 1993). 16 See Barkan v. Amsted Industries, Inc., 567 A.2d 1279, 1 286 -1287 (Del. 1989). 17 Proxy solicitor fees are in the neighborhood of $15,000, and the printing of proxy solicitation materials can cost $50,000. The actual mailing is also expensive, usually around $4 -$5 per shareholder. In addition, SEC filing fees, which vary d e- pending on the size of the transaction, can be significant (in 2007, the fee for transactional filings was $30.70 per $1 million, which can be calculated by multipl y- ing the aggregate offering amount by .00003070). See SEC Filing Fees, (rev. F eb. 2007, available at http://www.sec.gov/info/edgar/feeamt.htm (last visited Aug. 19, 2007). 18 See Klein, “When the Board Should Just Say Yes to Management: The Inte r- play Between the Decision of Whether to Conduct an Auction and Transaction Structure,” 5 Stan. J.L. Bus. & Fin. 45, 62 (1999), for a discussion of these costs. 4-03 Selling a REIT REITs tors may properly weigh a number of issues in evaluating a proposed transaction.

[a] —Short - and Long -Term Values Although nominal current market value provides a ready first est i- mate of the value of a transaction to a REIT’s stockholders, the Delaware Supr eme Court in Paramount Communications, Inc. v. QVC Network, Inc. ( QVC ) and in other cases has stated that such valuation alone is not sufficient, and certainly not determinative of value. 19 In the sale of control context, directors of a REIT have one prima ry o b- jective : “to seek the transaction offering the best value reasonably available to the stockholders.” 20 This objective ordinarily would not be satisfied by looking only to the latest closing prices on the relevant stock exchange : “[A] board of direct ors is not limited to considering only the amount of cash involved, and is not required to ignore totally its view of the future value of a strategic alliance . . . . When assessing the value of non -cash consideration, a board should focus on its value as of the date it will be received by the stockholders. Normally, such value will be determined with the assistance of experts using generally accepted methods of valuation.” 21 In Smith v. Van Gorkom (known as Trans Union ), a seminal Del a- ware Supreme Court d ecision on director responsibilities in selling a company, the court criticized the directors for relying on the stock market prices of the company’s stock in assessing value. 22 The court held that using stock market trading prices as a basis for measuring a premium “was a clearly faulty, indeed fallacious, premise.” 23 Instead, the court emphasized that the key issue must be the intrinsic value of the business and that the value to be ascribed to a share interest in a business must reflect sound valuation i nformation about the business. The same point was reiterated by the Delaware Supreme Court in its decision in Paramount Communications, Inc. v. Time, Inc., where the court pointedly noted “that it is not a breach of faith for directors to

19 See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 875 (Del. 1985) ( Trans Union ). 20 Paramount Communications, Inc. v. QVC Network, Inc ., 637 A.2d 34, 43 (Del. 1994). 21 Id., 637 A.2d at 44 and n.14. (Emphasis added; citations omitted.) 22 Smith v. Van Gorkom, N. 19 supra . 23 Id., 488 A.2d at 876. 4-03 Selling a REIT REITs

determine that th e present stock market price of shares is not represe n- tative of true value.” 24 In addition to current stock prices, directors should also consider historical trading prices and financial indicators of future market pe r- formance. The result of such analyses may be that the board values one bidder’s security with a lower current ma rket value more highly than another security with a higher current trading value. 25 Of course, the seller’s stockholders may not agree with the board in such a case and may reject a n offer with a lower current market value. Under either the Revlon standard or the traditional business jud g- ment rule, the valuation task necessarily calls for the exercise of business judgment by directors. A board must look not only at fina n- cial valuatio ns, but also make qualitative judgments concerning the potential for success of the combined company. Extensive due dil i- gence by both parties to a stock -based merger is indispensable to informed decision making, as is detailed analysis of pro forma fina n- ci al information and contribution anal yses. Risk assessment is also an important factor since experience has shown there to be a significant risk of failure to achieve the expected benefits of the merger, which, in turn, may have a negative impact on stockho lder values. Directors of a company may need to consider such factors as:

• Past performance of the security being issued, • Management, • Cost savings and synergies, • Past record of successful integration in other mergers, • Franchise value, • Antitrust issues, • Ear nings dilution, and • Certainty of consummation. •

24 Paramount Communications, Inc. v. Time, Inc ., 571 A.2d 1140, 1150 n.12 (Del. 1989). 25 In the context of competing bids, market prices may be a particularly confusing indicator. Once the offers are announced, the market may discount the securities of the higher bidder to reflect a likely victory and the accompanying dilution, but it also may discount the securities of the lower bidder if tha t party is expected to raise its bid. These uncertainties, however, do not affect the vali dity of historical trading averages and other market comparisons, which are not based on current stock prices. 4-03 Selling a REIT REITs

While predicting future stock prices is always speculative, a board can and should evaluate such information in the context of the historic performance of the other party, the business rationale underlying th e merger proposal and the future prospects for the combined companies. To the extent competing bids are under review, directors should be careful to apply the same evalu ation criteria in an unbiased manner to avoid any suggestion that they have a conflict of interest or are not acting in good faith.

[b] —Stock Options If bidders are offering their own stock as partial or total consider a- tion, the target will have more flexibility in negotiating the effect of the transaction on its outstanding stock options. F or example, the ta r- get may wish to exchange its own stock options for stock options in the buyer, adjusting the strike price and number of stock options per optionee to account for the relationship between the merger price b e- ing paid by the buyer and the b uyer’s stock price. Or, the buyer may agree to cash out outstanding options at closing (where the cash out amount, payable in cash or buyer stock, is the difference b etween the strike price and the per share merger price). The target may ask the buyer to g ive option hol ders the choice of cash, buyer stock, or buyer stock options. Additional considerations are tax implications and whether the target’s stock o ption plan provides for a specific type of conversion in a merger transaction. 26

[c] —Social Issues a nd Other Constituencies The termination or continued employment of top exec utives — commonly known as “social issues” —are legitimate concerns for a board in evaluating the relative strengths of different transa ctions. The fate of the senior executive team is usually discussed at an early stage of negotiations and may be predictable depending on the identity of the buyer. It is wise for a target REIT that is considering a sale to put in place, prior to the commencement of the sale process, employment agreement s that provide for either continued employment or severance pay and other perquisites. This will help to ensure that the senior ma n-

26 See Zinski, “Mergers and Acquisitions of Financial I nstitutions: A Primer on Deal Points,” 119 Banking L.J. 311, 321 (2002). 4-03 Selling a REIT REITs

agement will be focused on closing the deal without being distracted by concerns about their own fate. 27 In stock mergers no t involving a change of control, directors may appropriately consider the effect of the transaction on nonstockholder constituencies. In seeking to achieve stockholder value, directors are permitted to take into account the impact of the prospective transa c- tion on the REIT, its employees, its customers and the community in which it operates. 28 While the economic terms of a proposed merger or acquisition transaction and the benefits that the transaction brings to stockholder interests will predominate in the directors’ inquiry, neve r- theless, concerns regarding the business combination’s impact on the community may be properly considered by directors in evaluating the strategic benefits of a potential transaction not involving a change of control, at least ins ofar as they will affect future value. Even where a board’s action may be subject to enhanced scrutiny, Delaware case law has recognized the legitimacy, albeit more limited, of similar co n- cerns. 29 Consideration of employee and other constituent interests i s also important in assuring a smooth transition period between the signing of a merger agreement and the closing of the transaction. Given the risk of nonconsummation inherent in any transaction, it is important for the selling REIT to strive to preserve franchise value throughout the interim period. Moreover, the impact of a proposed merger on a selling REIT’s franchise and local community interests can have a direct impact on the acquiror’s ability to obtain the requisite regul a- tory approvals.

27 Id., 119 Banking L.J. at 329 -330. 28 See, e.g., Paramount Communications, Inc. v. Time, Inc ., 571 A.2d 1140, 1150, 1152 (Del. 1989). 29 See: Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985); Mills Acquisition Co. v. Macmillan, Inc ., C.A. No. 10168, 1988 Del. Ch. LEXIS 138 (Oct. 18, 1988), rev’d on other grounds 559 A.2d 1261 (Del. 1989). In the Macmillan case, the Delaware Supreme Court noted that it was legitimate fo r a board to consider the “effect on the various constituencies” of a corporation, the companies’ long -term str a- tegic plans, and “any special factors bearing on stockholder and public interests” in reviewing merger offers. Mills Acquisition Co. v. Macmilla n, Inc., supra, 559 A.2d at 1285 n.35. 4-03 Selling a REIT REITs

[4] —Protec ting the Deal Parties to negotiated business combination transactions frequently request or insist on certain protections from, or compensation for, i n- terference with the transaction by a third party. Deal protection devices in transactions not involving a sale of control traditionally have been reviewed under a Unocal enhanced scrutiny analysis. 30 The Unocal test as applied to deal protection devices requires that there be reasonable grounds to believe that a third -party bid would be a danger to corporate policy and that the deal protection measure must be re a- sonable in response to the perceived threat. 31 In contrast, review of deal protection devices in change of control transactions involves the much more exacting Revlon test, in which a board’s duty is t o secure the best value reasonably available for stockholders. 32 The deal pr o- te ction device therefore must be designed to secure the best value reasonably available to stockholders. Common deterrents to competing proposals are “no shop” prov i- sions, break -up fees, stock option agreements, cash put provisions and voting lockups. 33 These tools are discussed below.

[a] —No -Shop and Window -Shop Provisions A “no -shop” provision in a merger agreement provides that, subject to limited exceptions, a selling REIT wi ll not encourage, seek, solicit, provide information to or negotiate with third -party bidders. 34 A “wi ndow -shop” clause generally allows a seller to respond to unsoli c- ited offers by supplying confidential information and to consider certain competing bids. While a prohibition on the affirmative solicitation of other bidders may be reasonable, overly restrictive no -shop clauses may be rejected by Delaware courts as not in the best interest of stockholders. In QVC , which involved a sale of control, both the Delaware Supreme Court and the Delaware Court of Chancery expressed concern that the highly

30 See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). 31 Id. 32 Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (Revlon ). 33 Frankle, “Fiduciary Duties in Considering Deal L ockups: What’s a Board to Do?,” in Doing Deals 2000 B0 -00FM, pp.593, 595 (1167 PLI/Corp. Law and Practice Mar. 2000). 34 See discussion in § 5.07[2] infra. 4-03 Selling a REIT REITs

restrictive no -shop clause of the Viacom/Paramount merger agreement was interpreted by the board of Paramount as preventing directors from even learning of the term s and conditions of QVC’s offer, which was initially higher than Viacom’s by roughly $1.2 billion. The Del a- ware Supreme Court did not require negotiations with all interlopers, but it had difficulty seeing the justification for a no -shop clause which made it appear that the directors wished to impose ignorance on the m- selves as an excuse for inaction. After QVC , a board in a sale of control situation must be careful not to contract away its ability to b e- come informed as to the true value of the company and o f all bids. “No -talk” provisions in no -shop clauses, which prohibit a merging party from holding talks with potential third -party bidders, have come into question in Delaware even in the context of stock -for -stock mer g- ers that do not involve a change of co ntrol. In Phelps Dodge Corp. v . Cyprus Amax Minerals Co. (Phelps Dodge ), 35 on a competing bi d- der’s motion preliminarily to enjoin enforcement of a strict no -talk prov ision, Chancellor Chandler of the Delaware Court of Chancery stated that such provisions w ere “troubling” under a duty of care analysis “precisely because they prevent a board from meeting its duty to make an informed judgment with respect to even considering whether to negotiate with a third party.” 36 The court acknowledged that under Time , pa rties to a stock -for -stock merger not involving a change of control had no duty to negotiate with third parties, but noted that “even the decision not to negotiate, in my opinion, must be an informed one.” 37 Nevertheless, the court denied the motion on the ground that no irreparable injury would result if the injunction were not granted, because the stockholders of the seller had the ability to vote down the original merger.

[b] —Termination Provisions and Fiduciary Outs From the Time decision in 1989 until the spring of 2003, many practitioners believed that in a stock -for -stock merger not i nvolving a change of control, a board could contractually commit itself to a merger, without a so -called “fiduciary out,” or right to terminate in

35 Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 Del. Ch. LEXIS 202 (Sept. 27, 1999) ( Phelps Dodge ). 36 Id., 1999 Del. Ch. LEXIS 202 at *4. 37 Id., 1999 Del. Ch. LEXIS 202 at *3 -4. 4-03 Selling a REIT REITs favor of a better deal. 38 Absent a sale of control, a board’s dec ision to contract away the right to terminate would be judged under the same fiduciary principles as are applied to bust -up fees and stock o ptions, from the point of view of the time of entering into the original m erger agreement. 39 Notwithstanding the prevailing belief, many merger agreements providing for stock -for -stock mergers have i ncluded a right to terminate in favor of a superior deal. As a business matter, some companies entering into a strategic merger hav e felt it prudent to reserve such a termination right. In spring 2003, however, the Delaware Supreme Court issued an opinion in Omnicare that may signal a change in the legal principles go verning termination of merger contracts. 40 In a rare three -to -two de cision, the court referred to both Unocal and Unitrin in adopting a per se rule invalidating board approval of ”preclusive or coercive” measures to “ completely ‘lock up’” a merger transaction, however solid the record ind icating that the board acted in goo d faith and had a valid business justification. 41 Omnicare ’s emphasis on the “unremi t- ting” nature of the board’s duties to obtain the best price, and its flat per se rule that replaces previous factual, case -by -case analysis, may suggest that co ntracts wil l require some form of fiduciary out to pass muster in the future. 42 Subsequent case law, including Orman v. Cul l- man ( Orman ), suggests that over time the Delaware courts may soften the view taken in Omnicare .43

38 These provisions are discussed in § 5.07[2] infra. 39 A series of Delaware Court of Chancery opinions addressed the ramifications of these relatively settled princi ples See, e.g.: State of Wisconsin Investment Board v. Bartlett, C.A. No. 17727, 2000 Del. Ch. LEXIS 42 (Feb. 24, 2000) (rejecting cha l- lenge to no -talk provision in merger agreement where seller had made market canvass efforts prior to agreement); IXC Com munications, Inc. Shareholders Litigation, C.A. Nos. 17324, 17334, 1999 Del. Ch. LEXIS 210 (Oct. 27, 1999) (rejecting challenge to no -talk clause); Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 Del. Ch. LEXIS 202 (Sept. 27, 1999) (Phelps Dodge) (cou rt indicated that highly restrictive no -talk provisions were suspect, but preliminary injunction denied); Ace Limited v. Capital Re Corp., 747 A.2d 95 (Del. Ch. 1999) (fiduciary out in stock -for -stock merger required where shareholder vote is essentially l ocked up and board has not conducted an auction -like process). 40 See Omnicare, Inc. v. NCS Healthcare, Inc ., 818 A.2d 914 (Del. 2003). 41 Id., 818 A.2d at 932, 934. 42 Id. 43 See Orman v. Cullman, C.A. No. 18039 (Del. Ch. Oct. 20, 2004) ( Orman ), di s- cussed in § 4.03[4][e] infra . 4-03 Selling a REIT REITs

[c] —Stock Options and Break -Up Fees 44 Stock options of up to 19.9% of a target’s shares were at one time a popular means of locking up a deal. 45 The purpose is to confer on the buyer a potential “leg up” if a contested bidding situation develops, and a right to benefit from a third -party offer that is accepted by the seller. The original buyer claims that it had a role in creating the value in a third party’s higher offer, since the third party offered a superior price only because the buyer already had negotiated and committed to a sale transaction. Typically, a stock o ption agreement provides that the buyer will r eceive consideration equal to the difference between the price of seller’s stock immediately before it reached a definitive agreement with the buyer and the merger price eventually paid by a third -party acquiror multiplied by 19.9% of the seller’s common stock (that is, 19.9% of the shares of the seller’s stock at the time of the first deal, paid in cash or newly issued shares of the seller). The stock o p- tion agreement may also give the buye r the right to pay cash and exercise the option to buy 19.9% of the target shares or put the option to the target and take cash in lieu of shares. 46 The target board should be careful that any such agre ement provides for a cap on the price paid to the buye r. Stock option agreements in the merger context at one time also served to prevent pooling accounting treatment for a third -party a c- qu iror wishing to use all stock in an acquisition, but this benefit was eliminated by a change in the relevant accounting rules in 2001. 46.1 More commonly used are termination fees, or “break -up” fees, typically ranging from 2% to 4% of the transaction value, 47 d esigned

44 See § 5.07[3] infra , which contains a detailed discussion of the complexities of break -up fees in the REIT context. 45 The number 19.9% was chosen to avoid the shareholder approval requirement imposed by the New York Stock Exchan ge at the 20% threshold. See NYSE Listed Company Manual § 312.03(c). 46 See Zinski, “Mergers and Acquisitions of Financial Institutions: A Primer on Deal Points,” 119 Banking L.J. 311, 337 -338 (2002). 46.1 See Statement of Financial Accounting Standards No. 141 (as amended) (June 2001). 47 A study of 144 announced transactions in 2000 involving U.S. publicly traded target companies with an aggregate transaction value of at least $50 million found a mean and median termination fee as a percentage of trans action value of 3.0% and 2.9%, respectively. See Houlihan, Lokey, Howard & Zukin, 2000 Transaction Term i- (footnote continued) 4-03 Selling a REIT REITs to compensate one party to a merger agreement if the merger is not consummated because a bid is made for t he other party. The percen t- age of the transaction value may be higher in smaller deals in order to ensure that the amount of money at stake is significant to the parties. In the case of a stock -for -stock merger of equals, reciprocal stock options or break -up fees may be appropriate. Such arrangements have been routinely approved in the context of nonchange of control tran s- actions. In Paramount Communications, Inc. v. Time, Inc. , Time and Warner each had a stock option on approximately 10% of the other part y’s stock that would be triggered by third -party interference with the transaction. The Delaware Supreme Court noted approvingly that this feature of the agreement had the rational business purpose of pr o- tecting the stock merger agreement and was adopted t o prevent either Time or Warner from being put into play as a result of their agre e- ment. 48 The court also noted that the option was adopted before any takeover threat from a third party had surfaced, and that the no -shop clause in the agreement was adopted at the insistence of the other party in arm’s length bargaining. 49 In Brazen v. Bell Atlantic Corp. ( Bell Atlantic ), the Delaware S u- preme Court upheld a $550 million termination fee in the Bell Atlantic/NYNEX merger agreement. 50 The Delaware Court of Cha n- cery had upheld the provision, applying the business judgment rule. The Delaware Supreme Court found that the provision, which stated that it was a liquidated damages clause, should have been analyzed as such, but then upheld the provision on the grounds t hat it was reaso n- able because the amount was within the range of termination fees which have been upheld as reasonable by the Delaware courts. 51 Fo l-

(footnote continued) nation Fee Study (Houlihan Lokey Study). See § 5.07[3] infra for a discussion of special tax issues that such termination fees raise. 48 Paramount Commu nications, Inc. v. Time, Inc ., 571 A.2d 1140 (Del. 1989). 49 Id., 571 A.2d at 1151 n.15. 50 Brazen v. Bell Atlantic Corp., 695 A.2d 43 (Del. 1997) ( Bell Atlantic ). 51 Surveys of stock -for -stock mergers since January 1, 1994 where the value of the stock is sued exceeded $1 billion demonstrate that termination fees typically fell within a range of 1% to 3% of such value but were as high as 5% on occasion. The 2000 Houlihan Lokey study, involving deals with an aggregate transaction value of at least $50 millio n, found that termination fees ranged from 0.7% to 6.6% of such value, with the median at 2.9%. Of further interest was the sliding scale of median termination fees depending on deal size, with the smallest deals (between $50 million (footnote continued) 4-03 Selling a REIT REITs

lowing the decision in Bell Atlantic , the Delaware Court of Chancery upheld the decision of the board of Gre at Western Financial to include a break -up fee in a “white knight” merger agreement entered into in response to an unsolicited $6 billion acquisition proposal by H.F. A h- manson & Co. 52 The court ruled that the 3% break -up fee in a $7 billion white knight tr ansaction did not raise significant issues of v a- lidity, even where half the fee was to be payable solely upon the loss of the stockholder vote to approve the merger. In 2005, in Toys “R” Us , the Delaware Chancery Court dismissed a plaintiff’s cha llenge tha t a 3.75% break -up fee and a matching right unreasonably deterred additional bids. In the merger -of -equals transaction between First Union and W a- chovia, recognizing that the stock option grant no longer killed pooling accounting treatment, the parties nego tiated a slightly e n- hanced economic feature in the 19.9% cross stock options granted in the merger. The options contained a provision that doubled the in -the - money value of the option in certain circumstances involving an inte r- loping bidder, and included a cap on the total value that could be received in all instances at 6% of total deal value ($780 million). The options initially contained a feature that allowed the grantee to use property (including loans) to pay the exercise price of the option, but this feature was eliminated following SunTrust’s hostile bid. SunTrust sued to invalidate the lockup protection, among other things. The S u- perior Court of North Carolina upheld the lockup options (as amended to eliminate the property put feature) and the 6% ca p on the basis that neither the option nor the 6% cap was preclusive or coercive. 53

(footnote continued) and $250 million) at 3 .3% of transaction value and the largest transactions (over $1 billion) at 2.8%. See Houlihan, Lokey, Howard & Zukin, N. 47 supra. 52 H.F. Ahmanson & Co. v. Great Western Financial Corp., C.A. No. 15650, 1997 Del. Ch. LEXIS 84 (June 3, 1997). 53 See First Union Corp. v. SunTrust Banks, Inc ., C.A. Nos. 01 -CVS -10075, 01 - CVS -4486, 01 -CVS -8036 (N.C. Sup. July 20, 2001). SunTrust also sought to inval i- date a nine -month lockout period in the merger agreement between First Union and Wachovia, which provided that th e merger agreement could not be terminated prior to January 15, 2002 absent a material breach or a final denial of regulatory approval. The court invalidated the lockout feature as being contrary to North Carolina law while refusing to hold that the Wachov ia board had breached any of its fiduciary duties in agreeing to such a feature. The court noted that First Union and Wachovia would be free to agree to reach a subsequent agreement to take their proposed merger back to shareholders following any vote -down , holding only that it was inappropriate (anal o- gizing to the Delaware opinion in Quickturn Design Systems, Inc. v. Shapiro, 721 (footnote continued) 4-03 Selling a REIT REITs

In contrast, courts reviewing stock options and break -up fees in change of control transactions have not been as tolerant. The QVC decision was highly critical of the stock option and break -up fee a r- rangements that were entered into between Paramount and Viacom in the initial merger agreement. 54 The features in the QVC lockup option that drew criticism included a cash put feature enabling Viacom to “put” the option to Paramo unt at the spread between the exercise price and Paramount’s market price, a note feature permitting the option to be exercised for a Viacom subordinated note, and the open -ended value of the option. The Delaware Supreme Court did, however, make clear in QVC that stock option and break -up fee arrangements are ne i- ther per se nor presumptively invalid. 55 A 1999 decision regarding a merger not involving a change of co n- trol serves as a reminder that there are limits on such arrangements even when Revlon duties do not apply. 56 The Delaware Court of Chancery cast doubt on the validity of a 6.3% termination fee (calc u- lated based on the deal value to the seller’s stockholders), stating in dicta that the fee “certainly seems to stretch the definition of range of rea sonableness and probably stretches the definition beyond its brea k- ing point.” 57

[d] —Cash Put Provisions Lockup options granted in connection with acquisitions may i n- clude a so -called “cash put” provision providing that, in the event of a higher bid, the ac quiror has the right to “put” the option back to the seller for cash at a per share price equal to the difference between the option exercise price and the higher bid. Under QVC , these options are not per se breaches of the directors’ duties. The put right gives the option more bite because exercise of the put generally does not present

(footnote continued) A.2d 1281 (Del. 1998)) under North Carolina law for the Wachovia board to agree in advance to be contractually prevented from pu rsuing other options following a shar e- holder vote against the merger. 54 See Paramount Communications, Inc. v. QVC Network, Inc ., 637 A.2d 34, 49 - 51 (Del. 1994). 55 Id. 56 Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255 at *2 (Del. Ch. Sept . 27, 1999) ( Phelps Dodge ) (transcript of oral ruling). 57 Id. 4-03 Selling a REIT REITs

the same legal and regulatory issues with respect to its exercise as does exercise of the option. 58 Exercise of an option to purchase a seller’s shares could be delayed pend ing industry -specific or antitrust regulatory review, which could result in an acquiror being deprived of the benefit of its bargain. The exercise of the put right can serve both to protect the initial transaction and to provide the acquiror with an immedi ately payable profit should the initial transaction be outbid. Under the no -longer -available pooling -of -interests accounting rules, the put also carried significant deterrent value because the exe r- cise of the put would have inhibited pooling -of -interests t reatment for any competing offer. Absent pooling -of -interests accounting, the e f- fectiveness of stock options to protect a deal is more limited. While a stock option will still provide an economic deterrent to a potential competing bidder, and the ability t o exercise the option in certain ci r- cumstances may provide the initial acquiror with certain voting advantages in a potential battle for control, the loss of the initial bi d- der’s ability to frustrate favorable accounting treatment for third -party bids will place the initial bidder and potential interloper on more even foo ting than in the past. A seller will want to limit exercise of both the underlying option and the put to actual change of control events (that is, the consumm a- tion and not just the proposal of a competing offer) to avoid exposing the seller to a third -party bid that allows the initial acquiror to exercise the put but is then never consummated, leaving the seller with d e- pleted capital and a long face. So -called “double triggers” have been dev eloped that provide for certain “vesting” events (such as a publicly announced competing bid) that extend the life of the lockup beyond the normal termination provisions, as well as for events giving rise to the right to exercise the option and the put.

[e ]—Manag ement/Stockholder Voting Lockups In addition to stock options, break -up or termination fees, no -shop clauses and no termination provisions, an acquiror also may seek commitments from significant stockholders of the seller, whether members of managem ent or otherwise, to support the transaction. Such voting lockups may be in the form of voting agreements or sep a- rate options for the acquiror on such stockholders’ stock. The visible,

58 In the case of bank acquisitions the amount of cash paid out on exercise of the put does not exceed 10% of the target’s consolidated net worth. See 12 C.F.R. § 225.4(b)(1). 4-03 Selling a REIT REITs up -front support of major stockholders for a transaction can be a si g- ni ficant deterrent to third -party bids and may be crucial in consummating the transaction. Viacom’s merger with Blockbuster, for example, was approved after some delay by holders of 58% of Bloc k- buster’s outstanding common stock, including management proxies comprising nearly 23% of the outstanding shares. In court, however, these lockups in a change of control transaction will be scrutinized together with other protective and defensive mea s- ures to determine whether a board has fulfilled its fiduciary duties. Stockholder options granted at the request of the board of the seller rather than the acquiror may be suspect because such arrangements can prevent or deter third -party bidders. Stockholder lockups obtained prior to or in conjunction with a board’s approva l of a merger agre e- ment will be significant elements of a court’s review of whether the board has fulfilled its fiduciary obligations, particularly under any heightened standard since substantial lockups can effectively eliminate the possibility of a third -party bid. 59 Indeed, in Omnicare, Inc. v. NCS Healthcare, Inc. (Omnicare ), the Delaware Supreme Court enjoined a merger between Genesis Health Ventures, Inc. and NCS Healthcare, Inc. 60 The court held that the a p- proval by the NCS board of voting agreement s that ensured stockholder approval of the proposed merger, together with approval of an agreement to a so -called “force -the -vote” provision under Se c- tion 251(c) of the Delaware General Corporation Law without any ability of the board to terminate the tran saction to accept a superior offer, precluded the directors from exercising their continuing oblig a- tion to negotiate a sale of the company. 61 It further held that a merger agreement which leaves the board with no ability to prevent the su b- mission of the me rger to the target stockholders coupled with a majority -stockholder voting lockup is illegal per se , regardless of (1) the unconflicted and fully informed view of the board that such an agreement is in the best interests of the stockholders, (2) the suppor t

59 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 369 (Del. 1993) (acquiror’s lockup was one of five factors supporting conclusion that directors violated their duty of care in approving the transaction); Ace Limited v. Capital Re Corp., 747 A.2d 95, 108 (Del. Ch. 1999) ( a no -escape merger agreement that locks up the necessary votes may constitute an unreasonable preclusive and defensive obstacle within the meaning of Unocal ). 60 Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003). 61 Id., 818 A.2d at 936. 4-03 Selling a REIT REITs

by stockholders having a majority of the voting power and the largest economic interest, and (3) the belief of both of the board and the co n- trolling stockholders that the inducement of a no -outs merger agreement was the best and only way to obtain the hi ghest value for the stockholders. 62 As a doctrinal matter, in Omnicare, the court held that “deal prote c- tion devices” are subject to Unocal enhanced judicial scrutiny (rather than business judgment review) even in a stock -for -stock merger co n- text. 63 The c ourt held that the same rationale for such “reasonableness” review of anti -takeover actions applies to defensive devices which are intended to protect a merger agreement that will not result in a change of control. More particularly, it held that the “lat i- tude” that a board has in either maintaining or using such provisions depends post hoc on the degree of the benefit or detriment to the inte r- ests of the stockholders in the value or terms of the subsequent competing transaction. The court also declared the merger protections “invalid” on the alternative ground that they “prevented” the board from discharging its “continuing” fiduciary responsibilities to the m i- nority stockholders when a superior transaction appeared. Under the court’s ruling, no merger agre ement, regardless of ci r- cumstance, can be locked up, even at the behest of controlling stockholders and seemingly even at the end of a diligent sho p- ping/auction process. The ruling may make it more difficult for majority stockholders to arrange the sale of subsidiaries or for majo r- ity -controlled companies to attract the highest and best offers from merger partners who may be reluctant to enter into a merger contract that is required effectively to be an option. As Chief Justice Veasey noted in his dissentin g opinion, by “requiring that there must always be a fiduciary out, the universe of potential bidders who could re a- sonably be expected to benefit stockholders could shrink or disappear.” 64 Beyond that, the court’s application of a “reasonabl e- ness” review t o merger protection provisions and its insistence on directors’ continuing post -signing fiduciary duties may herald signif i-

62 Id., 818 A.2d at 942 -943. 63 Id., 818 A.2d at 930. 64 Id., at 818 A.2d 946 (noting that a “bright -line rule” against lockups could chill permissible conduct and fails to recognize that “[s]ituations will arise where business realities demand a lockup so t hat wealth -enhancing transactions may go forward.” 818 A.2d at 942.) (Veasey, C.J., and Steele, J., dissenting). 4-03 Selling a REIT REITs cant unce rtainty about what level of deal protection will be accepted or whether a later higher bid will just always win. The Delawa re Chancery Court has clarified the type of deal prote c- tion that an acquiror can seek from a controlling shareholder after Omnicare . In Orman v. Cullman , the court upheld a lockup agreement that required the controlling stockholder to vote for the proposed merger and against any alternative acquisition proposal for eighteen months following the termination of the merger agreement. 65 The court noted a number of factual differences from the circumstances presented in Omnicare : (1) the controlling shareholder s in Orman bound themselves to support the merger only as shareholders, but did not restrict their right as members of the board to recommend that public shareholders reject the merger; (2) the Orman board negotiated an effective fiduciary out that would a llow them to entertain bona fide superior offers, while no fiduciary out existed in Omnicare ; and (3) the deal in Orman was expressly subject to approval of a majority of the minority shareholders, but was not in Omnicare .66 In sum, the court concluded, th e public shareholders in Orman were not coerced into voting for the merger for “some reason other than the merits of that transaction,” and the deal protection measures did not make the transaction a “ fait accompli ” or a “mathematical certainty” as they di d in Omnicare .67 Accordingly, the voting arrangement survived the court’s review under the Unocal standard applied in Omnicare .

[5] —Preemptive Bids and Attempts to Derail a Process Unless the relevant market for the target REIT is a small, defined univers e of companies, all of whom were given the opportunity to join the bidding process, there is always the chance that an uninvited bi d- der will appear at any stage of the process. It is also possible that one or more bidders will, after entering the bidding p rocess, try to take control of the process away from the target board. A bidder may use pressure tactics such as giving the target board an offer that expires on short notice or demanding that the target proceed on an exclusive basis

65 See Orman v. Cullman, C.A. No. 18039, 2004 WL 2348395 (Del. Ch. Oct. 20, 2004). See also, “Majority Shareholders’ Voting Agreement Not Imper missible Lockup, Delaware Court Says,” 7 M&A Law Rep. 43 (Nov. 8, 2004). 66 See Orman v. Cullman, C.A. No. 18039, 2004 WL 2348395 at *6 (Del. Ch. Oct. 20, 2004). 67 Id. 4-03 Selling a REIT REITs

in order to eliminate the competition. When faced with an unexpected tactic that threatens to derail the process, the target board should i m- mediately seek advice from its legal counsel in order to understand fully its fiduciary duties and its legal options.

[6] —Timing Once a d efinitive agreement is reached between the target and the chosen buyer, the amount of time until closing will be largely dete r- mined by the filing requirements and waiting periods required under the federal securities laws and the HSR Act. The time period b etween execution of an agreement and consummation of a transaction poses risks for both seller and acquiror. A third party may attempt to inte r- vene, for example, or the buyer’s stock may suffer in the market for external reasons that make it difficult or i mpossible for the buyer to consummate the transaction. If the transaction collapses due to co m- peting bidders or market decline, the seller’s stock may require a substantial period of time before it returns to pre -merger values. These concerns and the inher ently fluctuating value of stock co n- sideration require both seller and acquiror to think carefully about the allocation of market risk and provide for such allocation in the defin i- tive documentation. 68

[a] —Sequence of Events The sequence of events in an a uction process differs from the s e- quence of events when there is only one buyer with whom the seller is negotiating. In an auction process, the target will undertake more planning and advance preparation in order to manage multiple bidders effectively. Bel ow is an example of the stages of an auction process.

Stage One: Preliminary Steps • Hire outside legal counsel and financial advisors • Decide on best pro cess for sale • Prepare preliminary marketing materials and detailed conf i- dential information memo ra ndum • Draft confidentiality agreements • Finalize potential buyers list • Execute confidentia lity agreements with bidders

68 See Chapter 5 infra for a discussion of the ways that these concerns typically are addressed in the merger agreement. 4-03 Selling a REIT REITs

• Distribute marketing materials and bidding instru ctions • Receive preliminary indications of interest • Decide whether to continu e or broaden process

Stage Two: Negotiating Bids • Establish data room for bidders • Draft and present management presentation • Schedule bidders’ site visits and due diligence • Draft and distribute merger agreement and other materials • Receive final o ffers, including markup of merger agreement • Negotiate merger agreement and side agreements • Finalize disclosure schedules • Get board approval, get agreement signed, and announce transa ction • Make any required regulatory filings

Stage Three: Completi ng the Transaction • Hold shareholder meeting and vote on transaction • Get any required regulatory approvals • Close transaction

Realistically, a target can expect that the process will take two to three months from finalizing the list of potential bidde rs to signing a definitive agreement, and there will be another two to three months from that time until the transaction is consummated.

[b] —Board Deliberations and Decisions The board of directors of the target should be well -informed at all stages of th e process. There are several key moments for board dec i- sions : First, when the board determines it is in the best interest of the shareholders to pursue a sale of the REIT; second, when the board decides to conduct an auction process; third, when the board decides whether to continue the process given the indications of interest r e- ceived in the first stage; fourth, when the board selects one or more bidders with whom to negotiate definitive agreements; and fifth, when the board approves a transaction. Each of these decisions ideally should be made at an in -person meeting of the directors that is a t- tended as well by the board’s top outside legal and financial advisors. If a board determines to pursue an auction process, the directors should be aware that a l arge time commitment and unpredictable scheduling are inevitable. The directors should make their best efforts 4-03 Selling a REIT REITs

to be available for in -person meetings and teleconferences and to set aside time for reviewing documents and presentation materials. It is impera tive that the board have the ability to meet in a timely fashion to deliberate and make decisions during the auction process, and it must have the flexibility to react quickly to unexpected moves by bi d- ders or third parties. Though the board is the ultima te decision maker at every key m o- ment in the auction process, the board should resist any temptation to have too many official spokespersons for the REIT in private merger discu ssions or public announcements. In the context of an important strategic merger or acquis ition, there should be only one official spokesperson, namely the chief executive officer, and only the most senior officers or agents of the CEO should handle signif icant issues related to the negotiations. It is important for all directors and officers of the corporation to unde rstand that no one other than the CEO should engage in casual discussions with agents or representatives of pote ntial merger partners, except as expressly authorized by the CEO or the board. 69

[c] —Federal Laws and Reg ulat ions The federal securities laws impose a broad array of disclosure obl i- gations in the merger context. Once a target has signed a definitive agreement with an acquiror, the next step is to make the HSR filings, if necessary, and prepare the registration st atement for the s ecurities to be used as consideration in the acquisition. The registration statement includes a proxy statement, which provides shareholders information about the transaction. Preparing a registration statement with a proxy statement typic ally will take twenty to thirty days, and the subsequent SEC review process can take an additional month or even two. In order to register securities under the ’33 Act, the acquiror files a registration statement with the SEC and awaits the SEC’s approval for the registration statement to become “effective.” The SEC has the right to review the registration statement and request modifications, which can delay a transaction. If an acquiror uses its own stock in a public company acquisition, it must fulfill t he disclosure requirements of the Securities Act of 1933 (’33 Act) 70 as well as the proxy solicit a-

69 See Martin Lipton, Memorandum, Mergers and Acquisitions 2004 (on file with authors). 70 See 15 U.S.C. §§ 77a -77aa. 4-03 Selling a REIT REITs tion rules of the Securities Exchange Act of 1934 (’34 Act). 71 The a c- quiror mails a combined registration statement/proxy statement to target shareholders onc e the registration statement is declared effe c- tive by the SEC. Affiliate resales also must be registered; since only the acquiror can register its own securities, registration rights are bargained for up front. If the acquisition is structured as an excha nge offer, the bidder may commence the offer once the registration statement is filed but before it becomes effective. However, the bidder may not actually purchase shares until the SEC declares the registration statement to be effective. 72 In a one -step merger, proxy statements must be sent to target shar e- holders to solicit votes to approve the merger. The proxy rules contain detailed disclosure requirements, including information about the pa r- ties to the transaction, background of the transaction, inform ation about the transaction, and all material information not otherwise r e- quired by the rules. The proxy statement must not omit any fact necessary to make a written statement not misleading. Even if no proxies are required, the target must send an “inform ation statement” that contains the same information as a proxy statement. A REIT may communicate with its shareholders prior to the mailing of the proxy statement, so long as these communications are filed with the SEC and shareholders are expressly advise d to read the full proxy when it is available. Typically, the proxy statement is delivered to shareholders at least twenty days before the shareholder vote. Federal law imposes a number of restrictions on affiliate trading during the merger process. These restrictions are discussed in Chapter 5. 73

71 See 15 U.S.C. § 78n(a) -(c). 72 This provision is designed to permit exchange offers to compete mor e effe c- tively with cash tender offers in terms of timing. 73 See § 5.07[5] infra . 4-04 Selling a REIT REITs

§ 4.04 Confidentiality Once the board determines to pursue an auction of the REIT, it should consider whether to issue a press release announcing the plan (and possibly some key terms). Such an announcement usuall y i n- cludes information as to the appointment of an independent committee, if applicable, and the identity of the outside legal and f i- nancial advisors. If the board chooses to attempt to conduct the auction privately, confidentiality becomes a major issue i n the process. Unfort unately, many negotiations do result in pre -announcement rumors and leaks — often because too many parties were brought into the loop too quickly without the necessarily intense focus on maintaining confidentia lity within as tight a circ le as poss ible.

[1] —Secrets and Leaks There is no foolproof way to preserve the confidentiality of a tran s- action. The more people and entities involved, the more likely it is that leaks will occur. Negotiating a merger does not necessarily require large t eams of people, and in order to keep the number of involved personnel to a minimum, the target may wish to limit due diligence activities and request that bidders refrain from seeking financing commitments until later in the process. The greatest threat t o consensual merger discussions is a prem ature leak. Leaks, or even the appearance of leaks, can have several neg a- tive effects. Disclosure can invite unwanted suitors or cause one of the merger partners to back away rather than attempt to negotiate a sens i- tive tran saction in public. In some instances, the market will respond negatively to rumors of a deal, thereby making it difficult or imposs i- ble for advisors and the board itself to determine that the transaction will be beneficial for shareholders. In oth er situations, the market will respond favorably, driving up the target stock price to the extent that the bidder can no longer afford to do the deal at a price that can be considered advantageous to shareholders. Furthermore, rumors and leaks can cause mi scommunications among representatives of the pa r- ties and cause a deal to founder on mistrust or blame. Leaks do sometimes occur even with the most careful attention to confidentia lity. Merger -related rumors or speculation can also arise concurrently with the existence of confidential merger di scussions even when there is no direct nexus between such discu ssions and the rumor. The best response to such market rumors is almost always “no comment.” Maintaining a “no comment” position r equires that the 4-04 Selling a REIT REITs compani es involved have previously maintained a standing policy of not commenting on market rumors. It also may be beneficial for a REIT to include some general umbrella disclosure in its periodic SEC filings that it may from time to time engage in merger and acq uisition discussions as part of its general business stra tegy. 1

[2] —Duty to Disclose While the applicable law on disclosure of a transaction has murky areas, at least one thing is clear : The federal securities laws require disclosure on Form 8 -K when a RE IT enters into a material, definitive agreement other than in the ordinary course of business. 2 There can be some debate as to whether an event rises to the level of materiality (defined by the U.S. Supreme Court as having “a substantial likel i- hood that a reasonable investor would consider [the fact] important”), 3 but this is not an issue when the event is a sale of the REIT. Prior to the signing of a definitive agreement, a target has some leeway in the timing of disclosure. If the target has a valid busi ness reason not to make disclosure of a pending transaction, such as a b e- lief that disclosure could harm the transaction, then the target may choose its moment. 4 However, as previously discussed, the target may have a duty to correct leaked information. Th ere is uncertainty regar d- ing a REIT’s duty to update information disclosed upon the signing of a definitive agreement. Most courts tend to require updating only when there have been dramatic changes from the previously disclosed information. 5 Leaks can req uire public disclosure of the pending transaction. If there is unusual trading activity in the target stock, it becomes difficult as a practical matter for the target to pretend ignorance and assume

1 See Martin Lipton, Memorandum, Mergers and Acquisitions 2004 (on file with authors). 2 See 17 C.F.R. Parts 228, 229, 230, 239, 240 and 249. 3 TSC Industries, Inc. v. Northw ay, Inc., 426 U.S. 438 , 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). 4 However, if the target has made a prior incomplete or misleading disclosure, it may not have the luxury of postponing disclosure of the full story. See, e.g., Backman v. Polaroid Corp., 910 F .2d 10 (1st Cir. 1990). 5 See, e.g ., In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1433 (3d Cir. 1997). See Kling and Nugent, 1 Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 7.01 (Law Journal Press 1992) for a di scussion of discl o- sure duties. 4-04 Selling a REIT REITs

that the leak does not come from within. When leaks and m arket acti v- ity reach a point at which disclosure is no longer optional, the target should instruct the NYSE to halt trading in its securities until an a n- nouncement is made. 6 In general, widespread rumors will require at least one party to make a statement about its intentions.

6 See NYSE Listed Company Manual §§ 202.06(B), 202.07. 4-05 Selling a REIT REITs

§ 4.05 The Role of Advisors

[1] —Financial Fairness Opinions In most merger transactions, an investment banker’s view of the fairness of the consideration to be paid, and the related analyses, pr o- vide a board with significant informa tion with which to evaluate a proposed transaction. This is particularly true where stock forms a part of the consideration to be paid. In its evaluation of a business comb i- nation proposal, a board is entitled to reasonable reliance on the expert advice of the REIT’s legal and financial advisors, as well as on the advice and analyses of management. 1 The analyses and opinions pr e- sented to a board, combined with presentations by management and the board’s own long -term strategic reviews, provide the key found a- tion for the exercise of the directors’ business judgment. Courts reviewing the a ctions of boards have commented favorably on the use by boards of investment bankers in evaluating merger and related pr o- posals. 2 Particularly in change of control situation s where directors are obl i- gated to choose among competing common stock (or other noncash) business combinations, a board’s decision making may be susceptible to claims of bias, faulty judgment and inadequate investigation of the relative values of competin g offers. Because the stock valuation pro c- ess inherently involves greater exercise of judgment by a board, consideration of the informed analyses of financial advisors is helpful in establishing the fulfillment of the applicable legal duties. While there i s no absolute duty that a board obtain an investment banker’s fairness opinion, boards of virtually all selling companies and many acquirors (at least with respect to major acquisitions) do so. In transactions requiring stockholder approval, fairness opini ons are

1 See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1142 (Del. Ch. 1994). 2 See, e.g.: Sixth Circuit: NCR Corp. v. American Telephone and Telegraph Co ., 761 F. Supp. 475, 494 (S.D. Ohio 1991). State Courts: Delaware: Smith v. Van Gorkom, 488 A.2d 858, 876 -877 (Del. 1985) ( Trans U n- ion ). See also, In re RJR Nabisco Shareholders Litigation, CCH Fed. Sec. L. Rep. p.94, 194 (1989). 4-05 Selling a REIT REITs beneficial in supporting the recommendation of the board set forth in the proxy statement. Investment bankers must take care in preparing the analyses that support their opinions and in the presentation of such analyses to ma n- agement and the board. The wording of the fairness opinion and the related proxy statement disclosures must be carefully drafted to reflect accurately the nature of the analyses underlying the opinion and the assumptions and qualifications upon which it is based. Further, dire c- tors should carefully consider whether the restrictions they impose on the investment banker’s conduct of the fairness evaluation (such as no market check) will result in an opinion that does not adequately su p- port the board’s analysis of competing stock m ergers or that raises inferences of bias or conflict. In the Paramount contest, for example, Paramount management placed various limitations on the fairness diligence, with the consequence that the fairness analysis and opinion did not protect the board’s initial decision to reject QVC’s hostile o f- fer. Because the decision to select one change of control stock merger over another is inherently more subjective than choosing between two cash offers, a board may want to rely more heavily on a well - documented f airness opinion or on an opinion that expresses a quant i- tative (or qualitative) comparison of competing bids, such as the “financial superiority” opinions that Paramount’s board received on several occasions from its financial advisor following the Delawar e Supreme Court’s QVC decision. The staff of the Securities and Exchange Commission requires d e- tailed disclosure of the procedures followed by an investment banker in preparing a fairness opinion, including a description of the co n- straints placed on the an alysis by the board, as well as detailed disclosure of information contained in financial presentations made by the banker to the board. The target should assume that such disclosure will be required in the proxy and prospectus and should consider car e- full y the litigation consequences of such disclosure. The issue of whether a fairness opinion should be “brought down” from the time of signing a merger agreement to the time of mailing the related proxy statement is a point to be considered by each party’s bo ard. In a stock -for -stock merger, the fairness of the consideration often turns on the relative contributions of each party to the combined company —in terms of revenues, earning and assets —as opposed to the absolute dollar value of the stock being received by one party’s stockholders. Parties to a stock -for -stock merger may opt to sign a merger agreement based on the fairness of the exchange ratio at the time of signing, without a bring down. This structure may enhance the 4-05 Selling a REIT REITs probability of consummation of the merger by not giving either party a right to walk away if the fairness opinion would otherwise have changed between signing and closing. In cases where parties have n e- gotiated an agreement without a bring down, the SEC staff has required detailed disclosu re with respect to whether there have been any changes which would have affected the opinion had it been re n- dered as of a date closer to the mailing. The use of fairness opinions in deals has come under increased scrutiny. The NASD has released several com ment letters to its pr o- posal that calls for more disclosure by investment banks that stand to earn success fees in the event of the completion of a transaction and fees for providing a fairness opinion in the transaction. 3 The proposal stops short of calli ng for an outright ban on the practice, but the Cal i- fornia Public Employees’ Retirement System (CalPERS) is agitating for regulators to overhaul rules governing the process of producing fairness opinions, arguing that the practice presents a conflict of in te r- est.

[2] —Advice of Legal Counsel A legal team on either side of a merger transaction typically will include attorneys who specialize in corporate, real estate, tax, e m- ployee benefits, and antitrust law. Corporate attorneys experienced with REIT mergers and acquisitions generally take the lead in asse m- bling and coordinating the legal team and working with representatives of the client as well as preparing agreements and SEC filings. The board r elies heavily on its legal counsel for advice as to whether t he definitive agreement is legally sound and whether the board can approve it co nsistent with the directors’ fiduciary duties. In any situation involving a preemptive bid or a bidder’s attempt to derail the process, the board should consult closely with th e leaders of its legal team in order to ensure that their actions are consistent with f i- duciary duty requir ements and that they are taking the necessary steps to increase their chance of their actions being upheld by a court if challenged.

3 See http://www.nasd.com/web/grou ps/rules_regs/documents/notice _to_members/nasdw_013246.pdf (last visited May 18, 2006). 4-06 Selling a REIT REITs

§ 4.06 The Art o f Running and Wi nning an Auction Directors of REITs have a central role in evaluating any proposed transaction and the alternatives avai lable to the REIT. The role is an active one and cannot be premised on anything other than a clear -eyed view of the real ities today facing REITs and other public companies in the takeover context. These include the current attitudes of large inst i- tutional shareholders and the willingness of shareholders to act aggressively when dealing with boards of directors, at annual me et- ings, and between annual meetings. Success in the M&A arena is based in large part on an understan d- ing and acceptance of the “art of the possible.” Often, the best opportunities arise when a seller chooses to sell and the right buyer is in the pos ition to act. Creating this moment, particularly in the auction context, requires more than legal compliance and financial number - crunching; it is a matter of business judgment and sensitivity. The one constant in the mergers and acquisitions marketplace is that the ma r- ketplace itself is in a co ntinual state of change. The best perceived merger partners one year may be different from the best perceived partners the next. And, while mana gers and boards sometimes feel a pressure to sell to capitalize on a perceived short -term window of o p- portunity, other windows of opportunity may very well arise down the road. 1 In the market for corporate control of REITs, it is important always to keep an eye on both the public and the private real estate markets. The sizeable pr ivate market for commercial real estate assets and the arbitrage between public and private market values are often a source of opportunities for REITs seeking strategic alternatives. Opportun i- ties for combinations with other public REITs can sometimes be outmatched by opportunities presented by private equity players, and vice versa. In the end, flexibility in evaluating options and willingness to consider alternatives often lead to better results for shareholders.

1 See Martin Lipton, Memorandum, Mergers and Acquisitions 2004 (on file with authors).