GOODWIN 17 and if buyer agrees to abide by the tax protection agreements. The change of control provisions in the operating partnership agreement may limit the parties’ options or give consent rights in such circumstances. Approximately 20% of the all-cash deals announced in the 2012-2017 period included an option for target OP unitholders to receive a form of tax deferred private partnership unit rather than the cash received by REIT shareholders. 4. DIVIDENDS. REITs are generally required to pay out to shareholders at least 90% of their annual taxable income and public REITs typically pay out more than the minimum requirement. For investors in public REITs, the dividend yield is an important component of total return. In M&A transactions, provisions of the definitive agreement will govern whether and when target shareholders will receive the regular quarterly dividend for all periods through closing. In all-cash deals, it is not a given that buyer will be amenable to having more cash go out to target shareholders in the form of interim dividends above and beyond the agreed-upon price per share to be paid at closing, which may already represent a meaningful premium. Even when the agreement permits target to continue to pay its regular quarterly dividend in the post-signing period, this provision still does not necessarily mean that target shareholders will receive a dividend for the period in which the closing occurs, since closing is likely to occur other than on a regularly scheduled quarterly record date. Instead, the ability to pay a partial, or pro-rated, dividend, must be specially negotiated and agreed to among the parties. Other than in competitive processes for highly desirable assets, the willingness of an all-cash buyer to subsidize ongoing regular quarterly dividends and/or a pro-rated dividend is likely to decrease in proportion to the value of the premium to market it is otherwise paying in the transaction. Indeed, we have seen a slight drop-off in the number of all-cash transactions where targets can pay dividends to target shareholders before closing. Over the 2012-2017 period, approximately 20% of the all-cash transactions restricted the payment of cash dividends entirely once the merger agreement had been signed (other than as required to maintain REIT qualification), with half of these coming in 2016 and 2017. In stock-for-stock combinations, conversely, the receipt by both sets of common shareholders of their respective dividends through closing is the norm. This approach is often referred to as “coordination of dividends”, whereby the parties agree to coordinate dividend declaration, record and payment dates during the interim period to ensure that shareholders of both companies receive the dividend to which they are entitled for all periods. A full 77% of public-to-public transactions over the 2012-2017 survey period provided for target shareholders to receive both regular quarterly dividends and a pro-rated dividend through closing, and approximately 90% provided for payment of at least regular quarterly dividends. Unlike the cash buyout scenario described above, it is still unusual in Practice Note. Offering the OP unitholders an alternative form of consideration may address issues surrounding tax protection agreements, but also requires the board to manage conflicts between the interests of public stockholders and those of the OP unitholders. For example, there may be a need for a special committee (or the approval of disinterested directors) if certain board members of the target are tax protected parties and the board will want to satisfy itself (through financial advisor advice, opinions or otherwise) that the alternative equity option for OP unitholders has not diverted value away from the public stockholders. Practice Note. The definitive agreement governing virtually every REIT cash buyout transaction will permit the REIT to pay any dividends necessary to maintain its qualification as a REIT under the federal tax rules. In the rare instance that such a dividend is paid, buyers should consider whether the amount of the dividend should reduce the per-share purchase price in like amount. Practice Note. The objective in coordinating the dividends of the buyer and the seller is to ensure that each set of common shareholders receives the dividend to which it is entitled – but not the dividend to which the other set of common shareholders is entitled. For example, if a merger is scheduled to close on March 1 and both companies have historically paid a regular quarterly dividend in arrears on April 15 to shareholders of record on March 31, except that Company A, the to-be acquired company, pays $0.10 per quarter and Company B, the acquiring company, pays $0.15 per quarter – then all shareholders would receive equal treatment if immediately prior to closing Company A pays a pro-rated dividend to its shareholders of $0.066 and Company B pays a pro-rata dividend of $0.098 to its shareholders, in each (continued on next page)