WAIVERS OF OWNERSHIP LIMITATION PROVISIONS IN REIT CHARTERS 42 Accordingly, to perhaps oversimplify, there are generally two different basic forms of 5/50 ownership limitation provisions in use today: • a limit that applies to any holder who beneficially owns the shares, including holders that are entities, irrespective of whether the holder’s entity-level ownership would be “looked through” for purposes of the 5/50 test;10 and • a limit that, in addition to applying to all holders of any kind who beneficially own shares, aggregates holdings of all “persons” (individual or entities) that together form a “group” for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, and treats the aggregate holdings of the group as being held by a single holder.11 Under Section 13(d), two or more parties are deemed to be a “group” (and will have their beneficial ownership attributed to one another) if they act together for the purpose of acquiring, disposing or holding the relevant securities. Inasmuch as both these types of ownership limitation apply to holders that are entities (or even groups of entities) rather than just “individuals,” they are drafted more broadly than is strictly necessary to satisfy the 5/50 test. Indeed, there are several REITs that have 5/50 ownership limitation provisions that are narrowly tailored to apply to only “individuals” — but these too are coupled with a second ownership limitation provision that applies to entities. This is because an ownership limit that is narrowly tailored to cover only “individuals” for purposes of the 5/50 test12 (without any additional ownership limitation on entities) would pose at least three distinct challenges: (i) the REIT would still be exposed to REIT qualification risk in the form of receiving related party tenant income; (ii) it would be near impossible for the REIT to continuously monitor and investigate the ultimate beneficial ownership of its shares under the tax rules; and (iii) investors themselves would not know when their ownership had triggered a REIT qualification problem and resulted in a portion of their shares being transferred to a trust under the charter. But because the ownership limitations are still drafted more broadly than is strictly necessary under the Internal Revenue Code, typical REIT charters also authorize the board of directors, as a “safety valve” of sorts, to waive an ownership limitation (prospectively or retroactively) to the extent the board determines, after consulting with counsel and evaluating all relevant facts and circumstances, including representations and undertakings made by the stockholder, that the proposed investment would not, among other things, jeopardize the REIT’s tax status. A minority of public REIT charters not only authorize the board to grant waivers from the ownership limitations, they require the board to grant a waiver, again so long as the board in its discretion is able to definitively conclude, after consulting with counsel and evaluating all relevant facts and circumstances, including representations made by the stockholder, that the proposed investment would not, among other things, jeopardize the REIT’s tax status. It is important to note, however, what cannot be waived under any circumstances. A 5/50 ownership limitation applicable only to “individuals,” for example, would never be waivable at all, since to do so would jeopardize the company’s REIT qualification. Likewise, even in practice where the ownership limitation provision is drafted more broadly, any provision or restriction that, if violated, would result in a true REIT qualification concern (such as the company becoming closely held or receiving related party tenant rent) is simply not waivable. A properly drafted charter will in fact by its terms — irrespective of any language or provision in a purported waiver — never permit the waiver of any provision or restriction that, if violated, would result in a true REIT qualification concern.13 The only restrictions that the board can 10 For an ownership limit of this type, the charter might provide in relevant part that “no Person (other than an Excepted Holder as determined by the Board of Directors) shall Beneficially Own or Constructively Own shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate outstanding shares of common stock.” The term “Person” would be defined to include an individual, corporation, partnership, limited liability company, estate, trust or other entity. The term “Constructively Own” relates to the related party tenant income ownership limit and is discussed below in footnotes 29-32 and the accompanying text. See also footnote 17 with respect to the definition of “beneficial ownership”. 11 For an ownership limit of this type, the relevant charter provision would further expand the definition of the term “Person” to include a “group” as used for purposes of Section 13(d)(3) or Rule 13d-5(b) of the Exchange Act. 12 E.g., “No Individual shall Beneficially Own shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate outstanding shares of common stock,” where the term “Individual” is defined by reference to Section 542(a)(2) of the Internal Revenue Code, which generally does not include entities such as mutual funds, corporations or most other legal “persons.” Note, however, that if an entity were to hold stock that causes an “individual” to violate the ownership limitation by virtue of the individual’s beneficial ownership of the stock through such entity, it is possible that some or all of the shares of stock held by the entity would be transferred to a charitable trust pursuant to the charter provisions described above. 13 This is typically effected in the charter through the inclusion of additional ownership limitations that are not subject to being waived under the terms of the charter. For example, the charter might provide in relevant part simply that “No Person shall Beneficially Own or Constructively Own shares of Capital Stock to the extent that such Beneficial Ownership or Constructive Ownership of Capital Stock would result in the Corporation (i) being “closely held” within the meaning of Section 856(h) of the Code, or (ii) otherwise failing to qualify as a REIT”.