WAIVERS OF OWNERSHIP LIMITATION PROVISIONS IN REIT CHARTERS 44 first question: does the investment management company or any other affiliated entity file a Schedule 13G showing the organization’s aggregate holdings (whether in the REIT or any other public company)?16 In other words, has the investment management company or any other entity already publicly conceded that it is the Section 13(d) beneficial owner17 of all the securities held throughout the organization, including those held by the client funds?18 If the answer is no, then merely being the parent company of entities that own similar securities would not, in and of itself, render the entire enterprise a “group” for purposes of Rule 13d-5(b). The SEC has provided guidance in the context of Section 13 to the effect that beneficial ownership need not be attributed to parent entities when there are substantive policies and procedures in place to ensure that voting and investment powers are independently exercised by subsidiaries and/or client funds.19 Accordingly, for an investment management organization that disaggregates beneficial ownership in reliance on the inter-company barriers outlined by the SEC, the board of directors of the REIT might reasonably conclude that the investment management company and its client funds do not constitute a “group” for purposes of the ownership limitation provisions — absent any other facts and circumstances that suggest to the board that the various affiliated investor entities are in fact acting as a “group.”20 If, however, the answer is yes, the investment management company or an affiliate is a Schedule 13G filer with respect to securities held by its client funds, then it gets harder, though not impossible, for the board of directors to reasonably conclude that all of the affiliated entities do not constitute a “group.” In most cases, a Schedule 13G filing by the investment management company is an acknowledgment that the parent entity ultimately has or shares voting or investment power (or both) for all securities held by its client funds. There are likely a limited number of circumstances where this does not automatically equate to finding that the organization as a whole constitutes a “group” for purposes of its aggregate holdings of a given REIT’s securities, for example, where the organization has nonetheless implemented the procedural and informational barriers discussed above to ensure independent exercise of voting and investment powers.21 In these cases, and in all other instances where the investment management company is a Schedule 13G filer on a consolidated basis, the REIT may need to obtain additional information and/or representations from the investment management company to enable the REIT to conclude to its satisfaction that the management entity and client funds do not in fact constitute a “group” for purposes of the charter provisions, as applicable. We note that there are a number of increasingly common fact patterns that would suggest the existence of a “group” among an investment management company and its client funds, irrespective of whether a consolidated Schedule 13G is filed or not. These include: • all shares held by the consolidated group are consistently voted each year on the same day, at the same time and in the same way (for, against, abstain, etc.); 16 Assuming that the organization’s aggregate ownership is 5.0% or more so that reporting under Section 13 of the Exchange Act would otherwise be required. 17 The definition of “beneficial ownership” for securities law purposes is entirely different from – and should not be confused with – the definition of the same term under the Internal Revenue Code and as typically used in the ownership limitation provisions. Rule 13d-3 under the Exchange Act defines “beneficial ownership” as including “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares (i) voting power which includes the power to vote, or to direct the voting of, such security; and/or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security”. 18 See also our REIT Alert “Recent Case Raises Questions Affecting Ownership Limits in Publicly Traded REITs,” where we discussed the implication under REIT ownership limitation provisions of the Southern District of New York discussion and decision in CSX Corporation v. The Children’s Investment Fund Management (UK) LLP, 562 F. Supp. 2d 511 (S.D.N.Y. 2008). That case turned a spotlight on derivatives trading and raised significant issues as to what it means to “beneficially own” shares of a public corporation in a world in which financial institutions and investors routinely structure synthetic positions that shift the benefits and risks of being a holder of traditional equity securities for a wide variety of reasons. As noted above, in May 2016, Senators Tammy Baldwin of Wisconsin and Jeffrey A. Merkley of Oregon introduced the “Brokaw Act”, a bill that would, among other things, amend the relevant beneficial ownership rules to specifically include derivatives and short positions. See https://www.baldwin.senate.gov/press- releases/brokaw-act. 19 SEC Release No. 34-39538 (January 12, 1998). In the SEC’s words, these policies must not be “arbitrary or artificial” but should be based on “written policies and procedures reasonably designed to prevent the flow of information to and from the other business units, divisions and entities that relate to the voting and investment powers over the securities.” The SEC’s guidance further provides that organization’s relying on this type of disaggregation of beneficial ownership should also obtain an annual, independent assessment of the operation of the policies and procedures established to prevent the flow of information among the related entities. 20 We note that determinations regarding securities-law or tax-law beneficial ownership or any other legal conclusions reached by an investor about its ownership of a REIT’s securities, while informative, is not binding on the REIT’s board of directors, who are charged with independently evaluating all relevant facts and circumstances in interpreting and enforcing the REIT’s own charter. 21 See Douglas Hammer et al., Shartis Friese LLP, U.S. Regulation of Hedge Funds (2005) at 274-275.