As filed with the Securities and Exchange Commission on June 16, 2006
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
FOR REGISTRATION UNDER
THE SECURITIES ACT OF 1933
OF CERTAIN REAL ESTATE COMPANIES
DOUGLAS EMMETT, INC.
(Exact name of registrant as specified in its governing instruments)
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
(310) 255-7700
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
William Kamer
Chief Financial Officer
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
(310) 255-7700
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Gregg A. Noel, Esq.
Jennifer A. Bensch, Esq. Rand S. April, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Telephone: (213) 687-5000 |
Julian T. H. Kleindorfer, Esq.
Edward Sonnenschein, Jr., Esq. Martha B. Jordan, Esq. Latham & Watkins LLP 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 Telephone: (213) 485-1234 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement of the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered
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Proposed maximum
aggregate offering price (1) |
Amount of
registration fee |
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Common Stock, par value $0.01 per share | $1,265,000,000 | $135,355.00 | ||
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The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 16, 2006
PROSPECTUS
Shares
Common Stock
This is the initial public offering of shares of common stock of Douglas Emmett, Inc. All of the shares of our common stock offered by this prospectus are being sold by us. We intend to be taxed as a real estate investment trust, or REIT, for United States federal income tax purposes commencing with our taxable year ending December 31, 2006.
We expect the public offering price of our common stock to be between $ and $ per share. Prior to this offering, there has been no public market for our common stock. We intend to apply to have our common stock listed on the New York Stock Exchange under the symbol "DEI."
See "Risk Factors" beginning on page 23 of this prospectus for certain risks relevant to an investment in our common stock, including, among others:
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Per Share
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Total
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Public offering price | $ | $ | ||||
Underwriting discount | $ | $ | ||||
Proceeds to us (before expenses) | $ | $ |
We have granted the underwriters a 30-day option to purchase up to an additional shares from us on the same terms and conditions as set forth above if the underwriters sell more than shares of our common stock in this offering to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock on or about , 2006.
Lehman Brothers | Merrill Lynch & Co. | Citigroup |
The date of this prospectus is , 2006
PROSPECTUS SUMMARY | 1 | ||
Douglas Emmett, Inc. | 1 | ||
Our Competitive Strengths | 2 | ||
Business and Growth Strategies | 4 | ||
Market Information | 5 | ||
Summary Risk Factors | 5 | ||
Our Portfolio Summary | 7 | ||
Structure and Formation of Our Company | 8 | ||
Consequences of this Offering, the Formation Transactions and the Financing Transactions | 10 | ||
Our Structure | 12 | ||
Benefits to Related Parties | 13 | ||
Restrictions on Transfer | 14 | ||
Restrictions on Ownership of Our Capital Stock | 14 | ||
Conflicts of Interest | 14 | ||
This Offering | 16 | ||
Dividend Policy | 16 | ||
Our Tax Status | 16 | ||
Summary Historical and Pro Forma Financial and Operating Data | 18 | ||
RISK FACTORS |
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23 |
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Risks Related to Our Properties and Our Business | 23 | ||
Risks Related to Our Organization and Structure | 31 | ||
Risks Related to This Offering | 35 | ||
Tax Risks Related to Ownership of REIT Shares | 38 | ||
FORWARD-LOOKING STATEMENTS |
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41 |
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USE OF PROCEEDS |
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42 |
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DIVIDEND POLICY |
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43 |
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CAPITALIZATION |
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44 |
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DILUTION |
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45 |
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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA |
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46 |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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51 |
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Overview | 51 | ||
Factors That May Influence Our Operating Results | 56 | ||
Critical Accounting Policies | 57 | ||
Historical Results of Operations | 60 | ||
Liquidity and Capital Resources | 66 | ||
Off Balance Sheet Arrangements | 70 | ||
Interest Rate Risk | 70 | ||
Cash Flows | 71 | ||
Funds From Operations | 73 | ||
Inflation | 73 | ||
Newly Issued Accounting Standards | 74 | ||
Quantitative and Qualitative Disclosure About Market Risk | 74 | ||
ECONOMIC AND MARKET OVERVIEW |
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76 |
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Los Angeles Regional Economy | 76 | ||
Los Angeles County Office Market | 77 | ||
Los Angeles County Multifamily Market | 81 | ||
Honolulu, Hawaii Economy | 83 | ||
BUSINESS AND PROPERTIES |
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87 |
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Overview | 87 | ||
History | 89 | ||
Our Competitive Strengths | 90 | ||
Business and Growth Strategies | 96 | ||
Existing Portfolio | 99 | ||
Douglas Emmett Submarkets Overview | 108 | ||
Regulation | 128 | ||
Insurance | 129 | ||
Competition | 130 | ||
Third-Party Property Management Services | 130 | ||
Employees | 130 | ||
Principal Executive Offices | 130 | ||
Legal Proceedings | 130 | ||
MANAGEMENT |
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131 |
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Directors and Executive Officers | 131 | ||
Board Committees | 133 | ||
Compensation of Directors | 133 | ||
Executive Officer Compensation | 134 | ||
Options Grants | 134 | ||
401(k) Plan | 134 | ||
2006 Stock Option and Incentive Plan | 135 | ||
Employment Agreements | 137 | ||
Indemnification Agreements | 137 | ||
Compensation Committee Interlocks and Insider Participation | 139 | ||
PRINCIPAL STOCKHOLDERS |
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140 |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
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141 |
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Formation Transactions | 141 | ||
DERA Contribution | 141 | ||
Partnership Agreement | 141 | ||
Registration Rights | 142 | ||
Employment Agreements | 142 | ||
Indemnification of Officers and Directors | 142 | ||
Brentwood Court Loan | 142 | ||
Offering Expenses Loan | 143 | ||
Pre-Closing Cash Distributions | 143 | ||
Release of Owensmouth Guarantee | 143 | ||
Intercompany Transactions Among Historical Operating Companies | 143 | ||
Other Properties Owned by Mr. Emmett | 144 | ||
Pre-Closing Cash Payments from our Predecessor Principals | 144 | ||
STRUCTURE AND FORMATION OF OUR COMPANY |
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145 |
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Our Operating Partnership | 145 | ||
Formation Transactions | 145 | ||
Consequences of this Offering, the Formation Transactions and the Financing Transactions | 148 | ||
Our Structure | 150 | ||
Benefits of the Formation Transactions and the Offering to Certain Parties | 151 | ||
Determination of Offering Price | 153 | ||
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES |
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154 |
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Investment Policies | 154 | ||
Dispositions | 155 | ||
Financing Policies | 155 | ||
Conflict of Interest Policies | 155 | ||
Policies With Respect To Other Activities | 156 | ||
Reporting Policies | 156 | ||
DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF DOUGLAS EMMETT PROPERTIES, LP |
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157 |
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General | 157 | ||
Purposes, Business and Management | 157 | ||
Restrictions on General Partner's Authority | 158 | ||
Additional Limited Partners | 159 | ||
Ability to Engage in Other Businesses; Conflicts of Interest | 160 | ||
Distributions | 160 | ||
Borrowing by the Operating Partnership | 160 | ||
Reimbursement of Us; Transactions with Our Affiliates and Us | 160 | ||
Our Liability and that of the Limited Partners | 161 | ||
Exculpation and Indemnification of Us | 161 | ||
Sales of Assets | 162 | ||
Redemption Rights of Qualifying Parties | 162 | ||
Transfers and Withdrawals | 162 | ||
Restrictions on General Partner | 164 | ||
Restrictions on Mergers, Sales, Transfers and Other Significant Transactions Involving Us | 164 | ||
Amendment of the Partnership Agreement for the Operating Partnership | 164 | ||
Amendment by the General Partner Without the Consent of the Limited Partners | 164 | ||
Amendment with the Consent of the Limited Partners | 165 | ||
Procedures for Actions and Consents of Partners | 165 | ||
Dissolution | 165 | ||
DESCRIPTION OF SECURITIES |
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167 |
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General | 167 | ||
Common Stock | 167 | ||
Preferred Stock | 168 | ||
Power to Increase Authorized Stock and Issue Additional Shares of our Common Stock and Preferred Stock | 168 | ||
Restrictions on Transfer | 168 | ||
Transfer Agent and Registrar | 171 | ||
MATERIAL PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS |
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172 |
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Our Board of Directors | 172 | ||
Removal of Directors | 172 | ||
Consideration of Non-Stockholder Constituencies | 172 | ||
Business Combinations | 172 | ||
Control Share Acquisitions | 173 | ||
Subtitle 8 | 174 | ||
Interested Director and Officer Transactions | 174 | ||
Amendment to Our Charter | 175 | ||
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Transactions Outside the Ordinary Course of Business | 175 | ||
Dissolution of Our Company | 175 | ||
Advance Notice of Director Nominations and New Business | 175 | ||
Anti-takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws | 176 | ||
Indemnification and Limitation of Directors' and Officers' Liability | 176 | ||
Indemnification Agreements | 177 | ||
SHARES ELIGIBLE FOR FUTURE SALE |
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178 |
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General | 178 | ||
Rule 144 | 178 | ||
Redemption/Exchange Rights | 178 | ||
Registration Rights | 179 | ||
Stock Options and Stock Incentive Plan | 179 | ||
Lock-up Agreements and Other Contractual Restrictions on Resale | 179 | ||
FEDERAL INCOME TAX CONSIDERATIONS |
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181 |
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Taxation of Douglas Emmett | 181 | ||
Tax Aspects of Investments in an Operating Partnership | 191 | ||
Taxation of Stockholders | 193 | ||
Other Tax Considerations | 197 | ||
ERISA CONSIDERATIONS |
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198 |
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UNDERWRITING |
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201 |
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Commissions and Expenses | 201 | ||
Option to Purchase Additional Shares | 201 | ||
Lock-Up Agreements | 202 | ||
Offering Price Determination | 203 | ||
Indemnification | 203 | ||
Directed Share Program | 203 | ||
Stabilization, Short Positions and Penalty Bids | 203 | ||
Electronic Distribution | 204 | ||
New York Stock Exchange | 204 | ||
Discretionary Sales | 205 | ||
Stamp Taxes | 205 | ||
Relationships | 205 | ||
European Economic Area | 205 | ||
United Kingdom | 205 | ||
LEGAL MATTERS |
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206 |
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EXPERTS |
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206 |
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WHERE YOU CAN FIND MORE INFORMATION |
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206 |
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INDEX TO FINANCIAL STATEMENTS |
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F-1 |
iii
You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
We use market data and industry forecasts and projections throughout this prospectus. We have obtained substantially all of this information from market research prepared or used by Eastdil Secured, L.L.C., or Eastdil Secured, in the market study that it prepared for us in connection with this offering. Such information is included herein in reliance on Eastdil Secured's authority as an expert on such matters. See "Experts." The Eastdil Secured market study will be filed as an exhibit to the registration statement of which this prospectus forms a part. In addition, we have obtained certain market data and industry forecasts and projections from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry and there is no assurance that any of the projected amounts will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently verified this information.
As used in this prospectus, the "predecessor principals" refers to Dan A. Emmett, Christopher Anderson, Jordan Kaplan and Kenneth Panzer, and "fully diluted basis" assumes the exchange of all outstanding units of limited partnership in our operating partnership for shares of our common stock on a one-for-one basis, including all outstanding long-term incentive units issued under our stock incentive plan. In addition, "pro forma" or "on a pro forma basis" means that the information presented gives effect to this offering, as well as the formation transactions and the financing transactions (each as described herein), in each case as if such transactions had occurred on January 1, 2005 with respect to statement of operations data, and with respect to balance sheet data, as if such transactions had occurred on March 31, 2006. Additionally, the pro forma consolidated statements of operations are presented as if the acquisition of the Villas at Royal Kunia, consummated on March 1, 2006, along with the related financing, had occurred on January 1, 2005.
Until , 2006 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
iv
You should read the following summary together with the more detailed information regarding our company, including under the caption "Risk Factors," as well as the financial information appearing elsewhere in this prospectus. Unless the context requires otherwise, references in this prospectus to "we," "our," "us" and "our company" refer to Douglas Emmett, Inc., a Maryland corporation, together with its consolidated subsidiaries after giving effect to the formation transactions described in this prospectus. Upon completion of this offering, our operations will be carried on through Douglas Emmett Properties, LP, a Delaware limited partnership, which we refer to in this prospectus as our operating partnership. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters' over-allotment option is not exercised and that the common stock to be sold in this offering is sold at $ per share, the mid-point of the price range indicated on the cover page of this prospectus.
Douglas Emmett, Inc.
We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and have a growing presence in Honolulu, Hawaii. Our presence in Los Angeles and Honolulu is the result of a consistent and focused strategy of identifying submarkets that are supply constrained, have high barriers to entry and exhibit strong economic characteristics such as population and job growth and a diverse economic base. In our office portfolio, we focus primarily on owning and acquiring a substantial share of top-tier office properties within these submarkets and which are located near high-end executive housing and key lifestyle amenities. In our multifamily portfolio, we focus primarily on owning and acquiring select properties at premier locations within these same submarkets. We believe our strategy generally allows us to achieve higher than market-average rents and occupancy levels, while also creating operating efficiencies.
As of March 31, 2006, our office portfolio consisted of 46 properties with approximately 11.6 million rentable square feet, and our multifamily portfolio consisted of nine properties with a total of 2,868 units. As of such date, our office portfolio was 92.1% leased, and our multifamily properties were 99.3% leased. Our office portfolio contributed approximately 84.8% of our annualized rent as of March 31, 2006, while our multifamily portfolio contributed approximately 15.2%. As of March 31, 2006, our Los Angeles County office and multifamily portfolio contributed approximately 91.0% of our annualized rent, and our Honolulu, Hawaii office and multifamily portfolio contributed approximately 9.0%.
Our properties are concentrated in nine premier Los Angeles County submarketsBrentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner Center/Woodland Hills and Burbankas well as in Honolulu, Hawaii. According to Eastdil Secured, most of our Los Angeles office portfolio and West Los Angeles multifamily properties could not be reproduced under current zoning and land-use regulations. Furthermore, given current market rents, construction costs and the lack of competitive development sites, Eastdil Secured estimates that our portfolio could not be replicated on a cost-competitive basis today.
Due to their superior locations and supply constraints in our submarkets, we believe that our existing properties are well positioned to provide continued cash flow growth and to continue to outperform our submarkets in terms of rental rates and occupancy. As of March 31, 2006, our average asking rents in our Los Angeles County office portfolio were at an 8.1% premium to our average in-place rents. Excluding the Warner Center/Woodland Hills submarket, where we acquired properties with significant vacancies in recent years, our occupancy rate was 95.5%, which reflects a 2.0 percentage point premium to our submarkets (including the Warner Center/Woodland Hills submarket, the occupancy rate reflects a 0.7 percentage point discount). In addition, in our West Los Angeles multifamily portfolio as of March 31, 2006, our weighted average asking rental rates were at a 31.3% premium to our average in-place rents, primarily as a result of historical rent control laws which now
1
allow landlords to increase rents to market rates as tenants vacate, and our average occupancy rates were at a 1.4 percentage point premium to the West Los Angeles market.
Under the direction of our senior management team, our historical operating companies acquired and financed our existing portfolio, managed nine institutional funds and raised over $1.5 billion in equity capital primarily from university endowments, foundations, pension plans, banks, other institutional investors and high net worth individuals. Since 1993, our senior management team has been responsible for the purchase of over 50 properties, representing an aggregate investment of approximately $3.1 billion, or an average of approximately $225.0 million per year.
Our principal executive offices are located at 808 Wilshire Boulevard, Suite 200, Santa Monica, California 90401. Our telephone number is (310) 255-7700. Our website address is www.douglasemmett.com . The information on our website does not constitute a part of this prospectus. We intend to qualify as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2006.
Our Competitive Strengths
We believe that we distinguish ourselves from other owners and operators of office and multifamily properties through the following competitive strengths:
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level and tenant renewal rate of approximately 90.5% and 73.2%, respectively (each including leases signed but not commenced), in our office portfolio.
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principals and our senior management team are expected to own, on a fully diluted basis, approximately % of our outstanding common stock with an aggregate value of $ million (assuming a price per share equal to the mid-point of the range set forth on the cover page of this prospectus). This amount includes $60.0 million recently contributed by our predecessor principals to one of our historical operating companies, the stock of which will be exchanged for common stock in the formation transactions at the initial public offering price.
Business and Growth Strategies
Our primary business objective is to enhance stockholder value by increasing cash flow from operations. The strategies we intend to execute to achieve this goal include:
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efficiently access our property management and leasing executives and to realize significant operating efficiencies in managing and leasing our portfolio.
Market Information
We believe that the strength of the economies underlying our Los Angeles County, California and Honolulu, Hawaii submarkets provides a solid foundation for growth in rental and occupancy rates, and that the economic diversity and positive demographics of these submarkets will mitigate against downturns.
Los Angeles
According to Eastdil Secured, the Los Angeles region represents the second largest metropolitan economy in the nation, with a robust service sector, the nation's largest manufacturing base, and a leading presence in both the motion picture and defense industries. The Los Angeles region has prospered as a Pacific Rim transportation and distribution hub, with trade volume expected to surpass $330 billion in 2006. Los Angeles County represents the nation's second largest office market with a total inventory of over 375 million rentable square feet, of which 178 million rentable square feet is considered Class-A office space. Between 1995 and 2005, the Los Angeles region experienced a net gain of approximately 2.6 million residents, a 16.8% increase, outpacing the national average by 5.4 percentage points. Additionally, over this same period, total employment in the region grew by over 1.0 million jobs, a 17.7% increase, exceeding the national average by 3.1 percentage points.
Hawaii
Hawaii's economy is driven by a number of factors, including international trade and tourism from the mainland United States and Asia, the construction industry, financial services, and a significant U.S. military presence. Employment grew by 13.0% from 1995 to 2005, while population grew by 6.6% during the same period. In addition, as of March 31, 2006, Hawaii's unemployment rate was the lowest in the nation for the 23 rd consecutive month. Hawaii's gross state product grew 4.7% and 3.2% in 2004 and 2005, respectively, and is expected to grow by 3.0% in 2006. The Honolulu CBD has the largest concentration of institutional quality office space in Hawaii, totaling over 5.1 million rentable square feet.
Summary Risk Factors
An investment in our common stock involves various risks, and prospective investors should carefully consider the matters discussed under "Risk Factors" prior to making an investment in our common stock. Such risks include, but are not limited to:
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Our Portfolio Summary
Our existing portfolio is located in the Brentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner Center/Woodland Hills and Burbank submarkets of Los Angeles County, California, and in Honolulu, Hawaii. The following table presents a summary of our existing portfolio as of March 31, 2006 by submarket.
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Office
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Submarket
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Market
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Number of
Properties |
Rentable
Square Feet (1) |
Percent
Leased (2) |
Annualized
Rent (3) |
Annualized
Rent Per Leased Square Foot (4) |
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Brentwood (5) | West Los Angeles | 13 | 1,390,625 | 94.4 | % | $43,699,392 | $ | 34.10 | |||||||
Olympic Corridor | West Los Angeles | 4 | 922,405 | 89.1 | 21,096,888 | 27.55 | |||||||||
Century City | West Los Angeles | 2 | 866,039 | 94.0 | 26,193,312 | 32.89 | |||||||||
Santa Monica | West Los Angeles | 7 | 860,083 | 98.2 | 34,865,364 | 42.64 | |||||||||
Beverly Hills | West Los Angeles | 4 | 571,869 | 96.7 | 19,878,084 | 37.11 | |||||||||
Westwood (6) | West Los Angeles | 2 | 396,729 | 93.5 | 11,892,240 | 33.60 | |||||||||
Sherman Oaks/Encino | San Fernando Valley | 9 | 2,878,769 | 97.2 | 73,407,840 | 27.43 | |||||||||
Warner Center/Woodland Hills (7) | San Fernando Valley | 2 | 2,567,808 | 81.3 | 53,716,296 | 26.35 | |||||||||
Burbank | Tri-Cities | 1 | 420,949 | 100.0 | 13,360,921 | 31.74 | |||||||||
Honolulu | Honolulu | 2 | 678,940 | 90.8 | 16,199,293 | 30.09 | |||||||||
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Total/Weighted Average | 46 | 11,554,216 | 92.1 | % | $ | 314,309,630 | $ | 30.74 | |||||||
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Multifamily |
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Submarket
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Market
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Number of
Properties |
Number
of Units |
Percent
Leased |
Annualized
Rent (8) |
Monthly
Rent Per Leased Unit |
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Brentwood | West Los Angeles | 5 | 950 | 99.2 | % | $21,318,295 | $ | 1,886 | ||||||
Santa Monica (9) | West Los Angeles | 2 | 820 | 99.6 | 17,813,572 | 1,817 | ||||||||
Honolulu | Honolulu | 2 | 1,098 | 99.1 | 17,170,845 | 1,315 | ||||||||
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Total/Weighted Average | 9 | 2,868 | 99.3 | % | $56,302,712 | $ | 1,648 | |||||||
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Structure and Formation of Our Company
Prior to completion of the formation transactions, our predecessor principals owned all of the outstanding interests in Douglas Emmett Realty Advisors, or DERA, Douglas Emmett and Company, or DECO, and P.L.E. Builders, Inc., or PLE, which we refer to as our historical operating companies. These entities provide asset management, property management, leasing, tenant improvement construction, acquisition, repositioning, redevelopment and financing services primarily to the properties owned, directly or indirectly, by the nine institutional funds and eight single-asset entities that we will acquire in the formation transactions. The institutional funds are owned by our predecessor principals and a number of unaffiliated private investors, consisting of endowments, foundations, pension plans, banks, other institutional investors and high net worth individuals. DERA is the general partner of each institutional fund. In addition, DERA is the general partner of three investment funds that own interests in certain of the institutional funds. Our predecessor principals, certain of our executive officers and unaffiliated third parties own the three investment funds. Our predecessor principals, together with their related parties, own a significant portion of the interests in the single-asset entities, and unaffiliated third parties own the remaining interests in the single-asset entities. Owners of the interests in the entities that we will acquire in the formation transactions, including our predecessor principals and certain of our executive officers, are referred to herein as the prior investors. Prior investors that will own units in our operating partnership or shares of our common stock following the consummation of the formation transactions are referred to in this prospectus as our continuing investors.
Prior to or concurrently with the completion of this offering, we will engage in formation transactions that are designed to:
We structured the formation transactions to minimize potential conflicts of interest. None of the predecessor principals or our senior management elected to receive any cash in the formation transactions and instead will receive only shares of our common stock and/or operating partnership units. The predecessor principals also recently contributed an additional $60.0 million to DERA, the stock of which will be exchanged for shares of our common stock, valued at the initial public offering price to the public, in the formation transactions. In addition, we will not enter into any tax protection agreements in connection with the formation transactions.
Pursuant to the formation transactions, the following have occurred or will occur on or prior to the completion of this offering. All amounts are based on the mid-point of the range set forth on the cover page of this prospectus:
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Consequences of this Offering, the Formation Transactions and the Financing Transactions
The completion of this offering, the formation transactions and the financing transactions will have the following consequences. All amounts are based on the mid-point of the range set forth on the cover page of this prospectus:
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The aggregate historical net tangible book value of the assets we will acquire in the formation transactions was approximately $ million as of March 31, 2006. In exchange for these assets, we will pay $ in cash, and we will issue operating partnership units and shares of our common stock with a combined aggregate value of $ , based on the mid-point of the range set forth on the cover page of this prospectus. If the underwriters' over-allotment option is exercised in full, we will pay $ in cash, and we will issue operating partnership units and shares of our common stock with a combined aggregate value of $ , based upon the mid-point of the range set forth on the cover of this prospectus. The value of the operating partnership units and the common stock that we will issue for the assets to be acquired in the formation transactions will increase or decrease if our common stock price increases or decreases. The initial public offering price does not necessarily bear any relationship to the book value or the fair market value of our assets.
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The following diagram depicts our ownership structure upon completion of this offering and the formation transactions.
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Benefits to Related Parties
In connection with this offering, the formation transactions and the financing transactions, our predecessor principals and certain of our executive officers will receive material benefits, including the following. All amounts are based on the mid-point of the range set forth on the cover page of this prospectus:
Continuing investors, including our predecessor principals, holding shares of our common stock or units in our operating partnership as a result of the formation transactions will have rights beginning 14 months after the completion of this offering:
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We have not obtained any third-party appraisals of the properties and other assets to be acquired by us in connection with this offering or the formation transactions. The consideration to be given by us for our properties and other assets in the formation transactions may exceed the fair market value of these properties and assets. See "Risk FactorsRisks Related to Our Properties and Our BusinessThe price we will pay for the assets to be acquired by us in the formation transactions may exceed their aggregate fair market value."
Restrictions on Transfer
Under the agreement governing our operating partnership, holders of units in our operating partnership do not have redemption or exchange rights and may not otherwise transfer their units, except under certain limited circumstances, for a period of 14 months after consummation of this offering. In addition, the predecessor principals and our executive officers and directors have agreed with the underwriters, subject to certain exceptions, not to sell or otherwise transfer or encumber any shares of our common stock or securities convertible or exchangeable into common stock (including units in our operating partnership) owned by them at the completion of this offering or thereafter acquired by them for a period of 360 days after the completion of this offering. All other continuing investors have agreed with the underwriters, subject to certain exceptions, not to sell or otherwise transfer or encumber any such securities owned by them at the completion of this offering for a period of 180 days after the completion of this offering. Such transfer restrictions may be lifted with the consent of each of Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc.
Restrictions on Ownership of Our Capital Stock
Our charter documents generally prohibit any person from actually or constructively owning more than 5.0% of the outstanding shares of our common stock, subject to certain exceptions. Our charter documents, however, permit exceptions to be made for stockholders with the approval of our board of directors.
Conflicts of Interest
Following the completion of this offering, there will be conflicts of interest with respect to certain transactions between the holders of units in our operating partnership and our stockholders. In particular, the consummation of certain business combinations, the sale of any properties or a reduction of indebtedness could have adverse tax consequences to holders of units in our operating partnership, which would make those transactions less desirable to holders of such units. Our predecessor principals and certain of our executive officers will hold both operating partnership units and shares of our common stock upon completion of this offering and the formation transactions.
Our predecessor principals and certain of our executive officers have ownership interests in our historical operating companies, the institutional funds, the investment funds and/or the single-asset entities that we will acquire in the formation transactions upon completion of this offering. Pursuant to a representation, warranty and indemnity agreement that we have entered into with our predecessor principals as part of the formation transactions, our predecessor principals made limited representations and warranties to us regarding potential material adverse impacts on the entities and assets to be acquired by us in a formation transactions and agreed to indemnify us and our operating partnership for breaches of such representations and warranties. Such indemnification is limited, however, to $20.0 million in shares of our common stock and operating partnership units to be deposited into an
14
escrow fund at closing of the formation transactions (or, if less, the fair market value of such shares and units) and is subject to a $1.0 million deductible. See "Risk FactorsWe may pursue less vigorous enforcement of terms of merger and other agreements because of conflicts of interest with certain of our officers." In addition, we expect that certain of our predecessor principals and executive officers will enter into employment agreements with us pursuant to which they will agree, among other things, not to engage in certain business activities in competition with us and pursuant to which they will devote substantially full-time attention to our affairs. See "ManagementEmployment Agreements." We may choose not to enforce, or to enforce less vigorously, our rights under these agreements due to our ongoing relationship with our predecessor principals and our executive officers.
We have adopted policies that are designed to eliminate or minimize certain potential conflicts of interest, and the limited partners of our operating partnership have agreed that in the event of a conflict in the fiduciary duties owed by us to our stockholders and, in our capacity as general partner of our operating partnership, to such limited partners, we are under no obligation to give priority to the interests of such limited partners. See "Policies with Respect to Certain ActivitiesConflict of Interest Policies" and "Description of the Partnership Agreement of Douglas Emmett Properties, LP."
15
Common stock offered by us | shares | |
Common stock to be outstanding after this offering |
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shares (1) |
Common stock and units in our operating partnership to be outstanding after this offering |
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shares / units (1) (2) |
Common stock and units in our operating partnership to be outstanding after this offering, assuming full exercise of the underwriters' over-allotment option |
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shares / units (1)(2)(3) |
Use of proceeds (3) |
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We intend to use the net proceeds of this offering, together with cash on hand and borrowings under our modified term loan, to pay the cash consideration to prior investors due in connection with the formation transactions, to repay certain indebtedness, to redeem preferred minority interests in certain entities to be acquired in the formation transactions and to pay related fees and expenses. |
New York Stock Exchange symbol |
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"DEI" |
Dividend Policy
We intend to pay cash dividends to holders of our common stock. We intend to pay a pro rata dividend with respect to the period commencing on the completion of this offering and ending , 2006 based on $ per share for a full quarter. On an annualized basis, this would be $ per share, or an annual dividend rate of approximately %, based on the mid-point of the range set forth on the cover page of this prospectus. We intend to maintain our initial dividend rate for the twelve month period following completion of this offering unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. Dividends made by us will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and the capital requirements of our company. We do not intend to reduce the expected dividend per share if the underwriters' over-allotment option is exercised.
Our Tax Status
We intend to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Code, commencing with our taxable year ending December 31, 2006. We believe that our organization and proposed method of operation will enable us to meet the
16
requirements for qualification and taxation as a REIT for federal income tax purposes. To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax on REIT taxable income we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. See "Federal Income Tax Considerations."
17
Summary Historical and Pro Forma Financial and Operating Data
The following table sets forth summary financial and operating data on (1) a pro forma basis for our company (which includes the historical operating companies, the institutional funds and the single-asset entities) and (2) a historical basis for our "predecessor." Our "predecessor" includes DERA, as the accounting acquirer, and the institutional funds, and excludes DECO, PLE and the single-asset entities. Our predecessor owned 42 office properties, the fee interest in two parcels of land that we lease to third parties under long-term ground leases and six multifamily properties as of March 31, 2006. DERA consolidated the institutional funds because it had control over major decisions, including decisions related to property sales or refinancings. We have not presented historical financial information for Douglas Emmett, Inc. because we have not had any corporate activity since our formation other than the issuance of shares of common stock in connection with the initial capitalization of our company and activity in connection with this offering, the formation transactions and the financing transactions, and because we believe that a discussion of the results of Douglas Emmett, Inc. would not be meaningful. In addition, we have not presented historical financial information for DECO, PLE or the single-asset entities because we believe that a discussion of the predecessor is more meaningful.
You should read the following summary financial and operating data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation," our unaudited pro forma consolidated financial statements and related notes, the audited consolidated historical financial statements and related notes of our predecessor, and the other financial statements included elsewhere in this prospectus.
The summary historical consolidated financial and operating data as of and for the years ended December 31, 2003, 2004 and 2005 have been derived from the audited historical consolidated financial statements of our predecessor. The summary historical consolidated balance sheet information as of March 31, 2006 and the consolidated statements of operations data for the three months ended March 31, 2005 and 2006 have been derived from the unaudited consolidated financial statements of our predecessor. In the opinion of management, the summary unaudited historical consolidated financial information for the interim periods presented includes all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. Our results of operations for interim periods are not necessarily indicative of the results to be obtained for the full fiscal year.
Our summary unaudited pro forma consolidated financial and operating data have been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus and assume a share price in this offering at the mid-point of the range set forth on the cover page of this prospectus. Our unaudited pro forma consolidated financial and operating data as of and for the three months ended March 31, 2006 and for the year ended December 31, 2005 are derived from the audited and unaudited financial statements of our predecessor, DECO, PLE, and the single-asset entities included elsewhere in this prospectus and are presented as if the formation transactions, the financing transactions, this offering, and the application of the net proceeds thereof, had all occurred on March 31, 2006 for the pro forma consolidated balance sheet and on January 1, 2005 for the pro forma consolidated statements of operations. Additionally the pro forma consolidated statements of operations are presented as if the acquisition of the Villas at Royal Kunia, consummated on March 1, 2006, along with the related financing, had occurred on January 1, 2005.
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Three Months Ended March 31,
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Year Ended December 31,
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Company
Pro Forma |
Historical
Predecessor |
Company
Pro Forma |
Historical Predecessor
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2006
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2006
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2005
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2005
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2005
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2004
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2003
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(In thousands) |
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Statement of Operations Data: | ||||||||||||||||||
Revenues: | ||||||||||||||||||
Office rental: | ||||||||||||||||||
Rental revenue | $87,651 | $75,760 | $71,590 | $335,982 | $297,551 | $249,402 | $242,463 | |||||||||||
Tenant recoveries | 4,191 | 4,095 | 3,080 | 14,979 | 14,632 | 9,439 | 9,303 | |||||||||||
Parking and other income | 10,465 | 10,239 | 8,957 | 37,123 | 36,383 | 30,311 | 31,546 | |||||||||||
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|
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Total office revenue | 102,307 | 90,094 | 83,627 | 388,084 | 348,566 | 289,152 | 283,312 | |||||||||||
Multifamily rental: |
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Rental revenue (1) | 14,960 | 12,281 | 10,454 | 60,146 | 43,942 | 32,787 | 31,070 | |||||||||||
Parking and other income | 343 | 235 | 267 | 1,909 | 1,280 | 1,006 | 924 | |||||||||||
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Total multifamily revenue | 15,303 | 12,516 | 10,721 | 62,055 | 45,222 | 33,793 | 31,994 | |||||||||||
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Total revenue | 117,610 | 102,610 | 94,348 | 450,139 | 393,788 | 322,945 | 315,306 | |||||||||||
Operating Expenses: |
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Office rental | 27,471 | 29,430 | 28,800 | 112,587 | 119,879 | 105,921 | 96,771 | |||||||||||
Multifamily rental | 4,657 | 4,233 | 3,697 | 17,664 | 15,347 | 13,219 | 11,765 | |||||||||||
General and administrative expenses (2) | 3,758 | 1,705 | 1,666 | 43,597 | 6,457 | 5,646 | 5,195 | |||||||||||
Depreciation and amortization (3) | 44,757 | 25,783 | 29,528 | 201,247 | 113,170 | 91,306 | 92,559 | |||||||||||
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Total operating expenses | 80,643 | 61,151 | 63,691 | 375,095 | 254,853 | 216,092 | 206,290 | |||||||||||
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Operating income | 36,967 | 41,459 | 30,657 | 75,044 | 138,935 | 106,853 | 109,016 | |||||||||||
Gain on investment in interest contracts, net |
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34,943 |
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15,264 |
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81,666 |
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37,629 |
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23,583 |
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Interest and other income | 755 | 1,221 | 348 | 344 | 2,264 | 1,463 | 514 | |||||||||||
Interest expense (4) | (36,481 | ) | (28,054 | ) | (26,014 | ) | (152,861 | ) | (115,674 | ) | (95,125 | ) | (94,783 | ) | ||||
Deficit recovery (distributions) from/(to) minority partners, net (5) | | 7,769 | (38,774 | ) | | (28,150 | ) | (57,942 | ) | | ||||||||
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Income (loss) before minority interest expense | 1,241 | 57,338 | (18,519 | ) | (77,473 | ) | 79,041 | (7,122 | ) | 38,330 | ||||||||
Minority Interest: |
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Minority interest expense in consolidated real estate partnerships | | 40,821 | 15,657 | | 79,756 | 47,144 | 30,944 | |||||||||||
Minority interest in operating partnership | 357 | | | (22,312 | ) | | | | ||||||||||
Preferred minority investor | | 4,025 | 3,730 | | 15,805 | 2,499 | | |||||||||||
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Income (loss) from continuing operations | 884 | 12,492 | (37,906 | ) | (55,161 | ) | (16,520 | ) | (56,765 | ) | 7,386 | |||||||
Income from discontinued operations, net of minority interest | | | | | | 174 | 239 | |||||||||||
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Net income / (loss) | $884 | $12,492 | $(37,906 | ) | $(55,161 | ) | $(16,520 | ) | $(56,591 | ) | $7,625 | |||||||
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19
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Three Months Ended March 31,
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Year Ended December 31,
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Company
Pro Forma |
Historical
Predecessor |
Company
Pro Forma |
Historical Predecessor
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2006
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2006
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2005
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2005
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2004
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2003
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(Unaudited)
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(Unaudited)
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(Unaudited)
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||||||||||||||
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(In thousands except per share data) |
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Balance Sheet Data (at end of period): | ||||||||||||||||||||
Investment in real estate, net | $ | 5,203,814 | $ | 2,721,847 | | $ | 2,622,484 | $ | 2,398,980 | $ | 2,222,854 | |||||||||
Total assets | 5,409,440 | 3,052,536 | | 2,904,647 | 2,585,697 | 2,356,296 | ||||||||||||||
Secured notes payable | 2,781,000 | 2,305,500 | | 2,223,500 | 1,982,655 | 1,716,200 | ||||||||||||||
Total liabilities | 3,083,340 | 2,407,477 | | 2,313,922 | 2,069,473 | 1,842,971 | ||||||||||||||
Minority interests in real estate partnerships | | 734,227 | | 688,516 | 579,838 | 496,838 | ||||||||||||||
Minority interests in operating partnership | 589,606 | | | | | | ||||||||||||||
Stockholders' / owners' equity | 1,736,494 | (89,168 | ) | | (97,791 | ) | (63,614 | ) | 16,487 | |||||||||||
Total liabilities and stockholders' / owners' equity | 5,409,440 | 3,052,536 | | 2,904,647 | 2,585,697 | 2,356,296 | ||||||||||||||
Per Share Data: |
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Pro forma earnings (loss) per sharebasic and diluted | ||||||||||||||||||||
Pro forma weighted average common shares outstandingbasic and diluted | ||||||||||||||||||||
Other Data: |
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Cash flows from | ||||||||||||||||||||
Operating activities | 43,106 | 127,811 | 92,767 | 113,950 | ||||||||||||||||
Investing activities | (122,316 | ) | (231,157 | ) | (223,574 | ) | 2,163 | |||||||||||||
Financing activities | 85,892 | 103,768 | 167,817 | (116,322 | ) | |||||||||||||||
Funds from operations (6) | $45,998 | $123,774 | ||||||||||||||||||
EBITDA before minority interest (7) | 82,479 | 276,635 | ||||||||||||||||||
Number of properties (at end of period) | 55 | 48 | 55 | 47 | 45 | 44 |
20
considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. FFO should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP. The following table sets forth a reconciliation of our pro forma funds from operations for the periods presented (in thousands):
|
|
Pro Forma |
|
|||||
---|---|---|---|---|---|---|---|---|
|
Three Months
Ended March 31, 2006 |
Year Ended
December 31, 2005 |
||||||
Pro forma income (loss) before minority interest in operating partnership | $1,241 | $ | (77,473 | ) | ||||
Plus: pro forma real estate depreciation and amortization | 44,757 | 201,247 | ||||||
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|
|||||||
Pro forma funds from operations (a) | $ | 45,998 | $ | 123,774 | ||||
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21
|
Pro Forma
|
|||||||
---|---|---|---|---|---|---|---|---|
|
Three Months
Ended March 31, 2006 |
Year Ended
December 31, 2005 |
||||||
Net income (loss) | $884 | $ | (55,161 | ) | ||||
Adjustments: | ||||||||
Interest expense | 36,481 | 152,861 | ||||||
Depreciation and amortization | 44,757 | 201,247 | ||||||
Minority in operating partnership | 357 | (22,312 | ) | |||||
|
|
|||||||
EBITDA before minority interest (a) | $ | 82,479 | $ | 276,635 | ||||
|
|
22
Investment in our common stock involves risks. In addition to other information contained in this prospectus, you should carefully consider the following factors before acquiring shares of common stock offered by this prospectus. The occurrence of any of the following risks might cause you to lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled "Forward-Looking Statements."
Risks Related to Our Properties and Our Business
All of our properties are located in Los Angeles County, California and Honolulu, Hawaii, and we are dependent on the Southern California and Honolulu economies and are susceptible to adverse local regulations and natural disasters in those areas.
Because all of our properties are concentrated in Los Angeles County, California and Honolulu, Hawaii, we are exposed to greater economic risks than if we owned a more geographically dispersed portfolio. Further, within Los Angeles County, our properties are concentrated in certain submarkets, exposing us to risks associated with those specific areas. We are susceptible to adverse developments in the Los Angeles County, Southern California and Honolulu economic and regulatory environment (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors) as well as natural disasters that occur in these areas (such as earthquakes, floods and other events). In addition, the State of California is also regarded as more litigious and more highly regulated and taxed than many states, which may reduce demand for office space in California. Any adverse developments in the economy or real estate market in Los Angeles County, Southern California in general, or Honolulu, or any decrease in demand for office space resulting from the California or Honolulu regulatory or business environment, could adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to you. We cannot assure you of the continued growth of the Los Angeles County, Southern California or Honolulu economies or of our future growth rate.
The price we will pay for the assets to be acquired by us in the formation transactions may exceed their aggregate fair market value.
We have not obtained any third-party appraisals of the properties and other assets to be acquired by us in connection with this offering or the formation transactions. The value of the cash, units in our operating partnership and shares of our common stock that we will pay or issue as consideration for the assets that we will acquire will increase or decrease if our common stock is priced above or below the mid-point of the range shown on the front cover of this prospectus. The initial public offering price of our common stock will be determined in consultation with the underwriters based on the history and prospects for the industry in which we compete, our financial information, the ability of our management and our business potential and earning prospects, the prevailing securities markets at the time of this offering, and the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. The initial public offering price does not necessarily bear any relationship to the book value or the fair market value of such assets. As a result, the price to be paid by us for the acquisition of the assets in the formation transactions may exceed the fair market value of those assets. The aggregate historical combined net tangible book value of the assets to be acquired by us in the formation transactions was approximately $ as of March 31, 2006.
23
Our operating performance is subject to risks associated with the real estate industry.
Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for dividends, as well as the value of our properties. These events include, but are not limited to:
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If we cannot operate our properties to meet our financial expectations, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to you could be adversely affected. There can be no assurance that we can achieve our return objectives.
We will have a substantial amount of indebtedness outstanding following this offering, which may affect our ability to pay dividends, may expose us to interest rate fluctuation risk and may expose us to the risk of default under our debt obligations.
As of March 31, 2006, on a pro forma basis, our total consolidated indebtedness would have been approximately $2.75 billion, excluding loan premium, and we may incur significant additional debt for various purposes, including, without limitation, to fund future acquisition and development activities and operational needs. Upon completion of this offering, we expect to have an additional $ million available for use under our senior secured revolving credit facility, assuming a pricing at the mid-point of the range set forth on the cover page of this prospectus. We also expect our senior secured revolving credit facility will contain an accordion feature that will allow us to increase the availability thereunder by $ million upon specified circumstances.
24
Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties or to pay the distributions currently contemplated or necessary to maintain our REIT qualification. Our substantial outstanding indebtedness, and the limitations imposed on us by our debt agreements, could have significant other adverse consequences, including the following:
If any one of these events were to occur, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to you could be adversely affected. In addition, any foreclosure on our properties could create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Code.
The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience lease roll down from time to time.
Throughout this prospectus, we make certain comparisons between our asking rents and our in-place rents, and between our asking rents and average asking rents in our submarkets. As a result of various factors, including competitive pricing pressure in our submarkets, adverse conditions in the Los Angeles County or Honolulu real estate market, a general economic downturn and the desirability of our properties compared to other properties in our submarkets, we may be unable to realize such asking rents across the properties in our portfolio. In addition, the degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from property to property and among different leased spaces within a single property. If we are unable to obtain rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted. In addition, depending on asking rental rates at any given time as compared to expiring leases in our portfolio, we may experience declines in expiring cash rental rates versus starting cash rental rates for new leases from time to time.
25
Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by insurance.
Our business operations in Southern California and Honolulu, Hawaii are susceptible to, and could be significantly affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, wind, floods, landslides and fires. These adverse weather conditions and natural disasters could cause significant damage to the properties in our portfolio, the risk of which is enhanced by the concentration of our properties' locations. Our insurance may not be adequate to cover business interruption or losses resulting from adverse weather or natural disasters. In addition, our insurance policies include substantial self insurance portions and significant deductibles and co-payments for such events, and recent hurricanes in the United States have affected the availability and price of such insurance. As a result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters. We may discontinue earthquake or any other insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss.
Furthermore, we do not carry insurance for certain losses, including, but not limited to, losses caused by certain environmental conditions, such as mold or asbestos, riots or war. In addition, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title claims.
If we experience a loss that is uninsured or which exceeds policy limits, we could incur significant costs, lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.
In addition, many of our properties could not be rebuilt to their existing height or size at their existing location under current land-use laws and policies. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications and otherwise may have to upgrade such property to meet current code requirements.
Terrorism and other factors affecting demand for our properties could harm our operating results.
The strength and profitability of our business depends on demand for and the value of our properties. Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of terrorism or war may have a negative impact on our operations. Such terrorist attacks could have an adverse impact on our business even if they are not directed at our properties. In addition, the terrorist attacks of September 11, 2001 have substantially affected the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. The lack of sufficient insurance for these types of acts could expose us to significant losses and could have a negative impact on our operations.
We face intense competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.
We compete with a number of developers, owners and operators of office and multifamily real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to
26
retain tenants when our tenants' leases expire. In that case, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to you may be adversely affected.
In addition, all of our multifamily properties are located in developed areas that include a significant number of other multifamily properties, as well as single-family homes, condominiums and other residential properties. The number of competitive multifamily and other residential properties in a particular area could have a material adverse effect on our ability to lease units and on our rental rates.
We may be unable to renew leases or lease vacant space .
As of March 31, 2006, leases representing approximately 10.3% of the square footage of the properties in our office portfolio will expire in the remainder of 2006, and an additional approximately 7.9% of the square footage of the properties in our office portfolio was available for lease. In addition, as of March 31, 2006, approximately 0.7% of the units in our multifamily portfolio was available for lease, and substantially all of the leases in our multifamily portfolio are renewable on an annual basis at the tenant's option and, if not renewed or terminated, automatically convert to month-to-month. We cannot assure you that leases will be renewed or that our properties will be re-leased at rental rates equal to or above our existing rental rates or that substantial rent abatements, tenant improvements, early termination rights or below-market renewal options will not be offered to attract new tenants or retain existing tenants. Accordingly, portions of our office and multifamily properties may remain vacant for extended periods of time. In addition, some existing leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof.
Furthermore, as part of our business strategy, we have focused and intend to continue to focus on securing smaller-sized companies as tenants for our office portfolios. Smaller tenants may present greater credit risks and be more susceptible to economic downturns than larger tenants, and may be more likely to cancel or elect not to renew their leases. In addition, we intend to actively pursue opportunities for what we believe to be well-located and high quality buildings that may be in a transitional phase due to current or impending vacancies. We cannot assure you that any such vacancies will be filled following a property acquisition, or that any new tenancies will be established at or above-market rates. If the rental rates for our properties decrease or other tenant incentives increase, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to you would be adversely affected.
Real estate investments are generally illiquid.
The real estate investments made, and to be made, by us are relatively difficult to sell quickly. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinance of the underlying property. We may be unable to realize our investment objectives by sale, other disposition or refinance at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located. Furthermore, the value of our Studio Plaza and One Westwood properties may be adversely affected by the contractual rights of first offer that exist with respect to such properties. We may give similar contractual rights in the future, which could affect the value of the subject property.
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Because we own real property, we are subject to extensive environmental regulation, which creates uncertainty regarding future environmental expenditures and liabilities.
Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various of these laws, an owner or operator of real estate is or may be liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow using such property as collateral. In addition, persons exposed to hazardous or toxic substances may sue for personal injury damages. For example, some laws impose liability for release of or exposure to asbestos-containing materials, a substance known to be present in a number of our buildings. In other cases, some of our properties have been (or may have been) impacted by contamination from past operations or from off-site sources. As a result, in connection with our current or former ownership, operation, management and development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under environmental laws.
Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments.
We cannot assure you that these or other environmental studies identified all potential environmental liabilities, or that we will not incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any affected properties.
We may incur significant costs complying with laws, regulations and covenants that are applicable to our properties.
The properties in our portfolio are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic, asbestos-cleanup or hazardous material abatement requirements. There can be no assurance that existing regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Our growth strategy may be affected by our ability to obtain permits, licenses and zoning relief. Our failure to obtain such permits, licenses and zoning relief could have a material adverse effect on our business, financial condition and results of operations.
In addition, federal and state laws and regulations, including laws such as the ADA, impose further restrictions on our operations. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Some of our properties may currently be in non-compliance with the ADA. If one or more of the properties in our portfolio is not in compliance with the ADA or any other regulatory requirements, we may be required to incur additional costs to bring the property into compliance and we might incur governmental fines. In addition, we do not
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know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to you.
Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents and pass through new or increased operating costs to our tenants.
Certain states and municipalities have adopted laws and regulations imposing restrictions on the timing or amount of rent increases or have imposed regulations relating to low- and moderate-income housing. Currently, neither California nor Hawaii have state mandated rent control, but various municipalities within Southern California, such as the City of Los Angeles and Santa Monica, have enacted rent control legislation, and portions of the Honolulu multifamily market are subject to low- and moderate-income housing regulations. We presently expect to continue operating and acquiring properties in areas that either are subject to these types of laws or regulations or where legislation with respect to such laws or regulations may be enacted in the future. Such laws and regulations limit our ability to increase rents, evict tenants or recover increases in our operating expenses and could make it more difficult for us to dispose of properties in certain circumstances. Similarly, compliance procedures associated with rent control statutes and low- and moderate-income housing regulations could have a negative impact on our operating costs, and any failure to comply with low- and moderate-income housing regulations could result in the loss of certain tax benefits and the forfeiture of rent payments. In addition, such low- and moderate-income housing regulations require us to rent a certain number of units at below-market rents, which has a negative impact on our ability to increase cash flow from our properties subject to such regulations. Furthermore, such regulations may negatively impact our ability to attract higher-paying tenants to such properties.
We may be unable to complete acquisitions that would grow our business, and even if consummated, we may fail to successfully integrate and operate acquired properties.
Our planned growth strategy includes the disciplined acquisition of properties as opportunities arise. Our ability to acquire properties on favorable terms and successfully integrate and operate them is subject to the following significant risks:
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If we cannot complete property acquisitions on favorable terms, or operate acquired properties to meet our goals or expectations, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to you could be adversely affected.
We may be unable to successfully expand our operations into new markets.
If the opportunity arises, we may explore acquisitions of properties in new markets. Each of the risks applicable to our ability to acquire and successfully integrate and operate properties in our current markets are also applicable to our ability to acquire and successfully integrate and operate properties in new markets. In addition to these risks, we will not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could adversely affect our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to you could be adversely affected.
We are exposed to risks associated with property development.
We may engage in development and redevelopment activities with respect to certain of our properties. To the extent that we do so, we will be subject to certain risks, including, without limitation:
These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken, any of which could have an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay distributions to you.
We are assuming liabilities in connection with the formation transactions, including unknown liabilities.
As part of the formation transactions, we will assume existing liabilities of our historical operating companies, the institutional funds, the investment funds and the single-asset entities, including, but not limited to, liabilities in connection with our properties, some of which may be unknown or unquantifiable at the time this offering is consummated. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants, vendors or other
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persons dealing with the entities prior to this offering, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. In connection with the formation transactions, we entered into a representation, warranty and indemnity agreement with our predecessor principals pursuant to which they made limited representations and warranties to us regarding potential material adverse impacts on the properties and entities to be acquired by us in the formation transactions and agreed to indemnify us with respect to claims for breaches of those representations and warranties brought by us within one year of the consummation of this offering. However, such indemnification is limited to $20.0 million in shares of our common stock and/or operating partnership units to be deposited into an escrow fund at the closing of the formation transactions (or, if less, the fair market value of such shares and units) and is subject to a $1.0 million deductible. Our predecessor principals are not required to add shares of our common stock or operating partnership units to the escrow in the event that the value of our common stock (and therefore, the units) decreases. Accordingly, such indemnification may not be sufficient to cover all liabilities assumed, and we are not entitled to indemnification from any other sources in connection with the formation transactions. In addition, because many liabilities, including tax liabilities, may not be identified within such period, we may have no recourse against our predecessor principals for these liabilities. See "Tax Risks Related to Ownership of REIT SharesWe and the operating partnership may inherit tax liabilities from the entities to be acquired in the formation transactions."
If we default on the ground leases for land on which some of our properties are located or other long-term leases, our business could be adversely affected.
We will own leasehold interests in certain land to be acquired in the formation transactions, and we are the tenant on other long-term leases such as the long-term lease on our Harbor Court property. If we default under the terms of these leases, we may be liable for damages and could lose our leasehold interest in the property or our options to purchase the fee interest in such properties. If any of these events were to occur, our business and results of operations would be adversely affected.
Risks Related to Our Organization and Structure
We may pursue less vigorous enforcement of terms of merger and other agreements because of conflicts of interest with certain of our officers.
Our predecessor principals and certain of our executive officers have ownership interests in the other entities to be acquired in the formation transactions. Following the completion of this offering and the formation transactions, under the representation, warranty and indemnification agreement with our predecessor principals, we will be entitled to indemnification in the event of breaches of the limited representations and warranties made by our predecessor principals with respect to potential material adverse impacts on the entities and properties to be acquired by us. Such indemnification is limited and we are not entitled to any other indemnification in connection with the formation transactions. See "We are assuming liabilities in connection with the formation transaction, including unknown liabilities" above. In addition, we expect that certain members of our senior management team, including some of our predecessor principals, will enter into employment agreements with us pursuant to which they will agree, among other things, not to engage in certain business activities in competition with us and pursuant to which they will devote substantially full-time attention to our affairs. See "ManagementEmployment Agreements." We may choose not to enforce, or to enforce less vigorously, our rights under these agreements due to our ongoing relationship with our predecessor principals and our executive officers.
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Our predecessor principals exercised significant influence with respect to the terms of the formation transactions.
We did not conduct arm's-length negotiations with our predecessor principals with respect to all of the terms of the formation transactions. In the course of structuring the formation transactions, our predecessor principals had the ability to influence the type and level of benefits that they and our other officers will receive from us. In addition, our predecessor principals had pre-existing ownership interests in our historical operating companies, the institutional funds, the investment funds and the single-asset entities and will receive substantial economic benefits as a result of the formation transactions. As a result, our predecessor principals may receive disproportionate benefits in this offering as compared to other stockholders.
Tax consequences to holders of operating partnership units upon a sale or refinancing of our properties may cause the interests of our senior management to differ from your own.
Some holders of operating partnership units, including our predecessor principals, may suffer different and more adverse tax consequences than holders of our common stock upon the sale or refinancing of the properties owned by our operating partnership, and therefore these holders may have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain properties, or whether to sell or refinance such properties at all.
Our senior management team will have significant influence over our affairs.
Upon completion of this offering, our senior management team will own approximately % of our outstanding common stock, or % on a fully diluted basis. As a result, our senior management team, to the extent they vote their shares in a similar manner, will have influence over our affairs and could exercise such influence in a manner that is not in the best interests of our other stockholders, including by attempting to delay, defer or prevent a change of control transaction that might otherwise be in the best interests of our stockholders. If our senior management team exercises their redemption rights with respect to their operating partnership units and we issue common stock in exchange therefor, our senior management team's influence over our affairs would increase substantially.
Our growth depends on external sources of capital which are outside of our control.
In order to maintain our qualification as a REIT, we are required under the Code to annually distribute at least 90% of our net taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. Our access to third-party sources of capital depends, in part, on:
If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or pay dividends to you necessary to maintain our qualification as a REIT.
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Our charter, the partnership agreement of our operating partnership and Maryland law contain provisions that may delay, defer, or prevent a change of control transaction.
Our charter contains a 5.0% ownership limit. Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to limit any person to actual or constructive ownership of no more than 5.0% in value of the outstanding shares of our stock and no more than 5.0% of the value or number, whichever is more restrictive, of the outstanding shares of our common stock. Our board of directors, in its sole discretion, may exempt a proposed transferee from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any proposed transferee whose ownership, direct or indirect, of more than 5.0% of the value or number of our outstanding shares of our common stock could jeopardize our status as a REIT. The ownership limit contained in our charter and the restrictions on ownership of our common stock may delay or impede a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. See "Description of SecuritiesRestrictions on Transfer."
Our board of directors may create and issue a class or series of preferred stock without stockholder approval. Our board of directors is empowered under our charter to amend our charter to increase or decrease the aggregate number of shares of our common stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock without stockholder approval. Our board of directors may determine the relative rights, preferences and privileges of any class or series of preferred stock issued. As a result, we may issue series or classes of preferred stock with preferences, dividends, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could also have the effect of delaying, deferring or preventing a change of control transaction that might otherwise be in the best interests of our stockholders.
Certain provisions in the partnership agreement for our operating partnership may delay or make more difficult unsolicited acquisitions of us. Provisions in the partnership agreement for our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:
Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:
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and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and
We have elected to opt out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our board of directors, and in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. However, our board of directors may by resolution elect to repeal the foregoing opt-outs from the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Our charter, bylaws, the partnership agreement for our operating partnership and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. See "Material Provisions of Maryland Law and of Our Charter and BylawsRemoval of Directors," "Consideration of Non-Stockholder Constituencies," "Control Share Acquisitions," "Advance Notice of Director Nominations and New Business" and "Description of the Partnership Agreement of Douglas Emmett Properties, LP."
Our fiduciary duties as sole member of the general partner of our operating partnership could create conflicts of interest.
After the consummation of this offering, we, as the sole member of the general partner of our operating partnership, will have fiduciary duties to the other limited partners in the operating partnership, the discharge of which may conflict with the interests of our stockholders. In addition, those persons holding operating partnership units will have the right to vote on certain amendments to the operating partnership agreement (which require approval by a majority in interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders.
The loss of any member of our senior management or certain other key executives could significantly harm our business.
Our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of our senior management team, including Dan A. Emmett, Jordan Kaplan, Kenneth M. Panzer and William Kamer. If we lose the services of any member of our senior management, our business may be significantly impaired. In addition, many of our senior executives have strong industry reputations, which aid us in identifying acquisition and borrowing opportunities, having such opportunities brought to us, and negotiating with tenants and sellers of properties. The loss of the services of these key personnel could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants, property sellers and industry personnel.
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We have no experience operating as a publicly traded REIT.
We have no experience operating as a publicly traded REIT. In addition, certain members of our board of directors and all of our executive officers have no experience in operating a publicly traded REIT. We cannot assure you that our past experience will be sufficient to successfully operate our company as a REIT or a publicly traded company, including the requirements to timely meet disclosure requirements and comply with the Sarbanes-Oxley Act of 2002. Failure to maintain REIT status would have an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to you.
If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.
In the past, we have reported our results to the investors in the institutional funds on a fund-by-fund basis, and we have not separately reported audited results for DECO, PLE or the single-asset entities. We have generally maintained separate systems and procedures for each institutional fund, as well as our non-predecessor entities, which makes it more difficult for us to evaluate and integrate their systems and procedures on a reliable company-wide basis. In addition, we were not required to report our results on a GAAP basis. In connection with our operation as a public company, we will be required to report our operations on a consolidated basis under GAAP and, in some cases, on a property by property basis. We are in the process of implementing an internal audit function and modifying our company-wide systems and procedures in a number of areas to enable us to report on a consolidated basis under GAAP as we continue the process of integrating the financial reporting of our predecessor, DECO, PLE and the single-asset entities. If we fail to implement proper overall business controls, including as required to integrate our diverse predecessor and non-predecessor entities and support our growth, our results of operations could be harmed or we could fail to meet our reporting obligations.
Our board of directors may change significant corporate policies without stockholder approval.
Our investment, financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, will be determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of the board of directors without a vote of our stockholders. In addition, the board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in these policies could have an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to you.
Risks Related to This Offering
The historical internal rates of return attributable to the institutional funds may not be indicative of our future results or an investment in our common stock.
We have presented in this prospectus internal rate of return, or IRR, information relating to the average historical performance of the institutional funds. When considering this information you should bear in mind that the historical results of the institutional funds may not be indicative of the future results that you should expect from us or any investment in our common stock. In particular, our results could vary significantly from the historical results due to the fact that:
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Differences between the book value of the assets to be acquired in the formation transactions and the price paid for our common stock will result in an immediate and material dilution of the book value of our common stock.
As of March 31, 2006, the aggregate historical net tangible book value of the assets to be acquired by us in the formation transactions was approximately $ , or $ per share of our common stock held by our continuing investors, assuming the exchange of units in our operating partnership for shares of our common stock on a one-for-one basis. As a result, the pro forma net tangible book value per share of our common stock after the consummation of this offering and the formation transactions will be less than the initial public offering price. The purchasers of our common stock offered hereby will experience immediate and substantial dilution of $ per share in the pro forma net tangible book value per share of our common stock.
The number of shares of our common stock available for future sale could adversely affect the market price of our common stock.
Sales of substantial amounts of shares of our common stock in the public market, or upon exchange of units in our operating partnership or exercise of any options, or the perception that such sales might occur could adversely affect the market price of the shares of our common stock. The exchange of units in our operating partnership for common stock, the exercise of any stock options or the vesting of any restricted stock granted to certain directors, executive officers and other employees under our stock incentive plan, the issuance of our common stock or units in our operating partnership in connection with property, portfolio or business acquisitions and other issuances of our common stock
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or units in our operating partnership could have an adverse effect on the market price of the shares of our common stock. Also, continuing investors that will hold % of our outstanding common stock on a pro forma basis are parties to agreements that provide for registration rights. The exercise of these registration rights could depress the price of our common stock. In addition, continuing investors that will hold $ of our common stock and units in our operating partnership in the aggregate, assuming a per share price based on the mid-point of the range set forth on the cover page of this prospectus, elected to receive cash in the formation transactions rather than these shares or units. However, due to limits on available cash, these continuing investors will receive such common stock or operating partnership units in lieu thereof. The existence of this equity held by such continuing investors, as well as units in our operating partnership, options, or shares of our common stock reserved for issuance as restricted shares or upon exchange of units may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. In addition, future sales of shares of our common stock may be dilutive to existing stockholders.
Increases in market interest rates may result in a decrease of the value of our common stock.
One of the factors that will influence the price of our common stock will be the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. Market interest rates have recently increased and may continue to do so. An increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield and, if we are unable to pay such yield, the market price of our common stock could decrease.
The market price of our common stock could be adversely affected by our level of cash dividends.
The market value of the equity securities of a REIT is based primarily upon the market's perception of the REIT's growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market's expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock.
There has been no public market for our common stock prior to this offering.
Prior to this offering, there has been no public market for our common stock, and there can be no assurance that an active trading market will develop or be sustained or that shares of our common stock will be resold at or above the initial public offering price. The initial public offering price of our common stock has been determined by agreement among us and the underwriters, but there can be no assurance that our common stock will not trade below the initial public offering price following the completion of this offering. See "Underwriting." The market value of our common stock could be substantially affected by general market conditions, including the extent to which a secondary market develops for our common stock following the completion of this offering, the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance and general stock and bond market conditions.
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Tax Risks Related to Ownership of REIT Shares
Our failure to qualify as a REIT would result in higher taxes and reduce cash available for dividends.
We intend to operate in a manner so as to qualify as a REIT for federal income tax purposes. Although we do not intend to request a ruling from the Internal Revenue Service, or IRS, as to our REIT status, we expect to receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, or Skadden Arps, with respect to our qualification as a REIT. Stockholders should be aware, however, that opinions of counsel are not binding on the IRS or any court. The opinion of Skadden Arps will, if issued, represent only the view of our counsel based on our counsel's review and analysis of existing law and on certain representations as to factual matters and covenants made by us, including representations relating to the values of our assets, the sources of our income, and the nature, construction, character and intended use of our properties. The opinion of Skadden Arps will, if issued, be expressed as of the date issued, and will not cover subsequent periods. Opinions of counsel impose no obligation to advise us or the holders of our common stock of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in applicable law.
Furthermore, both the validity of the tax opinions and our continued qualification as a REIT depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis, the results of which will not be monitored by tax counsel. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our common stock. Unless entitled to relief under certain Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to stockholders, and all distributions to stockholders will be subject to tax as dividend income to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock. See "Federal Income Tax Considerations" for a discussion of material federal income tax consequences relating to us and our common stock.
Dividends payable by REITs generally do not qualify for the reduced tax rates.
Tax legislation enacted in 2003 and 2006 reduces the maximum tax rate for dividends payable to individuals from 38.6% to 15.0% through 2010. Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
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In addition, the relative attractiveness of real estate in general may be adversely affected by the favorable tax treatment given to corporate dividends, which could affect the value of our real estate assets negatively.
REIT distribution requirements could adversely affect our liquidity.
We generally must distribute annually at least 90% of our net taxable income, excluding any net capital gain, in order to qualify as a REIT. In addition, we will be subject to corporate income tax to the extent that we distribute less than 100% of our net taxable income including any net capital gain. We intend to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligation. However, differences between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the distribution requirements of the Code. Certain types of assets generate substantial mismatches between taxable income and available cash. Such assets include rental real estate that has been financed through financing structures which require some or all of available cash flows to be used to service borrowings. As a result, the requirement to distribute a substantial portion of our taxable income could cause us to: (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, in order to comply with REIT requirements. Further, amounts distributed will not be available to fund our operations. We also will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
We and the operating partnership may inherit tax liabilities from the entities to be acquired in the formation transactions.
Pursuant to the formation transactions, we will acquire all of the assets and liabilities, including any tax liabilities, of DERA, DECO and other entities, including a REIT, and the operating partnership will acquire all of the assets and liabilities, including any tax liabilities, of the institutional funds, PLE, the investment funds and the single-asset entities. If the other acquired entity that is a REIT failed to qualify as a REIT, or if DERA, DECO or PLE failed to qualify as an S corporation, we could assume a material federal income tax liability in connection with the mergers. In addition, to qualify as a real estate investment trust, under these circumstances we would be required to distribute any earnings and profits acquired from the acquired REIT, DERA or DECO prior to the close of the taxable year in which the mergers occur. Similarly, if any of the institutional funds, the investment funds or the single-asset entities failed to qualify as a partnership for federal income tax purposes, the operating partnership could assume a material federal income tax liability in connection with the mergers. No rulings from the IRS will be requested and no opinions of counsel will be rendered regarding the federal income tax treatment of any of the entities to be acquired in the formation transactions. Accordingly, no assurance can be given that DERA, DECO and PLE have qualified as S corporations, that the acquired REIT has qualified as a REIT or that the institutional funds, the investment funds or the single-asset entities have qualified as partnerships for federal income tax purposes, or that these entities do not have any other tax liabilities.
We intend to take the position that each of the mergers of DERA and DECO and the acquired REIT qualify as a tax-free reorganization under the Code. If any of these mergers does not so qualify, the merger would be treated as a taxable asset sale in which DERA, DECO or the acquired REIT, as applicable, would be required to recognize taxable gain. In such a case, if DERA or DECO did not qualify as S corporations or the acquired REIT did not qualify as a REIT, then we could assume a material income tax liability in connection with the applicable merger. No rulings from the IRS will be requested and no opinions of counsel will be rendered regarding the federal income tax treatment of
39
the acquisition of the acquired REIT or the mergers of DERA or DECO. Accordingly, no assurance can be given that such mergers will be treated as tax-free reorganizations.
In connection with the formation transactions, we and the operating partnership will receive representations and warranties that, except as would not have a material adverse effect, the institutional funds, the investment funds, the single-asset entities, the acquired REIT, DERA, DECO and PLE have each paid all taxes due and payable. Although the occurrence of the events described above may constitute a breach of such representations and warranties, in the absence of fraud, recourse will be limited to the $20.0 million (or, if less, the fair market value) in our shares of common stock and/or operating partnership units to be deposited by our predecessor principals into the escrow fund at closing for a one-year period and subject to a $1.0 million deductible. As a result, if a breach occurs, but such breach is discovered more than one year after the closing of the formation transaction or exceeds the amount held in escrow, we and/or the operating partnership will not have an effective remedy.
We may have carryover tax basis on our assets as a result of the formation transactions.
Although we expect that the contribution of interests to us by certain participants in the formation transactions were fully taxable transactions, thereby resulting in a fair market value tax basis for such assets, no assurance can be given that the IRS would not attempt to recharacterize this part of the formation transactions as a tax-deferred exchange transaction. If the IRS were successful, we would generally take a carryover tax basis in such assets that is lower than the respective fair market values of such assets. This position would give rise to lower depreciation deductions that would have the effect of (i) increasing the distribution requirement imposed on us, and (ii) decreasing the extent to which our distributions are treated as tax free "return of capital" distributions. Consequently, if the IRS were successful in such an assertion, it could, among other things, adversely affect our ability to satisfy the REIT distribution requirement.
40
We make forward-looking statements in this prospectus. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, our pro forma financial statements and all our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. Any statement contained in this prospectus that is not a statement of historical fact may be considered a forward-looking statement. Without limiting the generality of the foregoing, in some cases you can identify forward-looking statements by terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. You should not rely on forward-looking statements as predictions of future events. Forward-looking statements involve numerous risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statement made by us. These risks and uncertainties include, but are not limited to:
For a more detailed discussion of these and other risks, please read carefully the information under the caption "Risk Factors." You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date of this prospectus, except as required by applicable law.
41
We expect to receive net proceeds from this offering, after deducting underwriting discounts and commissions and estimated expenses, of approximately $ million, or approximately $ million if the underwriters' over-allotment option is exercised in full. We will contribute the net proceeds of this offering, including any net proceeds received as a result of the exercise of the underwriters' over-allotment option, to our operating partnership in exchange for units in our operating partnership. Our operating partnership will subsequently use the net proceeds received from us from this offering of approximately $ , together with cash on hand of approximately $ and borrowings in connection with the financing transactions of approximately $ , to:
If the underwriters exercise their over-allotment option, we will use any additional net proceeds to pay more cash consideration and less equity consideration to prior investors in connection with the formation transactions. Accordingly, our total outstanding shares on a fully diluted basis will increase by only shares if the underwriters' over-allotment option is exercised in full.
The value of units in our operating partnership that we will receive in exchange for our contribution of the net proceeds from this offering to the operating partnership will increase or decrease if our common stock is priced above or below the mid-point of the range of prices shown on the cover page of this prospectus. The initial public offering price of our common stock will be determined in consultation with the underwriters. Among the factors to be considered in determining the initial public offering price are the history and prospects for the industry in which we compete, our financial information, the ability of our management and our business potential and earning prospects, the prevailing securities markets at the time of this offering, and the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. The initial public offering price does not necessarily bear any relationship to the book value or the fair market value of our assets. The aggregate historical net tangible book value of the assets to be acquired by us in the formation transactions was approximately $ million as of March 31, 2006. We have not obtained any third-party appraisals of the assets to be acquired in connection with this offering or the formation transactions. As a result, the consideration to be given by us for these assets in the formation transactions may exceed their fair market value.
42
We intend to pay cash dividends to holders of our common stock. We intend to pay a pro rata dividend with respect to the period commencing on the completion of this offering and ending , 2006 based on $ per share for a full quarter. On an annualized basis, this would be $ per share, or an annual dividend rate of approximately % based on the mid-point of the range set forth on the cover page of this prospectus. We intend to maintain our initial dividend rate for the twelve month period following completion of this offering unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. Dividends made by us will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and the capital requirements of our company. We do not intend to reduce the expected dividend per share if the underwriters' over-allotment option is exercised.
43
The following table sets forth the historical consolidated capitalization of our predecessor as of March 31, 2006 and our pro forma consolidated capitalization as of March 31, 2006, adjusted to give effect to the formation transactions, the financing transactions and this offering, including the use of the net proceeds as set forth in "Use of Proceeds." You should read this table in conjunction with "Use of Proceeds," "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources," our unaudited pro forma consolidated financial statements and related notes, the consolidated financial statements and notes thereto of our predecessor and the other financial statements appearing elsewhere in this prospectus.
|
As of March 31, 2006
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
Predecessor
Historical |
Company
Pro Forma |
|||||||
|
(In thousands
except per share amounts) |
||||||||
Debt: | |||||||||
Secured notes payable (1) (2) | $ | 2,305,500 | $ | 2,781,000 | |||||
Minority interests in real estate partnerships | 734,227 | ||||||||
Minority interest in our operating partnership | | ||||||||
Stockholders' equity (deficit): | |||||||||
Common stock, $.01 par value per share, shares authorized, issued and outstanding on a pro forma basis (3) | |||||||||
Additional paid-in capital | |||||||||
Owners' equity (deficit) | (29,168 | ) | |||||||
Notes receivable from stockholders (4) | (60,000 | ) | |||||||
|
|
||||||||
Total stockholders' equity (deficit) | (89,168 | ) | |||||||
|
|
||||||||
Common stock and additional paid in capital | | ||||||||
Total capitalization | $ | 2,950,559 | $ | ||||||
|
|
44
Purchasers of our common stock offered in this prospectus will experience an immediate and substantial dilution of the net tangible book value of our common stock from the initial public offering price. At March 31, 2006, we had a net tangible book value of approximately $ million, or $ per share of our common stock held by continuing investors, assuming the exchange of units in our operating partnership into shares of our common stock on a one-for-one basis. After giving effect to the sale of the shares of our common stock offered hereby, including the use of proceeds as described under "Use of Proceeds," and the formation transactions, the financing transactions, the deduction of underwriting discounts and commissions, and estimated offering and formation transaction expenses, the pro forma net tangible book value at March 31, 2006 attributable to common stockholders, including the effects of the grant of options and LTIP units to key employees, would have been $ million, or $ per share of our common stock. This amount represents an immediate increase in net tangible book value of $ per share to continuing investors and an immediate dilution in pro forma net tangible book value of $ per share from the assumed public offering price of $ per share of our common stock to new public investors. See "Risk FactorsRisks Related to This OfferingDifferences between the book value of the assets to be acquired in the formation transactions and the price paid for our common stock will result in an immediate and material dilution of the book value of our common stock." The following table illustrates this per share dilution:
Assumed initial public offering price per share | $ | |||
Net tangible book value per share before the formation and refinancing transactions and this offering (1) | ||||
Net increase in pro forma net tangible book value per share attributable to the formation and refinancing transactions and this offering | ||||
Pro forma net tangible book value per share after the formation and refinancing transactions and this offering (2) | ||||
|
||||
Dilution in pro forma net tangible book value per share to new investors (3) | $ | |||
|
45
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth selected historical financial and operating data on (1) a pro forma basis for our company (which includes the historical operating companies, the institutional funds and the single-asset entities) and (2) a historical basis for our "predecessor." Our "predecessor" includes DERA, as the accounting acquirer, and the institutional funds, and excludes DECO, PLE and the single-asset entities. Our predecessor owned 42 office properties, the fee interest in two parcels of land that we lease to third parties under long-term ground leases and six multifamily properties as of March 31, 2006. DERA consolidated the institutional funds because it had control over major decisions, including decisions related to property sales or refinancings. We have not presented historical financial information for Douglas Emmett, Inc. because we have not had any corporate activity since our formation other than the issuance of shares of common stock in connection with the initial capitalization of our company and activity in connection with this offering, the formation transactions and the financing transactions, and because we believe that a discussion of the results of Douglas Emmett, Inc. would not be meaningful. In addition, we have not presented historical financial information for DECO, PLE or the single-asset entities because we believe that a discussion of the predecessor is more meaningful.
You should read the following selected financial and operating data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the audited consolidated historical financial statements and related notes of our predecessor.
The selected historical consolidated financial and operating data as of and for the years ended December 31, 2003, 2004 and 2005 have been derived from the audited historical consolidated financial statements of our predecessor. The selected historical consolidated financial and operating data as of and for the years ended December 31, 2001 and 2002, the selected historical consolidated balance sheet information as of March 31, 2006 and the consolidated statements of operations data for the three months ended March 31, 2005 and 2006 have been derived from the unaudited consolidated financial statements of our predecessor. In the opinion of management, the selected unaudited historical consolidated financial information for the interim periods presented includes all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. Our results of operations for interim periods are not necessarily indicative of the results to be obtained for the full fiscal year.
Our selected unaudited pro forma consolidated financial and operating data have been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus and assume a share price in this offering at the mid-point of the range set forth on the cover page of this prospectus. Our unaudited pro forma consolidated financial and operating data as of and for the three months ended March 31, 2006 and for the year ended December 31, 2005 are derived from the audited and unaudited financial statements of our predecessor, DECO, PLE, and the single-asset entities included elsewhere in this prospectus and are presented as if the formation transactions, the financing transactions, this offering, and the application of the net proceeds thereof, had all occurred on March 31, 2006 for the pro forma consolidated balance sheet and on January 1, 2005 for the pro forma consolidated statements of operations. Additionally the pro forma consolidated statements of operations are presented as if the acquisition of the Villas at Royal Kunia, consummated on March 1, 2006, along with the related financing, had occurred on January 1, 2005.
46
|
Three Months Ended March 31,
|
Year Ended December 31,
|
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Company
Pro Forma |
Historical Predecessor
|
Company
Pro Forma |
Historical Predecessor
|
||||||||||||||||||
|
2006
|
2006
|
2005
|
2005
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|
|
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
|
(In thousands) |
|||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Office rental: | ||||||||||||||||||||||
Rental revenue | $87,651 | $75,760 | $71,590 | $335,982 | $297,551 | $249,402 | $242,463 | $206,464 | $176,496 | |||||||||||||
Tenant recoveries | 4,191 | 4,095 | 3,080 | 14,979 | 14,632 | 9,439 | 9,303 | 7,588 | 5,312 | |||||||||||||
Parking and other income | 10,465 | 10,239 | 8,957 | 37,123 | 36,383 | 30,311 | 31,546 | 30,975 | 21,605 | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Total office revenue | 102,307 | 90,094 | 83,627 | 388,084 | 348,566 | 289,152 | 283,312 | 245,027 | 203,413 | |||||||||||||
Multifamily rental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Rental revenue (1) | 14,960 | 12,281 | 10,454 | 60,146 | 43,942 | 32,787 | 31,070 | 31,960 | 28,581 | |||||||||||||
Parking and other income | 343 | 235 | 267 | 1,909 | 1,280 | 1,006 | 924 | 762 | 638 | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Total multifamily revenue | 15,303 | 12,516 | 10,721 | 62,055 | 45,222 | 33,793 | 31,994 | 32,722 | 29,219 | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Total revenue | 117,610 | 102,610 | 94,348 | 450,139 | 393,788 | 322,945 | 315,306 | 277,749 | 232,632 | |||||||||||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Office rental | 27,471 | 29,430 | 28,800 | 112,587 | 119,879 | 105,921 | 96,771 | 83,450 | 67,192 | |||||||||||||
Multifamily rental | 4,657 | 4,233 | 3,697 | 17,664 | 15,347 | 13,219 | 11,765 | 11,685 | 11,070 | |||||||||||||
General and administrative expenses (2) | 3,758 | 1,705 | 1,666 | 43,597 | 6,457 | 5,646 | 5,195 | 3,877 | 3,591 | |||||||||||||
Depreciation and amortization (3) | 44,757 | 25,783 | 29,528 | 201,247 | 113,170 | 91,306 | 92,559 | 76,753 | 57,524 | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Total operating expenses | 80,643 | 61,151 | 63,691 | 375,095 | 254,853 | 216,092 | 206,290 | 175,765 | 139,377 | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Operating income | 36,967 | 41,459 | 30,657 | 75,044 | 138,935 | 106,853 | 109,016 | 101,984 | 93,255 | |||||||||||||
Gain (loss) on investment in interest contracts, net |
|
|
|
34,943 |
|
15,264 |
|
|
|
81,666 |
|
37,629 |
|
23,583 |
|
(47,644 |
) |
(17,133 |
) |
|||
Interest and other income | 755 | 1,221 | 348 | 344 | 2,264 | 1,463 | 514 | 2,294 | 1,764 | |||||||||||||
Interest expense (4) | (36,481 | ) | (28,054 | ) | (26,014 | ) | (152,861 | ) | (115,674 | ) | (95,125 | ) | (94,783 | ) | (81,121 | ) | (73,712 | ) | ||||
Deficit recovery (distributions) from/(to) minority partners, net (5) | | 7,769 | (38,774 | ) | | (28,150 | ) | (57,942 | ) | | | | ||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Income (loss) before minority interest expense | 1,241 | 57,338 | (18,519 | ) | (77,473 | ) | 79,041 | (7,122 | ) | 38,330 | (24,487 | ) | 4,174 | |||||||||
Minority Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Minority interest expense (loss absorption) in consolidated real estate partnerships | | 40,821 | 15,657 | | 79,756 | 47,144 | 30,944 | (29,889 | ) | (1,846 | ) | |||||||||||
Minority interest in operating partnership | 357 | | | (22,312 | ) | | | | | | ||||||||||||
Preferred minority investor | | 4,025 | 3,730 | | 15,805 | 2,499 | | | | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Income (loss) from continuing operations | 884 | 12,492 | (37,906 | ) | (55,161 | ) | (16,520 | ) | (56,765 | ) | 7,386 | 5,402 | 6,020 | |||||||||
Income from discontinued operations, net of minority interest | | | | | | 174 | 239 | 11,470 | 474 | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
Net income / (loss) | $884 | $12,492 | $(37,906 | ) | $(55,161 | ) | $(16,520 | ) | $(56,591 | ) | $7,625 | $16,872 | $6,494 | |||||||||
|
|
|
|
|
|
|
|
|
47
|
Three Months Ended March 31,
|
Year Ended December 31,
|
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Company
Pro Forma |
Historical
Predecessor |
Company
Pro Forma |
Historical Predecessor
|
|||||||||||||||||||||
|
2006
|
2006
|
2005
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|
|
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||
|
(In thousands, except per share data) |
||||||||||||||||||||||||
Balance Sheet Data (at end of period): | |||||||||||||||||||||||||
Investment in real estate, net | $ | 5,203,814 | $ | 2,721,847 | | $ | 2,622,484 | $ | 2,398,980 | $ | 2,222,854 | $ | 2,293,636 | $ | 2,082,191 | ||||||||||
Total assets | 5,409,440 | 3,052,536 | | 2,904,647 | 2,585,697 | 2,356,296 | 2,415,429 | 2,168,433 | |||||||||||||||||
Secured notes payable | 2,781,000 | 2,305,500 | | 2,223,500 | 1,982,655 | 1,716,200 | 1,577,188 | 1,390,758 | |||||||||||||||||
Total liabilities | 3,083,340 | 2,407,477 | | 2,313,922 | 2,069,473 | 1,842,971 | 1,689,934 | 1,459,183 | |||||||||||||||||
Minority interests in real estate partnerships | | 734,227 | | 688,516 | 579,838 | 496,838 | 708,444 | 695,423 | |||||||||||||||||
Minority interests in operating partnership | 589,606 | | | | | | | | |||||||||||||||||
Stockholders' / owners' equity | 1,736,494 | (89,168 | ) | | (97,791 | ) | (63,614 | ) | 16,487 | 17,051 | 13,827 | ||||||||||||||
Total liabilities and stockholders' / owners' equity | 5,409,440 | 3,052,536 | | 2,904,647 | 2,585,697 | 2,356,296 | 2,415,429 | 2,168,433 | |||||||||||||||||
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Pro forma earnings (loss) per sharebasic and diluted | |||||||||||||||||||||||||
Pro forma weighted average common shares outstandingbasic and diluted | |||||||||||||||||||||||||
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Cash flows from | |||||||||||||||||||||||||
Operating activities | 43,106 | 127,811 | 92,767 | 113,950 | |||||||||||||||||||||
Investing activities | (122,316 | ) | (231,157 | ) | (223,574 | ) | 2,163 | ||||||||||||||||||
Financing activities | 85,892 | 103,768 | 167,817 | (116,322 | ) | ||||||||||||||||||||
Funds from operations (6) | $45,998 | $123,774 | |||||||||||||||||||||||
EBITDA before minority interest (7) | 82,479 | 276,635 | |||||||||||||||||||||||
Number of properties (at end of period) | 55 | 48 | 55 | 47 | 45 | 44 | 46 | 46 |
48
amortization and captures neither the changes in the value of our properties that results from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. Other equity REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. FFO should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP. The following table sets forth a reconciliation of our pro forma funds from operations for the periods presented (in thousands):
|
|
Pro Forma |
|
|||||
---|---|---|---|---|---|---|---|---|
|
Three Months
Ended March 31, 2006 |
Year Ended
December 31, 2005 |
||||||
Pro forma income (loss) before minority interest in operating partnership | $1,241 | $ | (77,473 | ) | ||||
Plus: pro forma real estate depreciation and amortization | 44,757 | 201,247 | ||||||
|
|
|||||||
Pro forma funds from operations (a) | $ | 45,998 | $ | 123,774 | ||||
|
|
49
|
Pro Forma
|
|||||||
---|---|---|---|---|---|---|---|---|
|
Three Months
Ended March 31, 2006 |
Year Ended
December 31, 2005 |
||||||
Net income (loss) | $884 | $ | (55,161 | ) | ||||
Adjustments: | ||||||||
Interest expense | 36,481 | 152,861 | ||||||
Depreciation and amortization | 44,757 | 201,247 | ||||||
Minority in operating partnership | 357 | (22,312 | ) | |||||
|
|
|||||||
EBITDA before minority interest (a) | $ | 82,479 | $ | 276,635 | ||||
|
|
50
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected Consolidated Financial Data," "Structure and Formation of Our Company," our pro forma consolidated financial statements and related notes and the historical consolidated financial statements and related notes of our "predecessor," included elsewhere in this prospectus. Our "predecessor" includes Douglas Emmett Realty Advisors, Inc., or DERA, as the accounting acquirer, and its consolidated subsidiaries, nine California real estate limited partnerships that own, directly or indirectly, office and multifamily properties and fee interests in land subject to ground leases. We refer to these nine limited partnerships as the "institutional funds." In the formation transactions described below, we will acquire our predecessor, as well as Douglas, Emmett and Company, or DECO, P.L.E. Builders, Inc., or PLE, and seven California limited partnerships and one California limited liability company, which we refer to collectively as the "single-asset entities." Each single-asset entity owns, directly or indirectly, one multifamily or office property (or, in one case, a fee interest in land subject to a ground lease). As used in this section, unless the context otherwise requires, "we," "us," "our" and "our company" mean our predecessor for the periods presented and Douglas Emmett, Inc. and its consolidated subsidiaries upon consummation of this offering and the formation transactions.
Overview
Our Company. Douglas Emmett, Inc. is a Maryland corporation formed on June 28, 2005 to continue and expand the operations of DERA, DECO and PLE and their predecessor entities, which we refer to as our historical operating companies. We are engaged in acquiring, owning, managing, repositioning and redeveloping real estate consisting primarily of office (including ancillary retail space) and multifamily properties located in Los Angeles County, California and Honolulu, Hawaii. For all periods presented, DERA was the general partner of, and had responsibility for the asset management of, our predecessor. As of each of December 31, 2005 and March 31, 2006, our predecessor owned 42 office properties and the fee interest in two parcels of land that we lease to third parties under long-term ground leases, and as of December 31, 2005 and March 31, 2006, our predecessor owned five and six multifamily properties, respectively. As of each of December 31, 2005 and March 31, 2006, the single-asset entities owned four office properties, three multifamily properties and the fee interest in one parcel of land that we lease to third parties under long-term ground leases, and for all periods presented were under the common management of DECO. DECO provides property management and leasing services to all of the properties to be acquired in the formation transactions, and PLE provides construction services in connection with improvements to tenant suites and common areas in the properties.
Douglas Emmett, Inc. has not had any corporate activity since its formation, other than the issuance of 100 shares of its common stock to two of our predecessor principals in connection with the initial capitalization of the company and activities in preparation for this offering and the formation transactions. Accordingly, we believe that a discussion of the results of Douglas Emmett, Inc. would not be meaningful, and we have therefore set forth below a discussion regarding the historical operations of our predecessor only. Our predecessor does not include DECO, PLE or the single-asset entities, collectively the "non-predecessor entities." For periods after consummation of this offering, our operations will include their operations. We have not included a separate discussion of the financial condition and results of operations of DECO, PLE or the single-asset entities because we believe that a discussion of our predecessor is more meaningful for investors. However, we have included elsewhere in this prospectus: (1) financial statements of DECO as of December 31, 2004 and 2005 and March 31, 2006, for the years ended December 31, 2003, 2004 and 2005, and for the three months ended March 31, 2005 and 2006; and (2) combined statements of revenues and certain expenses of the single-asset entities for the years ended December 31, 2003, 2004 and 2005 and for the three months ended March 31, 2005 and 2006. Given the size of PLE's operation, we have not included separate financial
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statements as we do not believe that PLE's historical financial information is meaningful to an understanding of our operations.
Acquisitions, Dispositions and Repositionings. The following sets forth the acquisition, disposition and repositioning activity for our predecessor for the periods presented. There were no such activities at the non-predecessor entities during these periods.
Office Property Acquisitions
Multifamily Property Acquisitions
Dispositions
The properties disposed of in 2003 were included in discontinued operations for the year ended December 31, 2003, and the property disposed of in 2004 was included in discontinued operations for each of the years ended December 31, 2003 and 2004 and, therefore, such properties did not impact the results of continuing operations for all comparable periods.
Repositionings. A property is generally selected for repositioning at the time we purchase it. We often strategically purchase properties with large vacancies or expected near-term lease roll-over and use our well-developed knowledge of the property and submarket to determine the optimal use and tenant mix. Generally, a repositioning consists of a range of improvements to a property. A repositioning may involve a complete structural renovation of a building to significantly upgrade the character of the property, or it may involve targeted remodeling of common areas and tenant spaces to make the property more attractive to certain identified tenants. Although each repositioning effort is unique and determined based on the property, tenants and overall trends in the general market and specific submarket, each repositioning has resulted in a period of varying degrees of depressed rental revenue and occupancy levels for the affected property, which impacts our results and, accordingly, comparisons of our performance from period to period. The repositioning process generally occurs in stages over the course of months or even years. During the periods presented, we had a number of
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on-going repositioning efforts on six of our office properties representing 14 buildings and approximately 4.2 million rentable square feet, which we refer to below as the repositioning properties. The repositioning properties exclude properties acquired during the periods presented that are undergoing repositioning efforts, as these properties are discussed within the context of acquisitions.
Significant Financing Transactions
Historical. In December 2004, we refinanced $218.0 million of indebtedness, secured by four multifamily properties, at a floating interest rate of Discount Mortgage-Backed Securities, or DMBS, plus 0.45%, with $293.0 million of indebtedness, secured by the same properties, at a floating interest rate of DMBS plus 0.60%, in order to increase the principal amount and extend the maturities on the loans from 2008 to 2011. In June 2005, we entered into swap transactions to fix the interest rate on these loans at 4.70%. In the discussion below, we refer to this transaction as the "December 2004 refinancing." In August 2005, we refinanced approximately $1.70 billion of indebtedness, secured by 40 office properties, at a weighted-average interest rate (after giving effect to related interest rate contracts and assuming London Interbank Offered Rate, or LIBOR, of 3.87% as of August 2005) of approximately 5.09% with $1.76 billion of term indebtedness, secured by 30 office properties, at an interest rate (after giving effect to related interest rate contracts) of approximately 4.92%. The purpose of this transaction was to lower the interest rate spread on the applicable loans, unencumber ten of the properties that had previously been securing the debt, and extend the maturity of the existing debt from between 2006 and 2009 to 2012. In the discussion below, we refer to this transaction as the "August 2005 refinancing."
Concurrent with this Offering. We expect to amend our existing $1.76 billion secured term loan with Eurohypo AG and Barclays Capital upon completion of this offering by increasing the principal amount of the term loan by $545.0 million at the same interest rate of LIBOR plus 0.85% and on substantially the same terms, but with additional properties securing the loan. We expect to use the entire $545.0 million in connection with this offering, the formation transactions and the financing transactions. We refer to this contemplated refinancing as our "modified term loan." We also expect to enter into a senior secured revolving credit facility providing for borrowings of up to $ million (or $ million pursuant to an accordion feature), which we expect to be undrawn at the completion of this offering, assuming an offering price at the mid-point of the range set forth on the cover page of this prospectus. For additional information regarding the modified term loan and the senior secured revolving credit facility, please refer to "Liquidity and Capital Resources" below.
Formation Transactions. Concurrently with this offering, we will complete the formation transactions, pursuant to which we will acquire, through a series of merger and contribution transactions, all of the interests in our predecessor and the non-predecessor entities. As a result of the formation transactions, we will acquire a total of 55 properties (42 office properties and six multifamily properties from our predecessor, and four office properties and three multifamily properties from the single-asset entities) as well as the fee interests in three parcels of land subject to ground leases and the other assets and operations of our predecessor and the non-predecessor entities. To acquire the interests in these entities from the holders thereof, or the "prior investors," we will issue to the prior investors an aggregate of shares of our common stock and units in our operating partnership with an aggregate value of $ , assuming an offering price at the mid-point of the range set forth on the cover page of this prospectus, and we will pay to the prior investors $ in cash, which would be provided from the net proceeds of the offering, the financing transactions and cash on hand, including the $60.0 million capital contribution made by our predecessor principals in March 2006 to DERA. In the formation transactions, the predecessor principals will receive shares of our common stock valued at the price to the public in this offering for their DERA stock.
If the underwriters' over-allotment option is exercised in full, we will use the additional net proceeds of $ (assuming an offering price at the mid-point of the range set forth on the cover
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page of this prospectus) to increase the cash consideration payable to the prior investors, and to correspondingly reduce the equity consideration payable to them. In such case, the prior investors would receive an aggregate of shares of our common stock and units in our operating partnership with an aggregate value of $ , assuming an offering price at the mid-point of the range set forth on the cover page of this prospectus, and we would pay them $ in cash. As a result, our outstanding shares of common stock on a fully diluted basis would increase by only shares.
Prior to the completion of the formation transactions, our predecessor principals owned all of the outstanding interests in DERA, DECO and PLE as well as certain interests in the nine institutional funds and the investment funds. Our predecessor principals, together with their related parties, also own a significant portion of the interests in the single-asset entities. Any interests contributed by or purchased from Mr. Emmett and his affiliates will be accounted for as a reorganization of entities under common control and recorded at historical cost. The acquisition of interests owned by unaffiliated investors (including the other predecessor principals) will be accounted for as an acquisition under the purchase method of accounting and recorded at the estimated fair value of acquired assets and assumed liabilities corresponding to their ownership interests. The fair value of these assets and liabilities has been allocated in accordance with SFAS No. 141, Business Combinations . The fair values of tangible assets acquired are determined on an as-if-vacant basis. The as-if-vacant fair value is allocated to land, building and tenant improvements based on relevant information obtained in connection with the acquisition of these interests. The estimated fair value of acquired in-place at-market leases are the costs we would have incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the fair value of leasing commissions and legal costs that would be incurred to lease this property to this occupancy level. Additionally, we evaluate the time period over which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to 8-12 months. Above-market and below-market in-place lease values are recorded as an asset or liability based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease for office property leases and our estimate of the remaining life of the tenancy for multifamily property tenants. The fair value of the variable rate debt assumed was determined using current market interest rates for comparable debt financings.
Upon consummation of this offering and the formation transactions, we expect our operations to be carried on through Douglas Emmett Properties, LP, our operating partnership, which we formed on July 25, 2005. Consummation of the formation transactions will enable us to consolidate our asset management, property management, leasing, tenant improvement construction, acquisition and financing businesses into our operating partnership; consolidate the ownership of our property portfolio under our operating partnership; facilitate this offering; and qualify as a real estate investment trust for federal income tax purposes commencing with the taxable year ending December 31, 2006. As a result, we expect to be a fully integrated, self-administered and self-managed real estate company with approximately 400 employees providing substantial in-house expertise in asset management, property management, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.
Revenue Base. We operate our business in two segments: office and multifamily. Historically, the office segment has represented a substantial majority of our overall business. Although our multifamily segment has grown recently with the purchases of Moanalua Hillside Apartments in January 2005 and Villas at Royal Kunia in March 2006, we expect that our office segment will remain larger than our multifamily segment. For the years ended December 31, 2003, 2004 and 2005 and the three months ended March 31, 2006, the office segment contributed 89.9%, 89.5%, 88.5% and 87.8%, respectively, of
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our predecessor's total revenue, while the multifamily segment contributed 10.1%, 10.5%, 11.5% and 12.2%, respectively, of such revenue. As of December 31, 2003 and 2004, our predecessor owned 41 and 42 office properties, respectively, and three and four multifamily properties, respectively. As of each of December 31, 2005 and March 31, 2006, our predecessor owned 42 office properties, and as of December 31, 2005 and March 31, 2006, they owned five and six multifamily properties, respectively. As of March 31, 2006, these office properties were approximately 92.0% leased at an average annualized rent per leased square foot of $30.45, and these multifamily properties were approximately 99.2% leased at an average monthly rent per leased unit of $1,656. Upon consummation of this offering and the formation transactions, we will acquire from our predecessor and the non-predecessor entities an aggregate of 46 office properties and nine multifamily properties, including the fee interests in three parcels of land subject to ground leases, one of which we will own a one-sixth undivided tenancy-in-common interest in that parcel. All of these properties are located in Los Angeles County, California and Honolulu, Hawaii. Our portfolio will contain a total of approximately 11.6 million office rentable square feet and 2,868 multifamily units.
Leases
Office Leases. Historically, our predecessor primarily leased office properties to tenants on a full service gross or triple net lease basis, and we expect to continue to do so in the future. A full service gross lease has a base year expense stop, whereby the tenant pays a stated amount of expenses as part of the rent payment, while future increases (above the base year stop) in property operating expenses are billed to the tenant based on such tenant's proportionate square footage in the property. The increased property operating expenses billed are reflected in operating expense and amounts recovered from tenants are reflected as tenant recoveries in the statements of income. In a triple net lease, the tenant is responsible for all property taxes and operating expenses. As such, the base rent payment does not include any operating expense, but rather all such expenses are billed to the tenant. The full amount of the expenses for this lease type is reflected in operating expenses, and the reimbursement is reflected in tenant recoveries. Our tenants in Los Angeles County, California predominantly have full service gross leases, and our tenants in Honolulu, Hawaii predominantly have triple net leases.
Multifamily Leases. Our multifamily leases generally have a one-year term that automatically transfers to month-to-month upon expiration of the term. Tenants normally pay a base rental amount, usually quoted in terms of a monthly rate for the respective unit.
Deficit Distributions to Minority Partners. Deficit distributions to minority partners are recorded as an expense in the statements of operations of our predecessor. When the institutional funds made cash distributions to their limited partners unaffiliated with DERA in excess of the carrying amount of such limited partners' interests, a charge equal to the amount of such excess distributions was recorded as deficit distributions to minority partners, even though there was no effect or cost relating to our operations. We do not expect to make cash distributions in excess of the carrying amount of the minority interests in the operating partnership after completion of this offering and the formation transactions.
Interest Rate Contracts. Any change in fair value of interest rate contracts of our predecessor was recorded as a gain or loss in the statement of operations because such contracts did not qualify as effective hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133, as amended by SFAS 138). As discussed in more detail below under "Liquidity and Capital ResourcesInterest Rate Risk." In conjunction with this offering, we intend to enter into a series of interest rate swaps that effectively offset any future changes in the fair value of all of our existing interest rate contracts. These new interest rate contracts will also not qualify for hedge accounting under SFAS 133. Our existing interest rate contracts resulted in an asset with a fair value of $110.4 million and a liability with a fair value of $9.4 million as of March 31, 2006. These offsetting
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interest rate contracts will result in these values being "locked-in" on the offering date. We will collect over the remaining life of these interest rate contracts an amount equal to the net fair value recorded.
We also intend to enter into a new series of interest rate swap contracts that will effectively hedge our variable rate debt from future changes in interest rates. Unlike the interest rate contracts described above, we expect the new interest rate contracts to qualify for cash flow hedge accounting treatment under SFAS 133, and as such, all future changes in fair value of the new interest rate contracts for periods after this offering will be recognized in other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of the new interest rate contracts' change in fair value is immediately recognized in earnings.
Factors That May Influence Our Operating Results
Business and Strategy. We expect to continue our strategy of growth through proactive asset and property management at existing properties and through selective acquisitions, repositioning and redevelopment. Our core strategy has been to own and operate office and multifamily properties within submarkets that are supply constrained, have high barriers to entry, exhibit strong economic characteristics and offer proximity to high-end executive housing and key lifestyle amenities. We often acquire properties with significant vacancies upon acquisition that we believe we can manage and lease in a manner that will increase their cash flow. In addition, we intend to continue to redevelop and reposition properties to increase rental and occupancy rates at these properties.
Since 2003, we experienced increasing occupancy rates in our Los Angeles County office properties, which we believe was due in part to the general economic recovery that took place after the relative economic slowdown that began in late 2000. We also saw rental rate growth, which typically follows occupancy growth, beginning in 2005. In addition, we have generally experienced fairly stable occupancy rates at our multifamily properties in recent years, and we began to see rental rate growth in 2005, as a result of higher demand. We expect these trends to continue in the near term as a result of continuing positive factors affecting our markets, growth of the local economy and the lease-up of our repositioning properties.
We expect to continue to acquire properties subject to existing mortgage financing and other indebtedness or to incur indebtedness in connection with acquiring or refinancing these properties. Historically, we have financed our properties with floating rate debt, where possible, hedged with interest rate swaps or caps, where appropriate, since we value the flexibility that this borrowing strategy affords. Debt service on such indebtedness will have a priority over any dividends with respect to our common stock.
Rental Revenue. We receive income primarily from rental revenue from our office and multifamily properties and parking garages at those properties. The amount of rental revenue generated by the properties in our portfolio depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from lease terminations. As of March 31, 2006, the occupancy levels in the properties that will comprise our initial portfolio upon completion of this offering and the formation transactions were approximately 92.1% of our rentable square feet for our office properties and approximately 99.3% for our multifamily properties. The amount of rental revenue generated by us also depends on our ability to maintain or increase rental rates at our properties. Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods.
Scheduled Lease Expirations. Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets as well as
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the desirability of our individual properties. As of March 31, 2006, in addition to approximately 913,434 rentable square feet of currently available space in our office properties that will comprise our initial portfolio, leases representing approximately 10.3% and 11.5% of the rentable square footage of such portfolio are scheduled to expire during the nine months ending December 31, 2006 and the twelve months ending December 31, 2007, respectively. The leases scheduled to expire in the nine months ending December 31, 2006 and the twelve months ending December 31, 2007 represent approximately 11.8% and 13.5%, respectively, of the total annualized rent for our initial portfolio.
Conditions in Our Markets. The properties in our portfolio are located in either Los Angeles County, California or Honolulu, Hawaii. Positive or negative changes in economic or other conditions, adverse weather conditions and natural disasters in these markets may impact our overall performance.
Operating Expenses. Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site maintenance costs, as well as rental expenses on the two ground leases and the Harbor Court lease where we are the lessee. As a public company, we estimate our annual general and administrative expenses will increase by $6 million to $8 million initially due to increased legal, insurance, accounting and other expenses related to corporate governance, SEC reporting and other compliance matters, compared to our predecessor's operations. In addition, our portfolio may be reassessed after the consummation of this offering. Therefore, the amount of property taxes we have paid in the past may not reflect what we will pay in the future.
Critical Accounting Policies
Our discussion and analysis of the historical financial condition and results of operations of our predecessor are based upon their consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses in the reporting period. Actual amounts may differ from these estimates and assumptions. We have provided a summary of our significant accounting policies in note 2 to the consolidated financial statements of our predecessor included elsewhere in this prospectus. We have summarized below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial conditions and results of operations. We evaluate these estimates on an ongoing basis, based upon information currently available and on various assumptions that we believe are reasonable as of the date hereof. In addition, other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our results of operations and financial conditions to those of other companies.
Consolidation of Limited Partnerships. In March 2005, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on Issue No. 04-05, Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights . EITF 04-5 clarifies certain aspects of Statement of Position 78-9, Accounting for Investments in Real Estate Ventures , and provides guidance on determining whether a sole general partner in a limited partnership should consolidate its investment in a limited partnership. DERA is the sole general partner of the institutional funds and the limited partners of the institutional funds do not have substantive "kick-out" or participation rights as defined by EITF 04-5. DERA early adopted the guidance of EITF 04-5 and has consolidated the institutional funds retrospectively.
The accompanying consolidated financial statements represent the historical financial statements of our predecessor, which include the accounts of DERA and the institutional funds. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
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Investment in Real Estate. Acquisitions of properties and other business combinations subsequent to June 30, 2001, the effective date of SFAS No. 141, Business Combinations , are accounted for utilizing the purchase method and, accordingly, the results of operations of acquired properties are included in our results of operations from the respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment and identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above- and below-market leases and tenant relationships. Initial valuations are subject to change until such information is finalized no later than 12 months from the acquisition date. Each of these estimates requires a great deal of judgment, and some of the estimates involve complex calculations. These allocation assessments have a direct impact on our results of operations because if we were to allocate more value to land there would be no depreciation with respect to such amount. If we were to allocate more value to the buildings as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the terms of the leases.
The fair values of tangible assets are determined on an "as-if-vacant" basis. The "as-if-vacant" fair value is allocated to land, where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information obtained in connection with the acquisition of the property.
The estimated fair value of acquired in-place at-market leases are the costs we would have incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimate includes the fair value of leasing commissions and legal costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluate the time period over which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to 8-12 months.
Above-market and below-market in-place lease values are recorded as an asset or liability based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease.
Expenditures for repairs and maintenance are expensed to operations as incurred. Significant betterments are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.
The values allocated to land, buildings, site improvements, tenant improvements, and in-place leases are depreciated on a straight-line basis using an estimated life of 40 years for buildings, 15 years for site improvements, and the respective lease term for tenant improvements and in-place leases. The values of above- and below-market leases are amortized over the life of the related lease and recorded as either an increase (for below-market leases) or a decrease (for above-market leases) to rental income. The amortization of acquired in-place leases is recorded as an adjustment to depreciation and amortization in the consolidated statements of operations. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. Interest, insurance and property tax costs incurred during the period of construction of real estate facilities are capitalized.
Impairment of Long-Lived Assets. We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an
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asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the undiscounted future cash flows expected to be generated by the asset. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our evaluation indicates that we may be unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether an asset has been impaired, our strategy of holding properties over the long-term directly decreases the likelihood of recording an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material.
Revenue Recognition. Revenue and gain is recognized in accordance with Staff Accounting Bulletin No. 104 of the Securities and Exchange Commission, Revenue Recognition in Financial Statements (SAB 104), as amended. SAB 104 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed and determinable; and collectibility is reasonably assured. All leases are classified as operating leases. For all lease terms exceeding one year, rental income is recognized on a straight-line basis over the terms of the leases. Deferred rent receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenues in the period the applicable costs are incurred. In addition, we record a capital asset for leasehold improvements constructed by us that are reimbursed by tenants, with the offsetting side of this accounting entry recorded to deferred revenue which is included in accounts payable, accrued expenses and tenant security deposits. The deferred revenue is amortized as additional rental revenue over the life of the related lease.
Rental revenue from month-to-month leases or leases with no scheduled rent increases or other adjustments are recognized on a monthly basis when earned.
Recoveries from tenants for real estate taxes, common area maintenance and other recoverable costs are recognized in the period that the expenses are incurred. Lease termination fees, which are included in rental income in the accompanying consolidated statements of operations, are recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants.
We recognize gains on sales of real estate pursuant to the provisions of SFAS No. 66, Accounting for Sales of Real Estate (SFAS No. 66). The specific timing of a sale is measured against various criteria in SFAS No. 66 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the finance, installment or cost recovery method.
Monitoring of Rents and Other Receivables. We maintain an allowance for estimated losses that may result from the inability of tenants to make required payments. If a tenant fails to make contractual payments beyond any allowance, we may recognize bad debt expense in future periods equal to the amount of unpaid rent and deferred rent. We generally do not require collateral or other security from our tenants, other than security deposits or letters of credit. If our estimates of collectibility differ from the cash received, the timing and amount of our reported revenue could be impacted.
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Financial Instruments. The estimated fair values of financial instruments are determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair values. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.
Interest Rate Agreements. We manage our interest rate risk associated with borrowings by obtaining interest rate swap and interest rate cap contracts. No other derivative instruments are used.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133. The statement requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income, which is a component of our stockholders' equity account. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Our investments in interest rate swap and interest rate cap contracts do not qualify as effective hedges, and as such, the changes in such contracts' fair market values are being recorded in earnings.
Historical Results of Operations
Comparison of three months ended March 31, 2006 to three months ended March 31, 2005
Revenue
Total Revenue. Total revenue consists of office revenue and multifamily revenue. Total revenues increased by $8.3 million, or 8.8%, to $102.6 million for the three months ended March 31, 2006 compared to $94.3 million for the three months ended March 31, 2005. The increase in total revenue was primarily due to the factors discussed below.
Office Revenue
Total Office Revenue. Total office revenue consists of rent, tenant recoveries and parking and other income, as discussed in more detail below. Total office revenue increased by $6.5 million, or 7.7%, to $90.1 million for the three months ended March 31, 2006 compared to $83.6 million for the three months ended March 31, 2005, primarily due to the factors discussed below.
Rent. Rent includes rental revenue from our office properties, percentage rent on the retail space contained within office properties, and lease termination income. Rental revenue increased $4.2 million, or 5.8%, to $75.8 million for the three months ended March 31, 2006 compared to $71.6 million for the three months ended March 31, 2005. Approximately $2.3 million of the increase was due to increased rents arising from the repositioning properties, offset by $0.3 million related to the repositioning of our Trillium property, which we acquired in early 2005. The remainder of the increase was primarily due to increases in occupancy and rental rates charged to tenants.
Tenant Recoveries. Tenant recoveries increased $1.0 million, or 33.0%, to $4.1 million for the three months ended March 31, 2006 compared to $3.1 million for the three months ended March 31, 2005. The increase was primarily due to the repositioning properties, which had tenant recoveries of $1.4 million for the three months ended March 31, 2006 compared to $0.8 million for the three months ended March 31, 2005. The remainder of the increase related to two Honolulu, Hawaii properties purchased in late 2004, which had primarily triple net leases during both periods presented and had
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tenant recoveries of $1.5 million for the three months ended March 31, 2006 compared to $1.1 million for the three months ended March 31, 2005.
Parking and Other Income. Parking and other income increased $1.3 million, or 14.3%, to $10.2 million for the three months ended March 31, 2006 compared to $9.0 million for the three months ended March 31, 2005. Approximately $0.4 million of the increase related to the acquisition of one office property in early 2005, and the remainder of the increase primarily related to increased parking income at the repositioning properties.
Multifamily Revenue
Total Multifamily Revenue. Total multifamily revenue consists of rent and parking and other income. Total multifamily revenue increased by $1.8 million, or 16.7%, to $12.5 million for the three months ended March 31, 2006 compared to $10.7 million for the three months ended March 31, 2005, primarily due to the factors discussed below.
Rent. Rent increased $1.8 million, or 17.5%, to $12.3 million for the three months ended March 31, 2006 compared to $10.5 million for the three months ended March 31, 2005. Approximately $1.1 million of the increase related to the purchase of one property in March 2006 and the purchase of one property in January 2005. The remainder of the increase was due to increases in rents charged to tenants.
Parking and Other Income. Parking and other income for the three months ended March 31, 2006 was comparable to that for the three months ended March 31, 2005.
Operating Expenses
Total Operating Expenses. Total operating expenses consist of office and multifamily rental expense as well as general and administrative expenses and depreciation and amortization. Total operating expenses decreased by $2.5 million, or 4.0%, to $61.2 million for the three months ended March 31, 2006 compared to $63.7 million for the three months ended March 31, 2005, primarily due to the factors discussed below.
Office Rental. Office rental expenses increased $0.6 million, or 2.2%, to $29.4 million for the three months ended March 31, 2006 compared to $28.8 million for the three months ended March 31, 2005. The increase was primarily due to increases in payroll, utilities, property taxes and janitorial services as well as the acquisition of one office property in early 2005, partially offset by a $0.1 million decrease in insurance premiums.
Multifamily Rental. Multifamily rental expenses increased $0.5 million, or 14.5%, to $4.2 million for the three months ended March 31, 2006 compared to $3.7 million for the three months ended March 31, 2005. The increase was primarily due to the acquisition of one multifamily property in early 2005 and one multifamily property in March 2006.
General and Administrative. General and administrative expense for the three months ended March 31, 2006 was comparable to the three months ended March 31, 2005.
Depreciation and Amortization. Depreciation and amortization expense decreased $3.7 million, or 12.7%, to $25.8 million for the three months ended March 31, 2006 compared to $29.5 million for the three months ended March 31, 2005. The decrease was primarily due to a decrease in intangibles amortization related to recent acquisitions, as leases expired, and $2.2 million in accelerated depreciation in the first quarter of 2005 related to tenant improvements for tenants that vacated prior to their lease termination.
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Non-Operating Income and Expenses
Gain on Investments in Interest Contracts, Net. Gain on investments in interest contracts, net increased $19.7 million, or 128.9%, to $34.9 million for the three months ended March 31, 2006 compared to $15.3 million for the three months ended March 31, 2005. The increase was due to increases in the value of swap contracts caused by increases in interest rates and a $1.14 billion increase in the notional amount of interest rate swap contracts outstanding from $1.07 billion as of March 31, 2005 to $2.21 billion as of March 31, 2006, in connection with our December 2004 and August 2005 refinancings.
Interest and Other Income. Interest and other income increased $0.9 million, or 250.9%, to $1.2 million for the three months ended March 31, 2006 compared to $0.3 million for the three months ended March 31, 2005. The increase was primarily due to an increase in average cash balances and higher short-term interest rates for the period ended March 31, 2006 compared to the period ended March 31, 2005.
Interest Expense. Interest expense increased $2.0 million, or 7.8%, to $28.1 million for the three months ended March 31, 2006 compared to $26.0 million for the three months ended March 31, 2005. Approximately $0.4 million of the increase related to the purchase of one multifamily property in March 2006, which was financed with $82.0 million in debt at an effective interest rate (after taking into account the effect of the interest rate swap contract) of 5.62%. The remaining increase was primarily due to an increase in the effective interest rates over the comparable period.
Deficit Recovery (Distributions) from/(to) Minority Partners, Net. Deficit recovery (distributions) from/(to) minority partners, net increased $46.5 million, to a $7.8 million recovery for the three months ended March 31, 2006 compared to a $(38.8) million distribution for the three months ended March 31, 2005. The increase was primarily due to a distribution in the first quarter of 2005 related to a preferred investment that did not occur in the first quarter of 2006. Additionally, in the first quarter of 2006, net income exceeded distributions to the limited partners, resulting in the reversal of a portion of the deficit distribution expense incurred in prior periods.
Minority Interest
Minority interest increased $25.5 million, or 131.3%, to $44.8 million for the three months ended March 31, 2006 compared to $19.4 million for the three months ended March 31, 2005. The increase was primarily due to an increase in net income before deficit distributions and increased capital contributions from minority partners.
Comparison of year ended December 31, 2005 to year ended December 31, 2004
Revenue
Total Revenue. Total revenues increased by $70.8 million, or 21.9%, to $393.8 million for the year ended December 31, 2005 compared to $322.9 million for the year ended December 31, 2004. The increase in total revenue was primarily due to the factors discussed below.
Office Revenue
Total Office Revenue. Total office revenue increased by $59.4 million, or 20.5%, to $348.6 million for the year ended December 31, 2005 compared to $289.2 million for the year ended December 31, 2004, primarily due to the factors discussed below.
Rent. Rent increased $48.1 million, or 19.3%, to $297.6 million for the year ended December 31, 2005 compared to $249.4 million for the year ended December 31, 2004. The increase was primarily due to $23.5 million relating to the acquisition of three office properties in late 2004 and the
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acquisition of one office property in early 2005. Additionally, $17.3 million of the increase was related to increased rent from the continued lease-up of the repositioning properties. The remainder of the increase is due to increases in occupancy and rental rates charged to tenants offset by a $1.3 million decrease in lease termination income.
Tenant Recoveries. Tenant recoveries increased $5.2 million, or 55.0%, to $14.6 million for the year ended December 31, 2005 compared to $9.4 million for the year ended December 31, 2004. The increase was primarily due to the acquisition of two Honolulu, Hawaii office properties in late 2004, which have primarily triple net leases, as well as the acquisition of two other office properties, one in late 2004 and one in early 2005.
Parking and Other Income. Parking and other income increased $6.1 million, or 20.0%, to $36.4 million for the year ended December 31, 2005 compared to $30.3 million for the year ended December 31, 2004. The increase was primarily due to $4.4 million related to the acquisition of three office properties in late 2004 and the acquisition of one office property in early 2005. The remainder of the increase related to a $1.6 million increase in parking revenue at the repositioning properties and increased parking rental rates.
Multifamily Revenue
Total Multifamily Revenue. Total multifamily revenue increased by $11.4 million, or 33.8%, to $45.2 million for the year ended December 31, 2005 compared to $33.8 million for the year ended December 31, 2004, primarily due to the factors discussed below.
Rent. Rent increased $11.2 million, or 34.0%, to $43.9 million for the year ended December 31, 2005 compared to $32.8 million for the year ended December 31, 2004. Approximately $8.6 million of the increase in rental income related to the acquisition of one multifamily property in early 2005. The remainder of the increase was primarily due to increases in rents charged to tenants.
Parking and Other Income. Parking and other income increased $0.3 million, or 27.2%, to $1.3 million for the year ended December 31, 2005 compared to $1.0 million for the year ended December 31, 2004. The increase was due to the acquisition of one multifamily property in early 2005.
Operating Expenses
Total Operating Expenses. Total operating expenses increased by $38.8 million, or 17.9%, to $254.9 million for the year ended December 31, 2005 compared to $216.1 million for the year ended December 31, 2004, primarily due to the factors discussed below.
Office Rental. Office rental expenses increased $14.0 million, or 13.2%, to $119.9 million for the year ended December 31, 2005 compared to $105.9 million for the year ended December 31, 2004. The increase was primarily due to the acquisition of three office properties in late 2004 and the acquisition of one office property in early 2005.
Multifamily Rental. Multifamily rental expenses increased $2.1 million, or 16.1%, to $15.3 million for the year ended December 31, 2005 compared to $13.2 million for the year ended December 31, 2004. The increase was primarily due to a $3.0 million increase relating to the acquisition of one multifamily property in early 2005, offset by a $1.1 million litigation settlement recorded in 2004.
General and Administrative. General and administrative expenses increased $0.8 million, or 14.4%, to $6.5 million for the year ended December 31, 2005 compared to $5.6 million for the year ended December 31, 2004. The increase was primarily due to increases in personnel costs.
Depreciation and Amortization. Depreciation and amortization expense increased $21.9 million or 23.9%, to $113.2 million for the year ended December 31, 2005 compared to $91.3 million for the year
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ended December 31, 2004. The increase was due to the acquisition of three office properties in late 2004 and the acquisition of one office property and one multifamily property in early 2005.
Non-Operating Income and Expenses
Gain on Investments in Interest Contracts, Net. Gain on investments in interest contracts, net increased $44.0 million, or 117.0%, to $81.7 million for the year ended December 31, 2005 compared to $37.6 million for the year ended December 31, 2004. The increase was primarily due to increases in the value of interest rate swap contracts caused by increases in interest rates and an increase in the notional amount of interest rate swaps outstanding from $1.51 billion as of December 31, 2004 to $2.12 billion as of December 31, 2005 as part of the August 2005 and December 2004 refinancings.
Interest and Other Income. Interest and other income increased $0.8 million, or 54.8%, to $2.3 million for the year ended December 31, 2005 compared to $1.5 million for the year ended December 31, 2004. The increase was primarily due to an increase in average cash balances and higher short-term interest rates during 2005 as compared to 2004.
Interest Expense. Interest expense increased $20.5 million, or 21.6%, to $115.7 million for the year ended December 31, 2005 compared to $95.1 million for the year ended December 31, 2004. The increase was partially due to $9.8 million in accelerated loan fee amortization from the write-off of deferred loan costs as part of the August 2005 refinancing and $12.4 million from the acquisition of three office properties in late 2004 and one office and one multifamily property in January 2005 offset by $2.3 million in defeasance and prepayment penalties incurred in 2004, but not in 2005.
Deficit Distributions to Minority Partners, Net. Deficit distributions to minority partners, net decreased $29.8 million, or 51.4%, to $28.2 million for the year ended December 31, 2005 compared to $57.9 million for the year ended December 31, 2004. The decrease was due to a reduction in the distribution of proceeds received from preferred minority investors.
Minority Interest
Minority interest increased $45.9 million, or 92.5%, to $95.6 million for the year ended December 31, 2005 compared to $49.6 million for the year ended December 31, 2004. The increase was primarily due to an increase in net income before deficit distributions and increased capital contributions from minority investors.
Comparison of year ended December 31, 2004 to year ended December 31, 2003
Revenue
Total Revenue. Total revenue increased by $7.6 million, or 2.4%, to $322.9 million for the year ended December 31, 2004 compared to $315.3 million for the year ended December 31, 2003. The increase in total revenue was primarily due to the factors discussed below.
Office Revenue
Total Office Revenue. Total office revenue increased by $5.8 million, or 2.1%, to $289.2 million for the year ended December 31, 2004 compared to $283.3 million for the year ended December 31, 2003, primarily due to the factors discussed below.
Rent. Rent increased $6.9 million, or 2.9%, to $249.4 million for the year ended December 31, 2004 compared to $242.5 million for the year ended December 31, 2003. Approximately $2.4 million of the increase was due to the acquisition of three office properties in late 2004, $3.8 million of the increase related to increased rent from lease-up of the repositioning properties, and $7.2 million of the
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increase was due to increased straight-line rent offset by a $6.5 million decrease in rent charged to tenants.
Tenant Recoveries. Tenant recoveries increased $0.1 million, or 1.5%, to $9.4 million for the year ended December 31, 2004 compared to $9.3 million for the year ended December 31, 2003. The increase was primarily due to the acquisition of three office properties in late 2004 partially offset by the repositioning properties.
Parking and Other Income. Parking and other income decreased $1.2 million, or 3.9%, to $30.3 million for the year ended December 31, 2004 compared to $31.5 million for the year ended December 31, 2003. The decrease was primarily due to a loss of parking income as part of the repositioning properties, offset by increase in parking and other income from three properties that were acquired in 2004.
Multifamily Revenue
Total Multifamily Revenue. Total multifamily revenue increased by $1.8 million, or 5.6%, to $33.8 million for the year ended December 31, 2005 compared to $32.0 million for the year ended December 31, 2004, primarily due to the factors discussed below.
Rent. Rent increased $1.7 million, or 5.5%, to $32.8 million for the year ended December 31, 2004 compared to $31.1 million for the year ended December 31, 2003. The increase was primarily due to increases in rents charged to tenants.
Parking and Other Income. Parking and other income increased $0.1 million, or 8.9%, to $1.0 million for the year ended December 31, 2004 compared to $0.9 million for the year ended December 31, 2003. The increase was primarily due to increased parking rental rates.
Operating Expenses
Total Operating Expenses. Total operating expenses increased by $9.8 million, or 4.8%, to $216.1 million for the year ended December 31, 2004 compared to $206.3 million for the year ended December 31, 2003, primarily due to the factors discussed below.
Office Rental. Office rental expenses increased $9.2 million, or 9.5%, to $105.9 million for the year ended December 31, 2004 compared to $96.8 million for the year ended December 31, 2003. Approximately $2.3 million of the increase was due to the acquisition of three office properties in late 2004, and approximately $2.3 million of the increase was due to increased expenses associated with the repositioning properties.
Multifamily Rental. Multifamily rental expenses increased $1.5 million, or 12.4%, to $13.2 million for the year ended December 31, 2004 compared to $11.8 million for the year ended December 31, 2003. The increase was primarily related to a $1.1 million litigation settlement recorded in 2004.
General and Administrative. General and administrative expense increased $0.5 million, or 8.7%, to $5.6 million for the year ended December 31, 2004 compared to $5.2 million for the year ended December 31, 2003. The increase was primarily due to increases in personnel costs.
Depreciation and Amortization. Depreciation and amortization expense decreased $1.3 million, or 1.4%, to $91.3 million for the year ended December 31, 2004 compared to $92.6 million for the year ended December 31, 2003. The decrease was primarily due to a decrease in intangibles amortization at our Warner Center property and accelerated depreciation and amortization on tenant improvements for early tenant expirations and renewals, offset by acquisitions in late 2004.
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Non-Operating Income and Expenses
Gain on Investments in Interest Contracts, Net. Gain on investments in interest contracts, net increased $14.0 million, or 59.6%, to $37.6 million for the year ended December 31, 2004 compared to $23.6 million for the year ended December 31, 2003. The increase was primarily due to the increase in the value of our swap contracts from increases in interest rates, offset by a slight decrease in the notional amount of interest rate swap contracts outstanding from $1.60 billion as of December 31, 2003 to $1.51 billion as of December 31, 2004.
Interest and Other Income. Interest and other income increased $0.9 million, or 184.6%, to $1.5 million for the year ended December 31, 2004 compared to $0.5 million for the year ended December 31, 2003. The increase was primarily due to higher average interest-earning cash balances in 2004 and slightly higher short-term interest rates.
Interest Expense. Interest expense increased $0.3 million, or 0.4%, to $95.1 million for the year ended December 31, 2004 compared to $94.8 million for the year ended December 31, 2003. The increase relates to $0.9 million increase from defeasance costs and prepayment penalties on the extinguishment of debt in 2004 versus 2003, and $0.4 million in interest expense relating to the financing of three office properties purchased in late 2004, partially offset by a decrease in the effective interest rates, after taking into account the effect of the interest rate contracts on hedged floating rate borrowings and the interest rates on our floating rate borrowings.
Deficit Distributions to Minority Partners, Net. Deficit distributions to minority partners, net increased $57.9 million, or 100.0%, to $57.9 million for the year ended December 31, 2004 compared to zero for the year ended December 31, 2003. The increase was due to the 2004 distribution of preferred equity proceeds in excess of retained earnings allocated to minority partners in 2004 compared to no deficit distributions in 2003.
Minority Interest
Minority interest increased $18.7 million, or 60.4%, to $49.6 million for the year ended December 31, 2004 compared to $30.9 million for the year ended December 31, 2003. The increase was primarily due to increased capital contributions from minority investors.
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
On a pro forma basis as of March 31, 2006, we would have had total indebtedness of $2.75 billion, excluding loan premium, or approximately % of our total market capitalization. Other than as described below in connection with the expected refinancing transaction, upon consummation of this offering and the formation transactions, we will retain substantially all of the debt encumbering the properties in our portfolio as originated by the institutional funds and the single-asset entities. On a pro forma basis as of March 31, 2006, 80.2% of our consolidated indebtedness would have been effectively fixed rate.
In connection with the completion of this offering and the formation transactions, we expect to amend our existing $1.76 billion secured financing with Eurohypo AG and Barclays Capital by increasing the amount of the term loan by $545.0 million at the existing interest rate of LIBOR plus 0.85%. We refer to this as our "modified term loan." We expect to borrow the full amount of the increase at the closing of this offering. We expect to use the proceeds from the modified term loan, together with the net proceeds of this offering and cash on hand, including the $60.0 million DERA contribution, to pay $ in cash to prior investors in the formation transactions, assuming this offering prices at the mid-point of the range set forth on the cover page of this prospectus, to redeem
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preferred stock at two of the institutional funds, including payment of associated premiums, of $ , and to repay certain variable rate debt totaling approximately $ million. In addition, shortly after this offering we expect to repay the outstanding $100.5 million loan secured by our property, the Trillium, which matures in January 2007. We may prepay the Trillium loan beginning in October 2006 without penalty. Upon completion, we expect that the modified term loan will be secured by 34 of our office properties and the fee interest in one parcel of land subject to a ground lease and will contain representations, warranties, covenants, other agreements and events of default substantially similar to the existing loan. We do not currently expect to hedge the additional borrowing under the modified term loan. We expect that the Trillium property will be unencumbered upon repayment of the Trillium loan. We also expect that the closing of the modified term loan will be contingent on the consummation of this offering and the satisfaction of customary conditions.
In addition, concurrently with this offering, we expect to enter into a $ million senior secured revolving credit facility, with an accordion feature that would allow us to increase the availability thereunder by $ million to $ million, under specified circumstances. We expect the senior secured revolving credit facility to be undrawn at closing, assuming a price in this offering at the mid-point of the range set forth on the cover page of this prospectus. We intend to use this new senior secured revolving credit facility for general corporate purposes, including to fund acquisitions, redevelopment and repositioning opportunities, to provide funds for tenant improvements and capital expenditures, and to provide working capital. We do not currently have any specific agreements or commitments to consummate any acquisitions. We expect that the senior secured revolving credit facility will be secured by office properties. In addition, we expect that the senior secured revolving credit facility will contain representations, warranties, covenants, other agreements and events of default customary for agreements of this type with comparable companies. We also expect that the closing of the senior secured revolving credit facility will be contingent on the consummation of this offering and the satisfaction of customary conditions. We expect that the Trillium property and our other unencumbered properties may be added as security for the senior secured revolving credit facility in the future, if and when additional capacity is added under the accordion feature of this facility.
We have historically financed our operations, acquisitions and development through the use of short term acquisition lines of credit and replaced those lines with long-term secured floating rate mortgage debt. To mitigate the impact of fluctuations in short-term interest rates that would impact our cash flow from operations, we generally enter into interest rate swap or interest rate cap agreements.
The nature of our business, and the requirements imposed by REIT rules that we distribute a substantial majority of our income on an annual basis, will cause us to have substantial liquidity needs over both the short term and the long term. We expect that our short-term liquidity needs will consist primarily of funds necessary to pay operating expenses associated with our properties, interest expense and scheduled principal payments on our debt, expected dividends to our stockholders required to maintain our REIT status (including distributions to persons who hold units in our operating partnership), recurring capital expenditures, ground lease payments and payments under the Harbor Court lease. When we lease space to new tenants, or renew leases for existing tenants, we also incur expenditures for tenant improvements and leasing commissions. This amount, as well as the amount of other capital expenditures, will vary from year to year, in some cases significantly. For the years ended December 31, 2003 through 2005 and the three months ended March 31, 2006, our predecessor's office portfolio weighted average annual tenant improvements were $15.70 per square foot of leased space and their leasing commission costs were $8.07 per square foot of leased space. We expect the cost of future tenant improvements and leasing commissions for the properties in our complete portfolio to be approximately $29.1 million during the 12 months ended March 31, 2007, based on approximately 1,224,334 rentable square feet that will become available in our properties as a result of leases scheduled to expire during the 12 months ended March 31, 2007. We expect the cost of recurring capital improvements for our office properties to be approximately $2.5 million during the 12 months
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ended March 31, 2007, based in part upon the weighted average annual capital expenditure of $0.22 per square foot for the years ended December 31, 2003 through 2005 and the three months ended March 31, 2006. Our recurring capital expenditure for our office properties have traditionally been low as a result of our comprehensive repair and maintenance programs. We have expensed the costs associated with our repair and maintenance programs and expect to continue to expense those costs in future periods. We expect the cost of recurring capital improvements for our multifamily properties to be approximately $0.5 million during the 12 months ended March 31, 2007, based in part upon the weighted average annual capital expenditure of $186 per unit for the years ended December 31, 2003 through 2005 and the three months ended March 31, 2006. Our recurring capital expenditures for our multifamily portfolio have also traditionally been low because we expense, rather than characterize as recurring capital expenditures, our make-ready costs associated with the turnover of units. However, we typically characterize as non-recurring capital expenditures costs associated with substantial renovations of units. Our turnover in our multifamily portfolio has traditionally been relatively low, resulting in relatively low turnover costs. Our nonrecurring capital expenditures are discretionary and also may vary significantly from year to year. We expect nonrecurring capital expenditures at our properties will be approximately $5.1 million for the nine months ended December 31, 2006. We expect to meet our short-term liquidity requirements generally through cash provided by operations and, if necessary, by drawing upon our senior secured revolving credit facility.
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, redevelopment and repositioning of properties, non-recurring capital expenditures, and repayment of indebtedness at maturity. We do not expect that we will have sufficient funds on hand to cover all of these long-term cash requirements. We will seek to satisfy these needs through cash flow from operations, long-term secured and unsecured indebtedness, including our amended term loan and our senior secured revolving credit facility, the issuance of debt and equity securities, including units in our operating partnership, property dispositions and joint venture transactions.
Commitments
On a pro forma basis as of March 31, 2006, we would have had long-term indebtedness outstanding of $2.75 billion, excluding loan premium. The following table summarizes our repayment obligations for the period from April 1, 2006 until December 31, 2006 and for each of the next five years and thereafter under the consolidated indebtedness outstanding at March 31, 2006 on a pro forma basis. We expect our senior secured revolving credit facility to be undrawn at closing.
|
(In thousands)
|
||
---|---|---|---|
2006 | $ | 0 | |
2007 | 0 | ||
2008 | 0 | ||
2009 | 0 | ||
2010 | 0 | ||
2011 | 293,000 | ||
Thereafter (1) | 2,457,000 | ||
|
|||
Total future principal payments | $ | 2,750,000 | |
|
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As of March 31, 2006, we pay $0.6 million per annum for the ground lease on Bishop Place through February 28, 2009, and $0.7 million per annum through February 28, 2019; thereafter, payments are determined by mutual agreement through December 31, 2086. We pay $1.3 million per annum for the ground lease on One Westwood through May 7, 2083. Rent may be increased annually based upon economic criteria defined in the lease agreement. We have the right to purchase the leased land for an amount equal to its fair market value in the 12 months subsequent to May 8, 2008. In addition, as of March 31, 2006, we had leased the office and other commercial portions of the Harbor Court condominium project. We pay $1.4 million per annum (net of abatement) for the lease on Harbor Court through May 26, 2014 and $2.0 million per annum from May 27, 2014 through May 26, 2024. After May 26, 2024, future rent increases occur every ten years based on market rates until expiration on May 26, 2074. We have the option to purchase the fee interest in the office and other commercial portions of Harbor Court by assuming the debt of $27.5 million at any time prior to May 27, 2014.
The following is a schedule of minimum lease payments under our two ground leases and the Harbor Court lease for the period from April 1, 2006 until December 31, 2006 and for each of the next five years and thereafter:
|
(In thousands)
|
||
---|---|---|---|
2006 | $ | 2,462 | |
2007 | 3,283 | ||
2008 | 3,283 | ||
2009 | 3,408 | ||
2010 | 3,433 | ||
2011 | 3,433 | ||
Thereafter | 125,042 | ||
|
|||
Total future real property lease payments | $ | 144,344 | |
|
Consolidated Indebtedness to be Outstanding After this Offering and Giving Effect to the Financing Transactions
On a pro forma basis as of March 31, 2006, we would have had total consolidated indebtedness outstanding of $2.75 billion, excluding loan premium, secured by 34 of our properties, or approximately % of our total market capitalization. In addition, 80.2% of our consolidated indebtedness would have been effectively fixed rate on a pro forma basis as of March 31, 2006. The weighted average interest rate on this indebtedness would have been 5.10% (based on the 30-day LIBOR rate at March 31, 2006 of 5.00% and after giving effect to our interest rate contracts). No scheduled loan principal payments will be due on this indebtedness from the estimated consummation date of this offering through March 31, 2007. On a pro forma basis as of March 31, 2006, we would have had $545.0 million, or 19.8%, of our outstanding long-term debt exposed to fluctuations in short term interest rates.
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The following table sets forth certain information with respect to the indebtedness outstanding as of March 31, 2006 on a pro forma basis.
Properties
|
Principal
Balance |
Fixed/Floating
Rate |
Effective
Annual Interest Rate (1) |
Maturity
Date |
Swap
Maturity Date |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in thousands)
|
|||||||||||
Variable Rate Swapped to Fixed Rate | ||||||||||||
Modified Term Loan (2) (3) | $ | 1,755,000 | LIBOR + 0.85 | % | 4.92 | % | 09/01/12 |
08/01/10-
08/01/12 |
||||
Barrington Plaza, Pacific Plaza | 153,000 | DMBS + 0.60 | 4.70 | 12/22/11 | 08/01/11 | |||||||
555 Barrington, The Shores | 140,000 | DMBS + 0.60 | 4.70 | 12/22/11 | 08/01/11 | |||||||
Moanalua Hillside Apartments | 75,000 | DMBS + 0.76 | 4.86 | 02/01/15 | 08/01/11 | |||||||
Villas at Royal Kunia | 82,000 | LIBOR + 0.62 | 5.62 | 02/01/16 | 03/01/12 | |||||||
|
||||||||||||
Subtotal | $ | 2,205,000 | ||||||||||
Variable Rate | ||||||||||||
Modified Term Loan (2) | 545,000 | LIBOR + 0.85 | 5.85 | 09/01/12 | N/A | |||||||
Loan Premium (4) | 31,000 | |||||||||||
|
||||||||||||
Total | $ | 2,781,000 | ||||||||||
|
Off Balance Sheet Arrangements
At March 31, 2006, we did not have any off-balance sheet arrangements.
Interest Rate Risk
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133, as amended by SFAS No. 138). The statement requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income, which is a component of stockholders equity. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Our existing investments in interest rate swap and interest rate cap contracts do not qualify as effective hedges, and as such, the changes in such contracts' fair market values are being recorded in earnings.
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For the three months ended March 31, 2005 and 2006, our predecessor recognized gains relating to the fair market value change of their interest rate contracts of $34.9 million and $15.3 million. For the years ended December 31, 2003, 2004 and 2005, our predecessor recognized gains relating to the fair market value change of our interest rate contracts of $23.6 million, $37.6 million and $81.7 million, and made payments related to the termination of certain interest rate contracts of $0.1 million, $7.7 million and $1.3 million, respectively.
In conjunction with this offering, we intend to enter into a series of interest rate swaps that effectively offset any future changes in fair value of all of our existing interest rate contracts. We expect that these new interest rate contracts, as well as our existing contracts, will not qualify as effective hedges under SFAS No. 133, and therefore will not qualify for hedge accounting. Although these new interest rate contracts are intended to offset any future changes in fair value of our existing interest rate contracts, and are thus not expected to be recorded in earnings, the $100.9 million net fair value of our existing interest rate contracts will be recorded in other assets and will be reduced by the cash flow difference between the existing interest rate contracts and the offsetting interest rate contracts over the remaining life of the contracts.
Concurrently with this offering, we intend to enter into a new series of interest rate swaps and interest rate cap contracts that will be substantially similar to our existing interest rate contracts. The new interest rate contracts are intended to replace our existing interest rate contracts as a hedge on our floating rate debt exposure. Unlike our existing interest rate contacts, we expect the new interest rate contracts to qualify for cash flow hedge accounting treatment under SFAS No. 133, and as such, all future changes in fair value of the new interest rate contracts will be recognized in other comprehensive income, which is a component of our equity account. Any ineffective portion of the new interest rate contracts' change in fair value is immediately recognized in earnings.
In connection with this offering and the formation transactions, we have marked to market $1.76 billion of assumed variable rate debt swapped to fixed rate related to our office properties. Based on changes in loan-to-value ratios on these loans and general market credit spread compression, the market rate on all of our assumed loans secured by office properties is LIBOR plus 0.50% versus the currently stated rate of LIBOR plus 0.85%. Based on the decrease in the interest rate spread, the market value of our assumed debt increased from $1.76 billion to $1.79 billion, representing a mark-to-market adjustment of $31.0 million. This mark-to-market adjustment will be amortized over the remaining term of each loan as a decrease in interest expense, using the effective interest method.
As of March 31, 2006, we had $2.21 billion of debt subject to interest rate contracts with a $100.9 million net fair value.
Cash Flows
Comparison of three months ended March 31, 2006 to three months ended March 31, 2005
Cash and cash equivalents were $115.0 million and $57.9 million, respectively, at March 31, 2006 and 2005.
Net cash provided by operating activities increased $7.4 million to $43.1 million for the three months ended March 31, 2006 compared to $35.7 million for the three months ended March 31, 2005. The increase was primarily due to an increase in occupancy rates, a $1.9 million increase from the change in operating assets and liabilities, the acquisition of one multifamily property in March 2006 and improved operations at the repositioning properties.
Net cash used in investing activities decreased $63.3 to $122.3 million for the three months ended March 31, 2006 compared to $185.6 million for the three months ended March 31, 2005. The decrease was primarily due to a $56.0 million decrease in the cash used to acquire properties.
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Net cash provided by financing activities decreased $14.0 million to $85.9 million for the three months ended March 31, 2006 compared to $99.9 million for the three months ended March 31, 2005. The decrease was due to a $34.4 million decrease in net borrowings partially offset by an increase in net contributions by minority interest and stockholders.
Comparison of year ended December 31, 2005 to year ended December 31, 2004
Cash and cash equivalents were $108.3 million and $107.9 million, respectively, at December 31, 2005 and 2004.
Net cash provided by operating activities increased $35.0 million to $127.8 million for the year ended December 31, 2005 compared to $92.8 million for the year ended December 31, 2004. The increase was primarily due to the increased operating income from the acquisition of three office properties in late 2004 and one office and one multifamily property in January 2005, as well as increased operating income from the repositioning properties, offset by a $1.6 million decrease from the change in operating assets and liabilities.
Net cash used in investing activities increased $7.6 million to $231.2 million for the year ended December 31, 2005 compared to $223.6 million used in investing activities for the year ended December 31, 2004. During the year ended December 31, 2004, we acquired three properties, while during the year ended December 31, 2005, we acquired two properties, one of which included the assumption of $100.5 million of indebtedness. As a result, the amount of net cash used for acquisitions during 2005 decreased by $3.5 million over 2004. In addition, net cash used in investing activities decreased by $39.1 million as a result of having no property dispositions in 2005, offset by a decrease in capital expenditures from the repositioning properties.
Net cash provided by financing activities decreased $64.0 million to $103.8 million for the year ended December 31, 2005 compared to $167.8 million for the year ended December 31, 2004. The decrease was primarily due to a net decrease in borrowings, offset by lower net distributions.
Comparison of year ended December 31, 2004 to year ended December 31, 2003
Cash and cash equivalents were $107.9 million and $70.9 million, respectively, at December 31, 2004 and 2003.
Net cash provided by operating activities decreased $21.2 million to $92.8 million for the year ended December 31, 2004 compared to $114.0 million for the year ended December 31, 2003. The decrease was primarily due to a $18.0 million decrease in the change in operating assets and liabilities as well as the impact of a decrease in operating income from the repositioning properties, partially offset by the increased operating income from the acquisition of three office properties in late 2004.
Net cash used in investing activities decreased $225.7 million to $223.6 million used in investing activities for the year ended December 31, 2004 compared to $2.2 million provided by investing activities for the year ended December 31, 2003. The decrease was primarily due to the expenditure of $173.5 million to acquire three properties during the year ended December 31, 2004. The remainder of the decrease was the result of a $27.2 million decrease in net cash received from property dispositions as compared to the prior year period and an increase in capital expenditures on repositioning properties.
Net cash provided by financing activities increased $284.1 million to $167.8 million for the year ended December 31, 2004 compared to $116.3 million used in financing activities for the year ended December 31, 2003. The increase was primarily due to a $78.6 million net increase in borrowings and an increase in net contributions by minority interest partners.
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Funds From Operations
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures.
Management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. Other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.
The following table sets forth a reconciliation of our pro forma funds from operations for the periods presented to income (loss) before minority interests, the nearest GAAP equivalent (in thousands):
|
|
Pro Forma |
|
|||||
---|---|---|---|---|---|---|---|---|
|
Three Months
Ended March 31, 2006 |
Year Ended
December 31, 2005 |
||||||
Pro forma income (loss) before minority interest in operating partnership | $ | 1,241 | $ | (77,473 | ) | |||
Plus: pro forma real estate depreciation and amortization | 44,757 | 201,247 | ||||||
|
|
|||||||
Pro forma funds from operations (1) | $ | 45,998 | $ | 123,774 | ||||
|
|
Inflation
Substantially all of our office leases provide for separate real estate tax and operating expense escalations. In addition, most of the leases provide for fixed rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above. Our multifamily properties are subject to one year leases. We believe this provides added flexibility to pass the impact of higher inflation on to tenants. However, six of our multifamily properties are subject to some form of rent regulation limiting annual increases in rents on existing
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tenants to amounts determined by local municipalities. Although new tenancies in our rent-regulated multifamily properties pay market rents upon occupancy, limits on rent increases may limit our ability to pass on the impact of higher inflation.
Newly Issued Accounting Standards
In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error CorrectionsA Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and that correction of errors in previously issued financial statements should be termed a "restatement." SFAS 154 is now effective for accounting changes and correction of errors, however, we had no such items during the current quarter.
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that compensation cost relating to share-based payment transactions be recognized in financial statements and measured based on the fair value of the equity or liability instruments issued. The adoption of SFAS 123R on January 1, 2006 did not impact our consolidated financial statements in 2006.
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligationsan interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, Accounting for Asset Retirement Obligations , represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within a company's control. Under this standard, a liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. Certain of our real estate assets contain asbestos. If these properties undergo major renovations or are demolished, certain environmental regulations are in place, which specify the manner in which the asbestos must be handled and disposed. As of March 31, 2006, the obligations to remove the asbestos from these properties have indeterminable settlement dates, and therefore, we are unable to reasonably estimate the fair value of the conditional asset retirement obligation.
Quantitative and Qualitative Disclosure About Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. As more fully described in the interest rate risk section, we use derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. In conjunction with this offering, we intend to enter into two new series of interest rate swap and interest rate cap contracts. The first series will effectively offset all future changes in fair value from our existing interest rate swap and interest rate cap contracts, and the second series will effectively replace the existing interest rate contacts and qualify for hedge accounting under SFAS 133. We only enter into contracts with major financial institutions based on their credit rating and other factors.
Upon completion of this offering, we expect to enter into interest rate swap agreements for approximately $2.21 billion of our variable rate debt. As a result, on a pro forma basis as of March 31, 2006, approximately 80.2% of our total indebtedness would have been subject to fixed interest rates.
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If, after consideration of the interest rate swaps and interest rate cap contracts described above, LIBOR were to increase by 10%, or approximately 50 basis points, the increase in interest expense on the unhedged variable rate debt would decrease future earnings and cash flows by approximately $2.7 million annually. If LIBOR were to decrease by 10%, or approximately 50 basis points, the decrease in interest expense on the unhedged variable rate debt would be approximately $2.7 million annually.
Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
As of March 31, 2006, on a pro forma basis, our total outstanding debt was approximately $2.75 billion, excluding loan premiums, which was comprised of $545.0 million of variable rate secured mortgage loans and $2.21 billion of variable rate secured mortgage loans swapped to fixed rates. As of March 31, 2006, the fair value of our pro forma variable rate secured mortgage loans that have been swapped to fixed rates was approximately $2.24 billion.
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Unless otherwise indicated, all information contained in this Economic and Market Overview section is derived from the market study prepared by Eastdil Secured.
Los Angeles Regional Economy
Los Angeles is a leading international gateway city with a large, dynamic and diverse economy. It is widely recognized as the most important financial, trade and cultural center in the western United States. The Los Angeles region is comprised of five major counties totaling over 35,000 square miles. These counties include Los Angeles County (4,752 square miles), Orange County (948 square miles), Riverside County (7,304 square miles), San Bernardino County (20,106 square miles) and Ventura County (2,208 square miles). As of December 31, 2004, the Los Angeles region had the largest metropolitan economy in California, the second largest metropolitan economy in the nation and accounted for more jobs than any U.S. region other than the New York metropolitan area. If the five-county Los Angeles region were viewed as an independent economy it would have ranked as the world's tenth largest, with $703 billion in annual gross domestic product. In addition, if the Los Angeles region were a separate state, it would have had the fourth largest population in the United States, with approximately 17.7 million residents, as of December 31, 2004.
The Los Angeles region has a diverse economic base that is driven by a robust service sector, including hospitality and leisure, health care, administrative and financial, legal and other professional services. The Los Angeles region is also the nation's largest metropolitan area for manufacturing, including apparel and textiles, machinery and equipment, minerals and metals and transportation equipment. Other leading industries affecting economic growth include trade and motion picture production. Additionally, recent increases in federal defense spending have contributed to a rebound in the aerospace industry. The Los Angeles region is home to the headquarters for many large corporations, including The Walt Disney Co., Occidental Petroleum Corp., Northrop Grumman Corp., Health Net, Inc., Mattel, Inc., KB Home, Amgen Inc. and Hilton Hotels Corp. In addition, Los Angeles County is widely recognized as the worldwide center of the entertainment industry.
The Los Angeles region is a major transportation and distribution hub for the southwest United States. The Los Angeles region is served by five major airports, including Los Angeles International Airport, which is the fifth-busiest airport in the world, serving over 75 major airlines and 60 million passengers annually. The Los Angeles region has two major seaports: the Port of Los Angeles and the Port of Long Beach. Combined, these ports are the largest in North America, ranking first in tonnage and dollar volume. The Port of Los Angeles ranks as the eighth busiest container port in the world. The Los Angeles Economic Development Council, or LAEDC, forecasts that the total value of two-way international trade passing through the Los Angeles customs district will increase by 12.2% in 2006 over 2005 to $330.9 billion, dominated by trade with China and Japan. Two major redevelopment projects are currently underway to enlarge both the Los Angeles and Long Beach ports, at total costs of $1.1 billion and $1.3 billion, respectively. The fifteen railroads that serve Southern California and link the region to the rest of the United States and Canada carry approximately eight billion tons of manufactured goods to and from the Los Angeles five-county region annually. The Los Angeles regional freeway system is recognized as one of the largest and most-utilized freeway systems in the world, comprising over 900 miles of interstate and state roadways for commuters and commerce.
Between 1995 and 2005, the five-county Los Angeles region experienced a gain of approximately 2.6 million residents, or a 16.8% total increase and a 1.6% compounded annual growth rate. The region's population is projected to increase by an additional 1.5% to 18.2 million residents in 2006. During the period from 1995 to 2005, total employment in the five-county Los Angeles region posted a net gain of over 1.0 million jobs, or a 17.7% total increase and a 1.6% compounded annual growth rate, and is projected to increase by 1.3% to 7.1 million jobs in 2006. These statistics compare favorably
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to the nation as a whole, with the Los Angeles region outpacing the national average between 1995 and 2005 by 5.4% in population growth and by 3.1% in job growth.
Los Angeles Five-County Area
Total Population |
Los Angeles Five-County Area
Total Non-Farm Employment |
|
Source: Los Angeles Economic Development Council. |
|
|
Of the five counties in the Los Angeles region, Los Angeles County has the largest economy and is the most populous. As of December 31, 2004, Los Angeles County had an annual gross domestic product of $408 billion, making it the world's seventeenth largest economy, and a population of 10.1 million residents, representing 58% of the Los Angeles region's gross domestic product and 57% of its population. The largest industry sectors in Los Angeles County, based on employment statistics, are business, financial and professional management services, tourism, entertainment, including motion picture and television production, technology, bio-medical and international trade.
Los Angeles County Office Market
Overview
Los Angeles County is the second largest market for office space in the United States and has a total inventory of over 375 million rentable square feet of office space and approximately 178 million rentable square feet of Class-A office space, representing 47% of the total office inventory in Los Angeles County. The Los Angeles County office market is comprised of seven distinct markets which attract different types of tenants and investors. These markets are West Los Angeles, Downtown Los Angeles, South Bay, San Fernando Valley, Tri-Cities, the Hollywood/Wilshire Corridors and the San Gabriel Valley.
The Los Angeles County office market is unique among gateway cities because the premier office markets are located outside of the downtown office market. As a result of limited access to convenient public transportation in most areas of Los Angeles County, proximity to one's residence is an important consideration in locating a business. Therefore, the most desirable office markets and submarkets in Los Angeles County have grown in proximity to high-end executive housing, providing executives and other business decision-makers with shorter and more convenient commutes to and from their workplace. These markets are characteristically supply constrained and offer a high level of lifestyle amenities. As a result, these markets have commanded premium rents and higher occupancies compared to other markets in Los Angeles County. Our portfolio of Class-A office properties is concentrated in the West Los Angeles, San Fernando Valley and Tri-Cities markets. The table below illustrates the Class-A inventory, asking rates and occupancy levels for our markets, the other Los Angeles County office markets and Los Angeles County as a whole as of March 31, 2006.
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Los Angeles County Class-A Office Markets
(As of March 31, 2006)
Market
|
Rentable
Square Feet |
Percent
of Total |
Asking Rents
|
Occupancy
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Douglas Emmett Markets | |||||||||||
West Los Angeles | 42,392,573 | 23.9 | % | $ | 34.71 | 92.4 | % | ||||
San Fernando Valley | 22,291,618 | 12.6 | 26.21 | 92.5 | |||||||
Tri-Cities | 24,788,349 | 14.0 | 29.58 | 93.5 | |||||||
|
|
|
|
||||||||
Total/Weighted AverageDouglas Emmett Markets (1) | 89,472,540 | 50.4 | % | $ | 31.17 | 92.7 | % | ||||
Non-Douglas Emmett Markets |
|
|
|
|
|
|
|
|
|
|
|
Downtown Los Angeles | 30,960,102 | 17.4 | % | $ | 29.16 | 85.4 | % | ||||
South Bay | 27,116,801 | 15.3 | 23.05 | 84.1 | |||||||
Hollywood/Wilshire | 17,194,280 | 9.7 | 22.11 | 89.0 | |||||||
San Gabriel Valley | 12,765,287 | 7.2 | 23.85 | 94.1 | |||||||
|
|
|
|
||||||||
Total/Weighted AverageNon-Douglas Emmett Markets (1) | 88,036,470 | 49.6 | % | $ | 25.13 | 87.0 | % | ||||
|
|
|
|
||||||||
Total/Weighted AverageLos Angeles County Class-A Office Market (1) | 177,509,010 | 100.0 | % | $ | 28.18 | 89.9 | % | ||||
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|
|
|
Source: CB Richard Ellis.
Beginning in the mid-1990s and through 2000, significant economic growth in the United States contributed to robust corporate expansion, which resulted in increased occupancy rates and strong growth in office rental rates. However, by the end of 2000, a slowing economy resulted in a general weakening of office markets across the country. While the Los Angeles County office market experienced declines in occupancy between 2000 and 2002 and declines in rental rates between 2001 and 2004, the diverse economic base of the Los Angeles region helped to mitigate the significant rental rate and occupancy fluctuations that certain other U.S. cities such as New York and San Francisco were experiencing. Beginning in 2003, occupancy rates in Los Angeles County began to recover and, as of March 31, 2006, Los Angeles County reported an average occupancy rate of 89.9%, the highest rate in over 10 years. Los Angeles County rental rates began to recover in 2005, and as of March 31, 2006, overall annual asking rental rates reached $28.18 per square foot, the highest average rate achieved since 2001 and the second highest in 10 years. In addition, according to Torto Wheaton Research, Class-A office rents in Los Angeles County are expected to grow 5.5% in 2006 with a five-year, 2006-2010 forecasted annual rental growth of 5.2%.
Douglas Emmett Office Submarkets
In addition to its seven major markets, the Los Angeles County office market is further defined by 59 distinct office submarkets located within the seven major markets according to CB Richard Ellis. These submarkets differ widely in terms of their desirability, tenant base, rental and occupancy rates and barriers to new construction and supply. Within our three Los Angeles County office markets of West Los Angeles, San Fernando Valley and Tri-Cities, we have chosen to focus on what we believe are nine of the premier office submarkets in these markets and in Los Angeles County as a whole. Six of these submarkets, Brentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills and Westwood, are located in the West Los Angeles market. Two of these submarkets, Sherman Oaks/Encino and Warner Center/Woodland Hills, are located in the San Fernando Valley market, and one, Burbank, is located in the Tri-Cities market. We have invested in these submarkets due to their high
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level of lifestyle amenities and proximity to high-end executive housing, features that have contributed to these submarkets historically achieving premium rents and higher occupancy levels than the other Los Angeles County office submarkets, as well as the Los Angeles County office market as a whole. The chart below illustrates a comparison of the historical rental rates and occupancy levels of Class-A office space in our submarkets, the other Los Angeles County submarkets and the Los Angeles County office market as a whole.
Historical Rental Rates & OccupancyClass-A Office
Douglas Emmett Submarkets vs. Los Angeles County vs. Non-Douglas Emmett Submarkets
(1)
Source: Costar Office Reports.
The decline in occupancies in our submarkets from 2000 to 2003 was the result of a combination of factors. A large amount of previously entitled office space was delivered to the market between 1999 and 2003. The combined impact of this new construction with the slowing of the technology sector and the general economic downturn that affected Los Angeles County as a whole from 2000 to 2003 led to a decrease in office space absorption as well as increasing vacancies in our submarkets during this same time period. Occupancy levels in our submarkets began to recover in 2004 and on average have significantly outperformed the Los Angeles County office market as a whole since then, with occupancy increasing from 83.2% in 2003 to 91.4% in 2005, or 8.2 percentage points, compared to the Los Angeles County market which increased from 83.8% to 88.7%, or 4.9 percentage points, and compared to the submarkets in which we do not have a presence, which increased from only 84.0% to 87.5%, or 3.5 percentage points. Rental rates in our submarkets began to recover in 2005, with annual rental rates increasing from $31.23 per square foot in 2004 to $33.46 per square foot in 2005, or an increase of 7.1%, compared to Los Angeles County, which increased from $26.51 per square foot to $27.66 per square foot, or an increase of 4.3%, and compared to the submarkets in which we do not have a presence, which increased from $24.34 per square foot to $25.46 per square foot, or an increase of 4.6%. Eastdil Secured projects average Class-A office rental rate growth of approximately 9.8% per year for 2006 and 2007 across our nine Los Angeles County submarkets with a projected five year growth rate average of 6.9% from 2006 to 2010.
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We believe that, within each of our submarkets, we generally own top quality office buildings in terms of their locations, occupancy levels and rental rate premiums. The table below summarizes the West Los Angeles, San Fernando Valley and Tri-Cities Class-A office markets as of March 31, 2006, and sets forth the rentable square feet, asking rents and occupancy levels in each of our nine submarkets within these three markets. As of March 31, 2006, the weighted average asking rental rates in our Los Angeles County office portfolio ($33.26 per square foot) were at an 8.2% premium to the weighted average asking rental rates in our Los Angeles County submarkets ($30.74 per square foot). Excluding the Warner Center/Woodland Hills submarket, where we acquired properties with significant vacancies in recent years, our occupancy rate was 95.5%, which reflects a 2.0 percentage point premium to our submarkets (including the Warner Center/Woodland Hills submarket, the occupancy rate reflects a 0.7 percentage point discount).
|
Rentable
Square Feet |
Asking Rents
|
Occupancy
(1)
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Market/Submarket
|
Douglas
Emmett Portfolio |
Douglas
Emmett Portfolio |
Submarket
|
Douglas
Emmett Portfolio |
Submarket
|
|||||||||
West Los Angeles | ||||||||||||||
Brentwood | 1,390,625 | $ | 33.77 | $ | 32.52 | 94.4 | % | 94.0 | % | |||||
Olympic Corridor | 922,405 | 28.77 | 28.20 | 89.1 | 91.6 | |||||||||
Century City | 866,039 | 34.70 | 36.96 | 94.0 | 89.6 | |||||||||
Santa Monica | 860,083 | 53.07 | 40.08 | 98.2 | 93.8 | |||||||||
Beverly Hills | 571,869 | 43.86 | 37.19 | 96.7 | 93.7 | |||||||||
Westwood | 396,729 | 33.01 | 29.76 | 93.5 | 90.7 | |||||||||
|
|
|
|
|
||||||||||
Total Douglas Emmett Submarkets (2) | 5,007,750 | $ | 37.42 | $ | 34.11 | 94.2 | % | 92.5 | % | |||||
Non-Douglas Emmett Submarkets | | | $ | 30.65 | | 93.4 | % | |||||||
San Fernando Valley |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sherman Oaks/Encino | 2,878,769 | $ | 30.30 | $ | 27.41 | 97.2 | % | 95.2 | % | |||||
Warner Center/Woodland Hills | 2,567,808 | 28.28 | 27.60 | 81.3 | 90.8 | |||||||||
|
|
|
|
|
||||||||||
Total Douglas Emmett Submarkets (2) | 5,446,577 | $ | 29.35 | $ | 27.50 | 89.7 | % | 93.1 | % | |||||
Non-Douglas Emmett Submarkets | | | $ | 24.66 | | 92.0 | % | |||||||
Tri-Cities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burbank | 420,949 | $ | 34.44 | $ | 32.64 | 100.0 | % | 94.5 | % | |||||
|
|
|
|
|
||||||||||
Total Douglas Emmett Submarkets (2) |
|
420,949 |
|
$ |
34.44 |
|
$ |
32.64 |
|
100.0 |
% |
94.5 |
% |
|
Non-Douglas Emmett Submarkets | | | $ | 28.66 | | 93.2 | % | |||||||
Total/Weighted Average Douglas Emmett Submarkets (2) |
|
10,875,276 |
|
$ |
33.26 |
|
$ |
30.74 |
|
92.2 |
% |
92.9 |
% |
|
Total/Weighted Average Non-Douglas Emmett Submarkets (3) | | | $ | 28.11 | | 92.9 | % | |||||||
|
|
|
|
|
||||||||||
Total/Weighted Average Los Angeles County | 10,875,276 | $ | 33.26 | $ | 28.68 | 92.2 | % | 92.9 | % | |||||
|
|
|
|
|
Source: CB Richard Ellis (other than Douglas Emmett data).
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Each of our submarkets is generally characterized by supply constraints that are the result of down-zoning, economic constraints, restrictive planning commission practices and homeowner groups who are opposed to new development, all of which have created high barriers to the development of new office space. Proposition U, which was approved in 1986, decreased the development capacity of the City of Los Angeles by approximately 50% and affects the Brentwood, Olympic Corridor, Sherman Oaks/Encino and Westwood submarkets. Under the existing specific plans governing development within the Century City and Burbank submarkets, future development is extremely limited. The City of Santa Monica adopted a series of plans in the mid-1980s that imposed stringent limits on development in the downtown area where all of our Santa Monica properties are located, and Beverly Hills limits development through a discretionary approval process for virtually all new building.
Over the past five years, new supply growth in our nine Los Angeles County office submarkets has been limited, with a total of approximately 3.1 million square feet of new additions from 2001 to 2005. This represents an average increase in Class-A inventory of only 1.1% per year across these submarkets. Of the 3.1 million total square feet delivered over the five-year period, approximately 60% of the total was concentrated in the Burbank and Century City submarkets. While approximately 1.3 million square feet of new space was delivered in Santa Monica over the period from 1999 to 2004, the space was primarily located in the eastern area of the city, outside of the downtown Santa Monica market where our properties are located, and was the result of previous development entitlements granted in the 1980s. Additionally, over this time period, there were no new significant office deliveries in our Westwood, Brentwood and Sherman Oaks/Encino submarkets. Within our Los Angeles County submarkets, the following net new supply of office space is expected over a three-year span from 2006 to 2008: 194,000 square feet planned in our Santa Monica submarket; two buildings totaling approximately 500,000 square feet planned in our Warner Center/Woodland Hills submarket; and one new building in our Century City submarket totaling 780,000 square feet of which 300,000 square feet has been pre-leased. In addition, in our Burbank submarket, where we own one building that is currently 100% leased to a single tenant through 2019, 180,000 square feet of new office space was completed in 2006, and an additional 1.1 million square feet is planned and 370,000 square feet is proposed over the three-year span from 2006 to 2008. Assuming all current planned and proposed construction in our submarkets is completed by 2008, this pipeline represents an average increase in Class-A inventory of approximately 1.9% per year across our submarkets. Excluding our Burbank submarket, this increase would be approximately 1.1% per year. No other significant office space is currently under construction, planned to begin construction or proposed during this period in our other submarkets.
Los Angeles County Multifamily Market
The Los Angeles County multifamily market is one of the strongest in the United States. Limited new construction of multifamily buildings and continued regional economic expansion and job growth have contributed to the overall strength of the Los Angeles County multifamily market, helping place Los Angeles County as the third most expensive multifamily market in the nation. Furthermore, high housing prices in Los Angeles County have contributed to the demand for multifamily units. From 1995 to 2005, household income growth in Los Angeles County averaged 3.9% annually while single family home prices increased 11.4% annually over this period.
Our Los Angeles multifamily properties are located in the Santa Monica and Brentwood submarkets of West Los Angeles. The West Los Angeles multifamily market is characterized by its coastal proximity, convenient access to the West Los Angeles office market and high level of lifestyle amenities. These submarkets also generally boast an affluent and highly educated population that is attracted to the better air quality and more temperate climate in these submarkets, as compared to the rest of Los Angeles County. Consequently, the West Los Angeles market has achieved premium rents and higher occupancy levels as compared to other Los Angeles County multifamily markets.
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Multifamily rents in West Los Angeles are the highest in Los Angeles County with an average rental rate of $1,897 per unit per month compared to an average of $1,440 per unit per month for Los Angeles County as a whole, as of March 31, 2006.
As the chart below illustrates, the Los Angeles County multifamily market has significantly outpaced the national average over the past six years in terms of rental rate premiums and growth, as well as in occupancy levels. Furthermore, the West Los Angeles multifamily market has enjoyed similar occupancy levels as Los Angeles County as a whole, while achieving a consistent premium in rental rates with an average premium in rental rates of 50.7% from 2000 to 2005.
Historical Multifamily Rental Rates and Occupancy
West Los Angeles vs. Los Angeles County vs. United States
Source: M/PF Research.
A strong flow of in-migration coupled with limited new housing supply has resulted in a significant imbalance between housing supply and demand in Los Angeles County. According to the LAEDC, from 2000 to 2005, the Los Angeles County population increased by over 700,000 new residents while only 128,000 new residential building permits were issued. The density of current development, zoning and other municipal restrictions and the natural geographic land constraints are factors that severely limit new multifamily development in the West Los Angeles multifamily market where our multifamily buildings are located.
Historical new multifamily completions in Los Angeles County have been very limited, with approximately 21,000 units, or a 0.3% average increase in available supply, completed from 2000 to 2005. During the same period, the rate of new supply of multifamily units in West Los Angeles has been consistent with Los Angeles County as a whole, with only approximately 3,260 new multifamily units completed, or a 0.4% average increase in available supply. In West Los Angeles, approximately 3,900 new multifamily units are proposed, planned or under construction between 2006 and 2008, the majority of which are located outside of our targeted West Los Angeles multifamily submarkets. Over this time period, there is no new supply projected in our Brentwood submarket and there are approximately 900 multifamily units either proposed, planned or under construction in Santa Monica. The new supply in Santa Monica is generally comprised of projects that are smaller in size and farther from the beach as compared to our two Santa Monica multifamily buildings. We expect this space will be absorbed by the significant rental demand in this highly desirable rental submarket.
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We believe that the supply constraints and positive demographics discussed above result in rental rate and occupancy premiums for the West Los Angeles market and provide significant potential for sustained increases in rental rates. As shown by the table below, as of March 31, 2006 the average asking rents for the West Los Angeles market are the highest in Los Angeles County. Furthermore, given the superior locations and quality of our properties, our buildings command significant rental rate and occupancy premiums to both Los Angeles County as a whole and the West Los Angeles market in which they are located.
|
Asking Rents (per unit/month)
|
Occupancy
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Market/Portfolio
|
Douglas Emmett
Portfolio |
Market
|
Douglas Emmett
Portfolio |
Market
|
||||||||
Douglas Emmett Markets | ||||||||||||
West Los Angeles | $ | 2,435 | $ | 1,897 | 99.4 | % | 98.0 | % | ||||
Non-Douglas Emmett Markets |
|
|
|
|
|
|
|
|
|
|
|
|
Hollywood | | $ | 1,633 | | 97.8 | % | ||||||
Tri-Cities | | 1,588 | | 97.6 | ||||||||
South Bay Cities | | 1,546 | | 97.5 | ||||||||
Downtown Los Angeles | | 1,401 | | 94.1 | ||||||||
San Fernando Valley | | 1,395 | | 97.8 | ||||||||
Santa Clarita Valley | | 1,357 | | 95.7 | ||||||||
Long Beach | | 1,226 | | 98.1 | ||||||||
San Gabriel Valley | | 1,211 | | 98.1 | ||||||||
East Los Angeles | | 1,147 | | 98.2 | ||||||||
|
|
|
|
|||||||||
Average Douglas Emmett Markets | $ | 2,435 | $ | 1,897 | 99.4 | % | 98.0 | % | ||||
Average Non-Douglas Emmett Markets | | 1,389 | | 97.2 | ||||||||
|
|
|
|
|||||||||
Average Los Angeles County | $ | 2,435 | $ | 1,440 | 99.4 | % | 97.3 | % | ||||
|
|
|
|
Source: M/PF Reports (other than Douglas Emmett data).
Honolulu, Hawaii Economy
The State of Hawaii is located in the mid-Pacific Ocean approximately 2,400 miles from the west coast of the mainland United States. The eight major islands of Hawaii are, in order from Northwest to Southeast, Niihau, Kauai, Oahu, Molokai, Lanai, Kahoolawe, Maui, and the Island of Hawaii. The Island of Oahu, also known as the City and County of Honolulu, is the most populous, with approximately 70% of Hawaii's population of 1.28 million people as of March 31, 2006, and 70.2% of Hawaii's civilian workforce. The downtown area of Honolulu, Hawaii's capital city, is located at the southeast section of Oahu and represents the political, economic, and cultural center of Hawaii as well as a center of international trade and travel for the United States and Asia. In addition to Hawaii's tourism and construction industries and a strong military presence, the Hawaiian Islands derive a significant portion of their employment from the health care, finance, and trade industries.
Population growth in both Oahu and Hawaii has been steady from 1995 to 2005 with aggregate increases of 2.7% and 6.6%, respectively. Job growth in Oahu and Hawaii from 1995 to 2005 has been 8.6% and 13.0%, respectively. Hawaii's unemployment rate averaged 2.3% in the first quarter of 2006, the lowest quarterly average unemployment rate since 1990, compared to 2.7% for the first quarter of 2005. As of March 31, 2006, Hawaii's unemployment rate was the lowest rate in the United States for the twenty-third consecutive month.
Total economic output for Hawaii has shown consistent growth since 1985. According to the State of Hawaii Department of Business, Economic Development and Tourism, or DBEDT, Hawaii's
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economy performed well in the first quarter of 2006 with the outlook remaining positive for the balance of the year. The DBEDT projects growth in Hawaii's gross state product of 3.0% in 2006, following robust growth rates of 3.2% and 4.7% in 2005 and 2004, respectively. According to the U.S. Bureau of Economic Analysis, Hawaiian personal income has more than doubled on a nominal basis since 1985 and according to DBEDT statistics, personal income is projected to rise 6.8% in 2006, following 7.0% and 8.0% growth in 2005 and 2004, respectively.
Honolulu Office Market
The metropolitan Honolulu office market consisted of approximately 11.6 million rentable square feet as of March 31, 2006. As of such date, the Honolulu CBD contained over 5.1 million rentable square feet totaling approximately 44% of total Honolulu inventory. We own two office properties in the Honolulu CBD. The combination of Class-A office inventory, amenity base and concentration of federal, state and local government centers in the Honolulu CBD has attracted corporate and service sector tenants including law firms, healthcare companies, and financial service and accounting firms that provide services throughout the Hawaiian Islands and/or require proximity to the various state and local government agencies in the central business district.
The Honolulu CBD office market has experienced significant growth in both occupancy and rental rates as a result of strong demographic trends and limited new supply. As of March 31, 2006, the average asking rental rate in the Honolulu CBD was $30.24 per square foot compared to $29.28 per square foot at year end 2005 and the average occupancy level was 91.4% compared to 90.2% at year end 2005. From 2003 to 2005, asking rental rates for office properties in the Honolulu CBD grew 10.2% while occupancy levels increased 0.6 percentage points.
Historical Rental Rates & Occupancy
Honolulu CBD
Source: CB Richard Ellis.
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As the table below illustrates, as of March 31, 2006, the average annual asking rent and occupancy rate for our office buildings was $30.18 and 90.8%, respectively, compared to $30.24 and 91.4% for the Honolulu CBD as a whole.
Market
|
Rentable Square Feet
|
Asking Rents
|
Occupancy
(1)
|
|||||
---|---|---|---|---|---|---|---|---|
Honolulu CBD | 5,140,907 | $ | 30.24 | 91.4 | % | |||
Douglas Emmett Portfolio | 678,940 | $ | 30.18 | 90.8 | % |
Source: CB Richard Ellis (other than Douglas Emmett data).
With current rental rates well below a level that would support new construction, new supply in the Honolulu CBD is expected to be extremely limited in the near term. When rental rates return to levels that can support new construction, developers will be faced with a limited number of fringe development sites on the perimeter of the core Honolulu CBD. There is no new significant office capacity projected to become available in the near term.
Honolulu Multifamily Market
Multifamily units in Oahu are scattered among an inventory that is mainly comprised of single family rental properties, individually owned condominium and multifamily complexes and a small number of institutionally owned multifamily properties. Rental demand is driven not only by residents of Oahu but also by visitors to the island seeking short term rentals. We own two institutional quality multifamily properties in Honolulu: Moanalua Hillside Apartments, which consists of 696 rental units, and the Villas at Royal Kunia, which consists of 402 rental units.
As the chart below illustrates, the Honolulu multifamily market has shown improvement in both rental rates and occupancy levels over the past six years. Average rental rates have grown from $1,150 per unit per month in 2000 to $1,264 per unit per month in 2005, representing a 9.9% increase or an average compounded annual growth rate of 1.9%. Additionally, occupancy levels have risen from 92.9% in 2001 to 94.6% in 2005.
Historical Rental Rates & Occupancy
Honolulu County
Source: Property & Portfolio Research.
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The construction of new residential units in Honolulu is dominated by condominium development and, in recent years, the number of multifamily, condominium and single family units for rent in Honolulu has decreased. The shrinking supply of rental units in the market can be attributed to a number of factors including significant growth in housing prices, the conversion of multifamily properties to for-sale condominium units and the sale of previously rented single family homes and condominium units to owner-occupants. Additionally, the high land values and the high cost of new construction in Hawaii makes the development of new multifamily rental units in the Honolulu market economically prohibitive.
We believe that job growth, a strong housing market and rising interest rates will continue to generate strong demand for multifamily units in the Honolulu market. Furthermore, these positive fundamentals combined with a lack of significant new supply should support increases in rental rates and cause already high occupancy rates to increase further over the near term. As the table below illustrates, as of March 31, 2006, the average monthly asking rent per unit and occupancy rate for our two Honolulu multifamily properties was $1,546 (excluding the income-restricted units in our portfolio) and 99.1%, respectively, compared to $1,272 and 94.9% for the Honolulu multifamily market as a whole.
Market
|
Asking Rents
(per unit/month) |
Occupancy
|
||||
---|---|---|---|---|---|---|
Honolulu | $ | 1,272 | 94.9 | % | ||
Douglas Emmett Portfolio | $ | 1,546 | (1) | 99.1 | % |
Source: Property & Portfolio Research (other than Douglas Emmett data).
(1) Excludes the income-restricted units in our portfolio.
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Unless otherwise indicated, all information contained in this Business and Properties section concerning the Los Angeles and Hawaii economies and the Los Angeles and Honolulu office and multifamily markets is derived from the market study prepared by Eastdil Secured.
Overview
We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and have a growing presence in Honolulu, Hawaii. Our presence in Los Angeles and Honolulu is the result of a consistent and focused strategy of identifying submarkets that are supply constrained, have high barriers to entry and exhibit strong economic characteristics such as population and job growth and a diverse economic base. In our office portfolio, we focus primarily on owning and acquiring a substantial share of top-tier office properties within these submarkets and which are located near high-end executive housing and key lifestyle amenities. In our multifamily portfolio, we focus primarily on owning and acquiring select properties at premier locations within these same submarkets. We believe our strategy generally allows us to achieve higher than market-average rents and occupancy levels, while also creating operating efficiencies.
As of March 31, 2006, our office portfolio consisted of 46 properties with approximately 11.6 million rentable square feet, and our multifamily portfolio consisted of nine properties with a total of 2,868 units. As of this date, our office portfolio was 92.1% leased to 1,659 tenants, and our multifamily properties were 99.3% leased. Our office portfolio contributed approximately 84.8% of our annualized rent as of March 31, 2006, while our multifamily portfolio contributed approximately 15.2%. As of March 31, 2006, our Los Angeles County office and multifamily portfolio contributed approximately 91.0% of our annualized rent, and our Honolulu, Hawaii office and multifamily portfolio contributed approximately 9.0%.
Most of our office properties are located in superior locations in premier Los Angeles County submarkets which benefit from supply constraints and generally enjoy higher rents and lower vacancy rates than other Los Angeles County office submarkets. Additionally, we expect that our West Los Angeles multifamily properties will provide significant growth opportunity due to their superior locations, supply constraints and the potential for rent increases as rent-controlled units are re-leased at market levels. We believe that the Honolulu market provides many of the same positive characteristics as our submarkets in Los Angeles County. As a result of the attractive locations and characteristics of our properties and the value added by our in-house marketing, leasing, property management and construction capabilities, we believe that our existing properties are well positioned to provide continued cash flow growth and to continue to outperform our markets in terms of rental rates and occupancy levels. As of March 31, 2006, our average asking rents in our Los Angeles County office portfolio were at an 8.1% premium to our average in-place rents. Excluding the Warner Center/Woodland Hills submarket, where we acquired properties with significant vacancies in recent years, our occupancy rate was 95.5%, which reflects a 2.0 percentage point premium to our submarkets (including the Warner Center/Woodland Hills submarket, the occupancy rate reflects a 0.7 percentage point discount). In addition, as of March 31, 2006, in our multifamily portfolio our weighted average asking rental rates were at a 31.3% premium to our average in-place rents, primarily as a result of historical rent control laws which now allow landlords to increase rents to market rates as tenants vacate, and our average occupancy rates were at a 1.4 percentage point premium to the West Los Angeles multifamily market as a whole.
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Our office and multifamily portfolio is located in nine premier Los Angeles County submarkets and Honolulu, Hawaii. As of March 31, 2006, the breakdown by submarket of our office and multifamily portfolio was as follows:
|
|
Office
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Submarket
|
Market
|
Number of
Properties |
Rentable
Square Feet (1) |
Percent
Leased (2) |
Annualized
Rent (3) |
Annualized
Rent Per Leased Square Foot (4) |
|||||||||
Brentwood (5) | West Los Angeles | 13 | 1,390,625 | 94.4 | % | $43,699,392 | $ | 34.10 | |||||||
Olympic Corridor | West Los Angeles | 4 | 922,405 | 89.1 | 21,096,888 | 27.55 | |||||||||
Century City | West Los Angeles | 2 | 866,039 | 94.0 | 26,193,312 | 32.89 | |||||||||
Santa Monica | West Los Angeles | 7 | 860,083 | 98.2 | 34,865,364 | 42.64 | |||||||||
Beverly Hills | West Los Angeles | 4 | 571,869 | 96.7 | 19,878,084 | 37.11 | |||||||||
Westwood (6) | West Los Angeles | 2 | 396,729 | 93.5 | 11,892,240 | 33.60 | |||||||||
Sherman Oaks/Encino | San Fernando Valley | 9 | 2,878,769 | 97.2 | 73,407,840 | 27.43 | |||||||||
Warner Center/Woodland Hills (7) | San Fernando Valley | 2 | 2,567,808 | 81.3 | 53,716,296 | 26.35 | |||||||||
Burbank | Tri-Cities | 1 | 420,949 | 100.0 | 13,360,921 | 31.74 | |||||||||
Honolulu | Honolulu | 2 | 678,940 | 90.8 | 16,199,293 | 30.09 | |||||||||
|
|
|
|
|
|||||||||||
Total/Weighted Average | 46 | 11,554,216 | 92.1 | % | $ | 314,309,630 | $ | 30.74 | |||||||
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|
Multifamily
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Submarket
|
Market
|
Number of
Properties |
Number
of Units |
Percent
Leased |
Annualized
Rent (8) |
Monthly
Rent Per Leased Unit |
||||||||
Brentwood | West Los Angeles | 5 | 950 | 99.2 | % | $21,318,295 | $ | 1,886 | ||||||
Santa Monica (9) | West Los Angeles | 2 | 820 | 99.6 | 17,813,572 | 1,817 | ||||||||
Honolulu | Honolulu | 2 | 1,098 | 99.1 | 17,170,845 | 1,315 | ||||||||
|
|
|
|
|
||||||||||
Total/Weighted Average | 9 | 2,868 | 99.3 | % | $56,302,712 | $ | 1,648 | |||||||
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|
We are a full-service real estate company with substantial expertise in asset management, property management, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing. Our senior management has been in the commercial real estate industry for an average of approximately 27 years, and has worked at Douglas Emmett or its related entities for an average of over 18 years, focusing primarily on our core markets. As of March 31, 2006, we had approximately 400 employees. Our central operations are located at our corporate headquarters in Santa Monica,
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California. As a result of our established infrastructure, we believe that we have the capability to increase the number of properties we own and manage without significant proportionate increases in overhead costs. We intend to qualify as a REIT for federal income tax purposes for the taxable year ending December 31, 2006.
History
Overview
We were formed to continue and expand the operations of DERA, DECO and PLE and their predecessors formed by Dan A. Emmett and partners from 1971 to 1991, which we refer to collectively as our historical operating companies. These companies have been acquiring, investing in, managing, leasing and developing real estate since their inception. While the early focus of our historical operating companies was on multifamily properties, over 20 years ago they expanded their activities to include acquisition and management of office properties and complementary retail space. Our predecessor principals, Dan A. Emmett, Chris Anderson, Jordan Kaplan and Kenneth M. Panzer, have been working together since the mid-1980s and in 1991 acquired the interests in DECO not already owned by them. Today, DECO's primary function is to provide property management and leasing services to our portfolio. DERA was formed in 1991 by our predecessor principals, commenced operation in 1993 and has been the primary vehicle through which we have acquired the substantial majority of our portfolio. DERA has served as the operating partner for each of the nine institutional funds to be acquired by us in the formation transactions since their respective dates of inception. PLE was founded by our predecessor principals in 1991 and commenced operations shortly thereafter. PLE has acted in the capacity of general contractor for tenant improvement projects, seismic retrofits, and common-area renovations for our properties.
Through the growth and development of our historical operating companies, we believe that we have established a superior acquisition, financing, leasing, property management and development platform and infrastructure. Since 1993, we have successfully expanded into the nine Los Angeles County submarkets in which we currently operate as well as more recently into the Honolulu, Hawaii market. Since that time, we have conducted all of our own management, leasing, and development activities, with few exceptions. Under the direction of our predecessor principals and our senior management team, our historical operating companies acquired and financed our existing portfolio, managed the nine institutional funds and raised over $1.5 billion in equity capital primarily from university endowments, foundations, pension plans, banks, other institutional investors and high net worth individuals.
DERA has been the general partner and asset manager of each of the nine institutional funds throughout their history. Our historical operating companies have been responsible for all acquisition, disposition, asset management, property management, leasing, and development/redevelopment activities for the institutional funds. Each of these funds will have achieved an internal rate of return, or IRR, in excess of 20% since its respective date of inception, assuming completion of the formation transactions. The activities of the institutional funds have comprised all of the investment activity of DERA since its inception.
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Our Competitive Strengths
We believe that we distinguish ourselves from other owners and operators of office and multifamily properties through the following competitive strengths:
Los Angeles County Class-A Office Rents and Occupancy
(As of March 31, 2006)
|
Douglas Emmett
Submarkets (1) |
Non-Douglas
Emmett Submarkets (2) |
Difference
|
||||||
---|---|---|---|---|---|---|---|---|---|
Asking Rents | $ | 30.74 | $ | 28.11 | $ | 2.63 | |||
Occupancy | 92.9 | % | 92.9 | % | |
Source: CB Richard Ellis.
We believe that we have not only selected premier submarkets within Los Angeles County, but have also aggressively sought and acquired premier assets within each of our submarkets. We seek to acquire properties that will command premium rental rates and maintain higher occupancy levels than other Class-A properties in our submarkets. As shown in the table below, as of March 31, 2006, the weighted average asking rental rates in our Los Angeles County portfolio were at an 8.2% premium to the weighted average asking rental rates for Class-A properties in our Los Angeles County submarkets. Excluding the Warner Center/Woodland Hills submarket, where we acquired properties with significant vacancies in recent years, our occupancy rate was 95.5%, which occupancy rate reflects a 2.0 percentage point premium to our submarkets (including the Warner Center/Woodland Hills submarket, the occupancy rate reflects a 0.7 percentage point discount).
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Douglas Emmett and Los Angeles County
Class-A Office Rents and Occupancy
(As of March 31, 2006)
|
Douglas Emmett
Portfolio |
Douglas Emmett
Submarkets |
Difference
|
|||||
---|---|---|---|---|---|---|---|---|
Asking Rents | $ | 33.26 | $ | 30.74 | $2.52 | |||
Occupancy (1) | 92.2 | % | 92.9 | % | (0.7) percentage points | |||
Occupancy Excluding Warner Center/Woodland Hills Submarket (1) | 95.5 | % | 93.5 | % | 2.0 percentage points |
Source: CB Richard Ellis (other than Douglas Emmett data).
The table below illustrates the average asking rental rates and occupancy rates of our two office properties in Honolulu, Hawaii as compared to the Honolulu CBD as a whole, as of March 31, 2006.
Douglas Emmett and Honolulu CBD
Office Rents and Occupancy
(As of March 31, 2006)
|
Douglas Emmett
Portfolio |
Honolulu
CBD |
Difference
|
|||||
---|---|---|---|---|---|---|---|---|
Asking Rents (1) | $ | 30.18 | $ | 30.24 | $(0.06) | |||
Occupancy (2) | 90.8 | % | 91.4 | % | (0.6) percentage points |
Source: CB Richard Ellis (other than Douglas Emmett data).
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Douglas Emmett Class-A Submarket Office Concentration
(As of March 31, 2006)
Submarket
|
Douglas Emmett
Rentable Square Feet (1) |
Submarket
Rentable Square Feet (2) |
Douglas Emmett
Market Share |
||||
---|---|---|---|---|---|---|---|
Brentwood | 1,390,625 | 3,331,731 | 41.7 | % | |||
Olympic Corridor | 922,405 | 2,327,630 | 39.6 | ||||
Century City | 866,039 | 9,574,342 | 9.0 | ||||
Santa Monica | 860,083 | 7,619,589 | 11.3 | ||||
Beverly Hills | 571,869 | 6,462,922 | 8.8 | ||||
Westwood | 396,729 | 3,365,978 | 11.8 | ||||
Sherman Oaks/Encino | 2,878,769 | 5,721,621 | 50.3 | ||||
Warner Center/Woodland Hills | 2,567,808 | 6,392,299 | 40.2 | ||||
Burbank | 420,949 | 5,764,318 | 7.3 | ||||
|
|
|
|||||
Subtotal/Weighted Average Los Angeles County | 10,875,276 | 50,560,430 | 21.5 | % | |||
Honolulu CBD | 678,940 | 5,140,907 | 13.2 | ||||
|
|
|
|||||
Total/Weighted Average | 11,554,216 | 55,701,337 | 20.7 | % | |||
|
|
|
Source: CB Richard Ellis (other than Douglas Emmett data).
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and were currently 99.4% leased, compared to average asking rental rates of $1,897 per unit per month and occupancy of 98.0% for the West Los Angeles multifamily market as a whole, for an asking rental rate premium of 28.4% and an occupancy premium of 1.4 percentage points.
Los Angeles County Multifamily Rent and Occupancy
(As of March 31, 2006)
|
Douglas Emmett
Portfolio |
West Los Angeles
Market |
Los Angeles
County |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Asking Rents (per unit/month) | $ | 2,435 | $ | 1,897 | $ | 1,440 | ||||
Occupancy | 99.4 | % | 98.0 | % | 97.3 | % |
Source: M/PF Research (other than Douglas Emmett data).
The table below illustrates the average asking rental rates and occupancy levels of our two multifamily properties in Honolulu, Hawaii as compared to Honolulu as a whole, as of March 31, 2006.
Honolulu Multifamily Rent and Occupancy
(As of March 31, 2006)
|
Douglas Emmett
Portfolio |
Honolulu
|
|||||
---|---|---|---|---|---|---|---|
Asking Rents (per unit/month) | $ | 1,546 | (1) | $ | 1,272 | ||
Occupancy | 99.1 | % | 94.9 | % |
Source: Property & Portfolio Research (other than Douglas Emmett data).
(1) Excludes the income-restricted units in our portfolio.
The high barriers to entry in our markets translate into significant embedded rent growth when comparing existing contractual rents to current market asking rents within both our office and multifamily portfolios. As shown in the table below, as of March 31, 2006, the average current asking rents in our Los Angeles County office portfolio represented a 8.1% premium to our average in-place rents, and the average current asking rents in our West Los Angeles multifamily portfolio represented a 31.3% premium to our average in-place rents, due largely to rent control laws, which now allow landlords to increase rents to market rates as tenants vacate.
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Los Angeles County Office and Multifamily Rents
(As of March 31, 2006)
|
Douglas Emmett
Portfolio Asking Rents |
Douglas Emmett
Submarkets Asking Rents |
Douglas Emmett
In-Place Rents |
Douglas Emmett
Asking vs. In-Place Rents |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Office | $ | 33.26 | $ | 30.74 | $ | 30.77 | 8.1 | % | ||||
Multifamily (per unit/month) (1) | $ | 2,435 | $ | 1,897 | $ | 1,854 | 31.3 | % |
Source: CB Richard Ellis and M/PF Research (other than Douglas Emmett data).
Additionally, we believe that we have an opportunity to experience significant rental revenue growth in our Los Angeles County multifamily portfolio as units affected by rent control restrictions are re-leased at market rates, as permitted under Santa Monica and Los Angeles rent control laws. As of March 31, 2006, approximately 357 units, or 45% of our Santa Monica multifamily units, were under leases signed prior to a 1999 change in California state law that allows landlords to reset rents in rent-controlled units to market rates when a tenant moves out. These units had an average discount to our asking rents of $1,940 per unit. Over the past three years, an average of 35 of these rent-controlled units in our portfolio rolled over to market rents each year. Accordingly, we believe that we will realize significant future rent growth as we re-tenant these properties at market rates over time.
As shown in the table below, as of March 31, 2006, the average current asking rents in our Honolulu office portfolio represented a 0.3% premium to our average in-place rents, and the average current asking rents in our Honolulu multifamily portfolio represented a 5.6% premium to our average in-place rents, excluding income-restricted units.
Honolulu Office and Multifamily Rents
(As of March 31, 2006)
|
Douglas Emmett
Portfolio Asking Rents |
Honolulu
Asking Rents |
Douglas Emmett
In-Place Rents |
Douglas Emmett
Asking vs. In-Place Rents |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Office (1) | $ | 30.18 | $ | 30.24 | $ | 30.09 | 0.3 | % | ||||
Multifamily (per unit/month) | $ | 1,546 | (2) | $ | 1,272 | $ | 1,464 | (2) | 5.6 | % |
Source: CB Richard Ellis and Portfolio & Property Research (other than Douglas Emmett data).
We also believe that we are well positioned to achieve internal growth through lease-up of existing vacant space in our portfolio. For example, our Warner Center Towers, Trillium and Bishop Place properties were 84.9%, 71.1% and 89.1% leased, respectively as of March 31, 2006. Upon completion of our repositioning efforts, we expect that we will be able to significantly increase occupancy at these properties. These properties represent approximately 26.3% of our office portfolio, based on rentable square feet.
We also have embedded rental revenue growth in our existing leases. Our leases have typically contained fixed annual rental rate increases on average of 3.0%. According to Eastdil Secured, Class-A office rents in our Los Angeles County submarkets are expected to grow 9.8%
94
in each of 2006 and 2007, with a five-year forecasted annual rental growth from 2006 to 2010 of 6.9%. With improving economic conditions in our submarkets, we have been able to increase these contractual escalations with our recent leasing activity to 4.0% for most of our leases since January 1, 2006.
95
Business and Growth Strategies
Our primary business objective is to enhance stockholder value by increasing cash flow from operations. The strategies we intend to execute to achieve this goal include:
Sherman Oaks Galleria
In 1997, in an off-market transaction, we acquired the Sherman Oaks Galleria, which at the time was an underutilized and obsolete regional mall and office tower located in the Sherman Oaks/Encino submarket, for $51.0 million. Thereafter, we began a $150 million redevelopment and repositioning of the property, which was completed in 2002. As a result of our redevelopment, we believe this project now reflects the highest and best use for this site. During the course of this redevelopment, we demolished a large portion of the mall and built a four-story structure containing lifestyle amenity retail uses as well as a new retail promenade. The balance of the mall space was converted to office space, and we also reconstructed an office building on the site. Additionally, the existing office tower was renovated to provide a new lobby with direct access to the retail promenade. As a result of this redevelopment, we transformed the property into a one million square foot, integrated mixed-use project, primarily consisting of office space enhanced by a high level of retail amenities. We believe that the redeveloped Sherman Oaks Galleria supports and enhances the value of our other eight office properties in the Sherman Oaks/Encino submarket. At the time of our acquisition in 1997, the Galleria had an occupancy of 78.3% and an average rental rate of $14.65 per square foot, increasing to an occupancy of 99.0% and an average rental rate of $29.16 per square foot as of March 31, 2006.
96
9601 Wilshire
In December 2001, in an off-market transaction, we acquired ownership of both the fee estate (subject to a ground lease) in, and the leasehold mortgage covering 9601 Wilshire Boulevard, which is located in the Beverly Hills submarket, for a total consideration of $71.0 million. Concurrently with our acquisition of the fee estate, we entered into a management and other agreements with the ground lease tenant pursuant to which we gained control of the property. At that time, the ground floor of the building was dominated by a large obsolete bank branch space which, although leased, was entirely vacant with the lease nearing expiration. We re-leased this space to a high-end health club operator and restaurant and leased much of the balance of the ground floor to other upscale retail tenants. The major office tenant in the building was a law firm which had been in the building for many years and was utilizing only a small portion of its space and was paying below-market rent. We negotiated the recapture of the office premises, completed a major lobby renovation at a cost of $2.0 million and re-leased the space to multiple small tenant users and a prominent entertainment agency. In January, 2006, we obtained title to the tenant position under the ground lease, and we now own title to all of the ownership interests in the property. This marked the completion of our repositioning process for the project. Through our repositioning efforts, we have created a property with the tenant mix and amenities that is most appropriate for the "Golden Triangle" area of Beverly Hills. As of December 31, 2001, occupancy was 96.0% (and occupancy was anticipated to drop to approximately 70% within several months), and the average rental rate was $29.75 per square foot. As of March 31, 2006, occupancy at 9601 Wilshire was 96.2% and the average rental rate was $36.76 per square foot.
Harbor Court
In August 2004, we acquired the leasehold interest in the Harbor Court office project for $27.2 million. In December 2004, we assisted our local Honolulu partner in acquiring the fee interest in the Harbor Court office project from the City and County Honolulu. In connection with this transaction, we negotiated a ten-year, $27.5 million fixed-price purchase option (equal to the amount of debt on the property) for the fee interest and reduced our annual leasehold rent by $93,994. We spent $1.4 million to reposition this property by converting some full-tenant floors to multi-tenant use, which is more consistent with tenant demands in the Honolulu CBD. When we acquired Harbor Court, the building occupancy was 68% and, as a result of our repositioning efforts, as of March 31, 2006, the building occupancy was 94.5% and average rental rates were $29.74 per square foot.
Other Repositioning Projects
We are currently in the process of completing the repositioning of Warner Center Towers and the Trillium. Additionally, we have completed extensive redevelopment projects at our three largest West Los Angeles multifamily projects, Barrington Plaza, The Shores and Pacific Plaza, and have completed additional development properties at several projects including a multi-story garage and retail structure adjacent to our 100 Wilshire Boulevard office property located in Santa Monica and a new retail building adjacent to our Valley Office Plaza building located in Sherman Oaks.
97
as of March 31, 2006 we managed 1,759 existing leases across our portfolio. We strive for cost effectiveness and energy efficiency in our properties. For example, we expended approximately $4.0 million on energy retrofits during 2000 to 2001, resulting in approximately $2.5 million annual recurring energy savings. Furthermore, we were among the initial group of companies designated as Energy Star Leaders by the United States Environmental Protection Agency. In addition, our submarket concentration allows our senior management team to efficiently access our property management and leasing executives to address any potential issues that may arise in our portfolio. Our corporate headquarters in Santa Monica is located within short driving distance of all of our Los Angeles County portfolio. Our submarket concentration also allows us to realize significant operating efficiencies in managing and leasing our portfolio.
98
Existing Portfolio
Our existing portfolio is located in the Brentwood, Olympic Corridor, Century City, Beverly Hills, Santa Monica, Westwood, Sherman Oaks/Encino, Warner Center/Woodland Hills and Burbank submarkets of Los Angeles County, California, and in Honolulu, Hawaii. Presented below is an overview of our existing portfolio as of March 31, 2006:
Office Properties
|
Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Rentable Square
Feet (1) |
Percent
Leased (2) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
West Los Angeles | |||||||||||||
Brentwood | |||||||||||||
Landmark II (3) | 2 | 100 | % | 1989 | 412,944 | 92.7 | % | ||||||
12400 Wilshire | 1 | 100 | 1985 | 235,808 | 93.8 | ||||||||
Gateway Los Angeles | 1 | 100 | 1987 | 147,815 | 100.0 | ||||||||
11777 San Vicente | 1 | 100 | 1974/1998 | 96,872 | 98.8 | ||||||||
Brentwood Executive Plaza | 1 | 100 | 1983/1996 | 89,660 | 95.1 | ||||||||
Brentwood Medical Plaza | 1 | 100 | 1975/2002 | 84,334 | 98.9 | ||||||||
Coral Plaza | 1 | 100 | 1981 | 71,801 | 100.0 | ||||||||
Brentwood/Saltair | 1 | 100 | 1986 | 57,344 | 70.9 | ||||||||
Saltair/San Vicente | 1 | 100 | 1964/1992 | 54,244 | 91.0 | ||||||||
Brentwood San Vicente Medical | 1 | 100 | 1957-1988/1989 | 46,466 | 100.0 | ||||||||
San Vicente Plaza (3) | 1 | 100 | 1985 | 34,546 | 95.1 | ||||||||
Barrington Plaza Commercial (3) | 1 | 100 | 1963 | 33,580 | 96.4 | ||||||||
Brentwood Court | 1 | 100 | 1985 | 25,211 | 91.4 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 14 | 1,390,625 | 94.4 | % | |||||||||
Olympic Corridor |
|
|
|
|
|
|
|
|
|
|
|
||
Westside Towers | 2 | 100 | 1985 | 411,078 | 87.9 | ||||||||
Executive Tower | 1 | 100 | 1989 | 240,331 | 87.5 | ||||||||
Olympic Center | 1 | 100 | 1985/1996 | 160,094 | 93.7 | ||||||||
Bundy/Olympic | 1 | 100 | 1991 | 110,902 | 90.2 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 5 | 922,405 | 89.1 | % | |||||||||
Century City |
|
|
|
|
|
|
|
|
|
|
|
||
1901 Avenue of the Stars | 1 | 100 | 1968/2001 | 492,139 | 94.5 | ||||||||
Century Park Plaza | 1 | 100 | 1972/1987 | 373,900 | 93.4 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 2 | 866,039 | 94.0 | % | |||||||||
Santa Monica |
|
|
|
|
|
|
|
|
|
|
|
||
100 Wilshire | 2 | 100 | 1968/2002 | 256,962 | 99.4 | ||||||||
First Federal Square | 1 | 100 | 1981/2000 | 221,181 | 100.0 | ||||||||
Palisades Promenade | 1 | 100 | 1990 | 98,606 | 100.0 | ||||||||
Second Street Plaza | 1 | 100 | 1991 | 80,766 | 100.0 | ||||||||
Santa Monica Square | 1 | 100 | 1983/2004 | 77,375 | 100.0 | ||||||||
Lincoln/Wilshire | 1 | 100 | 1996 | 76,757 | 82.2 | ||||||||
Verona | 1 | 100 | 1991 | 48,436 | 100.0 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 8 | 860,083 | 98.2 | % | |||||||||
99
Beverly Hills |
|
|
|
|
|
|
|
|
|
|
|
||
9601 Wilshire | 1 | 100 | % | 1962/2004 | 301,849 | 96.2 | % | ||||||
Beverly Hills Medical Center | 1 | 100 | 1964/2004 | 104,462 | 97.3 | ||||||||
Village on Canon | 1 | 100 | 1989/1995 | 101,004 | 95.3 | ||||||||
Camden Medical Arts | 1 | 100 | 1972/1992 | 64,554 | 100.0 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 4 | 571,869 | 96.7 | % | |||||||||
Westwood |
|
|
|
|
|
|
|
|
|
|
|
||
One Westwood (4)(5) | 1 | 100 | 1987/2004 | 201,921 | 95.0 | ||||||||
Westwood Place | 1 | 100 | 1987 | 194,808 | 92.0 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 2 | 396,729 | 93.5 | % | |||||||||
San Fernando Valley |
|
|
|
|
|
|
|
|
|
|
|
||
Sherman Oaks/Encino |
|
|
|
|
|
|
|
|
|
|
|
||
Sherman Oaks Galleria | 3 | 100 | 1981/2002 | 1,002,561 | 99.0 | ||||||||
Encino Terrace | 1 | 100 | 1986 | 418,344 | 94.0 | ||||||||
Valley Executive Tower | 1 | 100 | 1984 | 387,840 | 95.6 | ||||||||
Encino Gateway | 1 | 100 | 1975/1998 | 288,203 | 98.3 | ||||||||
Valley Office Plaza | 3 | 100 | 1966/2002 | 197,740 | 98.2 | ||||||||
Encino Plaza | 1 | 100 | 1971/1992 | 192,502 | 100.0 | ||||||||
Tower at Sherman Oaks | 1 | 100 | 1967/1991 | 164,310 | 98.0 | ||||||||
MB Plaza | 1 | 100 | 1971/1996 | 163,774 | 94.2 | ||||||||
Columbus Center | 1 | 100 | 1987 | 63,495 | 87.5 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 13 | 2,878,769 | 97.2 | % | |||||||||
Warner Center/Woodland Hills |
|
|
|
|
|
|
|
|
|
|
|
||
Warner Center Towers (6) | 7 | 100 | 1982-1993/2004 | 1,907,160 | 84.9 | ||||||||
The Trillium | 4 | 100 | 1988 | 660,648 | 71.1 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 11 | 2,567,808 | 81.3 | % | |||||||||
Tri-Cities |
|
|
|
|
|
|
|
|
|
|
|
||
Burbank |
|
|
|
|
|
|
|
|
|
|
|
||
Studio Plaza (7) | 1 | 100 | 1988/2004 | 420,949 | 100.0 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 1 | 420,949 | 100.0 | % | |||||||||
Honolulu |
|
|
|
|
|
|
|
|
|
|
|
||
Bishop Place (8) | 2 | 100 | 1992 | 472,172 | 89.1 | ||||||||
Harbor Court (9) | 1 | 100 | 1994 | 206,768 | 94.5 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 3 | 678,940 | 90.8 | % | |||||||||
|
|
|
|||||||||||
Portfolio Total/Weighted Average | 63 | 11,554,216 | 92.1 | % | |||||||||
|
|
|
100
Multifamily Properties
|
Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Number of
Units |
Percent
Leased |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
West Los Angeles | |||||||||||||
Brentwood | |||||||||||||
Barrington Plaza | 3 | 100 | % | 1963/1998 | 712 | 99.3 | % | ||||||
555 Barrington | 1 | 100 | 1989 | 111 | 97.3 | ||||||||
Barrington Kiowa | 1 | 100 | 1974/1989 | 55 | 100.0 | ||||||||
Barry | 1 | 100 | 1973/1989 | 53 | 100.0 | ||||||||
Kiowa | 1 | 100 | 1972/1989 | 19 | 100.0 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 7 | 950 | 99.2 | % | |||||||||
Santa Monica |
|
|
|
|
|
|
|
|
|
|
|
||
The Shores (1) | 2 | 100 | 1965-1967/2002 | 532 | 99.8 | ||||||||
Pacific Plaza (2) | 1 | 100 | 1963/1998 | 288 | 99.3 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 3 | 820 | 99.6 | % | |||||||||
Honolulu |
|
|
|
|
|
|
|
|
|
|
|
||
Moanalua Hillside Apartments | 25 | 100 | 1968/2004 | 696 | 98.7 | ||||||||
Villas at Royal Kunia | 65 | 100 | 1990-1994 | 402 | 99.8 | ||||||||
|
|
|
|||||||||||
Subtotal/Weighted Average | 90 | 1,098 | 99.1 | % | |||||||||
|
|
|
|||||||||||
Portfolio Total/Weighted Average |
|
100 |
|
|
|
|
|
2,868 |
|
99.3 |
% |
||
|
|
|
101
Tenant Diversification
Our office portfolio is currently leased to more than 1,600 tenants in a variety of industries, including entertainment, real estate, technology, legal and financial services. Our two largest tenants represent 7.0% and 1.5% of our annualized base rent, respectively.
The following table sets forth information regarding the 10 largest tenants in our office portfolio based on annualized rent as of March 31, 2006:
Tenant
|
Number of
Leases |
Number of
Properties |
Lease
Expiration (1) |
Total Leased
Square Feet |
Percent of Rentable
Square Feet |
Annualized
Rent (2) |
Percent of
Annualized Rent |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Time Warner | 6 | 5 | 20062019 | 686,466 | 5.9 | % | $ | 21,973,525 | 7.0 | % | |||||||
AIG SunAmerica | 1 | 1 | 2013 | 169,739 | 1.5 | 4,849,548 | 1.5 | ||||||||||
Blue Shield of California | 1 | 1 | 2009 | 135,106 | 1.2 | 3,809,976 | 1.2 | ||||||||||
Metrocities Mortgage, LLC | 4 | 2 | 20102015 | 138,040 | 1.2 | 3,714,732 | 1.2 | ||||||||||
Rubin Postaer & Associates | 1 | 1 | 2007 | 80,766 | 0.7 | 3,604,668 | 1.1 | ||||||||||
The Endeavor Agency, LLC | 1 | 1 | 2019 | 86,233 | 0.7 | 3,402,996 | 1.1 | ||||||||||
Pacific Theatres Exhibition Corp (3) | 1 | 1 | 2016 | 88,300 | 0.8 | 3,130,236 | 1.0 | ||||||||||
First Federal Bank | 1 | 1 | 2008 | 80,388 | 0.7 | 2,829,756 | 0.9 | ||||||||||
Premiere Radio Networks, Inc. | 3 | 2 | 20072016 | 94,792 | 0.8 | 2,796,864 | 0.9 | ||||||||||
Bryan Cave, LLP | 1 | 1 | 2016 | 65,169 | 0.6 | 2,617,992 | 0.8 | ||||||||||
|
|
|
|
|
|
||||||||||||
Total | 20 | 16 | 1,624,999 | 14.1 | % | $ | 52,730,293 | 16.8 | % | ||||||||
|
|
|
|
|
|
102
Industry Diversification
The following table sets forth information relating to tenant diversification by industry in our office portfolio based on annualized rent as of March 31, 2006:
Industry
|
Number of
Leases |
Leases as a
Percent of Total |
Rentable Square
Feet (1) |
Square Feet
as a Percent of Total |
Annualized
Rent (2) |
Annualized
Rent as a Percent of Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Available (3) | | | 913,434 | 7.9 | % | | | |||||||
Financial Services | 295 | 16.8 | % | 1,773,855 | 15.4 | $56,019,739 | 17.8 | % | ||||||
Legal | 286 | 16.3 | 1,548,875 | 13.4 | 48,701,820 | 15.5 | ||||||||
Entertainment | 99 | 5.6 | 1,197,438 | 10.4 | 37,939,501 | 12.1 | ||||||||
Real Estate | 160 | 9.1 | 935,739 | 8.1 | 29,527,889 | 9.4 | ||||||||
Health Services | 259 | 14.7 | 853,050 | 7.4 | 26,492,568 | 8.4 | ||||||||
Other | 215 | 12.2 | 856,321 | 7.4 | 25,864,308 | 8.2 | ||||||||
Insurance | 72 | 4.1 | 898,607 | 7.8 | 24,418,380 | 7.8 | ||||||||
Retail | 138 | 7.8 | 720,437 | 6.2 | 20,992,176 | 6.7 | ||||||||
Accounting | 107 | 6.1 | 692,234 | 6.0 | 20,581,152 | 6.5 | ||||||||
Advertising | 58 | 3.3 | 399,338 | 3.5 | 13,661,112 | 4.3 | ||||||||
Technology | 70 | 4.0 | 349,810 | 3.0 | 10,110,984 | 3.2 | ||||||||
BOMA Adjustment (4) | | | 354,687 | 3.1 | | | ||||||||
Building Management Use | | | 60,391 | 0.5 | | | ||||||||
|
|
|
|
|
|
|||||||||
Total/Weighted Average | 1,759 | 100.0 | % | 11,554,216 | 100.0 | % | $ | 314,309,630 | 100.0 | % | ||||
|
|
|
|
|
|
103
Lease Distribution
The following table sets forth information relating to the distribution of leases in our office portfolio, based on rentable square feet leased as of March 31, 2006:
Square Feet Under Lease
|
Number
of Leases |
Leases as a
Percent of Total |
Rentable Square
Feet (1) |
Square Feet
as a Percent of Total |
Annualized
Rent (2) |
Annualized
Rent as a Percent of Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Available (3) | | | 913,434 | 7.9 | % | | | |||||||
2,500 or less | 884 | 50.3 | % | 1,192,863 | 10.3 | $37,156,999 | 11.8 | % | ||||||
2,501-10,000 | 642 | 36.5 | 3,112,743 | 26.9 | 94,648,037 | 30.1 | ||||||||
10,001-20,000 | 153 | 8.7 | 2,102,968 | 18.2 | 64,543,740 | 20.5 | ||||||||
20,001-40,000 | 51 | 2.9 | 1,378,769 | 11.9 | 41,893,404 | 13.3 | ||||||||
40,001-100,000 | 24 | 1.4 | 1,447,077 | 12.5 | 47,028,780 | 15.0 | ||||||||
Greater than 100,000 | 5 | 0.3 | 991,284 | 8.6 | 29,038,669 | 9.2 | ||||||||
BOMA Adjustment (4) | | | 354,687 | 3.1 | | | ||||||||
Building Management Use | | | 60,391 | 0.5 | | | ||||||||
|
|
|
|
|
|
|||||||||
Portfolio Total/Weighted Average | 1,759 | 100.0 | % | 11,554,216 | 100.0 | % | $ | 314,309,630 | 100.0 | % | ||||
|
|
|
|
|
|
104
Lease Expirations
The following table sets forth a summary schedule of lease expirations for leases in place as of March 31, 2006, plus available space, for each of the ten full and partial calendar years beginning March 31, 2006 in our office portfolio. Unless otherwise stated in the footnotes, the information set forth in the table assumes that tenants exercise no renewal options and no early termination rights.
Year of Lease Expiration
|
Number of
Leases Expiring |
Rentable
Square Feet (1) |
Expiring
Square Feet as a Percent of Total |
Annualized
Rent (2) |
Annualized
Rent as a Percent of Total |
Annualized
Rent Per Leased Square Foot (3) |
Annualized
Rent Per Leased Square Foot at Expiration (4) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Available (5) | | 913,434 | 7.9 | % | | | | | |||||||||
2006 | 308 | 1,187,006 | 10.3 | $37,208,784 | 11.8 | % | $ | 31.35 | $ | 31.93 | |||||||
2007 | 320 | 1,328,829 | 11.5 | 42,483,948 | 13.5 | 31.97 | 33.30 | ||||||||||
2008 | 353 | 1,535,572 | 13.3 | 46,097,563 | 14.7 | 30.02 | 31.63 | ||||||||||
2009 | 266 | 1,274,106 | 11.0 | 38,273,784 | 12.2 | 30.04 | 32.67 | ||||||||||
2010 | 242 | 1,313,397 | 11.4 | 41,997,641 | 13.4 | 31.98 | 35.68 | ||||||||||
2011 | 101 | 769,467 | 6.7 | 23,748,984 | 7.6 | 30.86 | 35.51 | ||||||||||
2012 | 54 | 448,989 | 3.9 | 13,099,692 | 4.2 | 29.18 | 34.59 | ||||||||||
2013 | 38 | 612,961 | 5.3 | 18,207,924 | 5.8 | 29.70 | 35.35 | ||||||||||
2014 | 30 | 375,101 | 3.2 | 10,072,584 | 3.2 | 26.85 | 33.15 | ||||||||||
2015 | 28 | 257,747 | 2.2 | 7,479,864 | 2.4 | 29.02 | 35.52 | ||||||||||
Thereafter | 19 | 1,122,529 | 9.7 | 35,638,861 | 11.3 | 31.75 | 41.11 | ||||||||||
BOMA Adjustment (6) | | 354,687 | 3.1 | | | | | ||||||||||
Building Management Use | | 60,391 | 0.5 | | | | | ||||||||||
|
|
|
|
|
|
|
|||||||||||
Portfolio Total/Weighted Average | 1,759 | 11,554,216 | 100.0 | % | $ | 314,309,630 | 100.0 | % | $ | 30.74 | $ | 34.37 | |||||
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105
Historical Tenant Improvements and Leasing Commissions
The following table sets forth certain historical information regarding tenant improvement and leasing commission costs for tenants at the properties in our office portfolio through March 31, 2006:
|
Year Ended December 31,
|
|
Weighted
Average 2003 to March 31, 2006 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
Three Months
Ended March 31, 2006 |
||||||||||
|
2003
|
2004
(1)
|
2005
(2)
|
||||||||
Renewals (3) | |||||||||||
Number of leases | 187 | 249 | 253 | 56 | 229 | ||||||
Square Feet | 747,053 | 1,553,804 | 1,151,775 | 153,636 | 1,109,621 | ||||||
Tenant improvement costs per square foot (4) | $9.30 | $22.02 | $12.48 | $7.07 | $15.70 | ||||||
Leasing commission costs per square foot (4) | 7.19 | 8.96 | 7.59 | 6.84 | 8.07 | ||||||
Total tenant improvement and leasing commission costs per square foot (4) | 16.49 | 30.98 | 20.07 | 13.91 | 23.77 | ||||||
New leases (5) |
|
|
|
|
|
|
|
|
|
|
|
Number of leases | 152 | 184 | 216 | 54 | 186 | ||||||
Square Feet | 638,121 | 816,852 | 850,704 | 203,402 | 772,024 | ||||||
Tenant improvement costs per square foot (4) | $22.39 | $27.37 | $16.31 | $13.73 | $21.25 | ||||||
Leasing commission costs per square foot (4) | 8.47 | 9.49 | 7.80 | 8.48 | 8.58 | ||||||
Total tenant improvement and leasing commission costs per square foot (4) | 30.86 | 36.86 | 24.11 | 22.21 | 29.82 | ||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
Number of leases | 339 | 433 | 469 | 110 | 416 | ||||||
Square Feet | 1,385,174 | 2,370,656 | 2,002,479 | 357,038 | 1,881,645 | ||||||
Tenant improvement costs per square foot (4) | $15.33 | $23.86 | $14.11 | $10.86 | $17.98 | ||||||
Leasing commission costs per square foot (4) | 7.78 | 9.14 | 7.68 | 7.77 | 8.27 | ||||||
Total tenant improvement and leasing commission costs per square foot (4) | 23.11 | 33.01 | 21.79 | 18.64 | 26.25 |
Historical Capital Expenditures
Our recurring capital expenditures have traditionally been low as a result of our comprehensive repair and maintenance programs. The costs associated with our repair and maintenance programs are
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expensed and therefore not reflected in the chart below. For the year 2006, we expect non-recurring capital expenditures at the properties in our office portfolio (excluding the cost of tenant improvements) to be approximately $6.0 million ($0.52 per rentable square foot).
|
Office
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31,
|
|
Weighted
Average 2003 to March 31, 2006 |
|||||||||||
|
Three Months
Ended March 31, 2006 |
|||||||||||||
|
2003
|
2004
(1)
(2)
|
2005
(2)
(3)
|
|||||||||||
Recurring capital expenditures | $ | 2,152,794 | $ | 1,811,982 | $ | 2,667,883 | $ | 1,170,151 | ||||||
Total square feet | 10,110,166 | 10,893,568 | 11,554,216 | 11,554,216 | ||||||||||
Recurring capital expenditure per square foot | $0.21 | $0.17 | $0.23 | $0.10 | $0.22 |
The following table sets forth certain information regarding historical recurring capital expenditures at the properties in our multifamily portfolio through March 31, 2006.
Our multifamily portfolio contains a large number of units that, due to Santa Monica rent control laws, have had only insignificant rent increases since 1979. Historically, when a tenant has vacated one of these units, we have spent between $15,000 and $30,000 per unit, depending on apartment size, to bring the unit up to our standards. We have characterized these expenditures as non-recurring capital expenditures. As of March 31, 2006, there were 357 of these units in our portfolio and we expect to incur approximately $0.7 million in non-recurring capital expenditures for these units during 2006. Our make-ready costs associated with the turnover of our other units are expensed and not included in recurring capital expenditures. In addition, given the substantial recent unit renovations of many of our units as described above and due to the superior locations and quality of our multifamily properties, our portfolio has experienced a relatively low turnover rate, resulting in relatively low turnover costs. We believe these factors have lead to limited recurring capital expenses in our multifamily portfolio over the periods presented. For the year 2006, we expect non-recurring capital expenditures at the properties in our multifamily portfolio to be approximately $1.0 million ($359/unit).
|
Multifamily
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31,
|
|
Weighted
Average 2003 to March 31, 2006 |
|||||||||||
|
Three Months
Ended 3/31/2006 (3) |
|||||||||||||
|
2003
|
2004
|
2005
(1)
(2)
|
|||||||||||
Recurring capital expenditure | $ | 145,470 | $ | 490,516 | $ | 451,393 | $ | 177,500 | ||||||
Total Units | 1,770 | 1,770 | 2,466 | 2,868 | ||||||||||
Recurring capital expenditure per unit | $82 | $277 | $183 | $62 | $186 |
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Douglas Emmett Submarkets Overview
In Los Angeles County, our properties are located in what we believe are the most desirable markets and submarkets. Our portfolio of Class-A office properties is located in the West Los Angeles, San Fernando Valley and Tri-Cities markets. We have chosen to focus on nine of the premier office submarkets in these markets. Six of these submarkets, Brentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills and Westwood, are located in the West Los Angeles market. Two of these submarkets, Sherman Oaks/Encino and Warner Center/Woodland Hills, are located in the San Fernando Valley market, and one, Burbank, is located in the Tri-Cities market. Our Los Angeles County multifamily properties are located in the Santa Monica and Brentwood submarkets of West Los Angeles. Our submarkets are characterized by close proximity to high-end executive housing, constrained supply and a high level of lifestyle amenities. As a result, these submarkets consistently command premium rents and higher occupancies compared to other submarkets in Los Angeles County.
The following map shows the relative locations of the West Los Angeles, San Fernando Valley and Tri-Cities markets in Los Angeles County as well as the location of the nine submarkets within these markets in which our Los Angeles County office and multifamily properties are located.
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Similarly, Honolulu offers an attractive combination of high-quality office properties, a rich amenity base and a robust housing market. We own two office buildings in the Honolulu CBD and two institutional quality multifamily properties in Honolulu.
The following map shows the island of Oahu where our Honolulu office and multifamily properties are located as well as a detail of the Honolulu CBD in which our two office properties are located.
Brentwood
The Brentwood submarket consists of 3,331,731 square feet of Class-A office space. We own thirteen Class-A office properties comprising 1,390,625 rentable square feet in Brentwood, representing 13.9% of our office portfolio's total annualized rent. As of March 31, 2006, ancillary retail use accounted for 5.7% of the annualized rent of our Brentwood office portfolio. We also own five multifamily properties in Brentwood containing a total of 950 rental units. The Brentwood submarket consists of two primary segments: the San Vicente corridor, which is a pedestrian friendly area largely comprised of low- and mid-rise buildings in one of the premier restaurant and retail districts in the City of Los Angeles, as reflected in the high percentage of retail in our office portfolio in this submarket,
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and the Wilshire corridor, which is characterized by variety of mid- and high-rise buildings located on Wilshire Boulevard west of its intersection with San Vicente Boulevard. The San Vicente corridor is characterized by numerous small tenancies, prominently featuring medical, legal, entertainment and accounting professionals. We own approximately 41.7% of the Brentwood Class-A office market. As of March 31, 2006, our Brentwood office properties were 94.4% leased and had an average rental rate of $34.10 per square foot.
Strict zoning restrictions including Proposition U, very influential neighborhood groups and specific, stringent design standards create significant barriers to new real estate development of all kinds, but especially competitive office development. The height limit along San Vicente Boulevard is now only three stories, and on most of Wilshire Boulevard it is now between three stories and six stories. There have been no new Class-A office building deliveries in Brentwood over the past 10 years.
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As shown in the chart below, over the last ten years, occupancy and rental rates in our Brentwood submarket have moved in line with and maintained their premium to the broader Los Angeles County market as a whole. Due largely to the economic recovery that began in 2003, occupancy rates in this submarket have been growing steadily from a low of 87.8% in 2002 to approximately 94.0% in 2005, representing an increase of 6.2 percentage points. Rental rates reached a five-year low in 2004 and began to recover significantly in 2005, increasing from $30.72 per square foot in 2004 to $34.03 per square foot in 2005, representing an increase of 10.8%.
Historical Rental Rates & OccupancyClass-A Office
Brentwood vs. Los Angeles County
Source: CoStar Office Reports.
The outlook for the Brentwood office market remains strong in terms of supply, with no new office deliveries projected in Brentwood for 2006 through 2008. We believe that the combination of low vacancy rates and the absence of new supply will provide us with the opportunity to significantly increase rental rates in the foreseeable future.
Our four multifamily properties in the Brentwood market are all located in the premier multifamily area from Wilshire Boulevard north to Sunset Boulevard. These properties contain a total of 950 units and operate at virtually full occupancy in a very supply constrained market. Few undeveloped lots remain in this submarket, and it is generally possible to build new multifamily properties only by replacing existing buildings. No new multifamily projects are under construction or planned or proposed for 2006 through 2008, with all new development activity in condominiums. As of
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March 31, 2006, our asking rents for our Brentwood multifamily properties were $2,079 per unit versus our in-place rents of $1,886 per unit, representing a premium of 10.3%.
Brentwood Multifamily Properties
|
Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Number of
Units |
Percent
Leased |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Barrington Plaza | 3 | 100 | % | 1963/1998 | 712 | 99.3% | |||||
555 Barrington | 1 | 100 | 1989 | 111 | 97.3 | ||||||
Barrington Kiowa | 1 | 100 | 1974/1989 | 55 | 100.0 | ||||||
Barry | 1 | 100 | 1973/1989 | 53 | 100.0 | ||||||
Kiowa | 1 | 100 | 1972/1989 | 19 | 100.0 | ||||||
|
|
|
|||||||||
Total/Weighted Average | 7 | 950 | 99.2% | ||||||||
|
|
|
|||||||||
Annualized Rent (1) |
|
|
|
|
|
|
|
|
|
$ |
21,318,295 |
Monthly Rent Per Leased Unit | $1,886 |
Olympic Corridor
The Olympic Corridor submarket consists of 2,327,630 square feet of Class-A office space. We own four Class-A office properties comprising 922,405 rentable square feet in the Olympic Corridor submarket, representing 6.7% of our portfolio's total annualized rent. Olympic Boulevard is a main east-west artery developed and named in connection with the 1932 Olympics in Los Angeles, running from Santa Monica to downtown Los Angeles. The Olympic Corridor has developed into a major office hub that offers relative affordability as compared to the more expensive Santa Monica and Brentwood markets. It has proximate access to both major West Los Angeles freeways, the San Diego (405) and the Santa Monica (10), and major local surface streets, while still being easily accessible to major West Los Angeles executive housing areas such as Malibu, Santa Monica, Pacific Palisades, Brentwood and Westwood. Buildings in this market have attracted a diverse, high-quality tenant base, including law firms, financial service firms and prominent companies in the entertainment, technology and media sectors. The market features an array of amenities, including restaurants, neighborhood-serving retail establishments and several fitness centers. We have developed a significant presence in the Olympic Corridor and own four of the highest quality buildings in this submarket representing approximately 39.6% of the Class-A office space in this submarket. As of March 31, 2006, our Olympic Corridor office properties were 89.1% leased and had an average rental rate of $27.55 per square foot.
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As a result of stringent limits on development imposed under Proposition U in 1986, new deliveries have been limited to approximately 150,000 square feet of Class-A office building deliveries in the Olympic Corridor submarket over the past 10 years, all of which were delivered in 2002. The Olympic Corridor submarket was impacted by the same general economic downturn that affected both the nation and the Los Angeles County economy as a whole during the period from 2000 to 2003. The Olympic Corridor submarket began a sustained recovery in occupancy rates beginning in 2003 followed by a recovery in rental rates beginning in 2005. Occupancy rates in this submarket increased from 82.8% in 2002 to approximately 92.8% in 2005, while rental rates increased from approximately $26.25 per square foot in 2004 to $27.93 per square foot in 2005, representing an increase of 6.4%.
Historical Rental Rates & OccupancyClass-A Office
Olympic Corridor vs. Los Angeles County
Source: CoStar Office Reports.
The outlook for the Olympic Corridor office market remains strong in terms of supply, with no new office deliveries projected in the Olympic Corridor for 2006 through 2008. We believe that the combination of low vacancy rates and the absence of new supply will provide us with the opportunity to significantly increase rental rates in the foreseeable future.
Century City
The Century City submarket consists of 9,574,342 square feet of Class-A office space. We own two Class-A office buildings comprising 866,039 rentable square feet in the Century City submarket, representing 8.3% of our office portfolio's total annualized rent. The Century City market comprises almost ten million square feet of office space in a high-density, master-planned development located immediately southwest of Beverly Hills. It is the largest of the West Los Angeles office submarkets and has a high concentration of larger law and financial service firms as key components of its tenancy. Originally developed from the back lot of 20th Century Fox Studios, Century City remains the headquarters for 20th Century Fox and a hub of the entertainment industry. Our two office buildings in Century City comprise approximately 9.0% of the Class-A office space in this submarket. As of
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March 31, 2006, our Century City office properties were 94.0% leased and had an average rental rate of $32.89 per square foot.
Century City is effectively fully developed, with proposed new development taking the form of redevelopment of previously developed sites. There was only one new Class-A office building delivery in Century City over the past 10 years, which totaled approximately 775,000 square feet and was completed in 2003. Occupancy rates in Century City peaked in 2000 and declined from 2000 to 2003, largely as a result of the downturn in the general economy and the technology industry, which also negatively impacted the law and financial services firms that serviced the technology sector. The increase in new supply was exacerbated by the trend at the time for firms located in Century City to relocate their back-office functions to offices in other, less expensive markets. Occupancy rates in this submarket have recovered since 2003, increasing from 80.0% to approximately 86.6% in 2005, as the general economy recovered and vacant space was absorbed through leasing activity in this submarket. Despite the decline in occupancy, rental rates remained relatively flat since 2002, with rental rates in this submarket preserving a consistent premium to Los Angeles County rental rates generally. Rental rate growth in Century City has been hindered by existing vacancy in the submarket, certain corporate merger and acquisition transactions that relocated some large tenants out of the submarket and on-going road and infrastructure construction on Santa Monica Boulevard, a main east-west artery servicing the Century City submarket. The completion of the Santa Monica Boulevard improvements expected later in 2006 will enhance access between Century City and the San Diego (405) freeway.
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Historical Rental Rates & OccupancyClass-A Office
Century City vs. Los Angeles County
Source: CoStar Office Reports.
While our outlook for the Century City office market remains positive over the long term, near term fundamentals may be impacted by 780,000 square feet of new office space that is projected for delivery in 2006, of which 300,000 square feet has been pre-leased. We do not expect this additional capacity to negatively impact our performance in Century City, since we have limited our near-term lease expirations in this submarket to 14.9% and 5.7% of our leases in this submarket as of March 31, 2006 for 2006 and 2007, respectively. However, giving effect to leases that were not commenced as of March 31, 2006, our 2006 lease expirations would have been only 3.6% as of March 31, 2006. There are no remaining entitlements under the current Century City specific plan and no further new office deliveries projected in Century City from 2006 through 2008.
Santa Monica
The Santa Monica submarket consists of 7,619,589 square feet of Class-A office space. We own seven Class-A office properties comprising 860,083 rentable square feet in the City of Santa Monica, representing 11.1% of our office portfolio's total annualized rent. We also own two multifamily properties in Santa Monica containing a total of 820 rental units. Santa Monica is located near the executive housing areas of Brentwood, Pacific Palisades and Malibu and is adjacent to the Pacific Ocean, public beaches and extensive restaurant and retail amenities. All seven properties are located in downtown Santa Monica, a distinct section of the submarket that commands the highest average asking rents of any office market in Los Angeles County. We own approximately 11.3% of the Class-A office space in this submarket; however, our share of the downtown Santa Monica office market, where according to Eastdil Secured, asking rents are approximately 18% higher than in eastern Santa Monica,
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is approximately 45%. As of March 31, 2006, our Santa Monica office properties were 98.2% leased and had an average rental rate of $42.64 per square foot.
Santa Monica Office Properties
|
Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Rentable
Square Feet (1) |
Percent
Leased (2) |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
100 Wilshire | 2 | 100 | % | 1968/2002 | 256,962 | 99.4% | |||||
First Federal Square | 1 | 100 | 1981/2000 | 221,181 | 100.0 | ||||||
Palisades Promenade | 1 | 100 | 1990 | 98,606 | 100.0 | ||||||
Second Street Plaza | 1 | 100 | 1991 | 80,766 | 100.0 | ||||||
Santa Monica Square | 1 | 100 | 1983/2004 | 77,375 | 100.0 | ||||||
Lincoln/Wilshire | 1 | 100 | 1996 | 76,757 | 82.2 | ||||||
Verona | 1 | 100 | 1991 | 48,436 | 100.0 | ||||||
|
|
|
|||||||||
Total/Weighted Average | 8 | 860,083 | 98.2% | ||||||||
|
|
|
|||||||||
Annualized Rent (3) | $ | 34,865,364 | |||||||||
Annualized Rent Per Leased Square Foot (4) | $42.64 |
The fundamentals of the Santa Monica submarket are supported by stringent limits on development. Development entitlements that were granted in the late 1980s and that had a 10-year expiration allowed for the construction of approximately 1.3 million square feet of new Class-A office space that was completed between 1999 and 2004 and primarily located in a less desirable eastern part of the city. These deliveries, combined with the slowing of the technology sector at the time, negatively affected occupancy rates in Santa Monica through 2003 and rental rates through 2004. The Santa Monica market began a sustained recovery in occupancy rates beginning in 2004, followed by a significant recovery in rental rates beginning in 2005. Occupancy rates in this submarket increased from 80.3% in 2003 to approximately 93.0% in 2005 while rental rates increased from approximately $33.85 per square foot in 2004 to $38.80 per square foot in 2005, representing an increase of approximately 14.6%.
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Historical Rental Rates & OccupancyClass-A Office
Santa Monica vs. Los Angeles County
Source: CoStar Office Reports.
The outlook for the Santa Monica office market remains strong in terms of limited projected deliveries of new office space. There are no remaining specific plan projects left in Santa Monica for new office construction projects. Only 194,000 square feet of new office deliveries in the Santa Monica submarket, or 2.5% of current inventory, are projected for 2006 through 2008. This development represents the completion of a previously entitled office and media campus also located in eastern Santa Monica. We believe that the combination of low vacancy rates and limited projected supply will provide us with the opportunity to significantly increase rental rates in the foreseeable future.
Our Santa Monica holdings also include The Shores and Pacific Plaza, two luxury multifamily properties in Santa Monica that contain a total of 820 rental units in close proximity to the beach, most of which offer an ocean view. Santa Monica adopted rent control regulations in 1979 that permitted only minimal annual rent increases for rent controlled units and did not allow units to be re-leased at market rates upon vacancy. In 1999, the State of California passed a law permitting vacant units to be re-leased at market rents. In 2003, Santa Monica passed an ordinance that amended the rent control regulations to permit owners to charge market rents where a tenant was not using the rent-controlled unit as a primary residence. Approximately half of our 820 units in the Santa Monica submarket are at substantially below market rates, having received only minimal annual rental increases since at least 1979. We have averaged a roll-over of approximately 35 such units per year over the period from 2000 to 2005.
There is minimal vacancy in the Santa Monica multifamily submarket and there are approximately 900 multifamily units either proposed, planned or under construction in Santa Monica between 2006 and 2008. This new supply is generally comprised of projects that are smaller in size and farther from the beach as compared to our two Santa Monica multifamily buildings. We expect this space will be absorbed by the significant rental demand in this highly desirable rental submarket.
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Our current average in-place rent for our Santa Monica multifamily properties is $1,817 per unit, and our current average asking rent is $2,847 per unit, representing a premium of 56.7%.
Santa Monica Multifamily Properties
|
Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Number
of Units |
Percent
Leased |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
The Shores | 2 | 100 | % | 1965-1967/2002 | 532 | 99.8% | |||||
Pacific Plaza | 1 | 100 | 1963/1998 | 288 | 99.3 | ||||||
|
|
|
|||||||||
Total/Weighted Average | 3 | 820 | 99.6% | ||||||||
|
|
|
|||||||||
Annualized Rent (1) | $ | 17,813,572 | |||||||||
Monthly Rent Per Leased Unit | $1,817 |
Beverly Hills
The Beverly Hills submarket consists of 6,462,922 square feet of Class-A office space. We own four Class-A office buildings comprising 571,869 rentable square feet in the Beverly Hills submarket, representing 6.3% of our office portfolio's total annualized rent. One of the best known and most affluent cities in the United States, Beverly Hills is a separately incorporated city situated in West Los Angeles. A highly compact city at 5.7 square miles, Beverly Hills is a truly infill real estate market, with a majority of its area developed in mixed-use, pedestrian friendly patterns that are characterized by smaller, older structures and highly dispersed ownership. This is particularly true of the neighborhood within Beverly Hills that is commonly referred to as the Golden Triangle, bordered by Santa Monica Boulevard to the north, Wilshire Boulevard to the south and Crescent Drive to the east. Three of our four Beverly Hills buildings are located in the Golden Triangle, which is considered the commercial core of Beverly Hills and contains the Rodeo Drive shopping district. We own approximately 8.8% of the Class-A office space in this submarket. As of March 31, 2006, our Beverly Hills office properties were 96.7% leased and had an average rental rate of $37.11 per square foot.
Beverly Hills Office Properties
|
Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Rentable
Square Feet (1) |
Percent
Leased (2) |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
9601 Wilshire | 1 | 100 | % | 1962/2004 | 301,849 | 96.2% | |||||
Beverly Hills Medical Center | 1 | 100 | 1964/2004 | 104,462 | 97.3 | ||||||
Village on Canon | 1 | 100 | 1989/1995 | 101,004 | 95.3 | ||||||
Camden Medical Arts | 1 | 100 | 1972/1992 | 64,554 | 100.0 | ||||||
|
|
|
|||||||||
Total/Weighted Average | 4 | 571,869 | 96.7% | ||||||||
|
|
|
|||||||||
Annualized Rent (3) | $ | 19,878,084 | |||||||||
Annualized Rent Per Leased Square Foot (4) | $37.11 |
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Due to restrictive height and floor area limits, extremely strict municipal oversight of the development process, community opposition to new development, and the difficulty of acquiring redevelopment sites in Beverly Hills, little new office development has occurred in recent years or is contemplated in the near term. The only new Class-A office building deliveries in Beverly Hills over the past 10 years were three projects, totaling approximately 320,000 square feet that were delivered between 2000 and 2003. Performance in this submarket has generally tracked that of the Los Angeles County market as a whole, although the Beverly Hills submarket maintained consistent occupancy and rental rate premiums to the broader Los Angeles County market. Occupancy rates in this submarket began to recover in 2003, increasing from 85.0% in 2002 to approximately 92.8% in 2005 while rental rates have increased from $34.00 per square foot in 2003 to $35.33 per square foot in 2005, representing an increase of 3.9%.
Historical Rental Rates & OccupancyClass-A Office
Beverly Hills vs. Los Angeles County
Source: CoStar Office Reports.
The outlook for the Beverly Hills office market remains strong in terms of supply, with no new office deliveries projected in the Beverly Hills submarket for 2006 through 2008. We believe that the combination of low vacancy rates and the absence of new supply will provide us with the opportunity to significantly increase rental rates in the foreseeable future.
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Westwood
The Westwood submarket consists of 3,365,978 square feet of Class-A office space. We own two Class-A office buildings comprising 396,729 rentable square feet in Westwood, representing 3.8% of our office portfolio's total annualized rent. The Westwood office submarket is concentrated on Wilshire Boulevard immediately east of the San Diego (405) freeway and west of the city of Beverly Hills, directly south of the University of California, Los Angeles, or UCLA, campus. The Westwood submarket is dominated by high-rise buildings that range from 10 to 24 stories, with typical floor sizes of 15,000 to 20,000 square feet. Due to its central West Los Angeles location, Westwood attracts a broad array of tenants in the legal, accounting, financial services, entertainment, construction and other industries. Westwood's office properties are located close to executive housing in Westwood, Bel Air, Brentwood and Beverly Hills, as well as to a high percentage of the City of Los Angeles' premier high-rise condominium residences which are concentrated along Wilshire Boulevard in Westwood. Additionally, the Westwood area is very pedestrian friendly, with ample retail, dining and entertainment amenities in the immediately adjacent Westwood Village neighborhood. We own two of the highest quality buildings in Westwood, representing approximately 11.8% of the Class-A office space in this market. As of March 31, 2006, our Westwood office properties were 93.5% leased and had an average rental rate of $33.60 per square foot.
Westwood Office Properties
|
Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Rentable
Square Feet (1) |
Percent
Leased (2) |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
One Westwood (3) | 1 | 100 | % | 1987/2004 | 201,921 | 95.0% | |||||
Westwood Place | 1 | 100 | 1987 | 194,808 | 92.0 | ||||||
|
|
|
|||||||||
Total/Weighted Average | 2 | 396,729 | 93.5% | ||||||||
|
|
|
|||||||||
Annualized Rent (4) | $ | 11,892,240 | |||||||||
Annualized Rent Per Leased Square Foot (5) | $33.60 |
As a result of stringent limits on development imposed under Proposition U in 1986, there have been no new Class-A office building deliveries in Westwood over the past 10 years. The Westwood submarket was impacted by the downturn in the general economy and technology sector that affected the Los Angeles County economy as a whole during the period from 2000 to 2003. These conditions negatively impacted occupancy in the Westwood submarket through 2002 and rental rates through 2004. The Westwood submarket began a sustained recovery in occupancy rates beginning in 2003 followed by a strong recovery in rental rates beginning in 2005. Occupancy rates in this submarket increased from 81.9% in 2002 to approximately 91.2% in 2005, while rental rates increased from approximately $31.47 per square foot in 2004 to $33.43 per square foot in 2005, representing an increase of approximately 6.2%.
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Historical Rental Rates & OccupancyClass-A Office
Westwood vs. Los Angeles County
Source: CoStar Office Reports.
The outlook for the Westwood office market remains strong in terms of supply, with no new office deliveries projected in the Westwood submarket for 2006 through 2008. We believe that the combination of low vacancy rates and the absence of new supply will provide us with the opportunity to significantly increase rental rates in the foreseeable future.
Sherman Oaks/Encino
The Sherman Oaks/Encino submarket consists of 5,721,621 square feet of Class-A office space. We own nine Class-A office properties comprising 2,878,769 rentable square feet in the Sherman Oaks/Encino submarket, representing 23.4% of our office portfolio's total annualized rent. The core of the Sherman Oaks/Encino submarket runs east-west along Ventura Boulevard, which serves as the primary commercial corridor through the central San Fernando Valley. In addition to its role as a local commercial center, this submarket also benefits from its central location between the entertainment hubs in Burbank and West Los Angeles. The Sherman Oaks/Encino submarket is characterized by numerous smaller tenancies from the legal, accounting and medical professions. This submarket is home to location-sensitive residents who desire to have their offices in the immediate vicinity of their residences. The Sherman Oaks/Encino submarket has direct access to regional transportation arteries via the San Diego (405) and Ventura (101) freeways. The hub of this market is the intersection of Ventura Boulevard and Sepulveda Boulevard, the two main surface arteries in the area. We own properties on three of the four corners of this intersection, including the largest property in the market, our recently redeveloped Sherman Oaks Galleria. Our nine office properties in Sherman Oaks/Encino
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submarket comprise approximately 50.3% of this submarket. As of March 31, 2006, our Sherman Oaks/Encino properties were 97.2% leased and had an average rental rate of $27.43 per square foot.
As a result of stringent limits on development imposed under Proposition U in 1986 and active homeowners' associations, there have been no new Class-A office building deliveries in Sherman Oaks/Encino over the past 10 years with the exception of our Sherman Oaks Galleria redevelopment project completed in 2002. During the period from 1999 to 2001, the decrease in occupancy in this submarket was driven by the major redevelopment of our Sherman Oaks Galleria property, which represented approximately 12.3% of this submarket at the time, and the general downturn in the economy which affected the Los Angeles County market as a whole. Occupancy rates began to recover in 2002 as the Sherman Oaks Galleria property underwent lease-up and approached stabilization in 2003. Occupancy rates in this submarket have been growing steadily from 87.2% in 2001 to approximately 95.7% in 2005. Despite the additional new supply and the general economic downturn, rental rates in the Sherman Oaks/Encino submarket remained relatively stable from 2001 through 2004. Rental rates began to recover in 2005, increasing from $24.85 per square foot in 2004 to $27.29 per square foot in 2005, representing an increase of 9.8%. As demonstrated in the chart below, the Sherman Oaks/Encino submarket has remained relatively stable over time, with rental rates trending in line with the Los Angeles County market as a whole and occupancy rates significantly outperforming the Los Angeles County market as a whole.
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Historical Rental Rates & OccupancyClass-A Office
Sherman Oaks/Encino vs. Los Angeles County
Source: CoStar Office Reports.
The outlook for the Sherman Oaks/Encino office market remains strong in terms of supply, with no new office deliveries projected in the Sherman Oaks/Encino submarket for 2006 through 2008. We believe that the combination of low vacancy rates and the absence of new supply will provide us with the opportunity to significantly increase rental rates in the foreseeable future.
Warner Center/Woodland Hills
The Warner Center/Woodland Hills submarket consists of 6,392,299 square feet of Class-A office space. We own two Class-A office complexes totaling 2,567,808 rentable square feet in the Warner Center/Woodland Hills submarket, consisting of the five high-rise towers of the Warner Center Towers office development and the Trillium office development, representing 17.1% of our office portfolio's total annualized rent. We also own the fee interest in two parcels in this submarket that are subject to long-term ground leases in this submarket. Warner Center is a master-planned development in the western San Fernando Valley situated on the site of the former Warner Ranch and developed under a specific plan approved by the City of Los Angeles. Amenities in this area are numerous, including the Topanga Plaza regional mall and the dining and entertainment-oriented Promenade. The Warner Center/Woodlands Hills office submarket is a regional financial center with numerous tenants in the financial, accounting and legal services industries. In recent years, the submarket has matured into a more varied tenant mix, including significant tenancies in the healthcare and insurance industries. The submarket also benefits from its proximity to the growing and affluent population of the western San Fernando Valley and the adjacent Conejo Valley that extends into Ventura County. We own approximately 40.2% of the Class-A office space in this submarket. As of March 31, 2006, our Warner
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Center/Woodland Hills office properties were 81.3% leased and had an average rental rate of $26.35 per square foot.
The specific plan has placed strict limits on new development in this submarket. The primary new Class-A office building project delivered in Warner Center/Woodland Hills over the past 10 years was a multi-phase office campus development entitled for 1.3 million square feet, of which approximately 800,000 square feet was built between 2000 and 2005, and of which 500,000 square feet remains to be built. Primarily as a result of this new office supply and the general economic downturn that affected Los Angeles County as a whole, occupancy rates declined in 2001 and remained relatively flat until 2003. Occupancy rates in this submarket have increased dramatically from 81.8% in 2003 to 88.3% in 2005. Over the same period, rental rates have increased from approximately $25.81 per square foot in 2003 to $28.06 per square foot in 2005, representing an increase of approximately 8.7%.
Historical Rental Rate & OccupancyClass-A Office
Warner Center/Woodland Hills vs. Los Angeles County
Source: CoStar Office Reports.
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Approximately 500,000 square feet of new previously entitled office space is projected for delivery in the Warner Center/Woodland Hills submarket, or 7.7% of current inventory, between 2006 through 2008. However, the outlook for the Warner Center/Woodland Hills office market remains positive because the high development fees mandated by the specific plan in this submarket have made it expensive to build new office space, and community group opposition to development is further limiting prospects for additional office construction.
Burbank
The Burbank submarket consists of 5,764,318 square feet of Class-A office space. Studio Plaza, a Class-A office building and currently our only Burbank holding, is located in the Media District, Burbank's main business corridor, and contains 420,949 rentable square feet, representing 4.3% of our office portfolio's total annualized rent. Located within the Tri-Cities market, which includes Glendale and Pasadena, Burbank has historically been the rental rate and occupancy leader within the Tri-Cities' Class-A office market due to its large entertainment employment base and central location between Downtown Los Angeles and the San Fernando Valley. The Burbank submarket is a headquarters for the entertainment industry, with The Walt Disney Company, Time Warner and NBC Universal based in and around the district. On a combined basis, these studios control over 400 acres of land and provide a significant demand base for office space. Our Studio Plaza property in Burbank is adjacent to the Warner Bros. studio lot and comprises approximately 7.3% of the Class-A office space in this submarket. As of March 31, 2006, our Studio Plaza property was 100% leased to Time Warner with a lease term expiring in September 2019 and had an average rental rate of $31.74 per square foot.
A significant supply of new Class-A office space, consisting of 877,000 square feet, or approximately 15% of the total Burbank submarket, was delivered between 2000 and 2002. This new supply caused a sharp downturn in occupancy rates in the Burbank submarket from 2000, although rates began to recover in 2003 as a result of the general economic recovery and the rapid absorption of the additional supply in this submarket, with occupancy rates increasing from 82.0% in 2003 to approximately 93.6% in 2005. Rental rates dipped only slightly in 2002 and have recovered significantly since then, increasing from approximately $27.84 per square foot in 2003 to $31.38 per square foot in 2005, representing an increase of approximately 12.7%.
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Historical Rental Rate & OccupancyClass-A Office
Burbank vs. Los Angeles County
Source: CoStar Office Reports.
The outlook for the Burbank office market remains strong despite significant new deliveries expected in the near term. Approximately 180,000 square feet of new office space was completed in 2006, and an additional 1.1 million square feet of new office space is planned and 370,000 square feet is proposed in Burbank, or 24.7% of current inventory, between 2006 and 2008. Notwithstanding the new supply, the entertainment tenants in the Burbank submarket historically have shown a consistent ability to absorb additional new office space. We do not expect to be impacted by this increase in supply because our Studio Plaza property is 100% leased to a single tenant, Time Warner, through 2019, subject to the tenant's right to terminate the lease in September 2012 and September 2016 upon payment of certain termination fees.
Honolulu, Hawaii
The Honolulu office market consists of 5,140,907 square feet. We own two Class-A office properties totaling 678,940 square feet of rentable area in the Honolulu CBD, representing 5.2% of our office portfolio's total annualized rent. With an inventory of approximately 5.1 million square feet, the Honolulu CBD is Hawaii's largest office market. The market's combination of Class-A inventory, amenity base, and concentration of federal, state and local government centers has attracted Hawaii's largest corporate and service sector tenants, including a significant number of legal and financial service tenants. We have developed a significant presence in the Honolulu office market and own two of the highest quality buildings representing approximately 13.2% of the Honolulu CBD and approximately 16.2% of the Class-A office space in the Honolulu CBD. As of March 31, 2006, our Honolulu CBD office properties were 90.8% leased and had an average rental rate of $30.09 per square foot. As a result of significant job growth over the last three years, occupancy rates in the Honolulu CBD have remained consistently high, and rental rates have increased significantly from $26.58 per square foot in 2003 to $29.28 per square foot in 2005, representing an increase of 10.2%. Current average asking rental rates are well below a level that would support new construction, and therefore the forecast for new supply is extremely limited in the near-term, with no new projects currently under construction.
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The outlook for the Honolulu CBD office market remains strong in terms of supply, with limited projected deliveries of new space.
Historical Rental Rate & Occupancy
Honolulu CBD
Source: CB Richard Ellis.
We also own two institutional quality multifamily assets, Moanalua Hillside Apartments and the Villas at Royal Kunia, with a combined 1,098 units. Our two multifamily properties are among the largest in the Honolulu multifamily market, which has declined in number of rental units in recent years due to a number of factors including significant growth in housing prices, the conversion of multifamily properties to for-sale condominium units and the sale of previously rented single family homes and condominium units to owner-occupants. Since our acquisition of these properties, they have operated effectively at full occupancy. As a result of such tight occupancy levels, we have experienced average market rental rate increases from $1,240 per unit in 2005 to $1,446 per unit in 2006, or an increase of almost 17%, at Moanalua Hillside Apartments. Approximately 13% of the units in our Honolulu multifamily portfolio are subject to low income housing regulations and 26% are subject to moderate income regulations, which effectively limit our rental rates on these units. As of March 31, 2006, the average rental rate on our low and moderate income units was $1,232 per unit. In addition, rental rate increases on such units are limited to annual adjustments determined by the Department of Housing and Urban Development. We have the option of terminating our obligation to provide
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income-restricted units at the Villas at Royal Kunia annually in June of each year and at Moanalua Hillside Apartments in September 2017.
In consideration for our obligation to provide moderate income units at the Villas at Royal Kunia, we receive full property tax and general excise tax exemptions. Commencing in June 2017, the City and County of Honolulu will have the discretion to terminate these tax exemptions along with our obligation to provide income-restricted units. In consideration for our obligation to provide low and moderate income units at Moanalua Hillside Apartments, we receive a full property tax exemption and an exemption from general excise tax on the income restricted units. These exemptions, along with our obligation to provide income-restricted units may be terminated at Moanalua Hillside Apartments in September 2017.
The construction of new residential units in Honolulu is dominated by condominium development and, additionally, the high land values and the high cost of new construction in Hawaii makes the development of new multifamily rental units in the Honolulu market economically prohibitive. As a result, we expect that future supply of large multifamily projects in Honolulu will continue to be limited.
Honolulu Multifamily Properties
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Number of
Buildings |
Percent
Ownership |
Year Built/
Renovated |
Number of
Units |
Percent
Leased |
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Moanalua Hillside Apartments | 25 | 100 | % | 1968/2004 | 696 | 98.7% | |||||
Villas at Royal Kunia | 65 | 100 | 1990-1994 | 402 | 99.8 | ||||||
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Total/Weighted Average | 90 | 1,098 | 99.1% | ||||||||
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Annualized Rent (1) |
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$ |
17,170,845 |
Monthly Rent Per Leased Unit | $1,315 |
Regulation
General
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of the existing properties has the necessary permits and approvals to operate its business.
Americans With Disabilities Act
Our properties must comply with Title III of the ADA to the extent that such properties are "public accommodations" as defined by the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Although we believe that the properties in our portfolio in the aggregate substantially comply with present requirements of the ADA, we have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance, and we are aware that some particular properties may currently be in non-compliance with the ADA. Noncompliance with the ADA could result in the incurrence of additional costs to attain compliance. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
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Environmental Matters
Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various of these laws, an owner or operator of real estate is or may be liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow using such property as collateral. In addition, persons exposed to hazardous or toxic substances may sue for personal injury damages. For example, some laws impose liability for release or exposure to asbestos-containing materials, a substance known to be present in a number of our buildings. In other cases, some of our properties have been (or may have been) affected by contamination from past operations or from off-site sources. As a result, in connection with our current or former ownership, operation, management and development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under environmental laws.
Although most of our properties have been subjected to Phase I assessments, they are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments.
Rent Control
The City of Los Angeles and Santa Monica have enacted rent control legislation, and portions of the Honolulu multifamily market are subject to low- and moderate-income housing regulations. Such laws and regulations limit our ability to increase rents, evict tenants or recover increases in our operating expenses and could make it more difficult for us to dispose of properties in certain circumstances. In addition, any failure to comply with low- and moderate-income housing regulations could result in the loss of certain tax benefits and the forfeiture of rent payments. Although under current California law we are able to increase rents to market rates once a tenant vacates a rent-controlled unit, any subsequent increases in rental rates will remain limited by Los Angeles and Santa Monica rent control regulations.
Insurance
We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket insurance policy. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice; however, our insurance coverage may not be sufficient to fully cover our losses. We do not carry insurance for certain losses, including, but not limited to, losses caused by riots or war. Some of our policies, like those covering losses due to terrorism, earthquakes and floods, are insured subject to limitations involving substantial self insurance portions and significant deductibles and co-payments for such events. In addition, most of our properties are located in Southern California, an area subject to an increased risk of earthquakes. While we presently carry earthquake insurance on our properties, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from earthquakes. We may reduce or discontinue earthquake, terrorism or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. In addition, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our
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portfolio increases. See "Risk FactorsRisks Related to Our Properties and Our BusinessPotential losses may not be covered by insurance."
Competition
We compete with a number of developers, owners and operators of office and commercial real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants' leases expire. In that case, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to you may be adversely affected.
In addition, all of our multifamily properties are located in developed areas that include a number of other multifamily properties, as well as single-family homes, condominiums and other residential properties. The number of competitive multifamily and other residential properties in a particular area could have a material adverse effect on our ability to lease units and on our rental rates.
Third-Party Property Management Services
In connection with our Honolulu properties, we have entered into agreements with various unaffiliated parties to perform certain property management services. Under these agreements, we are obligated to pay certain fees, calculated as a portion of gross rental receipts or on a flat monthly fee basis, as well as certain specified fees and reimbursable expenses.
Employees
As of June 1, 2006, our predecessor employed approximately 400 persons. We believe that our relationships with our employees are good.
Principal Executive Offices
We own the building in which our headquarters is located at 808 Wilshire Boulevard, Santa Monica, California. We believe that our current facilities are adequate for our present and future operations, although we may add regional offices or relocate our headquarters, depending upon our future development projects.
Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operation if determined adversely to us.
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Directors and Executive Officers
Upon consummation of this offering, we anticipate that our board of directors will consist of between seven and nine members, including a majority of directors who are "independent directors" within the meaning of the listing standards of the New York Stock Exchange, or NYSE. Pursuant to our charter, each of our directors is elected by our stockholders to serve until the next annual meeting of our stockholders and until their successors are duly elected and qualify. See "Material Provisions of Maryland Law and of Our Charter and BylawsOur Board of Directors." The first annual meeting of our stockholders after this offering will be held in 2007. Subject to rights pursuant to any employment agreements, officers serve at the pleasure of our board of directors.
The following table sets forth certain information concerning our directors and executive officers as of the consummation of this offering:
Name
|
Age
|
Position
|
||
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Dan A. Emmett | 66 | Director, Chairman of the Board | ||
Jordan L. Kaplan | 45 | Director, Chief Executive Officer, President | ||
Kenneth M. Panzer | 46 | Director, Chief Operating Officer | ||
William Kamer | 55 | Chief Financial Officer | ||
Barbara J. Orr | 59 | Chief Accounting Officer | ||
Allan B. Golad | 51 | Senior Vice President, Property Management | ||
Michael J. Means | 45 | Senior Vice President, Commercial Leasing | ||
Victor J. Coleman | 44 | Director nominee | ||
Thomas E. O'Hern | 50 | Director nominee | ||
Dr. Andrea L. Rich | 62 | Director nominee | ||
William Wilson III | 69 | Director nominee |
The following is a biographical summary of the experience of our directors, director nominees, and executive officers.
Dan A. Emmett. Mr. Emmett will serve as the Chairman of our board of directors. Mr. Emmett co-founded the predecessor to DECO in 1971. In 1991, Mr. Emmett co-founded DERA and PLE. Mr. Emmett has been primarily responsible for investor relations since 1991. Mr. Emmett received his bachelor's degree from Stanford University in 1961 and his J.D. degree from Harvard University in 1964.
Jordan L. Kaplan. Mr. Kaplan will serve as our Chief Executive Officer, President and a member of our board of directors. Mr. Kaplan joined DECO in 1986, co-founded DERA and PLE in 1991, and has served as the Chief Financial Officer and Director of the Capital Markets Division for all of our operating companies since 1991. Since founding DERA, Mr. Kaplan has been responsible for all capital markets transactions including all acquisitions, dispositions, and financings. Mr. Kaplan received his bachelor's degree from the University of California, Santa Barbara in 1983 and his M.B.A. from the University of California, Los Angeles in 1986.
Kenneth M. Panzer. Mr. Panzer will serve as our Chief Operating Officer and a member of our board of directors. Mr. Panzer joined DECO in 1984, co-founded DERA and PLE in 1991, and has served as the Chief Operating Officer of all of our operating companies since 1991. Since founding DERA, Mr. Panzer has been responsible for all company operations including all leasing, property management, construction, and development activities. Mr. Panzer received his bachelor's degree from Penn State University in 1982.
William Kamer. Mr. Kamer will serve as our Chief Financial Officer. Mr. Kamer joined DECO in 2000 and has served as Senior Vice President in our Capital Markets Division for all our operating
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companies since that time. In this capacity, Mr. Kamer has overseen all financing activities. In addition, Mr. Kamer has served as General Counsel since 2000. Prior to joining DECO, Mr. Kamer was an attorney for 22 years focusing exclusively on real estate and real estate finance matters. He was a partner at the law firm of Cox, Castle & Nicholson LLP from 1986 through 1999. Mr. Kamer received his bachelor's degree from Vassar College in 1973, his master's degree in city and regional planning from Harvard University in 1978, and his J.D. degree from Boston University in 1978.
Barbara J. Orr. Ms. Orr will serve as our Chief Accounting Officer. Ms. Orr joined an affiliate of DECO in 1988 and joined DECO in 1998. Ms. Orr has served as the Chief Accounting Officer for all of our operating companies since joining DECO in 1998. Ms. Orr received her bachelor's degree from California State University, East Bay in 1979 and became a Certified Public Accountant in 1981.
Allan B. Golad. Mr. Golad will serve as our Senior Vice President in charge of Property Management. Mr. Golad joined DECO in 1988 and has served as the Director of Property Management since 1990. Mr. Golad serves on the board of directors for the Building Owners and Managers Association, or BOMA, and is on BOMA's executive committee. Prior to joining DECO, Mr. Golad was a senior acquisitions officer with Chase Manhattan Bank and Glendale Federal Bank. Mr. Golad received his bachelor's degree from Claremont McKenna College in 1977.
Michael J. Means. Mr. Means will serve as our Senior Vice President in charge of Commercial Leasing. Mr. Means joined DECO in 1998 and has served as the Director of Commercial Leasing since 2000. Prior to that time he was a senior officer in our Design and Construction Department. Prior to joining DECO, Mr. Means was a corporate real estate officer at the Walt Disney Company and Health Net. Mr. Means received his bachelor's degree from the University of California, Los Angeles in 1983.
Victor J. Coleman. Mr. Coleman will serve as a member of our board of directors. Mr. Coleman is the founder and managing director of Hudson Capital, LLC, a real estate investment firm in Los Angeles and he is a partner in a number of other investment companies. Mr. Coleman was a co-founder, President, and Chief Operating Officer of Arden Realty, a public REIT specializing in Southern California office real estate, from 1990 until its sale in the spring of 2006. Mr. Coleman served as a member of the board of directors of Arden Realty from 1996 to 2006. Mr. Coleman lives in Los Angeles and holds a bachelor's degree from the University of California, Berkeley and an M.B.A. from Golden Gate University.
Thomas E. O'Hern. Mr. O'Hern will serve as a member of our board of directors. Mr. O'Hern is Executive Vice President, Chief Financial Officer, and Treasurer of Macerich Company, a public REIT specializing in retail real estate. Prior to joining Macerich in 1993, Mr. O'Hern served as chief financial officer of several commercial real estate companies. Mr. O'Hern is a Certified Public Accountant who worked for Arthur Anderson & Co. from 1978 through 1984. Mr. O'Hern is a member of the board of directors of Linux Progeny, a private software company, and a trustee for Little Company of Mary Hospital Foundation. Mr. O'Hern lives in the Los Angeles area and holds a bachelor's degree from California Polytechnic University, San Luis Obispo.
Dr. Andrea L. Rich. Dr. Rich will serve as a member of our board of directors. Dr. Rich retired from the Los Angeles Museum of Art in 2005 where she served for ten years as President and Chief Executive Officer. During the second half of her career at the Museum, she also served as the Wallis Annenberg Director. Prior to her tenure at the Los Angeles Museum of Art, Dr. Rich had a long academic and administrative career at UCLA, culminating in her service as Executive Vice Chancellor and Chief Operating Officer from 1991 to 1995. Dr. Rich serves as a director of Mattel Corporation and the Private Bank of California. Dr. Rich lives in Los Angeles and earned her bachelor's degree, master's degree, and Ph.D. from UCLA.
William Wilson III. Mr. Wilson will serve as a member of our board of directors. Mr. Wilson is currently Managing Partner of Wilson Meany Sullivan, LLC, a real estate investment, development, and
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management firm in San Francisco. Mr. Wilson was founder of William Wilson and Associates, which merged with Cornerstone Properties, Inc., a public REIT specializing in office properties. Mr. Wilson served as Chairman of Cornerstone until it was acquired by Equity Office Properties Trust in 2000 and served on the Board of Equity Office Properties until 2004. Mr. Wilson is active in numerous civic organizations including service on the boards of the California Academy of Science, Lawrenceville School and the Presidio Trust. Mr. Wilson lives in the San Francisco Bay Area and earned his bachelor's degree in engineering from Stanford University.
Our board of directors will appoint an audit committee, a compensation committee, and a nominating and corporate governance committee effective upon consummation of this offering. Under our bylaws, the composition of each committee must comply with the listing requirements and other rules and regulations of the NYSE, as amended or modified from time to time. Each of these committees will have three directors and will be comprised exclusively of independent directors. Our bylaws define independent director by reference to the rules and regulations of the NYSE, which require that an independent director have no material relationship with us that may interfere with the exercise of his or her independence from management.
Audit Committee. The audit committee will select, on behalf of our board of directors, an independent public accounting firm to be engaged to audit our financial statements, discuss with the independent auditors their independence, review and discuss the audited financial statements with the independent auditors and management, and recommend to our board of directors whether the audited financial statements should be included in our Annual Reports on Form 10-K to be filed with the SEC. Thomas E. O'Hern will be the chairperson of our audit committee and the other members of our audit committee will be and .
Compensation Committee. The compensation committee will review and approve, on behalf of our board of directors, the annual salaries and other compensation of our executive officers and individual stock, stock option and other equity incentive grants. The compensation committee will also provide assistance and recommendations with respect to our compensation policies and practices and will assist with the administration of our compensation plans. Victor J. Coleman will be the chairman of our compensation committee and the other members of our compensation committee will be and .
Nominating and Corporate Governance Committee. The nominating and corporate governance committee will assist our board of directors in fulfilling its responsibilities by identifying and approving individuals qualified to serve as members of our board of directors, selecting director nominees for our annual meetings of stockholders, evaluating the performance of our board of directors, developing and recommending to our board of directors corporate governance guidelines and providing oversight with respect to corporate governance and ethical conduct. will be the chairman of our nominating and corporate governance committee and the other members of our nominating and corporate governance committee will be and .
Our board of directors may from time to time establish certain other committees to facilitate the management of our company.
Upon consummation of this offering, we intend to compensate each of our directors who is not an employee of our company or any of our subsidiaries through a combination of cash and equity incentives. Directors who are employees of our company or our subsidiaries will not receive compensation for their services as directors.
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Executive Officer Compensation
The following table sets forth the annual base salary and other compensation expected to be paid in 2006 to our Chief Executive Officer and our four other most highly compensated executive officers, who we refer to collectively as our "named executive officers." We intend to enter into employment agreements with certain of our executive officers which will become effective upon the consummation of this offering. We expect that such employment agreements will provide for salary, bonus and other benefits, including severance upon a termination of employment under certain circumstances.
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2006 Annual Compensation
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LTIP Payouts ($)
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Option Grants
The following table sets forth information regarding stock options we will grant effective upon consummation of this offering to our named executive officers. Potential realizable values are net of exercise price, before taxes, and are based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on SEC requirements and do not reflect our projection or estimate of future stock price growth.
We intend to assume and maintain sponsorship of the retirement savings plan under Section 401(k) of the Code that currently covers the eligible employees of our predecessors. The plan allows eligible employees to defer, within prescribed limits, up to 15% of their compensation on a pre-tax basis through contributions to the plan. Our employees will be eligible to participate in the plan
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if they meet certain requirements, including a minimum period of credited service. Any matching and discretionary company contributions permitted under the terms of the plan may be subject to certain vesting requirements.
2006 Stock Option and Incentive Plan
The Douglas Emmett, Inc. 2006 Stock Option and Incentive Plan, our stock incentive plan, will be adopted by our board of directors and approved by our stockholders prior to the consummation of this offering. The stock incentive plan permits us to make grants of "incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights and other stock-based awards" within the meaning of Section 422 of the Code, or any combination of the foregoing. We have initially reserved shares of our common stock for the issuance of awards under our stock incentive plan. The number of shares reserved under our stock incentive plan is also subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under our stock incentive plan also will be available for future awards.
Our stock incentive plan is administered by the compensation committee of our board of directors. The compensation committee may interpret the stock incentive plan and may make all determinations necessary or desirable for the administration of the stock incentive plan and has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of our stock incentive plan. All full-time and part-time officers, employees, directors and other key persons (including consultants and prospective employees) are eligible to participate in our stock incentive plan.
We may issue incentive stock options or non-qualified stock options under the stock incentive plan. The incentive stock options granted under the stock incentive plan are intended to qualify as incentive stock options. The exercise price of stock options awarded under our stock incentive plan may not be less than 100% of the fair market value of our common stock on the date of the option grant. The compensation committee will determine at what time or times each option may be exercised (provided that in no event may it exceed ten years from the date of grant) and the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.
Stock appreciation rights may be granted under our stock incentive plan. Stock appreciation rights allow the participant to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant in the form of shares of our common stock. The exercise price of stock appreciation rights awarded under our stock incentive plan may not be less than 100% of the fair market value of our common stock on the date of grant. The compensation committee determines the terms of stock appreciation rights, including when such rights become exercisable and the period of time, if any, after retirement, death, disability or other termination of employment during which stock appreciation rights may be granted.
Restricted stock and deferred stock awards may also be granted under our stock incentive plan. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the compensation committee. The compensation committee may impose whatever conditions to vesting it determines to be appropriate, including attainment of performance goals. Shares of restricted stock that do not satisfy the vesting conditions are subject to our right of repurchase or forfeiture. Deferred stock awards are stock units entitling the participant to receive shares of stock paid out on a deferred basis and subject to such restrictions and conditions as the compensation committee shall determine. The compensation committee may impose whatever conditions to vesting it determines to be appropriate, including attainment of performance goals. Deferred stock awards that do not satisfy the vesting conditions are subject to forfeiture.
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Dividend equivalent rights may also be granted under our stock incentive plan. These rights entitle the participant to receive credits for dividends that would be paid if the participant had held specified shares of our common stock. Dividend equivalent rights may be granted as a component of another award or as a freestanding award.
Other stock-based awards under our stock incentive plan will include awards that are valued in whole or in part by reference to shares of our common stock, including convertible preferred stock, convertible debentures and other convertible or exchangeable securities, partnership interests in a subsidiary or our operating partnership, awards valued by reference to book value, fair value or performance of a subsidiary, and any class of profits interest or limited liability company membership interest. We expect to make certain awards in the form of long-term incentive units, or "LTIP units." LTIP units will be issued pursuant to a separate series of units of limited partnership interests in our operating partnership. LTIP units, which can be granted either as free-standing awards or in tandem with other awards under our stock incentive plan, will be valued by reference to the value of our common stock, and will be subject to such conditions and restrictions as the compensation committee may determine, including continued employment or service, computation of financial metrics and/or achievement of pre-established performance goals and objectives. If applicable conditions and/or restrictions are not attained, participants would forfeit their LTIP units. LTIP unit awards, whether vested or unvested, may entitle the participant to receive, currently or on a deferred or contingent basis, dividends or dividend equivalent payments with respect to the number of shares of our common stock underlying the LTIP unit award or other distributions from the operating partnership, and the compensation committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional shares of our common stock or LTIP units.
LTIP units will be structured as "profits interests" for federal income tax purposes, and we do not expect the grant, vesting or conversion of LTIP units to produce a tax deduction for us. As profits interests, LTIP units initially will not have full parity, on a per unit basis, with the operating partnership's common units with respect to liquidating distributions. Upon the occurrence of specified events, LTIP units can over time achieve full parity with common units and therefore accrete to an economic value for the participant equivalent to common units. If such parity is achieved, LTIP units may be converted, subject to the satisfaction of applicable vesting conditions, on a one-for-one basis into common units, which in turn are redeemable by the holder for shares of our common stock on a one-for-one basis or for the cash value of such shares, at our election. However, there are circumstances under which LTIP units will not achieve parity with common units, and until such parity is reached, the value that a participant could realize for a given number of LTIP units will be less than the value of an equal number of shares of our common stock and may be zero. Ordinarily, we anticipate that each LTIP unit awarded will be equivalent to an award of one share of common stock reserved under our stock incentive plan, thereby reducing the number of shares of common stock available for other equity awards on a one-for-one basis. However, the compensation committee has the authority under the plan to determine the number of shares of common stock underlying an award of LTIP units in light of all applicable circumstances, including performance-based vesting conditions, operating partnership "capital account allocations," to the extent set forth in the partnership agreement for the operating partnership, Code, or Treasury Regulations, value accretion factors and conversion ratios.
Upon consummation of this offering, we will cause the operating partnership to issue an aggregate of LTIP units to our chairman, executive officers and our other key employees. LTIP units granted to Messrs. Emmett, Kaplan and Panzer will be fully vested upon grant, while LTIP units granted to our other executive officers and key employees will vest as to 25% of the amount of grant on each of December 21, 2007, 2008, 2009 and 2010. In addition, upon consummation of this offering, we will issue options to purchase an aggregate of shares of our common stock to our chairman, executive officers and our other key employees. Options granted to Messrs. Emmett, Kaplan and Panzer will be fully vested upon grant, while options granted to our other executive officers and
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key employees will vest as to 25% of the number of shares subject to such option on each of December 21, 2007, 2008, 2009 and 2010.
Our stock incentive plan provides for grants of stock options to independent directors on and after the consummation of this offering.
Unless the compensation committee provides otherwise, our stock incentive plan does not generally allow for the transfer of awards, and only the participant may exercise an award during his or her lifetime. In the event of a change-in-control of the company, our board of directors and the board of directors of the surviving or acquiring entity shall, as to outstanding awards under our stock incentive plan, make appropriate provision for the continuation or assumption of such awards and may provide for the acceleration of vesting with respect to existing awards.
The terms of the stock incentive plan provide that we may amend, suspend or terminate the stock incentive plan at any time, but stockholder approval of any such action will be obtained if required to comply with applicable law. Further, no action may be taken that adversely affects any rights under outstanding awards without the holder's consent. The stock incentive plan will terminate on the tenth anniversary of the date on which stockholder approval was received.
We intend to file with the SEC a Registration Statement on Form S-8 covering the shares of our common stock issuable under the stock incentive plan.
We intend to enter into employment agreements with Messrs. Kaplan, Panzer and Kamer, which will become effective upon the consummation of this offering. We expect that such employment agreements will provide for salary, bonus and other benefits, including severance upon a termination of employment under certain circumstances.
We intend to enter into indemnification agreements with our directors and executive officers that obligate us to indemnify them to the maximum extent permitted by Maryland law. The indemnification agreements provide that:
If a director or executive officer is a party or is threatened to be made a party to any proceeding, other than a proceeding by or in the right of our company, by reason of such director's or executive officer's status as a director, officer or employee of our company, we must indemnify such director or executive officer for all expenses and liabilities actually and reasonably incurred by him or her, or on his or her behalf, unless it has been established that:
If a director or executive officer is a party or is threatened to be made a party to any proceeding by or in the right of our company to procure a judgment in our company's favor by reason of such director's or executive officer's status as a director, officer, or employee of our company, we must
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indemnify such director or executive officer for all expenses and liabilities actually and reasonably incurred by him or her, or on his or her behalf, unless it has been established that:
Upon application of a director or executive officer of our company to a court of appropriate jurisdiction, the court may order indemnification of such director or executive officer if:
Notwithstanding, and without limiting, any other provisions of the agreements, if a director or executive officer is a party or is threatened to be made a party to any proceeding by reason of such director's or executive officer's status as a director, officer or employee of our company, and such director or executive officer is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such proceeding, we must indemnify such director or executive officer for all expenses actually and reasonably incurred by him or her, or on his or her behalf, in connection with each successfully resolved claim, issue or matter, including any claim, issue or matter in such a proceeding that is terminated by dismissal, with or without prejudice.
In addition, the indemnification agreements will require us to advance reasonable expenses incurred by the indemnitee within ten days of the receipt by us of a statement from the indemnitee requesting the advance, provided the statement evidences the expenses and is accompanied by:
The indemnification agreements will also provide for procedures for the determination of entitlement to indemnification, including requiring such determination be made by independent counsel after a change of control of us.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to trustees, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
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Compensation Committee Interlocks and Insider Participation
No member of the compensation committee is a current or former officer or employee of us or any of our subsidiaries. None of our executive officers serves as a member of the board of directors or compensation committee of any company that has one or more of its executive officers serving as a member of our board of directors or compensation committee.
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The following table sets forth the beneficial ownership of shares of our common stock and shares of common stock into which units are exchangeable (without giving effect to the 14-month restriction on exchange applicable to units) immediately following the consummation of this offering and the formation transactions for:
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are exercisable as of March 31, 2006, or will become exercisable within 60 days thereafter, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Each person named in the table has sole voting and investment power with respect to all of the shares of our common stock shown as beneficially owned by such person, except as otherwise set forth in the notes to the table. Unless otherwise indicated, the address of each person named in the table is c/o Douglas Emmett, Inc., 808 Wilshire Boulevard, Suite 200, Santa Monica, California 90401.
Name of Beneficial Owner
|
Number of Shares
and Units Beneficially Owned |
Percent of
All Shares (1) |
Percent of
All Shares and Units (2) |
|||
---|---|---|---|---|---|---|
Dan A. Emmett | ||||||
Jordan Kaplan | ||||||
Kenneth M. Panzer | ||||||
William Kamer | ||||||
Victor J. Coleman | ||||||
Thomas E. O'Hern | ||||||
Dr. Andrea L. Rich | ||||||
William Wilson III | ||||||
Yale University | ||||||
All directors, director nominees and executive officers as a group (11 persons) |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Formation Transactions
Our predecessor principals, certain of their related parties and certain of our executive officers are subject to merger and contribution agreements entered into with us and our operating partnership in connection with the formation transactions, pursuant to which they will exchange their direct or indirect interests in our historical operating companies, the institutional funds, the investment funds and the single-asset entities for shares of our common stock and/or units in our operating partnership. In addition, as holders of interests in our historical operating companies, the institutional funds and the single-asset entities, they will receive their appropriate share of the pre-closing fund distributions and the pre-closing operating company distributions pursuant to the applicable formation transaction documents.
In addition, in connection with the formation transactions, Messrs. Emmett, Anderson, Kaplan and Panzer entered into a Representation, Warranty and Indemnity Agreement with us, pursuant to which they made limited representations and warranties to us regarding potential material adverse impacts on the entities and assets to be acquired by us in a formation transactions and agreed to indemnify us and our operating partnership for breaches of such representations and warranties for one year after the consummation of this offering and the formation transactions. Such indemnification is limited to $20.0 million in shares of our common stock and operating partnership units to be deposited into an escrow fund at closing of the formation transactions (or, if less, the fair market value of such shares and units) and is subject to a $1.0 million deductible.
For more detailed information regarding the terms of the formation transactions, including the benefits to related parties, please refer to "Structure and Formation of Our CompanyFormation Transactions."
DERA Contribution
On March 15, 2006, Messrs. Emmett, Anderson, Kaplan and Panzer contributed $24.0 million, $12.0 million, $12.0 million and $12.0 million, respectively, or an aggregate of $60.0 million to DERA in the form of promissory notes. A portion of this amount may be used to fund capital commitments to the institutional fund formed in 2005 if and to the extent any capital calls are made by such fund prior to consummation of this offering pursuant to the applicable partnership agreement. On or prior to the closing of this offering, Messrs. Emmett, Anderson, Kaplan and Panzer expect to use a combination of their own cash or borrowings from a third-party financial institution to repay the promissory notes. Such loan is expected to be secured by shares of our common stock or operating partnership units that Messrs. Emmett, Anderson, Kaplan and Panzer will receive in the formation transactions. The full amount of the $60.0 million, whether retained by DERA or contributed to the 2005 institutional fund pursuant to a capital call, has the net effect of increasing the value of DERA by such amount, thereby resulting in an additional $60.0 million of common stock being exchanged for DERA in the formation transactions, based on the initial offering price to the public in this offering. Accordingly, the $60.0 million, less any amount that has been contributed to the 2005 institutional fund prior to the closing of this offering, will be acquired by us in the formation transactions pursuant to the DERA merger. Any of such amount that has been contributed to the 2005 institutional fund for asset acquisitions or other purposes will be acquired by us in the formation transactions in such form pursuant to the merger of the 2005 institutional fund.
Partnership Agreement
Concurrently with the completion of this offering, we will enter into the partnership agreement with the various persons receiving operating partnership units in the formation transactions, including certain of our predecessor principals, three of whom are directors and executive officers of our
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company, and certain other executive officers of our company. As a result, such persons will become limited partners of our operating partnership. See "Description of the Partnership Agreement of Douglas Emmett Properties, LP."
Pursuant to the partnership agreement, limited partners of our operating partnership will have rights beginning 14 months after the completion of this offering, to cause our operating partnership to redeem each of their units for cash equal to the then-current market value of one share of our common stock, or, at our election, to exchange their units for shares of our common stock on a one-for-one basis.
Registration Rights
We have entered into a registration rights agreement with the various persons receiving shares of our common stock and/or operating partnership units in the formation transactions, including our predecessor principals and certain of our executive officers. Under the registration rights agreement, subject to certain limitations, commencing not later than 14 months after the date of the this offering, we will file one or more registration statements covering the resale of the shares of our common stock issued in the formation transactions and the resale of the shares of our common stock issued or issuable, at our option, in exchange for operating partnership units issued in the formation transactions. We may, at our option, satisfy our obligation to prepare and file a resale registration statement with respect to shares of our common stock issuable upon exchange of operating partnership units received in the formation transactions by filing a registration statement providing for the issuance by us to the holders of such operating partnership units of shares of our common stock registered under the Securities Act in lieu of our operating partnership's obligation to pay cash for such operating partnership units. We have agreed to pay all of the expenses relating to a registration of such securities.
Under certain circumstances, we are required to undertake an underwritten offering under a resale registration statement filed by us as described above upon the written request of holders including the predecessor principals of at least 5% in the aggregate of the securities subject to the registration rights agreement, provided that we are not obligated to effect more than two underwritten offerings. See "Shares Eligible for Future SaleRegistration Rights."
Employment Agreements
We intend to enter into employment agreements with Messrs. Kaplan, Panzer and Kamer that will become effective upon the consummation of this offering. We expect that these agreements will provide for salary, bonuses and other benefits, including, among others, severance benefits upon termination of employment in certain circumstances.
Indemnification of Officers and Directors
We intend to enter into indemnification agreements with each of our executive officers and directors as described in "ManagementIndemnification Agreements." Please refer to that section for more detailed information regarding these agreements.
Brentwood Court Loan
Mr. Emmett loaned an aggregate of $1.0 million to one of the single-asset entities in connection with the refinancing of the Brentwood Court property in 1998. The current maturity of the loan is January 1, 2008, and the loan pays interest at an annual rate equal to the Bank of America prime rate. For the years ended December 31, 2004 and 2005, Mr. Emmett received $23,921 and $12,245, respectively, in interest payments, and $103,159 and $165,000, respectively, in principal payments on this loan. In connection with the financing transactions, we will pay off the outstanding principal
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amount and accrued interest, which as of March 28, 2006 totaled approximately $231,000 and $16,661, respectively.
Offering Expenses Loan
As of March 31, 2006, the entities to be acquired by us in the formation transactions had advanced $4.9 million to us to fund costs of this offering and the formation transactions, which have been capitalized on our balance sheet and will be charged against the offering proceeds upon completion of this offering. See note C to our pro forma consolidated financial statements, included elsewhere in the prospectus.
Pre-Closing Cash Distributions
Pursuant to the formation transaction documents for the acquisition of our historical operating companies, Messrs. Emmett, Anderson, Kaplan and Panzer, as the sole stockholders of those entities, will receive, on or prior to the closing of such acquisitions by us, an assignment of each such company's right, title and interest in its cash (other than the $60.0 million DERA contribution) and its other current assets in excess of its liabilities (excluding accrued employee benefits and future lease obligations). The value of this assignment is expected to be approximately $ , $ , $ and $ , respectively, to each of Messrs. Emmett, Anderson, Kaplan and Panzer.
Pursuant to the formation transaction documents relating to the acquisition of the institutional funds and the single-asset entities, our predecessor principals and certain of our executive officers, as indirect holders of the general partnership interests and/or direct holders of limited partnership interests in the institutional funds, and/or as holders of interests in the single-asset entities, as applicable, will receive, on or prior to the closing of the acquisition of the respective entity, their proportionate share of such entity's distribution to its equity holders of its good faith estimate of net operating income, less a capital expense allowance, for the period commencing on July 1, 2005 and ending on the closing date. The value of this distribution is expected to be approximately $ , $ , $ and $ , respectively, to each of Messrs. Emmett, Anderson, Kaplan and Panzer, and approximately $ , $ , $ and $ , respectively, to each of Mr. Kamer, Ms. Orr, Mr. Golad and Mr. Means.
Release of Owensmouth Guarantee
In connection with the refinancing of land owned by one of the single-asset entities, Mr. Emmett provided to the lender for the related financing a $3.0 million limited personal guarantee that takes effect in the event that LIBOR rises above 6.5%. As part of the financing transactions, all outstanding indebtedness secured by this property and guaranteed by Mr. Emmett will be repaid.
Intercompany Transactions Among Historical Operating Companies
During the year ended 2005 and for the three months ended March 31, 2006, the following transactions occurred between our historical operating companies, each of which is owned by our predecessor principals:
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In addition, DERA pays DECO property management fees based on percentages of the rental cash receipts collected by the properties. In 2005, DERA expensed $9.0 million in fees and had $600,000 in accrued and unpaid property management fees, and for the three months ended March 31, 2006, DERA expensed $2.3 million in fees and had $456,000 in accrued and unpaid property management fees. DECO also provides maintenance and management services to the single-asset entities. During 2005 and for the three months ended March 31, 2006, DECO was reimbursed $592,000 and $178,000, respectively, by the single-asset entities for such services.
Please refer to notes 10 and 11 to the consolidated financial statements of our predecessor for the year ended December 31, 2005 and the three months ended March 31, 2006, respectively, included elsewhere in this prospectus.
Other Properties Owned by Mr. Emmett
In addition to the interests in the properties to be acquired by us in the formation transactions, Mr. Emmett also owns interests in three additional multifamily properties consisting of a total of 32 units. We will not acquire any interests in any of these properties in the formation transactions, nor have an option to purchase any of them as of the close of this offering. Mr. Emmett and entities controlled by him will retain ownership of these properties. Mr. Emmett may devote time to matters related to these other properties consistent with past practice.
Pre-Closing Cash Payments from our Predecessor Principals
Immediately prior to the consummation of this offering, Messrs. Emmett, Anderson, Kaplan and Panzer intend to fund cash payments in an aggregate amount of approximately $ million to various of our employees.
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STRUCTURE AND FORMATION OF OUR COMPANY
Our Operating Partnership
Following the consummation of this offering and the formation transactions, substantially all of our assets will be held, indirectly or directly, by, and our operations run through, our operating partnership. We will contribute the net proceeds from this offering to our operating partnership in exchange for units therein. Our interest in our operating partnership will entitle us to share in cash distributions from, and in the profits and losses of, our operating partnership in proportion to our percentage ownership. As the sole member of the general partner of our operating partnership, we will generally have the exclusive power under the partnership agreement to manage and conduct its business, subject to certain limited approval and voting rights of the other limited partners described more fully below in "Description of the Partnership Agreement of Douglas Emmett Properties, LP." Our board of directors will manage the affairs of our company by directing the affairs of our operating partnership.
Beginning on or after the date which is 14 months after the consummation of this offering, limited partners of our operating partnership have the right to require our operating partnership to redeem part or all of their units for cash, or, at our election, shares of our common stock, based upon the fair market value of an equivalent number of shares of our common stock at the time of the redemption, subject to the ownership limits set forth in our charter and described under the section entitled "Description of SecuritiesRestrictions on Transfer." With each redemption of units, we will increase our percentage ownership interest in our operating partnership and our share of our operating partnership's cash distributions and profits and losses. See "Description of the Partnership Agreement of Douglas Emmett Properties, LP."
Formation Transactions
Prior to completion of the formation transactions, our predecessor principals owned all of the outstanding interests in our historical operating companies. These entities provide asset management, property management, leasing, tenant improvement construction, acquisition, repositioning, redevelopment and financing services primarily to the properties owned, directly or indirectly, by the nine institutional funds and eight single-asset entities that we will acquire in the formation transactions. The institutional funds are owned by our predecessor principals and a number of unaffiliated private investors, consisting of endowments, foundations, pension plans, banks, other institutional investors and high net worth individuals. DERA is the general partner of each institutional fund. In addition, DERA is the general partner of three investment funds that own interests in certain of the institutional funds. Our predecessor principals, certain of our executive officers and unaffiliated third parties own the three investment funds. Our predecessor principals, together with their related parties, own a significant portion of the interests in the single-asset entities, and unaffiliated third parties own the remaining interests in the single-asset entities.
Prior to or concurrently with the completion of this offering, we will engage in formation transactions that are designed to:
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We structured the formation transactions to minimize potential conflicts of interest. None of the predecessor principals or our senior management elected to receive any cash in the formation transactions and instead will receive only shares of our common stock and/or operating partnership units. The predecessor principals also recently contributed an additional $60.0 million to DERA, the stock of which will be exchanged for shares of our common stock, valued at the initial public offering price to the public, in the formation transactions. In addition, we will not enter into any tax protection agreements in connection with the formation transactions.
Pursuant to the formation transactions, the following have occurred or will occur on or prior to the completion of this offering. All amounts are based on the mid-point of the range set forth on the cover page of this prospectus:
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partnership or shares of our common stock for its interests in the applicable entities, with a total value of $ (whether or not the underwriters' over-allotment option is exercised). Holders that are not accredited investors will receive cash whether or not they made a different election. Holders that are accredited investors and that do not make an election will receive common stock. Pursuant to the contribution agreement, holders that are accredited investors and that elected to receive common stock for all or a part of their interests will contribute such interests directly to us for shares of our common stock. The general partnership interest in each of the institutional funds and the investment funds will remain issued and outstanding, and no consideration will be delivered therefor, as such interest will be acquired by us in the DERA merger described above.
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deposit into escrow at the closing of the formation transactions $20.0 million in shares of our common stock and/or units in our operating partnership, which constitutes a portion of the consideration received by our predecessor principals in the formation transactions. Our predecessor principals have no obligation to increase the amount of common stock and/or units in the escrow in the event the trading price of our common stock drops below the initial public offering price. The entire indemnity amount will be released to our predecessor principals after one year from the closing to the extent that claims have not been made against the escrow. If any claim for indemnification is made within such one year period, all or a portion of the indemnity amount will be held until resolution of such claim, at which time any amounts not used to satisfy such claim will be returned to our predecessor principals. Such indemnification is subject to a deductible of $1.0 million.
Consequences of this Offering, the Formation Transactions and the Financing Transactions
The completion of this offering, the formation transactions and the financing transactions will have the following consequences. All amounts are based on the mid-point of the range set forth on the cover page of this prospectus:
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The aggregate historical net tangible book value of the assets we will acquire in the formation transactions was approximately $ million as of March 31, 2006. In exchange for these assets, we will pay $ in cash, and we will issue operating partnership units and shares of our common stock with a combined aggregate value of $ , based on the mid-point of the range set forth on the cover page of this prospectus. If the underwriters' over-allotment option is exercised in full, we will pay $ in cash, and we will issue operating partnership units and shares of our common stock with a combined aggregate value of $ , based upon the mid-point of the range set forth on the cover of this prospectus. The value of the operating partnership units and the common stock that we will issue for the assets to be acquired in the formation transactions will increase or decrease if our common stock price increases or decreases. The initial public offering price does not necessarily bear any relationship to the book value or the fair market value of our assets.
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The following diagram depicts our ownership structure upon completion of this offering and the formation transactions, assuming an initial public offering price equal to the mid-point of the range set for on the cover page of this prospectus:
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Benefits of the Formation Transactions and the Offering to Certain Parties
In connection with this offering, the formation transactions and the financing transactions, our predecessor principals and certain of our executive officers will receive material benefits, including the following. Amounts below are based on the mid-point of the range set forth on the cover page of this prospectus. In addition, in each case, the value of the units and the common stock that we will issue for the assets in the formation transactions will increase or decrease if our common stock price increases or decreases. The initial public offering price does not necessarily bear any relationship to our book value or the fair market value of the assets to be acquired.
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for assets in the formation transactions. The aggregate historical combined net tangible book value of these assets was approximately $ as of March 31, 2006, resulting in an unrealized gain of $ million.
Continuing investors, including our predecessor principals, holding shares of our common stock or units in our operating partnership as a result of the formation transactions will have rights beginning 14 months after the completion of this offering:
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at our election, to exchange each of such units for which a redemption notice has been received for shares of our common stock on a one-for-one basis;
Determination of Offering Price
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the representatives of the underwriters and us. In determining the initial public offering price of our common stock, the representatives of the underwriters will consider the history and prospects for the industry in which we compete, our financial information, the ability of our management and our business potential and earning prospects, the prevailing securities markets at the time of this offering, and the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. The initial public offering price does not necessarily bear any relationship to the book value of our assets or the assets to be acquired in the formation transactions, our financial condition or any other established criteria of value and may not be indicative of the market price for our common stock after this offering. We have not obtained any third-party appraisals of the properties and other assets to be acquired by us in connection with this offering or the formation transactions. The consideration to be given by us for our properties and other assets in the formation transactions may exceed the fair market value of these properties and assets. See "Risk FactorsRisks Related to Our Properties and Our BusinessThe price we will pay for the assets to be acquired in the formation transactions may exceed their aggregate fair market value."
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain of our investment, financing and other policies. These policies have been determined by our board of directors and, in general, may be amended or revised from time to time by our board of directors without a vote of our stockholders.
Investment Policies
Investment in Real Estate or Interests in Real Estate
Our investment objectives are to provide quarterly cash dividends and achieve long-term capital appreciation through increases in the value of our company. We have not established a specific policy regarding the relative priority of these investment objectives. For a discussion of the properties and our acquisition and other strategic objectives, see "Business and Properties."
We expect to pursue our investment objectives primarily through the ownership, directly or indirectly, by our operating partnership of the properties to be acquired by us in the formation transactions. We currently intend to invest primarily in office and multifamily properties, including potential acquisitions of existing improved properties or properties in need of redevelopment. Future investment or development activities will not be limited to any geographic area, product type or to a specified percentage of our assets. While we may diversify in terms of property locations, size and market or submarket, we do not have any limit on the amount or percentage of our assets that may be invested in any one property or any one geographic area. We intend to engage in such future investment or development activities in a manner that is consistent with the maintenance of our status as a REIT for federal income tax purposes. In addition, we may purchase or lease income-producing commercial and other types of properties for long-term investment, expand and improve the properties we presently own or other acquired properties, or sell such properties, in whole or in part, when circumstances warrant.
We may also participate with third parties in property ownership, through joint ventures or other types of co-ownership. We also may acquire real estate or interests in real estate in exchange for the issuance of common stock, units, preferred stock or options to purchase stock.
Equity investments in acquired properties may be subject to existing mortgage financing and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments. Debt service on such financing or indebtedness will have a priority over any dividends with respect to our common stock. Investments are also subject to our policy not to be treated as an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act.
Investments in Real Estate Mortgages
Our current portfolio consists primarily of, and our business objectives emphasize, equity investments in office and multifamily real estate. Although we do not presently intend to invest in mortgages or deeds of trust, other than in a manner that is ancillary to an equity investment, we may elect, in our discretion, to invest in mortgages and other types of real estate interests, including, without limitation, participating or convertible mortgages; provided , in each case, that such investment is consistent with our qualification as a REIT. Investments in real estate mortgages run the risk that one or more borrowers may default under certain mortgages and that the collateral securing certain mortgages may not be sufficient to enable us to recoup our full investment.
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Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
Subject to the percentage of ownership limitations and gross income tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.
Investment in Other Securities
Other than as described above, we do not intend to invest in any additional securities such as bonds, preferred stocks or common stock.
Dispositions
We do not currently intend to dispose of any of our properties, although we reserve the right to do so if, based upon management's periodic review of our portfolio, our board of directors determines that such action would be in the best interest of our stockholders. In addition, we may elect to enter into joint ventures or other types of co-ownership with respect to properties that we already own, either in connection with acquiring interests in other properties (as discussed above in "Investment in Real Estate or Interests in Real Estate") or from investors to raise equity capital. Certain directors and executive officers who hold units may have their decision as to the desirability of a proposed disposition influenced by the tax consequences to them resulting from the disposition of a certain property. See "Risk FactorsRisks Related to Our Organization and StructureTax consequences to holders of operating partnership units upon a sale or refinancing of our properties may cause the interests of our senior management to differ from your own."
Financing Policies
Our board of directors has adopted a policy of limiting our indebtedness to approximately 65% of our total market capitalization at the time of incurrence. Our total market capitalization is defined as the sum of the market value of our outstanding common stock and preferred equity (which may decrease, thereby increasing our debt to total market capitalization ratio), including shares of restricted stock that we will issue to certain of our officers under our stock incentive plan, plus the aggregate value of operating partnership units not owned by us, plus the book value of our total consolidated indebtedness. Since this ratio is based, in part, upon market values of equity, it will fluctuate with changes in the price of our common stock. We believe, however, that this ratio provides an appropriate indication of leverage for a company whose assets are primarily real estate. We expect that our ratio of debt to total market capitalization upon consummation of this offering will be approximately % ( % if the underwriters' over-allotment option is exercised in full).
Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur. Our board of directors may from time to time modify our debt policy in light of then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general conditions in the market for debt and equity securities, fluctuations in the market price of our common stock, growth and acquisition opportunities and other factors. Accordingly, our board of directors may increase or decrease our ratio of debt to total market capitalization beyond the limits described above. If these policies were changed, we could become more highly leveraged, resulting in an increased risk of default on our obligations and a related increase in debt service requirements that could adversely affect our financial condition and results of operations and our ability to pay dividends to our stockholders.
Conflict of Interest Policies
Sale or Refinancing of Properties. Upon the sale or refinancing of certain of the properties to be acquired by us in the formation transactions, some holders of operating partnership units, including our
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predecessor principals, may suffer different and more adverse tax consequences than holders of our common stock. Consequently, holders of operating partnership unit may have differing objectives regarding the appropriate pricing and timing of any such sale or repayment of indebtedness. We will have the exclusive authority under the partnership agreement, as the sole member of the general partner of our operating partnership, to determine whether, when, and on what terms to sell a property or when to refinance or repay indebtedness, any such decision would require the approval of our board of directors. See "Description of the Partnership Agreement of Douglas Emmett Properties, LP."
Certain of our directors and executive officers may be subject to certain conflicts of interest in fulfilling their responsibilities to us. We have adopted certain policies that are designed to eliminate or minimize certain potential conflicts of interest. In addition, our board of directors is subject to certain provisions of Maryland law, which are also designed to eliminate or minimize conflicts. See "Material Provisions of Maryland Law and of our Charter and BylawsInterested Director and Officer Transactions" and "Material Provisions of Maryland Law and of our Charter and BylawsBusiness Opportunities."
Policies With Respect To Other Activities
We have authority to offer common stock, units, preferred stock, options to purchase stock or other securities in exchange for property, repurchase or otherwise acquire our common stock or other securities in the open market or otherwise, and we may engage in such activities in the future. As described in "Description of the Partnership Agreement of Douglas Emmett Properties, LP," we expect, but are not obligated, to issue common stock to holders of units upon exercise of their redemption rights. Except in connection with the formation transactions or pursuant to our stock incentive plan, we have not issued common stock, units or any other securities in exchange for property or any other purpose, although, as discussed above in "Investment in Real Estate or Interests in Real Estate," we may elect to do so. After the consummation of the formation transactions, our board of directors has no present intention of causing us to repurchase any common stock, although we may do so in the future. We may issue preferred stock from time to time, in one or more series, as authorized by our board of directors without the need for stockholder approval. See "Description of SecuritiesPreferred Stock." We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers other than our operating partnership and do not intend to do so. At all times, we intend to make investments in such a manner as to qualify as a REIT, unless because of circumstances or changes in the Code, or the Treasury regulations, our board of directors determines that it is no longer in our best interest to qualify as a REIT. We have not made any loans to third parties, although we may make loans to third parties, including, without limitation, to joint ventures in which we participate. We intend to make investments in such a way that we will not be treated as an investment company under the 1940 Act.
Reporting Policies
We intend to make available to our stockholders our annual reports, including our audited financial statements. After this offering, we will become subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Pursuant to those requirements, we will be required to file annual and periodic reports, proxy statements and other information, including audited financial statements, with the SEC.
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DESCRIPTION OF THE
PARTNERSHIP AGREEMENT OF DOUGLAS EMMETT PROPERTIES, LP
A summary of the material provisions of the Agreement of Limited Partnership of Douglas Emmett Properties, LP, dated as of , 2006, which we refer to as the partnership agreement, is set forth below. The following description does not purport to be complete and is subject to and qualified in its entirety by reference to applicable provisions of the Delaware Revised Uniform Limited Partnership Act and the partnership agreement for the operating partnership. We have filed a copy of the partnership agreement as an exhibit to the registration statement of which this prospectus is a part.
General
Upon completion of the formation transactions, substantially all of our assets will be held by, and substantially all of our operations will be conducted through, the operating partnership, either directly or through subsidiaries. We are the sole member of the general partner of the operating partnership. The general partner is a Delaware limited liability company and owns a 1% general partnership interest in the operating partnership. We are also a limited partner of the operating partnership, and we own, either directly or through subsidiaries including the general partner, % of the outstanding interests in the operating partnership through our ownership of operating partnership units.
Units are also held by persons who contributed interests in properties and/or other assets to the operating partnership. All holders of units in the operating partnership (including the general partner in its capacity as such and us in our capacity as a limited partner) are entitled to share in cash distributions from, and in the profits and losses of, the operating partnership in proportion to their respective percentage interests in the operating partnership. The units in the operating partnership will not be listed on any exchange or quoted on any national market system.
Provisions in the partnership agreement may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. Such provisions also make it more difficult for third parties to alter the management structure of the operating partnership without the concurrence of our board of directors. These provisions include, among others:
Purposes, Business and Management
The purpose of the operating partnership includes the conduct of any business that may be conducted lawfully by a limited partnership formed under the Delaware Revised Uniform Limited Partnership Act, except that the partnership agreement for the operating partnership requires the business of the operating partnership to be conducted in such a manner that will permit us to be classified as a REIT under Sections 856 through 860 of the Code. Subject to the foregoing limitation, the operating partnership may enter into partnerships, joint ventures or similar arrangements and may
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own interests in any other entity. The general partner shall cause the operating partnership not to take, or to refrain from taking, any action that, in its judgment, in its sole and absolute discretion:
unless, in any such case, such action described in the bullet points above is specifically consented to by us.
In general, our board of directors will manage the affairs of the operating partnership by directing our affairs, in our capacity as the sole member of the general partner of the operating partnership.
Except as otherwise expressly provided in the partnership agreement or as delegated or provided to an additional partner by the general partner or any successor general partner pursuant to the partnership agreement, all management powers over the business and affairs of the operating partnership are exclusively vested in the general partner. No limited partner or any other person to whom one or more partnership units have been transferred may, in its capacity as a limited partner, take part in the operations, management or control of the operating partnership's business, transact any business in the operating partnership's name or have the power to sign documents for or otherwise bind the operating partnership. The general partner may not be removed by the limited partners with or without cause, except with the general partner's consent. In addition to the powers granted to the general partner under applicable law or that are granted to the general partner under any other provision of the partnership agreement, the general partner, subject to the other provisions of the partnership agreement, has full power and authority to do all things deemed necessary or desirable by the general partner to conduct the business of the operating partnership, to exercise all powers of the operating partnership and to effectuate the purposes of the operating partnership. The operating partnership may incur debt or enter into other similar credit, guarantee, financing or refinancing arrangements for any purpose, including, without limitation, in connection with any acquisition of properties, upon such terms as the general partnership determines to be appropriate. With limited exceptions, the general partner is authorized to execute, deliver and perform agreements and transactions on behalf of the operating partnership without any further act, approval or vote of the limited partners.
Restrictions on General Partner's Authority
The general partner may not take any action in contravention of the partnership agreement. The general partner may not, without the prior consent of the limited partners (including us), undertake, on behalf of the operating partnership, any of the following actions or enter into any transaction that would have the effect of such actions:
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The general partner generally may not withdraw as general partner from the operating partnership nor transfer all of its interest in the operating partnership without the consent of a majority in interest of the limited partners (including us), subject to the exceptions discussed in "Transfers and WithdrawalsRestrictions on General Partner."
In addition, the general partner may not amend the partnership agreement for the operating partnership or take any action on behalf of the operating partnership, without the prior consent of each limited partner adversely affected by such amendment or action, if such amendment or action would:
Additional Limited Partners
The general partner is authorized to admit additional limited partners to the operating partnership from time to time, on terms and conditions and for such capital contributions as may be established in its sole and absolute discretion. The net capital contribution need not be equal for all limited partners. No person may be admitted as an additional limited partner without the general partner's consent, which consent may be given or withheld in its sole and absolute discretion.
No action or consent by the limited partners is required in connection with the admission of any additional limited partner. The general partner is expressly authorized to cause the operating partnership to issue additional units:
Subject to Delaware law, any additional units may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties (including, without limitation, rights, powers and duties that may be senior or otherwise entitled to preference over existing units) as the general partner shall determine, in its sole and absolute discretion without the approval of any limited partner or any other person. Without limiting the generality of the foregoing, the general partner has authority to specify:
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Ability to Engage in Other Businesses; Conflicts of Interest
We may not conduct any business other than in connection with the ownership, acquisition and disposition of partnership interests, the management of the business of the operating partnership, our operation as a reporting company with a class or classes of securities registered under the Exchange Act, our operations as a REIT, the offering, sale, syndication, private placement or public offering of stock, bonds, securities or other interests, financing or refinancing of any type related to the operating partnership or its assets or activities, and such activities as are incidental to those activities discussed above. We may, however, in our sole and absolute discretion, from time to time hold or acquire assets in our own name or otherwise other than through the operating partnership so long as we take commercially reasonable measures to insure that the economic benefits and burdens of such property are otherwise vested in the operating partnership.
Distributions
Subject to the terms of any partnership unit designation, the general partner shall cause the operating partnership to distribute quarterly, or on a more or less frequent basis as we determine, all, or such portion as we may in our sole and absolute discretion determine, of Available Cash (as such term is defined in the partnership agreement for the operating partnership) generated by the operating partnership during such quarter to the partners and limited partners:
To the extent we own properties outside the operating partnership, any income we receive in connection with the activities from those properties will result in a recalculation of distributions from the operating partnership such that we and the limited partners would each receive the same distributions that we and they would have received had we contributed such properties to the operating partnership.
Borrowing by the Operating Partnership
The general partner is authorized to cause the operating partnership to borrow money and to issue and guarantee debt as it deems necessary for the conduct of the activities of the operating partnership. Such debt may be secured, among other things, by mortgages, deeds of trust, liens or encumbrances on properties of the operating partnership.
Reimbursement of Us; Transactions with Our Affiliates and Us
Our subsidiary does not receive any compensation for its services as the general partner of the operating partnership. We, as a limited partner in the operating partnership, have the same right to allocations and distributions as other partners and limited partners. In addition, the operating
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partnership will reimburse us for all expenses incurred by us in connection with the operating partnership's business, including expenses relating to the ownership of interests in and management and operation of, or for the benefit of, the operating partnership, compensation of officers and employees, including, without limitation, payments under our future compensation plans that may provide for stock units, or phantom stock, pursuant to which our employees will receive payments based upon dividends on or the value of our common shares, director or manager fees and expenses and all costs and expenses that we incur in connection with our being a public company, including costs of filings with the SEC, reports and other distributions to our stockholders. The operating partnership will reimburse us for all expenses incurred by us relating to any other offering of capital stock, including any underwriting discounts or commissions in such case based on the percentage of the net proceeds from such issuance contributed to or otherwise made available to the operating partnership.
Except as expressly permitted by the partnership agreement for the operating partnership, we and our affiliates may not engage in any transactions with the operating partnership except on terms that are fair and reasonable and no less favorable to the operating partnership than would be obtained from an unaffiliated third party.
Our Liability and that of the Limited Partners
We, as the sole member of the general partner of the operating partnership, are ultimately liable for all general recourse obligations of the operating partnership to the extent not paid by the operating partnership. We are not liable for the nonrecourse obligations of the operating partnership.
The limited partners are not required to make additional contributions to the operating partnership. Assuming that a limited partner does not take part in the control of the business of the operating partnership, the liability of the limited partner for obligations of the operating partnership under the partnership agreement for the operating partnership and the Delaware Revised Uniform Limited Partnership Act is limited, subject to limited exceptions, generally to the loss of the limited partner's investment in the operating partnership represented by such limited partner's units. The operating partnership will operate in a manner we deem reasonable, necessary and appropriate to preserve the limited liability of the limited partners.
Exculpation and Indemnification of Us
The partnership agreement for the operating partnership generally provides that we, as sole member of the general partner, the general partner, and any of our respective directors or officers will incur no liability to the operating partnership, or any limited partner or assignee, for losses sustained or liabilities incurred or benefits not derived as a result of errors in judgment, mistakes of law or of any act or omission if we, the general partner or such officer or director acted in good faith. In addition, we, as sole member of the general partner, and the general partner are not responsible for any misconduct or negligence on the part of our agents, provided we appointed such agents in good faith. We, as sole member of the general partner, and the general partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors, and any action we take or omit to take in reliance upon the opinion of such persons, as to matters which we, as sole member of the general partner, and the general partner reasonably believe to be within their professional or expert competence, shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.
The partnership agreement for the operating partnership also provides for the indemnification, to the fullest extent permitted by law, of us, as sole member of the general partner, of the general partner, of our directors and officers, and of such other persons as the general partner may from time to time designate against any and all losses, claims, damages, liabilities, joint or several, expenses, judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits
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or proceedings in which such person may be involved that relate to the operations of the operating partnership, provided that such person will not be indemnified for (i) any act or omission of such person that was material to the matter giving rise to the action and either was committed in bad faith or was the result of active and deliberate dishonesty, (ii) in the case of any criminal proceeding, any act or omission that such person had reason to believe was unlawful, or (iii) any transaction for which such person received an improper personal benefit in violation or breach of any provision of the partnership agreement for the operating partnership.
Sales of Assets
Under the partnership agreement for the operating partnership, the general partner generally has the exclusive authority to sell all or substantially all of the assets of the operating partnership. However, in connection with the acquisition of properties from persons to whom the general partner issued units as part of the purchase price, in order to preserve such persons' tax deferral, the general partner may contractually agree, in general, not to sell or otherwise transfer the properties for a specified period of time, or in some instances, not to sell or otherwise transfer the properties without compensating the sellers of the properties for their loss of the tax deferral.
Redemption Rights of Qualifying Parties
After fourteen months of becoming a holder of units, each limited partner (other than us) and some assignees have the right, subject to the terms and conditions set forth in the partnership agreement for the operating partnership, to require the operating partnership to redeem all or a portion of the units held by such party in exchange for a cash amount equal to the value of our common shares, as determined in accordance with the partnership agreement for the operating partnership. The operating partnership's obligation to effect a redemption, however, will not arise or be binding against the operating partnership unless and until we decline or fail to exercise our prior and independent right to purchase such units for common shares, pursuant to the partnership agreement for the operating partnership.
On or before the close of business on the fifth business day after a limited partner gives us a notice of redemption, we may, in our sole and absolute discretion but subject to the restrictions on the ownership of our stock imposed under our Articles of Incorporation and the transfer restrictions and other limitations set forth in our Articles of Incorporation, acquire some or all of the tendered units from the tendering party in exchange for common shares, based on an exchange ratio of one common share for each unit, subject to adjustment as provided in the partnership agreement for the operating partnership. The partnership agreement for the operating partnership does not obligate us or any general partner to register, qualify or list any common shares issued in exchange for units with the SEC, with any state securities commissioner, department or agency, or with any stock exchange. Common shares issued in exchange for units pursuant to the partnership agreement for the operating partnership may contain legends regarding restrictions under the Securities Act and applicable state securities laws as we in good faith determine to be necessary or advisable in order to ensure compliance with securities laws.
Transfers and Withdrawals
Restrictions on Transfer
The partnership agreement for the operating partnership restricts the transferability of units. Any transfer or purported transfer of a unit not made in accordance with the partnership agreement for the operating partnership will not be valid. Until the expiration of fourteen months from the date on which a limited partner acquired units, such limited partner generally may not transfer all or any portion of its units to any transferee.
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After the expiration of fourteen months from the date on which a limited partner acquired units, such limited partner has the right to transfer all or any portion of its units to any person that is an "accredited investor," subject to the satisfaction of conditions specified in the partnership agreement for the operating partnership, including our right of first refusal. For purposes of this transfer restriction, "accredited investor" shall have the meaning set forth in Rule 501 promulgated under the Securities Act. It is a condition to any transfer that the transferee assumes by operation of law or express agreement all of the obligations of the transferor limited partner under the partnership agreement for the operating partnership with respect to such units, and no such transfer will relieve the transferor limited partner of its obligations under the partnership agreement for the operating partnership without our approval, in our sole and absolute discretion. This transfer restriction does not apply to a statutory merger or consolidation pursuant to which all obligations and liabilities of the limited partner are assumed by a successor corporation by operation of law.
In connection with any transfer of partnership interests or units, we will have the right to receive an opinion of counsel reasonably satisfactory to us to the effect that the proposed transfer may be effected without registration under the Securities Act, and will not otherwise violate any federal or state securities laws or regulations applicable to the operating partnership or the partnership interests or units transferred.
No transfer by a limited partner of its units, including any redemption or any acquisition of partnership interests or units by us or by the operating partnership, may be made to any person if:
In addition, we have a right of first refusal with respect to any proposed transfers by other limited partners, exercisable within ten business days of notice of the transfer and a description of the proposed consideration to be paid for the operating partnership units.
Substituted Limited Partners
No limited partner will have the right to substitute a transferee as a limited partner in its place. A transferee of the interest of a limited partner may be admitted as a substituted limited partner only with our consent, which consent may be given or withheld in our sole and absolute discretion. If we in our sole and absolute discretion, do not consent to the admission of any permitted transferee as a substituted limited partner, such transferee will be considered an assignee for purposes of the partnership agreement for the operating partnership. An assignee will be entitled to all the rights of an assignee of a limited partnership interest under the Delaware Revised Uniform Limited Partnership Act, including the right to receive distributions from the operating partnership and the share of net income, net losses and other items of income, gain, loss, deduction and credit of the operating partnership attributable to the units assigned to such transferee and the rights to transfer the units provided in the partnership agreement for the operating partnership, but will not be deemed to be a holder of units for any other purpose under the partnership agreement for the operating partnership, and will not be entitled to effect a consent or vote with respect to such units on any matter presented to the limited partners for approval. The right to consent or vote, to the extent provided in the partnership agreement for the operating partnership or under the Delaware Revised Uniform Limited Partnership Act, will fully remain with the transferor limited partner.
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Restrictions on General Partner
The general partner may not transfer any of its general partner interest (other than to us or our affiliates) or withdraw from managing the operating partnership unless:
Restrictions on Mergers, Sales, Transfers and Other Significant Transactions Involving Us
We may merge, consolidate or otherwise combine our assets with another entity, or sell all or substantially all of our assets, or reclassify, recapitalize or change the terms of our outstanding common equity interests without the consent of a majority in interest of the other limited partners, so long as:
Amendment of the Partnership Agreement for the Operating Partnership
Amendments to the partnership agreement for the operating partnership may be proposed only by the general partner or by limited partners holding 25% percent or more of the partnership interests held by limited partners (excluding us). Following such proposal, the general partner will submit to the partners and limited partners any proposed amendment that, pursuant to the terms of the partnership agreement, requires the consent of the general partner and a majority in interest of the limited partners holding units entitled to vote at the meeting. The general partner will seek the written consent of the partners and limited partners, if applicable, on the proposed amendment or will call a meeting to vote on the proposed amendment and to transact any other business that it may deem appropriate.
Amendment by the General Partner Without the Consent of the Limited Partners
The general partner has the power, without the consent of the limited partners, to amend the partnership agreement for the operating partnership as may be required to facilitate or implement any of the following purposes:
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other provisions of the partnership agreement for the operating partnership, or make other changes with respect to matters arising under the partnership agreement for the operating partnership that will not be inconsistent with law or with the provisions of the partnership agreement for the operating partnership;
Amendment with the Consent of the Limited Partners
The general partner may amend the partnership agreement for the operating partnership only with the consent of the limited partners in certain circumstances. See "Restrictions on General Partner's Authority."
Procedures for Actions and Consents of Partners
Meetings of the partners may be called only by the general partner. Notice of any such meeting will be given to all partners not less than seven days nor more than 60 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Each meeting of partners will be conducted by the general partner or such other person as it may appoint pursuant to such rules for the conduct of the meeting as it or such other person deems appropriate in its sole and absolute discretion. Whenever the vote or consent of partners is permitted or required under the partnership agreement for the operating partnership, such vote or consent may be given at a meeting of partners or may be given by written consent. Any action required or permitted to be taken at a meeting of the partners may be taken without a meeting if a written consent setting forth the action so taken is signed by partners holding a majority of outstanding partnership interests (or such other percentage as is expressly required by the partnership agreement for the operating partnership for the action in question).
Dissolution
The operating partnership will dissolve, and its affairs will be wound up, upon the first to occur of any of the following:
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Upon dissolution we, the general partner, or, in the event that there is no remaining general partner, a liquidator will proceed to liquidate the assets of the operating partnership and apply the proceeds from such liquidation in the order of priority set forth in the partnership agreement for the operating partnership.
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The following summary of the terms of the stock of our company does not purport to be complete and is subject to and qualified in its entirety by reference to our charter and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus forms a part. See "Where You Can Find More Information."
Our charter provides that we may issue up to shares of common stock, $0.01 par value per share, and shares of preferred stock, $0.01 par value per share. Our charter authorizes our board of directors to amend our charter to increase or decrease the aggregate number of authorized shares or the number of authorized shares of any class or series without stockholder approval. Upon completion of this offering, shares of our common stock and no shares of preferred stock will be issued and outstanding. Under Maryland law, stockholders generally are not liable for the corporation's debts or obligations.
All shares of our common stock offered hereby will be duly authorized, fully paid and nonassessable upon issuance as provided herein. Subject to the preferential rights of any other class or series of stock and to the provisions of the charter regarding the restrictions on transfer of stock, holders of shares of our common stock are entitled to receive dividends on such stock if, as and when authorized by our board of directors out of assets legally available therefor and declared by us and to share ratably in the assets of our company legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate provision for all known debts and liabilities of our company.
Subject to the provisions of our charter regarding the restrictions on transfer of stock and except as may otherwise be specified in the terms of any class or series of common stock, each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as provided with respect to any other class or series of stock, the holders of such shares will possess the exclusive voting power. There is no cumulative voting in the election of our board of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all of the directors then standing for election and the holders of the remaining shares will not be able to elect any directors.
Holders of shares of our common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of our company. Subject to the provisions of the charter regarding the restrictions on transfer of stock, shares of our common stock will have equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. Our charter provides for approval by the affirmative vote of stockholders holding two-thirds of all of the votes entitled to be cast on the matter in these situations, including the sale of all or substantially all of our assets and our subsidiaries' assets taken as a whole, except that amendments to our charter (other than any amendment to the provisions regarding director removal and the vote for extraordinary transactions) may be approved by the affirmative vote of stockholders holding a majority of the votes entitled to be cast on the amendment.
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Our charter authorizes our board of directors to reclassify any unissued shares of our common stock into other classes or series of classes of stock and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each such class or series.
Our charter authorizes our board of directors to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any series. Prior to issuance of shares of each series, our board of directors is required by the MGCL and our charter to set, subject to the provisions of our charter regarding the restrictions on transfer of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such series. Thus, our board of directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest. As of the date hereof, no shares of preferred stock are outstanding and we have no present plans to issue any preferred stock.
Power to Increase Authorized Stock and Issue Additional Shares of our Common Stock and Preferred Stock
We believe that the power of our board of directors to increase the number of authorized shares of stock, issue additional authorized but unissued shares of our common stock or preferred stock and to classify or reclassify unissued shares of our common stock or preferred stock and thereafter to cause us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. Shares of additional classes or series of stock, as well as of common stock, will be available for issuance without further action by our stockholders, unless stockholder consent is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors does not intend to do so, it could authorize us to issue a class or series that could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for our stockholders or otherwise be in their best interest.
In order for us to qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities such as qualified pension plans) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made).
Our charter contains restrictions on the ownership and transfer of our stock. The relevant sections of our charter provide that, subject to the exceptions described below, no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 5.0% in value of the aggregate of our outstanding shares of stock or more than 5.0% of the outstanding shares of our common stock. We refer to this restriction as the "ownership limit." A person or entity that becomes subject to the ownership limit by virtue of a violative transfer that results in a transfer to a trust, as set forth below, is referred to as a "purported beneficial
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transferee" if, had the violative transfer been effective, the person or entity would have been a record owner and beneficial owner or solely a beneficial owner of our stock, or is referred to as a "purported record transferee" if, had the violative transfer been effective, the person or entity would have been solely a record owner of our stock.
The constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than % in value of our outstanding stock or less than % of the value or number of our common stock (or the acquisition of an interest in an entity that owns, actually or constructively, our stock) by an individual or entity, could, nevertheless cause that individual or entity, or another individual or entity, to own constructively in excess of % in value of our outstanding stock or % of the value or number of our outstanding common stock and thereby subject such stock to the applicable ownership limit.
Our board of directors may, in its sole discretion, waive the ownership limit with respect to a particular stockholder if it determines, based on representations and undertakings it may obtain from the stockholder that:
As a condition of such waiver, our board of directors may also require an opinion of counsel or IRS ruling satisfactory to our board of directors with respect to preserving our REIT status.
In connection with the waiver of the ownership limit or at any other time, our board of directors may decrease the ownership limit for all other persons and entities; provided, however, that the decreased ownership limit will not be effective for any person or entity whose percentage ownership in our stock is in excess of such decreased ownership limit until such time as such person or entity's percentage of our stock equals or falls below the decreased ownership limit, but any further acquisition of our stock in excess of such percentage ownership of our stock will be in violation of the ownership limit. Additionally, the new ownership limit may not allow five or fewer stockholders to beneficially own more than 49.9% in value of our outstanding stock.
Our charter provisions further prohibit:
Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate any of the foregoing restrictions on transferability and ownership will be required to give notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfer on our status as a REIT. The foregoing provisions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.
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Pursuant to our charter, if any purported transfer of our stock or any other event would otherwise result in any person violating the ownership limit or such other limit as established by our board of directors or would result in our being "closely held" under Section 856(h) of the Code or otherwise failing to qualify as a REIT, then that number of shares in excess of the ownership limit or causing us to be "closely held" or otherwise to fail to qualify as a REIT (rounded up to the nearest whole) will be automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable organizations selected by us. The automatic transfer will be effective as of the close of business on the business day prior to the date of the violative transfer or other event that results in a transfer to the trust. Any dividend or other distribution paid to the purported record transferee, prior to our discovery that the shares had been automatically transferred to a trust as described above, must be repaid to the trustee upon demand for distribution to the beneficiary of the trust. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent violation of the applicable ownership limit or our being "closely held" or otherwise failing to qualify as a REIT, then our charter provides that the transfer of the excess shares will be void. If any transfer would result in shares of our stock being beneficially owned by fewer than 100 persons, then any such purported transfer will be void and of no force or effect.
Shares of our stock transferred to the trustee are deemed to be offered for sale to us or our designee at a price per share equal to the lesser of (i) the price paid by the purported record transferee for the shares (or, if the event which resulted in the transfer to the trust did not involve a purchase of such shares of our stock at market price, the last reported sales price reported on the New York Stock Exchange on the trading day immediately preceding the day of the event which resulted in the transfer of such shares of our stock to the trust) and (ii) the market price on the date we accept, or our designee accepts, such offer. We have the right to accept such offer until the trustee has sold the shares of our stock held in the trust pursuant to the clauses discussed below. Upon a sale to us, the interest of the charitable beneficiary in the shares sold terminates and the trustee must distribute the net proceeds of the sale to the purported record transferee and any dividends or other distributions held by the trustee with respect to such stock will be paid to the charitable beneficiary.
If we do not buy the shares, the trustee must, within 20 days of receiving notice from us of the transfer of shares to the trust, sell the shares to a person or entity designated by the trustee who could own the shares without violating the ownership limits or as otherwise permitted by our board of directors. After that, the trustee must distribute to the purported record transferee an amount equal to the lesser of (i) the price paid by the purported record transferee or owner for the shares (or, if the event which resulted in the transfer to the trust did not involve a purchase of such shares at market price, the last reported sales price reported on the New York Stock Exchange on the trading day immediately preceding the relevant date) and (ii) the sales proceeds (net of commissions and other expenses of sale) received by the trust for the shares. Any net sales proceeds in excess of the amount payable to the purported record transferee will be immediately paid to the charitable beneficiary, together with any dividends or other distributions thereon. In addition, if prior to discovery by us that shares of our stock have been transferred to a trust, such shares of stock are sold by a purported record transferee, then such shares shall be deemed to have been sold on behalf of the trust and to the extent that the purported record transferee received an amount for or in respect of such shares that exceeds the amount that such purported record transferee was entitled to receive, such excess amount shall be paid to the trustee upon demand. The purported beneficial transferee or purported record transferee has no rights in the shares held by the trustee.
The trustee shall be designated by us and shall be unaffiliated with us and with any purported record transferee or purported beneficial transferee. Prior to the sale of any shares by the trust, the trustee will receive, in trust for the beneficiary, all dividends and other distributions paid by us with respect to the shares, and may also exercise all voting rights with respect to the shares.
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Subject to Maryland law, effective as of the date that the shares have been transferred to the trust, the trustee shall have the authority, at the trustee's sole discretion:
However, if we have already taken irreversible corporate action, then the trustee may not rescind and recast the vote.
In addition, if our board of directors or other permitted designees determine in good faith that a proposed transfer would violate the restrictions on ownership and transfer of our stock set forth in our charter, our board of directors or other permitted designees will take such action as it deems or they deem advisable to refuse to give effect to or to prevent such transfer, including, but not limited to, causing the company to redeem shares of common stock or preferred stock, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer.
Any beneficial owner or constructive owner of shares of our common stock and any person or entity (including the stockholder of record) who is holding shares of our common stock for a beneficial owner must, on request, provide us with a completed questionnaire containing the information regarding their ownership of such shares, as set forth in the applicable Treasury regulations. In addition, any person or entity that is a beneficial owner or constructive owner of shares of our common stock and any person or entity (including the stockholder of record) who is holding shares of our common stock for a beneficial owner or constructive owner shall, on request, be required to disclose to us in writing such information as we may request in order to determine the effect, if any, of such stockholder's actual and constructive ownership of shares of our common stock on our status as a REIT and to ensure compliance with the ownership limit, or as otherwise permitted by our board of directors.
All certificates representing shares of our common stock bear a legend referring to the restrictions described above.
These ownership limits could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
The transfer agent and registrar for our common stock is .
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MATERIAL PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of our charter and bylaws does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and to our charter and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus forms a part. See "Where You Can Find More Information."
Our bylaws provide that the number of directors of our company may be established by our board of directors but may not be fewer than the minimum number permitted under the MGCL nor more than 15. Except as may be provided by our board of directors in setting the terms of any class or series of stock, any vacancy may be filled only by a vote of a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies.
Pursuant to our charter, each of our directors is elected by our stockholders to serve until the next annual meeting and until their successors are duly elected and qualify. Holders of shares of our common stock will have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of our common stock will be able to elect all of our directors.
Our charter provides that a director may be removed only for cause (as defined in our charter) and only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. This provision, when coupled with the exclusive power of our board of directors to fill vacant directorships, precludes stockholders from removing incumbent directors and filling the vacancies created by such removal with their own nominees, except upon the existence of cause for removal and a substantial affirmative vote.
Consideration of Non-Stockholder Constituencies
Our charter provides that in considering a potential acquisition of control of our company, our board of directors may consider the potential effect of the acquisition on (i) our stockholders, employees, suppliers and creditors and (ii) the communities in which our offices or other establishments are located. Inclusion of this provision does not create an inference concerning factors that may be considered by our board regarding a potential acquisition of control but could, depending on the circumstances, delay, defer or prevent a transaction or change of control of our company that might involve a premium price for our stockholders or otherwise be in their best interest.
Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested stockholder (defined as any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation), or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction
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by which the person otherwise would have become an interested stockholder. Our board of directors may provide that its approval is subject to compliance with any terms and conditions determined by it.
Any such business combination entered into after the five-year prohibition must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares.
These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has elected to opt-out from the business combination provisions of the MGCL; however, our board of directors may elect to opt-in to such provisions at any time.
The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved at a special meeting by the affirmative vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock in a corporation in respect of which any of the following persons is entitled to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors: (i) a person who makes or proposes to make a control share acquisition, (ii) an officer of the corporation or (iii) an employee of the corporation who is also a director of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-tenth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel our board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
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The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of our common stock. However, the board of directors can, at any time, elect to have these provisions of the MGCL apply to our company by amending our bylaws. There can be no assurance that such provision will not be amended or eliminated at any time in the future.
Title 3, Subtitle 8 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Securities Exchange Act of 1934 and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any of (1) a classified board, (2) a two-thirds vote requirement for removing a director, (3) a requirement that the number of directors be fixed only by vote of the directors, (4) a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred, or (5) a majority requirement for the calling of a special meeting of stockholders. Pursuant to Subtitle 8, we have elected to provide that vacancies on our board may be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred. Through provisions in our charter and bylaws unrelated to Subtitle 8, we already require a two-thirds vote for the removal of any director from the board, vest in the board the exclusive power to fix the number of directorships and require, unless called by the chairman of our board, our president, our chief executive officer or the board, the request of holders of a majority of outstanding shares to call a special meeting.
Interested Director and Officer Transactions
Pursuant to the MGCL, a contract or other transaction between us and a director or between us and any other corporation or other entity in which any of our directors is a director or has a material financial interest is not void or voidable solely on the grounds of such common directorship or interest, the presence of such director at the meeting at which the contract or transaction is authorized, approved or ratified or the counting of the director's vote in favor thereof, if:
Furthermore, under Delaware law (where our operating partnership is formed), we, as general partner, have a fiduciary duty to our operating partnership and, consequently, such transactions also are subject to the duties of care and loyalty that we, as general partner, owe to limited partners in our operating partnership (to the extent such duties have not been eliminated pursuant to the terms of the partnership agreement). We will adopt a policy which requires that all contracts and transactions between us, our operating partnership or any of our subsidiaries, on the one hand, and any of our directors or executive officers or any entity in which such director or executive officer is a director or
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has a material financial interest, on the other hand, must be approved by the affirmative vote of a majority of the disinterested directors, even if less than a quorum. Where appropriate in the judgment of the disinterested directors, our board of directors may obtain a fairness opinion or engage independent counsel to represent the interests of non-affiliated security holders, although our board of directors will have no obligation to do so.
Our charter, other than its provisions on removal of directors and the vote required for extraordinary transctions, may be amended only if such amendment is declared advisable by our board of directors and approved by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter. The provisions of our charter relating to the removal of directors and the vote required for extraordinary transactions may be amended only if such amendment is declared advisable by our board of directors and approved by the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter.
Transactions Outside the Ordinary Course of Business
We may not merge with or into another company, sell all or substantially all of our assets (including our assets and our subsidiaries' assets taken as a whole), engage in a share exchange or engage in similar transactions outside the ordinary course of business unless declared advisable by our board of directors and approved by the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter.
The dissolution of our company must be declared advisable by a majority of our entire board of directors and approved by the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter.
Advance Notice of Director Nominations and New Business
Our bylaws provide that:
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Anti-takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws
The provisions of our charter relating to the removal of directors, consideration of non-stockholder constituencies in a potential acquisition of control and the restriction or transfer of our stock and the advance notice provisions of the bylaws could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest. Likewise, if our company's board of directors were to opt in to the business combination provisions of the MGCL, the classified board provision of Subtitle 8 or if the provision in the bylaws opting out of the control share acquisition provisions of the MGCL were rescinded, these provisions of the MGCL could have similar anti-takeover effects.
Indemnification and Limitation of Directors' and Officers' Liability
The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law.
Our charter authorizes us, to the maximum extent that Maryland law in effect from time to time permits, to obligate us to indemnify any present or former director or officer or any individual who, while a director or officer of our company and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any such capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. Our bylaws obligate us, to the fullest extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:
Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of ours in any of the capacities described above and to any employee or agent of our company or a predecessor of our company.
The MGCL requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be
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made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that:
However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses.
In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of:
The partnership agreement provides that we, as general partner, and our officers and directors are indemnified to the fullest extent permitted by Delaware law. See "Description of the Partnership Agreement of Douglas Emmett Properties, LPIndemnification and Limitation of Liability."
Insofar as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We have entered into an indemnification agreement with each of our executive officers and directors as described in "ManagementIndemnification Agreements."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based upon an offering price at the mid-point of the range set forth on the cover page of this prospectus, we expect to have outstanding shares of our common stock ( shares if the underwriters' over-allotment option is exercised in full). In addition, a total of shares of our common stock are reserved for issuance upon exchange of operating partnership units, exercise of stock options and exchange of LTIP units issued under our stock incentive plan.
Of these shares, the shares sold in this offering ( shares if underwriters' over-allotment option is exercised in full) will be freely transferable without restriction or further registration under the Securities Act, subject to the limitations on ownership set forth in our charter, except for any shares held by our "affiliates," as that term is defined by Rule 144 under the Securities Act. The remaining shares issued in the formation transactions, plus other shares issued to our officers, directors and employees, plus any shares purchased by affiliates in this offering plus the shares of our common stock owned upon redemption or exchange of units will be "restricted shares" as defined in Rule 144 and may not be sold unless registered under the Securities Act or sold in accordance with any exemption from registration, including Rule 144.
Prior to this offering, there has been no public market for our common stock. Trading of our common stock on the New York Stock Exchange is expected to commence immediately following the completion of this offering. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of our common stock (including shares issued upon the exchange of units or the exercise of stock options), or the perception that such sales occur, could adversely affect prevailing market prices of our common stock. See "Risk FactorsRisks Related to this OfferingThere has been no public market for our common stock prior to this offering" and "Description of the Partnership Agreement of Douglas Emmett Properties, LPTransferability of Interests."
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell, within any three month period, that number of shares that does not exceed the greater of:
Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.
In connection with the formation transactions, our operating partnership will issue an aggregate of units to the continuing investors. Beginning on or after the date which is 14 months after the consummation of this offering, limited partners of our operating partnership have the right to require our operating partnership to redeem part or all of their units for cash, or, at our election,
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shares of our common stock, based upon the fair market value of an equivalent number of shares of our common stock at the time of the redemption, subject to the ownership limits set forth in our charter and described under the section entitled "Description of SecuritiesRestrictions on Transfer." See "Description of the Partnership Agreement of Douglas Emmett Properties, LP."
We have granted those persons who will receive common stock and operating partnership units in the formation transactions certain registration rights with respect to such shares of common stock and any shares of our common stock that may be acquired by them in connection with the redemption of the operating partnership units in accordance with the partnership agreement. These registration rights require us to seek to register all such shares of our common stock effective as of that date which is 14 months following completion of this offering. We will bear expenses incident to our registration requirements under the registration rights, except that such expenses shall not include any underwriting fees, discounts or commissions or any out-of-pocket expenses of the persons exercising the redemption/exchange rights or transfer taxes, if any, relating to such shares. Under certain circumstances, we are required to undertake an underwritten offering under a resale registration statement filed by us as described above upon the written request of holders including the predecessor principals of at least 5% in the aggregate of the securities subject to the registration rights agreement, provided that we are not obligated to effect more than two underwritten offerings.
Stock Options and Stock Incentive Plan
We intend to adopt our 2006 Stock Option and Incentive Plan prior to the consummation of this offering. The stock incentive plan provides for the grant of incentive awards to all full-time and part-time officers, employees, directors and other key persons (including consultants and prospective employees). We intend to issue stock options and LTIP units to officers, directors and key employees immediately prior to the consummation of this offering, and intend to reserve an additional shares of our common stock for issuance under our stock incentive plan.
We anticipate that we will file a registration statement with respect to the shares of our common stock issuable under our 2006 Stock Option and Incentive Plan following the consummation of this offering. Shares of our common stock covered by this registration statement, including shares of our common stock issuable upon the exercise of options or restricted shares of our common stock, will be eligible for transfer or resale without restriction under the Securities Act unless held by affiliates.
Lock-up Agreements and Other Contractual Restrictions on Resale
In addition to the limits placed on the sale of shares of our common stock by operation of Rule 144 and other provisions of the Securities Act, we, the predecessor principals and our other directors and executive officers and each of the other continuing investors have agreed with the underwriters that, subject to certain limited exceptions, without the prior written consent of each of Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., we and they will not directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of common stock (including, without limitation, shares of common stock that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and shares of common stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for common stock, (including operating partnership units), (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, (3) make any demand for or exercise any right or file or cause to be filed a registration statement with respect to the registration
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of any shares of common stock or securities convertible, exercisable or exchangeable into common stock or any of our other securities, or (4) publicly disclose the intention to do any of the foregoing for a period of 360 days after the date of this prospectus, in the case of the predecessor principals and our other directors and executive officers, and 180 days after the date of this prospectus, in the case of the other continuing investors. These lock-up agreements are subject to exceptions, including dispositions by gift, will or intestacy; transfers to immediate family members or entities wholly owned by or for the benefit of a continuing investor, its affiliates or members of its immediate family; dispositions to a corporation that is owned by a continuing investor and its affiliates alone or with other continuing investors; distributions to partners, members or stockholders of a continuing investor; and dispositions to charitable organizations. For continuing investors other than the predecessor principals and any director or executive officer, the foregoing restrictions will not apply to shares of our common stock that are purchased in the open market, and the restrictions in (1) and (2) above will not apply to other transactions on behalf of, but not at the request or discretion of, continuing investors so long as (1) the transaction does not involve shares of common stock acquired in the formation transactions, (2) the transaction does not result in a filing by the continuing investor under Section 16 of the Exchange Act and (3) the transaction does not result in a public announcement by the continuing investor regarding the transaction during the restricted period.
The 360-day and 180-day restricted periods described in the preceding paragraph will be extended, subject to certain exceptions, if:
in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., in their sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. When determining whether or not to release common stock and other securities from lock-up agreements, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. will consider, among other factors, the holder's reasons for requesting the release, the number of shares of common stock and other securities for which the release is being requested and market conditions at the time.
At the conclusion of the 360 or 180-day periods referenced above, common stock issued upon the subsequent exchange of operating partnership units may be sold by the predecessor principals and our other directors and executive officers, or the other continuing investors, as applicable, in the public market once registered pursuant to the registration rights described above.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax consequences relating to the acquisition, holding, and disposition of our stock. For purposes of this section under the heading "Federal Income Tax Considerations," references to "Douglas Emmett," "we," "our," and "us" mean only Douglas Emmett Inc., and not its subsidiaries, except as otherwise indicated. This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed herein. This summary also assumes that we and our subsidiaries and affiliated entities will operate in accordance with our applicable organizational documents or partnership agreements. This discussion is for your general information only and is not tax advice. It does not purport to address all aspects of federal income taxation that may be relevant to you in light of your particular investment circumstances, or if you are a type of investor subject to special tax rules, such as:
This summary assumes that you will hold our stock as a capital asset, which generally means as property held for investment.
The federal income tax treatment of holders of our stock depends in some instances on determinations of fact and interpretations of complex provisions of federal income tax law for which no clear precedent or authority may be available. In addition, the tax consequences of holding our stock to any particular stockholder will depend on the stockholder's particular tax circumstances. You are urged to consult your tax advisor regarding the specific tax consequences (including the federal, state, local, and foreign tax consequences) to you in light of your particular investment or tax circumstances of acquiring, holding, exchanging, or otherwise disposing of our stock.
We intend to elect to be taxed as a REIT commencing with our taxable year ended December 31, 2006. We believe that we were organized and have operated in such a manner as to qualify for taxation as a REIT, and intend to continue to operate in such a manner.
The law firm of Skadden Arps has acted as our special tax counsel in connection with our election to be taxed as a REIT. We expect to receive an opinion of Skadden Arps to the effect that we are
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organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT. It must be emphasized that the opinion of Skadden Arps will, if issued, be based on various assumptions relating to our organization and operation, and is conditioned upon representations and covenants made by our management regarding our organization, assets, and the past, present, and future conduct of our business operations. While we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given by Skadden Arps or us that we will so qualify for any particular year. The opinion of Skadden Arps, a copy of which will be filed as an exhibit to the registration statement of which this prospectus is a part, will be expressed as of the date issued, and will not cover subsequent periods. Opinions of counsel impose no obligation to advise us or the holders of our stock of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. You should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions.
Qualification and taxation as a REIT depends on our ability to meet, on a continuing basis, through actual operating results, asset ownership, distribution levels, and diversity of stock ownership, various qualification requirements imposed on REITs by the Code, compliance with which will not be reviewed by tax counsel. In addition, our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis, which may not be reviewed by tax counsel. Our ability to qualify as a REIT also requires that we satisfy certain asset tests, some of which depend upon the fair market values of assets directly or indirectly owned by us. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given that the actual results of our operations for any taxable year satisfy such requirements for qualification and taxation as a REIT.
Taxation of REITs in General
As indicated above, qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, various qualification requirements imposed upon REITs by the Code. The material qualification requirements are summarized below under "Requirements for QualificationGeneral." While we intend to operate so that we qualify as a REIT, no assurance can be given that the IRS will not challenge our qualification, or that we will be able to operate in accordance with the REIT requirements in the future. See "Failure to Qualify."
Provided that we qualify as a REIT, we will generally be entitled to a deduction for dividends that we pay and therefore will not be subject to federal corporate income tax on our net income that is currently distributed to our stockholders. This deduction for dividends paid substantially eliminates the "double taxation" of corporate income (i.e., taxation at both the corporate and stockholder levels) that generally results from an investment in a corporation. Thus, income generated by a REIT and distributed to its stockholders generally is taxed only at the stockholder level upon the distribution of that income.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Act") and the Tax Increase Prevention and Reconciliation Act of 2005 reduced the rate at which individual stockholders are taxed on corporate dividends from a maximum of 38.6% (as ordinary income) to a maximum of 15% (the same as long-term capital gains) for the 2003 through 2010 tax years. With limited exceptions, however, dividends received by stockholders from us, or from other entities that are taxed as REITs, are generally not eligible for the reduced rates, and will continue to be taxed at rates applicable to ordinary income, which will be as high as 35% through 2010. See "Taxation of StockholdersTaxation of Taxable Domestic StockholdersDistributions."
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Net operating losses, foreign tax credits and other tax attributes of a REIT generally do not pass through to the stockholders of the REIT, subject to special rules for certain items such as capital gains recognized by REITs. See "Taxation of Stockholders."
If we qualify as a REIT, we will nonetheless be subject to federal tax in the following circumstances:
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In addition, we and our subsidiaries may be subject to a variety of taxes, including payroll taxes and state, local, and foreign income, property, and other taxes on their assets and operations. We could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for QualificationGeneral
The Code defines a REIT as a corporation, trust or association:
The Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) do not apply until after the first taxable year for which an election is made to be taxable as a REIT. Our amended and restated certificate of incorporation provides restrictions regarding transfers of its shares, which are intended to assist us in satisfying the share ownership requirements described in conditions (5) and (6) above.
To monitor compliance with the share ownership requirements, we are generally required to maintain records regarding the actual ownership of our shares. To do so, we must demand written statements each year from the record holders of significant percentages of our stock in which the record holders are to disclose the actual owners of the shares, i.e., the persons required to include in gross income the dividends paid by us. A list of those persons failing or refusing to comply with this demand must be maintained as part of our records. Failure to comply with these record keeping requirements could subject us to monetary penalties. A stockholder that fails or refuses to comply with
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the demand is required by Treasury regulations to submit a statement with its tax return disclosing the actual ownership of the shares and other information.
In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. We satisfy this requirement.
The Code provides relief from violations of the REIT gross income requirements, as described below under "Income Tests," in cases where a violation is due to reasonable cause and not willful neglect, and other requirements are met, including the payment of a penalty tax that is based upon the magnitude of the violation. In addition, certain provisions of the Code extend similar relief in the case of certain violations of the REIT asset requirements (see "Asset Tests" below) and other REIT requirements, generally provided that the violation is due to reasonable cause and not willful neglect, and other conditions are met, including the payment of a penalty tax. If we fail to satisfy any of the various REIT requirements, there can be no assurance that these relief provisions would be available to enable us to maintain our qualification as a REIT, and, if available, the amount of any resultant penalty tax could be substantial.
Effect of Subsidiary Entities
Ownership of Partnership Interests. In the case of a REIT that is a partner in a partnership, such as our operating partnership, Treasury regulations provide that the REIT is deemed to own its proportionate share of the partnership's assets (subject to special rules relating to the 10% asset test described below), and to earn its proportionate share of the partnership's income for purposes of the asset and gross income tests applicable to REITs as described below. Similarly, the assets and gross income of the partnership are deemed to retain the same character in the hands of the REIT. Thus, our proportionate share of the assets, liabilities, and items of income in the operating partnership will be treated as our assets, liabilities, and items of income for purposes of applying the REIT requirements described below. A summary of certain rules governing the federal income taxation of partnerships and their partners is provided below in "Tax Aspects of Investments in an Operating Partnership."
Disregarded Subsidiaries. If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary," that subsidiary is generally disregarded for federal income tax purposes, and all assets, liabilities, and items of income, deduction, and credit of the subsidiary are treated as assets, liabilities, and items of income, deduction, and credit of the REIT itself, including for purposes of the gross income and asset tests applicable to REITs as summarized below. A qualified REIT subsidiary is any corporation, other than a "taxable REIT subsidiary" as described below, that is wholly owned by a REIT, or by one or more disregarded subsidiaries of the REIT, or by a combination of the two. Other entities that are wholly owned by a REIT, including single member limited liability companies, are also generally disregarded as separate entities for federal income tax purposes, including for purposes of the REIT income and asset tests. Disregarded subsidiaries, along with partnerships in which we hold an equity interest, are sometimes referred to herein as "pass-through subsidiaries."
In the event that a disregarded subsidiary of ours ceases to be wholly ownedfor example, if any equity interest in the subsidiary is acquired by a person other than us or another disregarded subsidiary of oursthe subsidiary's separate existence would no longer be disregarded for federal income tax purposes. Instead, it would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation. See "Asset Tests" and "Income Tests."
Taxable Subsidiaries. REIT, in general, may jointly elect with subsidiary corporations, whether or not wholly owned, to treat the subsidiary corporation as a taxable REIT subsidiary ("TRS") of the
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REIT. The separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for federal income tax purposes. Accordingly, such an entity would generally be subject to corporate income tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries in the aggregate, and our ability to make distributions to our stockholders.
A parent REIT is not treated as holding the assets of a taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued by the subsidiary is an asset in the hands of the parent REIT, and the REIT recognizes as income, the dividends, if any, that it receives from the subsidiary. This treatment can affect the income and asset test calculations that apply to the REIT, as described below. A TRS may be used by the parent REIT to indirectly undertake activities that the REIT rules might otherwise preclude the parent REIT from doing directly or through pass-through subsidiaries (for example, activities that give rise to certain categories of income such as management fees or foreign currency gains). We will initially have one TRS, P.L.E. Builders, Inc.
Income Tests
In order to maintain our qualification as a REIT, we annually must satisfy two gross income requirements. First, at least 75% of our gross income for each taxable year, excluding gross income from sales of inventory or dealer property in "prohibited transactions," must be derived from investments relating to real property or mortgages on real property, including "rents from real property," dividends received from other REITs, interest income derived from mortgage loans secured by real property, and gains from the sale of real estate assets, as well as income from some kinds of temporary investments. Second, at least 95% of our gross income in each taxable year, excluding gross income from prohibited transactions or income from certain hedging transactions, must be derived from some combination of such income from investments in real property (i.e., income that qualifies under the 75% income test described above), as well as other dividends, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property.
Rents received by us will qualify as "rents from real property" in satisfying the gross income requirements described above, only if several conditions, including the following, are met. If rent is partly attributable to personal property leased in connection with a lease of real property, the portion of the total rent that is attributable to the personal property will not qualify as "rents from real property" unless it constitutes 15% or less of the total rent received under the lease. We have reviewed our properties and have determined that rents attributable to personal property do not exceed 15% of the total rent with respect to any particular lease. There can be no assurance, however, that the IRS will not assert that rent attributable to personal property with respect to a particular lease is greater than 15% of the total rent with respect to such lease. If the amount of any such non-qualifying income, together with other non-qualifying income, exceeds 5% of our gross income, we may fail to qualify as a REIT. Moreover, for rents received to qualify as "rents from real property," the REIT generally must not furnish or render services to the tenants of such property, other than through an "independent contractor" from which the REIT derives no revenues and certain other requirements are satisfied. We and our affiliates are permitted, however, to perform services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. In addition, we and our affiliates may directly or indirectly provide non-customary services to tenants of our properties without disqualifying all of the rent from the property if the payment for such services does not exceed 1% of the total gross income from the property. For purposes of this test, the income received from such non-customary services is deemed to be at least 150% of the direct cost of providing the services. Furthermore, we are generally permitted to provide services to tenants or others through a TRS without disqualifying the rental income received from tenants for purposes of the REIT income requirements. In addition, we generally may not, and will not, charge rent that is based in whole or in part on the income or profits of any person, except for rents that are based on a percentage of the tenant's gross receipts or sales. Also, rental income will
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qualify as rents from real property only to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the tenant's equity. We believe that substantially all or our gross income will be rents from real property.
We may indirectly receive distributions from TRSs or other corporations that are not REITs or qualified REIT subsidiaries. These distributions will be classified as dividend income to the extent of the earnings and profits of the distributing corporation. Such distributions will generally constitute qualifying income for purposes of the 95% gross income test, but not under the 75% gross income test. Any dividends received by us from a REIT will be qualifying income in our hands for purposes of both the 95% and 75% income tests.
Any income or gain we or our pass-through subsidiaries derive from instruments that hedge certain risks, such as the risk of changes in interest rates, will not be treated as gross income for purposes of the 95% gross income test, and therefore will be exempt from this test, provided that specified requirements are met, but generally will constitute non-qualifying income for purposes of the 75% gross income test. Such requirements include that the instrument hedges risks associated with indebtedness issued or to be issued by us or our pass-through subsidiaries incurred to acquire or carry "real estate assets" (as described below under "Asset Tests"), and that the instrument is properly identified as a hedge, along with the risk that it hedges, within prescribed time periods.
If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may still qualify as a REIT for the year if we are entitled to relief under applicable provisions of the Code. These relief provisions will be generally available if: (i) our failure to meet these tests was due to reasonable cause and not due to willful neglect, and (ii) following our identification of the failure to meet the 75% or 95% gross income test for any taxable year, we file a schedule with the IRS setting forth each item of our gross income for purposes of the 75% or 95% gross income test for such taxable year in accordance with Treasury regulations to be issued. It is not possible to state whether we would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will not qualify as a REIT. As discussed above under "Taxation of REITs in General," even where these relief provisions apply and we retain our REIT status, a tax would be imposed based upon the amount by which we fail to satisfy the particular gross income test.
Asset Tests
We, at the close of each calendar quarter, must also satisfy four tests relating to the nature of our assets. First, at least 75% of the value of our total assets must be represented by some combination of "real estate assets," cash, cash items, U.S. government securities, and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, the term "real estate assets" includes interests in real property, such as land, buildings, leasehold interests in real property, stock of other corporations that qualify as REITs, and some kinds of mortgage-backed securities and mortgage loans. Securities that do not qualify for purposes of this 75% test are subject to the additional asset tests described below, while securities that do qualify for purposes of the 75% asset test are generally not subject to the additional asset tests.
Second, the value of any one issuer's securities owned by us may not exceed 5% of the value of our total assets.
Third, we may not own more than 10% of any one issuer's outstanding securities, as measured by either voting power or value. The 5% and 10% asset tests do not apply to securities of TRSs and qualified REIT subsidiaries, and the 10% value test does not apply to "straight debt" having specified characteristics and to certain other securities described below. Solely for the purposes of the 10% value test, the determination of our interest in the assets of a partnership or limited liability company in which we own an interest will be based on our proportionate interest in any securities issued by the
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partnership or limited liability company, excluding for this purpose certain securities described in the Code.
Fourth, the aggregate value of all securities of TRSs held by a REIT may not exceed 20% of the value of the REIT's total assets.
Notwithstanding the general rule, as noted above, that for purposes of the REIT income and asset tests, a REIT is treated as owning its share of the underlying assets of a subsidiary partnership, if a REIT holds indebtedness issued by a partnership, the indebtedness will be subject to, and may cause a violation of, the asset tests, unless it is a qualifying mortgage asset, satisfies the rules for "straight debt," or is sufficiently small so as not to otherwise cause an asset test violation. Similarly, although stock of another REIT is a qualifying asset for purposes of the REIT asset tests, non-mortgage debt held by us that is issued by another REIT may not so qualify.
Certain relief provisions are available to REITs to satisfy the asset requirements, or to maintain REIT qualification notwithstanding certain violations of the asset and other requirements. One such provision allows a REIT which fails one or more of the asset requirements (other than de minimis violations of the 5% and 10% asset tests as described below) to nevertheless maintain its REIT qualification if (a) it provides the IRS with a description of each asset causing the failure, (b) the failure is due to reasonable cause and not willful neglect, (c) the REIT pays a tax equal to the greater of (i) $50,000 per failure, and (ii) the product of the net income generated by the assets that caused the failure multiplied by the highest applicable corporate tax rate (currently 35%), and (d) the REIT either disposes of the assets causing the failure within 6 months after the last day of the quarter in which it identifies the failure, or otherwise satisfies the relevant asset tests within that time frame.
In the case of de minimis violations of the 10% and 5% asset tests, a REIT may maintain its qualification if (a) the value of the assets causing the violation do not exceed the lesser of 1% of the REIT's total assets, and $10,000,000, and (b) the REIT either disposes of the assets causing the failure within 6 months after the last day of the quarter in which it identifies the failure, or the relevant tests are otherwise satisfied within that time frame.
Certain securities will not cause a violation of the 10% value test described above. Such securities include instruments that constitute "straight debt," which includes securities having certain contingency features. A security will not qualify as "straight debt" where a REIT (or a controlled taxable REIT subsidiary of the REIT) owns other securities of the issuer of that security which do not qualify as straight debt, unless the value of those other securities constitute, in the aggregate, 1% or less of the total value of that issuer's outstanding securities. In addition to straight debt, certain other securities will not violate the 10% value test. Such securities include (a) any loan made to an individual or an estate, (b) certain rental agreements in which one or more payments are to be made in subsequent years (other than agreements between a REIT and certain persons related to the REIT), (c) any obligation to pay rents from real property, (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of (or payments made by) a non-governmental entity, (e) any security issued by another REIT, and (f) any debt instrument issued by a partnership if the partnership's income is of a nature that it would satisfy the 75% gross income test described above under "Income Tests." In applying the 10% value test, a debt security issued by a partnership to a REIT is not taken into account to the extent, if any, of the REIT's proportionate equity interest in that partnership.
We believe that our holdings of assets comply, and will continue to comply, with the foregoing REIT asset requirements, and we intend to monitor compliance on an ongoing basis. No independent appraisals have been obtained, however, to support our conclusions as to the value of our total assets, or the value of any particular security or securities. We do not intend to seek an IRS ruling as to the classification of our properties for purposes of the REIT asset tests. Accordingly, there can be no assurance that the IRS will not contend that our assets or our interest in other securities cause a violation of the REIT asset requirements.
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If we should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause us to lose our REIT status if we (1) satisfied the asset tests at the close of the preceding calendar quarter and (2) the discrepancy between the value of our assets and the asset test requirements was not wholly or partly caused by an acquisition of non-qualifying assets, but instead arose from changes in the market value of our assets. If the condition described in (2) were not satisfied, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose or by making use of relief provisions described below.
Annual Distribution Requirements
In order to qualify as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to:
(i) 90% of our "REIT taxable income" (computed without regard to our deduction for dividends paid and net capital gains); and
(ii) 90% of the net income, if any, (after tax) from foreclosure property (as described below); minus
Distributions must be paid in the taxable year to which they relate, or in the following taxable year if they are declared in October, November, or December of the taxable year, are payable to stockholders of record on a specified date in any such month, and are actually paid before the end of January of the following year. Such distributions are treated as both paid by us and received by each stockholder on December 31 of the year in which they are declared. In addition, a distribution for a taxable year may be declared before we timely file our tax return for the year and if paid with or before the first regular dividend payment after such declaration, provided such payment is made during the twelve month period following the close of such taxable year. In order for distributions to be counted for this purpose, and to give rise to a tax deduction by us, they must not be "preferential dividends." A dividend is not a preferential dividend if it is pro rata among all outstanding shares of stock within a particular class, and is in accordance with the preferences among different classes of stock as set forth in our organizational documents.
To the extent that we distribute at least 90%, but less than 100%, of our "REIT taxable income," as adjusted, we will be subject to tax at ordinary corporate tax rates on the retained portion. We may elect to retain, rather than distribute, our net long-term capital gains and pay tax on such gains. In this case, we could elect to have our stockholders include their proportionate share of such undistributed long-term capital gains in income, and to receive a corresponding credit for their share of the tax paid by us. Stockholders of ours would then increase the adjusted basis of their Douglas Emmett stock by the difference between the designated amounts included in their long-term capital gains and the tax deemed paid with respect to their shares. To the extent that a REIT has available net operating losses carried forward from prior tax years, such losses may reduce the amount of distributions that it must make in order to comply with the REIT distribution requirements. Such losses, however, will generally not affect the character, in the hands of stockholders, of any distributions that are actually made by the REIT, which are generally taxable to stockholders to the extent that the REIT has current or accumulated earnings and profits. See "Taxation of StockholdersTaxation of Taxable Domestic StockholdersDistributions."
If we should fail to distribute during each calendar year at least the sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT capital gain net income for such year, and (3) any undistributed taxable income from prior periods, we would be subject to a 4% excise tax on the excess of such required distribution over the sum of (a) the amounts actually distributed and (b) the amounts
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of income retained on which we have paid corporate income tax. We intend to make timely distributions so that we are not subject to the 4% excise tax.
It is possible that we, from time to time, may not have sufficient cash to meet the distribution requirements due to timing differences between (1) the actual receipt of cash, including receipt of distributions from our subsidiaries, and (2) our inclusion of items in income for federal income tax purposes. Other sources of non-cash taxable income include real estate and securities that are financed through securitization structures, which require some or all of available cash flows to be used to service borrowings, loans held by us as assets that are issued at a discount and require the accrual of taxable economic interest in advance of its receipt in cash, loans on which the borrower is permitted to defer cash payments of interest, and distressed loans on which we may be required to accrue taxable interest income even though the borrower is unable to make current servicing payments in cash. In the event that such timing differences occur, in order to meet the distribution requirements, it might be necessary to arrange for short-term, or possibly long-term, borrowings, or to pay dividends in the form of taxable in-kind distributions of property.
We may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. In this case, we may be able to avoid losing our REIT status or being taxed on amounts distributed as deficiency dividends. However, we will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.
Failure to Qualify
Specified cure provisions are available to us in the event we discover a violation of a provision of the Code that would result in our failure to qualify as a REIT. Except with respect to violations of the REIT income tests and asset tests (for which the cure provisions are described above), and provided the violation is due to reasonable cause and not due to willful neglect, these cure provisions generally impose a $50,000 penalty for each violation in lieu of a loss of REIT status. If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions of the Code do not apply, we would be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we are not a REIT would not be deductible by us, nor would they be required to be made. In this situation, to the extent of current and accumulated earnings and profits, all distributions to stockholders that are individuals will generally be taxable at a rate of 15% (through 2010), and, subject to limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless we are entitled to relief under specific statutory provisions, we would also be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether, in all circumstances, we would be entitled to this statutory relief.
Prohibited Transactions
Net income derived from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. We intend to conduct our operations so that no asset owned by us or our pass-through subsidiaries will be held for sale to customers, and that a sale of any such asset will not be in the ordinary course of our business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the particular facts and circumstances. No assurance can be given that any property we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent the imposition of the 100% excise tax. The 100% tax does not apply to gains from the sale of property that is held through a taxable REIT
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subsidiary or other taxable corporation, although such income will be subject to tax in the hands of that corporation at regular corporate tax rates.
Hedging Transactions
We and our subsidiaries from time to time enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. Any income from such instruments, or gain from the disposition of such instruments, would not be qualifying income for purposes of the REIT 75% gross income test.
Income of a REIT, including income from a pass-through subsidiary, arising from "clearly identified" hedging transactions that are entered into to manage the risk of interest rate or price changes or currency fluctuations with respect to borrowings, including gain from the disposition of such hedging transactions, to the extent the hedging transactions hedge indebtedness incurred, or to be incurred, by the REIT to acquire or carry real estate assets, are not treated as gross income for purposes of the 95% REIT income test, and, are therefore exempt from such test. In general, for a hedging transaction to be "clearly identified," (a) it must be identified as a hedging transaction before the end of the day on which it is acquired or entered into, and (b) the items or risks being hedged must be identified "substantially contemporaneously" with entering into the hedging transaction (generally, not more than 35 days after entering into the hedging transaction). To the extent that we hedge with other types of financial instruments or in other situations (for example, hedges against fluctuations in the value of foreign currencies), the resultant income will be treated as income that does not qualify under the 95% or 75% income tests unless certain technical requirements are met.
We intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT. We may conduct some or all of our hedging activities (including hedging activities relating to currency risk) through a TRS or other corporate entity, the income from which may be subject to federal income tax, rather than participating in the arrangements directly or through pass-through subsidiaries. No assurance can be given, however, that our hedging activities will not give rise to income that would adversely affect our ability to satisfy the REIT qualification requirements.
Tax Aspects of Investments in an Operating Partnership
General
We will hold substantially all of our real estate assets through a single "operating partnership" that holds pass-through subsidiaries. In general, an entity classified as a partnership (or a disregarded entity) for federal income tax purposes is a "pass-through" entity that is not subject to federal income tax. Rather, partners or members are allocated their proportionate shares of the items of income, gain, loss, deduction, and credit of the entity, and are potentially subject to tax on these items, without regard to whether the partners or members receive a distribution from the entity. Thus, we would include in our income our proportionate share of these income items for purposes of the various REIT income tests and in the computation of our REIT taxable income. Moreover, for purposes of the REIT asset tests, we would include our proportionate share of the assets held by the operating partnership. Consequently, to the extent that we hold an equity interest in an operating partnership, the partnership's assets and operations may affect our ability to qualify as a REIT.
Entity Classification
Our investment in our operating partnership involves special tax considerations, including the possibility of a challenge by the IRS of the tax status of such partnership. If the IRS were to successfully treat an operating partnership as an association, as opposed to a partnership, for federal
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income tax purposes, the operating partnership would be taxable as a corporation and therefore could be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of our gross income would change and could preclude us from satisfying the REIT asset tests or the gross income tests as discussed in "Taxation of Douglas EmmettAsset Tests" and "Income Tests," and in turn could prevent us from qualifying as a REIT unless we are eligible for relief from the violation pursuant to relief provisions described above. See "Taxation of Douglas EmmettFailure to Qualify," above, for a discussion of the effect of our failure to meet these tests for a taxable year, and of the relief provisions. In addition, any change in the status of an operating partnership for tax purposes could be treated as a taxable event, in which case we could have taxable income that is subject to the REIT distribution requirements without receiving any cash.
Tax Allocations with Respect to Partnership Properties
Under the Code and the Treasury regulations, income, gain, loss, and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for tax purposes in a manner such that the contributing partner is charged with, or benefits from, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of the unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution, and the adjusted tax basis of such property at the time of contribution (a "book-tax difference"). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. These rules may apply to a contribution of property by us to an operating partnership. To the extent that the operating partnership acquires appreciated (or depreciated) properties by way of capital contributions from its partners, allocations would need to be made in a manner consistent with these requirements. Where a partner contributes cash to a partnership at a time at which the partnership holds appreciated (or depreciated) property, the Treasury regulations provide for a similar allocation of these items to the other ( i.e. non-contributing) partners. These rules may apply to the contribution by us to the operating partnership of the cash proceeds received in offerings of our stock. As a result, partners, including us, could be allocated greater or lesser amounts of depreciation and taxable income in respect of the partnership's properties than would be the case if all of the partnership's assets (including any contributed assets) had a tax basis equal to their fair market values at the time of any contributions to that partnership. This could cause us to recognize taxable income in excess of cash flow from the partnership, which might adversely affect our ability to comply with the REIT distribution requirements discussed above.
Sale of Properties
Our share of any gain realized by our operating partnership or any other subsidiary partnership on the sale of any property held as inventory or primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a 100% excise tax. See "Taxation of REITs in General" and "Prohibited Transactions." Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business depends upon all of the facts and circumstances of the particular transaction. Our operating partnership and our other subsidiary partnerships generally intend to hold their interests in properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning, operating, financing and leasing the properties, and to make occasional sales of the properties, including peripheral land, as are consistent with our investment objectives.
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Taxation of Stockholders
Taxation of Taxable Domestic Stockholders
Distributions. Provided that we qualify as a REIT, distributions made to our taxable domestic stockholders out of current or accumulated earnings and profits, and not designated as capital gain dividends, will generally be taken into account by them as ordinary income and will not be eligible for the dividends received deduction for corporations. With limited exceptions, dividends received from REITs are not eligible for taxation at the preferential income tax rates (15% maximum federal rate through 2010) for qualified dividends received by individuals from taxable C corporations. Stockholders that are individuals, however, are taxed at the preferential rates on dividends designated by and received from REITs to the extent that the dividends are attributable to (1) income retained by the REIT in the prior taxable year on which the REIT was subject to corporate level income tax (less the amount of tax), (2) dividends received by the REIT from TRSs or other taxable C corporations, or (3) income in the prior taxable year from the sales of "built-in gain" property acquired by the REIT from C corporations in carryover basis transactions (less the amount of corporate tax on such income).
Distributions from us that are designated as capital gain dividends will generally be taxed to stockholders as long-term capital gains, to the extent that they do not exceed our actual net capital gain for the taxable year, without regard to the period for which the stockholder has held its stock. A similar treatment will apply to long-term capital gains retained by us, to the extent that we elect the application of provisions of the Code that treat stockholders of a REIT as having received, for federal income tax purposes, undistributed capital gains of the REIT, while passing through to stockholders a corresponding credit for taxes paid by the REIT on such retained capital gains. Corporate stockholders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at maximum federal rates of 15% (through 2010) in the case of stockholders who are individuals, and 35% in the case of stockholders that are corporations. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum federal income tax rate for taxpayers who are individuals, to the extent of previously claimed depreciation deductions.
In determining the extent to which a distribution constitutes a dividend for tax purposes, our earnings and profits generally will be allocated first to distributions with respect to preferred stock, none of which is currently issued and outstanding, and then to common stock. If we have net capital gains and designate some or all of our distributions as capital gain dividends to that extent, the capital gain dividends will be allocated among different classes of stock in proportion to the allocation of earnings and profits as described above.
Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's shares in respect of which the distributions were made, but rather, will reduce the adjusted basis of these shares. To the extent that such distributions exceed the adjusted basis of a stockholder's shares, they will be included in income as long-term capital gain, or short-term capital gain if the shares have been held for one year or less. In addition, any dividend we declare in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month will be treated as both paid by Douglas Emmett and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by us before the end of January of the following calendar year.
Dispositions of Douglas Emmett Stock. In general, a domestic stockholder will realize gain or loss upon the sale, redemption, or other taxable disposition of our stock in an amount equal to the difference between the sum of the fair market value of any property received and the amount of cash received in such disposition, and the stockholder's adjusted tax basis in the stock at the time of the disposition. In general, a stockholder's tax basis will equal the stockholder's acquisition cost, increased by the excess of net capital gains deemed distributed to the stockholder (discussed above), less tax
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deemed paid on it, and reduced by returns of capital. In general, capital gains recognized by individuals upon the sale or disposition of shares of our stock will be subject to a maximum federal income tax rate of 15% (through 2010) if our stock is held for more than 12 months, and will be taxed at ordinary income rates (of up to 35% through 2010) if our stock is held for 12 months or less. Gains recognized by stockholders that are corporations are subject to federal income tax at a maximum rate of 35%, whether or not classified as long-term capital gains. Capital losses recognized by a stockholder upon the disposition of our stock held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the stockholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of shares of our stock by a stockholder who has held the shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions received from us that are required to be treated by the stockholder as long-term capital gain.
If an investor recognizes a loss upon a subsequent disposition of our stock in an amount that exceeds a prescribed threshold, it is possible that the provisions of recently adopted Treasury regulations involving "reportable transactions" could apply, with a resulting requirement to separately disclose the loss generating transaction to the IRS. While these regulations are directed towards "tax shelters," they are written quite broadly and apply to transactions that would not typically be considered tax shelters. In addition significant penalties are imposed by the Code for failure to comply with these requirements. You should consult your tax advisor concerning any possible disclosure obligation with respect to the receipt or disposition of our stock, or transactions that might be undertaken directly or indirectly by us. Moreover, you should be aware that we and other participants in the transactions involving us (including their advisors) might be subject to disclosure or other requirements pursuant to these regulations.
Passive Activity Losses and Investment Interest Limitations. Distributions made by us and gain arising from the sale or exchange by a domestic stockholder of our stock will not be treated as passive activity income. As a result, stockholders will not be able to apply any "passive losses" against income or gain relating to our stock. Distributions made by us, to the extent they do not constitute return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation.
Taxation of Foreign Stockholders
The following is a summary of certain federal income and estate tax consequences of the ownership and disposition of our stock applicable to non-U.S. holders of our stock. A "non-U.S. holder" is any person other than:
The discussion is based on current law and is for general information only. It addresses only selected, and not all, aspects of federal income and estate taxation.
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Ordinary Dividends. The portion of dividends received by non-U.S. holders payable out of our earnings and profits which are not attributable to our capital gains and which are not effectively connected with a U.S. trade or business of the non-U.S. holder will be subject to U.S. withholding tax at the rate of 30%, unless reduced by an income tax treaty.
In general, non-U.S. holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our stock. In cases where the dividend income from a non-U.S. holder's investment in our stock is, or is treated as, effectively connected with the non-U.S. holder's conduct of a U.S. trade or business, the non-U.S. holder generally will be subject to U.S. tax at graduated rates, in the same manner as domestic stockholders are taxed with respect to such dividends, such income must generally be reported on a U.S. income tax return filed by or on behalf of the non-U.S. holder, and the income may also be subject to the 30% branch profits tax in the case of a non-U.S. holder that is a corporation.
Non-Dividend Distributions. Unless our stock constitutes a U.S. real property interest (a "USRPI"), distributions by us which are not dividends out of our earnings and profits will not be subject to U.S. income tax. If it cannot be determined at the time at which a distribution is made whether or not the distribution will exceed current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. However, the non-U.S. holder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits. If our stock constitutes a USRPI, as described below, distributions by us in excess of the sum of our earnings and profits plus the stockholder's basis in its Douglas Emmett stock will be treated as gain from the sale or exchange of such stock and be taxed under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") at the rate of tax, including any applicable capital gains rates, that would apply to a domestic stockholder of the same type (for example, an individual or a corporation, as the case may be). The collection of the tax will be enforced by a refundable withholding at a rate of 10% of the amount by which the distribution exceeds the stockholder's share of our earnings and profits.
Capital Gain Dividends. Under FIRPTA, a distribution made by us to a non-U.S. holder, to the extent attributable to gains from dispositions of USRPIs held by us directly, lower-tier REITs, or through pass-through subsidiaries ("USRPI capital gains"), will, except as discussed below, be considered effectively connected with a U.S. trade or business of the non-U.S. holder and will be subject to U.S. income tax at the rates applicable to U.S. individuals or corporations, without regard to whether the distribution is designated as a capital gain dividend. In addition, we will be required to withhold tax equal to 35% of the amount of dividends to the extent the dividends constitute USRPI capital gains. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a non-U.S. holder that is a corporation. A distribution is not a USRPI capital gain if we held the underlying asset solely as a creditor. Capital gain dividends received by a non-U.S. holder from a REIT attributable to dispositions by that REIT of assets other than USRPIs are generally not subject to U.S. income or withholding tax.
A capital gain dividend by us that would otherwise have been treated as a USRPI capital gain will not be so treated or be subject to FIRPTA, will generally not be treated as income that is effectively connected with a U.S. trade or business, and will instead be treated the same as an ordinary dividend from us (see "Taxation of Foreign StockholdersOrdinary Dividends"), provided that (1) the capital gain dividend is received with respect to a class of stock that is regularly traded on an established securities market located in the United States, and (2) the recipient non-U.S. holder does not own more than 5% of that class of stock at any time during the one-year period ending on the date on which the capital gain dividend is received.
Dispositions of Douglas Emmett Stock. Unless our stock constitutes a USRPI, a sale of the stock by a non-U.S. holder generally will not be subject to U.S. taxation under FIRPTA. The stock will be
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treated as a USRPI if 50% or more of our assets throughout a prescribed testing period consist of interests in real property located within the United States, excluding, for this purpose, interests in real property solely in a capacity as a creditor. Even if the foregoing test is met, our stock nonetheless will not constitute a USRPI if we are a "domestically controlled qualified investment entity." A domestically controlled qualified investment entity includes a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly by non-U.S. holders. We believe that we are, and we expect to continue to be, a domestically controlled qualified investment entity and, therefore, the sale of our stock by a non-U.S. holder should not be subject to taxation under FIRPTA. Because our stock is publicly traded, however, no assurance can be given that we will be a domestically controlled qualified investment entity.
In the event that we do not constitute a domestically controlled qualified investment entity, a non-U.S. holder's sale of stock nonetheless will generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (1) the stock owned is of a class that is "regularly traded," as defined by applicable Treasury regulations, on an established securities market, and (2) the selling non-U.S. holder held 5% or less of our outstanding stock of that class at all times during a specified testing period.
If gain on the sale of our stock were subject to taxation under FIRPTA, the non-U.S. holder would be subject to the same treatment as a U.S. stockholder with respect to such gain, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals, and the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.
Gain from the sale of our stock that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. holder in two cases: (1) if the non-U.S. holder's investment in our stock is effectively connected with a U.S. trade or business conducted by such non-U.S. holder, the non-U.S. holder will be subject to the same treatment as a U.S. stockholder with respect to such gain, or (2) if the non-U.S. holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, the nonresident alien individual will be subject to a 30% tax on the individual's capital gain. In addition, even if we are a domestically controlled qualified investment entity, upon disposition of our stock (subject to the 5% exception applicable to "regularly traded" stock described above), a non-U.S. holder may be treated as having gain from the sale or exchange of a USRPI if the non-U.S. holder (1) disposes of our common stock within a 30-day period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been treated as gain from the sale or exchange of a USRPI and (2) acquires, or enters into a contract or option to acquire, other shares of our common stock within 30 days after such ex-dividend date.
Estate Tax. Douglas Emmett stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for federal estate tax purposes) of the United States at the time of death will be includable in the individual's gross estate for federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and may therefore be subject to federal estate tax.
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). Provided that (1) a tax-exempt stockholder has not held our stock as "debt financed property" within the meaning of the Code (i.e. where the acquisition or holding of the property is financed through a borrowing by the tax-exempt stockholder), and (2) our stock is not otherwise used in an unrelated trade or business, distributions from us and income from the sale of our stock should not give rise to UBTI to a tax-exempt stockholder.
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Tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, are subject to different UBTI rules, which generally will require them to characterize distributions from us as UBTI.
In certain circumstances, a pension trust that owns more than 10% of our stock could be required to treat a percentage of the dividends from us as UBTI, if we are a "pension-held REIT." We will not be a pension-held REIT unless either (1) one pension trust owns more than 25% of the value of our stock, or (2) a group of pension trusts, each individually holding more than 10% of the value of our stock, collectively owns more than 50% of such stock. Certain restrictions on ownership and transfer of our stock should generally prevent a tax-exempt entity from owning more than 10% of the value of our stock, or our becoming a pension-held REIT.
Tax-exempt stockholders are urged to consult their tax advisors regarding the federal, state, local and foreign tax consequences of owning our stock.
Other Tax Considerations
Legislative or Other Actions Affecting REITs
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. No assurance can be given as to whether, or in what form, any proposals affecting REITs or their stockholders will be enacted. Changes to the federal tax laws and interpretations thereof could adversely affect an investment in our stock.
State, Local and Foreign Taxes
We and our subsidiaries and stockholders may be subject to state, local or foreign taxation in various jurisdictions, including those in which it or they transact business, own property or reside. We own properties located in a number of jurisdictions, and may be required to file tax returns in some or all of those jurisdictions. The state, local or foreign tax treatment of us and our stockholders may not conform to the federal income tax treatment discussed above. We will pay foreign property taxes, and dispositions of foreign property or operations involving, or investments in, foreign property may give rise to foreign income or other tax liability in amounts that could be substantial. Any foreign taxes incurred by us do not pass through to stockholders as a credit against their federal income tax liability. Prospective investors should consult their tax advisors regarding the application and effect of state, local and foreign income and other tax laws on an investment in stock or other securities of ours.
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The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code impose certain restrictions on (a) employee benefit plans (as defined in Section 3(3) of ERISA), (b) plans described in section 4975(e)(1) of the Code, including individual retirement accounts or Keogh plans, (c) any entities whose underlying assets include plan assets by reason of a plan's investment in such entities (each a "Plan") and (d) persons who have certain specified relationships to such Plans ("Parties-in-Interest" under ERISA and "Disqualified Persons" under the Code). Moreover, based on the reasoning of the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993), an insurance company's general account may be deemed to include assets of the Plans investing in the general account ( e.g. , through the purchase of an annuity contract), and the insurance company might be treated as a Party-in-Interest with respect to a Plan by virtue of such investment. ERISA also imposes certain duties on persons who are fiduciaries of Plans subject to ERISA and prohibits certain transactions between such a Plan and Parties-in-Interest or Disqualified Persons with respect to such Plans.
The United States Department of Labor (the "DOL") has issued a regulation (29 C.F.R. § 2510.3-101) concerning the definition of what constitutes the assets of a Plan (the "Plan Asset Regulations"). These regulations provide that, as a general rule, the underlying assets and properties of corporations, partnerships, trusts and certain other entities in which a Plan purchases an "equity interest" will be deemed for purposes of ERISA to be assets of the investing Plan unless certain exceptions apply. The Plan Asset Regulations define an "equity interest" as any interest in an entity other than an instrument that is treated as indebtedness under applicable local law and which has no substantial equity features. The shares of our common stock offered hereby, or REIT Shares, should be treated as "equity interests" for purposes of the Plan Asset Regulations.
The Plan Asset Regulations provide exceptions to the look-through rule for equity interests in some types of entities, including any entity which qualifies as either a "real estate operating company" or a "venture capital operating company." Under the Plan Asset Regulations, a "real estate operating company" is defined as an entity which on testing dates has at least 50% of its assets, other than short-term investments pending long-term commitment or distribution to investors, valued at cost:
According to those same regulations, a "venture capital operating company" is defined as an entity that on testing dates has at least 50% of its assets, other than short-term investments pending long-term commitment or distribution to investors, valued at cost invested in one or more operating companies with respect to which the entity has management rights; and that, in the ordinary course of its business, actually exercises its management rights with respect to one or more of the operating companies in which it invests.
Another exception under the Plan Asset Regulations applies to "publicly offered securities," which are defines as securities that are:
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after the end of the fiscal year of the issuer during which this offering of these securities to the public occurred.
Whether a security is considered "freely transferable" depends on the facts and circumstances of each case. Under the Plan Asset Regulations, if the security is part of an offering in which the minimum investment is $10,000 or less, then any restriction on or prohibition against any transfer or assignment of the security for the purposes of preventing a termination or reclassification of the entity for federal or state tax purposes or which would violate any state or federal statute, regulation, court order, judicial decree, or rule of law will not ordinarily prevent the security from being considered freely transferable. Additionally, limitations or restrictions on the transfer or assignment of a security that are created or imposed by persons other than the issuer of the security or persons acting for or on behalf of the issuer will ordinarily not prevent the security from being considered freely transferable.
A class of securities is considered "widely held" if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control.
We expect that the REIT Shares will meet the criteria of the publicly offered securities exception to the look-through rule. First, the REIT Shares should be considered to be freely transferable, as the minimum investment will be less than $10,000 and the only restrictions upon transfer of the REIT Shares are those generally permitted under the Plan Asset Regulations, those required under federal tax laws to maintain the REIT's status as a REIT, resale restrictions under applicable federal securities laws with respect to securities not purchased pursuant to a registered public offering and those owned by officers, directors and other affiliates, and voluntary restrictions agreed to by a selling stockholder regarding volume limitations.
Second, we expect (although we cannot confirm) that the REIT Shares will be held by 100 or more investors and that at least 100 or more of these investors will be independent of the REIT and of one another.
Third, the shares of the REIT's common stock will be part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the common stock will be registered under the Exchange Act.
If, however, none of the exceptions under the Plan Asset Regulations were applicable to the REIT and the REIT were deemed to hold Plan assets subject to ERISA or Section 4975 of the Code, such Plan assets would include an undivided interest in the assets held in the REIT. In such event, such assets and the persons providing services with respect to such assets would be subject to the fiduciary responsibility provisions of Title I of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the Code.
In addition, if the assets held in the REIT were treated as Plan assets, certain of the activities of the REIT could be deemed to constitute a transaction prohibited under Title I of ERISA or Section 4975 of the Code ( e.g. , the extension of credit between a Plan and a Party in Interest or Disqualified Person). Such transactions may, however, be subject to a statutory or administrative exemptions such as Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions effected on behalf of a Plan by a "qualified professional asset manager."
Each Plan fiduciary should consult with its counsel with respect to the potential applicability of ERISA and the Code to such investment or similar rules that may apply to Plans not subject to ERISA or Code Section 4975, such as governmental plans, church plans or plans maintained outside of the United States. Each Plan fiduciary should also determine on its own whether any exceptions or exemptions are applicable (including the publicly offered securities exception) and whether all conditions of any such exceptions or exemptions have been satisfied.
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Moreover, each Plan fiduciary should determine whether, under the general fiduciary standards of investment prudence and diversification, participation in the formation transactions is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's investment portfolio.
This Statement is in no respect a representation that any of the transactions contemplated herein meet all relevant legal requirements with respect to investments by Plans generally or that any such transaction is appropriate for any particular Plan.
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Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. are acting as joint book-running managers and representatives of the underwriters. Under the terms of an underwriting agreement, which will be filed as an exhibit to the registration statement, each of the underwriters named below has severally agreed to purchase from us the respective number of shares of common stock shown opposite its name below:
Underwriter
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Number of
Shares |
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Lehman Brothers Inc. | |||
Merrill Lynch, Pierce, Fenner & Smith
Incorporated |
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Citigroup Global Markets Inc. | |||
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Total | |||
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The underwriting agreement provides that the underwriters' obligation to purchase shares of common stock depends on the satisfaction of the conditions contained in the underwriting agreement including:
The following table summarizes the underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to us for the shares.
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No Exercise
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Full Exercise
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Per Share | ||||
Total |
The representatives of the underwriters have advised us that the underwriters propose to offer the shares of common stock directly to the public at the public offering price on the cover of this prospectus and to selected dealers, which may include the underwriters, at such offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $ per share to other dealers. After this offering, the representatives may change the offering price and other selling terms.
The expenses of this offering that are payable by us are estimated to be $ (excluding underwriting discounts and commissions).
Option to Purchase Additional Shares
We have granted the underwriters an option exercisable for 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of
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shares at the public offering price less underwriting discounts and commissions. This option may be exercised if the underwriters sell more than shares in connection with this offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriter's underwriting commitment in this offering as indicated in the table at the beginning of this Underwriting Section.
We, all of the predecessor principals and our other directors and executive officers and each of the other continuing investors have agreed with the underwriters that, subject to certain limited exceptions, without the prior written consent of each of Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., we and they will not directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of common stock (including, without limitation, shares of common stock that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and shares of common stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for common stock, (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, (3) make any demand for or exercise any right or file or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible, exercisable or exchangeable into common stock or any of our other securities, or (4) publicly disclose the intention to do any of the foregoing for a period of 360 days after the date of this prospectus, in the case of the predecessor principals and our other directors and executive officers, and 180 days after the date of this prospectus, in the case of the other continuing investors. These lock-up agreements are subject to exceptions, including dispositions by gift, will or intestacy; transfers to immediate family members or entities wholly owned by or for the benefit of a continuing investor, its affiliates or members of its immediate family; dispositions to a corporation that is owned by a continuing investor and its affiliates alone or with other continuing investors; distributions to partners, members or stockholders of a continuing investor; and dispositions to charitable organizations. For continuing investors other than the predecessor principals and any director or executive officer, the foregoing restrictions will not apply to shares of our common stock that are purchased in the open market, and the restrictions in (1) and (2) above will not apply to other transactions on behalf of, but not at the request or discretion of, continuing investors so long as (1) the transaction does not involve shares of common stock acquired in the formation transactions, (2) the transaction does not result in a filing by the continuing investor under Section 16 of the Exchange Act and (3) the transaction does not result in a public announcement by the continuing investor regarding the transaction during the restricted period.
The 360-day and 180-day restricted periods described in the preceding paragraph will be extended if:
in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.
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Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., in their sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. When determining whether or not to release common stock and other securities from lock-up agreements, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., will consider, among other factors, the holder's reasons for requesting the release, the number of shares of common stock and other securities for which the release is being requested and market conditions at the time.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the representatives and us. In determining the initial public offering price of our common stock, the representatives will consider:
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities incurred in connection with the directed share program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities.
At our request, the underwriters have reserved for sale at the initial public offering price up to shares offered hereby for officers, directors, employees and certain other persons associated with us. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby.
Stabilization, Short Positions and Penalty Bids
The representatives of the underwriters may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act of 1934:
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shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representatives on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any underwriter's or selling group member's web site and any information contained in any other web site maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors.
We have applied to list our shares of common stock for quotation on the New York Stock Exchange under the symbol "DEI." The underwriters have undertaken to sell the shares of common stock in this offering to a minimum of 2,000 beneficial owners in round lots of 100 or more units to meet the New York Stock Exchange distribution requirements for trading.
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The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of shares offered by them.
If you purchase shares of common stock offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.
The underwriters may in the future perform investment banking and advisory services for us from time to time for which they may in the future receive customary fees and expenses. The underwriters may, from time to time, engage in transactions with or perform services for us in the ordinary course of their business.
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter has represented and agreed that, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date), it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:
For the purposes of this provision, the expression an "offer of shares to the public" in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Each underwriter has represented and agreed that:
205
not offered or sold and will not offer or sell the shares other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the shares would otherwise constitute a contravention of Section 19 of the FSMA by the issuer;
Certain legal matters will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California and for the underwriters by Latham & Watkins LLP, Los Angeles, California. Venable LLP, Baltimore, Maryland, has issued an opinion to us regarding certain matters of Maryland law, including the validity of the common stock offered hereby.
Ernst & Young LLP, independent registered public accounting firm, has audited (i) the balance sheet of Douglas Emmett, Inc. at December 31, 2005 as set forth in their report, (ii) the consolidated financial statements and schedule of Douglas Emmett Realty Advisors, Inc. and Subsidiaries at December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, as set forth in their report, (iii) the financial statements of Douglas, Emmett and Company at December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, as set forth in their report and (iv) the statements of revenues and certain expenses of the Douglas Emmett Single Asset Entities for each of the three years in the period ended December 31, 2005, as set forth in their report. We have included each of the foregoing financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing.
The Eastdil Secured market studies, which will be filed as an exhibit to this registration statement, were prepared for us by Eastdil Secured. Information relating to the Los Angeles and Hawaii metropolitan area economies and the markets within Los Angeles County set forth in "Prospectus SummaryMarket Information," "Economic and Market Overview" and "Business and Properties" is derived from, and is subject to the qualifications and assumptions in, the Eastdil Secured market studies and is included in reliance on Eastdil Secured's authority as an expert on such matters.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-11, including exhibits, schedules and amendments filed with this registration statement, under the Securities Act with respect to the shares of our common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to our company and the shares of our common stock to be sold in this offering, reference is made to the registration statement, including the exhibits to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract is
206
an exhibit to the registration statement, each statement is qualified in all respects by the exhibit to which the reference relates. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549. Information about the operation of the public reference room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0300. Copies of all or a portion of the registration statement can be obtained from the public reference room of the SEC upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you on the SEC Web site, www.sec.gov.
207
Douglas Emmett, Inc. and Subsidiaries: | ||||
Unaudited Pro Forma Consolidated Financial Information: |
|
|
||
Pro Forma Consolidated Balance Sheet as of March 31, 2006 | F-5 | |||
Pro Forma Consolidated Statement of Operations for the three months ended March 31, 2006 | F-6 | |||
Pro Forma Consolidated Statement of Operations for the year ended December 31, 2005 | F-7 | |||
Notes to Unaudited Pro Forma Consolidated Financial Statements | F-8 | |||
Historical Financial Information: |
|
|
||
Report of Independent Registered Public Accounting Firm | F-23 | |||
Consolidated Balance Sheet as of March 31, 2006 | F-24 | |||
Notes to Consolidated Balance Sheet as of March 31, 2006 | F-25 | |||
Douglas Emmett Realty Advisors, Inc.: |
|
|
||
Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005 |
|
F-27 |
||
Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 (unaudited) | F-28 | |||
Consolidated Statements of Stockholders' Equity (Deficit) for the three months ended March 31, 2006 (unaudited) | F-29 | |||
Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited) | F-30 | |||
Notes to Consolidated Financial Statements | F-31 | |||
Report of Independent Registered Public Accounting Firm |
|
F-45 |
||
Consolidated Balance Sheets as of December 31, 2005 and 2004 | F-46 | |||
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 | F-47 | |||
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003 | F-48 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | F-49 | |||
Notes to Consolidated Financial Statements | F-50 | |||
Schedule III | F-68 | |||
Douglas, Emmett and Company: |
|
|
||
Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005 |
|
F-70 |
||
Statements of Income for the three months ended March 31, 2006 and 2005 (unaudited) | F-71 | |||
Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited) | F-72 | |||
Notes to Financial Statements | F-73 | |||
Report of Independent Registered Public Accounting Firm |
|
F-77 |
||
Balance Sheets as of December 31, 2005 and December 31, 2004 | F-78 | |||
Statements of Income for the years ended December 31, 2005, 2004 and 2003 | F-79 | |||
Statements of Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003 | F-80 | |||
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | F-81 | |||
Notes to Financial Statements | F-82 | |||
F-1
Douglas Emmett Single Asset Entities: |
|
|
||
Combined Statements of Revenues and Certain Expenses for the three months ended March 31, 2006 and 2005 (unaudited) |
|
F-86 |
||
Report of Independent Registered Public Accounting Firm |
|
F-90 |
||
Combined Statements of Revenues and Certain Expenses for the years ended December 21, 2005, 2004 and 2003 | F-91 | |||
Notes to Combined Statements of Revenues and Certain Expenses | F-92 |
F-2
Douglas Emmett, Inc. and Subsidiaries
Pro Forma Consolidated Financial Statements
(Unaudited)
The unaudited pro forma consolidated financial statements of Douglas Emmett, Inc. (together with its consolidated subsidiaries, the "Company", "we", "our" or "us") as of and for the three months ended March 31, 2006 and for the year ended December 31, 2005 are derived from the financial statements of: (1) the Company, (2) Douglas Emmett Realty Advisors, Inc. ("DERA") and its consolidated subsidiaries which consist of nine California limited partnerships, referred to as the institutional funds, and their subsidiaries (collectively, the "Predecessor"), (3) Douglas, Emmett and Company ("DECO"), (4) PLE Builders, Inc. ("PLE") and (5) seven California partnerships and one California limited liability company, collectively referred to as the single-asset entities ("SAEs"), and are presented as if this offering (including the application of the net proceeds therefrom as set forth under "Use of Proceeds"), the formation transactions and the financing transactions (each as described below) had occurred on March 31, 2006 for the pro forma consolidated balance sheet and on January 1, 2005 for the pro forma consolidated statements of operations. The acquisition of the Villas at Royal Kunia ("Royal Kunia") occurred on March 1, 2006 and the pro forma consolidated statements of operations are presented as if the acquisition and related financing had each occurred on January 1, 2005. The Predecessor also acquired a multifamily property and an office property in early January 2005. These properties and the results of their operations have been included in the Predecessor's financial statements since the date of their acquisition; however, we have not adjusted the pro forma consolidated statements of operations to reflect the financial results of these acquisitions from January 1, 2005 to their respective closing dates in early January 2005, as we believe that the impact of these adjustments would not be meaningful.
Our pro forma consolidated financial statements are presented for informational purposes only and should be read in conjunction with the historical financial statements and related notes thereto included elsewhere in this prospectus. The adjustments to our pro forma consolidated financial statements are based on available information and assumptions that we consider reasonable. Our pro forma consolidated financial statements do not purport to (1) represent our financial position that would have actually occurred had this offering, the formation transactions, the financing transactions occurred on March 31, 2006, (2) represent the results of our operations that would have actually occurred had this offering, the formation transactions, the financing transactions or the acquisition of Royal Kunia occurred on January 1, 2005, and (3) project our financial position or results of operations as of any future date or for any future period, as applicable.
We were formed as a Maryland corporation on June 28, 2005 to continue and expand the operations of DERA, DECO, PLE and their predecessors. Douglas Emmett Properties, LP, our operating partnership, was formed as a Delaware limited partnership on July 25, 2005. Douglas Emmett, LLC, a wholly-owned subsidiary that we also formed on July 25, 2005, owns the general partnership interest in our operating partnership, while we own all of the outstanding limited partnership interests therein prior to the formation transactions. Upon completion of the offering and the formation transactions, we expect our operations to be carried on through our operating partnership. At such time, the Company, as a limited partner of, and as sole member of the general partner of, the operating partnership, will own, directly or indirectly, % of the operating partnership and will have control of the operating partnership, as determined under EITF 04-5, Investor's Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partner has Certain Rights . Accordingly, the Company will consolidate the assets, liabilities and results of operations of the operating partnership. Upon completion of this offering, Dan Emmett, Christopher Anderson, Jordan Kaplan and Kenneth Panzer, the principals of DERA, DECO and PLE (collectively referred to as "the predecessor principals"), will own, directly or indirectly, approximately % of the operating partnership as limited partners, and approximately % of the Company's outstanding common stock.
F-3
Pursuant to the formation transactions, we will acquire DERA, DECO and PLE through a series of merger and contribution transactions in exchange for shares of our common stock and units in our operating partnership. DERA is also the general partner of the institutional funds and three investment funds that own interests in certain of the institutional funds. We will acquire the institutional funds, the investment funds and the SAEs through a series of merger and contribution transactions. In these acquisitions, all investors in these entities will receive as consideration, pursuant to irrevocable elections made by them prior to the filing of the registration statement of which this prospectus forms a part, cash and / or operating partnership units or shares of our common stock. Our operating partnership will also acquire outstanding minority interests in certain subsidiaries of the institutional funds through a contribution transaction whereby the holder of the minority interests will receive operating partnership units. Upon completion of this offering, we will redeem outstanding preferred minority interests in two of the institutional funds for cash. These transactions will all be made upon completion of this offering.
Upon completion of this offering, we also expect to amend our existing $1.76 billion secured financing by increasing the amount of the term loan by $545.0 million, the proceeds from which we expect to use, together with cash on hand and the net proceeds from this offering to pay the cash consideration in the formation transactions, to redeem preferred minority interests, to repay certain variable rate debt and to pay related fees and expenses. Upon completion of this offering, the formation transactions, and the financing transactions, we expect our total outstanding indebtedness to increase by approximately $210 million to $2.75 billion, excluding the loan premium of $31.0 million.
Prior to the completion of the formation transactions, the predecessor principals owned all of the outstanding interests in DERA, DECO and PLE as well as certain interests in the institutional funds and the investment funds. The predecessor principals, together with their related parties, also own a significant portion of the interests in the SAEs. Any interests contributed by or purchased from Dan Emmett and his affiliates (collectively, the "Affiliates") will be accounted for as a reorganization of entities under common control and recorded at historical cost. The acquisition of interests owned by non-Affiliate and non-controlling investors (including the other predecessor principals, the "Non-Affiliates") will be accounted for as an acquisition under the purchase method of accounting and recorded at the estimated fair value of acquired assets and assumed liabilities corresponding to their ownership interests. The fair value of these assets and liabilities has been allocated in accordance with SFAS No. 141, Business Combinations ("SFAS 141"). The fair values of tangible assets acquired are determined on an "as-if-vacant" basis. The "as-if-vacant" fair value is allocated to land, building and tenant improvements based on relevant information obtained in connection with the acquisition of these interests. The estimated fair value of acquired in-place at-market leases are the costs we would have incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the fair value of leasing commissions and legal costs that would be incurred to lease this property to this occupancy level. Additionally, we evaluate the time period over which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to 8-12 months. Above-market and below-market in-place lease values are recorded as an asset or liability based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease for office property leases and our estimate of the remaining life of the tenancy of multifamily property tenants. The fair value of the variable rate debt assumed was determined using current market interest rates for comparable debt financings.
F-4
Douglas Emmett, Inc. and Subsidiaries
Pro Forma Consolidated Balance Sheet
March 31, 2006
(Unaudited and in thousands)
|
|
|
|
|
Formation Transactions
|
|
|
||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
Acquisitions and Contributions
|
Use of Proceeds
|
|
|
|||||||||||||||||||||||||||
|
Douglas
Emmett, Inc. and Subsidiaries |
Predecessor
|
Proceeds
From Offering |
Financing and
Equity Transactions |
Acquisition of
Predecessor Minority Interests |
Acquisition of
Single Asset Entities |
Acquisition of
DECO & PLE |
Debt and
Preferred Repayments |
Formation
Transaction Consideration |
Other
Pro Forma Adjustments |
Company
Pro Forma |
||||||||||||||||||||||||
|
(A)
|
(B)
|
(C)
|
|
(F)
|
(G)
|
(H)
|
(D)
|
(I)
|
|
|
||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||
Investment in real estate, net | $ | | $ | 2,721,847 | $ | | $ | | $ | 2,373,964 | $ | 108,003 | $ | | $ | | $ | | $ | | $ | 5,203,814 | |||||||||||||
Cash and cash equivalents | 1 | 114,964 | 1,027,180 |
542,320
60,000 |
(D)
(E) |
| 2,749 | |
(338,290
|
)
|
(1,027,180
(204,030 (160,000 |
)
) (D) ) |
(4,000 | ) (L) | 13,714 | ||||||||||||||||||||
Tenant receivables | | 3,660 | | | | 262 | 2,219 | | | (2,219 | ) (K) | 3,922 | |||||||||||||||||||||||
Deferred rent receivables | | 64,233 | | | (58,752 | ) | 498 | | | | (286 | ) (K) | 5,693 | ||||||||||||||||||||||
Interest rate contracts | | 110,412 | | | | | | | | | 110,412 | ||||||||||||||||||||||||
Other assets | 4,930 | 37,420 | (4,930 | ) |
2,680
1,100 |
(D)
(D) |
34,104 | 1,262 | 249 | | | (4,930 | ) (M) | 71,886 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total assets | $ | 4,931 | $ | 3,052,536 | $ | 1,022,250 | $ | 606,100 | $ | 2,349,315 | $ | 112,774 | $ | 2,468 | $ | (338,290 | ) | $ | (1,391,210 | ) | $ | (11,435 | ) | $ | 5,409,440 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Secured notes payable | $ | | $ | 2,305,500 | $ | | $ | 545,000 | (D) | $ | 31,000 | $ | 50,960 | $ | | (151,460 | ) | $ | | $ | | $ | 2,781,000 | ||||||||||||
Due to a related party | 4,930 | | | | | | | | | (4,930 | ) (M) | | |||||||||||||||||||||||
Accounts payable, accrued expenses and tenant security deposits | | 92,496 | | | 197,761 | 1,634 | 3,473 | | |
(2,219
(286 |
)
(K)
) (K) |
292,859 | |||||||||||||||||||||||
Interest rate contracts | | 9,481 | | | | | | | | | 9,481 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total liabilities | $ | 4,930 | $ | 2,407,477 | $ | | $ | 545,000 | $ | 228,761 | $ | 52,594 | $ | 3,473 | $ | (151,460 | ) | $ | | $ | (7,435 | ) | $ | 3,083,340 | |||||||||||
Preferred minority interest in consolidated real estate partnerships |
|
|
|
|
|
184,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184,000 |
) |
|
|
|
|
|
|
|
|
||
Minority interest and limited partners in real estate partnerships | | 550,227 |
|
| 2,120,554 | 84,939 | | |
(1,027,180
(204,030 (160,000 (1,364,511 |
)
) (D) ) ) (J) |
(4,000
4,000 |
)
(L)
(J) |
| ||||||||||||||||||||||
Minority interest in operating partnership | | | | | | | | | 593,606 | (J) | (4,000 | ) (J) | 589,606 | ||||||||||||||||||||||
Stockholders' equity (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Owners' equity / (deficit) | | (29,168 | ) | | 1,100 | (D) | | (24,759 | ) | (1,005 | ) | (2,830 | ) | 770,905 | (J) | (714,244 | ) (N) | | |||||||||||||||||
Notes receivable from stockholders | | (60,000 | ) | | 60,000 | (E) | | | | | | | | ||||||||||||||||||||||
Common stock and additional paid in capital | 1 | |
1,027,180
(4,930 |
) |
| | | | | | 714,244 | (N) | 1,736,494 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total stockholders' equity (deficit) | $ | 1 | $ | (89,168 | ) | $ | 1,022,250 | $ | 61,100 | $ | | $ | (24,759 | ) | $ | (1,005 | ) | $ | (2,830 | ) | $ | 770,905 | $ | | $ | 1,736,494 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total liabilities and stockholders' equity (deficit) | $ | 4,931 | $ | 3,052,536 | $ | 1,022,250 | $ | 606,100 | $ | 2,349,315 | $ | 112,774 | $ | 2,468 | $ | (338,290 | ) | $ | (1,391,210 | ) | $ | (11,435 | ) | $ | 5,409,440 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-5
Douglas Emmett, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the Three Months Ended March 31, 2006
(Unaudited and in thousands, except per share amounts)
|
Predecessor
|
Acquisition of
Predecessor Minority Interests |
Acquisition of
DECO & PLE |
Acquisition of
Single Asset Entities |
Acquisition of
The Villas at Royal Kunia |
Financing
Transactions |
Other
Pro Forma Adjustments |
Company
Pro Forma |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(AA)
|
(BB)
|
(CC)
|
(DD)
|
(EE)
|
(FF)
|
|
|
|||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||
Office rental: | |||||||||||||||||||||||||||
Rental revenues | $ | 75,760 | $ | 9,892 | $ | | $ | 1,999 | $ | | $ | | $ | | $ | 87,651 | |||||||||||
Tenant recoveries | 4,095 | | | 96 | | | | 4,191 | |||||||||||||||||||
Parking and other income | 10,239 | | | 226 | | | | 10,465 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total office revenue | 90,094 | 9,892 | | 2,321 | | | | 102,307 | |||||||||||||||||||
Multifamily rental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Rental revenues | 12,281 | 1,061 | | 568 | 1,051 | | | 14,960 | |||||||||||||||||||
Parking and other income | 235 | | | 7 | 101 | | | 343 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total multifamily revenue | 12,516 | 1,061 | | 575 | 1,152 | | | 15,303 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total revenues | 102,610 | 10,953 | | 2,896 | 1,152 | | | 117,610 | |||||||||||||||||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Office rental | 29,430 | | | 428 | | | (2,387 | )(CC) | 27,471 | ||||||||||||||||||
Multifamily rental | 4,233 | | | 88 | 336 | | | 4,657 | |||||||||||||||||||
General and administrative | 1,705 | | 1,477 | 300 | | | 275 | (GG) | 3,758 | ||||||||||||||||||
Depreciation and amortization | 25,783 | 17,572 | | 740 | 661 | | | 44,757 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total operating expenses | 61,151 | 17,572 | 1,477 | 1,556 | 997 | | (2,112 | ) | 80,643 | ||||||||||||||||||
Operating income |
|
|
41,459 |
|
|
(6,619 |
) |
|
(1,477 |
) |
|
1,340 |
|
|
153 |
|
|
|
|
|
2,112 |
|
|
36,967 |
|
||
Gain on interest rate contracts, net |
|
|
34,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,943 |
)(FF) |
|
|
|
||
Interest and other income | 1,221 | | 34 | | | | (500 | )(HH) | 755 | ||||||||||||||||||
Interest expense | (28,054 | ) | 602 | | (705 | ) | (1,185 | ) | (7,139 | ) | | (36,481 | ) | ||||||||||||||
Deficit recovery (distributions) from/to minority partners, net | 7,769 | | | | | | (7,769 | )(II) | | ||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Income (loss) before minority interest expense |
|
|
57,338 |
|
|
(6,017 |
) |
|
(1,443 |
) |
|
635 |
|
|
(1,032 |
) |
|
(7,139 |
) |
|
(41,100 |
) |
|
1,241 |
|
||
Minority Interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Minority interest in consolidated real estate partnerships | 40,821 | | | | | | (40,821 | )(JJ) | | ||||||||||||||||||
Minority interest in operating partnerships | 357 | 357 | |||||||||||||||||||||||||
Preferred minority investor | 4,025 | (4,025 | ) | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Net income / (loss) | $ | 12,492 | $ | (6,017 | ) | $ | (1,443 | ) | $ | 635 | $ | (1,032 | ) | $ | (3,114 | ) | $ | (636 | ) | $ | 884 | ||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Pro Forma earnings per sharebasic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK) |
||
|
|||||||||||||||||||||||||||
Pro Forma weighted average common shares outstandingbasic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
See accompanying notes
F-6
Douglas Emmett, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2005
(Unaudited and in thousands, except per share amounts)
|
Predecessor
|
Acquisition of
Predecessor Minority Interests |
Acquisition of
DECO & PLE |
Acquisition of
Single Asset Entities |
Acquisition of
The Villas at Royal Kunia |
Financing
Transactions |
Other
Pro Forma Adjustments |
Company
Pro Forma |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(AA)
|
(BB)
|
(CC)
|
(DD)
|
(EE)
|
(FF)
|
|
|
|||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||
Office rental: | |||||||||||||||||||||||||||
Rental revenues | $ | 297,551 | $ | 31,139 | $ | | $ | 7,292 | $ | | $ | | $ | | $ | 335,982 | |||||||||||
Tenant recoveries | 14,632 | | | 347 | | | | 14,979 | |||||||||||||||||||
Parking and other income | 36,383 | | | 740 | | | | 37,123 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total office revenue | 348,566 | 31,139 | | 8,379 | | | | 388,084 | |||||||||||||||||||
Multifamily rental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Rental revenues | 43,942 | 7,685 | | 2,192 | 6,327 | | | 60,146 | |||||||||||||||||||
Parking and other income | 1,280 | | | 26 | 603 | | | 1,909 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total multifamily revenue | 45,222 | 7,685 | | 2,218 | 6,930 | | | 62,055 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total revenues | 393,788 | 38,824 | | 10,597 | 6,930 | | | 450,139 | |||||||||||||||||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Office rental | 119,879 | | | 1,839 | | | (9,131 | )(CC) | 112,587 | ||||||||||||||||||
Multifamily rental | 15,347 | | | 299 | 2,018 | | | 17,664 | |||||||||||||||||||
General and administrative expenses | 6,457 | | 6,135 | 905 | | | 30,100 | (GG) | 43,597 | ||||||||||||||||||
Depreciation and amortization | 113,170 | 82,220 | | 3,212 | 2,646 | | | 201,247 | |||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Total operating expenses | 254,853 | 82,220 | 6,135 | 6,255 | 4,664 | | 20,969 | 375,095 | |||||||||||||||||||
Operating income |
|
|
138,935 |
|
|
(43,396 |
) |
|
(6,135 |
) |
|
4,342 |
|
|
2,266 |
|
|
|
|
|
(20,969 |
) |
|
75,044 |
|
||
Gain on interest rate contracts, net |
|
|
81,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,666 |
)(FF) |
|
|
|
||
Interest and other income | 2,264 | | 80 | | | | (2,000 | )(HH) | 344 | ||||||||||||||||||
Interest expense | (115,674 | ) | 2,408 | | (2,397 | ) | (4,741 | ) | (32,457 | ) |
|
(152,861 | ) | ||||||||||||||
Deficit recovery (distributions) from/to minority partners, net | (28,150 | ) | | | | | | 28,150 | (II) | | |||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Income (loss) before minority interest expense | 79,041 | (40,988 | ) | (6,055 | ) | 1,944 | (2,475 | ) | (32,457 | ) | (76,485 | ) | (77,473 | ) | |||||||||||||
Minority Interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Minority interest in consolidated real estate partnerships | 79,756 | | | | | | (79,756 | )(JJ) | | ||||||||||||||||||
Minority interest in operating partnerships | (22,312 | ) | (22,312 | ) | |||||||||||||||||||||||
Preferred minority investor | 15,805 | | | | | (15,805 | ) | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Net income / (loss) | $ | (16,520 | ) | $ | (40,988 | ) | $ | (6,055 | ) | $ | 1,944 | $ | (2,475 | ) | $ | (16,652 | ) | $ | 25,583 | $ | (55,161 | ) | |||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
Pro Forma earnings per sharebasic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK) |
||
|
|||||||||||||||||||||||||||
Pro Forma weighted average common shares outstandingbasic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
See accompanying notes
F-7
Douglas Emmett, Inc. and Subsidiaries
Notes to Pro Forma Consolidated Financial Statements
(Unaudited and in thousands, except per share amounts)
1. Adjustments to the Pro Forma Consolidated Balance Sheet
The adjustments to the pro forma consolidated balance sheet as of March 31, 2006 are as follows:
F-8
been applied to the formation transactions. We will contribute the net proceeds from this offering to our operating partnership in exchange for operating partnership units therein.
Gross proceeds from offering | $ | 1,100,000 | |||
Less costs of this offering: |
|
|
|
|
|
Underwriters' discount and commissions, financial advisory fees and other costs (1) | (72,820 | ) | |||
|
|||||
Net proceeds from offering | $ | 1,027,180 | |||
|
|||||
Common stock and additional paid in capital | $ | 1,027,180 | |||
|
F-9
write-off capitalized loan fees, totaling approximately $1,100, related to the aforementioned debt pay down.
Debt Repayment
|
Principal
|
||||
---|---|---|---|---|---|
Modified Term Loan | $ | 545,000 | |||
Loan fees and costs | (2,680 | ) | |||
|
|||||
Net proceeds | $ | 542,320 | |||
Repayments | |||||
Brentwood Court | $ | (4,512 | ) | ||
Brentwood Plaza | (11,600 | ) | |||
Brentwood-San Vicente Medical, Ltd. | (7,600 | ) | |||
San Vicente Plaza | (6,600 | ) | |||
Owensmouth / Warner LLC | (15,000 | ) | |||
Barrington Kiowa Properties | (2,123 | ) | |||
Barry Properties, Ltd. | (2,483 | ) | |||
Kiowa Properties, Ltd. | (1,042 | ) | |||
The Trillium | (100,500 | ) | |||
|
|||||
Total debt repayments | $ | (151,460 | ) | ||
Redemption of preferred minority interests | $ | (184,000 | ) | ||
Premiums and other costs | (2,830 | ) | |||
|
|||||
Total debt repayments and redemption | $ | (338,290 | ) | ||
|
|||||
Net proceeds paid to prior investors | $ | 204,030 | |||
|
|||||
Write-off of existing loan fees | $ | (1,100 | ) | ||
|
F-10
registration statement of which this prospectus forms a part, cash and/or operating partnership units or shares of our common stock. Our operating partnership will also acquire outstanding minority interests in certain subsidiaries of the institutional funds in exchange for limited partnership units in the operating partnership. See also note (B) above. The institutional funds are owned by the Affiliates, the other predecessor principals and a number of other unaffiliated private investors, consisting of endowments, foundations, pension plans, banks, other institutional investors and high net worth individuals. The acquisition of interests owned by the Non-Affiliate investors will be accounted for as an acquisition of minority interests under the purchase method of accounting in accordance with SFAS 141 and recorded at the estimated fair value of acquired assets and assumed liabilities corresponding to their ownership interests. See note (I) below for a summary of total consideration paid in connection with the formation transactions.
Consideration paid to purchase Non-Affiliate investors | $ | 2,584,633 | ||
Less: historical cost of net assets attributable to Non-Affiliate investors | (464,079 | ) | ||
|
||||
Pro forma net equity adjustment | $ | 2,120,554 | ||
|
The following pro forma adjustments are necessary to reflect the initial allocation of purchase price. The allocation of purchase price shown below is based on the Company's preliminary estimates and is subject to change based on the final determination of the fair value of assets and liabilities acquired.
Land | $ | 218,690 | ||
Building and equipment | 1,544,090 | |||
Tenant improvements and other in-place lease assets | 122,047 | |||
Accumulated depreciation | 489,137 | |||
|
||||
Investment in real estate, net | $ | 2,373,964 | ||
Deferred rent receivable | (58,752 | ) | ||
Above-market tenant leases | 34,104 | |||
|
||||
Adjustment to total assets | $ | 2,349,315 | ||
Secured notes payable | 31,000 | |||
Below-market tenant leases | 197,761 | |||
|
||||
Adjustment to total liabilities | $ | 228,761 | ||
|
||||
Net purchase price adjustment | $ | 2,120,554 | ||
|
F-11
accounted for as a reorganization of entities under common control and recorded at the historical cost basis of contributed assets and assumed liabilities corresponding to their ownership interests. The acquisition of interests owned by the Non-Affiliate investors will be accounted for as an acquisition under the purchase method of accounting in accordance with SFAS 141 and recorded at the estimated fair value of the acquired assets and assumed liabilities corresponding to their ownership interests. The following pro forma adjustments are necessary to reflect the acquisition of the SAEs and related allocation of purchase price.
|
Single
Asset Entities |
Acquisition of
SAE Non-Affiliate Interests (1) |
Pro Forma
Adjustment |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||||
Investment in real estate, net | $ | 22,078 | $ | 85,925 | $ | 108,003 | ||||||
Cash and cash equivalents | 2,749 | | 2,749 | |||||||||
Tenant receivables | 262 | | 262 | |||||||||
Deferred rent receivables | 1,078 | (580 | ) | 498 | ||||||||
Other assets | 896 | 366 | 1,262 | |||||||||
|
|
|
||||||||||
Total assets | $ | 27,063 | $ | 85,711 | $ | 112,774 | ||||||
|
|
|
||||||||||
Liabilities and stockholders' and owners' equity |
|
|
|
|
|
|
|
|
|
|
||
Secured notes payable | 50,960 | | 50,960 | |||||||||
Accounts payable, accrued expenses and tenant security deposits | 862 | 772 | 1,634 | |||||||||
|
|
|
||||||||||
Total liabilities | 51,822 | 772 | 52,594 | |||||||||
Minority interest and limited partners in real estate partnerships | | 84,939 | 84,939 | |||||||||
Owners' equity | (24,759 | ) | (24,759 | ) | ||||||||
|
|
|
||||||||||
Total liabilities and owners' equity | $ | 27,063 | $ | 85,711 | $ | 112,774 | ||||||
|
|
|
Consideration paid to purchase Non-Affiliate investors | $ | 84,939 | |
Less: historical cost of net liabilities attributable to Non-Affiliate investors | | ||
|
|||
Pro forma net equity adjustment | $ | 84,939 | |
|
The following pro forma adjustments are necessary to reflect the initial allocation of purchase price. The allocation of purchase price shown below is based on the Company's
F-12
preliminary estimates and is subject to change based on the final determination of the fair value of assets and liabilities acquired.
Land | $ | 14,166 | ||
Building and equipment | 57,340 | |||
Tenant improvements and other in-place lease value | 1,600 | |||
Accumulated depreciation | 12,819 | |||
|
||||
Investment in real estate, net | $ | 85,925 | ||
Deferred rent receivable | (580 | ) | ||
Above-market tenant leases | 366 | |||
|
||||
Adjustment to total assets | $ | 85,711 | ||
Below-market tenant leases | 772 | |||
|
||||
Adjustment to total liabilities | 772 | |||
|
||||
Net purchase price adjustment | $ | 84,939 | ||
|
F-13
of certain intercompany balances between DERA on the one hand and DECO and PLE on the other.
|
March 31, 2006
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
DECO
|
PLE
|
Distributed
Assets (1) |
Net
Contributed to Company |
||||||||||
Cash | $ | 2,114 | $ | 1,223 | $ | (3,337 | ) | | ||||||
Accounts receivable | 2,617 | 2,219 | (2,617 | ) | 2,219 | |||||||||
Prepaid expenses and other assets | 182 | 17 | | 199 | ||||||||||
Property and equipment, net | 41 | 9 | | 50 | ||||||||||
|
|
|
|
|||||||||||
Total assets | $ | 4,954 | $ | 3,468 | $ | (5,954 | ) | $ | 2,468 | |||||
|
|
|
|
|||||||||||
Accounts payable |
|
|
363 |
|
|
2,824 |
|
|
|
|
|
3,187 |
|
|
Deferred rent liability | 286 | | | 286 | ||||||||||
Total stockholders' equity | 4,305 | 644 | $ | (5,954 | ) | (1,005 | ) | |||||||
|
|
|
|
|||||||||||
Total liabilities and stockholders' equity | $ | 4,954 | $ | 3,468 | $ | (5,954 | ) | $ | 2,468 | |||||
|
|
|
|
F-14
partnership units and shares of common stock that will be issued in the formation transactions have a combined book value of $ million (see note (J) for details).
|
Acquisition of
Predecessor Minority Interests |
Acquisition of
Single Asset Entities |
Total
Consideration |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Formation Transaction Obligations | ||||||||||||
Acquisition of interests owned by the Affiliates, at cost | $ | 86,148 | $ | | $ | 86,148 | ||||||
Acquisition of interests owned by Non- Affiliate investors, at fair value | 2,584,633 | 84,939 | 2,669,573 | |||||||||
|
|
|
||||||||||
Total consideration due in formation transactions | $ | 2,670,781 | $ | 84,939 | $ | 2,755,720 | ||||||
|
|
|
||||||||||
Formation Transation Consideration |
|
|
|
|
|
|
|
|
|
|||
Net offering proceeds | $ | 1,027,180 | ||||||||||
Financing transactions | 204,030 | |||||||||||
Existing cash | 160,000 | |||||||||||
|
||||||||||||
Total cash consideration | $ | 1,391,210 | ||||||||||
Total operating partnership units | 593,606 | |||||||||||
Total common shares | 770,905 | |||||||||||
|
||||||||||||
Total consideration paid in formation transactions | $ | 2,755,720 | ||||||||||
|
See also notes (F) and (G) above for details pertaining to the acquisition of the Predecessor minority interests and the SAEs.
F-15
2. Adjustments to the Pro Forma Consolidated Statement of Operation
The adjustments to the pro forma statement of operations for the three months ended March 31, 2006 and year ended December 31, 2005 are as follows:
F-16
the properties owned by the institutional funds and SAEs as well as the capitalization of certain DECO and PLE internal leasing and construction costs.
|
For The Three Months Ended
March 31, 2006 |
For The Year Ended
December 31, 2005 |
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
DECO
|
PLE
|
Adjustments
|
DECO-PLE
Combined |
DECO
|
PLE
|
Adjustments
|
DECO-PLE
Combined |
||||||||||||||||||
Service Revenues: | ||||||||||||||||||||||||||
Real estate commissions | $ | 1,376 | $ | | $ | (1,376 | ) (1) | $ | | $ | 5,872 | $ | | $ | (5,872 | ) (1) | $ | | ||||||||
Property management fees | 2,387 | | (2,387 | ) (2) | | 9,131 | | (9,131 | ) (2) | | ||||||||||||||||
Service contract fees |
5,045
|
4,670
|
(4,670
(5,045 |
)
(3)
) (4) |
|
20,166
|
18,837
|
(18,837
(20,166 |
)
(3)
) (4) |
|
||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total service revenues | 8,808 | 4,670 | $ | | 35,169 | 18,837 | $ | | ||||||||||||||||||
Costs of Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, benefits and other direct costs | ||||||||||||||||||||||||||
Reimburseable expenses | 5,045 | $ | | (5,045 | ) (4) | $ | | 20,166 | $ | | (20,166 | ) (4) | $ | | ||||||||||||
Unreimburseable expenses | 992 | 4,133 | (4,133 | ) (3) | 947 | 3,857 | 15,912 | (15,912 | ) (3) | 3,677 | ||||||||||||||||
(45 | ) (5) | (180 | ) (5) | |||||||||||||||||||||||
Selling, general and administrative expenses | 381 | 328 | (179 | ) (5) | 530 | 1,541 | 1,631 | (714 | ) (5) | 2,458 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total expenses | 6,418 | 4,461 | 1,477 | 25,564 | 17,543 | 6,135 | ||||||||||||||||||||
Interest and other income |
|
|
13 |
|
|
21 |
|
|
|
|
|
34 |
|
|
30 |
|
|
50 |
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net income | $ | 2,403 | $ | 229 | $ | (1,443 | ) | $ | 9,635 | $ | 1,344 | $ | (6,055 | ) | ||||||||||||
|
|
|
|
|
|
F-17
amounts were determined based on management's evaluation of the estimated useful lives of the properties and intangibles. In utilizing these useful lives for determining the pro forma adjustments, management considered the length of time the property had been in existence, the maintenance history as well as anticipated future maintenance, and any contractual stipulations that might limit the useful life.
|
For The Three Months Ended
March 31, 2006 |
For The Year Ended
December 31, 2005 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Single
Asset Entities |
Acquisition of
Minority Interests |
Adjusted
SAE |
Single
Asset Entities |
Acquisition of
Minority Interests |
Adjusted
SAE |
||||||||||||||
Revenues: | ||||||||||||||||||||
Office rental: | ||||||||||||||||||||
Rental revenues | $ | 1,960 | $ | 39 | $ | 1,999 | $ | 7,328 | $ | (36 | ) | $ | 7,292 | |||||||
Tenant recoveries | 96 | 96 | 347 | 347 | ||||||||||||||||
Parking and other income | 226 | 226 | 740 | 740 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total office revenue | 2,282 | 39 | 2,321 | 8,415 | (36 | ) | 8,379 | |||||||||||||
Multifamily rental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Rental revenues | 568 | | 568 | 2,165 | 27 | 2,192 | ||||||||||||||
Parking and other income | 7 | 7 | 26 | 26 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total multifamily revenue | 575 | | 575 | 2,191 | 27 | 2,218 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total revenues | 2,857 | 39 | 2,896 | 10,606 | (9 | ) | 10,597 | |||||||||||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Office rental | 428 | 428 | 1,839 | 1,839 | ||||||||||||||||
Multifamily rental | 88 | 88 | 299 | 299 | ||||||||||||||||
General and administrative expenses | 300 | 300 | 905 | 905 | ||||||||||||||||
Interest expense | 705 | 705 | 2,397 | 2,397 | ||||||||||||||||
Depreciation and amortization | 129 | 612 | 740 | 681 | 2,531 | 3,212 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total operating expenses | 1,650 | 612 | 2,261 | 6,121 | 2,531 | 8,652 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net income | $ | 1,207 | $ | (572 | ) | $ | 635 | $ | 4,485 | $ | (2,541 | ) | $ | 1,944 | ||||||
|
|
|
|
|
|
F-18
maintenance, and any contractual stipulations that might limit the useful life. The pro forma adjustments are as follows:
|
Three Months Ended
March 31, 2006 |
Twelve Months Ended
December 31, 2005 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Combined
Historical Revenues and Certain Expenses |
Adjustments
Resulting From Purchasing the Property |
Pro Forma
Adjustments |
Combined
Historical Revenues and Certain Expenses |
Adjustments
Resulting From Purchasing the Property |
Pro Forma
Adjustments |
||||||||||||||
Revenues: | ||||||||||||||||||||
Rental revenues | $ | 1,063 | $ | (12 | ) | $ | 1,051 | $ | 6,375 | $ | (48 | ) | $ | 6,327 | ||||||
Other income | 101 | 101 | 603 | 603 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total revenues | 1,164 | (12 | ) | 1,152 | 6,978 | (48 | ) | 6,930 | ||||||||||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily rental | 336 | 336 | 2,018 | 2,018 | ||||||||||||||||
Property taxes | | | | | ||||||||||||||||
Insurance | | | | | ||||||||||||||||
Depreciation and amortization | | 661 | (1) | 661 | | 2,646 | (1) | 2,646 | ||||||||||||
Other | | | | | ||||||||||||||||
Interest expense | 1,185 | 1,185 | 4,741 | 4,741 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total operating expenses | 336 | 1,846 | 2,183 | 2,018 | 7,386 | 9,404 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Income | $ | 827 | $ | (1,858 | ) | $ | (1,032 | ) | $ | 4,961 | $ | (7,435 | ) | $ | (2,475 | ) | ||||
|
|
|
|
|
|
F-19
refinancing transaction and the corresponding interest expense that would have been recorded had these loans been outstanding as of the beginning of the periods presented:
|
|
|
|
Interest Expense
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Properties
|
Principal
Balance |
Stated
Interest Rate |
Effective
Interest Rate (1) |
Three Months
Ended March 30, 2006 |
Year Ended
December 31, 2005 |
||||||||||
Variable Rate Swapped to Fixed Rate | |||||||||||||||
Modified term loan (2) (3) | $ | 1,755,000 | LIBOR + 0.85 | % | 4.92 | % | $ | 22,740 | $ | 89,297 | |||||
Barrington Plaza, Pacific Plaza | 153,000 | DMBS + 0.60 | 4.70 | 1,750 | 6,163 | ||||||||||
555 Barrington, The Shores | 140,000 | DMBS + 0.60 | 4.70 | 1,636 | 5,553 | ||||||||||
Moanalua | 75,000 | DMBS + 0.60 | 4.86 | 883 | 3,381 | ||||||||||
Royal Kunia | 82,000 | LIBOR + 0.62 | 5.62 | 1,185 | 4,741 | ||||||||||
|
|
|
|||||||||||||
Subtotal | $ | 2,205,000 | 28,194 | 109,135 | |||||||||||
Variable Rate | |||||||||||||||
Modified term loan (2)(4) | 545,000 | LIBOR + 0.85 | 5.85 | 7,971 | 31,883 | ||||||||||
Loan premium (5) | 31,000 | (1,205 | ) | (4,820 | ) | ||||||||||
|
|
|
|||||||||||||
Subtotal | $ | 2,781,000 | $ | 34,960 | $ | 136,198 | |||||||||
Amortization of loan costs |
|
|
|
|
|
|
|
|
|
151 |
|
|
11,783 |
|
|
Impact of interest rate swap transactions | 1,370 | 4,880 | |||||||||||||
|
|
|
|||||||||||||
Pro Forma Totals | $ | 2,781,000 | $ | 36,481 | $ | 152,861 | |||||||||
|
|||||||||||||||
Historical interest expense for Predecessor, Single Asset Entities, Royal Kunia and Other Pro Forma Adjustments | 29,342 | 120,404 | |||||||||||||
|
|
||||||||||||||
Pro Forma Adjustment | $ | 7,139 | $ | 32,457 | |||||||||||
|
|
F-20
as such, the changes in such contracts' fair market values historically have been recorded in earnings. For the three months ended March 31, 2006 and the year ended December 31, 2005, the Predecessor recognized gains relating to the fair market value change of our interest rate contracts of $34,900 and $81,500, respectively. In conjunction with this offering, we intend to enter into a series of interest rate swaps that effectively offset any future changes in the fair value of all of our existing interest rate contracts. These interest rate contracts will also not qualify for hedge accounting under SFAS 133.
|
Three Months
Ended March 31, 2006 |
Year Ended
December 31, 2005 |
||||
---|---|---|---|---|---|---|
Long-term incentive units | $ | 199 | $ | 18,195 | ||
Stock options | 76 | 11,905 | ||||
|
|
|||||
$ | 275 | $ | 30,100 | |||
|
|
F-21
We expect to incur additional general and administrative expense as a result of becoming a public company, including but not limited to incremental salaries, board of directors fees and expenses, director's and officer's insurance, Sarbanes-Oxley compliance costs, and incremental audit and tax fees. We estimate that these costs could result in incremental general and administrative expenses of $6,000 to $8,000 per year. As we have not yet entered into contracts with third parties to provide these services, we have not included these expenses in the accompanying pro forma consolidated statements of operations.
F-22
Report of Independent Registered Public Accounting Firm
The
Stockholders of
Douglas Emmett, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Douglas Emmett, Inc. and Subsidiaries as of March 31, 2006. This consolidated balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, and evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the consolidated financial position of Douglas Emmett, Inc. and Subsidiaries at March 31, 2006, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
May 12, 2006
F-23
Douglas Emmett, Inc. and Subsidiaries
Consolidated Balance Sheet
(In thousands, except share data)
|
March 31,
2006 |
||||
---|---|---|---|---|---|
Assets | |||||
Cash | $ | 1 | |||
Prepaid offering costs | 4,930 | ||||
|
|||||
Total assets | $ | 4,931 | |||
|
|||||
Liabilities and stockholders' equity |
|
|
|
|
|
Due to related party | $ | 4,930 | |||
Stockholders' equity |
|
|
|
|
|
Common stock$0.01 par value; 1,000 shares authorized and 100 shares outstanding | | ||||
Additional paid-in capital | 3 | ||||
Accumulated deficit | (2 | ) | |||
|
|||||
Total stockholders' equity | 1 | ||||
|
|||||
Total liabilities and stockholders' equity | $ | 4,931 | |||
|
See accompanying notes.
F-24
Douglas Emmett, Inc. and Subsidiaries
Notes to Consolidated Balance Sheet
March 31, 2006
1. Organization and Description of Business
Douglas Emmett, Inc. (the Company or the REIT) was incorporated in Maryland on June 28, 2005. The Company is majority owner of Douglas Emmett Properties, L.P. (the Operating Partnership) which was formed on July 25, 2005. Douglas Emmett, LLC (the LLC) also formed on July 25, 2005 is a wholly owned subsidiary of the Company and is the sole general partner of the Operating Partnership. The Company, the Operating Partnership, and the LLC were formed to continue to operate and expand the businesses of Douglas Emmett Realty Advisors, Inc. and its affiliates (DERA). DERA, our predecessor, is engaged in the business of owning, managing, leasing, acquiring, and developing real estate, consisting primarily of office properties, including complementary retail space. Its portfolio presently consists of approximately 46 office properties, nine multifamily properties, and two parcel of land, located in Los Angeles County California and Honolulu, Hawaii.
The Company intends to file a Registration Statement on Form S-11 with the Securities and Exchange Commission with respect to a proposed public offering (the Offering) of common stock. As discussed below, the Company intends to operate as a real estate investment trust or REIT. Concurrent with the Offering of the common stock of the REIT, which is expected to be completed in 2006, the REIT, the Operating Partnership, together with the partners and stockholders of the affiliated partnerships and corporations of DERA and other parties which hold direct or indirect interests in the properties (collectively, the Participants), will engage in certain formation transactions (the Formation Transactions). The Participants will elect to take either stock in the REIT, limited partnership units in the Operating Partnership and/or cash pursuant to the Formation Transactions. The Formation Transactions are designed to (i) consolidate our asset management, property management, leasing, tenant improvement construction, acquisition, repositioning, redevelopment and financing businesses into our Operating Partnership; (ii) consolidate the ownership of our property portfolio under our Operating Partnership; (iii) facilitate this offering; (iv) enable the REIT to qualify as a REIT for federal income tax purposes commencing with the taxable year ending December 31, 2006 (v) defer the recognition of taxable gain by certain continuing investors; and (vi) enable prior investors to obtain liquidity for their investments.
The operations of the Company will be carried on primarily through the Operating Partnership. The Company is the sole member of the LLC which in turn is the sole general partner of the Operating Partnership. It is the intent of the Company to elect the status of and qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company after the completion of the formation transactions will be fully integrated, self-administered, and self-managed.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated balance sheet includes the accounts of the Company, the Operating Partnership and the LLC. All significant intercompany balances and transactions have been eliminated.
Income Taxes
As a REIT, the Company will be permitted to deduct distributions paid to its stockholders, eliminating the federal taxation of income represented by such distributions at the Company level.
F-25
REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.
Offering Costs
In connection with the Offering, affiliates have or will incur legal, accounting, and related costs, which will be reimbursed by the Company upon the consummation of the Offering. Such costs will be deducted from the gross proceeds of the Offering.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated balance sheet and accompanying notes. Actual results could differ from those estimates.
F-26
Douglas Emmett Realty Advisors, Inc.
Consolidated Balance Sheets
(In thousands, except for share data)
|
March 31,
2006 |
December 31,
2005 |
|||||||
---|---|---|---|---|---|---|---|---|---|
|
(Unaudited)
|
|
|||||||
Assets | |||||||||
Investment in real estate | $ | 2,721,847 | $ | 2,622,484 | |||||
Cash and cash equivalents | 114,964 | 108,282 | |||||||
Tenant receivables | 3,660 | 3,658 | |||||||
Deferred rents receivable | 64,233 | 62,145 | |||||||
Interest rate contracts | 110,412 | 71,992 | |||||||
Other assets | 37,420 | 36,086 | |||||||
|
|
||||||||
Total assets | $ | 3,052,536 | $ | 2,904,647 | |||||
|
|
||||||||
Liabilities | |||||||||
Secured notes payable | $ | 2,305,500 | $ | 2,223,500 | |||||
Accounts payable, accrued expenses and tenant security deposits | 92,496 | 84,418 | |||||||
Interest rate contracts | 9,481 | 6,004 | |||||||
|
|
||||||||
Total liabilities |
|
|
2,407,477 |
|
|
2,313,922 |
|
||
Preferred minority interest in consolidated real estate partnerships |
|
|
184,000 |
|
|
184,000 |
|
||
Minority interest in consolidated real estate partnerships | 550,227 | 504,516 | |||||||
Stockholders' equity (deficit) |
|
|
|
|
|
|
|
||
Common stock$0 par value; 10,000 shares authorized and 65 shares outstanding | | | |||||||
Additional paid-in capital | | | |||||||
Retained earnings (deficit) | (29,168 | ) | (97,791 | ) | |||||
Notes receivable from stockholders | (60,000 | ) | | ||||||
|
|
||||||||
Total stockholders' equity (deficit) | (89,168 | ) | (97,791 | ) | |||||
|
|
||||||||
Total liabilities and stockholders' equity (deficit) | $ | 3,052,536 | $ | 2,904,647 | |||||
|
|
See accompanying notes.
F-27
Douglas Emmett Realty Advisors, Inc.
Consolidated Statements of Operations
(Unaudited and in thousands, except for share data)
|
Three Months Ended
March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2006
|
2005
|
|||||||
Revenues: | |||||||||
Office rental: | |||||||||
Rental revenues | $ | 75,760 | $ | 71,590 | |||||
Tenant recoveries | 4,095 | 3,080 | |||||||
Parking and other income | 10,239 | 8,957 | |||||||
|
|
||||||||
Total office revenue | 90,094 | 83,627 | |||||||
Multifamily rental: |
|
|
|
|
|
|
|
||
Rental revenues | 12,281 | 10,454 | |||||||
Parking and other income | 235 | 267 | |||||||
|
|
||||||||
Total multifamily revenue | 12,516 | 10,721 | |||||||
|
|
||||||||
Total revenues | 102,610 | 94,348 | |||||||
Operating Expenses: |
|
|
|
|
|
|
|
||
Office rental | 29,430 | 28,800 | |||||||
Multifamily rental | 4,233 | 3,697 | |||||||
General and administrative expenses | 1,705 | 1,666 | |||||||
Depreciation and amortization | 25,783 | 29,528 | |||||||
|
|
||||||||
Total operating expenses | 61,151 | 63,691 | |||||||
|
|
||||||||
Operating income |
|
|
41,459 |
|
|
30,657 |
|
||
Gain on investments in interest rate contracts, net |
|
|
34,943 |
|
|
15,264 |
|
||
Interest and other income | 1,221 | 348 | |||||||
Interest expense | (28,054 | ) | (26,014 | ) | |||||
Deficit recovery (distributions) from/(to) minority partners, net | 7,769 | (38,774 | ) | ||||||
|
|
||||||||
Income (loss) before minority interest | 57,338 | (18,519 | ) | ||||||
Minority interest: |
|
|
|
|
|
|
|
||
Minority interest in consolidated real estate partnerships | 40,821 | 15,657 | |||||||
Preferred minority investor | 4,025 | 3,730 | |||||||
|
|
||||||||
Net income (loss) | $ | 12,492 | $ | (37,906 | ) | ||||
|
|
||||||||
Net income (loss) per common share | $ | 192 | $ | (583 | ) | ||||
|
|
||||||||
Weighted average shares of common stock outstanding | 65 | 65 | |||||||
|
|
See accompanying notes.
F-28
Douglas Emmett Realty Advisors, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Three Months Ended March 31, 2006
(Unaudited and in thousands,
except for share data)
|
Number of
Common Shares |
Additional
Paid-in Capital |
Common
Stock |
Retained
Earnings (Deficit) |
Notes Receivable
from Stockholders |
Total
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, 2006 | 65 | $ | | $ | | $ | (97,791 | ) | $ | | $ | (97,791 | ) | ||||||
Net income | | | | 12,492 | | 12,492 | |||||||||||||
Contributions | | | | 60,336 | (60,000 | ) | 336 | ||||||||||||
Distributions | | | | (4,205 | ) | | (4,205 | ) | |||||||||||
|
|
|
|
|
|
||||||||||||||
Balance at March 31, 2006 | 65 | $ | | $ | | $ | (29,168 | ) | $ | (60,000 | ) | $ | (89,168 | ) | |||||
|
|
|
|
|
|
See accompanying notes.
F-29
Douglas Emmett Realty Advisors, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
|
Three Months Ended
March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2006
|
2005
|
|||||||
Operating activities: | |||||||||
Net income (loss) | $ | 12,492 | $ | (37,906 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||
Minority interests in consolidated real estate partnerships | 44,846 | 19,387 | |||||||
Deficit (recovery) distributions (from)/to minority partners | (7,769 | ) | 38,774 | ||||||
Depreciation and amortization | 25,783 | 29,528 | |||||||
Net accretion of above (below) market leases | (366 | ) | (434 | ) | |||||
Amortization of loan costs and fees | 650 | 1,154 | |||||||
Gain on interest rate swap contracts | (34,943 | ) | (15,264 | ) | |||||
Changes in operating assets and liabilities: | |||||||||
Tenant receivables | (2 | ) | (373 | ) | |||||
Deferred rent | (2,088 | ) | (3,627 | ) | |||||
Other assets | (692 | ) | (564 | ) | |||||
Accounts payable, accrued expenses and tenant security deposits | 5,195 | 5,055 | |||||||
|
|
||||||||
Net cash provided by operating activities | 43,106 | 35,730 | |||||||
|
|
||||||||
Investing activities: | |||||||||
Acquisition of and additions to properties | (122,316 | ) | (185,631 | ) | |||||
|
|
||||||||
Net cash used in investing activities | (122,316 | ) | (185,631 | ) | |||||
|
|
||||||||
Financing activities: | |||||||||
Proceeds from borrowings | 82,000 | 96,915 | |||||||
Proceeds from affiliate borrowing | | 19,500 | |||||||
Deferred loan costs | (873 | ) | (1,099 | ) | |||||
Contributions by minority interests | 33,264 | 102,918 | |||||||
Distributions to minority interests | (24,630 | ) | (106,446 | ) | |||||
Contributions by stockholders | 336 | | |||||||
Distributions to stockholders | (4,205 | ) | (11,869 | ) | |||||
|
|
||||||||
Net cash provided by financing activities | 85,892 | 99,919 | |||||||
|
|
||||||||
Net increase (decrease) in cash and cash equivalents | 6,682 | (49,982 | ) | ||||||
Cash and cash equivalents at beginning of the period | 108,282 | 107,860 | |||||||
|
|
||||||||
Cash and cash equivalents at end of the period | $ | 114,964 | $ | 57,878 | |||||
|
|
||||||||
Supplemental disclosure of non-cash financing information: | |||||||||
Notes receivable from stockholders | (60,000 | ) | | ||||||
Contribution of notes receivable from stockholders | 60,000 | | |||||||
|
|
See accompanying notes for additional non-cash investing and financing information.
F-30
Douglas Emmett Realty Advisors, Inc.
Notes to Consolidated Financial Statements
Three months ended March 31, 2006 and 2005
(Unaudited and in thousands)
1. Organization and Description of Business
Douglas Emmett Realty Advisors, Inc. (DERA) and subsidiaries consists of Douglas Emmett Realty Advisors, Inc., a California S-Corporation, and eight California real estate limited partnerships (the Real Estate Entities) (collectively, the Company) and their operations as described in Note 2. The Company is engaged in the business of acquiring, owning, and developing real estate, consisting primarily of office and multifamily properties located in Los Angeles County, California and Honolulu, Hawaii. During all periods presented in the accompanying consolidated financial statements, the Company consists of DERA and the Real Estate Entities that own the properties that will be contributed through the formation transactions as discussed in the Company's December 31, 2005 financial statements. DERA has and continues to have responsibility for the asset management of such entities.
2. Summary of Significant Accounting Policies
Basis of Presentation
In March 2005, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on Issue No. 04-5, Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights . EITF 04-5 clarifies certain aspects of Statement of Positions 78-9 Accounting for Investments in Real Estate Ventures , and provides guidance on determining whether a sole general partner in a limited partnership should consolidate its investment in a limited partnership. DERA is the sole general partner of the Real Estate Entities and the limited partners of the Real Estate Entities do not have substantive "kick-out" or participation rights as defined by EITF 04-5. DERA early adopted the guidance of EITF 04-5 and has consolidated the Real Estate Entities retrospectively.
The accompanying consolidated financial statements represent the historical financial statements of the Company. They include the accounts of DERA and the Real Estate Entities. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Unaudited Interim Financial Information
The accompanying interim unaudited financial statements have been prepared by the Company's management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with accounting principals generally accepted in the United States may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the presentation not misleading. The unaudited financial statements as of March 31, 2006 and for the three months ended March 31, 2006 and 2005 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. The interim financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2005 and notes thereto.
F-31
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Information
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information , established standards for disclosure about operating segments and related disclosures about products and services, geographic areas and major customers. Segment information is prepared on the same basis that the Company's management reviews information for operational decision making purposes. The Company currently operates two business segments: the acquisition, redevelopment, ownership and management of office real estate and the acquisition, redevelopment, ownership and management of multifamily real estate.
The products for the office segment include primarily rental of office space and other tenant services including parking and storage space rental. The products for the multifamily segment include rental of apartments and other tenant services including parking and storage space rental.
Investment in Real Estate
Acquisitions of properties subsequent to June 30, 2001, the effective date of SFAS No. 141, Business Combinations , are accounted for utilizing the purchase method and accordingly, the results of operations of acquired properties are included in our results of operations from the respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment and identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above-market ground leases, acquired above and below-market leases and tenant relationships. Initial valuations are subject to change until such information is finalized, but no later than 12 months from the acquisition date.
F-32
The net above and below market tenant and ground lease liability is summarized as follows:
|
March 31,
2006 |
December 31,
2005 |
|||||
---|---|---|---|---|---|---|---|
Above-market tenant leases (1) | $ | 11,018 | $ | 11,018 | |||
Below-market tenant leases (2) | (15,011 | ) | (14,748 | ) | |||
Above-market ground leases (3) | (18,977 | ) | (18,977 | ) | |||
|
|
||||||
Subtotal | (22,970 | ) | (22,707 | ) | |||
Accumulated net accretion | 1,769 | 1,403 | |||||
|
|
||||||
Above and below-market leases, net | $ | (21,201 | ) | $ | (21,304 | ) | |
|
|
Impairment of Long-Lived Assets
The Company assesses whether there has been impairment in the value of its long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the current carrying value exceeds the estimated undiscounted cash flows, an impairment loss is recorded equal to the difference between the asset's current carrying value and its value based on the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Based upon such periodic assessments, no indications of impairment were identified during the three months ended March 31, 2006 and 2005.
Interest Rate Agreements
The Company manages its interest rate risk associated with borrowings by obtaining interest rate swap and interest rate cap contracts. No other derivative instruments are used.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133, as amended by SFAS No. 138). The statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income, a component of stockholders' equity (deficit) until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. The
F-33
Company's investments in interest rate swap and interest rate cap contracts do not qualify as effective hedges, and as such, the changes in such contracts' fair market values are being recorded in earnings.
For the three months ended March 31, 2006 and 2005, the Company recognized gains relating to the change in fair market value of its interest rate contracts of $34,943 and $15,264, respectively.
Income Taxes
Douglas Emmett Realty Advisors is an S-Corporation and the Real Estate Entities are limited partnerships. Under applicable federal and state income tax rules, the allocated share of net income or loss from the limited partnerships and S-Corporation is reportable in the income tax returns of the respective partners and stockholders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements other than the 1.5% tax due on taxable income of S-Corporations in the State of California.
3. Investment in Real Estate
Investment in real estate consists of the following:
|
March 31,
2006 |
December 31,
2005 |
|||||
---|---|---|---|---|---|---|---|
Land | $ | 487,803 | $ | 444,894 | |||
Buildings | 2,397,049 | 2,324,536 | |||||
Tenant improvements and leasing costs | 368,404 | 359,312 | |||||
|
|
||||||
Investment in real estate | 3,253,256 | 3,128,742 | |||||
Less accumulated depreciation | (531,409 | ) | (506,258 | ) | |||
|
|
||||||
Net investment in real estate | $ | 2,721,847 | $ | 2,622,484 | |||
|
|
In March 2006, the Company acquired from unrelated parties a multifamily property in Honolulu, Hawaii. The aggregate acquisition costs of this property approximated $113,730.
In January 2005, the Company acquired from unrelated parties an office building in Woodland Hills, California and a multifamily property in Honolulu, Hawaii. The aggregate acquisition costs of these properties approximated $169,870.
F-34
The following table summarizes the allocation of estimated fair values of the assets acquired at the date of acquisition.
|
March 31,
2006 |
March 31,
2005 |
||||||
---|---|---|---|---|---|---|---|---|
Land | $ | 42,887 | $ | 45,407 | ||||
Buildings and equipment | 68,394 | 204,137 | ||||||
Tenant improvements and other in-place lease assets | 2,982 | 24,661 | ||||||
Other assets: | ||||||||
Tenant receivables and other assets | 579 | 1,767 | ||||||
Above-market tenant leases | | 2,986 | ||||||
Accounts payable, accrued expenses and tenant security deposits: | ||||||||
Other liabilities | (849 | ) | (3,708 | ) | ||||
Below-market tenant leases | (263 | ) | (4,880 | ) | ||||
Secured notes payable | | (100,500 | ) | |||||
|
|
|||||||
$ | 113,730 | $ | 169,870 | |||||
|
|
4. Other Assets
Other assets consist of the following:
|
March 31,
2006 |
December 31,
2005 |
||||
---|---|---|---|---|---|---|
Deferred loan costs, net of accumulated amortization of $1,619 and $969 at March 31, 2006 and December 31, 2005 | $ | 14,352 | $ | 14,617 | ||
Above-market tenant leases | 5,138 | 5,562 | ||||
Security deposit funds | 3,050 | 3,043 | ||||
Prepaid impounds | 5,533 | 5,266 | ||||
Prepaid expenses | 8,072 | 7,081 | ||||
Other | 1,275 | 517 | ||||
|
|
|||||
$ | 37,420 | $ | 36,086 | |||
|
|
For the three months ended March 31, 2006 and 2005, the Company incurred deferred loan cost amortization expense of $650 and $1,154, respectively, related to the refinance of certain secured notes payable. The deferred loan cost amortization is included as a component of interest expense in the consolidated statements of operations.
5. Minimum Future Lease Rentals
The Company leases space to tenants primarily under noncancelable operating leases, which generally contain provisions for a base rent plus reimbursement for certain operating expenses. Operating expense reimbursements for the three months ended March 31, 2006 and 2005, were $4,095 and $3,080, respectively.
F-35
The Company leases space to certain tenants under noncancelable leases, which provide for contingent rents based upon tenant revenues. The contingent rental income for the three months ended March 31, 2006 and 2005, totaled $295 and $174, respectively.
Future minimum base rentals on noncancelable operating leases at March 31, 2006, are as follows:
April 1, 2006 to December 31, 2006 | $ | 208,394 | |
2007 | 262,971 | ||
2008 | 229,601 | ||
2009 | 190,556 | ||
2010 | 152,421 | ||
Thereafter | 433,094 | ||
|
|||
$ | 1,477,037 | ||
|
The above future minimum lease payments exclude tenant reimbursements, amortization of deferred rent receivables and above/below-market lease intangibles. Some leases are subject to termination options. In general, these leases provide for termination payments should the termination options be exercised. The above table is prepared assuming such options are not exercised.
F-36
6. Secured Notes Payable
A summary of secured notes payable is as follows:
Type of Debt
|
March 31,
2006 |
December 31,
2005 |
Effective
Interest Rate at March 31, 2006 (3) |
Fixed/
Floating Rate |
Maturity Date
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Secured by: | ||||||||||||
Barrington Plaza and Pacific Plaza (1) | $ | 153,000 | $ | 153,000 | 4.70 | % | DMBS + 0.60% (2) | December 22, 2011 | ||||
555 Barrington and The Shores (1) |
|
|
140,000 |
|
|
140,000 |
|
4.70 |
|
DMBS + 0.60 (2) |
|
December 22, 2011 |
Studio Plaza, Gateway Building, Bundy Olympic and Brentwood Executive Plaza (1) |
|
|
170,000 |
|
|
170,000 |
|
5.00 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
Palisades Promenade, 12400 Wilshire, First Federal Square, 11777 Building and Landmark II (1) |
|
|
260,000 |
|
|
260,000 |
|
5.00 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
Galleria, Second Street (1) |
|
|
215,000 |
|
|
215,000 |
|
5.00 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
Olympic Center, MB Plaza, Valley Office Plaza, Coral Plaza, Westside Towers, Valley Executive Tower, Encino Terrace, Westwood Place, Century Park Plaza, Lincoln/Wilshire (1) |
|
|
425,000 |
|
|
425,000 |
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
One Hundred Wilshire, Encino Gateway, Encino Plaza (1) |
|
|
150,000 |
|
|
150,000 |
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
1901 Avenue of the Stars, Columbus Center, and Warner Center (1) |
|
|
425,000 |
|
|
425,000 |
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
Beverly Hills Medical Center, Harbor Court, and Bishop Place (1) |
|
|
110,000 |
|
|
110,000 |
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
The Trillium (1) |
|
|
100,500 |
|
|
100,500 |
|
4.28 |
|
LIBOR + 0.85 |
|
January 1, 2007 |
Moanalua (1) |
|
|
75,000 |
|
|
75,000 |
|
4.86 |
|
DMBS + 0.60 (2) |
|
February 1, 2015 |
Royal Kunia (1) |
|
|
82,000 |
|
|
|
|
5.62 |
|
LIBOR + 0.62 |
|
March 1, 2016 |
|
|
|
|
|
|
|
|
|
|
|
||
Total secured notes payable |
|
$ |
2,305,500 |
|
$ |
2,223,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
6. Secured Notes Payable (continued)
The minimum future principal payments due on the secured notes payable at March 31, 2006, are as follows:
April 1, 2006 to December 31, 2006 | $ | | |
2007 | 100,500 | ||
2008 | | ||
2009 | | ||
2010 | | ||
Thereafter | 2,205,000 | ||
|
|||
Total future principal payments | $ | 2,305,500 | |
|
7. Accounts Payable, Accrued Expenses and Tenant Security Deposits
Accounts payable, accrued expenses and tenant security deposits consist of the following:
|
March 31,
2006 |
December 31,
2005 |
||||
---|---|---|---|---|---|---|
Tenant security deposits | $ | 26,886 | $ | 25,670 | ||
Below-market tenant leases | 9,234 | 9,593 | ||||
Accounts payable | 27,791 | 20,009 | ||||
Deferred revenue | 11,478 | 11,872 | ||||
Above-market ground leases | 17,107 | 17,274 | ||||
|
|
|||||
$ | 92,496 | $ | 84,418 | |||
|
|
F-38
8. Interest Rate Agreements
The table below lists the Company's derivative instruments, and their fair values as of March 31, 2006 and December 31, 2005:
|
|
|
|
|
Fair Value
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Instrument
|
Notional
Value |
Interest
Pay Rate |
Effective
Date |
Maturity
Date |
March 31, 2006
|
December 31, 2005
|
||||||||||
|
|
|
|
|
Asset (Liability)
|
|||||||||||
Interest rate caps | $ | 368,000 | Ranging from 6.520% to 6.700% | Ranging from December 2004 to January 2005 | Ranging from December 2007 to January 2008 | $ | 56 | $ | 60 | |||||||
Interest rate swaps |
|
|
2,123,003 |
|
Ranging from 4.038% to 4.173% |
|
Ranging from August 2005 to September 2005 |
|
Ranging from August 2010 to August 2012 |
|
|
100,875 |
|
|
65,928 |
|
Interest rate caps |
|
|
368,000 |
|
5.500% |
|
November 1, 2005 |
|
August 1, 2011 |
|
|
9,481 |
|
|
6,004 |
|
Sold caps |
|
|
368,000 |
|
5.500% |
|
November 1, 2005 |
|
August 1, 2011 |
|
|
(9,481 |
) |
|
(6,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total net fair value of interest rate contracts |
|
|
|
$ |
100,931 |
|
$ |
65,988 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Minority Interests in Consolidated Real Estate Partnerships
The Company reflects unaffiliated partners' interests in the Real Estate Entities as minority interest in consolidated real estate partnerships. Minority interest in consolidated real estate partnerships represents the minority partners' share of the underlying net assets of the Company's consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions to partners in excess of the carrying amount of the minority interest, the Company generally records a charge equal to the amount of such excess distributions, even though there is no economic effect or cost. If the excess distributions previously absorbed by the Company are recovered through the future earnings of the consolidated real estate partnership, the Company will record income in the period of recovery. The Company reports this charge and any subsequent recovery in the consolidated statements of operations as deficit recovery (distributions) from (to) minority partners, net.
The minority interest charge of $40,821 and $15,657 for the three months ended March 31, 2006 and 2005, respectively, represents the Real Estate Entities net income allocable to the limited partners.
A preferred minority investor invested $99,000 and $85,000, in 2005 and 2004, respectively, in two of the Company's consolidated subsidiaries. In return, the preferred minority investor will receive a profit participation of 8.75% per annum on its unreturned capital contribution. Under certain circumstances the preferred minority investor has the right but not the obligation to initiate the sale of certain properties. Upon the sale of the properties, the initial capital contribution of the preferred investor will be returned. The preferred investor's contributed capital is reflected in the consolidated balance sheets as a component of minority interests as of March 31, 2006 and December 31, 2005. For the three months ended March 31, 2006 and 2005, the Company has allocated $4,025 and $3,730, respectively, of the Company's consolidated subsidiaries' net income to the preferred minority investor.
F-39
10. Related-Party Transactions
The Company paid $1,213 and $1,939 in real estate commissions to an operating company owned by the stockholders of DERA for the three months ended March 31, 2006 and 2005, respectively. The commissions paid to the operating company are accounted for as leasing costs and are included in the Company's investment in real estate in the consolidated balance sheets.
The Company has contributed its share of discretionary profit-sharing contribution (subject to statutory limitations), totaling $92 and $88 for the three months ended March 31, 2006 and 2005, respectively, for services rendered by employees of an operating company owned by the stockholders of DERA.
Property management fees related to management services are paid to an operating company owned by the stockholders of DERA. The management fees are based upon percentages of the rental cash receipts collected by the properties. The fees range from 1.75% to 4.00% of the cash receipts. The Company expensed $2,252 and $2,089 in such property management fees for the three months ended March 31, 2006 and 2005, respectively. At March 31, 2006 and December 31, 2005, the Company had $634 and $600, respectively, in accrued and unpaid property management fees.
The Company has contracted with an operating company owned by the stockholders of DERA to provide building and tenant improvement work. For the three months ended March 31, 2006 and 2005, amounts totaling $1,686 and $2,408, respectively, were paid to the operating company for contracting work performed. These amounts are included in the costs basis of the buildings and in tenant improvements.
The Company leases approximately 26,785 square feet of office space to two operating companies owned or controlled by the stockholders. The annual rents from these leases totaled $195 and $195 for the three months ended March 31, 2006 and 2005, respectively. The terms under these leases were negotiated with unaffiliated third parties prior to the building being acquired by the Company.
Notes Receivable From Stockholders
On March 15, 2006, the Company's stockholders contributed $60,000 to the Company in the form of promissory notes. A portion of this amount may be used to fund capital commitments to the institutional fund formed in 2005 if and to the extent any capital calls are made by such fund prior to consummation of this offering pursuant to the applicable partnership agreement. On or prior to the closing of this offering, the Company's stockholders expect to use a combination of their own cash or borrowings from a third-party financial institution to repay the promissory notes. Such loans are expected to be secured by shares of our common stock or operating partnership units that the Company's stockholders will receive in the formation transactions. The full amount of the $60,000, whether retained by DERA or contributed to one of the real estate entities pursuant to a capital call, has the net effect of increasing the value of DERA, thereby resulting in an additional $60,000 of common stock being exchanged for DERA in the formation transactions, based on the initial offering price to the public in this offering. Accordingly, the $60,000 less any amount that has been contributed to one of the real estate entities prior to the closing of this offering, will be acquired by us in the formation transactions pursuant to the DERA merger. Any of such amount that has been contributed
F-40
to one of the real estate entities for asset acquisitions or other purposes will be acquired by us in the formation transactions in such form pursuant to the merger of one of the real estate entities.
11. Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate settlement of these actions will not have a material adverse effect on Company's financial position and results of operations or cash flows.
Concentration of Credit Risk
The Company's operating properties are located in Los Angeles County, California and Honolulu, Hawaii. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate.
Financial instruments that subject the Company to credit risk consist primarily of cash, accounts receivable, deferred rents receivable and interest rate contracts. The Company maintains its cash and cash equivalents and restricted cash on deposit and enters into interest rate contracts with high quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100; and to date, the Company has not experienced any losses on its invested cash. The Company performs ongoing credit evaluations of its tenants for potential credit losses.
Asset Retirement Obligations
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligationsan interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, Accounting for Asset Retirement Obligations , represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within a company's control. Under this standard, a liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. Certain of our real estate assets contain asbestos. If these properties undergo major renovations or are demolished, certain environmental regulations are in place, which specify the manner in which the asbestos must be handled and disposed. As of March 31, 2006, the obligations to remove the asbestos from these properties have indeterminable settlement dates, and therefore, we are unable to reasonably estimate the fair value of the conditional asset retirement obligation.
Future Minimum Lease Payments
At March 31, 2006, the Company has leased portions of the land underlying three of its office properties as more fully described in the notes to our December 31, 2005 consolidated financial statements. For the three months ended March 31, 2006 and 2005, the Company expensed ground lease payments in the amount of $821 and $815, respectively.
F-41
The following is a schedule of minimum ground lease payments as of March 31, 2006:
April 1, 2006 to December 31, 2006 | $ | 2,462 | |
2007 | 3,283 | ||
2008 | 3,283 | ||
2009 | 3,408 | ||
2010 | 3,433 | ||
Thereafter | 128,475 | ||
|
|||
$ | 144,344 | ||
|
Tenant Concentrations
For the three months ended March 31, 2006 and 2005, no tenant exceeded 10% of the Company's total rental revenue and tenant reimbursements.
12. Segment Reporting
The Company's segments are based on the Company's method of internal reporting which classifies its operation by property type. The Company's segments by property type include: Office and Multifamily.
Asset information by segment is not reported because the Company does not use this measure to assess performance and make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income, management services, general and administrative expenses, interest expense, depreciation and amortization expense and net derivative gains and losses are not included in rental revenues less rental expenses as the internal reporting addresses these items on a corporate level.
F-42
Rental revenues less rental expenses is not a measure of operating results or cash flows from operating activities as measured by U.S. generally accepted accounting principles, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate rental revenues less rental expenses in the same manner. The Company considers rental revenues less rental expenses to be an appropriate supplemental measure to net income because it assists both investors and management to understand the core operations of the Company's properties.
|
Three months ended March 31, 2006
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Office
|
Multifamily
|
Total
|
|||||||
Rental revenues | $ | 90,094 | $ | 12,516 | $ | 102,610 | ||||
Percentage of total | 88 | % | 12 | % | 100 | % | ||||
Rental expenses |
|
|
29,430 |
|
|
4,233 |
|
|
33,663 |
|
Percentage of total | 87 | % | 13 | % | 100 | % | ||||
Rental revenues less rental expenses |
|
$ |
60,664 |
|
$ |
8,283 |
|
$ |
68,947 |
|
Percentage of total | 88 | % | 12 | % | 100 | % |
|
Three months ended March 31, 2005
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Office
|
Multifamily
|
Total
|
|||||||
Rental revenues | $ | 83,627 | $ | 10,721 | $ | 94,348 | ||||
Percentage of total | 89 | % | 11 | % | 100 | % | ||||
Rental expenses |
|
|
28,800 |
|
|
3,697 |
|
|
32,497 |
|
Percentage of total | 89 | % | 11 | % | 100 | % | ||||
Rental revenues less rental expenses |
|
$ |
54,827 |
|
$ |
7,024 |
|
$ |
61,851 |
|
Percentage of total | 89 | % | 11 | % | 100 | % |
F-43
The following is a reconciliation of rental revenues less rental expenses to net income available to common stockholders:
|
Three Months Ended March 31,
|
|||||||
---|---|---|---|---|---|---|---|---|
|
2006
|
2005
|
||||||
Rental revenues less rental expenses | $ | 68,947 | $ | 61,851 | ||||
Add: |
|
|
|
|
|
|
|
|
Interest and other income | 1,221 | 348 | ||||||
Gain on investments in interest rate contracts | 34,943 | 15,264 | ||||||
Less: |
|
|
|
|
|
|
|
|
General and administrative expenses | 1,705 | 1,666 | ||||||
Interest expense | 28,054 | 26,014 | ||||||
Depreciation and amortization | 25,783 | 29,528 | ||||||
Deficit (recovery) distributions (from)/to minority partners | (7,769 | ) | 38,774 | |||||
Minority interest expense | 44,846 | 19,387 | ||||||
|
|
|||||||
Net income (loss) | $ | 12,492 | $ | (37,906 | ) | |||
|
|
13. Recent Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error CorrectionsA Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and that correction of errors in previously issued financial statements should be termed a "restatement." SFAS 154 is now effective for accounting changes and correction of errors, however, we had no such items during the current quarter.
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that compensation cost relating to share-based payment transactions be recognized in financial statements and measured based on the fair value of the equity or liability instruments issued. The adoption of SFAS 123R on January 1, 2006 did not impact our consolidated financial statements in 2006.
F-44
Report of Independent Registered Public Accounting Firm
The
Stockholders of
Douglas Emmett Realty Advisors, Inc.
We have audited the accompanying consolidated balance sheets of Douglas Emmett Realty Advisors, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule of real estate and accumulated depreciation. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Douglas Emmett Realty Advisors, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Los
Angeles, California /s/ Ernst & Young LLP
April 28, 2006
F-45
Douglas Emmett Realty Advisors, Inc.
Consolidated Balance Sheets
(In thousands, except for share data)
|
December 31,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
|||||||
Assets | |||||||||
Investment in real estate | $ | 2,622,484 | $ | 2,398,980 | |||||
Cash and cash equivalents |
|
|
108,282 |
|
|
107,860 |
|
||
Tenant receivables | 3,658 | 3,280 | |||||||
Deferred rent receivables | 62,145 | 46,248 | |||||||
Interest rate contracts | 71,992 | 4,330 | |||||||
Other assets | 36,086 | 24,999 | |||||||
|
|
||||||||
Total assets | $ | 2,904,647 | $ | 2,585,697 | |||||
|
|
||||||||
Liabilities |
|
|
|
|
|
|
|
||
Secured notes payable | $ | 2,223,500 | $ | 1,982,655 | |||||
Accounts payable, accrued expenses and tenant security deposits | 84,418 | 76,511 | |||||||
Interest rate contracts | 6,004 | 10,307 | |||||||
|
|
||||||||
Total liabilities | 2,313,922 | 2,069,473 | |||||||
Preferred minority interest in consolidated real estate partnerships |
|
|
184,000 |
|
|
85,000 |
|
||
Minority interest in consolidated real estate partnerships | 504,516 | 494,838 | |||||||
Stockholders' equity (deficit) |
|
|
|
|
|
|
|
||
Common stock$0 par value; 10,000 shares authorized and 65 shares outstanding | | | |||||||
Additional paid-in-capital | | | |||||||
Retained earnings (deficit) | (97,791 | ) | (63,614 | ) | |||||
|
|
||||||||
Total stockholders' equity (deficit) | (97,791 | ) | (63,614 | ) | |||||
|
|
||||||||
Total liabilities and stockholders' equity (deficit) | $ | 2,904,647 | $ | 2,585,697 | |||||
|
|
See accompanying notes.
F-46
Douglas Emmett Realty Advisors, Inc.
Consolidated Statements of Operations
(In thousands, except for share data)
|
Years Ended December 31,
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
|||||||||
Revenues: | ||||||||||||
Office rental: | ||||||||||||
Rental revenues | $ | 297,551 | $ | 249,402 | $ | 242,463 | ||||||
Tenant recoveries | 14,632 | 9,439 | 9,303 | |||||||||
Parking and other income | 36,383 | 30,311 | 31,546 | |||||||||
|
|
|
||||||||||
Total office revenue | 348,566 | 289,152 | 283,312 | |||||||||
Multifamily rental: | ||||||||||||
Rental revenues | 43,942 | 32,787 | 31,070 | |||||||||
Parking and other income | 1,280 | 1,006 | 924 | |||||||||
|
|
|
||||||||||
Total multifamily revenue | 45,222 | 33,793 | 31,994 | |||||||||
|
|
|
||||||||||
Total revenues | 393,788 | 322,945 | 315,306 | |||||||||
Operating Expenses: | ||||||||||||
Office rental | 119,879 | 105,921 | 96,771 | |||||||||
Multifamily rental | 15,347 | 13,219 | 11,765 | |||||||||
General and administrative expenses | 6,457 | 5,646 | 5,195 | |||||||||
Depreciation and amortization | 113,170 | 91,306 | 92,559 | |||||||||
|
|
|
||||||||||
Total operating expenses | 254,853 | 216,092 | 206,290 | |||||||||
|
|
|
||||||||||
Operating income | 138,935 | 106,853 | 109,016 | |||||||||
Gain on investments in interest rate contracts, net |
|
|
81,666 |
|
|
37,629 |
|
|
23,583 |
|
||
Interest and other income | 2,264 | 1,463 | 514 | |||||||||
Interest expense | (115,674 | ) | (95,125 | ) | (94,783 | ) | ||||||
Deficit distributions to minority partners, net | (28,150 | ) | (57,942 | ) | | |||||||
|
|
|
||||||||||
Income (loss) from continuing operations before minority interest expense | 79,041 | (7,122 | ) | 38,330 | ||||||||
Minority interest: | ||||||||||||
Minority interest in consolidated real estate partnerships | 79,756 | 47,144 | 30,944 | |||||||||
Preferred minority investor | 15,805 | 2,499 | | |||||||||
|
|
|
||||||||||
Income (loss) from continuing operations | (16,520 | ) | (56,765 | ) | 7,386 | |||||||
Income from discontinued operations, net of minority interest | | 174 | 239 | |||||||||
|
|
|
||||||||||
Net income (loss) | $ | (16,520 | ) | $ | (56,591 | ) | $ | 7,625 | ||||
|
|
|
||||||||||
Basic income per common share: | ||||||||||||
Income (loss) from continuing operations | $ | (254 | ) | $ | (873 | ) | $ | 114 | ||||
Income from discontinued operations | | 3 | 4 | |||||||||
|
|
|
||||||||||
Net income (loss) per common share | $ | (254 | ) | $ | (870 | ) | $ | 118 | ||||
|
|
|
||||||||||
Weighted average shares of common stock outstanding | 65 | 65 | 65 | |||||||||
|
|
|
See accompanying notes.
F-47
Douglas Emmett Realty Advisors, Inc.
Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2005, 2004 and 2003
(In thousands, except share data)
|
Number of
Common Shares |
Additional
Paid-in Capital |
Common
Stock |
Retained
Earnings (Deficit) |
Total
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, 2003 | 65 | $ | 5,615 | $ | | $ | 11,474 | $ | 17,089 | |||||||
Net income | | | | 7,625 | 7,625 | |||||||||||
Distributions | | | | (8,227 | ) | (8,227 | ) | |||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2003 | 65 | 5,615 | | 10,872 | 16,487 | |||||||||||
Net loss | | | | (56,591 | ) | (56,591 | ) | |||||||||
Contributions | 2,000 | | | 2,000 | ||||||||||||
Distributions | | (7,615 | ) | | (17,895 | ) | (25,510 | ) | ||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2004 | 65 | | | (63,614 | ) | (63,614 | ) | |||||||||
Net loss | | | | (16,520 | ) | (16,520 | ) | |||||||||
Distributions | | | | (17,657 | ) | (17,657 | ) | |||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2005 | 65 | $ | | $ | | $ | (97,791 | ) | $ | (97,791 | ) | |||||
|
|
|
|
|
See accompanying notes.
F-48
Douglas Emmett Realty Advisors, Inc.
Consolidated Statements of Cash Flows
(In thousands)
|
Years Ended December 31,
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
|||||||||
Operating activities: | ||||||||||||
Net income (loss): | $ | (16,520 | ) | $ | (56,591 | ) | $ | 7,625 | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Minority interests in consolidated real estate partnerships, including discontinued operations | 95,561 | 66,827 | 54,578 | |||||||||
Deficit distributions to minority partners | 28,150 | 57,942 | | |||||||||
Depreciation and amortization, including discontinued operations | 113,170 | 91,588 | 93,809 | |||||||||
Accretion and amortization of above (below) market leases | (1,690 | ) | (266 | ) | 472 | |||||||
Gain on sale of property | | (16,656 | ) | (22,693 | ) | |||||||
Amortization of loan costs and fees | 10,482 | 5,668 | 3,830 | |||||||||
Gain on interest rate swap contracts | (81,666 | ) | (37,629 | ) | (23,583 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Tenant receivables | (1,278 | ) | (933 | ) | 10 | |||||||
Deferred rent | (15,897 | ) | (14,044 | ) | (6,836 | ) | ||||||
Other assets | (2,935 | ) | 3,935 | 1,459 | ||||||||
Accounts payable and accrued expenses | 434 | (7,074 | ) | 5,279 | ||||||||
|
|
|
||||||||||
Net cash provided by operating activities | 127,811 | 92,767 | 113,950 | |||||||||
|
|
|
||||||||||
Investing activities: | ||||||||||||
Acquisition of and additions to properties | (231,157 | ) | (262,641 | ) | (64,105 | ) | ||||||
Proceeds from sale of properties | | 39,067 | 66,268 | |||||||||
|
|
|
||||||||||
Net cash used in investing activities | (231,157 | ) | (223,574 | ) | 2,163 | |||||||
|
|
|
||||||||||
Financing activities: | ||||||||||||
Proceeds from borrowings | 1,865,000 | 534,455 | 717,023 | |||||||||
Repayments of borrowings | (1,724,655 | ) | (289,200 | ) | (550,400 | ) | ||||||
Proceeds from affiliated borrowing | 19,500 | | | |||||||||
Repayments of borrowing from affiliate | (19,500 | ) | | | ||||||||
Deferred loan costs | (14,476 | ) | (4,467 | ) | (8,408 | ) | ||||||
Proceeds from interest rate swap contract termination | 10,982 | | | |||||||||
Payment on interest rate swap contract termination | (1,281 | ) | (7,692 | ) | (126 | ) | ||||||
Contributions by minority interest | 142,518 | 231,427 | | |||||||||
Distributions to minority interests | (156,663 | ) | (273,196 | ) | (266,184 | ) | ||||||
Contributions by stockholders | | 2,000 | | |||||||||
Distributions to stockholders | (17,657 | ) | (25,510 | ) | (8,227 | ) | ||||||
|
|
|
||||||||||
Net cash provided by (used in) financing activities | 103,768 | 167,817 | (116,322 | ) | ||||||||
|
|
|
||||||||||
Net increase (decrease) in cash and cash equivalents | 422 | 37,010 | (209 | ) | ||||||||
Cash and cash equivalents at beginning of the year | 107,860 | 70,850 | 71,059 | |||||||||
|
|
|
||||||||||
Cash and cash equivalents at end of the year | $ | 108,282 | $ | 107,860 | $ | 70,850 | ||||||
|
|
|
||||||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the year for interest, net of amounts capitalized | $ | 110,651 | $ | 89,906 | $ | 85,672 |
See accompanying notes.
F-49
Douglas Emmett Realty Advisors, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
(In thousands)
1. Organization and Description of Business
Organization
Douglas Emmett Realty Advisors, Inc. (DERA) and subsidiaries consists of Douglas Emmett Realty Advisors, Inc., a California S-Corporation, and eight California real estate limited partnerships (the Real Estate Entities) (collectively, the Company) and their operations as described in Note 2. The Company is engaged in the business of acquiring, owning, and developing real estate, consisting primarily of office and multi-family properties located in Los Angeles County, California and Honolulu, Hawaii. During all periods presented in the accompanying consolidated financial statements, the Company consists of DERA and the Real Estate Entities that own the properties that will be contributed through the formation transactions discussed below. DERA also has responsibility for the asset management of the real estate entities.
DERA is the predecessor of Douglas Emmett, Inc. (the REIT). Concurrent with an initial public offering (the Offering) of the common stock of the REIT, which is expected to be completed in 2006, the REIT and a newly formed majority owned limited partnership, Douglas Emmett Properties, L.P. (the Operating Partnership), together with the partners and stockholders of the affiliated partnerships and corporations of the Company and other parties which hold direct or indirect interests in the properties (collectively, the Participants), and will engage in certain formation transactions (the Formation Transactions). The Participants will elect to take either stock in the REIT, limited partnership units in the Operating Partnership and/or cash pursuant to the Formation Transactions. The Formation Transactions are designed to (i) consolidate our asset management, property management, leasing, tenant improvement construction, acquisition, repositioning, redevelopment and financing businesses into our Operating Partnership; (ii) consolidate the ownership of our property portfolio under our Operating Partnership; (iii) facilitate this offering; (iv) enable the REIT to qualify as a REIT for federal income tax purposes commencing with the taxable year ending December 31, 2006 (v) defer the recognition of taxable gain by certain continuing investors; and (vi) enable prior investors to obtain liquidity for their investments.
The operations of the REIT will be carried on primarily through the Operating Partnership. It is the intent of the REIT to elect the status of and qualify as a REIT under the Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Douglas Emmett, LLC, a wholly owned subsidiary of the REIT, will be the sole general partner in the Operating Partnership. The REIT after the completion of the formation transactions will be fully integrated, self-administered and self-managed.
Description of Business
The REIT was formed as a Maryland corporation on June 28, 2005, and Douglas Emmett Properties, L.P., the Company's Operating Partnership, was formed as a Delaware limited partnership on July 25, 2005.
Upon the completion of Formation Transactions that will consolidate asset management, property management, leasing, tenant improvement construction, acquisition, and development businesses and the ownership of a property portfolio under our Operating Partnership, the REIT will be fully integrated, self-advised and self-managed. Currently, the properties constitute an office and multifamily portfolio located in Los Angeles County, California, and Honolulu, Hawaii. The Company's office
F-50
portfolio, with its complementary retail space, consists of 42 properties, five multifamily apartment properties, and two parcels of land.
2. Summary of Significant Accounting Policies
Basis of Presentation
In March 2005, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on Issue No. 04-5, Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights . EITF 04-5 clarifies certain aspects of Statement of Positions 78-9 Accounting for Investments in Real Estate Ventures , and provides guidance on determining whether a sole general partner in a limited partnership should consolidate its investment in a limited partnership. DERA is the sole general partner of the Real Estate Entities and the limited partners of the Real Estate Entities do not have substantive "kick-out" or participation rights as defined by EITF 04-5. DERA early adopted the guidance of EITF 04-5 and has consolidated the Real Estate Entities retrospectively.
The accompanying consolidated financial statements represent the historical financial statements of the Company. They include the accounts of DERA and the Real Estate Entities. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Disclosure
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information , established standards for disclosure about operating segments and related disclosures about products and services, geographic areas and major customers. Segment information is prepared on the same basis that the Company's management reviews information for operational decision making purposes. The Company currently operates two business segments: the acquisition, development, ownership and management of office real estate and the acquisition, redevelopment, ownership and management of multifamily real estate.
The products for the office segment include primarily rental of office space and other tenant services including parking and storage space rental. The products for the multifamily segment include rental of apartments and other tenant services including parking and storage space rental.
Investment in Real Estate
Acquisitions of properties subsequent to June 30, 2001, the effective date of SFAS No. 141, Business Combinations , are accounted for utilizing the purchase method and, accordingly, the results of
F-51
operations of acquired properties are included in our results of operations from the respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment and identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above-market ground leases, acquired above and below-market leases and tenant relationships. Initial valuations are subject to change until such information is finalized, but no later than 12 months from the acquisition date.
The fair values of tangible assets are determined on an "as-if vacant" basis. The "as-if vacant" fair value is allocated to land, where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information obtained in connection with the acquisition of the property.
The estimated fair value of acquired in-place at-market leases are the costs we would have incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimate includes the fair value of leasing commissions and legal costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluate the time period over which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges from eight to 12 months.
Above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease. As of December 31, 2005 and 2004, the Company had a net liability related to above and below market tenant and ground leases of $21,304 and $21,179, respectively.
The net above and below market tenant and ground lease liability is summarized as follows:
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2005
|
2004
|
|||||
Above market tenant leases (1) | $ | 11,018 | $ | 8,032 | |||
Below market tenant leases (2) | (14,748 | ) | (9,868 | ) | |||
Above market ground leases | (18,977 | ) | (18,977 | ) | |||
|
|
||||||
Subtotal | (22,707 | ) | (20,813 | ) | |||
Accumulated net accretion | 1,403 | (366 | ) | ||||
|
|
||||||
Above and below market leases, net | $ | (21,304 | ) | $ | (21,179 | ) | |
|
|
F-52
Net accretion/(amortization) above (below) market in-place tenant lease value of $1,690, $266, $(476) was recorded as an increase (decrease) in rental income for the years ended December 31, 2005, 2004 and 2003, respectively. The weighted-average amortization period for the Company's above and below market tenant leases was approximately 9.8 years as of December 31, 2005.
The net accretion of above market ground lease value of $1,146, $556 and $0 has been recorded as a reduction of ground lease expense.
Following is the estimated net accretion at December 31, 2005 for the next five years:
Year
|
|
||||
---|---|---|---|---|---|
2006 | $ | (1,594 | ) | ||
2007 | (1,425 | ) | |||
2008 | (1,195 | ) | |||
2009 | (1,243 | ) | |||
2010 | (1,483 | ) | |||
Thereafter | (14,364 | ) | |||
|
|||||
Total | $ | (21,304 | ) | ||
|
Expenditures for repairs and maintenance are charged to operations as incurred. Significant betterments and costs incurred in the execution of leases are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.
The values allocated to land, buildings, site improvements, tenant improvements, leasing costs and in-place leases are depreciated on a straight-line basis using an estimated life of 40 years for buildings, 15 years for site improvements, and the respective lease term for tenant improvements, leasing costs and in-place leases. The values of above and below market leases are amortized over the life of the related lease and recorded as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of acquired above-market ground leases are amortized over the life of the lease and recorded as a decrease to office rental operating expense. The amortization of acquired in-place leases is recorded as an adjustment to depreciation and amortization in the consolidated statements of operations. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.
The Company accounts for properties held for disposition or properties that are sold during the period in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). An asset is classified as an asset held for disposition when it meets the requirements of SFAS No. 144, which include, among other criteria, the approval of the sale of the asset, the asset has been marketed for sale and the Company expects that the sale will likely occur within the next 12 months. Upon classification of an asset as held for disposition, the net book value of the asset, excluding long-term debt, is included on the balance sheet as properties held for disposition, depreciation of the asset is ceased and the operating results of the asset are included in discontinued operations for all periods presented.
F-53
Impairment of Long-Lived Assets
The Company assesses whether there has been impairment in the value of its long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the current carrying value exceeds the estimated undiscounted cash flows, an impairment loss is recorded equal to the difference between the asset's current carrying value and its value based on the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Based upon such periodic assessments, no indications of impairment were identified for the years ended December 31, 2005 and 2004.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers short-term investments with original maturities of three months or less when purchased to be cash equivalents.
Revenue and Gain Recognition
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104 of the Securities and Exchange Commission, Revenue Recognition (SAB 104), as amended. SAB 104 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed and determinable; and collectibility is reasonably assured. All leases are classified as operating leases. For all lease terms exceeding one year, rental income is recognized on a straight-line basis over the terms of the leases. Deferred rent receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenues in the period the applicable costs are incurred. In addition, the Company records a capital asset for leasehold improvements constructed by the Company that are reimbursed by tenants, with the offsetting side of this accounting entry recorded to deferred revenue which is included in accounts payable, accrued expenses and tenant security deposits. The deferred revenue is amortized as additional rental revenue over the life of the related lease.
Rental revenue from month-to-month leases or leases with no scheduled rent increases or other adjustments is recognized on a monthly basis when earned.
Lease termination fees, which are included in rental revenues in the accompanying consolidated statements of operations, are recognized when the related leases are canceled and the Company has no continuing obligation to provide services to such former tenants. Total lease termination revenue for the years ended December 31, 2005, 2004 and 2003, was $1,291, $2,619 and $2,112, respectively.
The Company recognizes gains on sales of real estate pursuant to the provisions of SFAS No. 66, Accounting for Sales of Real Estate (SFAS No. 66). The specific timing of a sale is measured against various criteria in SFAS No. 66 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are
F-54
not met, the Company defers gain recognition and accounts for the continued operations of the property by applying the finance, installment or cost recovery methods, as appropriate, until the sales criteria are met.
Monitoring of Rents and Other Receivables
The Company maintains an allowance for estimated losses that may result from the inability of tenants to make required payments. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize bad debt expense in future periods equal to the amount of unpaid rent and deferred rent. As of December 31, 2005 and 2004, the Company had an allowance for doubtful accounts of $72 and $0, respectively.
The Company generally does not require collateral or other security from its tenants, other than security deposits or letters of credit. As of December 31, 2005, 2004 and 2003, the Company had a total of approximately $13,670 and $12,700, respectively, of total lease security available on existing letters of credit; and $25,670 and $21,389 of security available in security deposits.
Deferred Loan Costs
Costs incurred in issuing secured notes payable are capitalized. Deferred loan costs are included in other assets in the consolidated balance sheets at December 31, 2005 and 2004. The deferred loan costs are amortized to interest expense over the life of the respective loans. Any unamortized amounts upon early repayment of secured notes payable are written off in the period of repayment.
Financial Instruments
The estimated fair values of financial instruments at December 31, 2005 and 2004, were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair values. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.
Cash and cash equivalents, tenant receivables, certain other assets, accounts payable and accrued expenses and tenant security deposits are carried at amounts that reasonably approximate their fair value amounts. The Company's interest rate contracts are recorded on the consolidated balance sheets at their fair values. The estimated fair values of secured notes payable are approximately $2,255,227 at December 31, 2005, and are based on interest rates available at each of the dates presented for issuance of debt with similar terms and remaining maturities.
Interest Rate Agreements
The Company manages its interest rate risk associated with borrowings by obtaining interest rate swap and interest rate cap contracts. No other derivative instruments are used.
F-55
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended by SFAS No. 138). The statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income. A component of stockholder's equity, until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. The Company's investments in interest rate swap and interest rate cap contracts do not qualify as effective hedges, and as such, the changes in such contracts' fair market values are being recorded in earnings.
During the years ended December 31, 2005, 2004 and 2003, the Company recognized gains relating to the change in fair market value of its interest rate contracts of $81,666, $37,629 and $23,583, respectively, and made payments related to the termination of certain interest rate contracts of $1,281, $7,692 and $126, respectively. Additionally, the Company received proceeds of $10,982 related to the termination of certain interest rate contracts during 2005.
Income Taxes
Douglas Emmett Realty Advisors is an S-Corporation and the Real Estate Entities are limited partnerships. Under applicable federal and state income tax rules, the allocated share of net income or loss from the limited partnerships and S-Corporation is reportable in the income tax returns of the respective partners and stockholders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements other than the 1.5% tax due on taxable income of S-Corporations in the state of California.
3. Investment in Real Estate
Investment in real estate consists of the following:
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2005
|
2004
|
|||||
Land | $ | 444,894 | $ | 406,911 | |||
Buildings | 2,324,536 | 2,039,037 | |||||
Tenant improvements and leasing costs | 359,312 | 358,260 | |||||
|
|
||||||
Investment in real estate | 3,128,742 | 2,804,208 | |||||
Less accumulated depreciation | (506,258 | ) | (405,228 | ) | |||
|
|
||||||
Net investment in real estate | $ | 2,622,484 | $ | 2,398,980 | |||
|
|
In January 2005, the Company acquired from unrelated parties an office building in Woodland Hills, California, and an apartment building in Honolulu, Hawaii. The aggregate acquisition costs of these properties approximated $169,870.
F-56
In June, August and November 2004, the Company acquired from unrelated parties office properties in Honolulu, Hawaii, Beverly Hills, California, and Honolulu, Hawaii, respectively. The aggregate acquisition costs of these properties approximated $171,898.
The following table summarizes the allocation of estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
|
December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
|||||||
Land | $ | 45,407 | $ | 13,323 | $ | | ||||
Buildings and equipment | 204,137 | 158,483 | | |||||||
Tenant improvements and other in-place lease assets | 24,661 | 22,384 | | |||||||
Other assets: | ||||||||||
Tenant receivables and other assets | 1,767 | 79 | | |||||||
Above-market tenant leases | 2,986 | 3,612 | | |||||||
Accounts payable, accrued expenses and tenant security deposits: | ||||||||||
Other liabilities | (3,708 | ) | (1,811 | ) | | |||||
Above-market ground leases | | (18,977 | ) | | ||||||
Below-market tenant leases | (4,880 | ) | (5,195 | ) | | |||||
Secured notes payable | (100,500 | ) | | | ||||||
|
|
|
||||||||
$ | 169,870 | $ | 171,898 | $ | | |||||
|
|
|
Interest, insurance and property tax costs incurred during the period of construction of real estate facilities are capitalized. For the years ended December 31, 2005, 2004 and 2003, the Company capitalized $0, $196 and $0 of interest, respectively.
4. Other Assets
Other assets consist of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2005
|
2004
|
||||
Deferred loan costs, net of accumulated amortization of $969 and $14,501 at December 31, 2005 and 2004 | $ | 14,617 | $ | 10,623 | ||
Above-market tenant leases | 5,562 | 4,789 | ||||
Security deposit funds | 3,043 | 2,633 | ||||
Prepaid impounds | 5,266 | 2,454 | ||||
Prepaid expenses | 7,081 | 4,101 | ||||
Other | 517 | 399 | ||||
|
|
|||||
$ | 36,086 | $ | 24,999 | |||
|
|
During the years ended December 31, 2005, 2004 and 2003, the Company incurred deferred loan cost amortization expense of $10,482, $5,668 and $4,205, respectively, inclusive of loan cost write-offs
F-57
totaling $9,823, $2,299 and $1,441, respectively, related to the refinancing of certain secured notes payable. The deferred loan cost amortization and write-offs are included as a component of interest expense in the consolidated statements of operations.
5. Minimum Future Lease Rentals
The Company leases space to tenants primarily under noncancelable operating leases, which generally contain provisions for a base rent plus reimbursement for certain operating expenses. Operating expense reimbursements for the years ended December 31, 2005, 2004 and 2003, were $14,632, $9,439 and $9,303, respectively.
The Company leases space to certain tenants under noncancelable leases, which provide for contingent rents based upon tenant revenues. The contingent rental income for the years ended December 31, 2005, 2004 and 2003, totaled $933, $483 and $239, respectively.
Future minimum base rentals on noncancelable operating leases at December 31, 2005, are as follows:
2006 | $ | 273,078 | |
2007 | 251,062 | ||
2008 | 217,516 | ||
2009 | 179,467 | ||
2010 | 141,458 | ||
Thereafter | 409,899 | ||
|
|||
$ | 1,472,480 | ||
|
The above future minimum lease payments exclude tenant reimbursements, amortization of deferred rent receivables and above/below-market lease intangibles. Some leases are subject to termination options. In general, these leases provide for termination payments should the termination options be exercised. The above table is prepared assuming such options are not exercised.
6. Secured Notes Payable
Payments on mortgage debt are generally due in monthly installments of interest only. The aggregate historical cost, net of accumulated depreciation, of secured properties at December 31, 2005 and 2004, was approximately $2,366,600 and $2,394,320, respectively.
F-58
A summary of secured notes payable and secured line of credit is as follows:
Type of Debt
|
December 31, 2005
|
December 31, 2004
|
Effective Interest Rate at December 31, 2005
(4)
|
Fixed/
Floating Rate |
Maturity Date
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Secured Notes Payable | ||||||||||||
Secured by: |
|
|
|
|
|
|
|
|
|
|
|
|
Barrington Plaza and Pacific Plaza (1) |
|
$ |
153,000 |
|
$ |
153,000 |
|
4.70% |
|
DMBS + 0.60% (3) |
|
December 22, 2011 |
555 Barrington and The Shores (1) |
|
|
140,000 |
|
|
140,000 |
|
4.70 |
|
DMBS + 0.60 (3) |
|
December 22, 2011 |
Studio Plaza, Gateway Building, Bundy Olympic and Brentwood Executive Plaza (1) |
|
|
170,000 |
|
|
|
|
5.00 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
Palisades Promenade, 12400 Wilshire, First Federal Square, 11777 Building and Landmark II (1) |
|
$ |
260,000 |
|
$ |
|
|
5.00% |
|
LIBOR +0.85% |
|
September 1, 2012 |
Galleria, Second Street (1) |
|
|
215,000 |
|
|
|
|
5.00 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
Alameda Media, Olympic Center, MB Plaza, Valley Office Plaza, Coral Plaza, Westside Towers, Valley Executive Tower, Encino Terrace, Westwood Place, Century Park Plaza, Lincoln/Wilshire (1) |
|
|
425,000 |
|
|
|
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
One Hundred Wilshire, Encino Gateway, Encino Plaza (1) |
|
|
150,000 |
|
|
|
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
1901 Avenue of the Stars, Columbus Center and Warner Center (1) |
|
|
425,000 |
|
|
|
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
Beverly Hills Medical Center, Harbor Court, and Bishop Place (1) |
|
|
110,000 |
|
|
|
|
4.89 |
|
LIBOR + 0.85 |
|
September 1, 2012 |
The Trillium (1) |
|
|
100,500 |
|
|
|
|
4.28 |
|
LIBOR + 0.85 |
|
January 1, 2007 |
Moanalua (1) |
|
|
75,000 |
|
|
|
|
4.86 |
|
DMBS + 0.60 (3) |
|
February 1, 2015 |
Alameda Media, Olympic Center, MB Plaza, Valley Office Plaza, Coral Plaza, Westside Towers, Valley Executive Tower, Encino Terrace, Westwood Place, Century Park Plaza, One Westwood, Lincoln/Wilshire (1) |
|
|
|
|
|
418,700 |
|
n/a |
|
LIBOR + 1.3 |
|
December 1, 2009 |
Verona, Second Street, Saltair/San Vicente, Sherman Oaks Tower and the Galleria (1) |
|
|
|
|
|
210,000 |
|
n/a |
|
LIBOR + 1.2 |
|
July 1, 2009 |
F-59
Executive Tower, Camden Medical Arts, Palisades Promenade, 12400 Wilshire, First Federal Square, 11777 Building and Landmark II (1) |
|
|
|
|
|
260,000 |
|
n/a |
|
LIBOR + 1.35 |
|
March 2, 2008 |
Warner Center (1) |
|
|
|
|
|
214,000 |
|
n/a |
|
LIBOR + 1.55 |
|
September 9, 2007 |
Village on Canon, Gateway Building, Bundy Olympic and Brentwood Executive Plaza (1) |
|
|
|
|
|
73,500 |
|
n/a |
|
LIBOR + 1.375 |
|
August 6, 2007 |
Studio Plaza (1) |
|
|
|
|
|
88,255 |
|
n/a |
|
LIBOR + 1.07 |
|
August 1, 2007 |
9601 Wilshire |
|
|
|
|
|
55,000 |
|
n/a |
|
LIBOR + 1.6 |
|
September 18, 2006 |
1901 Avenue of the Stars, Santa Monica Square and Columbus Center (1) |
|
$ |
|
|
$ |
129,000 |
|
n/a |
|
LIBOR + 1.3% |
|
September 18, 2006 |
One Hundred Wilshire, Encino Gateway, Encino Plaza and Brentwood/Saltair (1) |
|
|
|
|
|
132,000 |
|
n/a |
|
LIBOR + 1.33 |
|
March 1, 2006 |
Line of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
Secured by: |
|
|
|
|
|
|
|
|
|
|
|
|
Beverly Hills Medical Center, Harbor Court and Bishop Place (2) |
|
|
|
|
|
109,200 |
|
n/a |
|
LIBOR + 1.40 |
|
November 19, 2006 |
|
|
|||||||||||
Total secured notes payable | $ | 2,223,500 | $ | 1,982,655 | ||||||||
|
|
The minimum future principal payments due on the secured notes payable at December 31, 2005, are as follows:
2006 | $ | | |
2007 | 100,500 | ||
2008 | | ||
2009 | | ||
2010 | | ||
Thereafter | 2,123,000 | ||
|
|||
Total future principal payments | $ | 2,223,500 | |
|
F-60
7. Accounts Payable, Accrued Expenses and Tenant Security Deposits
Accounts payable, accrued expenses and tenant security deposits consist of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2005
|
2004
|
||||
Tenant security deposits | $ | 25,670 | $ | 21,389 | ||
Accounts payable | 20,009 | 22,190 | ||||
Above-market ground leases | 17,274 | 18,420 | ||||
Deferred revenue | 11,872 | 6,963 | ||||
Below-market tenant leases | 9,593 | 7,549 | ||||
|
|
|||||
$ | 84,418 | $ | 76,511 | |||
|
|
8. Interest Rate Agreements
The table below lists the Company's derivative instruments and their fair values as of December 31, 2005 and 2004:
|
|
|
|
|
|
Fair Value
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Instrument
|
Notional Value
|
Interest Pay Rate
|
|
|
Termination/Sold Date
|
|||||||||||||
Effective Date
|
Maturity Date
|
2005
|
2004
|
|||||||||||||||
|
|
|
|
|
|
Asset (Liability)
|
||||||||||||
Interest rate swap | $ | 300,000 | 5.449% | February 1, 2001 | February 1, 2005 | August 26, 2005 | $ | | $ | (792 | ) | |||||||
Interest rate swap |
|
|
132,000 |
|
5.300% |
|
March 1, 2001 |
|
March 1, 2005 |
|
August 26, 2005 |
|
|
|
|
|
(623 |
) |
Interest rate swaps |
|
|
1,073,500 |
|
Ranging from 2.775% to 4.855% |
|
Ranging from September 2001 to August 2004 |
|
Ranging from October 2005 to July 2008 |
|
August 26, 2005 |
|
|
|
|
|
(4,900 |
) |
Interest rate cap |
|
|
218,700 |
|
8.550% |
|
November 7, 2003 |
|
June 1, 2008 |
|
August 26, 2005 |
|
|
|
|
|
74 |
|
Interest rate caps |
|
|
368,000 |
|
Ranging from 6.520% to 6.700% |
|
Ranging from December 2004 to January 2005 |
|
Ranging from December 2007 to January 2008 |
|
|
|
|
60 |
|
|
264 |
|
Interest rate swaps |
|
|
2,123,003 |
|
Ranging from 4.038% to 4.173% |
|
Ranging from August 2005 to September 2005 |
|
Ranging from August 2010 to August 2012 |
|
|
|
|
65,928 |
|
|
|
|
Interest rate caps |
|
|
368,000 |
|
5.500% |
|
November 1, 2005 |
|
August 1, 2011 |
|
|
|
|
6,004 |
|
|
|
|
Sold caps |
|
|
368,000 |
|
5.500% |
|
November 1, 2005 |
|
August 1, 2011 |
|
|
|
|
(6,004 |
) |
|
|
|
|
|
|||||||||||||||||
Total net fair value of interest rate contracts | $ | 65,988 | $ | (5,977 | ) | |||||||||||||
|
|
9. Minority Interests in Consolidated Real Estate Partnerships
The Company reflects unaffiliated partners' interests in the Real Estate Entities as minority interest in consolidated real estate partnerships. Minority interest in consolidated real estate partnerships represents the minority partners' share of the underlying net assets of the Company's consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions to
F-61
partners in excess of the carrying amount of the minority interest, the Company generally records a charge equal to the amount of such excess distributions, even though there is no economic effect or cost. If the excess distributions previously absorbed by the Company are recovered through the future earnings of the consolidated real estate partnership, the Company will record income in the period of recovery. The Company reports this charge and any subsequent recovery in the consolidated statements of operations as deficit distributions to minority partners, net.
The minority interest charge of $79,756, $47,144 and $30,944 for the years ended December 31, 2005, 2004 and 2003, respectively, represents the Real Estate Entities net income allocable to the limited partners.
A preferred minority investor invested $99,000 and $85,000 in 2005 and 2004, respectively, in two of the Company's consolidated subsidiaries. In return, the preferred minority investor will receive a profit participation of 8.75% per annum on its unreturned capital contribution. Under certain circumstances, the preferred minority investor has the right but not the obligation to initiate the sale of certain properties. Upon the sale of the properties, the initial capital contribution of the preferred investor will be returned. The preferred investor's contributed capital is reflected in the consolidated balance sheets as a component of minority interests as of December 31, 2005 and 2004. For the years ended December 31, 2005, 2004 and 2003, the Company has allocated $15,805, $2,499 and $0, respectively, of the Company's consolidated subsidiaries' net income to the preferred minority investor.
10. Discontinued Operations
SFAS No. 144 requires, among other things, that the operating results of real estate properties classified as held for disposition, be classified as discontinued operations in the statements of operations for all periods presented. All buildings classified as discontinued operations were sold during 2004 and 2003.
|
Years Ended December 31,
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
||||||||
Income statement | |||||||||||
Revenues | $ | | $ | 1,744 | $ | 8,659 | |||||
Operating expenses | | (48 | ) | (3,481 | ) | ||||||
|
|
|
|||||||||
Revenues less operating expenses | | 1,696 | 5,178 | ||||||||
Interest expense |
|
|
|
|
|
(714 |
) |
|
(2,756 |
) |
|
Depreciation expense | | (282 | ) | (1,250 | ) | ||||||
Other income | | 2 | 8 | ||||||||
|
|
|
|||||||||
Income before gain on sale of properties and minority interest | | 702 | 1,180 | ||||||||
Gain on sale of properties |
|
|
|
|
|
16,656 |
|
|
22,693 |
|
|
Minority interest | | (17,184 | ) | (23,634 | ) | ||||||
|
|
|
|||||||||
Income from discontinued operations, net of minority interest | $ | | $ | 174 | $ | 239 | |||||
|
|
|
F-62
Income from discontinued operations, net, includes the operating results of one property sold in 2004 and three properties sold during 2003. The properties sold in 2004 and 2003 were classified as office properties for purposes of segment reporting. The net proceeds received from the sales transactions were $0, $39,067 and $66,268 for the years ended December 31, 2005, 2004 and 2003, respectively. Interest expense included in discontinued operations represents interest related to a secured note payable, which was repaid in connection with the sale of the respective property. Gains and losses on sales of these properties are included in the consolidated statements of operations as a component of discontinued operations, net.
11. Related-Party Transactions
The Company paid $5,633, $5,988 and $6,260 in real estate commissions to an operating company owned by the stockholders of DERA for the years ended December 31, 2005, 2004 and 2003, respectively. The commissions paid to the operating company are accounted for as leasing costs and are included in the Company's investment in real estate in the consolidated balance sheets.
The Company has contributed its share of discretionary profit-sharing contributions (subject to statutory limitations), totaling $192, $180 and $168, for the years ended December 31, 2005, 2004 and 2003, respectively, for services rendered by employees of an operating company owned by the stockholders of DERA.
Property management fees related to management services are paid to an operating company owned by the stockholders of DERA. The management fees are based upon percentages of the rental cash receipts collected by the properties. The fees range from 1.75% to 4.00% of the cash receipts. The Company expensed $8,972, $7,415 and $7,534 in such property management fees for the years ended December 31, 2005, 2004 and 2003, respectively. At December 31, 2005, 2004 and 2003, the Company had $600, $524 and $498, respectively, in accrued and unpaid property management fees.
The Company has contracted with an operating company owned by the stockholders of DERA to provide building and tenant improvement work. For the years ended December 31, 2005, 2004 and 2003, amounts totaling $16,250, $16,086 and $18,617, respectively, were paid to the operating company for contracting work performed. These amounts are included in the costs basis of the buildings and in tenant improvements.
The Company leases approximately 26,785 square feet of commercial office space to two operating companies owned or controlled by the stockholders. The annual rents from these leases totaled $814, $782, and $782 for the years ended December 31, 2005, 2004 and 2003, respectively. The terms under these leases were negotiated with unaffiliated third parties prior to the building being acquired by the Company.
12. Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate
F-63
settlement of these actions will not have a material adverse effect on the Company's financial position and results of operations or cash flows.
Concentration of Credit Risk
The Company's operating properties are located in Los Angeles County, California and Honolulu, Hawaii. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the communities in which the tenants operate.
Financial instruments that subject the Company to credit risk consist primarily of cash, accounts receivable, deferred rents receivable and interest rate contracts. The Company maintains its cash and cash equivalents and restricted cash on deposit and enters into interest rate contracts with high quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100; and to date, the Company has not experienced any losses on its invested cash. The Company performs ongoing credit evaluations of its tenants for potential credit losses.
Asset Retirement Obligations
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligationsan interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, Accounting for Asset Retirement Obligations , represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within a company's control. Under this standard, a liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. Certain of our real estate assets contain asbestos. If these properties undergo major renovations or are demolished, certain environmental regulations are in place, which specify the manner in which the asbestos must be handled and disposed. As of December 31, 2005, the obligations to remove the asbestos from these properties have indeterminable settlement dates, and therefore, we are unable to reasonably estimate the fair value of the conditional asset retirement obligation.
Future Minimum Lease Payments
At December 31, 2005, the Company has leased portions of the land underlying three of its office properties. Effective December 2004, the Company agreed to pay $1,377 per annum for the ground lease on Harbor Court through May 31, 2014, and the Company has the option to purchase the fee interest for $27,500. The Company entered into a ground lease for a portion of the land under Bishop Place that calls for annual rent of $550 through February 28, 2009, and $700 per annum, through February 28, 2019; thereafter, payments are determined by mutual agreement through December 31, 2086. The Company entered into a ground lease for One Westwood that calls for annual rents which were $1,301 in 2005. Rent may be increased annually based upon economic criteria defined in the lease agreement. The Company has the right to purchase the leased land for an amount equal to its fair market value as defined in the agreement. If the option is not exercised, the ground lease expires
F-64
May 7, 2083. For the years ended December 31, 2005, 2004 and 2003, the Company expensed ground lease payments in the amount of $3,261, $1,863 and $1,219, respectively.
The following is a schedule of minimum ground lease payments as of December 31, 2005:
2006 | $ | 3,283 | |
2007 | 3,283 | ||
2008 | 3,283 | ||
2009 | 3,408 | ||
2010 | 3,433 | ||
Thereafter | 128,475 | ||
|
|||
$ | 145,165 | ||
|
Tenant Concentrations
For the years ended December 31, 2005, 2004 and 2003, no tenant exceeded 10% of the Company's total rental revenue and tenant reimbursements.
13. Recent Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error CorrectionsA Replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"). This new standard replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements . Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a change in method of depreciation or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and that correction of errors in previously issued financial statements should be termed a "restatement." We do not anticipate the adoption of SFAS 154 will impact our consolidated financial statements.
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost relating to share-based payment transactions be recognized in financial statements and measured based on the fair value of the equity or liability instruments issued. We do not anticipate the adoption of SFAS 123R on January 1, 2006 will impact our consolidated financial statements.
14. Segment Reporting
The Company's segments are based on the Company's method of internal reporting which classifies its operation by property type. The Company's segments by property type include: Office and Multifamily.
F-65
Asset information by segment is not reported because the Company does not use this measure to assess performance and make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income, management services, general and administrative expenses, interest expense, depreciation and amortization expense and net derivative gains and losses are not included in rental revenues less rental expenses as the internal reporting addresses these items on a corporate level.
Rental revenues less rental expenses is not a measure of operating results or cash flows from operating activities as measured by U.S. generally accepted accounting principles, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate rental revenues less rental expenses in the same manner. The Company considers rental revenues less rental expenses to be an appropriate supplemental measure to net income because it assists both investors and management to understand the core operations of the Company's properties.
|
Year ended December 31, 2005
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Office
|
Multifamily
|
Total
|
|||||||
Rental revenues | $ | 348,566 | $ | 45,222 | $ | 393,788 | ||||
Percentage of total | 89 | % | 11 | % | 100 | % | ||||
Rental expenses |
|
|
119,879 |
|
|
15,347 |
|
|
135,226 |
|
Percentage of total | 89 | % | 11 | % | 100 | % | ||||
Rental revenues less rental expenses |
|
$ |
228,687 |
|
$ |
29,875 |
|
$ |
258,562 |
|
Percentage of total | 88 | % | 12 | % | 100 | % |
|
Year ended December 31, 2004
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Office
|
Multifamily
|
Total
|
|||||||
Rental revenues | $ | 289,152 | $ | 33,793 | $ | 322,945 | ||||
Percentage of total | 90 | % | 10 | % | 100 | % | ||||
Rental expenses |
|
|
105,921 |
|
|
13,219 |
|
|
119,140 |
|
Percentage of total | 89 | % | 11 | % | 100 | % | ||||
Rental revenues less rental expenses |
|
$ |
183,231 |
|
$ |
20,574 |
|
$ |
203,805 |
|
Percentage of total | 90 | % | 10 | % | 100 | % |
F-66
|
Year ended December 31, 2003
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Office
|
Multifamily
|
Total
|
|||||||
Rental revenues | $ | 283,312 | $ | 31,994 | $ | 315,306 | ||||
Percentage of total | 90 | % | 10 | % | 100 | % | ||||
Rental expenses |
|
|
96,771 |
|
|
11,765 |
|
|
108,536 |
|
Percentage of total | 89 | % | 11 | % | 100 | % | ||||
Rental revenues less rental expenses |
|
$ |
186,541 |
|
$ |
20,229 |
|
$ |
206,770 |
|
Percentage of total | 90 | % | 10 | % | 100 | % |
The following is a reconciliation of rental revenues less rental expenses to net income (loss):
|
Years Ended December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
|||||||
Rental revenues less rental expenses | $ | 258,562 | $ | 203,805 | $ | 206,770 | ||||
Add: | ||||||||||
Interest and other income | 2,264 | 1,463 | 514 | |||||||
Gain on investments in interest swaps | 81,666 | 37,629 | 23,583 | |||||||
Less: |
|
|
|
|
|
|
|
|
|
|
General and administrative expenses | 6,457 | 5,646 | 5,195 | |||||||
Interest expense | 115,674 | 95,125 | 94,783 | |||||||
Depreciation and amortization | 113,170 | 91,306 | 92,559 | |||||||
Deficit distribution to minority partners, net | 28,150 | 57,942 | | |||||||
Minority interest expense | 95,561 | 49,643 | 30,944 | |||||||
|
|
|
||||||||
Income (loss) from continuing operations | $ | (16,520 | ) | $ | (56,765 | ) | $ | 7,386 | ||
|
|
|
15. Subsequent Events
In March 2006, the Company acquired a multifamily property in Honolulu, Hawaii, for $114,000. In conjunction with the acquisition, the Company issued a note payable of $82,000. The note bears interest at the one-month LIBOR rate plus 62 basis points and matures February 28, 2016. Additionally, the Company entered into an interest rate swap contract for the amount of the loan which matures March 1, 2012.
F-67
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
(Dollars in thousands)
|
|
|
|
Cost Capitalized
Subsequent to Acquisition |
Gross Carrying Amount
At December 31, 2005 |
|
|
|
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Initial Cost
|
|
|
|
||||||||||||||||||||||||||
|
|
Accumulated
Depreciation at December 31, 2005 |
|
|
|||||||||||||||||||||||||||
Name
|
Encumbrances at December 31, 2005
|
Land
|
Building &
Improvements |
Land
|
Building &
Improvements |
Land
|
Building &
Improvements |
Total
|
Year Built/
Renovated |
Year
Acquired |
|||||||||||||||||||||
Office Properties | |||||||||||||||||||||||||||||||
Bundy/Olympic | $ | 19,342 | $ | 4,201 | $ | 11,860 | $ | | $ | 5,271 | $ | 4,201 | $ | 17,131 | $ | 21,332 | $ | 5,504 | 1991 | 1994 | |||||||||||
Gateway Los Angeles | 24,725 | 2,376 | 15,302 | | 4,350 | 2,376 | 19,652 | 22,028 | 6,027 | 1987 | 1994 | ||||||||||||||||||||
Village on Canon | | 5,933 | 11,389 | | 2,422 | 5,933 | 13,811 | 19,744 | 4,905 | 1989/1995 | 1994 | ||||||||||||||||||||
Brentwood Executive Plaza | 21,117 | 3,255 | 9,654 | | 2,482 | 3,255 | 12,136 | 15,391 | 3,912 | 1983/1996 | 1995 | ||||||||||||||||||||
Camden Medical Arts | | 3,102 | 12,221 | | 3,178 | 3,102 | 15,399 | 18,501 | 4,609 | 1972/1992 | 1995 | ||||||||||||||||||||
Executive Tower | | 6,660 | 32,045 | | 6,033 | 6,660 | 38,078 | 44,738 | 12,319 | 1989 | 1995 | ||||||||||||||||||||
Palisades Promenade | 31,432 | 5,253 | 15,547 | | (338 | ) | 5,253 | 15,209 | 20,462 | 4,272 | 1990 | 1995 | |||||||||||||||||||
Studio Plaza | 104,816 | 9,347 | 73,358 | | 30,546 | 9,347 | 103,904 | 113,251 | 30,536 | 1988/2004 | 1995 | ||||||||||||||||||||
First Federal Square | 66,927 | 9,989 | 29,187 | | 7,691 | 9,989 | 36,878 | 46,867 | 13,762 | 1981/2000 | 1996 | ||||||||||||||||||||
Wilshire Plaza | 44,040 | 5,013 | 34,283 | | 5,547 | 5,013 | 39,830 | 44,843 | 12,619 | 1985 | 1996 | ||||||||||||||||||||
Landmark II | 93,578 | 19,156 | 109,259 | | 10,655 | 19,156 | 119,914 | 139,070 | 28,390 | 1989 | 1997 | ||||||||||||||||||||
Olympic Center | 23,266 | 5,473 | 22,850 | | 3,988 | 5,473 | 26,838 | 32,311 | 7,147 | 1985/1996 | 1997 | ||||||||||||||||||||
Saltair/San Vicente | | 5,075 | 6,946 | | 1,865 | 5,075 | 8,811 | 13,886 | 2,145 | 1964/1992 | 1997 | ||||||||||||||||||||
Second Street Plaza | 19,807 | 4,377 | 15,277 | | 631 | 4,377 | 15,908 | 20,285 | 4,081 | 1991 | 1997 | ||||||||||||||||||||
The Galleria | 195,193 | 33,213 | 17,820 | | 199,649 | 33,213 | 217,469 | 250,682 | 40,887 | 1981/2002 | 1997 | ||||||||||||||||||||
Tower at Sherman Oaks | | 4,712 | 15,747 | | 3,766 | 4,712 | 19,513 | 24,225 | 5,554 | 1967/1991 | 1997 | ||||||||||||||||||||
Verona | | 2,574 | 7,111 | | 1,198 | 2,574 | 8,309 | 10,883 | 2,320 | 1991 | 1997 | ||||||||||||||||||||
Coral Plaza | 16,406 | 4,028 | 15,019 | | 1,981 | 4,028 | 17,000 | 21,028 | 4,000 | 1981 | 1998 | ||||||||||||||||||||
MB Plaza | 24,579 | 4,533 | 22,024 | | 3,522 | 4,533 | 25,546 | 30,079 | 6,264 | 1971/1996 | 1998 | ||||||||||||||||||||
Valley Executive Tower | 76,242 | 8,446 | 67,672 | | 8,818 | 8,446 | 76,490 | 84,936 | 18,213 | 1984 | 1998 | ||||||||||||||||||||
Valley Office Plaza | 32,633 | 5,731 | 24,329 | | 12,916 | 5,731 | 37,245 | 42,976 | 7,471 | 1966/2002 | 1998 | ||||||||||||||||||||
Westside Towers | 61,268 | 8,506 | 79,532 | | 7,134 | 8,506 | 86,666 | 95,172 | 18,814 | 1985 | 1998 | ||||||||||||||||||||
100 Wilshire | 87,479 | 12,769 | 78,447 | | 20,092 | 12,769 | 98,539 | 111,308 | 19,212 | 1968/2002 | 1999 | ||||||||||||||||||||
11777 San Vicente | 24,022 | 5,032 | 15,768 | | 6,160 | 5,032 | 21,928 | 26,960 | 4,126 | 1974/1998 | 1999 | ||||||||||||||||||||
Century Park Plaza | 71,529 | 10,275 | 70,761 | | 14,677 | 10,275 | 85,438 | 95,713 | 17,389 | 1972/1987 | 1999 | ||||||||||||||||||||
Encino Terrace | 58,882 | 12,535 | 59,554 | | 8,312 | 12,535 | 67,866 | 80,401 | 15,149 | 1986 | 1999 | ||||||||||||||||||||
One Westwood | | 2,376 | 29,784 | | 6,566 | 2,376 | 36,350 | 38,726 | 7,553 | 1987/2004 | 1999 | ||||||||||||||||||||
Westwood Place | 42,774 | 8,542 | 44,419 | | 5,185 | 8,542 | 49,604 | 58,146 | 10,659 | 1987 | 1999 | ||||||||||||||||||||
Brentwood/Saltair | | 4,468 | 11,615 | | 1,088 | 4,468 | 12,703 | 17,171 | 2,070 | 1986 | 2000 | ||||||||||||||||||||
Encino Gateway | 39,108 | 8,475 | 48,525 | | 5,529 | 8,475 | 54,054 | 62,529 | 9,885 | 1975/1998 | 2000 | ||||||||||||||||||||
Encino Plaza | 23,413 | 5,293 | 23,125 | | 2,747 | 5,293 | 25,872 | 31,165 | 5,160 | 1971/1992 | 2000 | ||||||||||||||||||||
Lincoln/Wilshire | 17,420 | 3,833 | 12,484 | | 755 | 3,833 | 13,239 | 17,072 | 2,094 | 1996 | 2000 | ||||||||||||||||||||
1901 Avenue of the Stars | 107,000 | 18,514 | 131,752 | | 15,739 | 18,514 | 147,491 | 166,005 | 20,682 | 1968/2001 | 2001 | ||||||||||||||||||||
9601 Wilshire | | 16,597 | 54,774 | | 22,441 | 16,597 | 77,215 | 93,812 | 9,389 | 1962/2004 | 2001 | ||||||||||||||||||||
Columbus Center | 9,460 | 2,096 | 10,396 | | 989 | 2,096 | 11,385 | 13,481 | 2,049 | 1987 | 2001 | ||||||||||||||||||||
Santa Monica Square | | 5,366 | 18,025 | | 4,638 | 5,366 | 22,663 | 28,029 | 2,968 | 1983/2004 | 2001 | ||||||||||||||||||||
Warner Center | 308,542 | 43,110 | 292,147 | | 45,459 | 43,110 | 337,606 | 380,716 | 67,621 | 1982-1993/2004 | 2002 | ||||||||||||||||||||
Beverly Hills Medical Center | 21,227 | 4,955 | 27,766 | | 462 | 4,955 | 28,228 | 33,183 | 1,918 | 1964/2004 | 2004 | ||||||||||||||||||||
Bishop Place | 70,850 | 8,317 | 105,651 | | 7,331 | 8,317 | 112,982 | 121,299 | 5,744 | 1992 | 2004 | ||||||||||||||||||||
Harbor Court | 17,923 | 51 | 41,001 | | 4,362 | 51 | 45,363 | 45,414 | 2,991 | 1994 | 2004 | ||||||||||||||||||||
The Trillium | 100,500 | 20,688 | 143,263 | | 2,894 | 20,688 | 146,157 | 166,845 | 7,580 | 1988 | 2005 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
1,855,500 | 354,245 | 1,867,689 | | 498,731 | 354,245 | 2,366,420 | 2,720,665 | 457,990 | |||||||||||||||||||||||
Multifamily Properties |
|
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|
|
|
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Barrington Plaza | $ | 117,600 | $ | 28,568 | $ | 81,485 | $ | | $ | 3,691 | $ | 28,568 | $ | 85,176 | $ | 113,744 | $ | 17,029 | 1963/1998 | 1998 | |||||||||||
555 Barrington | 35,900 | 6,461 | 27,639 | | 1,294 | 6,461 | 28,933 | 35,394 | 4,991 | 1989 | 1999 | ||||||||||||||||||||
Pacific Plaza | 35,400 | 10,091 | 16,159 | | 8,903 | 10,091 | 25,062 | 35,153 | 4,708 | 1963/1998 | 1999 | ||||||||||||||||||||
The Shores | 104,100 | 20,809 | 74,191 | | 18,027 | 20,809 | 92,218 | 113,027 | 15,064 | 1965-67/2002 | 1999 | ||||||||||||||||||||
Moanalua Hillside Apartments | 75,000 | 24,720 | 85,895 | | 144 | 24,720 | 86,039 | 110,759 | 6,476 | 1968/2004 | 2005 | ||||||||||||||||||||
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|||||||||||||||||||||||
368,000 | 90,649 | 285,369 | | 32,059 | 90,649 | 317,428 | 408,077 | 48,268 | |||||||||||||||||||||||
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|||||||||||||||||||||||
Total | $ | 2,223,500 | $ | 444,894 | $ | 2,153,058 | $ | | $ | 530,790 | $ | 444,894 | $ | 2,683,848 | $ | 3,128,742 | $ | 506,258 | |||||||||||||
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F-68
The following is a reconciliation of real estate assets and accumulated depreciation:
|
Years Ended December 31,
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
||||||||
Real Estate Assets | |||||||||||
Balance, beginning of period | $ | 2,804,208 | $ | 2,550,279 | $ | 2,546,171 | |||||
Additionsproperty acquisitions | 274,205 | 187,779 | | ||||||||
improvements* | 50,329 | 100,336 | 65,108 | ||||||||
Deductionsproperty dispositions | | (34,186 | ) | (61,000 | ) | ||||||
|
|
|
|||||||||
Balance, end of period | $ | 3,128,742 | $ | 2,804,208 | $ | 2,550,279 | |||||
|
|
|
|||||||||
Accumulated Depreciation | |||||||||||
Balance, beginning of period | $ | (405,228 | ) | $ | (325,674 | ) | $ | (249,529 | ) | ||
Additionsdepreciation | (106,282 | ) | (88,082 | ) | (89,322 | ) | |||||
Deductionsdisposals | 5,252 | 8,528 | 13,177 | ||||||||
|
|
|
|||||||||
Balance, end of period | $ | (506,258 | ) | $ | (405,228 | ) | $ | (325,674 | ) | ||
|
|
|
Depreciation of real estate assets reflected in the statements of operations is calculated over the estimated original lives of the assets as follows:
Buildings and improvements | 40 years | |
Tenant improvements | Life of respective lease | |
Tenant origination costs | Life of respective lease |
F-69
Douglas, Emmett and Company
Balance Sheets
(In thousands)
|
March 31,
2006 |
December 31,
2005 |
||||||
---|---|---|---|---|---|---|---|---|
|
(Unaudited)
|
|
||||||
Assets | ||||||||
Cash | $ | 2,114 | $ | 1,398 | ||||
Accounts receivableaffiliated properties | 2,617 | 3,932 | ||||||
Prepaid expenses and other assets | 182 | 163 | ||||||
Property and equipment, net | 41 | 52 | ||||||
|
|
|||||||
Total assets | $ | 4,954 | $ | 5,545 | ||||
|
|
|||||||
Liabilities: |
|
|
|
|
|
|
||
Accounts payable and accrued liabilities | $ | 363 | $ | 540 | ||||
Deferred rent liability | 286 | 303 | ||||||
|
|
|||||||
Total liabilities | 649 | 843 | ||||||
Stockholders' equity: |
|
|
|
|
|
|
||
Common stock$0 par value; 10,000 shares authorized and 6,500 shares outstanding | | | ||||||
Additional paid-in capital | 128 | 128 | ||||||
Retained earnings | 4,177 | 4,574 | ||||||
|
|
|||||||
Total stockholders' equity | 4,305 | 4,702 | ||||||
|
|
|||||||
Total liabilities and stockholders' equity | $ | 4,954 | $ | 5,545 | ||||
|
|
See accompanying notes.
F-70
Douglas, Emmett and Company
Statements of Income
(Unaudited and in thousands)
|
Three Months Ended
March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2006
|
2005
|
|||||
Service revenues: | |||||||
Real estate commissions | $ | 1,376 | $ | 1,571 | |||
Property management fees | 2,387 | 2,166 | |||||
Service contract fees | 5,045 | 4,750 | |||||
|
|
||||||
Total service revenues | 8,808 | 8,487 | |||||
Costs of services: |
|
|
|
|
|
|
|
Salaries, wages, benefits and other direct costs | 6,037 | 5,657 | |||||
Selling, general and administrative expenses |
|
|
381 |
|
|
386 |
|
|
|
||||||
Total expenses | 6,418 | 6,043 | |||||
Other income |
|
|
13 |
|
|
1 |
|
|
|
||||||
Net income | $ | 2,403 | $ | 2,445 | |||
|
|
See accompanying notes.
F-71
Douglas, Emmett and Company
Statements of Cash Flows
(Unaudited and in thousands)
|
Three Months Ended
March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2006
|
2005
|
|||||||
Operating activities | |||||||||
Net income | $ | 2,403 | $ | 2,445 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 11 | 7 | |||||||
Changes in assets and liabilities: | |||||||||
Accounts receivableaffiliated properties | 1,315 | (230 | ) | ||||||
Prepaid expenses and other assets | (19 | ) | | ||||||
Accounts payable and other liabilities | (177 | ) | 6 | ||||||
Deferred rent liability | (17 | ) | 11 | ||||||
|
|
||||||||
Net cash provided by operating activities | 3,516 | 2,239 | |||||||
Investing activities | |||||||||
Additions to property and equipment | | (21 | ) | ||||||
|
|
||||||||
Net cash used in investing activities | | (21 | ) | ||||||
Financing activities | |||||||||
Dividends paid on common stock | (2,800 | ) | (1,100 | ) | |||||
|
|
||||||||
Net cash used in financing activities | (2,800 | ) | (1,100 | ) | |||||
|
|
||||||||
Net increase in cash and cash equivalents | 716 | 1,118 | |||||||
Cash and cash equivalents at beginning of period | 1,398 | 776 | |||||||
|
|
||||||||
Cash and cash equivalents at end of period | $ | 2,114 | $ | 1,894 | |||||
|
|
See accompanying notes.
F-72
Douglas, Emmett and Company
Notes to Financial Statements
March 31, 2006
(Unaudited and in thousands)
1. Background
Douglas, Emmett and Company (the Company) is an S-Corporation, which is owned by four individuals (collectively, the Stockholders). The Company was formed in 1971 and is primarily engaged in providing leasing and management services to properties owned by limited partnerships in which the Stockholders directly or indirectly have general and limited partnership interests. As of March 31, 2006, the Company managed 46 office properties and nine multifamily properties (collectively, the Affiliated Properties).
Unaudited Interim Financial Information
The accompanying interim unaudited financial statements have been prepared by the Company's management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the presentation not misleading. The unaudited financial statements as of March 31, 2006, and for the three months ended March 31, 2006 and 2005, include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. The interim financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2005, and notes thereto.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers short-term investments with remaining maturities of three months or less when purchased to be cash equivalents.
Property and Equipment
Office equipment and computer hardware costs are stated at cost, net of accumulated depreciation. Depreciation of office equipment and computer hardware costs are computed using the straight-line method over their estimated useful life, ranging from three to seven years. The Company capitalizes expenditures that materially increase the life of the Company's assets and expenses the costs of maintenance and repairs.
F-73
Revenue Recognition
Real estate commissions relate to tenant leases at the Affiliated Properties and are generally recorded as income once the Company satisfies its obligations under the commission agreement. Terms and conditions of a commission agreement may include, but are not limited to, execution of a signed lease agreement and future contingencies including tenant occupancy, payment of a deposit or payment of a first month's rent (or a combination thereof). As some of these conditions are outside of the Company's control and are often not clearly defined, judgment must be exercised in determining when such required events have occurred in order to recognize revenue.
A typical commission agreement provides that the Company earns half of the lease commission upon the execution of the lease agreement by the tenant, while the remaining portion(s) of the lease commission is earned at a later date, usually upon tenant occupancy. The existence of any significant future contingencies, such as tenant occupancy, results in the delay of recognition of the corresponding revenue until such contingencies are satisfied. For example, if the Company does not earn all or a portion of the lease commission until the tenant pays its first month's rent, and the lease agreement provides the tenant with a free rent period, the Company delays revenue recognition until rent is paid by the tenant.
Property management fees are generally based upon percentages of the rental cash receipts generated by the Affiliated Properties, ranging from 1.75% to 4.00%, and are recognized when earned under the provisions of the related management agreements.
Under the terms of service contracts, the Affiliated Properties will typically reimburse the Company for certain expenses, which are comprised primarily of employee salaries and related benefit costs. The amounts, which are to be reimbursed per the terms of the services contract, are recognized in the same period as the related expenses are incurred.
The lease commission agreements, property management agreements, and service contracts are terminable 30 days subsequent to receipt of written notification by either the Company or the owners of the Affiliated Properties.
Income Taxes
Under applicable federal and state income tax rules as an S-Corporation, the allocated share of net income or loss is reportable in the income tax returns of the Stockholders. Accordingly, no income tax provision is included in the accompanying financial statements other than the 1.5% tax due on taxable income of S-Corporations in the state of California, which has been included as a component of selling, general and administrative expenses.
F-74
3. Accounts ReceivableAffiliated Properties
Account receivableaffiliated properties at March 31, 2006, and December 31, 2005, consisted of the following:
|
March 31, 2006
|
December 31, 2005
|
||||
---|---|---|---|---|---|---|
Property management fees | $ | 842 | $ | 786 | ||
Property expense reimbursements | 32 | 5 | ||||
Leasing commissions | 56 | 12 | ||||
Salary and expense reimbursement | 1,687 | 3,129 | ||||
|
|
|||||
$ | 2,617 | $ | 3,932 | |||
|
|
4. Property and Equipment
Property and equipment consists of the following:
|
March 31, 2006
|
December 31, 2005
|
|||||
---|---|---|---|---|---|---|---|
Computer hardware | $ | 64 | $ | 64 | |||
Office equipment | 64 | 64 | |||||
|
|
||||||
128 | 128 | ||||||
Less accumulated depreciation and amortization | (87 | ) | (76 | ) | |||
|
|
||||||
$ | 41 | $ | 52 | ||||
|
|
5. Other Assets
The following table summarizes the items included in other assets:
|
March 31, 2006
|
December 31, 2005
|
||||
---|---|---|---|---|---|---|
Legal retainer | $ | 60 | $ | 60 | ||
Prepaid insurance and other | 122 | 103 | ||||
|
|
|||||
$ | 182 | $ | 163 | |||
|
|
6. Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate settlement of these actions will not have a material adverse effect on the Company's financial position and results of operations or cash flows.
Employee Retirement Savings Plan
The Company has a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code whereby the Company's employees may contribute a portion of their compensation to their
F-75
respective retirement accounts, in an amount not to exceed the maximum allowed under the Internal Revenue Code. The Company has elected to provide discretionary profit-sharing contributions (subject to statutory limitations), which amounted to $92 and $88 for the three months ended March 31, 2006 and 2005, respectively. The contributions have been recorded in salaries, wages, benefits and other direct costs in the accompanying statements of income. Employees who participate in the plan are immediately vested in their contributions and are vested in the contributions of the Company over a five-year period. At March 31, 2006, and December 31, 2005, the Company recorded a liability of $92 and $280, respectively, for unfunded contributions.
Concentration of Credit Risk
The Company maintains cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Company believes that the risk is not significant.
7. Related Party Transactions
Noncancelable Operating Leases
The Company has a noncancelable operating lease obligation for office space with an affiliate in which the Stockholders have a general partnership interest. This lease expires on April 30, 2010, with two options to extend, provides for rent increases based on specific terms and requires payments of the Company's share of property taxes, insurance and maintenance costs. For the three months ended March 31, 2006 and 2005, the Company incurred rental expenses of $195 and $195, respectively, which has been included in selling, general and administrative expenses in the accompanying statements of income.
Future minimum payments under this lease were as follows at March 31, 2006:
April 1, 2006 to December 31, 2006 | $ | 639 | |
2007 | 852 | ||
2008 | 852 | ||
2009 | 852 | ||
2010 | 284 | ||
|
|||
$ | 3,479 | ||
|
F-76
Report of Independent Registered Public Accounting Firm
The
Stockholders of
Douglas, Emmett and Company
We have audited the accompanying balance sheets of Douglas, Emmett and Company (Company) as of December 31, 2005 and 2004, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Douglas, Emmett and Company at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 31, 2006
F-77
Douglas, Emmett and Company
Balance Sheets
(In thousands, except for share data)
|
December 31,
|
|||||||
---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
||||||
Assets | ||||||||
Cash | $ | 1,398 | $ | 776 | ||||
Accounts receivableaffiliated properties | 3,932 | 2,312 | ||||||
Prepaid expenses and other assets | 163 | 86 | ||||||
Property and equipment, net | 52 | 46 | ||||||
|
|
|||||||
Total assets | $ | 5,545 | $ | 3,220 | ||||
|
|
|||||||
Liabilities: |
|
|
|
|
|
|
||
Accounts payable and accrued liabilities | $ | 540 | $ | 517 | ||||
Deferred rent liability | 303 | 336 | ||||||
|
|
|||||||
Total liabilities | 843 | 853 | ||||||
Stockholders' equity: |
|
|
|
|
|
|
||
Common stock$0 par value; 10,000 shares authorized and 6,500 shares outstanding | | | ||||||
Additional paid-in capital | 128 | 128 | ||||||
Retained earnings | 4,574 | 2,239 | ||||||
|
|
|||||||
Total stockholders' equity | 4,702 | 2,367 | ||||||
|
|
|||||||
Total liabilities and stockholders' equity | $ | 5,545 | $ | 3,220 | ||||
|
|
See accompanying notes.
F-78
Douglas, Emmett and Company
Statements of Income
(In thousands)
|
Years Ended December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
|||||||
Service revenues: | ||||||||||
Real estate commissions | $ | 5,872 | $ | 6,391 | $ | 7,177 | ||||
Property management fees | 9,131 | 7,781 | 7,956 | |||||||
Service contract fees | 20,166 | 19,249 | 18,845 | |||||||
|
|
|
||||||||
Total service revenues | 35,169 | 33,421 | 33,978 | |||||||
Costs of services: |
|
|
|
|
|
|
|
|
|
|
Salaries, wages, benefits and other direct costs | 24,023 | 22,839 | 22,938 | |||||||
Selling, general and administrative expenses |
|
|
1,541 |
|
|
1,256 |
|
|
1,333 |
|
|
|
|
||||||||
Total expenses | 25,564 | 24,095 | 24,271 | |||||||
Interest and other income |
|
|
30 |
|
|
7 |
|
|
10 |
|
|
|
|
||||||||
Net income | $ | 9,635 | $ | 9,333 | $ | 9,717 | ||||
|
|
|
See accompanying notes.
F-79
Douglas, Emmett and Company
Statements of Stockholders Equity
(In thousands, except for share data)
|
Number of
Common Shares |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings |
Total
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, 2003 | 6,500 | $ | | $ | 128 | $ | 2,489 | $ | 2,617 | |||||||
Net income | | | | 9,717 | 9,717 | |||||||||||
Distributions | | | | (8,700 | ) | (8,700 | ) | |||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2003 | 6,500 | | 128 | 3,506 | 3,634 | |||||||||||
Net income | | | | 9,333 | 9,333 | |||||||||||
Distributions | | | | (10,600 | ) | (10,600 | ) | |||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2004 | 6,500 | | 128 | 2,239 | 2,367 | |||||||||||
Net income | | | | 9,635 | 9,635 | |||||||||||
Distributions | | | | (7,300 | ) | (7,300 | ) | |||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2005 | 6,500 | $ | | $ | 128 | $ | 4,574 | $ | 4,702 | |||||||
|
|
|
|
|
See accompanying notes.
F-80
Douglas, Emmett and Company
Statements of Cash Flows
(In thousands)
|
Years Ended December 31,
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
|||||||||
Operating activities | ||||||||||||
Net income | $ | 9,635 | $ | 9,333 | $ | 9,717 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 32 | 22 | 10 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivableaffiliated properties | (1,620 | ) | 117 | (301 | ) | |||||||
Other assets | (77 | ) | 78 | (90 | ) | |||||||
Accounts payable and other liabilities | 23 | 75 | 220 | |||||||||
Deferred rent liability | (33 | ) | 43 | 43 | ||||||||
|
|
|
||||||||||
Net cash provided by operating activities | 7,960 | 9,668 | 9,599 | |||||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
||
Additions to property and equipment | (38 | ) | (30 | ) | (31 | ) | ||||||
|
|
|
||||||||||
Net cash used in investing activities | (38 | ) | (30 | ) | (31 | ) | ||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
||
Dividends paid on common stock | (7,300 | ) | (10,600 | ) | (8,700 | ) | ||||||
|
|
|
||||||||||
Net cash used in financing activities | (7,300 | ) | (10,600 | ) | (8,700 | ) | ||||||
|
|
|
||||||||||
Net increase (decrease) in cash and cash equivalents |
|
|
622 |
|
|
(962 |
) |
|
868 |
|
||
Cash and cash equivalents at beginning of year | 776 | 1,738 | 870 | |||||||||
|
|
|
||||||||||
Cash and cash equivalents at end of year | $ | 1,398 | $ | 776 | $ | 1,738 | ||||||
|
|
|
See accompanying notes.
F-81
Douglas, Emmett and Company
Notes to Financial Statements
December 31, 2005
(In thousands)
1. Background
Douglas, Emmett and Company (the Company) is an S-Corporation, which is owned by four individuals (collectively, the Stockholders). The Company was formed in 1971 and is primarily engaged in providing leasing and management services to properties owned by limited partnerships in which the Stockholders directly or indirectly have general and limited partnership interests. As of December 31, 2005, the Company managed 46 office properties and eight multifamily properties (collectively, the Affiliated Properties).
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers short-term investments with remaining maturities of three months or less when purchased to be cash equivalents.
Property and Equipment
Office equipment and computer hardware costs are stated at cost, net of accumulated depreciation. Depreciation of office equipment and computer hardware costs are computed using the straight-line method over their estimated useful lives, ranging from three to seven years. The Company capitalizes expenditures that materially increase the life of the Company's assets and expenses the costs of maintenance and repairs.
Revenue Recognition
Real estate commissions relate to tenant leases at the Affiliated Properties and are generally recorded as income once the Company satisfies its obligations under the commission agreement. Terms and conditions of a commission agreement may include, but are not limited to, execution of a signed lease agreement and future contingencies including tenant occupancy, payment of a deposit or payment of a first month's rent (or a combination thereof). As some of these conditions are outside of the Company's control and are often not clearly defined, judgment must be exercised in determining when such required events have occurred in order to recognize revenue.
A typical commission agreement provides that the Company earns half of the lease commission upon the execution of the lease agreement by the tenant, while the remaining portion(s) of the lease commission is earned at a later date, usually upon tenant occupancy. The existence of any significant future contingencies, such as tenant occupancy, results in the delay of recognition of the corresponding revenue until such contingencies are satisfied. For example, if the Company does not earn all or a portion of the lease commission until the tenant pays its first month's rent, and the lease agreement
F-82
provides the tenant with a free rent period, the Company delays revenue recognition until rent is paid by the tenant.
Property management fees are generally based upon percentages of the rental cash receipts generated by the Affiliated Properties, ranging from 1.75% to 4.00%, and are recognized when earned under the provisions of the related management agreements.
Under the terms of service contracts, the Affiliated Properties will typically reimburse the Company for certain expenses, which are comprised primarily of employee salaries and related benefit costs. The amounts, which are to be reimbursed per the terms of the services contract, are recognized in the same period as the related expenses are incurred.
The lease commission agreements, property management agreements, and service contracts are terminable 30 days subsequent to receipt of written notification by either the Company or the owners of the Affiliated Properties.
Accounts ReceivableAffiliated Properties
Accounts receivableaffiliated properties consisted of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2005
|
2004
|
||||
Property management fees | $ | 786 | $ | 687 | ||
Property expense reimbursements | 5 | 11 | ||||
Leasing commissions | 12 | 59 | ||||
Salary and expense reimbursement | 3,129 | 1,555 | ||||
|
|
|||||
$ | 3,932 | $ | 2,312 | |||
|
|
3. Property and Equipment
Property and equipment consisted of the following:
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2005
|
2004
|
|||||
Computer hardware | $ | 64 | $ | 43 | |||
Office equipment | 64 | 47 | |||||
|
|
||||||
128 | 90 | ||||||
Less accumulated depreciation and amortization | (76 | ) | (44 | ) | |||
|
|
||||||
$ | 52 | $ | 46 | ||||
|
|
F-83
4. Other Assets
The following table summarizes the items included in other assets:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2005
|
2004
|
||||
Legal retainer | $ | 60 | $ | 60 | ||
Prepaid insurance and other | 103 | 26 | ||||
|
|
|||||
$ | 163 | $ | 86 | |||
|
|
Interest Income
Interest income was $30, $3 and $9 for the years ended December 31, 2005, 2004 and 2003, respectively, and has been included in other income in the accompanying statements of income.
Income Taxes
Under applicable federal and state income tax rules as an S-Corporation, the allocated share of net income or loss is reportable in the income tax returns of the Stockholders. Accordingly, no income tax provision is included in the accompanying financial statements other than the 1.5% tax due on taxable income of S-Corporations in the state of California, which has been included as a component of selling, general and administrative expenses.
5. Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate settlement of these actions will not have a material adverse effect on the Company's financial position and results of operations or cash flows.
Employee Retirement Savings Plan
The Company has a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code whereby the Company's employees may contribute a portion of their compensation to their respective retirement accounts, in an amount not to exceed the maximum allowed under the Internal Revenue Code. The Company has elected to provide discretionary profit-sharing contributions (subject to statutory limitations), which amounted to $280, $246 and $271 for the years ended December 31, 2005, 2004 and 2003, respectively. The contributions have been recorded in salaries, wages, benefits and other direct costs in the accompanying statements of income. Employees who participate in the plan are immediately vested in their contributions and are vested in the contributions of the Company over a five-year period. At December 31, 2005 and 2004, the Company recorded a liability of $280 and $246, respectively, for unfunded contributions.
F-84
Concentration of Credit Risk
The Company maintains cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Company believes that the risk is not significant.
6. Related Party Transactions
Noncancelable Operating Leases
The Company has a noncancelable operating lease obligation for office space with an affiliate in which the Stockholders have a general partnership interest. This lease expires on April 30, 2010, with two options to extend, provides for rent increases based on specific terms, and requires payments of the Company's share of property taxes, insurance and maintenance costs. For the years ended December 31, 2005, 2004 and 2003, the Company incurred rental expenses of $782,000, $782,000 and $782,000, respectively, which has been included in selling, general and administrative expenses in the accompanying statements of income.
Future minimum payments under this lease were as follows at December 31, 2005:
2006 | $ | 852 | |
2007 | 852 | ||
2008 | 852 | ||
2009 | 852 | ||
2010 | 284 | ||
|
|||
$ | 3,692 | ||
|
F-85
Douglas Emmett Single Asset Entities
Combined Statements of Revenues and Certain Expenses
(Unaudited and in thousands)
|
Three Months Ended March 31,
|
|||||||
---|---|---|---|---|---|---|---|---|
|
2006
|
2005
|
||||||
Revenues: | ||||||||
Office rental: | ||||||||
Rental revenues | $ | 1,960 | $ | 1,835 | ||||
Tenant recoveries | 96 | 75 | ||||||
Parking and other | 226 | 167 | ||||||
|
|
|||||||
Total office revenue | 2,282 | 2,077 | ||||||
Multifamily rental: |
|
|
|
|
|
|
||
Rental revenues | 568 | 532 | ||||||
Parking and other | 7 | 6 | ||||||
|
|
|||||||
Total multifamily revenue | 575 | 538 | ||||||
|
|
|||||||
Total revenues | 2,857 | 2,615 | ||||||
Certain expenses: |
|
|
|
|
|
|
||
Operating expenses | ||||||||
Office rental | 428 | 402 | ||||||
Multifamily rental | 88 | 71 | ||||||
Maintenance and management servicesaffiliates | 178 | 129 | ||||||
General and administrative | 122 | 78 | ||||||
|
|
|||||||
Total certain expenses | 816 | 680 | ||||||
|
|
|||||||
Revenues in excess of certain expenses | $ | 2,041 | $ | 1,935 | ||||
|
|
See accompanying notes.
F-86
Douglas Emmett Single Asset Entities
Notes to Combined Statements of Revenues and Certain Expenses
Three Months Ended March 31, 2006 and 2005
(Unaudited and in
thousands)
1. Basis of Presentation
The accompanying combined statements of revenues and certain expenses relate to the operations of eight properties (collectively, the Single Asset Entities). The following table provides information about the individual properties and their owners.
Property
|
Type
|
Location
|
General Partner/
Managing Member |
|||
---|---|---|---|---|---|---|
Barry Properties, Ltd. | Multifamily | Brentwood, CA | Aberdeen Properties LP | |||
Barrington Kiowa Properties | Multifamily | Brentwood, CA | Aberdeen Properties LP | |||
Kiowa Properties, Ltd. | Multifamily | Brentwood, CA | Aberdeen Properties LP | |||
Brentwood Court | Office | Brentwood, CA | Coral Realty LP and Offer Family Trust | |||
Owensmouth/Warner LLC | Land | Woodland Hills, CA | Coral Realty LP | |||
Brentwood-San Vicente Medical, Ltd. | Office | Brentwood, CA | Coral Realty LP | |||
San Vicente Plaza | Office | Brentwood, CA | EA Realty LP | |||
Brentwood Plaza | Office | Brentwood, CA | EA Realty LP |
The stockholders of Douglas Emmett Realty Advisors (DERA) directly or indirectly have general partnership and limited partnership interests in Aberdeen Properties LP, Coral Realty LP and EA Realty LP. Concurrent with the consummation of the initial public offering of the common stock of Douglas Emmett, Inc. (the Company), Aberdeen Properties LP, Coral Realty LP and EA Realty LP will contribute their ownership interests in the properties to the Company. Affiliates of the Single Asset Entities and DERA have historically provided maintenance and management services to the Single Asset Entities.
The accompanying combined statements of revenues and certain expenses relate to the Single Asset Entities and have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended. Accordingly, the combined statements are not representative of the actual operations for the years presented as revenues and certain operating expenses, which may not be directly attributable to the revenues and expenses expected to be incurred to the future operations of the Single Asset Entities, have been excluded. Such items include depreciation, amortization, management fees, interest expense and interest income.
All of the Single Asset Entities are under common management and their acquisition will be conditioned on a single event, consummation of the Company's initial public offering. Due to common management, and consistent with Accounting Research Bulletin 51, Consolidated Financial Statements , management views the eight Single Asset Entities on a combined basis.
Unaudited Interim Financial Information
The accompanying interim unaudited financial statements have been prepared by the Single Asset Entities' management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are
F-87
adequate to make the presentation not misleading. The unaudited combined statements of revenues and certain expenses for the three months ended March 31, 2006 and 2005, include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. The interim combined statements of revenues and certain expenses should be read in conjunction with the Single Asset Entities' audited combined statements of revenues and certain expenses for the year ended December 31, 2005, and notes thereto.
2. Principles of Combination
The combined financial statements include selected accounts of the Single Asset Entities as described in Note 1. All significant intercompany accounts and transactions have been eliminated in the combined statements of revenues and certain expenses.
3. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104 of the Securities and Exchange Commission, Revenue Recognition, (SAB 104), as amended. SAB 104 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed and determinable; and collectibility is reasonably assured. All leases are classified as operating leases. For all lease terms exceeding one year, rental income is recognized on a straight-line basis over the terms of the leases.
Multifamily units are leased under operating leases with typical terms of 12 months and such rental revenue is recognized monthly as tenants are billed. Multifamily leases are renewable upon consent of both the lessor and lessee on an annual or monthly basis.
Tenant reimbursements for real estate taxes, common area maintenance and other recoverable costs are recognized in the period that the expenses are incurred. Lease termination fees, which are included in parking and other revenue in the accompanying combined statements of revenues and certain expenses, are recognized when the related leases are canceled and the landlord has no continuing obligation to provide services to such former tenants.
Use of Estimates
Management has made a number of estimates and assumptions relating to the reporting and disclosure of revenues and certain expenses during the reporting periods to prepare the combined statements of revenues and certain expenses in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.
F-88
4. Minimum Future Lease Rentals
There are various lease agreements in place with tenants to lease space in the Single Asset Entities. As of March 31, 2006, the minimum future cash rents receivable under noncancelable operating leases in each of the next five years and thereafter are as follows:
April 1, 2006 to December 31, 2006 | $ | 4,841 | |
2007 | 6,061 | ||
2008 | 5,628 | ||
2009 | 5,096 | ||
2010 | 3,332 | ||
Thereafter | 5,710 | ||
|
|||
$ | 30,668 | ||
|
Leases generally require reimbursement of the tenant's proportional share of common area, real estate taxes and other operating expenses, which are excluded from the amounts above.
5. Tenant Concentrations
For each of the three months ended March 31, 2006 and 2005, one tenant represented 12% of the Single Asset Entities' total revenue.
6. Related-Party Transactions
An operating company that is owned by DERA's stockholders provides certain property maintenance and management services to the Single Asset Entities. For each of the three months ended March 31, 2006 and 2005, the operating company was reimbursed $178 and $129, respectively, for maintenance and management services incurred on behalf of the Single Asset Entities. The maintenance and management costs are included in maintenance and management servicesaffiliates.
7. Commitments and Contingencies
The Single Asset Entities are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate settlement of these actions will not have a material adverse effect on the Single Asset Entities' results of operations.
F-89
Report of Independent Registered Public Accounting Firm
The
Stockholders of
Douglas Emmett Realty Advisors, Inc. and Subsidiaries
We have audited the accompanying combined statements of revenues and certain expenses (as defined in Note 1) of Barry Properties, Ltd., Barrington/Kiowa Properties, Kiowa Properties, Ltd., Brentwood Court, Owensmouth/Warner LLC, Brentwood-San Vicente Medical, Ltd., San Vicente Plaza and Brentwood Plaza (collectively, the Single Asset Entities) for each of the three years in the period ended December 31, 2005. These combined statements of revenues and certain expenses are the responsibility of the Single Asset Entities' management. Our responsibility is to express an opinion on these combined statements of revenues and certain expenses based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined statements of revenues and certain expenses are free of material misstatement. We were not engaged to perform an audit of the Single Asset Entities' internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Single Asset Entities' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined statements of revenues and certain expenses, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined statements of revenues and certain expenses of the Single Asset Entities were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of Douglas Emmett, Inc. as described in Note 1, and are not intended to be a complete presentation of the revenues and expenses of Barry Properties, Ltd., Barrington/Kiowa Properties, Kiowa Properties, Ltd., Brentwood Court, Owensmouth/Warner LLC, Brentwood-San Vicente Medical Ltd., San Vicente Plaza and Brentwood Plaza.
In our opinion, the combined statements of revenues and certain expenses present fairly, in all material respects, the combined revenues and certain expenses, as defined above, of the Single Asset Entities for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP |
Los
Angeles, California
March 31, 2006
F-90
Douglas Emmett Single Asset Entities
Combined Statements of Revenues and Certain Expenses
(In thousands)
|
Years Ended December 31,
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2004
|
2003
|
||||||||
Revenues: | |||||||||||
Office rental: | |||||||||||
Rental revenues | $ | 7,328 | $ | 7,461 | $ | 6,889 | |||||
Tenant recoveries | 347 | 365 | 391 | ||||||||
Parking and other | 740 | 775 | 841 | ||||||||
|
|
|
|||||||||
Total office revenue | 8,415 | 8,601 | 8,121 | ||||||||
Multifamily rental: |
|
|
|
|
|
|
|
|
|
||
Rental revenues | 2,165 | 2,044 | 2,022 | ||||||||
Parking and other | 26 | 26 | 11 | ||||||||
|
|
|
|||||||||
Total multifamily revenue | 2,191 | 2,070 | 2,033 | ||||||||
|
|
|
|||||||||
Total revenues | 10,606 | 10,671 | 10,154 | ||||||||
Certain expenses: |
|
|
|
|
|
|
|
|
|
||
Operating expenses: | |||||||||||
Office rental | 1,839 | 1,647 | 1,603 | ||||||||
Multifamily rental | 299 | 349 | 349 | ||||||||
Maintenance and management servicesaffiliates | 592 | 539 | 543 | ||||||||
General and administrative | 313 | 235 | 232 | ||||||||
|
|
|
|||||||||
Total certain expenses | 3,043 | 2,770 | 2,727 | ||||||||
|
|
|
|||||||||
Revenues in excess of certain expenses | $ | 7,563 | $ | 7,901 | $ | 7,427 | |||||
|
|
|
See accompanying notes.
F-91
Douglas Emmett Single Asset Entities
Notes to Combined Statements of Revenues and Certain Expenses
Years Ended December 31, 2005, 2004 and 2003
(In thousands)
1. Basis of Presentation
The accompanying combined statements of revenues and certain expenses relate to the operations of eight properties (collectively, the Single Asset Entities). The following table provides information about the individual properties and their owners.
Property
|
Type
|
Location
|
General Partner/
Managing Member |
|||
---|---|---|---|---|---|---|
Barry Properties, Ltd. | Multifamily | Brentwood, CA | Aberdeen Properties LP | |||
Barrington Kiowa Properties | Multifamily | Brentwood, CA | Aberdeen Properties LP | |||
Kiowa Properties, Ltd. | Multifamily | Brentwood, CA | Aberdeen Properties LP | |||
Brentwood Court | Office | Brentwood, CA | Coral Realty LP and Offer Family Trust | |||
Owensmouth/Warner LLC | Land | Woodland Hills, CA | Coral Realty LP | |||
Brentwood-San Vicente Medical, Ltd. | Office | Brentwood, CA | Coral Realty LP | |||
San Vicente Plaza | Office | Brentwood, CA | EA Realty LP | |||
Brentwood Plaza | Office | Brentwood, CA | EA Realty LP |
The stockholders of Douglas Emmett Realty Advisors (DERA) directly or indirectly have general partnership and limited partnership interests in Aberdeen Properties LP, Coral Realty LP and EA Realty LP. Concurrent with the consummation of the initial public offering of the common stock of Douglas Emmett, Inc. (the Company), Aberdeen Properties LP, Coral Realty LP and EA Realty LP will contribute their ownership interests in the properties to the Company. Affiliates of the Single Asset Entities and DERA have historically provided maintenance and management services to the Single Asset Entities.
The accompanying combined statements of revenues and certain expenses relate to the Single Asset Entities and have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended. Accordingly, the combined statements are not representative of the actual operations for the years presented as revenues and certain operating expenses, which may not be directly attributable to the revenues and expenses expected to be incurred to the future operations of the Single Asset Entities, have been excluded. Such items include depreciation, amortization, management fees, interest expense and interest income.
All of the Single Asset Entities are under common management and their acquisition will be conditioned on a single event, consummation of the Company's initial public offering. Due to common management, and consistent with Accounting Research Bulletin 51, Consolidated Financial Statements , management views the eight Single Asset Entities on a combined basis.
2. Principles of Combination
The combined financial statements include selected accounts of the Single Asset Entities as described in Note 1. All significant intercompany accounts and transactions have been eliminated in the combined financial statements.
F-92
3. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104 of the Securities and Exchange Commission, Revenue Recognition, (SAB 104), as amended. SAB 104 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed and determinable; and collectibility is reasonably assured. All leases are classified as operating leases. For all lease terms exceeding one year, rental income is recognized on a straight-line basis over the terms of the leases.
Multifamily units are leased under operating leases with typical terms of 12 months and such rental revenue is recognized monthly as tenants are billed. Multifamily leases are renewable upon consent of both the lessor and lessee on an annual or monthly basis.
Tenant reimbursements for real estate taxes, common area maintenance and other recoverable costs are recognized in the period that the expenses are incurred. Lease termination fees, which are included in parking and other revenue in the accompanying combined statements of revenues and certain expenses, are recognized when the related leases are canceled and the landlord has no continuing obligation to provide services to such former tenants.
Use of Estimates
Management has made a number of estimates and assumptions relating to the reporting and disclosure of revenues and certain expenses during the reporting periods to prepare the combined statements of revenues and certain expenses in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.
4. Minimum Future Lease Rentals
There are various lease agreements in place with tenants to lease space in the Single Asset Entities. As of December 31, 2005, the minimum future cash rents receivable under noncancelable operating leases in each of the next five years and thereafter are as follows:
2006 | $ | 6,287 | |
2007 | 5,909 | ||
2008 | 5,470 | ||
2009 | 4,930 | ||
2010 | 3,159 | ||
Thereafter | 4,890 | ||
|
|||
$ | 30,645 | ||
|
Leases generally require reimbursement of the tenant's proportional share of common area, real estate taxes and other operating expenses, which are excluded from the amounts above.
F-93
5. Tenant Concentrations
For the years ended December 31, 2005 and 2004, one tenant represented 10% of the Single Asset Entities' total revenue. For the year ended December 31, 2003, no tenant exceeded 10% of the Single Asset Entities' total revenue.
6. Related-Party Transactions
An operating company that is owned by the Single Asset Entities' and DERA's stockholders provides certain property maintenance and management services to the Single Asset Entities. For the years ended December 31, 2005, 2004 and 2003, the operating company was reimbursed $592, $539 and $543, respectively, for maintenance and management services incurred on behalf of the Single Asset Entities. The maintenance and management costs are included in maintenance and management servicesaffiliates.
7. Commitments and Contingencies
The Single Asset Entities are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate settlement of these actions will not have a material adverse effect on the Single Asset Entities' results of operations.
F-94
Joint Bookrunning Managers | ||
Lehman Brothers |
Merrill Lynch & Co. |
Citigroup |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
The following table itemizes the fees and expenses incurred by us in connection with the issuance and registration of the securities being registered hereunder. All amounts shown are estimates except the Securities and Exchange Commission registration fee and NYSE listing fee.
SEC Registration Fee | $ | 135,355.00 | ||
National Association of Securities Dealers Fee | 75,500.00 | |||
Accounting Fees and Expenses | * | |||
Legal Fees and Expenses (other than Blue Sky) | * | |||
Blue Sky Fees and Expenses | * | |||
Printing Expenses | * | |||
NYSE Listing Fees | * | |||
Miscellaneous | * | |||
|
||||
Total | $ | * | ||
|
Item 32. Sales to Special Parties.
None.
Item 33. Recent Sales of Unregistered Securities.
Upon our formation on June 28, 2005, Dan A. Emmett was issued 50 shares of our common stock for total consideration of $50.00 in cash, and Jordan Kaplan was issued 50 shares of our common stock for total consideration of $50.00 in cash. The issuance of such shares was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act.
In connection with the formation transactions, shares of common stock and units of limited partnership in our operating partnership with an aggregate value of $ , assuming a price per share or unit at the mid-point of the range set forth on the cover page of the prospectus that forms a part of this registration statement, will be issued to certain persons transferring interests in our historical operating companies, the institutional funds, the investment funds and the single-asset entities to us in consideration of such transfer. All such persons made irrevocable elections to receive such securities in the formation transactions prior to the filing of this registration statement with the SEC. All of such persons are "accredited investors" as defined under Regulation D of the Securities Act. The issuance of such shares and units will be effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act.
In addition, upon consummation of this offering, stock options and LTIP units will be granted pursuant to our stock incentive plan to certain executive officers, the number of which will be based on a formula using the mid-point of the price range for this offering to be set forth on the cover page of the prospectus. All such executive officers irrevocably committed to accept such options and LTIP units prior to the filing of this Registration Statement and are "accredited investors" as defined under Regulation D of the Securities Act. The grants will be effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act.
II-1
Item 34. Indemnification of Directors and Officers.
The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law.
Our charter authorizes us, to the maximum extent that Maryland law in effect from time to time permits, to obligate us to indemnify any present or former director or officer or any individual who, while a director or officer of our company and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any such capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. Our bylaws obligate us, to the fullest extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:
Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of ours in any of the capacities described above and to any employee or agent of our company or a predecessor of our company.
The MGCL requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that:
II-2
However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses.
In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of:
Furthermore, our officers and directors are indemnified against specified liabilities by the underwriters, and the underwriters are indemnified against certain liabilities by us, under the purchase agreements relating to this offering. See "Underwriting."
We have entered into indemnification agreements with each of our executive officers and directors whereby we indemnify such executive officers and directors to the fullest extent permitted by Maryland law against all expenses and liabilities, subject to limited exceptions. These indemnification agreements also provide that upon an application for indemnity by an executive officer or director to a court of appropriate jurisdiction, such court may order us to indemnify such executive officer or director.
In addition, our directors and officers are indemnified for specified liabilities and expenses pursuant to the partnership agreement of Douglas Emmett Properties, LP, the partnership in which we serve as sole general partner.
Item 35. Treatment of Proceeds from Stock Being Registered.
None.
Item 36. Financial Statements and Exhibits.
(A) Financial Statements. See Index to Consolidated Financial Statements and the related notes thereto.
(B) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this registration statement on Form S-11:
Exhibits
|
|
|
---|---|---|
1.1* | Form of Underwriting Agreement. | |
3.1* | Form of Articles of Amendment and Restatement of Douglas Emmett, Inc. | |
3.2* | Form of Amended and Restated Bylaws of Douglas Emmett, Inc. | |
4.1* | Form of Certificate of Common Stock of Douglas Emmett, Inc. | |
5.1* | Opinion of Venable LLP, with respect to the legality of the shares being registered. | |
8.1* | Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to tax matters. | |
10.1* | Form of Agreement of Limited Partnership of Douglas Emmett Properties, LP. | |
10.2* | Amended and Restated Discount MBS Multifamily Note for $117,600,000 between Fannie Mae and Barrington Pacific, LLC, dated December 22, 2004. | |
II-3
10.3* | Amended and Restated Discount MBS Multifamily Note for $35,400,000 between Fannie Mae and Barrington Pacific, LLC, dated December 22, 2004. | |
10.4* | Amended and Restated Discount MBS Multifamily Note for $35,900,000 between Fannie Mae and Douglas Emmett Realty Fund 1998 (assumed by Shores Barrington LLC), dated December 22, 2004. | |
10.5* | Amended and Restated Discount MBS Multifamily Note for $104,100,000 between Fannie Mae and Douglas Emmett Realty Fund 1998 (assumed by Shores Barrington LLC), dated December 22, 2004. | |
10.6* | Discount MBS Multifamily Note for $75,000,000 between Fannie Mae and DEG Residential, LLC, dated January 14, 2005. | |
10.7 | Form of Registration Rights Agreement among Douglas Emmett, Inc. and the persons named therein. | |
10.8* | Form of Indemnification Agreement between Douglas Emmett, Inc. and its directors and officers. | |
10.9* | Form of Douglas Emmett, Inc. 2006 Stock Option and Incentive Plan. | |
10.10* | Form of Stock Option Agreement. | |
10.11* | Employment Agreement between Douglas Emmett, Inc. and Jordan Kaplan. | |
10.12* | Employment Agreement between Douglas Emmett, Inc. and Kenneth Panzer. | |
10.13* | Employment Agreement between Douglas Emmett, Inc. and William Kamer. | |
10.14 | Representation, Warranty and Indemnity Agreement among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Dan A. Emmett, Christopher Anderson, Jordan Kaplan and Kenneth Panzer, dated as of June 15, 2006. | |
10.15 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF Acquisition, LLC and Douglas Emmett Realty Fund, dated as of June 15, 2006. | |
10.16 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF No. 2 Acquisition, LLC and Douglas Emmett Realty Fund No. 2, dated as of June 15, 2006. | |
10.17 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1995 Acquisition, LLC and Douglas Emmett Realty Fund 1995, dated as of June 15, 2006. | |
10.18 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1996 Acquisition, LLC and Douglas Emmett Realty Fund 1996, dated as of June 15, 2006. | |
10.19 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1997 Acquisition, LLC and Douglas Emmett Realty Fund 1997, dated as of June 15, 2006. | |
10.20 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1998 Acquisition, LLC and Douglas Emmett Realty Fund 1998, dated as of June 15, 2006. | |
10.21 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 2000 Acquisition, LLC and Douglas Emmett Realty Fund 2000, dated as of June 15, 2006. | |
II-4
10.22 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 2002 Acquisition, LLC and Douglas Emmett Realty Fund 2002, dated as of June 15, 2006. | |
10.23 | Agreement and Plan of Merger among Douglas Emmett, Inc., DERF 2005 Acquisition, LLC, Douglas Emmett 2005 REIT, Inc. and Douglas Emmett Realty Fund 2005, dated as of June 15, 2006. | |
10.24 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Opp Fund Acquisition, LLC and The Opportunity Fund, dated as of June 15, 2006. | |
10.25 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Opp Fund 1995 Acquisition, LLC and The Opportunity Fund 1995, dated as of June 15, 2006. | |
10.26 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Opp Fund 1996 Acquisition, LLC and The Opportunity Fund 1996, dated as of June 15, 2006. | |
10.27 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Barry Acquisition, LLC and Barry Properties, Ltd., dated as of June 15, 2006. | |
10.28 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Kiowa Acquisition, LLC and Kiowa Properties, Ltd., dated as of June 15, 2006. | |
10.29 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Barrington/Kiowa Acquisition, LLC and Barrington/Kiowa Properties, dated as of June 15, 2006. | |
10.30 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, BSVM Acquisition, LLC and Brentwood-San Vicente Medical, Ltd., dated as of June 15, 2006. | |
10.31 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Brentwood Court Acquisition, LLC and Brentwood Court, dated as of June 15, 2006. | |
10.32 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Brentwood Plaza Acquisition, LLC and Brentwood Plaza, dated as of June 15, 2006. | |
10.33 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, San Vicente Plaza Acquisition, LLC and San Vicente Plaza, dated as of June 15, 2006. | |
10.34 | Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Owensmouth Acquisition, LLC and Owensmouth/Warner, LLC, dated as of June 15, 2006. | |
10.35 | Agreement and Plan of Merger among Douglas Emmett, Inc., DECO Acquisition, LLC, DERA Acquisition, LLC, Douglas, Emmett and Company and Douglas Emmett Realty Advisors, Inc., dated as of June 15, 2006. | |
10.36 | P.L.E. OP Contribution Agreement among Douglas Emmett Properties, LP, Douglas Emmett Realty Advisors, Inc. and the stockholders of P.L.E. Builders, Inc., dated as of June 15, 2006. | |
10.37 | REIT Contribution Agreement among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Douglas Emmett Realty Advisors, Inc., Aberdeen Properties, Coral Realty, EA Realty, New September, LLC and the contributors signatory thereto, dated as of June 15, 2006. | |
10.38 | HBRCT OP Contribution Agreement among Douglas Emmett Properties, LP, Douglas Emmett Realty Advisors and HBRCT LLC., dated as of June 15, 2006. | |
II-5
10.39 | Asset Contribution Agreement among Douglas Emmett, Inc., DERA Acquisition, LLC, DECO Acquisition, LLC, DERF 2005 Acquisition, LLC and Douglas Emmett Properties, LP, dated as of June 15, 2006. | |
21.1* | List of Subsidiaries of the Registrant. | |
23.1* | Consent of Venable LLP (included in Exhibit 5.1). | |
23.2* | Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1). | |
23.3 | Consent of Ernst & Young LLP. | |
23.4 | Consent of Eastdil Secured. | |
24.1 | Power of Attorney (included on the Signature Page). | |
99.1 | Consent of Victor J. Coleman. | |
99.2 | Consent of Thomas E. O'Hern. | |
99.3 | Consent of Dr. Andrea L. Rich. | |
99.4 | Consent of William Wilson III. |
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance under Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby further undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification of liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-6
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Santa Monica, state of California, on June 16, 2006.
DOUGLAS EMMETT, INC | |||
|
|
By: |
/s/ JORDAN KAPLAN |
Name: Jordan Kaplan
Title: Chief Executive Officer |
Each person whose signature appears below constitutes and appoints Dan Emmett and Jordan Kaplan, and each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (and to any registration statement filed pursuant to Rule 462 under the Securities Act of 1933), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
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|
|
|
|
|
/s/
JORDAN KAPLAN
Jordan Kaplan |
Chief Executive Officer, President and Director (Principal Executive Officer) | June 16, 2006 | ||
/s/ WILLIAM KAMER William Kamer |
|
Chief Financial Officer (Principal Financial Officer) |
|
June 16, 2006 |
/s/ BARBARA J. ORR Barbara J. Orr |
|
Chief Accounting Officer (Principal Accounting Officer) |
|
June 16, 2006 |
/s/ DAN A. EMMETT Dan A. Emmett |
|
Chairman of the Board of Directors |
|
June 16, 2006 |
II-7
Exhibits
|
|
|
---|---|---|
1.1* |
|
Form of Underwriting Agreement. |
3.1* |
|
Form of Articles of Amendment and Restatement of Douglas Emmett, Inc. |
3.2* |
|
Form of Amended and Restated Bylaws of Douglas Emmett, Inc. |
4.1* |
|
Form of Certificate of Common Stock of Douglas Emmett, Inc. |
5.1* |
|
Opinion of Venable LLP, with respect to the legality of the shares being registered. |
8.1* |
|
Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to tax matters. |
10.1* |
|
Form of Agreement of Limited Partnership of Douglas Emmett Properties, LP. |
10.2* |
|
Amended and Restated Discount MBS Multifamily Note for $117,600,000 between Fannie Mae and Barrington Pacific, LLC, dated December 22, 2004. |
10.3* |
|
Amended and Restated Discount MBS Multifamily Note for $35,400,000 between Fannie Mae and Barrington Pacific, LLC, dated December 22, 2004. |
10.4* |
|
Amended and Restated Discount MBS Multifamily Note for $35,900,000 between Fannie Mae and Douglas Emmett Realty Fund 1998 (assumed by Shores Barrington LLC), dated December 22, 2004. |
10.5* |
|
Amended and Restated Discount MBS Multifamily Note for $104,100,000 between Fannie Mae and Douglas Emmett Realty Fund 1998 (assumed by Shores Barrington LLC), dated December 22, 2004. |
10.6* |
|
Discount MBS Multifamily Note for $75,000,000 between Fannie Mae and DEG Residential, LLC, dated January 14, 2005. |
10.7 |
|
Form of Registration Rights Agreement among Douglas Emmett, Inc. and the persons named therein. |
10.8* |
|
Form of Indemnification Agreement between Douglas Emmett, Inc. and its directors and officers. |
10.9* |
|
Form of Douglas Emmett, Inc. 2006 Stock Option and Incentive Plan. |
10.10* |
|
Form of Stock Option Agreement. |
10.11* |
|
Employment Agreement between Douglas Emmett, Inc. and Jordan Kaplan. |
10.12* |
|
Employment Agreement between Douglas Emmett, Inc. and Kenneth Panzer. |
10.13* |
|
Employment Agreement between Douglas Emmett, Inc. and William Kamer. |
10.14 |
|
Representation, Warranty and Indemnity Agreement among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Dan A. Emmett, Christopher Anderson, Jordan Kaplan and Kenneth Panzer, dated as of June 15, 2006. |
10.15 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF Acquisition, LLC and Douglas Emmett Realty Fund, dated as of June 15, 2006. |
10.16 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF No. 2 Acquisition, LLC and Douglas Emmett Realty Fund No. 2, dated as of June 15, 2006. |
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10.17 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1995 Acquisition, LLC and Douglas Emmett Realty Fund 1995, dated as of June 15, 2006. |
10.18 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1996 Acquisition, LLC and Douglas Emmett Realty Fund 1996, dated as of June 15, 2006. |
10.19 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1997 Acquisition, LLC and Douglas Emmett Realty Fund 1997, dated as of June 15, 2006. |
10.20 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 1998 Acquisition, LLC and Douglas Emmett Realty Fund 1998, dated as of June 15, 2006. |
10.21 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 2000 Acquisition, LLC and Douglas Emmett Realty Fund 2000, dated as of June 15, 2006. |
10.22 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, DERF 2002 Acquisition, LLC and Douglas Emmett Realty Fund 2002, dated as of June 15, 2006. |
10.23 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., DERF 2005 Acquisition, LLC, Douglas Emmett 2005 REIT, Inc. and Douglas Emmett Realty Fund 2005, dated as of June 15, 2006. |
10.24 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Opp Fund Acquisition, LLC and The Opportunity Fund, dated as of June 15, 2006. |
10.25 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Opp Fund 1995 Acquisition, LLC and The Opportunity Fund 1995, dated as of June 15, 2006. |
10.26 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Opp Fund 1996 Acquisition, LLC and The Opportunity Fund 1996, dated as of June 15, 2006. |
10.27 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Barry Acquisition, LLC and Barry Properties, Ltd., dated as of June 15, 2006. |
10.28 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Kiowa Acquisition, LLC and Kiowa Properties, Ltd., dated as of June 15, 2006. |
10.29 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Barrington/Kiowa Acquisition, LLC and Barrington/Kiowa Properties, dated as of June 15, 2006. |
10.30 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, BSVM Acquisition, LLC and Brentwood-San Vicente Medical, Ltd., dated as of June 15, 2006. |
10.31 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Brentwood Court Acquisition, LLC and Brentwood Court, dated as of June 15, 2006. |
II-9
10.32 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Brentwood Plaza Acquisition, LLC and Brentwood Plaza, dated as of June 15, 2006. |
10.33 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, San Vicente Plaza Acquisition, LLC and San Vicente Plaza, dated as of June 15, 2006. |
10.34 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Owensmouth Acquisition, LLC and Owensmouth/Warner, LLC, dated as of June 15, 2006. |
10.35 |
|
Agreement and Plan of Merger among Douglas Emmett, Inc., DECO Acquisition, LLC, DERA Acquisition, LLC, Douglas, Emmett and Company and Douglas Emmett Realty Advisors, Inc., dated as of June 15, 2006. |
10.36 |
|
P.L.E. OP Contribution Agreement among Douglas Emmett Properties, LP, Douglas Emmett Realty Advisors, Inc. and the stockholders of P.L.E. Builders, Inc., dated as of June 15, 2006. |
10.37 |
|
REIT Contribution Agreement among Douglas Emmett, Inc., Douglas Emmett Properties, LP, Douglas Emmett Realty Advisors, Inc., Aberdeen Properties, Coral Realty, EA Realty, New September, LLC and the contributors signatory thereto, dated as of June 15, 2006. |
10.38 |
|
HBRCT OP Contribution Agreement among Douglas Emmett Properties, LP, Douglas Emmett Realty Advisors and HBRCT LLC, dated as of June 15, 2006. |
10.39 |
|
Asset Contribution Agreement among Douglas Emmett, Inc., DERA Acquisition, LLC, DECO Acquisition, LLC, DERF 2005 Acquisition, LLC and Douglas Emmett Properties, LP, dated as of June 15, 2006. |
21.1* |
|
List of Subsidiaries of the Registrant. |
23.1* |
|
Consent of Venable LLP (included in Exhibit 5.1). |
23.2* |
|
Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1). |
23.3 |
|
Consent of Ernst & Young LLP. |
23.4 |
|
Consent of Eastdil Secured. |
24.1 |
|
Power of Attorney (included on the Signature Page). |
99.1 |
|
Consent of Victor J. Coleman. |
99.2 |
|
Consent of Thomas E. O'Hern. |
99.3 |
|
Consent of Dr. Andrea L. Rich. |
99.4 |
|
Consent of William Wilson III. |
II-10
THIS REGISTRATION RIGHTS AGREEMENT is entered into as of [ ], 2006 by and among Douglas Emmett, Inc., a Maryland corporation (the " Company "), and the holders listed on Schedule I hereto (each an " Initial Holder " and, collectively, the " Initial Holders ").
RECITALS
WHEREAS, in connection with the initial public offering of shares of the Company's common stock, par value $.01 per share (the " Common Stock "), the Company and Douglas Emmett Properties, LP, a Delaware limited partnership (the " Operating Partnership "), have engaged in certain formation transactions (the " Formation Transactions "), pursuant to which the Initial Holders have received units of limited partnership interests (" OP Units ") in the Operating Partnership and/or shares of Common Stock for their respective interests in the entities participating in the Formation Transactions;
WHEREAS, pursuant to the Operating Partnership Agreement (defined below), OP Units will be redeemable for cash or, at the Company's option, exchangeable for shares of Common Stock of the Company upon the terms and subject to the conditions contained therein; and
WHEREAS, as a condition to receiving the consent of the Initial Holders to the Formation Transactions, the Company has agreed to grant the Initial Holders and their permitted assignees and transferees the registration rights set forth in Article II hereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
Section 1.1 Definitions. In addition to the definitions set forth above, the following terms, as used herein, have the following meanings:
" Affiliate " of any Person means any other Person directly or indirectly controlling or controlled by or under common control with such Person. For the purposes of this definition, "control" when used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing.
" Agreement " means this Registration Rights Agreement, as it may be amended, supplemented or restated from time to time.
" Business Day " means any day except a Saturday, Sunday or other day on which commercial banks in The City of New York, New York or Los Angeles, California are authorized by law to close.
" Charter " means the Articles of Amendment and Restatement of the Company as filed with the Secretary of State of the State of Maryland on [ ], 2006, as the same may be amended, modified or restated from time to time.
" Commission " means the Securities and Exchange Commission.
" Exchange Act " means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder.
" Exchangeable OP Units " means OP Units which may be redeemable for cash or, at the Company's option, exchangeable for shares of Common Stock pursuant to Section 15.1 of the
Operating Partnership Agreement (without regard to any limitations on the exercise of such exchange right as a result of the Ownership Limit Provisions).
" General Partner " means Douglas Emmett, LLC, a Delaware limited liability company, or its successors as general partner of the Operating Partnership.
" Holder " means any Initial Holder who is the record or beneficial owner of any Registrable Security or any assignee or transferee of such Initial Holder (including assignments or transfers of Registrable Securities to such assignees or transferees as a result of the foreclosure on any loans secured by such Registrable Securities) (x) to the extent permitted under the Operating Partnership Agreement or the Charter, as applicable, and (y) provided such assignee or transferee agrees in writing to be bound by all the provisions hereof, unless such owner, assignee or transferee acquires such Registrable Security in a public distribution pursuant to a registration statement under the Securities Act or pursuant to transactions exempt from registration under the Securities Act where securities sold in such transaction may be resold without subsequent registration under the Securities Act.
" Initial Period " means a period commencing on the date hereof and ending 365 days following the effective date of the first Resale Shelf Registration Statement (except that, if the shares of Common Stock issuable upon exchange of Exchangeable OP Units received in the Formation Transactions are not included in that Resale Shelf Registration Statement as a result of Section 2.1(b)), the 365 days shall not begin until the later of the effective date of (i) the first Resale Shelf Registration Statement and (ii) the first Issuer Shelf Registration Statement.
" Issuer Shelf Registration Statement " has the meaning set forth in Section 2.1(b).
" Notice and Questionnaire " means a written notice, substantially in the form attached as Exhibit A , delivered by a Holder to the Company (i) notifying the Company of such Holder's desire to include Registrable Securities held by it in a Resale Shelf Registration Statement, (ii) containing all information about such Holder required to be included in such registration statement in accordance with applicable law, including Item 507 of Regulation S-K promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto, and (iii) pursuant to which such Holder agrees to bound by the terms and conditions hereof.
" Ownership Limit Provisions " mean the various provisions of the Company's Charter set forth in Article VI thereof restricting the ownership of Common Stock by Persons to specified percentages of the outstanding Common Stock.
" Operating Partnership Agreement " means the Agreement of Limited Partnership of the Operating Partnership dated as of , 2006, as the same may be amended, modified or restated from time to time.
" Person " means an individual or a corporation, partnership, limited liability company, association, trust, or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.
" Registrable Securities " means with respect to any Holder shares of Common Stock at any time owned, either of record or beneficially, by such Holder and (a) received in the Formation Transactions or (b) issued or issuable upon exchange of Exchangeable OP Units received in the Formation Transactions, and, in the case of (a) and (b), any additional shares of Common Stock issued as a dividend, distribution or exchange for, or in respect of such shares (including as a result of combinations, recapitalizations, mergers, consolidations, reorganizations or otherwise) until (i) a registration statement (including a Resale Shelf Registration Statement) covering such shares has been declared effective by the Commission and such shares have been disposed of pursuant to such effective registration statement or unless such shares (other than Restricted
2
Shares) were issued pursuant to an effective registration statement (including an Issuer Shelf Registration Statement), (ii) such shares have been publicly sold under Rule 144; (iii) all such shares may be sold pursuant to Rule 144(k), (iv) such shares may be sold pursuant to Rule 144 and could be sold in one transaction in accordance with the volume limitations contained in Rule 144(e)(l)(i), or (v) such shares have been otherwise transferred in a transaction that constitutes a sale thereof under the Securities Act, the Company has delivered a new certificate or other evidence of ownership for such shares not bearing the Securities Act restricted stock legend and such shares may be resold without subsequent registration under the Securities Act.
" Resale Shelf Registration " shall have the meaning set forth in Section 2.1(a).
" Resale Shelf Registration Statement " shall have the meaning set forth in Section 2.1(a).
" Restricted Shares " means shares of Common Stock issued under an Issuer Shelf Registration Statement which if sold by the holder thereof would constitute "restricted securities" as defined under Rule 144.
" Rule 144 " means Rule 144 promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto that may be promulgated by the Commission.
" Securities Act " means the Securities Act of 1933, as amended and the rules and regulations promulgated thereunder.
" Selling Holder " means a Holder who is selling Registrable Securities pursuant to a Resale Shelf Registration Statement under the Securities Act.
" Shelf Registration Statement " means a Resale Shelf Registration Statement and/or an Issuer Shelf Registration Statement.
" Suspension Notice " means any written notice delivered by the Company pursuant to Section 2.11 with respect to the suspension of rights under a Resale Shelf Registration Statement or any prospectus contained therein.
" Underwriter " means a securities dealer who purchases any Registrable Securities as principal and not as part of such dealer's market-making activities.
ARTICLE II
REGISTRATION RIGHTS
Section 2.1 Shelf Registration.
(a) Subject to Section 2.11, the Company shall prepare and file not later than fourteen (14) months after the consummation date of the Company's initial public offering, a "shelf" registration statement with respect to the resale of the Registrable Securities (" Resale Shelf Registration ") by the Holders thereof on an appropriate form for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act (the " Resale Shelf Registration Statement ") and permitting registration of such Registrable Securities for resale by such Holders in accordance with the methods of distribution elected by the Holders and set forth in the Resale Shelf Registration Statement. The Company shall use its reasonable efforts to cause the Resale Shelf Registration Statement to be declared effective by the Commission as promptly as reasonably practicable after the filing thereof, and, subject to Sections 2.1(d) and 2.11, to keep such Resale Shelf Registration Statement continuously effective for a period ending when all shares of Common Stock covered by the Resale Shelf Registration Statement are no longer Registrable Securities.
At the time the Resale Shelf Registration Statement is declared effective, each Holder that has delivered a duly completed and executed Notice and Questionnaire to the Company on or prior to the date ten (10) Business Days prior to such time of effectiveness shall be named as a
3
selling securityholder in the Resale Shelf Registration Statement and the related prospectus in such a manner as to permit such Holder to deliver such prospectus to purchasers of Registrable Securities in accordance with applicable law. If required by applicable law, subject to the terms and conditions hereof, after effectiveness of the Resale Shelf Registration Statement, the Company shall file a supplement to such prospectus or amendment to the Resale Shelf Registration Statement not less than once a quarter as necessary to name as selling securityholders therein any Holders that provide to the Company a duly completed and executed Notice and Questionnaire and shall use reasonable efforts to cause any post-effective amendment to such Resale Shelf Registration Statement filed for such purpose to be declared effective by the Commission as promptly as reasonably practicable after the filing thereof.
(b) The Company may, at its option, satisfy its obligation to prepare and file a Resale Shelf Registration Statement pursuant to Section 2.1(a) with respect to shares of Common Stock issuable upon exchange of Exchangeable OP Units received in the Formation Transactions by preparing and filing with the Commission a registration statement on an appropriate form for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act (an " Issuer Shelf Registration Statement ") providing for the issuance by the Company, from time to time, to the Holders of such Exchangeable OP Units shares of Common Stock registered under the Securities Act (the " Primary Shares ") in lieu of the Operating Partnership's obligation to pay cash for such Exchangeable OP Units. The Company shall use its reasonable efforts to cause the Issuer Shelf Registration Statement to be declared effective by the Commission as promptly as reasonably practicable after filing thereof. The Company shall use reasonable efforts, subject to Sections 2.1(d) and 2.11, to keep the Issuer Shelf Registration Statement continuously effective for a period (the " Effectiveness Period ") expiring on the date all of the shares of Common Stock covered by such Issuer Shelf Registration Statement have been issued by the Company pursuant thereto. If the Company shall exercise its rights under this Section 2.1(b), Holders (other than Holders of Restricted Shares) shall have no right to have shares of Common Stock issued or issuable upon exchange of Exchangeable OP Units included in a Resale Shelf Registration Statement pursuant to Section 2.1(a).
(c) Underwritten Resale Shelf Registration Statement. Any offering under a Resale Shelf Registration Statement shall be underwritten at the written request of Holders of Registrable Securities under such registration statement that hold in the aggregate at least 5% of the Registrable Securities; provided that the Company shall not be obligated to effect more than two underwritten offerings hereunder; provided , further , that the Company shall not be obligated to effect, or take any action to effect, an underwritten offering (i) within 120 days following the last date on which an underwritten offering was effected pursuant to this Section 2.1(c) or if longer, the length of any lock-up required by the underwriters in the prior underwritten offering, or (ii) during the period commencing with the date thirty (30) days prior to the Company's good faith estimate of the date of filing of (provided the Company is actively employed in good faith commercially reasonable efforts to file such registration statement), and ending on a date ninety (90) days after the effective date of, a registration statement with respect to an offering by the Company. Any request for an underwritten offering hereunder shall be made to the Company in accordance with the notice provisions of this Agreement.
(d) Subsequent Filing. The Company shall prepare and file such additional registration statements as necessary every three (3) years and use its reasonable efforts to cause such registration statements to be declared effective by the Commission so that a shelf registration statement remains continuously effective, subject to Section 2.11, with respect to resales of Registrable Securities as and for the periods required under Section 2.1(a) or (b), as applicable, such subsequent registration statements to constitute a Issuer Shelf Registration Statement or a Resale Shelf Registration Statement, as the case may be, hereunder.
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(e) Selling Holders Become Party to Agreement. Each Holder acknowledges that by participating in its registration rights pursuant to this Agreement, such Holder will be deemed a party to this Agreement and will be bound by its terms, notwithstanding such Holder's failure to deliver a Notice and Questionnaire; provided, that any Holder that has not delivered a duly completed and executed Notice and Questionnaire shall not be entitled to be named as a Selling Holder in, or have the Registrable Securities held by it covered by, a Resale Shelf Registration Statement.
Section 2.2
Reduction of Offering.
Notwithstanding anything contained herein, if the managing
Underwriter or Underwriters of an offering described in Section 2.1(c) advise in writing the Company
and the Holder(s) of the Registrable Securities included in such offering that the size of the intended offering is such that the success of the offering would be materially and adversely affected by
inclusion of all the Registrable Securities requested to be included, then the amount of securities to be offered for the accounts of Holders shall be reduced
pro
rata
(according to the Registrable Securities requested for inclusion) to the extent necessary to reduce the total amount of securities to be included in such offering to the
amount recommended by such managing Underwriter or Underwriters but in priority to any securities proposed to be sold by the Company for its own account or any other holders of securities of the
Company with registration rights to participate therein.
Section 2.3
Registration Procedures; Filings; Information.
Subject to Section 2.11 hereof, in
connection with any Resale Shelf Registration Statement under Section 2.1(a), the Company will use its reasonable efforts to
effect the registration of the Registrable Securities covered thereby in accordance with the intended method of disposition thereof as quickly as practicable, and, in connection with any Issuer Shelf
Registration Statement under Section 2.1(b), the Company will use its reasonable efforts to effect the registration of the Primary Shares as quickly as reasonably practicable. In connection with any
Shelf Registration Statement:
(a) The Company will, if requested, prior to filing a Resale Shelf Registration Statement or prospectus or any amendment or supplement thereto, furnish to each Selling Holder and each Underwriter, if any, of the Registrable Securities covered by such registration statement copies of such registration statement as proposed to be filed, and thereafter furnish to such Selling Holder and Underwriter, if any, such number of conformed copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Selling Holder or Underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Selling Holder.
(b) After the filing of a Resale Shelf Registration Statement, the Company will promptly notify each Selling Holder of Registrable Securities covered by such registration statement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered.
(c) The Company will use its reasonable efforts to (i) register or qualify the Registrable Securities under such other securities or "blue sky" laws of such jurisdictions in the United States (where an exemption does not apply) as any Selling Holder or managing Underwriter(s), if any, reasonably (in light of such Selling Holder's intended plan of distribution) requests and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable such Selling Holder to consummate the disposition of the Registrable Securities owned by such Selling Holder; provided that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (c), (B)
5
subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction.
(d) The Company will immediately notify each Selling Holder of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of (i) the Company's receipt of any notification of the suspension of the qualification of any Registrable Securities covered by a Resale Shelf Registration Statement for sale in any jurisdiction; or (ii) the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and promptly make available to each Selling Holder any such supplement or amendment.
(e) The Company will otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder (or any successor rule or regulation hereafter adopted by the Commission).
(f) In the case of an underwritten offering pursuant to a Resale Shelf Registration Statement, the Company will enter into and perform its obligations under customary agreements (including an underwriting agreement, if any, in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities (including, to the extent reasonably requested by the lead or managing underwriters, sending appropriate officers of the Company to attend "road shows" scheduled in reasonable number and at reasonable times in connection with any such underwritten offering with all out-of-pocket costs and expenses incurred by the Company or such officers in connection with such attendance to be paid by the Company) subject to such underwritten offering.
(g) In the case of an underwritten offering pursuant to a Resale Shelf Registration Statement, the Company will make available for inspection by any Selling Holder of Registrable Securities subject to such underwritten offering, any Underwriter participating in any disposition of such Registrable Securities and any attorney, accountant or other professional retained by any such Selling Holder or Underwriter, all financial and other records, pertinent corporate documents and properties of the Company (collectively, the " Records ") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement, subject to entry by each such customary confidentiality agreement in a form reasonably acceptable to the Company.
(h) The Company will use its reasonable efforts to cause all Registrable Securities covered by such Resale Shelf Registration Statement or Primary Shares covered by such Issuer Shelf Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed.
(i) In addition to the Notice and Questionnaire, the Company may require each Selling Holder of Registrable Securities to promptly furnish in writing to the Company such information regarding such selling Holder, the Registrable Securities held by it and the intended method of distribution of the Registrable Securities as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration. No Holder may include Registrable Securities in any registration statement pursuant to this
6
Agreement unless and until such Holder has furnished to the Company such information. Each Holder further agrees to furnish as soon as reasonably practicable to the Company all information required to be disclosed in order to make information previously furnished to the Company by such Holder not materially misleading.
(j) Each Selling Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2.2(b) or 2.2(d) or upon receipt of a Suspension Notice, such Selling Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Selling Holder's receipt of written notice from the Company that such disposition may be made and, in the case of clause (ii) of Section 2.2(d) or, if applicable, Section 2.11, copies of any supplemented or amended prospectus contemplated by clause (ii) of Section 2.2(d) or, if applicable, prepared under Section 2.11, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies, other than permanent file copies then in such Selling Holder's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. Each Selling Holder of Registrable Securities agrees that it will immediately notify the Company at any time when a prospectus relating to the registration of such Registrable Securities is required to be delivered under the Securities Act of the happening of an event as a result of which information previously furnished by such Selling Holder to the Company in writing for inclusion in such prospectus contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made.
Section 2.4
Registration Expenses.
In connection with any registration statement required to be filed
hereunder, the Company shall pay the following registration expenses incurred in connection
with the registration hereunder (the "
Registration Expenses
"): (i) all registration and filing fees, (ii) fees and expenses of compliance with
securities or "blue sky" laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) internal
expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred in connection with the
listing of the Registrable Securities, (vi) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the
Company, and (vii) the reasonable fees and expenses of any special experts retained by the Company in connection with such registration. The Company shall have no obligation to pay any fees, discounts
or commissions attributable to the sale of Registrable Securities, or any out-of-pocket expenses of the Holders (or the agents who manage their accounts) or any transfer taxes relating to the
registration or sale of the Registrable Securities.
Section 2.5
Indemnification by the Company.
The Company agrees to indemnify and hold harmless each
Selling Holder of Registrable Securities, its officers, directors and agents, and each Person, if any, who
controls such Selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities that arise
out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or
supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or that arise out of or are based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages or liabilities arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission included in reliance upon and in conformity with
information furnished in writing to the Company by such Selling Holder or on such Selling Holder's behalf expressly for inclusion therein.
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Section 2.6
Indemnification by Holders of Registrable Securities.
Each Selling Holder agrees,
severally but not jointly, to indemnify and hold harmless the Company, its officers, directors and agents and each Person, if any, who
controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Selling
Holder, but only with respect to information relating to such Selling Holder included in reliance upon and in conformity with information furnished in writing by such Selling Holder or on such Selling
Holder's behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus. In case any
action or proceeding shall be brought against the Company or its officers, directors or agents or any such controlling person, in respect of which indemnity may be sought against such Selling Holder,
such Selling Holder shall have the rights and duties given to the Company, and the Company or its officers, directors or agents or such controlling person shall have the rights and duties given to
such Selling Holder, by Section 2.6;
provided
,
however
, that the obligations of such Selling Holder
hereunder will be limited to an amount equal to the net proceeds to such Selling Holder (after deducting any discounts and commissions) from the disposition of Registrable Securities pursuant to such
registration.
Section 2.7
Conduct of Indemnification Proceedings.
In case any proceeding (including any
governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to
Section 2.4 or 2.5, such person (an "
Indemnified Party
") shall promptly notify the person against whom such indemnity may be sought (an
"
Indemnifying Party
") in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses; provided, however, that the failure of any Indemnified Party to give such notice will not relieve such
Indemnified Party of any obligations under this Section 2, except to the extent such Indemnified Party is materially prejudiced by such failure. In any such proceeding, any Indemnified Party shall
have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall
have mutually agreed to the retention of such counsel or (ii) representation of the Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and the Indemnified Party. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties,
and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by (i) in the
case of Persons indemnified pursuant to Section 2.4 hereof, the Selling Holders which owned a majority of the Registrable Securities sold under the applicable registration statement and (ii) in the
case of Persons indemnified pursuant to Section 2.5, the Company. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, which consent
shall not be unreasonably withheld, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified
Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. No Indemnifying Party shall, without the prior written consent of the Indemnified
Party, which consent shall not be unreasonably withheld, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such
proceeding.
Section 2.8
Contribution.
If the indemnification provided for in Section 2.5 or 2.6 hereof is
unavailable to an Indemnified Party or insufficient in respect of any losses, claims, damages
or liabilities referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party,
8
shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the Company and of each Selling Holder in connection with such statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 2.8 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.8, no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the securities of such Selling Holder were sold to the public exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Selling Holder's obligations to contribute pursuant to this Section 2.8 are several in proportion to the proceeds of the offering received by such Selling Holder bears to the total proceeds of the offering received by all the Selling Holders and not joint.
Section 2.9
Rule 144.
The Company covenants that it will (a) make and keep public information
regarding the Company available as those terms are defined in Rule 144, (b) file in a
timely manner any reports and documents required to be filed by it under the Securities Act and the Exchange Act , (c) furnish to any Holder forthwith upon request (i) a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 (at any time more than 90 days after the effective date of the registration statement for the Company's initial public
offering), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), and (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (d) take such further action as any Holder may reasonably request, all to the extent required from time to time to enable
Holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.
Section 2.10
Participation in Underwritten Offerings.
No Person may participate in any underwritten
offerings hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such underwriting arrangements and these registration rights provided for in this Article II.
Section 2.11
Suspension of Use of Registration Statement
.
(a) If the Board of Directors of the Company determines in its good faith judgment that the filing of a Resale Shelf Registration Statement under Section 2.1(a) or the use of any related prospectus would be materially detrimental to the Company because such action would require the disclosure of material information that the Company has a bona fide business purpose for
9
preserving as confidential or the disclosure of which would materially impede the Company's ability to consummate a significant transaction, and that the Company is not otherwise required by applicable securities laws or regulations to disclose, upon written notice of such determination by the Company to the Holders which shall be signed by the Chief Executive Officer, President or any Executive Vice President of the Company certifying thereto, the rights of the Holders to offer, sell or distribute any Registrable Securities pursuant to a Resale Shelf Registration or to require the Company to take action with respect to the registration or sale of any Registrable Securities pursuant to a Resale Shelf Registration Statement shall be suspended until the earliest of (i) the date upon which the Company notifies the Holders in writing that suspension of such rights for the grounds set forth in this Section 2.11(a) is no longer necessary and they may resume use of the applicable prospectus, (ii) the date upon which copies of the applicable supplemented or amended prospectus is distributed to the Holders, and (iii) (x) up to 30 consecutive days after the notice to the Holders if that notice is given during the Initial Period or (y) 90 consecutive days after the notice to the Holders if that notice is given after the Initial Period; provided , that the Company shall not be entitled to exercise any such right more than two (2) times in any twelve month period or less than 30 days from the termination of the prior such suspension period; and provided further , that such exercise shall not prevent the Holders from being entitled to at least 320 days of effective registration with respect to such registration statement during each Initial Period and thereafter 210 days of effective registration with respect to such registration statement in any 365-day period. The Company agrees to give the notice under (i) above as promptly as practicable following the date that such suspension of rights is no longer necessary.
(b) If all reports required to be filed by the Company pursuant to the Exchange Act have not been filed by the required date without regard to any extension, or if the consummation of any business combination by the Company has occurred or is probable for purposes of Rule 3-05 or Article 11 of Regulation S-X promulgated under the Securities Act or any similar successor rule, upon written notice thereof by the Company to the Holders, the rights of the Holders to offer, sell or distribute any Registrable Securities pursuant to a Resale Shelf Registration Statement or to require the Company to take action with respect to the registration or sale of any Registrable Securities pursuant to a Resale Shelf Registration Statement shall be suspended until the date on which the Company has filed such reports or obtained and filed the financial information required by Rule 3-05 or Article 11 of Regulation S-X to be included or incorporated by reference, as applicable, in a Resale Shelf Registration Statement, and the Company shall notify the Holders as promptly as practicable when such suspension is no longer required.
Section 2.12
Additional Shares.
The Company, at its option, may register under a Shelf Registration
Statement and any filings with any state securities commissions filed pursuant to this
Agreement, any number of unissued shares of Common Stock or any shares of Common Stock owned by any other stockholder or stockholders of the Company.
Section 3.1 Remedies. In addition to being entitled to exercise all rights provided herein and granted by law, including recovery of damages, the Holders shall be entitled to specific performance of the rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.
Section 3.2
Amendments and Waivers.
The provisions of this Agreement, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, in each case without the written consent of the
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Company and the Holders of a majority of the Registrable Securities (with Holders of Exchangeable OP Units deemed to be Holders, for purposes of this Section, of the number of shares of Common Stock into which such Exchangeable OP Units would be exchangeable for as of the date on which consent is requested); provided , however , that the effect of any such amendment will be that the consenting Holders will not be treated more favorably than all other Holders (without regard to any differences in effect that such amendment or waiver may have on the Holders due to the differing amounts of Registrable Shares held by such Holders). No failure or delay by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon any breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.
Section 3.3
Notices.
All notices and other communications in connection with this Agreement shall be
made in writing by hand delivery, registered first-class mail, telecopier, or air
courier guaranteeing overnight delivery:
(1) if to any Holder, initially to the address indicated in such Holder's Notice and Questionnaire or, if no Notice and Questionnaire has been delivered, c/o Douglas Emmett, Inc., 808 Wilshire Boulevard, Suite 200, Santa Monica, California 90401, Attention: Chief Executive Officer, or to such other address and to such other Persons as any Holder may hereafter specify in writing ; and
(2) if to the Company, initially at 808 Wilshire Boulevard, Suite 200, Santa Monica, California 90401, Attention: Chief Executive Officer, or to such other address as the Company may hereafter specify in writing.
All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when received if deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery.
Section 3.4
Successors and Assigns; Assignment of Registration Rights.
This Agreement shall inure to
the benefit of and be binding upon the successors, assigns and transferees of each of the parties. Any Holder may assign its rights
under this Agreement without the consent of the Company in connection with a transfer of such Holder's Registrable Securities;
provided
, that the Holder
notifies the Company of such proposed transfer and assignment and the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Agreement.
Section 3.5
Counterparts.
This Agreement may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall be deemed to
be an original and all of which taken together shall constitute one and the same agreement. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.
Section 3.6
Governing Law.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York, including, without limitation, Section 5-1401 of
the New York General Obligations Law.
Section 3.7
Severability.
In the event that any one or more of the provisions contained herein, or
the application thereof in any circumstance, is held invalid, illegal or unenforceable,
the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.
Section 3.8
Entire Agreement.
This Agreement is intended by the parties as a final expression of
their agreement and intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein
with
11
respect to the registration rights granted by the Company with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.
Section 3.9
Headings.
The headings in this Agreement are for convenience of reference only and shall
not limit or otherwise affect the meaning hereof.
Section 3.10
Termination.
The obligations of the parties hereunder shall terminate with respect to a
Holder when it no longer holds Registerable Securities and with respect to the Company
upon the end of the Effectiveness Period with respect to any Issuer Shelf Registration Statement and with respect to Resale Shelf Registration Statement when there are no longer Registrable Securities
with respect to a Resale Shelf Registration Statement, except, in each case, for any obligations under Sections 2.1(d), 2.4, 2.5, 2.6, 2.7, 2.8 and Article III.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
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HOLDERS LISTED ON SCHEDULE I HERETO DOUGLAS EMMETT REALTY ADVISORS |
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By: |
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Name: Title: As Attorney-in-Fact acting on behalf of each of the Holders named on Schedule I hereto |
Schedule I
[LIST OF HOLDERS]
Exhibit A
Form of Notice and Questionnaire
REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT
This REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT is made and entered into as of June 15, 2006 (this " Agreement ") and is effective as of the Closing Date (as defined below), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), and Douglas Emmett Properties, LP, a Delaware limited partnership and subsidiary of the REIT (the " Operating Partnership ", and collectively with the REIT, the " Consolidated Entities ") on the one hand, and the individuals listed on the signature page hereto on the other hand (such individuals collectively, the " Principals ").
WHEREAS, through a series of merger agreements and contribution agreements dated as of even date herewith between (i) certain institutional funds (the " DERA Funds ") for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner, (ii) certain single asset entities managed by Affiliates of DERA (the " Single Asset Entities ") and (iii) DERA, Douglas, Emmett and Company, a California corporation, and P.L.E. Builders, Inc., a California corporation (collectively, the " Management Companies " and, together with the DERA Funds and the Single Assets Entities, the " Douglas Emmett Entities ") (the acquisitions of the Douglas Emmett Entities are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests in all of the Douglas Emmett Entities immediately prior to the Formation Transactions; and the " Formation Transaction Documentation " is all of the merger and contribution agreements under which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions), the Operating Partnership is acquiring, directly and through subsidiaries, the ownership of a portfolio of office, residential and other properties and certain operating assets currently owned, directly or indirectly, by the Douglas Emmett Entities. The Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share, of the REIT (the " REIT Shares ");
WHEREAS, pursuant to the Formation Transaction Documentation, the Consolidated Entities will be paying a combination of cash, without interest, units of limited partnership in the Operating Partnership (" OP Units "), REIT Shares, or any combination of the foregoing to the Pre-Formation Participants for their equity interests in the Douglas Emmett Entities;
WHEREAS, the Principals are the sole stockholders of the Management Companies and directly or indirectly own interests in certain of the other Douglas Emmett Entities;
WHEREAS, in order to induce the Consolidated Entities to enter into the Formation Transaction Documentation, the Principals have agreed to provide certain representations, warranties and indemnities as set forth herein; and
WHEREAS, the Principals have agreed to deposit REIT Shares and/or OP Units with an aggregate value on the Closing Date equal to $20.0 million (collectively, the " Indemnity Holdback Amount ") into an " Indemnity Holdback Escrow " pursuant to the " Escrow Agreement " attached as Exhibit A hereto with the " Escrow Agent " (as defined therein) in order to provide the exclusive remedy for any breaches of this Agreement. Each OP Unit and REIT Share so deposited shall be valued at the initial public offering price of a REIT Share in the IPO (the " IPO Price ").
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
REPRESENTATION AND WARRANTIES
Except as disclosed in the Prospectus, each of the Principals hereby jointly and severally represents and warrants to the Consolidated Entities that as of the Closing Date:
Section 1.01
ORGANIZATION; AUTHORITY.
(a) Each of the Douglas Emmett Entities has been duly organized and is validly existing under the laws of its jurisdiction of organization and has all requisite power and authority to enter into each agreement or other document contemplated by the Formation Transaction Documentation and to carry out the transactions contemplated thereby, and to own, lease and/or operate each of its Fund Properties and to carry on its business as presently conducted. Each such Douglas Emmett Entity and each of its Subsidiaries, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Fund Properties make such qualification necessary, other than such failures to be so qualified as would not, individually or in the aggregate, reasonably be expected have a Material Adverse Effect.
(b) The appropriate schedules attached to the Formation Transaction Documentation set forth as of the date hereof with respect to each Douglas Emmett Entity (i) each Subsidiary of such Douglas Emmett Entity, (ii) the ownership interest therein of such Douglas Emmett Entity, (iii) if not wholly owned by such Douglas Emmett Entity, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each Fund Property owned or leased pursuant to a ground lease by such Douglas Emmett Entity or such Subsidiary. Each Subsidiary of each Douglas Emmett Entity has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Fund Properties and to carry on its business as presently conducted. Each Subsidiary of each Douglas Emmett Entity, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Fund Properties make such qualification necessary, other than such failures to be so qualified as would not, individually or in the aggregate, reasonably be expected have a Material Adverse Effect.
Section 1.02
DUE AUTHORIZATION.
The execution, delivery and performance by each Douglas Emmett Entity of each agreement or other document contemplated by the Formation Transaction Documentation to which it is a party
have been duly and validly authorized by all necessary actions required of such Douglas Emmett Entity. Each agreement, document and instrument contemplated by the Formation Transaction Documentation
and executed and delivered by or on behalf of each Douglas Emmett Entity constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of such Douglas Emmett
Entity, each enforceable against such Douglas Emmett Entity in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights
and general principles of equity.
Section 1.03
CAPITALIZATION.
The appropriate schedules attached to the Formation Transaction Documentation set forth as of the date hereof the ownership of each Douglas Emmett Entity. All of the issued and
outstanding equity interests of such Douglas Emmett Entity are validly issued (other than the Profits Interests in respect of any Douglas Emmett Entity, if applicable, where the concept of valid
issuance is not applicable) and, to the Principals' Knowledge, are not subject to preemptive rights.
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Section 1.04
LICENSES AND PERMITS.
To the Principals' Knowledge, all notices, licenses, permits, certificates and authorizations required for the continued use, occupancy, management, leasing and operation of the Fund
Properties have been obtained or can be obtained without material cost, are in full force and effect, are in good standing and (to the extent required in connection with the transactions contemplated
by the Formation Transaction Documentation) are assignable to the Operating Partnership, except in each case for items that would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect. To the Principals' Knowledge, no Douglas Emmett Entity or any of their Subsidiaries nor any third party has taken any action that (or failed to take any action the omission
of which) would result in the revocation of any such notice, license, permit, certificate or authorization where such revocation or revocations would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect, nor has any of them received any written notice of violation from any Governmental Authority or written notice of the intention of any entity to revoke any
of them, that in each case has not been cured or otherwise resolved to the satisfaction of such Governmental Authority and that would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
Section 1.05
LITIGATION.
Except for actions, suits or proceedings covered by the policies of insurance described in Section 1.07(a), to the Principals' Knowledge, there is no action, suit or proceeding
pending or threatened against any Douglas Emmett Entity or any of their Subsidiaries which, if adversely determined, would, individually or together with all such other actions, reasonably be expected
to have a Material Adverse Effect. To the Principals' Knowledge, there is no action, suit or proceeding pending or, threatened against any Douglas Emmett Entity or any of their Subsidiaries which
challenges or impairs the ability of the Douglas Emmett Entities to execute or deliver, or perform its obligations under any of the Formation Transaction Documentation or to consummate the
transactions contemplated hereby and thereby.
Section 1.06
COMPLIANCE WITH LAWS.
To the Principals' Knowledge, the Douglas Emmett Entities and the Subsidiaries have conducted their business in compliance with all applicable Laws, except for such failures that would
not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. To the Principal's Knowledge, no Douglas Emmett Entity or any of the Subsidiaries nor any third party
has been informed in writing of any continuing violation of any such Laws or that any investigation has been commenced and is continuing or is contemplated respecting any such possible violation,
except in each case for violations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(a) Each applicable Douglas Emmett Entity or Subsidiary set forth on Schedule 1.07(a) is insured under a policy of title insurance as the owner of, and, to the Principals' Knowledge, the applicable Douglas Emmett Entity or Subsidiary is the owner of, the fee simple estate (or, in the case of certain Fund Properties, the leasehold estate) to the Douglas Emmett Entity's Fund Property identified on Schedule 1.07(a) as being owned by the applicable Douglas Emmett Entity or Subsidiary, in each case free and clear of all Liens except for Permitted Liens and Liens, if any, given to secure mortgage indebtedness encumbering such Fund Property. Prior to the effective time of the mergers contemplated in the Formation Transaction Documentation, no Douglas Emmett Entity or Subsidiary shall take or omit to take any action to cause any Lien to attach to any Fund Property, except for Permitted Liens and Liens, if any, given to secure mortgage Indebtedness encumbering such Fund Property
(b) Except for matters that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, to the Principals' Knowledge, (1) none of the Douglas Emmett Entities, any of their Subsidiaries, nor any other party to any agreement affecting any Fund Property (other than a Lease (as such term is hereinafter defined) for space within such
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Fund Property), has given or received any notice of default with respect to any term or condition of any such agreement, including, without limitation, any ground lease, (2) no event has occurred or has been threatened in writing, which with or without the passage of time or the giving of notice, or both, would, individually or together with all such other events, constitute a default under any such agreement, or would, individually or together with all such other events, reasonably be expected to cause the acceleration of any material obligation of any party thereto or the creation of a Lien upon any asset of any Douglas Emmett Entity or any of their Subsidiaries, except for Permitted Liens, and (3) all agreements affecting any Fund Property required for the continued use, occupancy, management, leasing and operation of such Fund Property (exclusive of space Leases) are valid and binding and in full force and effect.
(c) To the Principals' Knowledge, as presently conducted, none of the operation of the buildings, fixtures and other improvements comprising a part of the Fund Properties are in violation of any applicable building code, zoning ordinance or other law or regulation, except for such violations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(d) Except for matters that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (1) to the Principals' Knowledge, no Douglas Emmett Entity or any of their Subsidiaries, nor any other party to any Lease, has given or received any notice of default with respect to any term or condition of any such Lease, (2) to the Principals' Knowledge, no event has occurred or has been threatened in writing, which with or without the passage of time or the giving of notice, or both, would, individually or together with all such other events, constitute a default under any Lease, or would, individually or together with all such other events, reasonably be expected to cause the acceleration of any material obligation of any party thereto or the creation of a Lien upon any asset of the Douglas Emmett Entities or any of their Subsidiaries, except for Permitted Liens, and (3) each of the leases (and all amendments thereto or modifications thereof) to which any Douglas Emmett Entity or any of their Subsidiaries is a party or by which any Douglas Emmett Entity or any of their Subsidiaries or any Fund Property is bound or subject (collectively, the " Leases ") is and will be valid and binding and in full force and effect.
Section 1.08
INSURANCE.
The applicable Douglas Emmett Entity or Subsidiary has in place the public liability, casualty and other insurance coverage with respect to each Fund Property as the Principals
reasonably deem necessary. Each of the insurance policies with respect to the Fund Properties is in full force and effect and all premiums due and payable thereunder have been fully paid when due. To
the Principals' Knowledge, no Douglas Emmett Entity nor any Subsidiary has received from any insurance company any notices of cancellation or intent to cancel any insurance.
Section 1.09
ENVIRONMENTAL MATTERS.
Except for matters that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, to the Principals' Knowledge, (A) the Douglas Emmett
Entities and their Subsidiaries are in compliance with all Environmental Laws (B) neither the Douglas Emmett Entities nor their Subsidiaries have received any written notice from any
Governmental Authority or third party alleging that any Douglas Emmett Entity, any of their Subsidiaries or any Fund Property is not in compliance with applicable Environmental Laws, and
(C) there has not been a release of a hazardous substance on any Fund Property that would require investigation or remediation under applicable Environmental Laws. The representations and
warranties contained in this Section 1.06 constitute the sole and exclusive representations and warranties made by the Principals concerning environmental matters.
Section 1.10
EMINENT DOMAIN.
There is no existing or, to the Principals' Knowledge, proposed or threatened condemnation, eminent domain or similar proceeding, or private purchase in lieu of such a proceeding which
would affect any of the Fund Properties, except for such proceedings that would not have a Material Adverse Effect.
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Section 1.11
FINANCIAL STATEMENTS.
The financial statements of the Douglas Emmett Entities included in the Prospectus have been prepared in all material respects in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto), subject, in the case of unaudited statements, to normal year-end audit
adjustments.
Section 1.12
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any
applicable Laws is required to be obtained by any Douglas Emmett Entity or Subsidiary in connection with the execution, delivery and performance of any of the agreements or documents contemplated by
the Formation Transaction Documentation to which such Douglas Emmett Entity is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals,
authorizations or filings, the failure of which to obtain or to file would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 1.13
NO VIOLATION.
None of the execution, delivery or performance by any Douglas Emmett Entity of any agreement or document contemplated by the Formation Transaction Documentation to which it is a party
and the transactions contemplated hereby and thereby does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default
under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of any Douglas Emmett Entity or Subsidiary, (B) any
agreement, document or instrument to which any Douglas Emmett Entity or Subsidiary or any of their respective assets or properties are bound or (C) any term or provision of any judgment, order,
writ, injunction, or decree binding on any Douglas Emmett Entity or Subsidiary, except for, in the case of clause (B) or (C), any such breaches or defaults that would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 1.14
TAXES.
To the Principals' Knowledge, and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (i) each Douglas Emmett Entity
and Subsidiary has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and
all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for
any Taxes have been proposed, asserted or assessed against any Douglas Emmett Entity or Subsidiary, and no requests for waivers of the time to assess any such Taxes are pending.
Section 1.15
NON-FOREIGN STATUS.
None of the Douglas Emmett Entities is a foreign person (as defined in the Code) and none is, therefore, subject to the provisions of the Code relating to the withholding of sales or
exchange proceeds to foreign persons.
ARTICLE II
NATURE OF REPRESENTATIONS AND WARRANTIES
Section 2.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with Section 4.02 has been given prior to the Expiration Date, then the relevant representation or warranty shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived.
Section 2.02
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in Article I, the Principals shall not be deemed to
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have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
ARTICLE III
INDEMNITY HOLDBACK ESCROW
Section 3.01 ESTABLISHMENT. On the Closing Date, each Principal shall deposit his Individual Percentage of the Indemnity Holdback Amount into the Indemnity Holdback Escrow in the form of REIT Shares and/or OP Units at such Principal's election, each such security to be valued at the IPO Price. A separate " Participant Account " within the Indemnity Holdback Escrow will be established and maintained for each Principal consisting of (i) the type and amount of the Indemnity Holdback Amount from that Principal deposited with respect to that Principal plus (ii) any earnings, dividends, distributions, interest and gains earned or realized (" Earnings ") on the Indemnity Holdback Amount for that Participant Account and minus (iii) any distributions charged to that Participant Account. The list of Participant Accounts, the associated Principal and the amounts and types of consideration being deposited into each is attached as Schedule I to the Escrow Agreement. As provided in the Escrow Agreement, most Earnings with respect to the Indemnity Holdback Amount will be promptly distributed to the Principals.
Section 4.01 INDEMNIFICATION OF CONSOLIDATED ENTITIES. The Consolidated Entities and their Affiliates and each of their respective directors, officers, employees, agents and representatives (each of which is an " Indemnified Party ") shall be indemnified and held harmless, under the terms and conditions of this Agreement out of the Indemnity Holdback Escrow, from and against any and all Losses in excess of $1,000,000 arising out of or relating to, asserted against, imposed upon or incurred by the Indemnified Party in connection with or as a result of any breach of a representation or warranty of any Principal contained in this Agreement; provided , that the directors, officers and employees of the Consolidated Entities shall be indemnified hereunder only in their capacities as such and not individually. No Indemnified Party (other than the Consolidated Entities) may make a claim hereunder without the prior written consent of the REIT.
(a) At the time when the Consolidated Entities learn of any potential claim under this Agreement (an " Escrow Claim ") against any Principal, it will promptly give written notice (a " Claim Notice ") to the Principals and to the Escrow Agent; provided that failure to so notify the Principals or the Escrow Agent shall not prevent recovery under this Agreement, except to the extent that any Principal shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Indemnified Party giving rise to such Escrow Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. The Indemnified Party shall deliver to the Principals, promptly after the Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnified Party relating to a Third Party Claim (as defined below); provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that a Principal shall have been materially prejudiced by such failure. Any Indemnified Party may at its option demand indemnity under this Article IV as soon as an Escrow Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Indemnified Party shall in good faith determine that such claim is not frivolous and that the Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
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(b) Any payment made from the Indemnity Holdback Escrow in respect of an Escrow Claim will be allocated among all Participant Accounts pro rata in accordance with the Individual Percentages. In determining value for allocation or distribution, each OP Unit and REIT Share shall be valued at the IPO Price. Within any Participant Account, any Escrow Claim will first be allocated to any OP Units and then to any REIT Shares. If the Escrow Agent is restrained, enjoined or stayed by law or court order from withdrawing assets from a Participant Account, the amount which would have been drawn from such Participant Account shall be allocated pro rata among and withdrawn from the remaining Participant Accounts involved as to which the Escrow Agent is not so restrained, enjoined or stayed. If the Escrow Agent ceases to be so restrained, enjoined or stayed, then, to the extent practicable, any Participant Account from which an additional amount was withdrawn under the prior sentence shall be credited, pro rata, with the amount of such withdrawal through a deduction from the Participant Account that was the subject of such restraint, injunction or stay.
(c) The Principals shall be entitled, at their own expense, to elect in accordance with Section 4.06 below, to assume and control the defense of any Escrow Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the Principals, if they give written notice of their intention to do so to the Consolidated Entities within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Indemnified Parties may at all times participate in such defense at their own expense. Without limiting the foregoing, in the event that the Principals exercise the right to undertake any such defense against a Third Party Claim, the Indemnified Party shall cooperate with the Principals in such defense and make available to the Principals, at the Principals' expense, all witnesses, pertinent records, materials and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as is reasonably required by the Principals. No compromise or settlement of such Third Party Claim may be effected by either the Indemnified Party, on the one hand, or the Principals, on the other hand, without the other party's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Indemnified Party that is party to such claim is released from all liability with respect to such claim.
Section 4.03
DELIVERY AND RELEASE OF INDEMNITY ESCROW WITH RESPECT TO CLAIMS.
Upon resolution of any Escrow Claim or portion of an Escrow Claim as evidenced by a written instruction of the Operating Partnership, in which an officer of the Operating Partnership
certifies that the instruction has been approved by either (x) the Principals in accordance with Section 4.06 or (y) a final award of an arbitral tribunal in accordance with this
Agreement, the Escrow Agent shall release the amount and type of Indemnity Holdback Amount specified therein, and shall charge such amount to the Participant Accounts as set forth therein. Upon any
disbursement pursuant to this Agreement, the Consolidated Entities will purchase (at a price per REIT Share or OP Unit, as applicable, equal to the IPO Price) such number of the securities as will
permit the Escrow Agent to distribute cash in lieu of any fractional shares.
Section 4.04
DELIVERY AND RELEASE OF INDEMNITY ESCROW AFTER EXPIRATION DATE.
Within 10 days after the Expiration Date, and at the end of each calendar quarter thereafter while any Indemnity Holdback Amount remains in the Indemnity Holdback Escrow, the
Consolidated Entities shall deliver to the Escrow Agent a notice which shall set forth (i) a list of outstanding Escrow Claims, together with a good faith estimate of the maximum value
(expressed in dollars) of each such Escrow Claim and the aggregate amount of such values that would be allocated against each Participant Account in accordance with Section 4.02(b) if the
actual amount of Losses in respect of each such Escrow Claim were equal to such good faith estimate of the maximum value thereof and (ii) shall instruct the Escrow Agent to release to each
Principal any consideration in such Principal's Participant Account in excess of the aggregate value allocated to such Participant Account in accordance with the immediately preceding
clause (i).
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Section 4.05
EXCLUSIVE REMEDY.
The sole and exclusive remedy for Indemnified Parties with respect to any and all claims relating to a breach of this Agreement (other than breaches arising out of or in connection with
fraud) shall be recovery from the Indemnity Holdback Escrow in accordance with the terms of this Agreement and the Escrow Agreement. The Principals shall not be liable or obligated to make payments
under this Agreement to the extent such payments in the aggregate exceed the Indemnity Holdback Amount. In furtherance of the foregoing, each of the Consolidated Entities hereby waives, to the fullest
extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto
arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Agreement.
Section 4.06
AUTHORIZATION.
For purposes of this Article IV, a decision, act, consent, election or instruction of the Principals shall be deemed to be authorized if approved by a majority of the Principals,
and the Escrow Agent and Consolidated Entities may rely upon any decision, act, consent or instruction of such majority as provided in this Section 4.06 as being the decision, act, consent or
instruction of each Principal. The Escrow Agent and the Consolidated Entities, including their respective directors, officers, employees, agents and representatives, are hereby relieved from any
liability to any person for any acts done by them in accordance with such decision, act, consent or instruction. The Principals may from time to time by written notice to the Consolidated Entities
appoint a representative or representatives to exercise such powers with respect to one or more claims as may be delegated by the Principals.
Section 4.07
INDEMNITY PAYMENTS.
All indemnity payments made hereunder shall be treated as adjustments to the consideration paid under the Formation Transaction Documentation for United States federal income tax
purposes.
Section 5.01 NOTICES. All notices and other communications under this Agreement after the closing shall be in writing and shall be deemed given when (i) delivered personally, (ii) five Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to any Principal, to:
c/o
Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
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Section 5.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(b) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(c) " Closing Date " means the closing date of the IPO.
(d) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(e) " Environmental Laws " means all federal, state and local Laws governing pollution or the protection of human health or the environment.
(f) " Fund Properties " means the office, residential or other property owned or leased pursuant to a ground lease by any Douglas Emmett Entity or any Subsidiary.
(g) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(h) " Individual Percentages " means the percentages set forth next to each Principal's name on Exhibit B.
(i) " Knowledge " means the actual current knowledge of Dan A. Emmett, Jordan Kaplan, Kenneth M. Panzer, William Kamer and Barbara Orr, without duty of investigation or inquiry.
(j) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(k) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(l) " Losses " means charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds, but does not include any diminution in value of the Consolidated Entities except in the case of breaches of Section 1.08.
(m) " Material Adverse Effect " means a material adverse effect on the REIT and the Fund Properties taken as a whole.
(n) " Permitted Liens " means (i) Liens, or deposits made to secure the release of such Liens, securing Taxes, the payment of which is not delinquent or the payment of which is actively being contested in good faith by appropriate proceedings diligently pursued; (ii) zoning Laws generally applicable to the districts in which Fund Properties are located; (iii) easements for public utilities, encroachments, rights of access or other non-monetary matters that do not materially interfere with the use of the Fund Properties; (iv) Liens securing financing or credit arrangements existing
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as of the Closing Date; (v) Liens arising under leases entered into in the ordinary course of business; (vi) any exceptions contained in the title policies relating to the Fund Properties as of the Closing Date; and (vii) any matters that would not have a Material Adverse Effect.
(o) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(p) " Prospectus " means the REIT's final prospectus as filed with the Securities and Exchange Commission.
(q) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(r) " Subsidiary " means any corporation, partnership, limited liability company, joint venture, trust or other legal entity which a Douglas Emmett Entity owns (either directly or through or together with another Subsidiary) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity. As used herein, "Subsidiary" or "Subsidiaries" refers to the Subsidiaries of the Douglas Emmett Entities, or an applicable Douglas Emmett Entity, as applicable, as set forth on Schedule 5.02, unless the context otherwise requires.
(s) " Tax " means all federal, state, local and foreign income, withholding, property, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
Section 5.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 5.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement and the Escrow Agreement, including, without limitation, the exhibits hereto and thereto, constitute the entire agreement and supersede each prior agreement and
understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the
parties hereto.
Section 5.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 5.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns;
provided, however,
that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the
other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations
hereunder to an Affiliate.
Section 5.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles (collectively, the
"
California Courts
"), with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would
have subject matter jurisdiction with respect to such dispute, and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it
is not subject personally to the jurisdiction of the above-named courts, that its
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property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 5.08
DISPUTE RESOLUTION.
The parties intend that this Section 5.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to clause (c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to clause (a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The parties hereto shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If an arbitrator is not appointed within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the
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arbitrator, and the fees, costs and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 5.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 5.10
RULES OF CONSTRUCTION
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 5.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the
Douglas Emmett Entities and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the
Operating Partnership is entitled under this Agreement or otherwise at law or in equity.
Section 5.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing Date, each of the parties hereto expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby
waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such
specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 5.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
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Section 5.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 5.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT or the Operating
Partnership in their capacities as such.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
CONSOLIDATED ENTITIES | ||||
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DOUGLAS EMMETT, INC. |
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By: |
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/s/ JORDAN KAPLAN |
Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
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Douglas Emmett, LLC |
Its General Partner | ||||
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By: |
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Douglas Emmett, Inc. |
Its Sole Member | ||||
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By: |
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/s/ JORDAN KAPLAN |
Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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PRINCIPALS |
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/s/ DAN A. EMMETT Dan A. Emmett |
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/s/ CHRISTOPHER ANDERSON Christopher Anderson |
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/s/ JORDAN KAPLAN Jordan Kaplan |
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/s/ KENNETH M. PANZER Kenneth M. Panzer |
Exhibit A : Form of Escrow Agreement
Exhibit B : Individual Percentages
This INDEMNITY ESCROW AGREEMENT (this " Agreement "), dated as of June 15, 2006, is made by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership (the " Operating Partnership " and collectively with the REIT, the " Consolidated Entities "), and the REIT, acting in the capacity of escrow agent (the " Escrow Agent "). Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Indemnity Agreement (as defined below).
WHEREAS, the REIT, the Operating Partnership and the Principals are parties to that certain Representation, Warranty and Indemnity Agreement, dated as of , 2006 and effective as of even date herewith (the " Indemnity Agreement ");
WHEREAS, the Indemnity Agreement contains, among other things, representations and warranties of the Principals and indemnities with respect thereto, and contemplate the deposit of the Indemnity Holdback Amount into an Indemnity Holdback Escrow;
WHEREAS, the indemnification procedures governing the indemnification obligations of each Principal are set forth in the Indemnity Agreement; and
WHEREAS, the parties wish to establish the Indemnity Holdback Escrow pursuant to this Agreement, and the Escrow Agent has agreed to hold and to release the Indemnity Holdback Amount (as increased by any interest and other earnings thereon and as reduced by any disbursements hereunder, the " Escrow Fund ") pursuant to the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows:
1.
ESCROW FUND.
In accordance with the Indemnity Agreement, the Principals have deposited the Indemnity Holdback Amount (consisting of REIT Shares and OP Units) in escrow with the Escrow Agent as of the
date hereof;
provided
, that in no event shall REIT Shares received by the Principals as a result of the merger of Douglas Emmett 2005 REIT, Inc.
with and into a subsidiary of the REIT constitute a portion of the Indemnity Holdback Amount. OP Units and REIT Shares constituting any portion of the Indemnity Holdback Amount and any other
securities received by the Escrow Agent in respect thereof are referred to herein as "
Escrow Securities
". A separate
"
Participant Account
" within the Indemnity Holdback Escrow will be established and maintained for each Principal, consisting of (i) the type and
amount of the Indemnity Holdback Amount from that Principal deposited with respect to that Principal plus (ii) any earnings, dividends, distributions, interest and gains earned or realized
("
Earnings
") on the Escrow Fund for that Participant Account and minus (iii) any distributions charged to that Participant Account. The list of
Participant Accounts, the associated Principal and the amounts and types of consideration being deposited into each as of the establishment of the Indemnity Holdback Escrow is attached as Annex A
hereto.
2.
INVESTMENT.
Escrow Agent shall promptly invest any cash portion of the Escrow Fund not being disbursed,
provided
that such investments
(i) shall be obligations of or guaranteed by the United States of America, in commercial paper obligations receiving the highest rating from either Moody's Investors Services, Inc. or
Standard & Poor's Corporation, or in certificates of deposit, bank repurchase agreements or bankers acceptances of domestic commercial banks with equity capital exceeding $500,000,000
(collectively "
Permitted Investments
") or in money market funds which are invested solely in Permitted Investments and (ii) shall have maturities
that will not prevent or delay payments to be made pursuant to this Agreement and the Indemnity Agreement.
3.
EARNINGS.
Notwithstanding anything herein to the contrary, all dividends and distributions in respect of the Escrow Securities, whether in cash, additional OP Units or REIT Shares (including
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but not limited to REIT Shares received with respect to a dividend reinvestment plan) or other property received by the Escrow Agent shall not be part of the Escrow Fund, shall be property of the Principals and shall be distributed currently to the Principals; provided , that stock dividends made to effect stock splits or similar events in respect of any Escrow Securities shall be retained by the Escrow Agent as part of the Escrow Fund and credited proportionately to the Participant Accounts to which the Escrow Securities are credited. In the event any Escrow Securities are reclassified or otherwise changed into or exchanged for other securities, property or cash pursuant to any merger, consolidation, sale of assets and liquidation or other transaction, the securities, cash or other property received by the Escrow Agent in respect of the Escrow Securities shall be retained by it as part of the Escrow Fund and credited proportionately to the Participant Accounts to which the Escrow Securities are credited. The provisions of this Section 3 shall apply to successive distributions. Such stock dividends so made or any securities, property or cash so reclassified or exchanged in respect of an OP Unit or a REIT Share shall be valued in the aggregate at the IPO Price, and any such successive stock dividends, reclassifications or exchanges shall be similarly valued.
4.
VOTING.
Each Principal shall have the right to vote all Escrow Securities credited to such Principal's Participant Account. The Escrow Agent will forward to each Principal all notices of
shareholders' meetings, proxy statements and reports to shareholders received by the Escrow Agent in respect of (x) Escrow Securities in the Participation Account or (y) that Principal,
and will either (i) vote the Escrow Securities credited to such Principal's Participation Account only in accordance with written instructions received from such Principal, or
(ii) forward to such Principal a signed proxy (with power of substitution) enabling the Principal to vote such Escrow Securities.
5.
DISBURSEMENTS OF ESCROW FUND.
From time to time, the Escrow Agent shall disburse all or part of the Escrow Fund in accordance with any written instruction from the REIT or the Operating Partnership (which shall
include the amounts of each form of consideration to be disbursed, the person(s) to whom the disbursement is to be made, and the amount to be deducted from each Participant Account),
provided
that an
officer of the REIT or the Operating Partnership certifies that such disbursement instructions (i) have been approved in
accordance with Section 4.03 of the Indemnity Agreement, or (ii) represent a distribution to the Principals in accordance with Section 4.04 of the Indemnity Agreement.
6.
TERMINATION OF ESCROW FUND.
Upon distribution of the entire amount of the Escrow Fund, the Indemnity Holdback Escrow shall terminate, and the Escrow Agent shall give the Consolidated Entities notice to such effect.
7.
LIABILITY AND COMPENSATION OF ESCROW AGENT.
(a) The duties and obligations of the Escrow Agent hereunder shall be determined solely by the express provisions of this Agreement, and no implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall, in determining its duties hereunder, be under no obligation to refer to any other documents between or among the parties related in any way to this Agreement (except to the extent that this Agreement specifically refers to or incorporates by reference provisions of any other document, including the Indemnity Agreement). The Consolidated Entities shall indemnify and hold the Escrow Agent harmless from and against any and all liability and expense which may arise out of any action taken or omitted by the Escrow Agent, except such liability and expense as may result from the gross negligence or willful misconduct of the Escrow Agent. The reasonable costs and expenses of the Escrow Agent to enforce its indemnification rights under this Section 7(a) shall also be paid by the Consolidated Entities. Notwithstanding the foregoing, in the event that any liability, cost or expense referred to in the preceding two sentences arises as a result of any actual or threatened complaint, suit, claim or other action brought by or on behalf of any Principal, any payments in respect of indemnification or expense or cost reimbursement therefore shall be satisfied first out of the
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Escrow Fund and, only if the amounts in the Escrow Fund are insufficient to satisfy such indemnification and reimbursement payments, thereafter by the Consolidated Entities. Any such indemnification or reimbursement payment from the Escrow Fund shall be made in accordance with the payment and allocation provisions of the Indemnity Agreement as if such payment were made in respect of an indemnification claim by an Indemnified Party; provided, however , that if any such payment would result in the distribution to the Escrow Agent of OP Units or REIT Shares, the Consolidated Entities shall, prior to such distribution, purchase from the Escrow Fund at the IPO Price such OP Units and/or REIT Shares as is necessary for the Escrow Fund to have sufficient cash to make such payment to the Escrow Agent solely in cash. None of the Consolidated Entities nor any other person or entity shall have any obligation to replace in the Escrow Fund any amounts paid therefrom to the Escrow Agent in accordance with this Section 7. The Escrow Agent's indemnification rights under this Section 7 shall survive the termination of this Agreement and removal or resignation of the Escrow Agent. With respect to any claims or actions against the Escrow Agent which are indemnified by the Consolidated Entities under this Section 7, the Consolidated Entities shall have the right to retain sole control over the defense, settlement, investigation and preparation related to such claims or actions; provided, that (i) the Escrow Agent may employ its own counsel to defend such a claim or action if it reasonably concludes, based on the advice of counsel, that there are defenses available to it which are different from or additional to those available to the Operating Partnership, and (ii) neither the Operating Partnership or the Escrow Agent shall settle or compromise any such claim or action without the consent of the other, which consent shall not be unreasonably withheld or delayed.
(b) The Escrow Agent shall not be liable to any person by reason of any error of judgment or for any act done or step taken or omitted by it, or for any mistake of fact or law or anything which it may do or refrain from doing in connection herewith, unless caused by or arising out of its own gross negligence or willful misconduct.
(c) The Escrow Agent shall be entitled to rely on, and shall be protected in acting in reliance upon, any instructions or directions furnished to it in writing signed by the REIT or the Operating Partnership (so long as the instructions include a certificate signed by an officer that the instruction or direction has been given in compliance with any approval procedures required under the Indemnity Agreement) and shall be entitled to treat as genuine, and as the document it purports to be, any letter, paper or other document furnished to it by the REIT or the Operating Partnership, and believed by the Escrow Agent to be genuine and to have been signed and presented by the proper party or parties. In performing its obligations hereunder, the Escrow Agent may consult with its counsel and shall be entitled to rely on, and shall be protected in acting in reliance upon, the advice or opinion of such counsel.
(d) The Escrow Agent shall not be entitled to compensation for the services to be rendered by the Escrow Agent hereunder nor shall the Escrow Agent be reimbursed for any costs or expenses incurred by it in connection with the performance of such services.
(e) The Escrow Agent may resign at any time by giving sixty (60) days written notice to the Consolidated Entities; provided that such resignation shall not be effective unless and until a successor Escrow Agent has been appointed and accepts such position pursuant to the terms of this Section 7; and provided further that any such successor agent shall be entitled to customary fees and reimbursement of expenses for providing its services hereunder. In such event, the Consolidated Entities (with the approval of a majority of the Principals) shall appoint a successor Escrow Agent or, if the Consolidated Entities do not do so within sixty (60) days after such notice, the Escrow Agent shall be entitled to (i) appoint its own successor, provided that such successor is reasonably acceptable to the Consolidated Entities or (ii) at the expense of the Consolidated Entities, petition any court of competent jurisdiction for the appointment of a successor Escrow Agent. Such appointment, whether by the Consolidated Entities or the Escrow Agent shall be
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effective on the effective date of the aforesaid resignation (the " Indemnity Transfer Date "). On the Indemnity Transfer Date, all right title and interest to the Escrow Fund, including interest thereon, shall be transferred to the successor Escrow Agent and this Agreement shall be assigned by the Escrow Agent to such successor Escrow Agent, and thereafter, the resigning Escrow Agent shall be released from any further obligations hereunder. The Escrow Agent shall continue to serve until its successor is appointed, accepts this Agreement and receives the transferred Escrow Fund.
(f) The Escrow Agent shall not have any right, claim or interest in any portion of the Escrow Fund except in its capacity as Escrow Agent hereunder.
8.
TAXES; FRACTIONAL INTERESTS.
All Earnings credited to a Participant Account shall be treated as having been received for tax purposes by the Principals to whose Participant Account the Earnings are credited. In the
event the Escrow Agent becomes liable for the payment of taxes, including withholding taxes, relating to Earnings, the Escrow Agent may deduct such taxes from each applicable Participant Account, and
the Principal involved shall be required to reimburse such amount. To the extent that any disbursement is made pursuant to this Agreement in the form of securities, the Consolidated Entities will
purchase (at then market value) such number of the securities as will permit the Escrow Holder to distribute cash in lieu of any fractional shares.
9.
REPRESENTATIONS AND WARRANTIES.
Each of the REIT, the Operating Partnership and the Escrow Agent represents and warrants to the other parties hereto that it is duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization; that it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; that the execution, delivery and
performance of this Agreement has been duly authorized and approved by all necessary action; that this Agreement constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity; and that the execution,
delivery and performance of this Agreement will not result in a breach of or loss of rights under or constitute a default under or a violation of any trust (constructive or other), agreement,
judgment, decree, order or other instrument to which it is a party or it or its properties or assets may be bound.
10.
BENEFIT; SUCCESSOR AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns but shall not be assignable by any party hereto
without the written consent of all of the other parties hereto;
provided, however
, that the Escrow Agent may assign its rights hereunder to a successor
Escrow Agent appointed hereunder in accordance with Section 7. Except for the persons specified in the preceding sentence, this Agreement is not intended to confer on any person not a party
hereto any rights or remedies hereunder.
11.
NOTICES.
All notices and other communications hereunder shall be in writing and shall be deemed given when actually received and shall be given by a nationally recognized overnight courier
delivery service, certified first class mail or by facsimile (with a confirmatory copy sent by overnight courier) to the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to the Escrow Agent:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Attention: Chief Executive Officer
Facsimile No.: (310) 255-7701
Telephone No.: (310) 255-7700
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If to the REIT or the Operating Partnership, to it at:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Attention: Chief Executive Officer
Facsimile No.: (310) 255-7701
Telephone No.: (310) 255-7700
Any party may designate such other address in writing to all the other parties hereto.
12.
GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflict of laws principles.
13.
COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
14.
HEADINGS.
The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
15.
SEVERABILITY.
Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective in the jurisdiction involved to the extent, but only to the extent, of
such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a
construction would be unreasonable.
16.
ENTIRE AGREEMENT; MODIFICATION AND WAIVER.
This Agreement and the Indemnity Agreement embody the entire agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede any and all
prior agreements and understandings relating to the subject matter hereof. Notwithstanding the preceding sentence, the parties hereto acknowledge that the Escrow Agent is not a party to nor is it
bound by the Indemnity Agreement. No amendment, modification or waiver of this Agreement shall be binding or effective for any purpose unless (i) it is made in a writing signed by the Escrow
Agent, the REIT and the Operating Partnership, and (ii) an officer of the Consolidated Entities certifies in writing that the amendment has been approved by a majority of the Principals. No
course of dealing between the parties to this Agreement shall be deemed to affect or to modify, amend or discharge any provision or term of this Agreement. No delay by any party to or any beneficiary
of this Agreement in the exercise of any of its rights or remedies shall operate as a waiver thereof, and no single or partial exercise by any party to or any beneficiary of this Agreement of any such
right or remedy shall preclude any other or further exercise thereof. A waiver of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy on
any other occasion.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.
CONSOLIDATED ENTITIES | |||
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DOUGLAS EMMETT, INC. |
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By: |
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Name: | |||
Title: | |||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: | |||
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ESCROW AGENT |
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DOUGLAS EMMETT, INC. |
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By: |
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Name: | |||
Title: |
Participant Accounts
Principal
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OP Unit Indemnity Amount
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REIT Share Indemnity Amount
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Total: |
Principal
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Percentage
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Dan A. Emmett | 40% | |
Jordan Kaplan | 20% | |
Christopher Anderson | 20% | |
Kenneth M. Panzer | 20% |
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.
CONSOLIDATED ENTITIES | |||
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DOUGLAS EMMETT, INC. |
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By: |
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Name: | |||
Title: | |||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: | |||
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ESCROW AGENT |
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DOUGLAS EMMETT, INC. |
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By: |
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Name: | |||
Title: |
Exhibit 10.15
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND,
A CALIFORNIA LIMITED PARTNERSHIP
TABLE OF CONTENTS
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 |
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EFFECTIVE TIME |
|
3 |
Section 1.03 |
|
EFFECT OF THE MERGER |
|
4 |
Section 1.04 |
|
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT |
|
4 |
Section 1.05 |
|
CONVERSION OF FUND PARTNERSHIP INTERESTS |
|
4 |
Section 1.06 |
|
CONVERSION OF MERGER SUB MEMBER INTERESTS |
|
6 |
Section 1.07 |
|
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS |
|
6 |
Section 1.08 |
|
FRACTIONAL INTERESTS |
|
6 |
Section 1.09 |
|
DISTRIBUTION OF PRE-CLOSING CASH FLOW |
|
6 |
Section 1.10 |
|
CALCULATION OF MERGER CONSIDERATION |
|
6 |
Section 1.11 |
|
TRANSACTION COSTS |
|
7 |
Section 1.12 |
|
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE |
|
7 |
ARTICLE II CLOSING; TERM OF AGREEMENT |
||||
Section 2.01 |
|
CLOSING |
|
8 |
Section 2.02 |
|
PAYMENT OF MERGER CONSIDERATION |
|
8 |
Section 2.03 |
|
TAX WITHHOLDING |
|
9 |
Section 2.04 |
|
FURTHER ACTION |
|
9 |
Section 2.05 |
|
TERM OF THE AGREEMENT |
|
9 |
Section 2.06 |
|
EFFECT OF TERMINATION |
|
9 |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
||||
Section 3.01 |
|
ORGANIZATION; AUTHORITY |
|
10 |
Section 3.02 |
|
DUE AUTHORIZATION |
|
10 |
Section 3.03 |
|
CONSENTS AND APPROVALS |
|
11 |
Section 3.04 |
|
NO VIOLATION |
|
11 |
Section 3.05 |
|
VALIDITY OF OP UNITS AND REIT SHARES |
|
11 |
Section 3.06 |
|
OP AGREEMENT |
|
11 |
Section 3.07 |
|
LIMITED ACTIVITIES |
|
11 |
Section 3.08 |
|
LITIGATION |
|
11 |
Section 3.09 |
|
NO OTHER REPRESENTATIONS OR WARRANTIES |
|
11 |
i
Section 3.10 |
|
INDEMNIFICATION |
|
11 |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
||||
Section 4.01 |
|
ORGANIZATION; AUTHORITY |
|
13 |
Section 4.02 |
|
DUE AUTHORIZATION |
|
13 |
Section 4.03 |
|
CAPITALIZATION |
|
14 |
Section 4.04 |
|
CONSENTS AND APPROVALS |
|
14 |
Section 4.05 |
|
NO VIOLATION |
|
14 |
Section 4.06 |
|
TAXES |
|
14 |
Section 4.07 |
|
NON-FOREIGN STATUS |
|
14 |
Section 4.08 |
|
NO IMPLIED REPRESENTATIONS OR WARRANTIES |
|
14 |
Section 4.09 |
|
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND |
|
14 |
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
||||
ARTICLE VI ADDITIONAL AGREEMENTS |
||||
Section 6.01 |
|
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
|
15 |
Section 6.02 |
|
OBLIGATIONS OF MERGER SUB |
|
15 |
Section 6.03 |
|
TAX AGREEMENT |
|
16 |
ARTICLE VII CONDITIONS PRECEDENT |
||||
Section 7.01 |
|
CONDITION TO EACH PARTY'S OBLIGATIONS |
|
16 |
Section 7.02 |
|
CONDITIONS TO OBLIGATIONS OF THE FUND |
|
16 |
Section 7.03 |
|
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
|
17 |
ARTICLE VIII GENERAL PROVISIONS |
||||
Section 8.01 |
|
NOTICES |
|
17 |
Section 8.02 |
|
DEFINITIONS |
|
18 |
Section 8.03 |
|
COUNTERPARTS |
|
20 |
Section 8.04 |
|
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES |
|
20 |
Section 8.05 |
|
GOVERNING LAW |
|
20 |
Section 8.06 |
|
ASSIGNMENT |
|
20 |
Section 8.07 |
|
JURISDICTION |
|
20 |
Section 8.08 |
|
DISPUTE RESOLUTION |
|
20 |
Section 8.09 |
|
SEVERABILITY |
|
21 |
Section 8.10 |
|
RULES OF CONSTRUCTION |
|
21 |
Section 8.11 |
|
EQUITABLE REMEDIES |
|
22 |
ii
Section 8.12 |
|
WAIVER OF SECTION 1542 PROTECTIONS |
|
22 |
Section 8.13 |
|
TIME OF THE ESSENCE |
|
22 |
Section 8.14 |
|
DESCRIPTIVE HEADINGS |
|
22 |
Section 8.15 |
|
NO PERSONAL LIABILITY CONFERRED |
|
22 |
Section 8.16 |
|
AMENDMENTS |
|
22 |
iii
DEFINED TERMS
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Section 1.05 | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
Fund Value | Section 1.05 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
iv
HBRCT | Section 1.05 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
v
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund, a California limited partnership (the " Fund "), and DERF Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1.1260% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who
2
have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund shall file
a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of Merger
"), providing
that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and
executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the
"
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of
Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall
have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents
detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for
purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in
the event that the IPO is terminated
3
for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of
the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement (defined below), as in effect immediately prior to the
Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 5.9066% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance with Section 5.3 of
4
the Amended and Restated Agreement of Limited Partnership of the Fund dated as of September 9, 1993 (the " Fund Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash: (A) 100% of the Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units. The Elected OP Unit Percentage of the Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares. The full amount of the Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non- Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT
5
shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued
and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in
exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be
cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and
retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the
Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled to receive
as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in
lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder
would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of
Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as
the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Fund's
Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of the Fund Partnership
Agreement. Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement, "
Adjusted
Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of
derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such
line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund)
less
(B) the
Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
6
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
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ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or
8
REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such amounts as the
Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are
so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of
which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the
Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized
to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or (ii) the Merger
shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the
obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to
a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other
obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination
unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
9
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and
10
Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or
decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and
Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other
representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and
11
against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there
12
is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have
13
been duly and validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits
Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction
Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or
filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any term or provision of any judgment, order,
writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns and reports required to be filed
by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material
respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund or any of
the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection with
this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
14
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership interests or other equity interests in any of the Fund Subsidiaries;
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(e) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this
Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
15
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation Section 1.704-3(b)
with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or
remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction
of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
16
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed
17
within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
18
(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
19
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this
Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way
of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment
or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The
20
arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless
21
explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or
the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to
the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes
all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which
provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification
or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY FUND, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of
, DERF ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
Exhibit 10.16
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF NO. 2 ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND NO. 2,
A CALIFORNIA LIMITED PARTNERSHIP
TABLE OF CONTENTS
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 |
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EFFECTIVE TIME |
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3 |
Section 1.03 |
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EFFECT OF THE MERGER |
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4 |
Section 1.04 |
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CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT |
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4 |
Section 1.05 |
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CONVERSION OF FUND PARTNERSHIP INTERESTS |
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4 |
Section 1.06 |
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CONVERSION OF MERGER SUB MEMBER INTERESTS |
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6 |
Section 1.07 |
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CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS |
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6 |
Section 1.08 |
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FRACTIONAL INTERESTS |
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6 |
Section 1.09 |
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DISTRIBUTION OF PRE-CLOSING CASH FLOW |
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6 |
Section 1.10 |
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CALCULATION OF MERGER CONSIDERATION |
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6 |
Section 1.11 |
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TRANSACTION COSTS |
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7 |
Section 1.12 |
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ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE |
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7 |
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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8 |
Section 2.02 |
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PAYMENT OF MERGER CONSIDERATION |
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8 |
Section 2.03 |
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TAX WITHHOLDING |
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9 |
Section 2.04 |
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FURTHER ACTION |
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9 |
Section 2.05 |
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TERM OF THE AGREEMENT |
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9 |
Section 2.06 |
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EFFECT OF TERMINATION |
|
9 |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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10 |
Section 3.02 |
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DUE AUTHORIZATION |
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10 |
Section 3.03 |
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CONSENTS AND APPROVALS |
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11 |
Section 3.04 |
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NO VIOLATION |
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11 |
Section 3.05 |
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VALIDITY OF OP UNITS AND REIT SHARES |
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11 |
Section 3.06 |
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OP AGREEMENT |
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11 |
Section 3.07 |
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LIMITED ACTIVITIES |
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11 |
Section 3.08 |
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LITIGATION |
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11 |
Section 3.09 |
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NO OTHER REPRESENTATIONS OR WARRANTIES |
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11 |
i
Section 3.10 |
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INDEMNIFICATION |
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11 |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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13 |
Section 4.02 |
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DUE AUTHORIZATION |
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13 |
Section 4.03 |
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CAPITALIZATION |
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14 |
Section 4.04 |
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CONSENTS AND APPROVALS |
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14 |
Section 4.05 |
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NO VIOLATION |
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14 |
Section 4.06 |
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TAXES |
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14 |
Section 4.07 |
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NON-FOREIGN STATUS |
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14 |
Section 4.08 |
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NO IMPLIED REPRESENTATIONS OR WARRANTIES |
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14 |
Section 4.09 |
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SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND |
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14 |
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
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15 |
Section 6.02 |
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OBLIGATIONS OF MERGER SUB |
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15 |
Section 6.03 |
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TAX AGREEMENT |
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16 |
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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16 |
Section 7.02 |
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CONDITIONS TO OBLIGATIONS OF THE FUND |
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16 |
Section 7.03 |
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CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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17 |
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
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NOTICES |
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17 |
Section 8.02 |
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DEFINITIONS |
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18 |
Section 8.03 |
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COUNTERPARTS |
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20 |
Section 8.04 |
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ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES |
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20 |
Section 8.05 |
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GOVERNING LAW |
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20 |
Section 8.06 |
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ASSIGNMENT |
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20 |
Section 8.07 |
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JURISDICTION |
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20 |
Section 8.08 |
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DISPUTE RESOLUTION |
|
20 |
Section 8.09 |
|
SEVERABILITY |
|
21 |
Section 8.10 |
|
RULES OF CONSTRUCTION |
|
21 |
Section 8.11 |
|
EQUITABLE REMEDIES |
|
22 |
ii
Section 8.12 |
|
WAIVER OF SECTION 1542 PROTECTIONS |
|
22 |
Section 8.13 |
|
TIME OF THE ESSENCE |
|
22 |
Section 8.14 |
|
DESCRIPTIVE HEADINGS |
|
22 |
Section 8.15 |
|
NO PERSONAL LIABILITY CONFERRED |
|
22 |
Section 8.16 |
|
AMENDMENTS |
|
22 |
iii
DEFINED TERMS
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Section 1.05 | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
Fund Value | Section 1.05 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
iv
HBRCT | Section 1.05 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
v
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund No. 2, a California limited partnership (the " Fund "), and DERF No. 2 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who
2
have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund shall file
a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of Merger
"), providing
that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and
executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the
"
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of
Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall
have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents
detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for
purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in
the event that the IPO is terminated
3
for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of
the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement (defined below), as in effect immediately prior to the
Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 1.4102% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance with Section 5.3 of
4
the Amended Agreement of Limited Partnership of the Fund dated as of September 9, 1993 (the " Fund Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash: (A) 100% of the Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units. The Elected OP Unit Percentage of the Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares. The full amount of the Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT
5
shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued
and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in
exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be
cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and
retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the
Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled to receive
as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in
lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder
would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of
Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as
the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Fund's
Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of the Fund Partnership
Agreement. Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement, "
Adjusted
Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of
derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such
line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund)
less
(B) the
Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests. TRANSACTION
6
COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
7
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or
8
REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such amounts as the
Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are
so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of
which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the
Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized
to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or (ii) the Merger
shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the
obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to
a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other
obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination
unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
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ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and
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Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or
decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and
Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other
representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and
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against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there
12
is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have
13
been duly and validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits
Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction
Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or
filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any term or provision of any judgment, order,
writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns and reports required to be filed
by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material
respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund or any of
the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection with
this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
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ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership interests or other equity interests in any of the Fund Subsidiaries;
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(e) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this
Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
15
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation Section 1.704-3(b)
with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or
remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction
of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
16
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed
17
within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund No. 2
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
18
(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
19
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this
Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way
of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment
or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The
20
arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless
21
explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or
the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to
the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes
all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which
provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification
or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY FUND NO. 2, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of
, DERF NO. 2 ACQUISITION, LLC |
|||
By: |
Douglas Emmett GP, LLC Its Managing Member |
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|
By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
Exhibit 10.17
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF 1995 ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND 1995,
A CALIFORNIA LIMITED PARTNERSHIP
TABLE OF CONTENTS
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PAGE
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---|---|---|---|---|
ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 |
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EFFECTIVE TIME |
|
3 |
Section 1.03 |
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EFFECT OF THE MERGER |
|
4 |
Section 1.04 |
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CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT |
|
4 |
Section 1.05 |
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CONVERSION OF FUND PARTNERSHIP INTERESTS |
|
4 |
Section 1.06 |
|
CONVERSION OF MERGER SUB MEMBER INTERESTS |
|
6 |
Section 1.07 |
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CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS |
|
6 |
Section 1.08 |
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FRACTIONAL INTERESTS |
|
6 |
Section 1.09 |
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DISTRIBUTION OF PRE-CLOSING CASH FLOW |
|
6 |
Section 1.10 |
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CALCULATION OF MERGER CONSIDERATION |
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6 |
Section 1.11 |
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TRANSACTION COSTS |
|
7 |
Section 1.12 |
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ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE |
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7 |
ARTICLE II CLOSING; TERM OF AGREEMENT |
||||
Section 2.01 |
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CLOSING |
|
8 |
Section 2.02 |
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PAYMENT OF MERGER CONSIDERATION |
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8 |
Section 2.03 |
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TAX WITHHOLDING |
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9 |
Section 2.04 |
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FURTHER ACTION |
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9 |
Section 2.05 |
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TERM OF THE AGREEMENT |
|
9 |
Section 2.06 |
|
EFFECT OF TERMINATION |
|
9 |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
||||
Section 3.01 |
|
ORGANIZATION; AUTHORITY |
|
10 |
Section 3.02 |
|
DUE AUTHORIZATION |
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10 |
Section 3.03 |
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CONSENTS AND APPROVALS |
|
11 |
Section 3.04 |
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NO VIOLATION |
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11 |
Section 3.05 |
|
VALIDITY OF OP UNITS AND REIT SHARES |
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11 |
Section 3.06 |
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OP AGREEMENT |
|
11 |
Section 3.07 |
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LIMITED ACTIVITIES |
|
11 |
i
Section 3.08 |
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LITIGATION |
|
11 |
Section 3.09 |
|
NO OTHER REPRESENTATIONS OR WARRANTIES |
|
11 |
Section 3.10 |
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INDEMNIFICATION |
|
11 |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
||||
Section 4.01 |
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ORGANIZATION; AUTHORITY |
|
13 |
Section 4.02 |
|
DUE AUTHORIZATION |
|
13 |
Section 4.03 |
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CAPITALIZATION |
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14 |
Section 4.04 |
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CONSENTS AND APPROVALS |
|
14 |
Section 4.05 |
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NO VIOLATION |
|
14 |
Section 4.06 |
|
TAXES |
|
14 |
Section 4.07 |
|
NON-FOREIGN STATUS |
|
14 |
Section 4.08 |
|
NO IMPLIED REPRESENTATIONS OR WARRANTIES |
|
14 |
Section 4.09 |
|
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND |
|
14 |
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
|
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
|
15 |
Section 6.02 |
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OBLIGATIONS OF MERGER SUB |
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15 |
Section 6.03 |
|
TAX AGREEMENT |
|
16 |
ARTICLE VII CONDITIONS PRECEDENT |
||||
Section 7.01 |
|
CONDITION TO EACH PARTY'S OBLIGATIONS |
|
16 |
Section 7.02 |
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CONDITIONS TO OBLIGATIONS OF THE FUND |
|
16 |
Section 7.03 |
|
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
|
17 |
ARTICLE VIII GENERAL PROVISIONS |
||||
Section 8.01 |
|
NOTICES |
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17 |
Section 8.02 |
|
DEFINITIONS |
|
18 |
Section 8.03 |
|
COUNTERPARTS |
|
20 |
Section 8.04 |
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ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES |
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20 |
Section 8.05 |
|
GOVERNING LAW |
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20 |
Section 8.06 |
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ASSIGNMENT |
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20 |
ii
Section 8.07 |
|
JURISDICTION |
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20 |
Section 8.08 |
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DISPUTE RESOLUTION |
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20 |
Section 8.09 |
|
SEVERABILITY |
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21 |
Section 8.10 |
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RULES OF CONSTRUCTION |
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21 |
Section 8.11 |
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EQUITABLE REMEDIES |
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22 |
Section 8.12 |
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WAIVER OF SECTION 1542 PROTECTIONS |
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22 |
Section 8.13 |
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TIME OF THE ESSENCE |
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22 |
Section 8.14 |
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DESCRIPTIVE HEADINGS |
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22 |
Section 8.15 |
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NO PERSONAL LIABILITY CONFERRED |
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22 |
Section 8.16 |
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AMENDMENTS |
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22 |
iii
DEFINED TERMS
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Section 1.05 | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
Fund Value | Section 1.05 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
iv
HBRCT | Section 1.05 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
v
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund 1995, a California limited partnership (the " Fund "), and DERF 1995 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who
2
have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund shall file
a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of Merger
"), providing
that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and
executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the
"
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of
Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall
have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents
detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for
purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in
the event that the IPO is terminated
3
for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of
the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement (defined below), as in effect immediately prior to the
Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 8.7110% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance with Section 5.3 of
4
the Amended and Restated Agreement of Limited Partnership of the Fund dated as of February 14, 1996 (the " Fund Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units. The Elected OP Unit Percentage of the Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares. The full amount of the Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non- Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT
5
shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued
and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in
exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be
cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and
retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the
Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled to receive
as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in
lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder
would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of
Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as
the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Fund's
Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of the Fund Partnership
Agreement. Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement, "
Adjusted
Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of
derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such
line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund)
less
(B) the
Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
6
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
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ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or
8
REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such amounts as the
Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are
so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of
which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the
Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized
to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or (ii) the Merger
shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the
obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to
a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other
obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination
unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
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ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and
10
Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or
decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and
Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other
representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and
11
against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there
12
is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have
13
been duly and validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits
Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction
Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or
filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any term or provision of any judgment, order,
writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns and reports required to be filed
by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material
respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund or any of
the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection with
this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
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ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership interests or other equity interests in any of the Fund Subsidiaries;
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(e) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
15
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation Transactions, and
therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction
of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
16
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed
17
within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund 1995
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
18
(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
19
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The
20
arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless
21
explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or
the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to
the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes
all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of
Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification
or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY FUND 1995, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of
, DERF 1995 ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
Exhibit 10.18
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF 1996 ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND 1996,
A CALIFORNIA LIMITED PARTNERSHIP
TABLE OF CONTENTS
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 |
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EFFECTIVE TIME |
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3 |
Section 1.03 |
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EFFECT OF THE MERGER |
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4 |
Section 1.04 |
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CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT |
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4 |
Section 1.05 |
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CONVERSION OF FUND PARTNERSHIP INTERESTS |
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4 |
Section 1.06 |
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CONVERSION OF MERGER SUB MEMBER INTERESTS |
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6 |
Section 1.07 |
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CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS |
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6 |
Section 1.08 |
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FRACTIONAL INTERESTS |
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6 |
Section 1.09 |
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DISTRIBUTION OF PRE-CLOSING CASH FLOW |
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6 |
Section 1.10 |
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CALCULATION OF MERGER CONSIDERATION |
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6 |
Section 1.11 |
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TRANSACTION COSTS |
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7 |
Section 1.12 |
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ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE |
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7 |
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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8 |
Section 2.02 |
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PAYMENT OF MERGER CONSIDERATION |
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8 |
Section 2.03 |
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TAX WITHHOLDING |
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9 |
Section 2.04 |
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FURTHER ACTION |
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9 |
Section 2.05 |
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TERM OF THE AGREEMENT |
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9 |
Section 2.06 |
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EFFECT OF TERMINATION |
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9 |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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10 |
Section 3.02 |
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DUE AUTHORIZATION |
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10 |
Section 3.03 |
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CONSENTS AND APPROVALS |
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11 |
Section 3.04 |
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NO VIOLATION |
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11 |
Section 3.05 |
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VALIDITY OF OP UNITS AND REIT SHARES |
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11 |
Section 3.06 |
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OP AGREEMENT |
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11 |
Section 3.07 |
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LIMITED ACTIVITIES |
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11 |
Section 3.08 |
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LITIGATION |
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11 |
Section 3.09 |
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NO OTHER REPRESENTATIONS OR WARRANTIES |
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11 |
i
Section 3.10 |
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INDEMNIFICATION |
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11 |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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13 |
Section 4.02 |
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DUE AUTHORIZATION |
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13 |
Section 4.03 |
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CAPITALIZATION |
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14 |
Section 4.04 |
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CONSENTS AND APPROVALS |
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14 |
Section 4.05 |
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NO VIOLATION |
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14 |
Section 4.06 |
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TAXES |
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14 |
Section 4.07 |
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NON-FOREIGN STATUS |
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14 |
Section 4.08 |
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NO IMPLIED REPRESENTATIONS OR WARRANTIES |
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14 |
Section 4.09 |
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SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND |
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14 |
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
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15 |
Section 6.02 |
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OBLIGATIONS OF MERGER SUB |
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15 |
Section 6.03 |
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TAX AGREEMENT |
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16 |
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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16 |
Section 7.02 |
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CONDITIONS TO OBLIGATIONS OF THE FUND |
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16 |
Section 7.03 |
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CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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17 |
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
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NOTICES |
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17 |
Section 8.02 |
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DEFINITIONS |
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18 |
Section 8.03 |
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COUNTERPARTS |
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20 |
Section 8.04 |
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ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES |
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20 |
Section 8.05 |
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GOVERNING LAW |
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20 |
Section 8.06 |
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ASSIGNMENT |
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20 |
Section 8.07 |
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JURISDICTION |
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20 |
Section 8.08 |
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DISPUTE RESOLUTION |
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20 |
Section 8.09 |
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SEVERABILITY |
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21 |
Section 8.10 |
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RULES OF CONSTRUCTION |
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21 |
Section 8.11 |
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EQUITABLE REMEDIES |
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22 |
ii
Section 8.12 |
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WAIVER OF SECTION 1542 PROTECTIONS |
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22 |
Section 8.13 |
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TIME OF THE ESSENCE |
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22 |
Section 8.14 |
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DESCRIPTIVE HEADINGS |
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22 |
Section 8.15 |
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NO PERSONAL LIABILITY CONFERRED |
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22 |
Section 8.16 |
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AMENDMENTS |
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22 |
iii
DEFINED TERMS
TERM
|
SECTION
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---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Section 1.05 | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
Fund Value | Section 1.05 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
iv
HBRCT | Section 1.05 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
v
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund 1996, a California limited partnership (the " Fund "), and DERF 1996 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who
2
have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund shall file
a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of Merger
"), providing
that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and
executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the
"
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of
Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall
have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents
detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for
purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in
the event that the IPO is terminated
3
for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of
the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement (defined below), as in effect immediately prior to the
Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 10.1286% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance with Section 5.3 of
4
the Agreement of Limited Partnership of the Fund dated as of October 3, 1996 (the " Fund Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash: (A) 100% of the Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units. The Elected OP Unit Percentage of the Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares. The full amount of the Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non- Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT
5
shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued
and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in
exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be
cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and
retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the
Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled to receive
as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in
lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder
would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of
Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as
the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Fund's
Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of the Fund Partnership
Agreement. Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement, "
Adjusted
Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of
derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such
line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund)
less
(B) the
Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
6
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
7
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or
8
REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such amounts as the
Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are
so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of
which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the
Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized
to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or (ii) the Merger
shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the
obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to
a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other
obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination
unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
9
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and
10
Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or
decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and
Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other
representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and
11
against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there
12
is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have
13
been duly and validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits
Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction
Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or
filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any term or provision of any judgment, order,
writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns and reports required to be filed
by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material
respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund or any of
the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection with
this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
14
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership interests or other equity interests in any of the Fund Subsidiaries;
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(e) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this
Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
15
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation Section 1.704-3(b)
with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or
remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction
of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
16
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed
17
within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund 1996
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
18
(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
19
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this
Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way
of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment
or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The
20
arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless
21
explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or
the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to
the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes
all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which
provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification
or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY FUND 1998, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of
, DERF 1996 ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF 1997 ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND 1997,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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---|---|---|---|---|
ARTICLE I THE MERGER | 3 | |||
Section 1.01 | THE MERGER | 3 | ||
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 4 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 6 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 7 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 7 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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7 |
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Section 2.01 | CLOSING | 7 | ||
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 9 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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9 |
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Section 3.01 | ORGANIZATION; AUTHORITY | 9 | ||
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 11 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 12 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
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13 |
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Section 4.01 | ORGANIZATION; AUTHORITY | 13 | ||
Section 4.02 | DUE AUTHORIZATION | 14 | ||
Section 4.03 | CAPITALIZATION | 14 | ||
Section 4.04 | CONSENTS AND APPROVALS | 14 | ||
Section 4.05 | NO VIOLATION | 14 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 15 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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15 |
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i
ARTICLE VI ADDITIONAL AGREEMENTS |
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15 |
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Section 6.01 | COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND | 15 | ||
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 16 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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16 |
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Section 7.01 | CONDITION TO EACH PARTY'S OBLIGATIONS | 16 | ||
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE FUND | 16 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 17 | ||
ARTICLE VIII GENERAL PROVISIONS |
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17 |
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Section 8.01 | NOTICES | 17 | ||
Section 8.02 | DEFINITIONS | 18 | ||
Section 8.03 | COUNTERPARTS | 20 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 20 | ||
Section 8.05 | GOVERNING LAW | 20 | ||
Section 8.06 | ASSIGNMENT | 20 | ||
Section 8.07 | JURISDICTION | 20 | ||
Section 8.08 | DISPUTE RESOLUTION | 20 | ||
Section 8.09 | SEVERABILITY | 21 | ||
Section 8.10 | RULES OF CONSTRUCTION | 21 | ||
Section 8.11 | EQUITABLE REMEDIES | 22 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 22 | ||
Section 8.13 | TIME OF THE ESSENCE | 22 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 22 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | ||
Section 8.16 | AMENDMENTS | 22 |
ii
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Recitals | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
Fund Value | Section 1.05 | |
General Partner | Recitals | |
iii
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund 1997, a California limited partnership (the " Fund "), and DERF 1997 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders
2
who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), and Section 8.3 of the Agreement of Limited Partnership of the Fund dated as of September 9, 1997 (the " Fund Partnership Agreement "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund
shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of
Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean
3
such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement, as in effect immediately prior to
the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 16.8514% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance
4
with Section 5.3 of the Fund Partnership Agreement, it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non- Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT
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shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in
Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be
delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner
of the Fund, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled
to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation
and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which
such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that
a holder of Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP
Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good faith estimate of the
Fund's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of
the Fund Partnership Agreement. Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement,
"
Adjusted Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate
investments and the fair value of derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any depreciation or
amortization used to calculate such line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically
employed by the Fund)
less
(B) the Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
6
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the
7
REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund
8
Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the
Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized
to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the
obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the
conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation,
warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach
will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and
9
thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order,
10
writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of
Amendment and Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
11
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials
12
and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of
13
its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by
all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund
pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each
enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of
equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits
Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction
Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or
filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any term or provision of any
judgment, order, writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material
Adverse Effect.
Section 4.06
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns and reports required to
be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all
material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the
Fund or any of the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection
with this Agreement or the transactions contemplated hereby.
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Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership interests or other equity interests in any of the Fund Subsidiaries;
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(e) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to
15
consummate the Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation Transactions, and
therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction
of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements
16
and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01
NOTICES.
All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days
after being
17
mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund 1997
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
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(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is
19
limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and
20
binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions
21
contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or
the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to
the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes
all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of
Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification
or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN Name: Jordan Kaplan Title: Chief Executive Officer |
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DOUGLAS EMMETT PROPERTIES, LP |
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Douglas Emmett, LLC Its General Partner |
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Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN Name: Jordan Kaplan Title: Chief Executive Officer |
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DOUGLAS EMMETT REALTY FUND 1997, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT Name: Dan A. Emmett Title: President and Chief Executive Officer |
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AGREED AND ACCEPTED as of , | ||||
DERF 1997 ACQUISITION, LLC | ||||
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Douglas Emmett GP, LLC Its Managing Member |
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By: |
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Douglas Emmett Properties, LP Its Sole Member |
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By: |
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Douglas Emmett, LLC Its General Partner |
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By: |
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Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: Title: |
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Exhibit A : |
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List of DERA Funds and Single Asset Entities |
Exhibit B : |
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List of Formation Transaction Documentation |
Exhibit C : |
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Form of Contribution Agreement |
Exhibit D : |
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Form of Registration Rights Agreement |
Exhibit E : |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF 1998 ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND 1998,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | 3 | ||
Section 1.01 | THE MERGER | 3 | |
Section 1.02 | EFFECTIVE TIME | 3 | |
Section 1.03 | EFFECT OF THE MERGER | 4 | |
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | |
Section 1.05 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | |
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 6 | |
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS | 6 | |
Section 1.08 | FRACTIONAL INTERESTS | 6 | |
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | |
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | |
Section 1.11 | TRANSACTION COSTS | 7 | |
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 7 | |
ARTICLE II CLOSING; TERM OF AGREEMENT | 7 | ||
Section 2.01 | CLOSING | 7 | |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | |
Section 2.03 | TAX WITHHOLDING | 9 | |
Section 2.04 | FURTHER ACTION | 9 | |
Section 2.05 | TERM OF THE AGREEMENT | 9 | |
Section 2.06 | EFFECT OF TERMINATION | 9 | |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF
THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 | ORGANIZATION; AUTHORITY | 9 | |
Section 3.02 | DUE AUTHORIZATION | 10 | |
Section 3.03 | CONSENTS AND APPROVALS | 10 | |
Section 3.04 | NO VIOLATION | 11 | |
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 11 | |
Section 3.06 | OP AGREEMENT | 11 | |
Section 3.07 | LIMITED ACTIVITIES | 11 | |
Section 3.08 | LITIGATION | 11 | |
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | |
Section 3.10 | INDEMNIFICATION | 11 | |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND | 13 | ||
Section 4.01 | ORGANIZATION; AUTHORITY | 13 | |
Section 4.02 | DUE AUTHORIZATION | 13 | |
Section 4.03 | CAPITALIZATION | 14 | |
Section 4.04 | CONSENTS AND APPROVALS | 14 | |
Section 4.05 | NO VIOLATION | 14 | |
Section 4.06 | TAXES | 14 | |
Section 4.07 | NON-FOREIGN STATUS | 14 | |
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | |
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 14 | |
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND | 14 | ||
ARTICLE VI ADDITIONAL AGREEMENTS | 15 | ||
Section 6.01 | COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND | 15 | |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | |
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Section 6.03 | TAX AGREEMENT | 15 | |
ARTICLE VII CONDITIONS PRECEDENT | 16 | ||
Section 7.01 | CONDITION TO EACH PARTY'S OBLIGATIONS | 16 | |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE FUND | 16 | |
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 17 | |
ARTICLE VIII GENERAL PROVISIONS | 17 | ||
Section 8.01 | NOTICES | 17 | |
Section 8.02 | DEFINITIONS | 18 | |
Section 8.03 | COUNTERPARTS | 20 | |
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 20 | |
Section 8.05 | GOVERNING LAW | 20 | |
Section 8.06 | ASSIGNMENT | 20 | |
Section 8.07 | JURISDICTION | 20 | |
Section 8.08 | DISPUTE RESOLUTION | 20 | |
Section 8.09 | SEVERABILITY | 21 | |
Section 8.10 | RULES OF CONSTRUCTION | 21 | |
Section 8.11 | EQUITABLE REMEDIES | 22 | |
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 22 | |
Section 8.13 | TIME OF THE ESSENCE | 22 | |
Section 8.14 | DESCRIPTIVE HEADINGS | 22 | |
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | |
Section 8.16 | AMENDMENTS | 22 |
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TERM
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SECTION
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Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Recitals | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
Fund Value | Section 1.05 | |
General Partner | Recitals | |
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Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
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This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund 1998, a California limited partnership (the " Fund "), and DERF 1998 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders
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who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), and Section 8.3 of the Restated Agreement of Limited Partnership of the Fund dated as of September 1, 1999 (the " Fund Partnership Agreement "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02 EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the " Certificate of Merger "), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the " Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean
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such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Sction 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04 CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT. At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement, as in effect immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05 CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 13.0375% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance
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with Section 5.3 of the Fund Partnership Agreement, it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non- Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT
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shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06 CONVERSION OF MERGER SUB MEMBER INTERESTS. At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07 CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS. Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the Merger Consideration applicable thereto.
Section 1.08 FRACTIONAL INTERESTS. No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09 DISTRIBUTION OF PRE-CLOSING CASH FLOW. During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Fund's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of the Fund Partnership Agreement. Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement, " Adjusted Net Operating Income " means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of derivatives, i.e. , the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund) less (B) the Capital Expense Allowance.
Section 1.10 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
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Section 1.11 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12 ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE. Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the
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Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02 PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
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Section 2.03 TAX WITHHOLDING. The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04 FURTHER ACTION. If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as
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applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
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Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05 VALIDITY OF OP UNITS AND REIT SHARES. The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06 OP AGREEMENT. Attached as Exhibit E hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 3.08 LITIGATION. There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 3.10 INDEMNIFICATION.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit,
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certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the
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relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01 ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
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Section 4.03 CAPITALIZATION. Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06 TAXES. To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund or any of the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07 NON-FOREIGN STATUS. The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.09 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having
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business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership interests or other equity interests in any of the Fund Subsidiaries;
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(e) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02 OBLIGATIONS OF MERGER SUB. Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03 TAX AGREEMENT. In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
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ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02 CONDITIONS TO OBLIGATIONS OF THE FUND. The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net
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proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03 CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to
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the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund 1998
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
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(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
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Section 8.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 8.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 8.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08 DISPUTE RESOLUTION. The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The
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arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless
21
explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 8.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating Partnership, Merger Sub and the Fund.
Section 8.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY FUND 1996, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of ,
DERF 1998 ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: | |||
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Name:
Title: |
Exhibit A: |
List of DERA Funds and Single Asset Entities |
Exhibit B: |
List of Formation Transaction Documentation |
Exhibit C: |
Form of Contribution Agreement |
Exhibit D: |
Form of Registration Rights Agreement |
Exhibit E: |
Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF 2000 ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND 2000,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | 3 | ||
Section 1.01 | THE MERGER | 3 | |
Section 1.02 | EFFECTIVE TIME | 3 | |
Section 1.03 | EFFECT OF THE MERGER | 4 | |
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | |
Section 1.05 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | |
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 6 | |
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS | 6 | |
Section 1.08 | FRACTIONAL INTERESTS | 6 | |
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | |
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | |
Section 1.11 | TRANSACTION COSTS | 6 | |
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 7 | |
ARTICLE II CLOSING; TERM OF AGREEMENT |
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7 |
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Section 2.01 | CLOSING | 7 | |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | |
Section 2.03 | TAX WITHHOLDING | 8 | |
Section 2.04 | FURTHER ACTION | 9 | |
Section 2.05 | TERM OF THE AGREEMENT | 9 | |
Section 2.06 | EFFECT OF TERMINATION | 9 | |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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9 |
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Section 3.01 | ORGANIZATION; AUTHORITY | 9 | |
Section 3.02 | DUE AUTHORIZATION | 10 | |
Section 3.03 | CONSENTS AND APPROVALS | 10 | |
Section 3.04 | NO VIOLATION | 10 | |
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 11 | |
i
Section 3.06 | OP AGREEMENT | 11 | |
Section 3.07 | LIMITED ACTIVITIES | 11 | |
Section 3.08 | LITIGATION | 11 | |
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | |
Section 3.10 | INDEMNIFICATION | 12 | |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
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13 |
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Section 4.01 | ORGANIZATION; AUTHORITY | 13 | |
Section 4.02 | DUE AUTHORIZATION | 14 | |
Section 4.03 | CAPITALIZATION | 14 | |
Section 4.04 | CONSENTS AND APPROVALS | 14 | |
Section 4.05 | NO VIOLATION | 14 | |
Section 4.06 | TAXES | 14 | |
Section 4.07 | NON-FOREIGN STATUS | 14 | |
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | |
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 14 | |
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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15 |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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15 |
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Section 6.01 | COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND | 15 | |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | |
Section 6.03 | TAX AGREEMENT | 16 | |
ARTICLE VII CONDITIONS PRECEDENT |
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16 |
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Section 7.01 | CONDITION TO EACH PARTY'S OBLIGATIONS | 16 | |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE FUND | 16 | |
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 17 | |
ARTICLE VIII GENERAL PROVISIONS |
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18 |
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Section 8.01 | NOTICES | 18 | |
Section 8.02 | DEFINITIONS | 18 | |
Section 8.03 | COUNTERPARTS | 20 | |
ii
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 20 | |
Section 8.05 | GOVERNING LAW | 20 | |
Section 8.06 | ASSIGNMENT | 20 | |
Section 8.07 | JURISDICTION | 20 | |
Section 8.08 | DISPUTE RESOLUTION | 20 | |
Section 8.09 | SEVERABILITY | 21 | |
Section 8.10 | RULES OF CONSTRUCTION | 21 | |
Section 8.11 | EQUITABLE REMEDIES | 22 | |
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 22 | |
Section 8.13 | TIME OF THE ESSENCE | 22 | |
Section 8.14 | DESCRIPTIVE HEADINGS | 22 | |
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | |
Section 8.16 | AMENDMENTS | 22 |
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TERM
|
SECTION
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Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CULPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Recitals | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
Fund Value | Section 1.05 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
iv
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
v
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund 2000, a California limited partnership (the " Fund "), and DERF 2000 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the
forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders
2
who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Section 16911 of the Uniform Limited Partnership Act of 1994 of the State of the California (" CULPA "), and Section 8.3 of the Agreement of Limited Partnership of the Fund dated as of May 23, 2000 (the " Fund Partnership Agreement "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 16911 of the CULPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CULPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement,
concurrently with or as soon as practicable after the execution by the REIT of the IPO
underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating
Partnership, Merger Sub and the Fund shall file a certificate of merger as contemplated by the CULPA, with the Secretary of State of the State of California (the
"
Certificate of Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates
and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CULPA. The Merger shall become effective as of
the date set forth in the Certificate of Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is
later than the date set forth in the Certificate of Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as
practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a
new Certificate of Merger and the other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any
such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean
3
such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as
provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and
the CULPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time,
(i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the
Certificate of Limited Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CULPA, and (ii) the Fund Partnership Agreement, as in
effect immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CULPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 23.3831% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance with Section 5.3 of the Fund Partnership Agreement, it being expressly acknowledged and agreed by
4
the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
5
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the
Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each
non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall
cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time
shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest
converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights
as a limited partner of the Fund, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the
Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests
would otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares
resulting from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT
Share, as applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit
or REIT Share. In the event that a holder of Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such
holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005
through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good
faith estimate of the Fund's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with
Section 5.3 of the Fund Partnership Agreement. Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this
Agreement, "
Adjusted Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in
real estate investments and the fair value of derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any
depreciation or amortization used to calculate such line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting
historically employed by the Fund)
less
(B) the Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the
determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall
be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership
shall be solely responsible for all transaction costs and expenses of the REIT, the Operating
6
Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything
else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total
Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is
exercised (an "
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the
7
REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold,
from the consideration payable pursuant to this Agreement to any holder of Non-GP
Fund Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be
8
treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership
shall determine or be advised that any deeds, bills of sale, assignments, assurances or any
other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights,
properties or assets of the Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving
Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest,
perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the
initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason,
all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall
terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because
one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a
covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies
with respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary,
9
other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and
the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and
Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation
Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or
the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and
Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of
the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person
or Governmental Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of
this Agreement and the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the
other Formation Transaction Documentation, any agreement contemplated hereby between the
parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict
with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any
judgment, order, writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the
Merger Sub is a party thereto.
10
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this
Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by
the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of
Amendment and Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in
substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the
Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or
incurred any material obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of
the REIT or the Operating Partnership, threatened against any of the REIT, the Operating
Partnership, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the
Operating Partnership or which challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and
the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and
warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be
deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
11
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating
12
Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
13
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this
Agreement and the other Formation Transaction Documentation to which it is a party have been duly and
validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or
on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation
of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general
principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership
of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued
(other than the Profits Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the
Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any
Governmental Authority or under any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement,
the other Formation Transaction Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers,
approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any
agreement contemplated hereby between the parties to this Agreement and the transactions
contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a
default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any
term or provision of any judgment, order, writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would
not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse
Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns
and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are
accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed,
asserted or assessed against the Fund or any of the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and
is not, therefore, subject to the provisions of the Code relating to the withholding of sales
proceeds to foreign persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and
warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or
warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree
and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
14
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT
and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub
(i) to be formed prior to the Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such
execution, the "
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions
set forth in this Agreement. All representations,
15
warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating
Partnership shall adopt and use only the so-called "traditional method" described
in Treasury Regulation Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation
Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the
Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further
subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and
16
covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The
obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this
Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in
part):
17
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund 2000
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
following meanings.
18
any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
19
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or more
counterparts have been signed by each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution
Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the
entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to
confer any rights or remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California, regardless of any laws that might otherwise govern
under applicable principles of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and
inure to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties,
and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an
Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive
jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any
dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably
waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property
is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid,
binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this
Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such
20
negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be
effective and valid under applicable law, but if any provision is held invalid, illegal or
unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be
21
deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the
REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other
remedy to which the REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable
remedies otherwise available to the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly
acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby
waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such
specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under
this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience
only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any
personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT,
the Operating Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the
consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration
to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
Name:
Title: |
Jordan Kaplan
Chief Executive Officer |
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
Name:
Title: |
Jordan Kaplan
Chief Executive Officer |
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DOUGLAS EMMETT REALTY FUND 2000, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
Name:
Title: |
Dan A. Emmett
President and Chief Executive Officer |
AGREED AND ACCEPTED as of
, DERF 2000 ACQUISITION, LLC |
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By: |
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Douglas Emmett GP, LLC Its Managing Member |
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By: |
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Douglas Emmett Properties, LP Its Sole Member |
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By: |
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Douglas Emmett, LLC Its General Partner |
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By: |
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Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: Title: |
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Exhibit A: |
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List of DERA Funds and Single Asset Entities |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DERF 2002 ACQUISITION, LLC
AND
DOUGLAS EMMETT REALTY FUND 2002,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 | THE MERGER | 3 | ||
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 4 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 6 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 7 | ||
Section 1.11 | TRANSACTION COSTS | 7 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 7 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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8 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | ||
Section 2.03 | TAX WITHHOLDING | 9 | ||
Section 2.04 | FURTHER ACTION | 9 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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10 |
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 11 | ||
Section 3.04 | NO VIOLATION | 11 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 11 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 12 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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13 |
Section 4.02 | DUE AUTHORIZATION | 14 | ||
Section 4.03 | CAPITALIZATION | 14 | ||
Section 4.04 | CONSENTS AND APPROVALS | 14 | ||
Section 4.05 | NO VIOLATION | 14 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 15 | ||
i
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
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15 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 16 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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16 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE FUND | 16 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 17 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
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NOTICES |
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18 |
Section 8.02 | DEFINITIONS | 18 | ||
Section 8.03 | COUNTERPARTS | 20 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 20 | ||
Section 8.05 | GOVERNING LAW | 20 | ||
Section 8.06 | ASSIGNMENT | 20 | ||
Section 8.07 | JURISDICTION | 20 | ||
Section 8.08 | DISPUTE RESOLUTION | 20 | ||
Section 8.09 | SEVERABILITY | 21 | ||
Section 8.10 | RULES OF CONSTRUCTION | 21 | ||
Section 8.11 | EQUITABLE REMEDIES | 22 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 22 | ||
Section 8.13 | TIME OF THE ESSENCE | 22 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 22 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | ||
Section 8.16 | AMENDMENTS | 22 |
ii
DEFINED TERMS
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Fund Value | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CULPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DEG Operating Agreement | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.05 | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Recitals | |
Fund Partnership Interests | Section 8.02 | |
Fund Subsidiary | Section 4.01 | |
iii
Fund Value | Section 1.05 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Recitals | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Douglas Emmett Realty Fund 2002, a California limited partnership (the " Fund "), and DERF 2002 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds), DERA's share of the respective Allocated Shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund (the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders
2
who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Section 16911 of the Uniform Limited Partnership Act of 1994 of the State of the California (" CULPA "), and Section 8.3 of the Agreement of Limited Partnership of the Fund dated as of October 1, 2002 (the " Fund Partnership Agreement "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 16911 of the CULPA;
WHEREAS, as of the date hereof, the Fund owns certain of its property indirectly through DEG, LLC, a Delaware limited liability company, 98% of which is owned indirectly by the Fund and 2% of which is owned by HBRCT LLC, a Hawaii limited liability company (" HBRCT ");
WHEREAS, concurrently with the execution of this Agreement, HBRCT and the REIT have entered into a contribution agreement, pursuant to which HBRCT will contribute, among other thing, all of its interest in DEG to the Operating Partnership in exchange for OP Units with a value equal to HBRCT's allocated share of the Fund Value (defined below), as determined in accordance with Section 7.1 of the Limited Liability Company Agreement of DEG (the " DEG Operating Agreement ");
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CULPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02 EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund shall file a certificate of merger as contemplated by the CULPA, with the Secretary of State of the State of California (the " Certificate of Merger "), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CULPA. The Merger shall become effective as of the date set forth
3
in the Certificate of Merger (the " Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CULPA.
Section 1.04 CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT. At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CULPA, and (ii) the Fund Partnership Agreement, as in effect immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CULPA.
Section 1.05 CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 9.0359% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT, if any (such capital contributions by the
4
DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. The portion of the Fund Value allocated to the Fund Partnership Interests (the " Adjusted Fund Value ") shall be equal to the sum of (1) the portion of 40.5390% of the Fund Value allocable to the Fund in accordance with Section 7.1 of the DEG Operating Agreement, plus (2) 59.4610% of the Fund Value. An amount (the " Allocated Share ") of the Adjusted Fund Value shall be allocated to each Fund Partnership Interest or portion thereof in accordance with Section 5.3 of the Fund Partnership Agreement, it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-GP Fund Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to
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an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non- Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06 CONVERSION OF MERGER SUB MEMBER INTERESTS. At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07 CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS. Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the Merger Consideration applicable thereto.
Section 1.08 FRACTIONAL INTERESTS. No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09 DISTRIBUTION OF PRE-CLOSING CASH FLOW. During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Fund's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of the Fund Partnership Agreement. Subject to this limitation,
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the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement, " Adjusted Net Operating Income " means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of derivatives, i.e. , the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund) less (B) the Capital Expense Allowance.
Section 1.10 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
Section 1.11 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12 ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE. Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares
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or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02 PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
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(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03 TAX WITHHOLDING. The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04 FURTHER ACTION. If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
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If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and
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delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05 VALIDITY OF OP UNITS AND REIT SHARES. The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06 OP AGREEMENT. Attached as Exhibit E hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 3.08 LITIGATION. There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
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Section 3.10 INDEMNIFICATION.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials
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and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01 ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable
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Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03 CAPITALIZATION. Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by the Fund or any of the Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or any Fund Subsidiary or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on the Fund or any Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06 TAXES. To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund and each of the Fund Subsidiaries has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund or any of the Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07 NON-FOREIGN STATUS. The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
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Section 4.09 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership interests or other equity interests in any of the Fund Subsidiaries;
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(e) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02 OBLIGATIONS OF MERGER SUB. Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such
15
execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03 TAX AGREEMENT. In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02 CONDITIONS TO OBLIGATIONS OF THE FUND. The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
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(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03 CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
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ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
Douglas
Emmett Realty Fund 2002
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election
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(without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
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(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 8.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 8.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08 DISPUTE RESOLUTION. The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the
20
foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to
21
the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 8.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating Partnership, Merger Sub and the Fund.
Section 8.16 AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY FUND 2002, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of
, |
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DERF 2002 ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities |
Exhibit B: |
List of Formation Transaction Documentation |
Exhibit C: |
Form of Contribution Agreement |
Exhibit D: |
Form of Registration Rights Agreement |
Exhibit E: |
Operating Partnership Agreement |
Exhibit 10.23
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DERF 2005 ACQUISITION, LLC
DOUGLAS EMMETT 2005 REIT, INC.
AND
DOUGLAS EMMETT REALTY FUND 2005,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MIGRATORY MERGER | ||||
Section 1.01 |
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MIGRATORY MERGER |
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3 |
Section 1.02 | MIGRATORY MERGER EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MIGRATORY MERGER | 4 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CHARTER AND BYLAWS OF SURVIVING ENTITY | 4 | ||
Section 1.06 | DIRECTORS AND OFFICERS | 4 | ||
Section 1.07 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | ||
Section 1.08 | CANCELLATION AND RETIREMENT OF COMMON STOCK OF DE2005 REIT | 5 | ||
Section 1.09 | CANCELLATION AND RETIREMENT OF FUND PARTNERSHIP INTERESTS | 5 | ||
Section 1.10 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
ARTICLE II REIT ACQUISITION MERGER |
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Section 2.01 |
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REIT ACQUISITION MERGER |
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6 |
Section 2.02 | REIT ACQUISITION EFFECTIVE TIME | 6 | ||
Section 2.03 | EFFECT OF THE REIT ACQUISITION MERGER | 7 | ||
Section 2.04 | ORGANIZATIONAL DOCUMENTS OF THE SURVIVING ENTITY | 7 | ||
Section 2.05 | MANAGING MEMBER AND OFFICERS | 7 | ||
Section 2.06 | CONVERSION OF DE2005 REIT COMMON STOCK. | 7 | ||
Section 2.07 | CANCELLATION AND RETIREMENT OF DE2005 REIT COMMON SHARES | 8 | ||
Section 2.08 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 8 | ||
Section 2.09 | FRACTIONAL INTERESTS | 9 | ||
Section 2.10 | CALCULATION OF MERGER CONSIDERATION | 9 | ||
Section 2.11 | TRANSACTION COSTS | 9 | ||
Section 2.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 9 | ||
ARTICLE III CLOSING; TERM OF AGREEMENT |
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Section 3.01 |
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CLOSING |
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10 |
Section 3.02 | PAYMENT OF MERGER CONSIDERATION | 10 | ||
Section 3.03 | TAX WITHHOLDING | 11 | ||
Section 3.04 | FURTHER ACTION | 11 | ||
Section 3.05 | TERM OF THE AGREEMENT | 11 | ||
Section 3.06 | EFFECT OF TERMINATION | 11 | ||
ARTICLE IV REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT AND MERGER SUB |
||||
Section 4.01 |
|
ORGANIZATION; AUTHORITY |
|
12 |
Section 4.02 | DUE AUTHORIZATION | 12 | ||
Section 4.03 | CONSENTS AND APPROVALS | 13 | ||
Section 4.04 | NO VIOLATION | 13 | ||
Section 4.05 | VALIDITY OF REIT SHARES | 13 | ||
Section 4.06 | LIMITED ACTIVITIES | 13 | ||
i
Section 4.07 | LITIGATION | 13 | ||
Section 4.08 | NO OTHER REPRESENTATIONS OR WARRANTIES | 13 | ||
Section 4.09 | INDEMNIFICATION | 13 | ||
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE FUND AND DE2005 REIT |
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Section 5.01 |
|
ORGANIZATION; AUTHORITY |
|
15 |
Section 5.02 | DUE AUTHORIZATION | 15 | ||
Section 5.03 | CAPITALIZATION | 15 | ||
Section 5.04 | CONSENTS AND APPROVALS | 16 | ||
Section 5.05 | NO VIOLATION | 16 | ||
Section 5.06 | TAXES | 16 | ||
Section 5.07 | NON-FOREIGN STATUS | 16 | ||
Section 5.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 16 | ||
Section 5.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 16 | ||
ARTICLE VI COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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ARTICLE VII ADDITIONAL AGREEMENTS |
||||
Section 7.01 |
|
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE FUND AND DE2005 REIT |
|
17 |
Section 7.02 | OBLIGATIONS OF MERGER SUB | 17 | ||
Section 7.03 | REDEMPTION OF PREFERRED STOCK | 17 | ||
Section 7.04 | AMENDMENT TO CHARTER | 17 | ||
ARTICLE VIII CONDITIONS PRECEDENT |
||||
Section 8.01 |
|
CONDITION TO EACH PARTY'S OBLIGATIONS |
|
18 |
Section 8.02 | CONDITIONS TO OBLIGATIONS OF THE FUND AND DE2005 REIT | 18 | ||
Section 8.03 | CONDITIONS TO OBLIGATION OF THE REIT AND MERGER SUB | 19 | ||
ARTICLE IX GENERAL PROVISIONS |
||||
Section 9.01 |
|
NOTICES |
|
19 |
Section 9.02 | DEFINITIONS | 20 | ||
Section 9.03 | COUNTERPARTS | 22 | ||
Section 9.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 22 | ||
Section 9.05 | GOVERNING LAW | 22 | ||
Section 9.06 | ASSIGNMENT | 22 | ||
Section 9.07 | JURISDICTION | 22 | ||
Section 9.08 | DISPUTE RESOLUTION | 22 | ||
Section 9.09 | SEVERABILITY | 23 | ||
Section 9.10 | RULES OF CONSTRUCTION | 23 | ||
Section 9.11 | EQUITABLE REMEDIES | 24 | ||
Section 9.12 | WAIVER OF SECTION 1542 PROTECTIONS | 24 | ||
Section 9.13 | TIME OF THE ESSENCE | 24 | ||
Section 9.14 | DESCRIPTIVE HEADINGS | 24 | ||
Section 9.15 | NO PERSONAL LIABILITY CONFERRED | 24 | ||
Section 9.16 | AMENDMENTS | 24 |
ii
DEFINED TERMS
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 9.02 | |
Additional Contributions | Section 1.07 | |
Adjusted Net Operating Income | Section 1.10 | |
Adjusted Fund Value | Section 1.07 | |
Affiliate | Section 9.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.07 | |
Alternative Division | Section 2.12 | |
Business Day | Section 9.02 | |
Capital Expense Allowance | Section 9.02 | |
Cash Requirements | Section 2.06 | |
Claim | Section 4.09 | |
Claim Notice | Section 4.09 | |
Closing | Section 3.01 | |
Closing Date | Section 3.01 | |
Code | Section 9.02 | |
Consent Form | Section 9.02 | |
CULPA | Recitals | |
DE2005 REIT | Introduction | |
DE2005 REIT Common Shares | Recitals | |
DECO | Recitals | |
DEGA | Recitals | |
DEGA Operating Agreement | Recitals | |
DERA | Recitals | |
DERA/DECO Merger | Recitals | |
DERA Funds | Recitals | |
DERF 2005 Investment Amount | Section 1.07 | |
Dispute | Section 9.08 | |
Douglas Emmett Entities | Recitals | |
Elected Cash Percentage | Section 9.02 | |
Excess Preferred Return | Section 1.10 | |
Expiration Date | Section 4.09 | |
Formation Transactions | Recitals | |
Formation Transaction Documentation | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 4.09 | |
Fund Partnership Agreement | Recitals | |
Fund Partnership Interests | Section 9.02 | |
Fund LP Interests | Recitals | |
Fund Subsidiary | Section 5.01 | |
Fund Value | Section 1.07 | |
General Partner | Recitals | |
Governmental Authority | Section 9.02 | |
HBRCT | Recitals | |
HBRCT Share | Recitals | |
Investment Funds | Recitals | |
iii
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 9.02 | |
IPO Price | Section 9.02 | |
Joinder Date | Section 7.02 | |
Knowledge | Section 9.02 | |
Laws | Section 9.02 | |
Liens | Section 9.02 | |
Liquidity Discount | Section 9.02 | |
Losses | Section 4.09 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 9.02 | |
Maximum Cash Consideration | Section 2.06 | |
Maximum Cash Percentage | Section 2.06 | |
Merger Sub | Introduction | |
Mergers | Recitals | |
MGCL | Section 1.01 | |
Migratory Merger | Recitals | |
Migratory Merger Certificates of Merger | Section 1.02 | |
Migratory Merger Consideration | Section 1.07 | |
Migratory Merger Effective Time | Section 1.02 | |
MLLCA | Section 2.01 | |
MSDAT | Section 1.02 | |
Non-GP Fund Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Recitals | |
Outside Date | Section 3.05 | |
Person | Section 9.02 | |
PLE | Recitals | |
Preferred Return | Section 1.10 | |
Preferred Stock | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 9.02 | |
Profits Interests | Recitals | |
Property | Section 5.01 | |
Prospects | Section 9.02 | |
Registration Statement | Section 3.05 | |
REIT | Introduction | |
REIT Acquisition Articles | Section 2.02 | |
REIT Acquisition Merger | Recitals | |
REIT Acquisition Certificates of Merger (referenced but not defined) | Section 2.02 | |
REIT Acquisition Effective Time | Section 2.02 | |
REIT Acquisition Merger Consideration | Section 2.06 | |
REIT Common Stock | Recitals | |
REIT Share Interest | Section 2.06 | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 4.01 | |
Representation, Warranty and Indemnity Agreement | Section 9.02 | |
iv
SEC | Section 3.05 | |
Securities Act | Section 9.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.07 | |
Subsidiary | Section 9.02 | |
Surviving Entity | Section 9.02 | |
Tax | Section 9.02 | |
Third Party Claims | Section 4.09 | |
Total Formation Transaction Value | Section 1.07 | |
Valid Election | Section 9.02 |
v
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Realty Fund 2005, a California limited partnership (the " Fund "), Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of the Fund (" DE2005 REIT "), and DERF 2005 Acquisition, LLC, a Maryland limited liability company to be formed prior to the REIT Acquisition Effective Time (defined below) and to be wholly owned by the REIT (" Merger Sub ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including the Fund, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, the REIT and Douglas Emmett Properties, LP, a Delaware limited partnership and a Subsidiary of the REIT (the " Operating Partnership "), will enter into (i) an agreement and plan of merger with each other DERA Fund pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity;
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Migratory Merger (defined below), the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund,
including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's Allocated Share of the Fund Value (each as defined below) of each DERA Fund (other than the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, the Fund will first be merged with and into DE2005 REIT (the " Migratory Merger "), with DE2005 REIT as the surviving entity and pursuant to which each limited partnership interest and preferred partnership interest in the Fund (collectively, the " Fund LP Interests ") and each promoted profits interest in the Fund (the " Profits Interests " and, together with the Fund LP Interests, the " Non-GP Fund Interests ") and the Fund GP Interest will be converted automatically as set forth herein into the right to receive shares of common stock, par value $.01 per share, of DE2005 REIT (" DE2005 REIT Common Shares ");
WHEREAS, the Migratory Merger is intended to be treated as a liquidation of the Fund under the Code;
WHEREAS, immediately following the Migratory Merger, DE2005 REIT will be merged with and into Merger Sub (the " REIT Acquisition Merger " and, together with the Migratory Merger, the " Mergers "), with Merger Sub as the surviving entity and pursuant to which the DE2005 REIT Common Shares held by the former Non-GP Fund Interest holders will be converted automatically as set forth herein into the right to receive cash, shares (" REIT Shares ") of REIT Common Stock, or any combination of the foregoing in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT); provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, the REIT Acquisition Merger is intended to be a reorganization under Section 368(a)(1)(A) of the Code;
WHEREAS, in accordance with Section 16911 of the Uniform Limited Partnership Act of 1994 of the State of the California (" CULPA "), and Section 8.3 of the Restated Agreement of Limited Partnership of the Fund dated as of March 10, 2005, as amended (the " Fund Partnership Agreement "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 16911 of the CULPA and the Fund Partnership Agreement;
WHEREAS, as of the date hereof, the Fund owns its property indirectly through DEGA, LLC, a Delaware limited liability company (" DEGA "), 98% of which is owned indirectly by the Fund and 2% of which is owned by HBRCT LLC, a Hawaii limited liability company (" HBRCT ");
WHEREAS, concurrently with the execution of this Agreement, HBRCT and the Operating Partnership have entered into a contribution agreement, pursuant to which HBRCT will contribute,
2
concurrently with the Mergers, among other things, all of its interest in DEGA to the Operating Partnership in exchange for OP Units, with a value (the " HBRCT Share ") equal to HBRCT's allocated share of the Fund Value (defined below), as determined in accordance with Section 7.1 of the Limited Liability Company Agreement of DEGA dated as of January 3, 2005 (the " DEGA Operating Agreement ");
WHEREAS, DE2005 REIT currently has issued and outstanding 250 DE2005 REIT Common Shares, all of which are owned by the Fund, and 125 shares of 12.5% Series A Cumulative Non-Voting Preferred Stock, par value $1,500 per share (the " Preferred Stock "), and, immediately prior to the Mergers, DE2005 REIT shall redeem all of its issued and outstanding shares of Preferred Stock pursuant to the terms thereof;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT and Merger Sub, on the one hand, and the Fund and DE2005 REIT, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Mergers and the other Formation Transactions;
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MIGRATORY MERGER
Section 1.01 MIGRATORY MERGER. At the Migratory Merger Effective Time (defined below), and subject to and the Maryland General Corporation Law (" MGCL "), the Fund shall be merged with and into DE2005 REIT, whereby the separate existence of the Fund shall cease, and DE2005 REIT shall continue its existence under the MGCL as the Surviving Entity.
Section 1.02 MIGRATORY MERGER EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VIII, the Fund and DE2005 REIT shall cause the Migratory Merger to be consummated by filing (i) articles of merger as contemplated by the MGCL (the " Migratory Articles "), with the State Department of Assessments and Taxation of Maryland (" MSDAT "), and (ii) a certificate of merger as contemplated by the CULPA, with the Secretary of State of the State of California (such filings being collectively referred to as the " Migratory Merger Certificates of Merger "), such Migratory Merger Certificates of Merger to state that the Migratory Merger shall become effective as of the earlier of 30 days after the Migratory Articles are accepted for record by the MSDAT or the IPO Closing Date, together with, in the case of clauses (i) and (ii), any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the MGCL and the CULPA. The Migratory Merger shall become effective as of the date set forth in the Migratory Merger Certificates of Merger (the " Migratory Merger Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Migratory Merger Certificates of Merger, the REIT, the Fund and DE2005 REIT shall, prior to the Migratory Merger Effective Time, abandon the Migratory Merger Certificates of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California and the MSDAT new Migratory
3
Merger Certificates of Merger and the other documents detailed above, such new Migratory Merger Certificates of Merger to state that the Migratory Merger shall become effective as of the earlier of 30 days after the Migratory Articles are accepted for record by the MSDAT or the new IPO Closing Date. In the event of any such abandonment of the Migratory Merger Certificates of Merger, for purposes of this Agreement, from and after the filing of such new Migratory Merger Certificates of Merger, the term "Migratory Merger Certificates of Merger" shall mean such new Migratory Merger Certificates of Merger (including the new Migratory Articles). Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the REIT, the Fund and DE2005 REIT shall, as soon as practicable after such determination, abandon the Migratory Merger Certificates of Merger and file notice of abandonment of the Migratory Articles with the MSDAT.
Section 1.03 EFFECT OF THE MIGRATORY MERGER. At the Migratory Merger Effective Time, the effect of the Migratory Merger shall be as provided in this Agreement, the Migratory Merger Certificates of Merger and the applicable provisions of the MGCL and the CULPA.
Section 1.04 CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT. At the Migratory Merger Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Migratory Merger Effective Time, shall be cancelled, and (ii) the Fund Partnership Agreement, as in effect immediately prior to the Migratory Merger Effective Time, shall be terminated.
Section 1.05 CHARTER AND BYLAWS OF SURVIVING ENTITY. At the Migratory Merger Effective Time, (i) the charter of DE2005 REIT, as in effect immediately prior to the Migratory Merger Effective Time, shall be the charter of the Surviving Entity until thereafter amended as provided therein or in accordance with the MGCL, and (ii) the bylaws of DE2005 REIT, as in effect immediately prior to the Migratory Merger Effective Time, shall be the bylaws of the Surviving Entity until thereafter amended as provided therein or in accordance with the MGCL.
Section 1.06 DIRECTORS AND OFFICERS. The directors of DE2005 REIT immediately prior to the Migratory Merger Effective Time shall be, from and after the Migratory Merger Effective Time, the directors of DE2005 REIT until their respective successors are duly elected and qualify or until their earlier death or resignation or removal from office in accordance with the bylaws of DE2005 REIT. The officers of DE2005 REIT immediately prior to the Migratory Merger Effective Time shall be, from and after the Migratory Merger Effective Time, the officers of DE2005 REIT until their respective successors are duly elected and qualify or until their earlier death or resignation or removal from office in accordance with the bylaws of DE2005 REIT.
Section 1.07 CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, as a result of and upon consummation of the Mergers or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any)
4
and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Fund Value " means (i) 2.5079% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The portion of the Fund Value allocated to the Fund Partnership Interests (the "Adjusted Fund Value") shall be equal (1) to the portion of 89.9818% of the Fund Value allocable to the Fund in accordance with Section 7.1 of the DEGA Operating Agreement (and thus shall exclude the HBRCT Share), plus (2) 10.0182% of the Fund Value less (3) the Excess Preferred Return (defined below). An amount (the " Allocated Share ") shall be allocated to each Fund Partnership Interest or portion thereof as the sum of (1) the portion of the Adjusted Fund Value allocable to such Fund Partnership Interest or portion thereof in accordance with Section 5.3 of the Fund Partnership Agreement, it being expressly acknowledged and agreed by the parties hereto that Section 5.3 of the Fund Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of Distributable Net Proceeds (as defined in the Fund Partnership Agreement) from sales of properties plus (2) the portion of the DERF 2005 Investment Amount (defined below) arising from the Additional Contributions made with respect to such Fund Partnership Interest.
The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Fund Partnership Agreement) made to the Fund by its partners and (y) Capital Contributions (as defined in the DEGA Operating Agreement) made by HBRCT, if any (such capital contributions by the Fund partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date.
(b) At the Migratory Merger Effective Time, by virtue of the Migratory Merger and without any action on the part of DE2005 REIT, the Fund or the holders of any Fund Partnership Interests, each Fund Partnership Interest issued and outstanding immediately prior to the Migratory Merger Effective Time shall be converted automatically into the right to receive a number of DE2005 REIT Common Shares (the " Migratory Merger Consideration ") equal to (i) the Allocated Share in respect of that Fund Partnership Interest divided by (ii) the IPO Price. Fractional DE2005 REIT Common Shares shall be issued in the Migratory Merger. The DE2005 REIT Common Shares issued in the Migratory Merger will not be certificated and such share ownership will be evidenced solely in the stockholder records of DE2005 REIT.
Section 1.08 CANCELLATION AND RETIREMENT OF COMMON STOCK OF DE2005 REIT. At the Migratory Merger Effective Time, by virtue of the Migratory Merger and without any action on the part of the Fund or DE2005 REIT, each DE2005 REIT Common Share issued and outstanding immediately prior to the Migratory Merger Effective Time shall no longer be outstanding and shall automatically be cancelled and cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.09 CANCELLATION AND RETIREMENT OF FUND PARTNERSHIP INTERESTS. Each Fund Partnership Interest converted into the right to receive the Migratory Merger Consideration pursuant to Section 1.07 shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Fund Partnership Interests so
5
converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the Migratory Merger Consideration applicable thereto.
Section 1.10 DISTRIBUTION OF PRE-CLOSING CASH FLOW. During the period from July 1, 2005 through the Closing Date, the Fund has distributed or will distribute, from time to time, no more or less than (i) its good faith estimate of the Fund's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Fund Partnership Interests in accordance with Section 5.3 of the Fund Partnership Agreement, and (ii) the Preferred Return (as defined in the Fund Partnership Agreement) payable to partners in the Fund pursuant to Section 3.2(c) of the Fund Partnership Agreement during the period commencing on July 1, 2005 and ending on the Closing Date (the " Preferred Return "). Subject to this limitation, the Fund may continue to make distributions in accordance with the Fund Partnership Agreement. For purposes of this Agreement, " Adjusted Net Operating Income " means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of derivatives, i.e. , the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such line item), of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund) less (B) the Capital Expense Allowance. As provided under Section 1.07, the Adjusted Fund Value (and hence the amount distributable under Section 1.07), shall be reduced by the amount (the " Excess Preferred Return "), if any, by which the Preferred Return exceeds the good faith estimate of the Fund's Adjusted Net Operating Income during the period commencing on July 1, 2005 and ending on the Closing Date.
ARTICLE II
REIT ACQUISITION MERGER
Section 2.01 REIT ACQUISITION MERGER. Immediately following the consummation of the Migratory Merger and at the REIT Acquisition Effective Time (defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the MGCL and the Maryland Limited Liability Company Act (" MLLCA "), DE2005 REIT shall be merged with and into Merger Sub, whereby the separate existence of DE2005 REIT shall cease, and Merger Sub shall continue its existence under the MLLCA as the Surviving Entity.
Section 2.02 REIT ACQUISITION EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VIII, the REIT, Merger Sub and DE2005 REIT shall cause the REIT Acquisition Merger to be consummated by filing articles of merger as contemplated by the MGCL, with the MSDAT (the " REIT Acquisition Articles "), such REIT Acquisition Articles to state that the REIT Acquisition shall become effective as of the earlier of 30 days after the REIT Acquisition Articles are accepted for record by the MSDAT or the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the MLLCA and MGCL. The REIT Acquisition shall become effective as of the date set forth in the REIT Acquisition Articles (the " REIT Acquisition Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the REIT Acquisition Articles, the REIT, Merger Sub and DE2005 REIT shall, prior to the REIT Acquisition Effective Time, abandon the REIT Acquisition Articles and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the MSDAT new REIT Acquisition Articles and the other documents detailed above, such new REIT Acquisition Articles to state that the REIT Acquisition Merger shall become effective as of the earlier of 30 days after the REIT Acquisition Articles are accepted for record or the
6
new IPO Closing Date. In the event of any such revocation of the REIT Acquisition Certificates of Merger, for purposes of this Agreement, from and after the filing of such new REIT Acquisition Articles, the term "REIT Acquisition Articles" shall mean such new REIT Acquisition Articles. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the REIT, Merger Sub and DE2005 REIT shall, as soon as practicable after such determination, abandon the REIT Acquisition Articles and file notice of abandonment of the REIT Acquisition Articles with the MSDAT.
Section 2.03 EFFECT OF THE REIT ACQUISITION MERGER. At the REIT Acquisition Effective Time, the effect of the REIT Acquisition Merger shall be as provided in this Agreement, the REIT Acquisition Articles and the applicable provisions of the MLLCA and the MGCL.
Section 2.04 ORGANIZATIONAL DOCUMENTS OF THE SURVIVING ENTITY. At the REIT Acquisition Effective Time, (i) the Articles of Organization of Merger Sub, as in effect immediately prior to the REIT Acquisition Effective Time, shall be the Articles of Organization of the Surviving Entity until thereafter amended as provided therein or in accordance with the MLLCA, and (ii) the operating agreement of Merger Sub, as in effect immediately prior to the REIT Acquisition Effective Time, shall be the operating agreement of the Surviving Entity until thereafter amended as provided therein or in accordance with the MLLCA.
Section 2.05 MANAGING MEMBER AND OFFICERS. The managing member of Merger Sub immediately prior to the REIT Acquisition Effective Time shall be, from and after the REIT Acquisition Effective Time, the managing member of the Surviving Entity. The officers of Merger Sub immediately prior to the REIT Acquisition Effective Time shall be, from and after the REIT Acquisition Effective Time, the officers of Surviving Entity until their respective successors are duly elected or appointed and qualify or until their earlier resignation, removal from office or death in accordance with the operating agreement of the Surviving Entity.
Section 2.06 CONVERSION OF DE2005 REIT COMMON STOCK.
(a) At the REIT Acquisition Effective Time, by virtue of the REIT Acquisition Merger and without any action on the part of the REIT, DE2005 REIT or the holders of DE2005 REIT Common Shares, except as provided in Section 2.06(b), each DE2005 REIT Common Share or fraction thereof issued in respect of such holder's Allocated Share pursuant to Section 1.07 and outstanding immediately prior to the REIT Acquisition Effective Time shall be converted automatically into the right to receive cash with an aggregate value equal to the IPO Price or equivalent fraction thereof or one REIT Share or equivalent fraction thereof (collectively referred to as the " REIT Acquisition Merger Consideration "). For all purposes under this Section 2.06, other than as specifically provided in Section 2.06(a)(i),any REIT Shares paid and issued as REIT Acquisition Merger Consideration, and any DE2005 REIT Common Share, will be valued at the IPO Price.
Subject to Section 2.09, the form of payment to each holder of DE2005 REIT Common Shares of the REIT Acquisition Merger Consideration for the DE2005 REIT Common Shares or fraction thereof so converted shall be in the form and in the amounts as follows:
(i) Cash : (A) All DE2005 REIT Common Shares for each such holder who is not an Accredited Investor shall be paid in cash, (B) to the extent such holder elected cash in respect thereof, DE2005 REIT Common Shares with a value equal to 100% of the DERF 2005 Investment Amount attributable to such holder shall be paid in cash, and (C) DE2005 REIT Common Shares with a value equal to the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each holder (other than holders who are not Accredited Investors) shall be paid in cash; provided that if the aggregate cash (i) payable under this Section 2.06 and Section 2.09, (ii) paid as distributions required by
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Section 1.10 (other than cash that would not be treated as money or property under Section 356 of the Code, as determined in good faith by DERA with the advice of tax counsel consistent with the intent that the REIT Acquisition Merger constitute a reorganization under Section 368 of the Code) and (iii) paid to effect the redemption required by Section 7.03 (the aggregate amounts under (i), (ii) and (iii), the " Cash Requirements ") exceeds 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger plus (y) the amount of cash described in clauses (ii) and (iii) above, as determined for tax purposes (the " Maximum Cash Consideration "), the cash payable under this Section 2.06(a)(i)(C) shall be reduced for each Pre-Formation Participant hereunder in an amount proportionate to the cash the Pre-Formation Participant would otherwise receive under this Section 2.06(a)(i)(C) until the Cash Requirements equal the Maximum Cash Consideration. Solely for purposes of the preceding proviso, any REIT Shares issued in the REIT Acquisition Merger shall be treated as having a value equal to the IPO Price minus the Liquidity Discount. This proviso is intended to ensure that the portion of the consideration paid in the REIT Acquisition Merger that consists of REIT Shares is sufficient to meet the "continuity of interest" requirement of Section 368 of the Code and shall be interpreted in accordance with such intent. For the avoidance of doubt, pursuant to Section 2.06(b), DE2005 REIT Shares held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger, and the foregoing calculation will be made accordingly. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors, and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the Maximum Cash Consideration. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the REIT Acquisition Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the portion of such holder's Pre-Formation Interest in the Fund that has not been allocated cash pursuant to the REIT Acquisition Merger shall instead be treated, in accordance with such holder's prior Valid Election, as a REIT Share Interest (defined below) under clause (ii) below; and
(ii) one (1) REIT Share (or applicable fraction thereof) for each such DE2005 REIT Common Share (or applicable fraction thereof) (a " REIT Share Interest ") that is not paid in cash under clause (i).
(b) Each DE2005 REIT Common Share issued and outstanding immediately prior to the REIT Acquisition Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall be automatically cancelled and retired and cease to exist, and no consideration shall be delivered in exchange therefor.
Section 2.07 CANCELLATION AND RETIREMENT OF DE2005 REIT COMMON SHARES. Each DE2005 REIT Common Share converted into the right to receive the REIT Acquisition Merger Consideration pursuant to Section 2.06 shall no longer be outstanding and shall automatically be canceled and retired and shall thereafter cease to exist, and each holder of such DE2005 REIT Common Share so converted shall cease to have any rights with respect thereto, except for the right to receive the REIT Acquisition Merger Consideration applicable thereto.
Section 2.08 CONVERSION OF MERGER SUB MEMBER INTERESTS. At the REIT Acquisition Effective Time, by virtue of the REIT Acquisition Merger and without any action on the part of the REIT or Merger Sub or the holders of member interests in Merger Sub, each member
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interest in Merger Sub issued and outstanding immediately prior to the REIT Acquisition Effective Time shall remain issued and outstanding and constitute all of the issued and outstanding member interests of the Surviving Entity.
Section 2.09 FRACTIONAL INTERESTS. No fractional REIT Shares shall be issued in the REIT Acquisition Merger. All fractional REIT Shares that a holder of DE2005 REIT Common Shares would otherwise be entitled to receive as a result of the REIT Acquisition Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole REIT Shares resulting from such aggregation and, in lieu of any fractional REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of a REIT Share to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional REIT Share. In the event that a holder of DE2005 REIT Common Shares participates only in the REIT Acquisition Merger or other mergers alone or in combination with the contributions contemplated by the other Formation Transaction Documentation, any cash payable to such holder in lieu of fractional REIT Shares shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the contribution agreement.
Section 2.10 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Migratory Merger Effective Time, all calculations relating to the Migratory Merger Consideration and the REIT Acquisition Merger Consideration shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests and DE2005 REIT Common Shares.
Section 2.11 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 2.12 ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE. Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment to each holder of DE2005 REIT Common Shares or fraction thereof converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares as provided in this Agreement in an amount and/or number calculated on the basis of the final
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amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. The Cash Requirements and the Maximum Cash Consideration shall be calculated (and the Cash Requirements shall not exceed the Maximum Cash Consideration) (i) at the Effective Time taking into account the consideration described in clauses (1) and (2) of the preceding sentence but not the consideration described in clause (3) of the preceding sentence and (ii) after the over-allotment option has been fully exercised or has expired, taking into account the consideration described in clauses (1), (2) and (3) above.
(C) No cash shall be paid with respect to any fractional REIT Shares in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares shall be aggregated with any fractional REIT Shares in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE III
CLOSING; TERM OF AGREEMENT
Section 3.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 3.05, and subject to the satisfaction or waiver of the conditions in Article VIII, the closing of the Mergers and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 3.02 PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the REIT Acquisition Effective Time, the Surviving Entity (or its successor in interest) shall deliver to each holder of DE2005 Common Shares whose DE2005 Common Shares have been converted into the right to receive the REIT Acquisition Merger Consideration pursuant to Section 2.06(a) hereof, the REIT Acquisition Merger Consideration payable to such holder in the amounts and form provided in Section 2.06(a) hereof. Each certificate representing REIT Shares issuable as REIT Acquisition Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED
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WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with the REIT's charter and applicable law.
(b) The Surviving Entity (or its successor in interest) shall not be liable to any stockholder of DE2005 REIT for any portion of the REIT Acquisition Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
Section 3.03 TAX WITHHOLDING. The REIT shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of DE2005 REIT Common Shares, such amounts as the REIT is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the REIT, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of DE2005 REIT Common Shares in respect of which such deduction and withholding was made by the REIT.
Section 3.04 FURTHER ACTION. If, at any time after the Migratory Merger Effective Time or the REIT Acquisition Effective Time, the Surviving Entity shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Entity the right, title or interest in, to or under any of the rights, properties or assets of the Fund or DE2005 REIT acquired or to be acquired by the Surviving Entity as a result of, or in connection with, the Migratory Merger or the REIT Acquisition Merger or otherwise to carry out this Agreement, the Surviving Entity shall be authorized to execute and deliver, in the name and on behalf of each of the REIT, the Fund, DE2005 REIT or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the REIT, the Fund, DE2005 REIT or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Entity or otherwise to carry out this Agreement.
Section 3.05 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Mergers shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 3.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub, the Fund and DE2005 REIT under this Agreement shall terminate, except that the obligations set forth in Article IX shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Fund is as set forth in clause (i) of the definition of Fund Value.
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ARTICLE IV
REPRESENTATIONS, WARRANTIES AND
INDEMNITIES OF THE REIT AND MERGER SUB
Each of the REIT and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 4.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 4.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Mergers. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the REIT, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT and Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT and Merger Sub, each enforceable against each of the REIT and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
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Section 4.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT or Merger Sub in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 4.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any of the REIT or Merger Sub, or (C) any other agreement to which the REIT or the Merger Sub is a party thereto.
Section 4.05 VALIDITY OF REIT SHARES. The REIT Shares to be issued to the holders of DE2005 REIT Common Shares pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 4.06 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 4.07 LITIGATION. There is no action, suit or proceeding pending or, to the knowledge of the REIT, threatened against any of the REIT, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or which challenges or impairs the ability of any of the REIT or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 4.08 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT nor Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.09 INDEMNIFICATION.
(a) From and after the Closing Date, the REIT shall indemnify and hold harmless the Fund, DE2005 REIT and their respective directors, beneficiaries, officers, employees, partners, stockholders, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund, DE2005 REIT or any of the Properties (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT or Merger Sub pursuant to this Agreement; provided , however , that the REIT shall not have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares, (ii) the
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Fund's or DE2005 REIT's breach of its respective obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's or DE2005 REIT's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 4.09(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 4.09 (a " Claim ") against the REIT, it will promptly give written notice (a " Claim Notice ") to the REIT; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 4.09 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT shall be entitled, at its own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT in such defense and make available to the REIT (unless prohibited by Law), at its expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's control relating thereto as is reasonably required by the REIT. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 4.09 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 4.09. The foregoing sentence shall not (i) limit the Fund's right to specific
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performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the consideration payable hereunder for United States federal income tax purposes.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE FUND AND DE2005 REIT
Except as disclosed in the Prospectus, each of the Fund and DE2005 REIT hereby represents and warrants to the REIT that as of the Closing Date:
Section 5.01 ORGANIZATION; AUTHORITY.
(a) Each of the Fund and DE2005 REIT has been duly organized or formed and is validly existing under the laws of its jurisdiction of formation or incorporation, as applicable, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. Each of the Fund and DE2005 REIT, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 5.01(b) sets forth as of the date hereof with respect to the Fund (i) each Subsidiary of the Fund (each a " Fund Subsidiary "), (ii) the ownership interest therein of the Fund, (iii) if not wholly owned by the Fund, the identity and ownership interest of each of the other owners of such Subsidiary, and (iv) each office, residential or other property owned by the Fund or such Subsidiary or leased pursuant to a ground lease (each a " Property "). Each Fund Subsidiary has been duly organized and is validly existing under the laws of its jurisdiction of organization, and has all power and authority to own, lease and/or operate its Property and to carry on its business as presently conducted. Each Fund Subsidiary, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect.
Section 5.02 DUE AUTHORIZATION. The execution, delivery and performance by the Fund and DE2005 REIT of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of each of the Fund and DE2005 REIT. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the Fund and DE2005 REIT pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the Fund and DE2005 REIT, each enforceable against each of the Fund and DE2005 REIT in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 5.03 CAPITALIZATION. Schedule 5.03 sets forth as of the date hereof the ownership of the Fund and DE2005 REIT. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights. All of the issued and outstanding shares of capital stock of DE2005 REIT are validly issued, fully paid and non-assessable and, to DE2005 REIT's Knowledge, are not subject to preemptive rights.
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Section 5.04 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by the Fund, DE2005 REIT or any of the other Fund Subsidiaries in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Fund or any of the Fund Subsidiaries is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 5.05 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund, DE2005 REIT or any other Fund Subsidiary or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on the Fund, DE2005 REIT or any other Fund Subsidiary, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 5.06 TAXES. To the Fund's and DE2005 REIT's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund, DE2005 REIT and each of the other Fund Subsidiaries has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund, DE2005 REIT or any of the other Fund Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.
Section 5.07 NON-FOREIGN STATUS. Each of the Fund and DE2005 REIT is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales or exchange proceeds to foreign persons.
Section 5.08 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, neither the Fund nor DE2005 REIT shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 5.09 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE VI
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to (and to cause each of the Fund Subsidiaries to) conduct its businesses and operate and maintain the Properties in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except
16
in connection with the Formation Transactions, the Fund shall not (and shall not permit any of the Fund Subsidiaries to) without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests, other than as provided in Section 1.10, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund or any Fund Subsidiary, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests or member interests of any of the Fund Subsidiaries or any other securities thereof;
(b) issue, deliver, sell, pledge or otherwise encumber any limited liability company, partnership or other equity interests in any of the Fund Subsidiaries (including DE2005 REIT);
(c) amend its certificate of limited partnership or the Fund Partnership Agreement;
(d) amend the organizational documents of DE2005 REIT;
(e) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(f) materially alter the manner of keeping such Fund or Fund Subsidiary's books, accounts or records or the accounting practices therein reflected; or
(g) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE FUND AND DE2005 REIT. Each of the REIT, the Fund and DE2005 REIT shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 7.02 OBLIGATIONS OF MERGER SUB. Subject to the terms of this Agreement, the REIT shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the Migratory Merger Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the REIT Acquisition Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 7.03 REDEMPTION OF PREFERRED STOCK. Prior to the Migratory Merger Effective Time, each issued and outstanding share of Preferred Stock shall be redeemed by DE2005 REIT in accordance with the terms thereof.
Section 7.04 AMENDMENT TO CHARTER. Prior to the Migratory Merger Effective Time, DE2005 REIT shall amend its charter to increase the total authorized shares of common stock to 20,000,000 and effect any other amendments necessary to consummate the transactions contemplated hereunder, including, without limitation, an amendment to DE2005 REIT's charter permitting the holders of DE2005 REIT Common Shares in the REIT Acquisition Merger to receive the different consideration provided pursuant to this Agreement.
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ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Mergers and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated no later than concurrently herewith. This condition may not be waived by any party.
Section 8.02 CONDITIONS TO OBLIGATIONS OF THE FUND AND DE2005 REIT. The obligations of the Fund and DE2005 REIT to effect the Mergers and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit C . This condition may not be waived by any party.
(d) PREFERRED STOCK REDEMPTION. DE2005 REIT shall redeem all of its issued and outstanding shares of Preferred Stock pursuant to the terms thereof. This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments
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for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 8.03 CONDITIONS TO OBLIGATION OF THE REIT AND MERGER SUB. The obligations of each of the REIT and Merger Sub to effect the REIT Acquisition Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of each of the Fund and DE2005 REIT contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND AND DE2005 REIT. Each of the Fund and DE2005 REIT shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund and DE2005 REIT to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund or DE2005 REIT to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund and the Properties, taken as a whole.
(e) TITLE ENDORSEMENTS. The Fund (or its successor in interest) shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policies for each Property, in each case in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE IX
GENERAL PROVISIONS
Section 9.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
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Santa
Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Fund or DE2005 REIT, to:
Douglas
Emmett Realty Fund 2005
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 9.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings:
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any DE2005 REIT Common Share, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
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(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Liquidity Discount " means the discount from the IPO Price of a REIT Share issued in the REIT Acquisition Merger as a result of the restrictions on transfer pursuant to the Securities Act and the lock-up agreement based on the advice of a nationally recognized investment banking firm at the time of the REIT Acquisition Merger.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Surviving Entity " means, in the case of the Migratory Merger, DE2005 REIT and, in the case of the REIT Acquisition Merger, Merger Sub.
(x) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(y) " Valid Election " means, with respect to any holder of DE2005 REIT Common Shares, an irrevocable election to receive all or a portion of such holder's Allocated Share of the Fund Partnership Interest in respect of which such DE2005 REIT Common Shares were issued in the form of cash and/or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Fund Partnership Interests, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
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Section 9.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 9.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 9.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof, except to the extent the MLLCA and the MGCL are applicable to the Mergers.
Section 9.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 9.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute, and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 9.08 DISPUTE RESOLUTION. The parties intend that this Section 9.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 9.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 9.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The
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arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 9.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 9.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless
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explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 9.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Fund pursuant to the terms and provisions contained in Section 4.09.
Section 9.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, each of the Fund and DE2005 REIT hereto expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 9.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 9.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 9.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, Merger Sub, the Fund and DE2005 REIT.
Section 9.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Migratory Merger Effective Time; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Mergers.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY FUND 2005, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its General Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer | ||
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DOUGLAS EMMETT 2005 REIT, INC. |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of
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DERF 2005 ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities |
Exhibit B: |
List of Formation Transaction Documentation |
Exhibit C: |
Form of Registration Rights Agreement |
Exhibit 10.24
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
OPP FUND ACQUISITION, LLC
AND
THE OPPORTUNITY FUND,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 4 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS | 5 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.10 | TRANSACTION COSTS | 6 | ||
Section 1.11 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 7 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 8 | ||
Section 2.05 | TERM OF THE AGREEMENT | 8 | ||
Section 2.06 | EFFECT OF TERMINATION | 8 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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9 |
Section 3.02 | DUE AUTHORIZATION | 9 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | ||
Section 3.06 | OP AGREEMENT | 10 | ||
Section 3.07 | LIMITED ACTIVITIES | 10 | ||
Section 3.08 | LITIGATION | 10 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 10 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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12 |
Section 4.02 | DUE AUTHORIZATION | 12 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | OWNERSHIP OF PARTNERSHIP INTEREST | 13 | ||
Section 4.05 | CONSENTS AND APPROVALS | 13 | ||
Section 4.06 | NO VIOLATION | 13 | ||
Section 4.07 | TAXES | 13 | ||
Section 4.08 | NON-FOREIGN STATUS | 13 | ||
Section 4.09 | ACTIVITIES | 13 | ||
Section 4.10 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 13 | ||
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Section 4.11 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 13 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
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14 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 14 | ||
Section 6.03 | TAX AGREEMENT | 14 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE FUND | 15 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
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NOTICES |
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16 |
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 18 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 18 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 20 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 21 | ||
Section 8.16 | AMENDMENTS | 21 |
ii
TERM
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SECTION
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Accredited Investor | Section 8.02 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Alternative Division | Section 1.11 | |
Business Day | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Section 1.05 | |
Fund Partnership Interests | Section 8.02 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
iii
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Percentage Allocated Share | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), The Opportunity Fund, a California limited partnership (the " Fund "), and Opp Fund Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds (the " Institutional Funds ") and certain investment funds (the " Investment Funds "), including the Fund, in each case identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, the Fund holds a 3.72% limited partnership interest (the " DERF Fund Interest" ) in Douglas Emmett Realty Fund, a California limited partnership (the " DERF Fund "), an Institutional Fund;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of the Investment Funds) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT (such agreement and plan of merger, as it relates to the acquisition of the DERF Fund, the " DERF Fund Merger Agreement ")), (ii) an agreement and plan of merger with each other Investment Fund (together with this Agreement, the " Investment Fund Merger Agreements ") pursuant to which, immediately prior to the Merger (defined below) and the mergers described in (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and
the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's allocated share of the value of each DERA Fund (other than the Investment Funds), DERA's share of the respective allocated shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund
2
(the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund
shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date.
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In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement (defined below), as in effect
immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Partner Percentage in respect of such Non-GP Fund Interest multiplied by the Fund's Allocated Share (as defined and calculated in the DERF Fund Merger Agreement) (the " Percentage Allocated Share ") (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Percentage Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Percentage Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage
4
which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount (as defined in the DERF Fund Merger Agreement). The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Percentage Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Percentage Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in
Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be
delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to
5
Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled
to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation
and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which
such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that
a holder of Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP
Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
Section 1.10
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.11
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number
6
calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
7
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such
amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund
Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the
Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized
to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the
obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated
8
because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other
9
Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party
thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of
Amendment and Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
10
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's
11
control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) The Fund has no Subsidiaries.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by
all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund
pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each
enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of
equity.
12
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits
Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
OWNERSHIP OF PARTNERSHIP INTEREST.
The Fund is the record owner of the DERF Fund Interest. The Fund has no assets other than the DERF Fund Interest, and the Fund does not engage in any business activities outside of its
ownership of the DERF Fund Interest.
Section 4.05
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Fund in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Fund
is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a
Material Adverse Effect.
Section 4.06
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on the Fund, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.07
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund has filed all Tax returns and reports required to be filed by it (after giving effect
to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or
had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund, and no requests for waivers of
the time to assess any such Taxes are pending.
Section 4.08
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.09
ACTIVITIES.
The Fund has not incurred any liabilities or obligations, except those incurred as a Pre-Formation Participant in the DERA Funds and in connection with its organization and
with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except its ownership of Pre-Formation
Interests in the DERA Funds and except in connection with the transactions contemplated by this Agreement, the Fund has not engaged in any business activities of any type or kind whatsoever, or
entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking.
Section 4.10
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection
with this Agreement or the transactions contemplated hereby.
Section 4.11
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
13
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to conduct its businesses in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with Persons having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests if any such distribution would cause the liabilities of the Fund to exceed its current assets (not including as current assets any interest in any DERA Fund), (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests;
(b) amend its certificate of limited partnership or the Fund Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Fund's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the
14
Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement and the Contribution Agreement shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction
of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
15
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund.
(e) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
16
if to the Fund, to:
The
Opportunity Fund
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(i) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(e) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Percentage Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(f) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Percentage Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(g) " Fund Partnership Agreement " means the Amended and Restated Agreement of Limited Partnership of the Fund dated as of August 10, 1993, as amended.
(h) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
17
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Partner Percentage " has the meaning set forth in the Fund Partnership Agreement.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Percentage Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this
18
Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the
19
arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
20
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or
the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to
the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes
all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of
Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification
or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
|
|
By: |
/s/ JORDAN KAPLAN |
|
|||
Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
|
|
DOUGLAS EMMETT PROPERTIES, LP |
|
|
|
By: |
Douglas Emmett, LLC Its General Partner |
|
|
By: |
Douglas Emmett, Inc. Its Sole Member |
|
|
By: |
/s/ JORDAN KAPLAN |
|
|||
Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
|
|
THE OPPORTUNITY FUND, A CALIFORNIA LIMITED PARTNERSHIP |
|
|
|
By: |
Douglas Emmett Realty Advisors Its Operating Partner |
|
|
By: |
/s/ DAN A. EMMETT |
|
|||
Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
22
AGREED AND ACCEPTED as of | ||||
|
||||
OPP FUND ACQUISITION, LLC | ||||
By: |
Douglas Emmett GP, LLC
Its Managing Member |
|||
By: |
Douglas Emmett Properties, LP
Its Sole Member |
|||
By: |
Douglas Emmett, LLC
Its General Partner |
|||
By: |
Douglas Emmett, Inc.
Its Sole Member |
|||
By: | ||||
|
||||
Name: | ||||
Title: |
23
Exhibit A : | List of DERA Funds and Single Asset Entities |
Exhibit B : |
List of Formation Transaction Documentation |
Exhibit C : |
Form of Contribution Agreement |
Exhibit D : |
Form of Registration Rights Agreement |
Exhibit E : |
Operating Partnership Agreement |
Exhibit 10.25
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
OPP FUND 1995 ACQUISITION, LLC
AND
THE OPPORTUNITY FUND 1995,
A CALIFORNIA LIMITED PARTNERSHIP
|
|
PAGE
|
||
---|---|---|---|---|
ARTICLE I THE MERGER | ||||
Section 1.01 |
|
THE MERGER |
|
3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 4 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS | 5 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.10 | TRANSACTION COSTS | 6 | ||
Section 1.11 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
||||
Section 2.01 |
|
CLOSING |
|
7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 7 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 8 | ||
Section 2.05 | TERM OF THE AGREEMENT | 8 | ||
Section 2.06 | EFFECT OF TERMINATION | 8 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
||||
Section 3.01 |
|
ORGANIZATION; AUTHORITY |
|
9 |
Section 3.02 | DUE AUTHORIZATION | 9 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | ||
Section 3.06 | OP AGREEMENT | 10 | ||
Section 3.07 | LIMITED ACTIVITIES | 10 | ||
Section 3.08 | LITIGATION | 10 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 10 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
||||
Section 4.01 |
|
ORGANIZATION; AUTHORITY |
|
12 |
Section 4.02 | DUE AUTHORIZATION | 12 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | OWNERSHIP OF PARTNERSHIP INTEREST | 13 | ||
Section 4.05 | CONSENTS AND APPROVALS | 13 | ||
Section 4.06 | NO VIOLATION | 13 | ||
Section 4.07 | TAXES | 13 | ||
Section 4.08 | NON-FOREIGN STATUS | 13 | ||
Section 4.09 | ACTIVITIES | 13 | ||
Section 4.10 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 13 | ||
i
Section 4.11 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 13 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
||||
ARTICLE VI ADDITIONAL AGREEMENTS |
||||
Section 6.01 |
|
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
|
14 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 14 | ||
Section 6.03 | TAX AGREEMENT | 14 | ||
ARTICLE VII CONDITIONS PRECEDENT |
||||
Section 7.01 |
|
CONDITION TO EACH PARTY'S OBLIGATIONS |
|
15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE FUND | 15 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
||||
Section 8.01 |
|
NOTICES |
|
16 |
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 18 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 18 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 20 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 21 | ||
Section 8.16 | AMENDMENTS | 21 |
ii
DEFINED TERMS
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Alternative Division | Section 1.11 | |
Business Day | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Section 1.05 | |
Fund Partnership Interests | Section 8.02 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
iii
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Percentage Allocated Share | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), The Opportunity Fund 1995, a California limited partnership (the " Fund "), and Opp Fund 1995 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds (the " Institutional Funds ") and certain investment funds (the " Investment Funds "), including the Fund, in each case identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, the Fund holds a 1.5666% limited partnership interest (the " DERF Fund Interest" ) in Douglas Emmett Realty Fund 1995, a California limited partnership (the " DERF Fund "), an Institutional Fund;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of the Investment Funds) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT (such agreement and plan of merger, as it relates to the acquisition of the DERF Fund, the " DERF Fund Merger Agreement ")), (ii) an agreement and plan of merger with each other Investment Fund (together with this Agreement, the " Investment Fund Merger Agreements ") pursuant to which, immediately prior to the Merger (defined below) and the mergers described in (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and
the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's allocated share of the value of each DERA Fund (other than the Investment Funds), DERA's share of the respective allocated shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund
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(the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02 EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the " Certificate of Merger "), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the " Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date.
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In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04 CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT. At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement (defined below), as in effect immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05 CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Partner Percentage in respect of such Non-GP Fund Interest multiplied by the Fund's Allocated Share (as defined and calculated in the DERF Fund Merger Agreement) (the " Percentage Allocated Share ") (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Percentage Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Percentage Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in
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all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount (as defined in the DERF Fund Merger Agreement). The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Percentage Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Percentage Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06 CONVERSION OF MERGER SUB MEMBER INTERESTS. At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07 CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS. Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-GP Fund Interests so
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converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the Merger Consideration applicable thereto.
Section 1.08 FRACTIONAL INTERESTS. No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
Section 1.10 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.11 ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE. Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section,
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which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02 PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
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(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03 TAX WITHHOLDING. The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04 FURTHER ACTION. If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction
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Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and
9
delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05 VALIDITY OF OP UNITS AND REIT SHARES. The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06 OP AGREEMENT. Attached as Exhibit E hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 3.08 LITIGATION. There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
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Section 3.10 INDEMNIFICATION.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's
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control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01 ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) The Fund has no Subsidiaries.
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
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Section 4.03 CAPITALIZATION. Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04 OWNERSHIP OF PARTNERSHIP INTEREST. The Fund is the record owner of the DERF Fund Interest. The Fund has no assets other than the DERF Fund Interest, and the Fund does not engage in any business activities outside of its ownership of the DERF Fund Interest.
Section 4.05 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by the Fund in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Fund is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.06 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on the Fund, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.07 TAXES. To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.08 NON-FOREIGN STATUS. The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.09 ACTIVITIES. The Fund has not incurred any liabilities or obligations, except those incurred as a Pre-Formation Participant in the DERA Funds and in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except its ownership of Pre-Formation Interests in the DERA Funds and except in connection with the transactions contemplated by this Agreement, the Fund has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking.
Section 4.10 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
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ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to conduct its businesses in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with Persons having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests if any such distribution would cause the liabilities of the Fund to exceed its current assets (not including as current assets any interest in any DERA Fund), (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests;
(b) amend its certificate of limited partnership or the Fund Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Fund's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02 OBLIGATIONS OF MERGER SUB. Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03 TAX AGREEMENT. In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the
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Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement and the Contribution Agreement shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02 CONDITIONS TO OBLIGATIONS OF THE FUND. The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
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(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03 CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund.
(e) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
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Facsimile:
(310) 255-7702
Attention: Chief Executive Officer
if to the Fund, to:
The
Opportunity Fund 1995
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(e) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(f) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Percentage Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(g) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Percentage Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(h) " Fund Partnership Agreement " means the Amended and Restated Agreement of Limited Partnership of the Fund dated as of November 1, 1995, as amended.
(i) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
(j) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(k) " IPO Closing Date " means the closing date of the IPO.
(l) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
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(m) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(n) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(o) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(p) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(q) " Partner Percentage " has the meaning set forth in the Fund Partnership Agreement.
(r) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(s) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(t) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(u) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(v) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(w) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(x) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(y) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Percentage Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 8.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and supersede each prior agreement and
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understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 8.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08 DISPUTE RESOLUTION. The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than
19
sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
20
Section 8.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 8.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating Partnership, Merger Sub and the Fund.
Section 8.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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THE OPPORTUNITY FUND 1995, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Douglas Emmett Realty Advisors Its Operating Partner |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of | ||||
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OPP FUND 1995 ACQUISITION, LLC | ||||
By: |
Douglas Emmett GP, LLC
Its Managing Member |
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By: |
Douglas Emmett Properties, LP
Its Sole Member |
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By: |
Douglas Emmett, LLC
Its General Partner |
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By: |
Douglas Emmett, Inc.
Its Sole Member |
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By: | ||||
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Name: | ||||
Title: |
Exhibit A : | List of DERA Funds and Single Asset Entities |
Exhibit B : |
List of Formation Transaction Documentation |
Exhibit C : |
Form of Contribution Agreement |
Exhibit D : |
Form of Registration Rights Agreement |
Exhibit E : |
Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
OPP FUND 1996 ACQUISITION, LLC
AND
THE OPPORTUNITY FUND 1996,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | |||
Section 1.01 |
THE MERGER |
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3 |
Section 1.02 | EFFECTIVE TIME | 3 | |
Section 1.03 | EFFECT OF THE MERGER | 4 | |
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | |
Section 1.05 | CONVERSION OF FUND PARTNERSHIP INTERESTS | 4 | |
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | |
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS | 5 | |
Section 1.08 | FRACTIONAL INTERESTS | 6 | |
Section 1.09 | CALCULATION OF MERGER CONSIDERATION | 6 | |
Section 1.10 | TRANSACTION COSTS | 6 | |
Section 1.11 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | |
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
CLOSING |
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7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 7 | |
Section 2.03 | TAX WITHHOLDING | 8 | |
Section 2.04 | FURTHER ACTION | 8 | |
Section 2.05 | TERM OF THE AGREEMENT | 8 | |
Section 2.06 | EFFECT OF TERMINATION | 8 | |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
ORGANIZATION; AUTHORITY |
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9 |
Section 3.02 | DUE AUTHORIZATION | 9 | |
Section 3.03 | CONSENTS AND APPROVALS | 10 | |
Section 3.04 | NO VIOLATION | 10 | |
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | |
Section 3.06 | OP AGREEMENT | 10 | |
Section 3.07 | LIMITED ACTIVITIES | 10 | |
Section 3.08 | LITIGATION | 10 | |
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 10 | |
Section 3.10 | INDEMNIFICATION | 17 | |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND |
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Section 4.01 |
ORGANIZATION; AUTHORITY |
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12 |
Section 4.02 | DUE AUTHORIZATION | 12 | |
Section 4.03 | CAPITALIZATION | 13 | |
Section 4.04 | OWNERSHIP OF PARTNERSHIP INTEREST | 13 | |
Section 4.05 | CONSENTS AND APPROVALS | 13 | |
Section 4.06 | NO VIOLATION | 13 | |
Section 4.07 | TAXES | 13 | |
Section 4.08 | NON-FOREIGN STATUS | 13 | |
Section 4.09 | ACTIVITIES | 13 | |
Section 4.10 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 13 | |
Section 4.11 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 13 | |
i
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND |
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14 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 14 | |
Section 6.03 | TAX AGREEMENT | 14 | |
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
CONDITION TO EACH PARTY'S OBLIGATIONS |
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15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE FUND | 15 | |
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | |
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
NOTICES |
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16 |
Section 8.02 | DEFINITIONS | 17 | |
Section 8.03 | COUNTERPARTS | 18 | |
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 18 | |
Section 8.05 | GOVERNING LAW | 19 | |
Section 8.06 | ASSIGNMENT | 19 | |
Section 8.07 | JURISDICTION | 19 | |
Section 8.08 | DISPUTE RESOLUTION | 19 | |
Section 8.09 | SEVERABILITY | 20 | |
Section 8.10 | RULES OF CONSTRUCTION | 20 | |
Section 8.11 | EQUITABLE REMEDIES | 21 | |
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | |
Section 8.13 | TIME OF THE ESSENCE | 21 | |
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | |
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 21 | |
Section 8.16 | AMENDMENTS | 21 |
ii
TERM
|
SECTION
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|
---|---|---|
Accredited Investor | Section 8.02 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Alternative Division | Section 1.11 | |
Business Day | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Fund Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERA/DECO Merger | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund | Introduction | |
Fund GP Interest | Recitals | |
Fund Indemnified Party | Section 3.10 | |
Fund LP Interests | Recitals | |
Fund Partnership Agreement | Section 1.05 | |
Fund Partnership Interests | Section 8.02 | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
iii
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Interest | Recitals | |
Non-GP Fund Interests | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Percentage Allocated Share | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Profits Interests | Recitals | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), The Opportunity Fund 1996, a California limited partnership (the " Fund "), and Opp Fund 1996 Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds (the " Institutional Funds ") and certain investment funds (the " Investment Funds "), including the Fund, in each case identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner (the " General Partner "), and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, the Fund holds a 1.6767% limited partnership interest (the " DERF Fund Interest" ) in Douglas Emmett Realty Fund 1996, a California limited partnership (the " DERF Fund "), an Institutional Fund;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of the Investment Funds) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT (such agreement and plan of merger, as it relates to the acquisition of the DERF Fund, the " DERF Fund Merger Agreement ")), (ii) an agreement and plan of merger with each other Investment Fund (together with this Agreement, the " Investment Fund Merger Agreements ") pursuant to which, immediately prior to the Merger (defined below) and the mergers described in (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the Profits Interests (defined below) and
the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, among other things, DERA's Pre-Formation Interests in the Fund, including its 1% general partnership interest in the Fund (the " Fund GP Interest "), in exchange for a number of REIT Shares (defined below) with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's allocated share of the value of each DERA Fund (other than the Investment Funds), DERA's share of the respective allocated shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA (the " DERA/DECO Merger ");
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and prior to the Effective Time, certain holders of Fund LP Interests or Profits Interests (each as defined below) who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Fund LP Interests or Profits Interests, as applicable, for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Fund LP Interests or Profits Interests, as applicable, so contributed, the " Contributed Fund Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Fund Interest but rather a Non-GP Fund Interest (defined below));
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Fund Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Fund Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Fund, with the Fund as the surviving entity (the " Merger "), pursuant to which each limited partnership interest in the Fund
2
(the " Fund LP Interest ") and each promoted profits interest in the Fund (a " Profits Interest " and, together with the Fund LP Interests, in each case that are not Contributed Fund Interests, the " Non-GP Fund Interests ") will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1 and 15678.2 of the California Revised Limited Partnership Act (" CRLPA "), the Fund may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and the General Partner has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Fund, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Fund to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Fund, whereby the separate existence of Merger Sub shall cease, and the Fund shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Fund
shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Fund shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date.
3
In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Fund shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Fund, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Fund Partnership Agreement (defined below), as in effect
immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF FUND PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Fund or the holders of any interest in the Fund, except as provided in Section 1.05(c), each Non-GP Fund Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Partner Percentage in respect of such Non-GP Fund Interest multiplied by the Fund's Allocated Share (as defined and calculated in the DERF Fund Merger Agreement) (the " Percentage Allocated Share ") (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-GP Fund Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Percentage Allocated Share for each Non-GP Fund Interests held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Percentage Allocated Share with respect to each other Non-GP Fund Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage
4
which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount (as defined in the DERF Fund Merger Agreement). The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax-free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Fund in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-GP Fund Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Percentage Allocated Share for each Non-GP Fund Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Percentage Allocated Share for each Non-GP Fund Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Interest shall be distributed in REIT Shares.
(c) Each Non-GP Fund Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
(d) The Fund GP Interest issued and outstanding immediately prior to the Effective Time (having been acquired by the REIT under the Management Company Merger Agreement) shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in
Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be
delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-GP FUND INTERESTS.
Each Non-GP Fund Interest converted into the right to receive the Merger Consideration pursuant to
5
Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-GP Fund Interests so converted shall thereafter cease to have any rights as a limited partner of the Fund, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-GP Fund Interests would otherwise be entitled
to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation
and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which
such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that
a holder of Non-GP Fund Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP
Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Fund Partnership Interests.
Section 1.10
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.11
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-GP Fund Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number
6
calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-GP Fund Interests whose Non-GP Fund Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
7
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-GP Fund Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-GP Fund Interests of such holder shall be treated as a sale of such Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-GP Fund Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-GP Fund Interests to which a holder of Non-GP Fund Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-GP Fund Interests by the holder and a purchase of such Non-GP Fund Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Non-GP Fund Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-GP Fund Interests, such
amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-GP Fund
Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, properties or assets of the
Fund acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized
to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Operating Partnership and the Fund or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Fund under this Agreement shall terminate, except that the
obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated
8
because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Fund as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other
9
Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party
thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of
Amendment and Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
10
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Fund and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Fund Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Fund Indemnified Party (i) in connection with the Fund or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or a Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided, however, that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Fund Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Fund's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Fund's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Fund Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Fund Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Fund Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Fund Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Fund Indemnified Party relating to a Third Party Claim (as defined below). Any Fund Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Fund Indemnified Party shall in good faith determine that such claim is not frivolous and that the Fund Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Fund Indemnified Parties (or any person authorized by the Fund Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Fund Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Fund Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Fund Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Fund Indemnified Party's possession or under the Fund Indemnified Party's
11
control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Fund Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Fund Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Fund hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Fund's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Fund under the Fund Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FUND
Except as disclosed in the Prospectus, the Fund hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Fund has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to carry on its business as presently conducted. The Fund, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) The Fund has no Subsidiaries.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Fund of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by
all necessary actions required of the Fund. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Fund
pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Fund, each
enforceable against the Fund in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of
equity.
12
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Fund. All of the issued and outstanding equity interests of the Fund are validly issued (other than the Profits
Interests in respect of the Fund, where the concept of valid issuance is not applicable) and, to the Fund's Knowledge, are not subject to preemptive rights.
Section 4.04
OWNERSHIP OF PARTNERSHIP INTEREST.
The Fund is the record owner of the DERF Fund Interest. The Fund has no assets other than the DERF Fund Interest, and the Fund does not engage in any business activities outside of its
ownership of the DERF Fund Interest.
Section 4.05
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Fund in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Fund
is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a
Material Adverse Effect.
Section 4.06
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Fund or (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on the Fund, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.07
TAXES.
To the Fund's Knowledge, and except as would not have a Material Adverse Effect, (i) the Fund has filed all Tax returns and reports required to be filed by it (after giving effect
to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or
had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Fund, and no requests for waivers of
the time to assess any such Taxes are pending.
Section 4.08
NON-FOREIGN STATUS.
The Fund is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.09
ACTIVITIES.
The Fund has not incurred any liabilities or obligations, except those incurred as a Pre-Formation Participant in the DERA Funds and in connection with its organization and
with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except its ownership of Pre-Formation
Interests in the DERA Funds and except in connection with the transactions contemplated by this Agreement, the Fund has not engaged in any business activities of any type or kind whatsoever, or
entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking.
Section 4.10
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Fund shall not be deemed to have made any other representation or warranty in connection
with this Agreement or the transactions contemplated hereby.
Section 4.11
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
13
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE FUND
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Fund shall use commercially reasonable efforts to conduct its businesses in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with Persons having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Fund shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Fund Partnership Interests if any such distribution would cause the liabilities of the Fund to exceed its current assets (not including as current assets any interest in any DERA Fund), (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Fund Partnership Interests or make any other changes to the equity capital structure of the Fund, or (iii) purchase, redeem or otherwise acquire any Fund Partnership Interests;
(b) amend its certificate of limited partnership or the Fund Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Fund's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE FUND. Each of the REIT, the Operating Partnership and the Fund shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the
14
Fund to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement and the Contribution Agreement shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE FUND.
The obligation of the Fund to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction
of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
15
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Fund contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE FUND. The Fund shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Fund to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Fund to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Fund.
(e) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
16
if to the Fund, to:
The
Opportunity Fund 1996
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(i) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(e) " Elected Cash Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Percentage Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(f) " Elected OP Unit Percentage " means, with respect to any Non-GP Fund Interest, the percentage of the Percentage Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(g) " Fund Partnership Agreement " means the Amended and Restated Agreement of Limited Partnership of the Fund dated as of January 20, 1997, as amended.
(h) " Fund Partnership Interests " means, individually and collectively, the Fund GP Interest, the Profits Interests in respect of the Fund, and the Fund LP Interests.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
17
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Partner Percentage " has the meaning set forth in the Fund Partnership Agreement.
(q) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(r) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(s) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(t) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(u) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(v) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(w) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(x) " Valid Election " means, with respect to any Non-GP Fund Interest, an irrevocable election to receive all or a portion of its Percentage Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-GP Fund Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this
18
Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Fund shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Fund cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the
19
arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
20
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Fund and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or
the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to
the Fund pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Fund expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes
all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of
Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Fund.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Fund, at any time prior to the Effective Time;
provided
, that no such amendment, modification
or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
|
|
By: |
/s/ JORDAN KAPLAN |
|
|||
Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
|
|
DOUGLAS EMMETT PROPERTIES, LP |
|
|
|
By: |
Douglas Emmett, LLC Its General Partner |
|
|
By: |
Douglas Emmett, Inc. Its Sole Member |
|
|
By: |
/s/ JORDAN KAPLAN |
|
|||
Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
|
|
THE OPPORTUNITY FUND 1996, A CALIFORNIA LIMITED PARTNERSHIP |
|
|
|
By: |
/s/ DAN A. EMMETT |
|
|||
Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
AGREED AND ACCEPTED as of | ||||
|
||||
OPP FUND 1996 ACQUISITION, LLC | ||||
By: |
Douglas Emmett GP, LLC
Its Managing Member |
|||
By: |
Douglas Emmett Properties, LP
Its Sole Member |
|||
By: |
Douglas Emmett, LLC
Its General Partner |
|||
By: |
Douglas Emmett, Inc.
Its Sole Member |
|||
By: | ||||
|
||||
Name: | ||||
Title: |
Exhibit A : | List of DERA Funds and Single Asset Entities |
Exhibit B : |
List of Formation Transaction Documentation |
Exhibit C : |
Form of Contribution Agreement |
Exhibit D : |
Form of Registration Rights Agreement |
Exhibit E : |
Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
BARRY ACQUISITION, LLC
AND
BARRY PROPERTIES, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
|
|
PAGE
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---|---|---|---|---|
ARTICLE I THE MERGER | ||||
Section 1.01 |
|
THE MERGER |
|
3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF PARTNERSHIP INTERESTS. | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
||||
Section 2.01 |
|
CLOSING |
|
7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION. | 8 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 9 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
||||
Section 3.01 |
|
ORGANIZATION; AUTHORITY |
|
9 |
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 11 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP |
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Section 4.01 |
|
ORGANIZATION; AUTHORITY |
|
13 |
Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
|
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP |
|
15 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
|
CONDITION TO EACH PARTY'S OBLIGATIONS |
|
15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP | 16 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
|
NOTICES |
|
17 |
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 20 | ||
Section 8.09 | SEVERABILITY | 21 | ||
Section 8.10 | RULES OF CONSTRUCTION | 21 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 22 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | ||
Section 8.16 | AMENDMENTS | 22 |
ii
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Partnership Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
iii
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Partnership Interest | Recitals | |
Non-Performing Contributor | Recitals | |
Partnership Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Partnership | Introduction | |
Partnership Agreement | Section 1.05 | |
Partnership Indemnified Party | Section 3.10 | |
Partnership Interests | Recitals | |
Partnership Value | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Barry Properties, Ltd., a California limited partnership (the " Partnership "), and Barry Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including the Partnership, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of general and limited partnership interests and promoted profits interest in the Partnership (collectively, the " Partnership Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Partnership Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Partnership Interests so contributed, the " Contributed Partnership Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Partnership Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Partnership Interest but rather a Non-Contributed Partnership Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Partnership Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Partnership Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Partnership, with the Partnership as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Partnership Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1, 15678.2 and 15712(a) of the California Revised Limited Partnership Act (" CRLPA "), the Partnership may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
2
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and Aberdeen Properties, a California limited partnership and the general partner of the Partnership (the " General Partner "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Partnership, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Partnership to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Partnership, whereby the separate existence of Merger Sub shall cease, and the Partnership shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02 EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Partnership shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the " Certificate of Merger "), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the " Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of Merger, the Operating Partnership, Merger Sub and the Partnership shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Partnership shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
3
Section 1.04 CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT. At the Effective Time, (i) the Certificate of Limited Partnership of the Partnership, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Partnership Agreement (defined below), as in effect immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05 CONVERSION OF PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Partnership Value " means (i) 0.4738% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Partnership Value shall be allocated to each Partnership Interest or portion thereof in accordance with Section 5.1 of the Amended and Restated Agreement of Limited Partnership of the Partnership dated as of November 15, 1985 (the " Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 5.1 of the Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of distributable net proceeds from sales of properties in accordance with the Partnership Agreement.
4
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Partnership or the holders of any interest in the Partnership, except as provided in Section 1.05(c), each Non-Contributed Partnership Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Partnership Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Partnership Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Partnership Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Partnership Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Partnership in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Partnership Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Partnership Interest shall be distributed in REIT Shares.
(c) Each Partnership Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06 CONVERSION OF MERGER SUB MEMBER INTERESTS. At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or
5
Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a general partnership interest in the Surviving Partnership.
Section 1.07 CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS. Each Non-Contributed Partnership Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Partnership Interests so converted shall thereafter cease to have any rights as a partner of the Partnership, except the right to receive the Merger Consideration applicable thereto.
Section 1.08 FRACTIONAL INTERESTS. No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Partnership Interests would otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of Non-Contributed Partnership Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09 DISTRIBUTION OF PRE-CLOSING CASH FLOW. During the period from July 1, 2005 through the Closing Date, the Partnership has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Partnership's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Partnership Interests in accordance with Section 5.1 of the Partnership Agreement. Subject to this limitation, the Partnership may continue to make distributions in accordance with the Partnership Agreement. For purposes of this Agreement, " Adjusted Net Operating Income " means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of derivatives, i.e. , the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such line item), of the Partnership on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Partnership) less (B) the Capital Expense Allowance.
Section 1.10 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Partnership Interests.
Section 1.11 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12 ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE. Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent
6
the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Partnership Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
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Section 2.02 PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-Contributed Partnership Interests whose Non-Contributed Partnership Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-Contributed Partnership Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Partnership Interests of such holder shall be treated as a sale of such Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Partnership Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Partnership Interests to which a holder of Non-Contributed Partnership Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Partnership Interests.
Section 2.03 TAX WITHHOLDING. The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Partnership Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder
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of Non-Contributed Partnership Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04 FURTHER ACTION. If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, property or assets of the Partnership acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05 TERM OF THE AGREEMENT(a) . This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Partnership under this Agreement shall terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Partnership is as set forth in clause (i) of the definition of Partnership Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Partnership as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in
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good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or
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(C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05 VALIDITY OF OP UNITS AND REIT SHARES. The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06 OP AGREEMENT. Attached as Exhibit E hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 3.08 LITIGATION. There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 3.10 INDEMNIFICATION
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Partnership and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Partnership Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Partnership Indemnified Party (i) in connection with the Partnership or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Partnership Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Partnership's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Partnership's operation of its business or the ownership and operation of its assets outside of the
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ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Partnership Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Partnership Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Partnership Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Partnership Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Partnership Indemnified Party relating to a Third Party Claim (as defined below). Any Partnership Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Partnership Indemnified Party shall in good faith determine that such claim is not frivolous and that the Partnership Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Partnership Indemnified Parties (or any person authorized by the Partnership Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Partnership Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Partnership Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Partnership Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Partnership Indemnified Party's possession or under the Partnership Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Partnership Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Partnership Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Partnership hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising
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under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Partnership's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Partnership under the Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as disclosed in the Prospectus, the Partnership hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01 ORGANIZATION; AUTHORITY.
(a) The Partnership has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. The Partnership, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by the Partnership (the " Property "). The Partnership has no Subsidiaries.
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance by the Partnership of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of the Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Partnership, each enforceable against the Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03 CAPITALIZATION. Schedule 4.03 sets forth as of the date hereof the ownership of the Partnership. All of the issued and outstanding equity interests of the Partnership are validly issued (other than any profits interests in respect of the Partnership, where the concept of valid issuance is not applicable) and, to the Partnership's Knowledge, are not subject to preemptive rights.
Section 4.04 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by the Partnership in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Partnership is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the
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transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Partnership or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on the Partnership, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06 TAXES. To the Partnership's Knowledge, and except as would not have a Material Adverse Effect, (i) the Partnership has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Partnership, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07 NON-FOREIGN STATUS. The Partnership is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, the Partnership shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.09 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Partnership shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Partnership shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Partnership Interests or make any other changes to the equity capital structure of the Partnership, or (iii) purchase, redeem or otherwise acquire any Partnership Interests;
(b) amend its certificate of limited partnership or the Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Partnership's books, accounts or records or the accounting practices therein reflected; or
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(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Each of the REIT, the Operating Partnership and the Partnership shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02 OBLIGATIONS OF MERGER SUB. Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03 TAX AGREEMENT. In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
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(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02 CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP. The obligation of the Partnership to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03 CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Partnership contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE PARTNERSHIP. The Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
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(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Partnership to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Partnership to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Partnership and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. The Partnership shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Partnership, to:
Aberdeen
Properties, a California limited partnership
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to
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any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
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(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(w) " Valid Election " means, with respect to any Non-Contributed Partnership Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Partnership Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 8.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 8.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
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Section 8.08 DISPUTE RESOLUTION. The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Partnership shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Partnership cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
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Section 8.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Partnership and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Partnership pursuant to the terms and provisions contained in Section 3.10.
Section 8.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, the Partnership expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
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Section 8.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating Partnership, Merger Sub and the Partnership.
Section 8.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of the Partnership, at any time prior to the Effective Time; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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BARRY PROPERTIES, LTD., A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Aberdeen Properties, a California limited partnership Its General Partner |
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By: |
New September, LLC, a California limited liability company Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
___________________, |
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BARRY ACQUISITION, LLC |
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By: |
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Douglas Emmett GP, LLC Its Managing Member |
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By: |
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Douglas Emmett Properties, LP Its Sole Member |
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By: |
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Douglas Emmett, LLC Its General Partner |
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By: |
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Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: |
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Title: |
Exhibit A: List of DERA Funds and Single Asset Entities
Exhibit B: List of Formation Transaction Documentation
Exhibit C: Form of Contribution Agreement
Exhibit D: Form of Registration Rights Agreement
Exhibit E: Operating Partnership Agreement
Exhibit 10.28
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
KIOWA ACQUISITION, LLC
AND
KIOWA PROPERTIES, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 9 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 11 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
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Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP |
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Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP | 16 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
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NOTICES |
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Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 21 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | ||
Section 8.16 | AMENDMENTS | 22 |
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DEFINED TERMS
TERM
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SECTION
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Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Partnership Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
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Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Partnership Interest | Recitals | |
Non-Performing Contributor | Recitals | |
Partnership Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Partnership | Introduction | |
Partnership Agreement | Section 1.05 | |
Partnership Indemnified Party | Section 3.10 | |
Partnership Interests | Recitals | |
Partnership Value | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Kiowa Properties, Ltd., a California limited partnership (the " Partnership "), and Kiowa Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including the Partnership, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of general and limited partnership interests and promoted profits interest in the Partnership (collectively, the " Partnership Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Partnership Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Partnership Interests so contributed, the " Contributed Partnership Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Partnership Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Partnership Interest but rather a Non-Contributed Partnership Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Partnership Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Partnership Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Partnership, with the Partnership as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Partnership Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1, 15678.2 and 15712(a) of the California Revised Limited Partnership Act (" CRLPA "), the Partnership may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
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WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and Aberdeen Properties, a California limited partnership and the general partner of the Partnership (the " General Partner "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Partnership, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Partnership to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Partnership, whereby the separate existence of Merger Sub shall cease, and the Partnership shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02 EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the Partnership shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the " Certificate of Merger "), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the " Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of Merger, the Operating Partnership, Merger Sub and the Partnership shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Partnership shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
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Section 1.04 CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT. At the Effective Time, (i) the Certificate of Limited Partnership of the Partnership, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Partnership Agreement (defined below), as in effect immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05 CONVERSION OF PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Partnership Value " means (i) 0.2072% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Partnership Value shall be allocated to each Partnership Interest or portion thereof in accordance with Section 4.2 of the Amended and Restated Agreement of Limited Partnership of the Partnership dated as of October 1, 1990 (the " Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 4.2 of the Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of distributable net proceeds from sales of properties in accordance with the Partnership Agreement).
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(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Partnership or the holders of any interest in the Partnership, except as provided in Section 1.05(c), each Non-Contributed Partnership Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Partnership Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Partnership Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Partnership Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Partnership Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Partnership in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Partnership Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Partnership Interest shall be distributed in REIT Shares.
(c) Each Partnership Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06 CONVERSION OF MERGER SUB MEMBER INTERESTS. At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or
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Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a general partnership interest in the Surviving Partnership.
Section 1.07 CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS. Each Non-Contributed Partnership Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Partnership Interests so converted shall thereafter cease to have any rights as a partner of the Partnership, except the right to receive the Merger Consideration applicable thereto.
Section 1.08 FRACTIONAL INTERESTS. No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Partnership Interests would otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of Non-Contributed Partnership Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09 DISTRIBUTION OF PRE-CLOSING CASH FLOW. During the period from July 1, 2005 through the Closing Date, the Partnership has distributed or will distribute, from time to time, no more or less than its good faith estimate of the Partnership's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Partnership Interests in accordance with Section 4.2 of the Partnership Agreement. Subject to this limitation, the Partnership may continue to make distributions in accordance with the Partnership Agreement. For purposes of this Agreement, " Adjusted Net Operating Income " means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of derivatives, i.e. , the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such line item), of the Partnership on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Partnership) less (B) the Capital Expense Allowance.
Section 1.10 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Partnership Interests.
Section 1.11 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12 ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE. Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the
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extent the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Partnership Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
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Section 2.02 PAYMENT OF MERGER CONSIDERATION
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-Contributed Partnership Interests whose Non-Contributed Partnership Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-Contributed Partnership Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Partnership Interests of such holder shall be treated as a sale of such Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Partnership Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Partnership Interests to which a holder of Non-Contributed Partnership Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Partnership Interests.
Section 2.03 TAX WITHHOLDING. The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Partnership Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld
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amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-Contributed Partnership Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04 FURTHER ACTION. If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, property or assets of the Partnership acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Partnership under this Agreement shall terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Partnership is as set forth in clause (i) of the definition of Partnership Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND
INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Partnership as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in
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good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or
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(C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05 VALIDITY OF OP UNITS AND REIT SHARES. The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06 OP AGREEMENT. Attached as Exhibit E hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 3.08 LITIGATION. There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 3.10 INDEMNIFICATION
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Partnership and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Partnership Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Partnership Indemnified Party (i) in connection with the Partnership or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Partnership Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Partnership's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Partnership's operation of its business or the ownership and operation of its assets outside of the
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ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Partnership Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Partnership Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Partnership Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Partnership Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Partnership Indemnified Party relating to a Third Party Claim (as defined below). Any Partnership Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Partnership Indemnified Party shall in good faith determine that such claim is not frivolous and that the Partnership Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Partnership Indemnified Parties (or any person authorized by the Partnership Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Partnership Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Partnership Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Partnership Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Partnership Indemnified Party's possession or under the Partnership Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Partnership Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Partnership Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Partnership hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising
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under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Partnership's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Partnership under the Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as disclosed in the Prospectus, the Partnership hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01 ORGANIZATION; AUTHORITY.
(a) The Partnership has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. The Partnership, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by the Partnership (the " Property "). The Partnership has no Subsidiaries.
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance by the Partnership of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of the Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Partnership, each enforceable against the Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03 CAPITALIZATION. Schedule 4.03 sets forth as of the date hereof the ownership of the Partnership. All of the issued and outstanding equity interests of the Partnership are validly issued (other than any profits interests in respect of the Partnership, where the concept of valid issuance is not applicable) and, to the Partnership's Knowledge, are not subject to preemptive rights.
Section 4.04 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by the Partnership in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which the Partnership is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without
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the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Partnership or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on the Partnership, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06 TAXES. To the Partnership's Knowledge, and except as would not have a Material Adverse Effect, (i) the Partnership has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Partnership, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07 NON-FOREIGN STATUS. The Partnership is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, the Partnership shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.09 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Partnership shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Partnership shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Partnership Interests or make any other changes to the equity capital structure of the Partnership, or (iii) purchase, redeem or otherwise acquire any Partnership Interests;
(b) amend its certificate of limited partnership or the Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Partnership's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
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ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Each of the REIT, the Operating Partnership and the Partnership shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02 OBLIGATIONS OF MERGER SUB. Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03 TAX AGREEMENT. In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation
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Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02 CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP. The obligation of the Partnership to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03 CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Partnership contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE PARTNERSHIP. The Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Partnership to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the
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ability of the Partnership to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Partnership and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. The Partnership shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Partnership, to:
Aberdeen
Properties, a California limited partnership
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
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(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
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(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(w) " Valid Election " means, with respect to any Non-Contributed Partnership Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Partnership Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 8.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 8.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08 DISPUTE RESOLUTION. The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
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(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Partnership shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Partnership cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect
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any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Partnership and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Partnership pursuant to the terms and provisions contained in Section 3.10.
Section 8.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, the Partnership expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 8.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
21
Section 8.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating Partnership, Merger Sub and the Partnership.
Section 8.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of the Partnership, at any time prior to the Effective Time; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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KIOWA PROPERTIES, LTD., A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Aberdeen Properties, a California limited partnership Its General Partner |
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By: |
New September, LLC, a California limited liability company Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
___________________, |
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KIOWA ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities |
Exhibit B: |
List of Formation Transaction Documentation |
Exhibit C: |
Form of Contribution Agreement |
Exhibit D: |
Form of Registration Rights Agreement |
Exhibit E: |
Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
BARRINGTON/KIOWA
ACQUISITION, LLC
AND
BARRINGTON/KIOWA PROPERTIES,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 7 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 8 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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9 |
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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13 |
Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
i
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP |
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14 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP | 15 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 | NOTICES | 17 | ||
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 20 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 21 | ||
Section 8.16 | AMENDMENTS | 21 |
ii
TERM
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SECTION
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Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Partnership Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
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Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Partnership Interest | Recitals | |
Non-Performing Contributor | Recitals | |
Partnership Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Partnership | Introduction | |
Partnership Agreement | Section 1.05 | |
Partnership Indemnified Party | Section 3.10 | |
Partnership Interests | Recitals | |
Partnership Value | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Barrington/Kiowa Properties, a California limited partnership (the " Partnership "), and Barrington/Kiowa Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including the Partnership, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of general and limited partnership interests and promoted profits interest in the Partnership (collectively, the " Partnership Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Partnership Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Partnership Interests so contributed, the " Contributed Partnership Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Partnership Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Partnership Interest but rather a Non-Contributed Partnership Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Partnership Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Partnership Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Partnership, with the Partnership as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Partnership Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1, 15678.2 and 15712(a) of the California Revised Limited Partnership Act (" CRLPA "), the Partnership may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
2
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and Aberdeen Properties, a California limited partnership and the general partner of the Partnership (the " General Partner "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Partnership, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Partnership to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Partnership, whereby the separate existence of Merger Sub shall cease, and the Partnership shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the
Partnership shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Partnership shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of
Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the
foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Partnership shall, as soon as practicable after such determination, revoke the
Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
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Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Partnership, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Partnership Agreement (defined below), as in effect
immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Partnership Value " means (i) 0.5773% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Partnership Value shall be allocated to each Partnership Interest or portion thereof in accordance with Section 4.1 of the Agreement of Limited Partnership of the Partnership dated as of April 16, 1973, as amended (the " Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 4.1 of the Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of distributable net proceeds from sales of properties in accordance with the Partnership Agreement.
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(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Partnership or the holders of any interest in the Partnership, except as provided in Section 1.05(c), each Non-Contributed Partnership Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Partnership Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Partnership Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Partnership Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Partnership Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Partnership in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Partnership Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Partnership Interest shall be distributed in REIT Shares.
(c) Each Partnership Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or
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Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a general partnership interest in the Surviving Partnership.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS.
Each Non-Contributed Partnership Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Partnership Interests so converted shall thereafter cease to have any rights
as a partner of the Partnership, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Partnership Interests would
otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting
from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as
applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT
Share. In the event that a holder of Non-Contributed Partnership Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable
to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Partnership has distributed or will distribute, from time to time, no more or less than its good faith estimate
of the Partnership's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Partnership Interests in accordance with
Section 4.1 of the Partnership Agreement. Subject to this limitation, the Partnership may continue to make distributions in accordance with the Partnership Agreement. For purposes of this
Agreement, "
Adjusted Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in
real estate investments and the fair value of derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any
depreciation or amortization used to calculate such line item), of the Partnership on a consolidated basis for such period (as determined on the same fair value basis of accounting historically
employed by the Partnership) less (B) the Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Partnership Interests.
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent
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the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Partnership Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-Contributed Partnership Interests whose
7
Non-Contributed Partnership Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-Contributed Partnership Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Partnership Interests of such holder shall be treated as a sale of such Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Partnership Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Partnership Interests to which a holder of Non-Contributed Partnership Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Partnership Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Partnership
Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of
Non-Contributed Partnership Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, property or assets
8
of the Partnership acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT(a).
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Partnership under this Agreement shall terminate, except
that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of
the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant,
representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with
respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Partnership is as set forth in clause (i) of the definition of Partnership Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE
OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Partnership as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority
9
to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party
thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of
Amendment and Restatement of the REIT).
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Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Partnership and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Partnership Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Partnership Indemnified Party (i) in connection with the Partnership or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Partnership Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Partnership's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Partnership's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Partnership Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Partnership Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Partnership Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Partnership Indemnified Party's receipt thereof, copies
11
of all notices and documents (including court papers) received by the Partnership Indemnified Party relating to a Third Party Claim (as defined below). Any Partnership Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Partnership Indemnified Party shall in good faith determine that such claim is not frivolous and that the Partnership Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Partnership Indemnified Parties (or any person authorized by the Partnership Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Partnership Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Partnership Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Partnership Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Partnership Indemnified Party's possession or under the Partnership Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Partnership Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Partnership Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Partnership hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Partnership's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Partnership under the Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as disclosed in the Prospectus, the Partnership hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Partnership has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. The Partnership, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by the Partnership (the " Property "). The Partnership has no Subsidiaries.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Partnership of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly
authorized by all necessary actions required of the Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or
on behalf of the Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding
obligation of the Partnership, each enforceable against the Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Partnership. All of the issued and outstanding equity interests of the Partnership are validly issued (other
than any profits interests in respect of the Partnership, where the concept of valid issuance is not applicable) and, to the Partnership's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Partnership in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which
the Partnership is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file
would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Partnership or (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on the Partnership, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Partnership's Knowledge, and except as would not have a Material Adverse Effect, (i) the Partnership has filed all Tax returns and reports required to be filed by it (after
giving effect to any filing extension properly granted by a Governmental Authority having authority to
13
do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Partnership, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Partnership is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign
persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Partnership shall not be deemed to have made any other representation or warranty in
connection with this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Partnership shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Partnership shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Partnership Interests or make any other changes to the equity capital structure of the Partnership, or (iii) purchase, redeem or otherwise acquire any Partnership Interests;
(b) amend its certificate of limited partnership or the Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Partnership's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Each of the REIT, the Operating Partnership and the Partnership shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any
14
Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and
therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP.
The obligation of the Partnership to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to
satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the
15
Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Partnership contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE PARTNERSHIP. The Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Partnership to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Partnership to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Partnership and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. The Partnership shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway"
16
endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Partnership, to:
Aberdeen
Properties, a California limited partnership
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
17
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
18
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(w) " Valid Election " means, with respect to any Non-Contributed Partnership Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Partnership Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall
19
not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Partnership shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Partnership cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
20
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Partnership and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the
REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise
available to the Partnership pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Partnership expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and
relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver
of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Partnership.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Partnership, at any time prior to the Effective Time;
provided
, that no such amendment,
modification or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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|||
Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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BARRINGTON/KIOWA PROPERTIES, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Aberdeen Properties, a California limited partnership Its General Partner |
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By: |
New September, LLC, a California limited liability company Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
___________________, |
||
BARRINGTON/KIOWA ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name:
Title: |
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
BSVM ACQUISITION, LLC
AND
BRENTWOOD-SAN VICENTE MEDICAL, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 9 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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9 |
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 11 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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13 |
Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
i
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
|
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP |
|
15 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
||||
Section 7.01 |
|
CONDITION TO EACH PARTY'S OBLIGATIONS |
|
15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP | 16 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
||||
Section 8.01 |
|
NOTICES |
|
17 |
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 21 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | ||
Section 8.16 | AMENDMENTS | 22 |
ii
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Partnership Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
iii
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Partnership Interest | Recitals | |
Non-Performing Contributor | Recitals | |
Partnership Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Partnership | Introduction | |
Partnership Agreement | Section 1.05 | |
Partnership Indemnified Party | Section 3.10 | |
Partnership Interests | Recitals | |
Partnership Value | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Brentwood-San Vicente Medical, Ltd., a California limited partnership (the " Partnership "), and BSVM Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including the Partnership, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of general and limited partnership interests and promoted profits interest in the Partnership (collectively, the " Partnership Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Partnership Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Partnership Interests so contributed, the " Contributed Partnership Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Partnership Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Partnership Interest but rather a Non-Contributed Partnership Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Partnership Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Partnership Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Partnership, with the Partnership as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Partnership Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1, 15678.2 and 15712(a) of the California Revised Limited Partnership Act (" CRLPA "), the Partnership may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
2
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and Coral Realty, a California limited partnership and the general partner of the Partnership (the " General Partner "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Partnership, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Partnership to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Partnership, whereby the separate existence of Merger Sub shall cease, and the Partnership shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the
Partnership shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Partnership shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of
Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the
foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Partnership shall, as soon as practicable after such determination, revoke the
Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
3
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Partnership, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Partnership Agreement (defined below), as in effect
immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Partnership Value " means (i) 0.6051% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Partnership Value shall be allocated to each Partnership Interest or portion thereof in accordance with Section 4.2 of the First Amended and Restated Agreement of Limited Partnership of the Partnership dated as of December 31, 1999 (the " Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 4.2 of the Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of distributable net proceeds from sales of properties in accordance with the Partnership Agreement.
4
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Partnership or the holders of any interest in the Partnership, except as provided in Section 1.05(c), each Non-Contributed Partnership Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Partnership Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Partnership Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Partnership Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Partnership Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Partnership in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Partnership Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Partnership Interest shall be distributed in REIT Shares.
(c) Each Partnership Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in
Merger Sub issued and outstanding
5
immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a general partnership interest in the Surviving Partnership.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS.
Each Non-Contributed Partnership Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Partnership Interests so converted shall thereafter cease to have any rights
as a partner of the Partnership, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Partnership Interests would
otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting
from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as
applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT
Share. In the event that a holder of Non-Contributed Partnership Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable
to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Partnership has distributed or will distribute, from time to time, no more or less than its good faith estimate
of the Partnership's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Partnership Interests in accordance with
Section 4.2 of the Partnership Agreement. Subject to this limitation, the Partnership may continue to make distributions in accordance with the Partnership Agreement. For purposes of this
Agreement, "
Adjusted Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in
real estate investments and the fair value of derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any
depreciation or amortization used to calculate such line item), of the Partnership on a consolidated basis for such period (as determined on the same fair value basis of accounting historically
employed by the Partnership) less (B) the Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Partnership Interests.
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent
6
the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Partnership Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
7
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-Contributed Partnership Interests whose Non-Contributed Partnership Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-Contributed Partnership Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Partnership Interests of such holder shall be treated as a sale of such Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Partnership Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Partnership Interests to which a holder of Non-Contributed Partnership Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Partnership Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Partnership
Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of
Non-Contributed Partnership Interests in respect of which such deduction and withholding was made by the Operating Partnership.
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Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, property or assets of the
Partnership acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be
authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such deeds, bills of sale, assignments and assurances and to
take and do, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Partnership under this Agreement shall terminate, except
that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of
the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant,
representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with
respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Partnership is as set forth in clause (i) of the definition of Partnership Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Partnership as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be
9
so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party
thereto.
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Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of
Amendment and Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Partnership and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Partnership Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Partnership Indemnified Party (i) in connection with the Partnership or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Partnership Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Partnership's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Partnership's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
11
(b) At the time when any Partnership Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Partnership Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Partnership Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Partnership Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Partnership Indemnified Party relating to a Third Party Claim (as defined below). Any Partnership Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Partnership Indemnified Party shall in good faith determine that such claim is not frivolous and that the Partnership Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Partnership Indemnified Parties (or any person authorized by the Partnership Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Partnership Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Partnership Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Partnership Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Partnership Indemnified Party's possession or under the Partnership Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Partnership Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Partnership Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Partnership hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Partnership's right to specific performance or injunctive relief in connection with the breach by either the REIT
12
or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Partnership under the Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as disclosed in the Prospectus, the Partnership hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Partnership has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. The Partnership, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by the Partnership (the " Property "). The Partnership has no Subsidiaries.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Partnership of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly
authorized by all necessary actions required of the Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or
on behalf of the Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding
obligation of the Partnership, each enforceable against the Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Partnership. All of the issued and outstanding equity interests of the Partnership are validly issued (other
than any profits interests in respect of the Partnership, where the concept of valid issuance is not applicable) and, to the Partnership's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Partnership in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which
the Partnership is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file
would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Partnership or (B) any term or provision of any judgment,
13
order, writ, injunction, or decree binding on the Partnership, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Partnership's Knowledge, and except as would not have a Material Adverse Effect, (i) the Partnership has filed all Tax returns and reports required to be filed by it (after
giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and
has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Partnership, and no
requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Partnership is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign
persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Partnership shall not be deemed to have made any other representation or warranty in
connection with this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Partnership shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Partnership shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Partnership Interests or make any other changes to the equity capital structure of the Partnership, or (iii) purchase, redeem or otherwise acquire any Partnership Interests;
(b) amend its certificate of limited partnership or the Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Partnership's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
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ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Each of the REIT, the Operating Partnership and the Partnership shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and
therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation
15
Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP.
The obligation of the Partnership to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to
satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Partnership contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE PARTNERSHIP. The Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Partnership to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the
16
ability of the Partnership to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Partnership and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. The Partnership shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Partnership, to:
Coral
Realty, a California limited partnership
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
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(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together
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with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(w) " Valid Election " means, with respect to any Non-Contributed Partnership Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Partnership Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which
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the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Partnership shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Partnership cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
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Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Partnership and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the
REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise
available to the Partnership pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Partnership expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and
relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver
of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
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Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Partnership.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Partnership, at any time prior to the Effective Time;
provided
, that no such amendment,
modification or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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BRENTWOOD-SAN VICENTE MEDICAL, LTD., A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Coral Realty, a California limited partnership Its General Partner |
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By: |
New September, LLC, a California limited liability company Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
___________________, |
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BSVM ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name:
Title: |
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
BRENTWOOD COURT ACQUISITION, LLC
AND
BRENTWOOD COURT,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 3 | ||
Section 1.05 | CONVERSION OF PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS | 5 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 7 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 8 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 13 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
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Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP |
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Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP | 15 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
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NOTICES |
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Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 20 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 21 | ||
Section 8.16 | AMENDMENTS | 21 |
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TERM
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SECTION
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Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Partnership Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
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Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Partnership Interest | Recitals | |
Non-Performing Contributor | Recitals | |
Partnership Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Partnership | Introduction | |
Partnership Agreement | Section 1.05 | |
Partnership Indemnified Party | Section 3.10 | |
Partnership Interests | Recitals | |
Partnership Value | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
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This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Brentwood Court, a California limited partnership (the " Partnership "), and Brentwood Court Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including the Partnership, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of general and limited partnership interests and promoted profits interest in the Partnership (collectively, the " Partnership Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Partnership Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Partnership Interests so contributed, the " Contributed Partnership Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Partnership Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Partnership Interest but rather a Non-Contributed Partnership Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Partnership Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Partnership Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Partnership, with the Partnership as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Partnership Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1, 15678.2 and 15712(a) of the California Revised Limited Partnership Act (" CRLPA "), the Partnership may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
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WHEREAS, the Boards of Directors of the REIT and Coral Realty, a California limited partnership and the general partner of the Partnership (the " General Partner "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Partnership, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Partnership to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Partnership, whereby the separate existence of Merger Sub shall cease, and the Partnership shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the
Partnership shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Partnership shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of
Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the
foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Partnership shall, as soon as practicable after such determination, revoke the
Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Partnership, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Partnership Agreement (defined below), as in effect
immediately prior to the Effective Time,
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shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Partnership Value " means (i) 0.2420% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Partnership Value shall be allocated to each Partnership Interest or portion thereof in accordance with Section 4.1 of the Agreement of Limited Partnership of the Partnership dated as of July 14, 1981, as amended (the " Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 4.1 of the Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of distributable net proceeds from sales of properties in accordance with the Partnership Agreement.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Partnership or the holders of any interest in the Partnership, except as provided in Section 1.05(c), each Non-Contributed Partnership Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Partnership Interest (collectively referred to as the " Merger Consideration ").
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Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Partnership Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Partnership Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Partnership Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Partnership in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Partnership Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Partnership Interest shall be distributed in REIT Shares.
(c) Each Partnership Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in
Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be
delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a general partnership
interest in the Surviving Partnership.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS.
Each Non-Contributed Partnership Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and
shall
5
automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Partnership Interests so converted shall thereafter cease to have any rights as a partner of the Partnership, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Partnership Interests would
otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting
from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as
applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT
Share. In the event that a holder of Non-Contributed Partnership Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable
to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
uDring the period from July 1, 2005 through the Closing Date, the Partnership has distributed or will distribute, from time to time, no more or less than its good faith estimate
of the Partnership's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Partnership Interests in accordance with
Section 4.1 of the Partnership Agreement. Subject to this limitation, the Partnership may continue to make distributions in accordance with the Partnership Agreement. For purposes of this
Agreement, "
Adjusted Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in
real estate investments and the fair value of derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any
depreciation or amortization used to calculate such line item), of the Partnership on a consolidated basis for such period (as determined on the same fair value basis of accounting historically
employed by the Partnership) less (B) the Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Partnership Interests.
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
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(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Partnership Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-Contributed Partnership Interests whose Non-Contributed Partnership Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP
7
Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-Contributed Partnership Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Partnership Interests of such holder shall be treated as a sale of such Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Partnership Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Partnership Interests to which a holder of Non-Contributed Partnership Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Partnership Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Partnership
Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of
Non-Contributed Partnership Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, property or assets of the
Partnership acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be
authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such deeds, bills of sale, assignments and assurances and to
take
8
and do, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Partnership under this Agreement shall terminate, except
that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of
the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant,
representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with
respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Partnership is as set forth in clause (i) of the definition of Partnership Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Partnership as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in
9
each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party
thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of
Amendment and Restatement of the REIT).
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Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Partnership and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Partnership Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Partnership Indemnified Party (i) in connection with the Partnership or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Partnership Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Partnership's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Partnership's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Partnership Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Partnership Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Partnership Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Partnership Indemnified Party's receipt thereof, copies
11
of all notices and documents (including court papers) received by the Partnership Indemnified Party relating to a Third Party Claim (as defined below). Any Partnership Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Partnership Indemnified Party shall in good faith determine that such claim is not frivolous and that the Partnership Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Partnership Indemnified Parties (or any person authorized by the Partnership Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Partnership Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Partnership Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Partnership Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Partnership Indemnified Party's possession or under the Partnership Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Partnership Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Partnership Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Partnership hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Partnership's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Partnership under the Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as disclosed in the Prospectus, the Partnership hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Partnership has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. The Partnership, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by the Partnership (the " Property "). The Partnership has no Subsidiaries.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Partnership of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly
authorized by all necessary actions required of the Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or
on behalf of the Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding
obligation of the Partnership, each enforceable against the Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Partnership. All of the issued and outstanding equity interests of the Partnership are validly issued (other
than any profits interests in respect of the Partnership, where the concept of valid issuance is not applicable) and, to the Partnership's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Partnership in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which
the Partnership is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file
would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Partnership or (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on the Partnership, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Partnership's Knowledge, and except as would not have a Material Adverse Effect, (i) the Partnership has filed all Tax returns and reports required to be filed by it (after
giving effect to any filing extension properly granted by a Governmental Authority having authority to
13
do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Partnership, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Partnership is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign
persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Partnership shall not be deemed to have made any other representation or warranty in
connection with this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Partnership shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Partnership shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Partnership Interests or make any other changes to the equity capital structure of the Partnership, or (iii) purchase, redeem or otherwise acquire any Partnership Interests;
(b) amend its certificate of limited partnership or the Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Partnership's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Each of the REIT, the Operating Partnership and the Partnership shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any
14
Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and
therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP.
The obligation of the Partnership to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to
satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the
15
Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Partnership contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE PARTNERSHIP. The Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Partnership to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Partnership to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Partnership and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. The Partnership shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
16
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Partnership, to:
Coral
Realty, a California limited partnership
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
17
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
18
(w) " Valid Election " means, with respect to any Non-Contributed Partnership Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Partnership Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the
19
foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Partnership shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Partnership cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to
20
the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Partnership and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the
REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise
available to the Partnership pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Partnership expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and
relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver
of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Partnership.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Partnership, at any time prior to the Effective Time;
provided
, that no such amendment,
modification or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | ||||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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BRENTWOOD COURT, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
Coral Realty, a California limited partnership Its General Partner |
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By: |
New September, LLC, a California limited liability company Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
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Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
___________________, |
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BRENTWOOD COURT ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name:
Title: |
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
BRENTWOOD PLAZA ACQUISITION, LLC
AND
BRENTWOOD PLAZA,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 7 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 8 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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9 |
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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13 |
Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 13 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
i
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 |
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COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP |
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14 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 |
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CONDITION TO EACH PARTY'S OBLIGATIONS |
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15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP | 15 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 |
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NOTICES |
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17 |
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 20 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 21 | ||
Section 8.16 | AMENDMENTS | 21 |
ii
TERM
|
SECTION
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|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Partnership Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
iii
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Partnership Interest | Recitals | |
Non-Performing Contributor | Recitals | |
Partnership Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Partnership | Introduction | |
Partnership Agreement | Section 1.05 | |
Partnership Indemnified Party | Section 3.10 | |
Partnership Interests | Recitals | |
Partnership Value | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Brentwood Plaza, a California limited partnership (the " Partnership "), and Brentwood Plaza Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including the Partnership, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of general and limited partnership interests and promoted profits interest in the Partnership (collectively, the " Partnership Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Partnership Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Partnership Interests so contributed, the " Contributed Partnership Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Partnership Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Partnership Interest but rather a Non-Contributed Partnership Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Partnership Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Partnership Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Partnership, with the Partnership as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Partnership Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1, 15678.2 and 15712(a) of the California Revised Limited Partnership Act (" CRLPA "), the Partnership may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
2
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and EA Realty, a California limited partnership and the general partner of the Partnership (the " General Partner "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Partnership, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Partnership to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Partnership, whereby the separate existence of Merger Sub shall cease, and the Partnership shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the
Partnership shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Partnership shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of
Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the
foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Partnership shall, as soon as practicable after such determination, revoke the
Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
3
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Partnership, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Partnership Agreement (defined below), as in effect
immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Partnership Value " means (i) 1.0073% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Partnership Value shall be allocated to each Partnership Interest or portion thereof in accordance with Section 4.3 of the Limited Partnership Agreement of the Partnership dated as of October 15, 1986 (the " Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 4.3 of the Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of distributable net proceeds from sales of properties in accordance with the Partnership Agreement.
4
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Partnership or the holders of any interest in the Partnership, except as provided in Section 1.05(c), each Non-Contributed Partnership Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Partnership Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Partnership Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Partnership Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Partnership Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Partnership in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Partnership Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Partnership Interest shall be distributed in REIT Shares.
(c) Each Partnership Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in
Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be
delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a general partnership
interest in the Surviving Partnership.
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Section 1.07
CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS.
Each Non-Contributed Partnership Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Partnership Interests so converted shall thereafter cease to have any rights
as a partner of the Partnership, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Partnership Interests would
otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting
from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as
applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT
Share. In the event that a holder of Non-Contributed Partnership Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable
to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Partnership has distributed or will distribute, from time to time, no more or less than its good faith estimate
of the Partnership's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Partnership Interests in accordance with
Section 4.2 of the Partnership Agreement. Subject to this limitation, the Partnership may continue to make distributions in accordance with the Partnership Agreement. For purposes of this
Agreement, "
Adjusted Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in
real estate investments and the fair value of derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any
depreciation or amortization used to calculate such line item), of the Partnership on a consolidated basis for such period (as determined on the same fair value basis of accounting historically
employed by the Partnership) less (B) the Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Partnership Interests.
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with
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(1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Partnership Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-Contributed Partnership Interests whose Non-Contributed Partnership Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP
7
Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-Contributed Partnership Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Partnership Interests of such holder shall be treated as a sale of such Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Partnership Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Partnership Interests to which a holder of Non-Contributed Partnership Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Partnership Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Partnership
Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of
Non-Contributed Partnership Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, property or assets of the
Partnership acquired or to be acquired by the Surviving Partnership as a result of, or in
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connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Partnership under this Agreement shall terminate, except
that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of
the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant,
representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with
respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Partnership is as set forth in clause (i) of the definition of Partnership Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT,
THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Partnership as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under
9
the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party
thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the
"
Operating Partnership Agreement
")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued
against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all
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Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Partnership and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Partnership Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Partnership Indemnified Party (i) in connection with the Partnership or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Partnership Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Partnership's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Partnership's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Partnership Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Partnership Indemnified Party giving rise
11
to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Partnership Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Partnership Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Partnership Indemnified Party relating to a Third Party Claim (as defined below). Any Partnership Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Partnership Indemnified Party shall in good faith determine that such claim is not frivolous and that the Partnership Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Partnership Indemnified Parties (or any person authorized by the Partnership Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Partnership Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Partnership Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Partnership Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Partnership Indemnified Party's possession or under the Partnership Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Partnership Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Partnership Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Partnership hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Partnership's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Partnership under the Partnership Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as disclosed in the Prospectus, the Partnership hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Partnership has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. The Partnership, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by the Partnership (the " Property "). The Partnership has no Subsidiaries.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Partnership of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly
authorized by all necessary actions required of the Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or
on behalf of the Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding
obligation of the Partnership, each enforceable against the Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Partnership. All of the issued and outstanding equity interests of the Partnership are validly issued (other
than any profits interests in respect of the Partnership, where the concept of valid issuance is not applicable) and, to the Partnership's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Partnership in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which
the Partnership is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file
would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Partnership or (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on the Partnership, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
TAXES.
To the Partnership's Knowledge, and except as would not have a Material Adverse Effect, (i) the Partnership has filed all Tax returns and reports required to be filed by it (after
giving effect to any filing extension properly granted by a Governmental Authority having authority to
13
do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Partnership, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Partnership is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign
persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Partnership shall not be deemed to have made any other representation or warranty in
connection with this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Partnership shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Partnership shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Partnership Interests or make any other changes to the equity capital structure of the Partnership, or (iii) purchase, redeem or otherwise acquire any Partnership Interests;
(b) amend its certificate of limited partnership or the Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Partnership's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Each of the REIT, the Operating Partnership and the Partnership shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any
14
Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and
therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02
CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP.
The obligation of the Partnership to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to
satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the
15
Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Partnership contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE PARTNERSHIP. The Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Partnership to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Partnership to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Partnership and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. The Partnership shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
16
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Partnership, to:
EA
Realty, a California limited partnership
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
17
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
18
(w) " Valid Election " means, with respect to any Non-Contributed Partnership Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Partnership Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the
19
foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Partnership shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Partnership cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to
20
the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Partnership and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the
REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise
available to the Partnership pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Partnership expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and
relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver
of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Partnership.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Partnership, at any time prior to the Effective Time;
provided
, that no such amendment,
modification or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | ||||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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||||
Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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BRENTWOOD PLAZA, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
EA Realty, a California limited partnership Its General Partner |
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By: |
New September, LLC, a California limited liability company Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
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Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
___________________, |
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BRENTWOOD PLAZA ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name:
Title: |
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
SAN VICENTE PLAZA ACQUISITION, LLC
AND
SAN VICENTE PLAZA,
A CALIFORNIA LIMITED PARTNERSHIP
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 |
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THE MERGER |
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3 |
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT | 4 | ||
Section 1.05 | CONVERSION OF PARTNERSHIP INTERESTS | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS | 6 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 |
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CLOSING |
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7 |
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 9 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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9 |
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | ||
Section 3.06 | OP AGREEMENT | 11 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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13 |
Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
i
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP |
||||
ARTICLE VI ADDITIONAL AGREEMENTS |
||||
Section 6.01 |
|
COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP |
|
14 |
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
||||
Section 7.01 |
|
CONDITION TO EACH PARTY'S OBLIGATIONS |
|
15 |
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP | 16 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
||||
Section 8.01 |
|
NOTICES |
|
17 |
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 19 | ||
Section 8.06 | ASSIGNMENT | 19 | ||
Section 8.07 | JURISDICTION | 19 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 21 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 21 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | ||
Section 8.16 | AMENDMENTS | 22 |
ii
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contributed Partnership Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
CRLPA | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
General Partner | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
iii
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Partnership Interest | Recitals | |
Non-Performing Contributor | Recitals | |
Partnership Interests | Recitals | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Partnership | Introduction | |
Partnership Agreement | Section 1.05 | |
Partnership Indemnified Party | Section 3.10 | |
Partnership Interests | Recitals | |
Partnership Value | Section 1.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Partnership | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), San Vicente Plaza, a California limited partnership (the " Partnership "), and San Vicente Plaza Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including the Partnership, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of general and limited partnership interests and promoted profits interest in the Partnership (collectively, the " Partnership Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Partnership Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ;" and the Partnership Interests so contributed, the " Contributed Partnership Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Partnership Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Partnership Interest but rather a Non-Contributed Partnership Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Partnership Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Partnership Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into the Partnership, with the Partnership as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Partnership Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 15678.1, 15678.2 and 15712(a) of the California Revised Limited Partnership Act (" CRLPA "), the Partnership may be merged with another entity, subject to the requisite approval of the partners as provided in Section 15678.2 of the CRLPA;
2
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
WHEREAS, the Boards of Directors of the REIT and EA Realty, a California limited partnership and the general partner of the Partnership (the " General Partner "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and the Partnership, on the other hand, and their respective stockholders, equity holders and limited partners, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the General Partner has obtained the requisite approval of the limited partners of the Partnership to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CRLPA and the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Merger Sub shall be merged with and into the Partnership, whereby the separate existence of Merger Sub shall cease, and the Partnership shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Partnership ").
Section 1.02
EFFECTIVE TIME.
Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to
which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and the
Partnership shall file a certificate of merger as contemplated by the CRLPA, with the Secretary of State of the State of California (the "
Certificate of
Merger
"), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings,
in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA and the CRLPA. The Merger shall become effective as of the date set forth in the Certificate of
Merger (the "
Effective Time
"). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the
Certificate of Merger, the Operating Partnership, Merger Sub and the Partnership shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the
underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the
other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of
Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the
foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and the Partnership shall, as soon as practicable after such determination, revoke the
Certificate of Merger.
Section 1.03
EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA and the CRLPA.
3
Section 1.04
CERTIFICATE OF LIMITED PARTNERSHIP; PARTNERSHIP AGREEMENT.
At the Effective Time, (i) the Certificate of Limited Partnership of the Partnership, as in effect immediately prior to the Effective Time, shall be the Certificate of Limited
Partnership of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA, and (ii) the Partnership Agreement (defined below), as in effect
immediately prior to the Effective Time, shall be the partnership agreement of the Surviving Partnership until thereafter amended as provided therein or in accordance with the CRLPA.
Section 1.05
CONVERSION OF PARTNERSHIP INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Partnership Value " means (i) 0.4053% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Partnership Value shall be allocated to each Partnership Interest or portion thereof in accordance with Section 5.2 of the Limited Partnership Agreement of the Partnership dated as of December 31, 1989 (the " Partnership Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 5.2 of the Partnership Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of distributable net proceeds from sales of properties in accordance with the Partnership Agreement.
4
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, the Partnership or the holders of any interest in the Partnership, except as provided in Section 1.05(c), each Non-Contributed Partnership Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Partnership Interest (collectively referred to as the " Merger Consideration ").
Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Partnership Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Partnership Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Partnership Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in the Partnership in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Partnership Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Partnership Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Partnership Interest shall be distributed in REIT Shares.
(c) Each Partnership Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06
CONVERSION OF MERGER SUB MEMBER INTERESTS.
At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or
5
Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a general partnership interest in the Surviving Partnership.
Section 1.07
CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED PARTNERSHIP INTERESTS.
Each Non-Contributed Partnership Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Partnership Interests so converted shall thereafter cease to have any rights
as a partner of the Partnership, except the right to receive the Merger Consideration applicable thereto.
Section 1.08
FRACTIONAL INTERESTS.
No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Partnership Interests would
otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting
from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as
applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT
Share. In the event that a holder of Non-Contributed Partnership Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable
to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
During the period from July 1, 2005 through the Closing Date, the Partnership has distributed or will distribute, from time to time, no more or less than its good faith estimate
of the Partnership's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Partnership Interests in accordance with
Section 5.2 of the Partnership Agreement. Subject to this limitation, the Partnership may continue to make distributions in accordance with the Partnership Agreement. For purposes of this
Agreement, "
Adjusted Net Operating Income
" means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in
real estate investments and the fair value of derivatives,
i.e.
, the line item after deduction for minority interests, if any (but adding back any
depreciation or amortization used to calculate such line item), of the Partnership on a consolidated basis for such period (as determined on the same fair value basis of accounting historically
employed by the Partnership) less (B) the Capital Expense Allowance.
Section 1.10
CALCULATION OF MERGER CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good
faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Partnership Interests.
Section 1.11
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent
6
the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Partnership Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
7
Section 2.02
PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Partnership (or its successor in interest) shall deliver to each holder of Non-Contributed Partnership Interests whose Non-Contributed Partnership Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Partnership (or its successor in interest) shall not be liable to any holder of Non-Contributed Partnership Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Partnership Interests of such holder shall be treated as a sale of such Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Partnership Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Partnership Interests to which a holder of Non-Contributed Partnership Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Partnership Interests by the holder and a purchase of such Non-Contributed Partnership Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Partnership Interests.
Section 2.03
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Partnership
Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder
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of Non-Contributed Partnership Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04
FURTHER ACTION.
If, at any time after the Effective Time, the Surviving Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things
are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Partnership the right, title or interest in, to or under any of the rights, property or assets of the
Partnership acquired or to be acquired by the Surviving Partnership as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Partnership shall be
authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such deeds, bills of sale, assignments and assurances and to
take and do, in the name and on behalf of each of the Operating Partnership and the Partnership or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Partnership or otherwise to carry out this Agreement.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the "
Registration
Statement
") has not been filed with the Securities and Exchange Commission ("
SEC
") by December 31, 2006, or
(ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the "
Outside
Date
").
Section 2.06
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and the Partnership under this Agreement shall terminate, except
that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of
the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant,
representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with
respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for the Partnership is as set forth in clause (i) of the definition of Partnership Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE
OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with the Partnership as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01
ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
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(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly
and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and
each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation
Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each
enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party
thereto.
Section 3.05
VALIDITY OF OP UNITS AND REIT SHARES.
The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating
Partnership, free and clear of all Liens created by the
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Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06
OP AGREEMENT.
Attached as
Exhibit E
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.07
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material
obligations.
Section 3.08
LITIGATION.
There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or
any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which
challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it
pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any
other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless the Partnership and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Partnership Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Partnership Indemnified Party (i) in connection with the Partnership or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Partnership Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) the Partnership's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Partnership's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Partnership Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give
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written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Partnership Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Partnership Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Partnership Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Partnership Indemnified Party relating to a Third Party Claim (as defined below). Any Partnership Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Partnership Indemnified Party shall in good faith determine that such claim is not frivolous and that the Partnership Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Partnership Indemnified Parties (or any person authorized by the Partnership Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Partnership Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Partnership Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Partnership Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Partnership Indemnified Party's possession or under the Partnership Indemnified Party's control relating thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Partnership Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Partnership Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Partnership hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Partnership's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Partnership under the Partnership Agreement.
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(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as disclosed in the Prospectus, the Partnership hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
(a) The Partnership has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. The Partnership, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by the Partnership (the " Property "). The Partnership has no Subsidiaries.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance by the Partnership of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly
authorized by all necessary actions required of the Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or
on behalf of the Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding
obligation of the Partnership, each enforceable against the Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 4.03
CAPITALIZATION.
Schedule 4.03 sets forth as of the date hereof the ownership of the Partnership. All of the issued and outstanding equity interests of the Partnership are validly issued (other
than any profits interests in respect of the Partnership, where the concept of valid issuance is not applicable) and, to the Partnership's Knowledge, are not subject to preemptive rights.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under
any applicable Laws is required to be obtained by the Partnership in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which
the Partnership is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file
would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of the Partnership or (B) any term or provision of any judgment, order, writ,
injunction, or decree binding on the Partnership, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
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Section 4.06
TAXES.
To the Partnership's Knowledge, and except as would not have a Material Adverse Effect, (i) the Partnership has filed all Tax returns and reports required to be filed by it (after
giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and
has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against the Partnership, and no
requests for waivers of the time to assess any such Taxes are pending.
Section 4.07
NON-FOREIGN STATUS.
The Partnership is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign
persons.
Section 4.08
NO IMPLIED REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Partnership shall not be deemed to have made any other representation or warranty in
connection with this Agreement or the transactions contemplated hereby.
Section 4.09
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE PARTNERSHIP
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), the Partnership shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, the Partnership shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Partnership Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Partnership Interests or make any other changes to the equity capital structure of the Partnership, or (iii) purchase, redeem or otherwise acquire any Partnership Interests;
(b) amend its certificate of limited partnership or the Partnership Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping the Partnership's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Each of the REIT, the Operating Partnership and the
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Partnership shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02
OBLIGATIONS OF MERGER SUB.
Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the
Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the
"
Joinder Date
") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03
TAX AGREEMENT.
In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation
Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and
therefore shall not make any curative or remedial allocations with respect to such properties.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
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Section 7.02
CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP.
The obligation of the Partnership to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to
satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03
CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB.
The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the
Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Partnership contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE PARTNERSHIP. The Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Partnership to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Partnership to consummate the transactions contemplated by this Agreement) shall have been obtained.
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(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Partnership and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. The Partnership shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to the Partnership, to:
EA
Realty, a California limited partnership
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
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(d) " Capital Expense Allowance" means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) "Elected OP U nit Percentage " means, with respect to any Non-Contributed Partnership Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or
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other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(w) " Valid Election " means, with respect to any Non-Contributed Partnership Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Partnership Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 8.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and
supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or
remedies on any Person other than the parties hereto.
Section 8.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment
without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08
DISPUTE RESOLUTION.
The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute
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following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and the Partnership shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and the Partnership cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable
law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
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Section 8.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement by the Partnership and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the
REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise
available to the Partnership pursuant to the terms and provisions contained in Section 3.10.
Section 8.12
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing, the Partnership expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and
relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver
of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 8.14
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
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Section 8.15
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, the Operating
Partnership, Merger Sub and the Partnership.
Section 8.16
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Partnership, at any time prior to the Effective Time;
provided
, that no such amendment,
modification or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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SAN VICENTE PLAZA, A CALIFORNIA LIMITED PARTNERSHIP |
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By: |
EA Realty, a California limited partnership Its General Partner |
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By: |
New September, LLC, a California limited liability company Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
___________________, |
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SAN VICENTE PLAZA ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name:
Title: |
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Contribution Agreement |
Exhibit D: |
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Form of Registration Rights Agreement |
Exhibit E: |
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Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
OWENSMOUTH ACQUISITION, LLC
AND
OWENSMOUTH/WARNER, LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
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PAGE
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ARTICLE I THE MERGER | ||||
Section 1.01 | THE MERGER | 3 | ||
Section 1.02 | EFFECTIVE TIME | 3 | ||
Section 1.03 | EFFECT OF THE MERGER | 3 | ||
Section 1.04 | CERTIFICATE OF FORMATION; LLC AGREEMENT | 3 | ||
Section 1.05 | CONVERSION OF COMPANY INTERESTS. | 4 | ||
Section 1.06 | CONVERSION OF MERGER SUB MEMBER INTERESTS | 5 | ||
Section 1.07 | CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED COMPANY INTERESTS | 5 | ||
Section 1.08 | FRACTIONAL INTERESTS | 6 | ||
Section 1.09 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 6 | ||
Section 1.10 | CALCULATION OF MERGER CONSIDERATION | 6 | ||
Section 1.11 | TRANSACTION COSTS | 6 | ||
Section 1.12 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 | CLOSING | 7 | ||
Section 2.02 | PAYMENT OF MERGER CONSIDERATION. | 7 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 8 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB |
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Section 3.01 | ORGANIZATION; AUTHORITY | 9 | ||
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF OP UNITS AND REIT SHARES | 10 | ||
Section 3.06 | OP AGREEMENT | 10 | ||
Section 3.07 | LIMITED ACTIVITIES | 11 | ||
Section 3.08 | LITIGATION | 11 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.10 | INDEMNIFICATION | 12 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF OWENSMOUTH |
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Section 4.01 | ORGANIZATION; AUTHORITY | 13 | ||
Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 14 | ||
Section 4.04 | CONSENTS AND APPROVALS | 14 | ||
Section 4.05 | NO VIOLATION | 14 | ||
Section 4.06 | TAXES | 14 | ||
Section 4.07 | NON-FOREIGN STATUS | 14 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 14 | ||
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF OWENSMOUTH | 14 | ||
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ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY OWENSMOUTH |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 | COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND OWENSMOUTH | 15 | ||
Section 6.02 | OBLIGATIONS OF MERGER SUB | 15 | ||
Section 6.03 | TAX AGREEMENT | 15 | ||
ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 | CONDITION TO EACH PARTY'S OBLIGATIONS | 16 | ||
Section 7.02 | CONDITIONS TO OBLIGATIONS OF OWENSMOUTH | 16 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB | 17 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 | NOTICES | 17 | ||
Section 8.02 | DEFINITIONS | 18 | ||
Section 8.03 | COUNTERPARTS | 19 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 19 | ||
Section 8.05 | GOVERNING LAW | 20 | ||
Section 8.06 | ASSIGNMENT | 20 | ||
Section 8.07 | JURISDICTION | 20 | ||
Section 8.08 | DISPUTE RESOLUTION | 20 | ||
Section 8.09 | SEVERABILITY | 21 | ||
Section 8.10 | RULES OF CONSTRUCTION | 21 | ||
Section 8.11 | EQUITABLE REMEDIES | 21 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 22 | ||
Section 8.13 | TIME OF THE ESSENCE | 22 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 22 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 22 | ||
Section 8.16 | AMENDMENTS | 22 |
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TERM
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SECTION
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Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.05 | |
Adjusted Net Operating Income | Section 1.09 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Alternative Division | Section 1.12 | |
Business Day | Section 8.02 | |
Capital Expense Allowance | Section 8.02 | |
Certificate of Merger | Section 1.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
CLLCA | Recitals | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Company Indemnified Party | Section 3.10 | |
Company Interests | Recitals | |
Company Value | Section 1.05 | |
Consent Form | Section 8.02 | |
Contributed Company Interest | Recitals | |
Contribution Agreement | Recitals | |
Contributions | Recitals | |
Contributors | Recitals | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Merger Agreement | Recitals | |
Dispute | Section 8.08 | |
Douglas Emmett Entities | Recitals | |
Effective Time | Section 1.02 | |
Elected Cash Percentage | Section 8.02 | |
Elected OP Unit Percentage | Section 8.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.05 | |
Investment Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
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Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Management Company Merger Agreement | Recitals | |
Material Adverse Effect | Section 8.02 | |
Maximum Cash Percentage | Section 1.05 | |
Merger | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Sub | Introduction | |
Non-Contributed Company Interest | Recitals | |
Non-Performing Contributor | Recitals | |
OP Units | Recitals | |
Operating Agreement | Section 1.05 | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Outside Date | Section 2.05 | |
Owensmouth | Introduction | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 8.02 | |
Property | Section 4.01 | |
Prospectus | Section 8.02 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Election | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.05 | |
Subsidiary | Section 8.02 | |
Surviving Entity | Section 1.01 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.05 | |
Valid Election | Section 8.02 |
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This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), Owensmouth/Warner, LLC, a California limited liability company (" Owensmouth "), and Owensmouth Acquisition, LLC, a California limited liability company to be formed prior to the Effective Time (defined below) and to be owned by the Operating Partnership and one or more of its Affiliates (" Merger Sub ").
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities, including Owensmouth, identified as such on Exhibit A hereto (collectively, the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each other Single Asset Entity pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto,
pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, concurrently with the execution of this Agreement, the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which, immediately prior to the Merger, the REIT will acquire directly or indirectly, all of the issued and outstanding capital stock of DERA and DECO;
WHEREAS, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of the contribution agreements, subsequent to the mergers in the Management Company Merger Agreement and the Investment Fund Merger Agreements and prior to the Effective Time, certain holders of member interests in Owensmouth (collectively, the " Company Interests ") who have elected to receive shares of REIT Common Stock (" REIT Shares ") in the Formation Transactions (a " REIT Share Election ") will contribute the portion of their Company Interests for which they are to receive REIT Shares to the REIT in exchange for REIT Shares (the " Contributions "), pursuant to a contribution agreement substantially in the form attached hereto as Exhibit C (the " Contribution Agreement ", and the Company Interests so contributed, the " Contributed Company Interests ;" and the holders of interests to be so contributed, the " Contributors ;" and, for purposes of clarity, any such interests not contributed to the REIT as provided in the Contribution Agreement as a result of a breach by the Contributor thereunder (each such interest, a " Non-Contributed Company Interest " and each such Contributor, a " Non-Performing Contributor ") shall not constitute a Contributed Company Interest but rather a Non-Contributed Company Interest;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Contributions, prior to the Effective Time, the REIT shall contribute the Contributed Company Interests to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued by the REIT to the holders of the Contributed Company Interests in exchange for such interests;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, Merger Sub will merge with and into Owensmouth, with Owensmouth as the surviving entity (the " Merger "), pursuant to which each Non-Contributed Company Interest will be converted automatically as set forth herein into the right to receive cash, without interest, OP Units, or, solely with respect to Non-Performing Contributors and holders who have failed to make a Valid Election (defined below), REIT Shares, or a combination of the foregoing; provided that all holders that are not Accredited Investors will receive cash;
WHEREAS, in accordance with Sections 17550 and 17551 of the Beverly-Killea Limited Liability Company Act of the State of California (" CLLCA "), Owensmouth may be merged with another entity, subject to the requisite approval of the members as provided in Section 17551 of the CLLCA;
WHEREAS, Douglas Emmett, LLC, a Delaware limited liability company and Subsidiary of the REIT, as general partner of the Operating Partnership, has approved and authorized the Merger and the other Formation Transactions;
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WHEREAS, the Boards of Directors of the REIT and New September, LLC, a California limited liability company and the manager of Owensmouth (the " Manager "), has each determined that it is advisable and in the best interest of the REIT, the Operating Partnership and Merger Sub, on the one hand, and Owensmouth, on the other hand, and their respective stockholders and equity holders, as the case may be, to proceed with the Formation Transactions on the terms described in this Agreement; and
WHEREAS, the Manager has obtained the requisite approval of the members of Owensmouth to the Merger and the other Formation Transactions.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE MERGER. At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and in accordance with the CLLCA, Merger Sub shall be merged with and into Owensmouth, whereby the separate existence of Merger Sub shall cease, and Owensmouth shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving Entity ").
Section 1.02 EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the Operating Partnership, Merger Sub and Owensmouth shall file a certificate of merger as contemplated by the CLLCA, with the Secretary of State of the State of California (the " Certificate of Merger "), providing that the Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA. The Merger shall become effective as of the date set forth in the Certificate of Merger (the " Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the Certificate of Merger, the Operating Partnership, Merger Sub and Owensmouth shall, prior to the Effective Time, revoke the Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new Certificate of Merger and the other documents detailed above, such new Certificate of Merger to state that the Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a Certificate of Merger, for purposes of this Agreement, from and after the filing of such new Certificate of Merger, the term "Certificate of Merger" shall mean such new Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the Operating Partnership, Merger Sub and Owensmouth shall, as soon as practicable after such determination, revoke the Certificate of Merger.
Section 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the CLLCA.
Section 1.04 CERTIFICATE OF FORMATION; LLC AGREEMENT. At the Effective Time, (i) the Certificate of Formation of Owensmouth, as in effect immediately prior to the Effective Time, shall be the Certificate of Formation of the Surviving Entity until thereafter amended as provided therein or in accordance with the CLLCA, and (ii) the Operating Agreement (defined below), as in
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effect immediately prior to the Effective Time, shall be limited liability company agreement of the Surviving Entity until thereafter amended as provided therein or in accordance with the CLLCA.
Section 1.05 CONVERSION OF COMPANY INTERESTS.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either in the Contribution or as a result of and upon consummation of the Merger or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.05, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" Company Value " means (i) 0.3004% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Company Value shall be allocated to each Company Interest or portion thereof in accordance with Section 4.2 of the First Amended and Restated Limited Liability Company Operating Agreement of Owensmouth dated as of November 15, 2005 (the " Operating Agreement "), it being expressly acknowledged and agreed by the parties hereto that Section 4.2 of the Operating Agreement shall apply to the allocation hereunder, treating the Allocated Share as a distribution of net proceeds from sales of properties in accordance with the Operating Agreement.
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership, Owensmouth or the holders of any interest in Owensmouth, except as provided in Section 1.05(c), each Non-Contributed Company Interest shall be converted automatically into the right to receive cash, OP Units and/or REIT Shares with an aggregate value equal to the Allocated Share in respect of that Non-Contributed Company Interest (collectively referred to as the " Merger Consideration ").
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Subject to Section 1.08, the form of payment of the Merger Consideration for each Non-Contributed Company Interest so converted shall be as follows:
(i) Cash : (A) 100% of the Allocated Share for each Non-Contributed Company Interest held by a Pre-Formation Participant who is not an Accredited Investor shall be paid in cash, and (B) the lesser of the Elected Cash Percentage and the Maximum Cash Percentage of the Allocated Share with respect to each other Non-Contributed Company Interest or portion thereof shall be paid in cash. The " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount. The Maximum Cash Percentage shall be calculated after determining, and shall include the impact, if any, of, the cash limitation set forth in the DERF 2005 Merger Agreement, which provides that in order for the acquisition of DE2005 REIT to be treated as a tax free reorganization for United States federal income tax purposes, the total amount of (1) cash paid in the DE2005 REIT merger, plus (2) certain pre-closing cash distributions, plus (3) cash paid for the redemption of the DE2005 REIT preferred stock will be limited to 60% of the sum of (x) the aggregate consideration paid in the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), plus (y) the cash payable under (2) and (3) above, as determined for tax purposes. For the avoidance of doubt, all interests in DE2005 REIT held by a subsidiary of the REIT (as a result of the DERA/DECO Merger) will be cancelled without consideration in the REIT Acquisition Merger and the foregoing calculation will be made accordingly. If the Maximum Cash Percentage for any Pre-Formation Participant in Owensmouth in the Merger is less than its Elected Cash Percentage pursuant to its Valid Election, the Non-Contributed Company Interest or portion thereof of such holder that has not been allocated cash pursuant to the Merger shall instead be treated, in accordance with such holder's prior Valid Election, as subject to an election to receive OP Units under clause (ii) below or as a Contributed Interest pursuant to the Contribution Agreement.
(ii) OP Units . The Elected OP Unit Percentage of the Allocated Share for each Non-Contributed Company Interest or portion thereof shall be distributed in OP Units; and
(iii) REIT Shares . The full amount of the Allocated Share for each Non-Contributed Company Interest or portion thereof (i) as to which the holder (other than a holder that is not an Accredited Investor) shall have failed to make a Valid Election and (ii) that is a Non-Contributed Company Interest shall be distributed in REIT Shares.
(c) Each Company Interest issued and outstanding immediately prior to the Effective Time that is owned by the REIT or any direct or indirect wholly owned Subsidiary of the REIT shall remain issued and outstanding, and no consideration shall be delivered hereunder in exchange therefor.
Section 1.06 CONVERSION OF MERGER SUB MEMBER INTERESTS. At the Effective Time, by virtue of the Merger and without any action on the part of the Operating Partnership or Merger Sub, (i) each non-managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor, and (ii) each managing member interest in Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into a managing member interest in the Surviving Entity.
Section 1.07 CANCELLATION AND RETIREMENT OF NON-CONTRIBUTED COMPANY INTERESTS. Each Non-Contributed Company Interest converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) shall no longer be outstanding and shall
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automatically be cancelled and retired and shall cease to exist, and each holder of such Non-Contributed Company Interests so converted shall thereafter cease to have any rights as a member of Owensmouth, except the right to receive the Merger Consideration applicable thereto.
Section 1.08 FRACTIONAL INTERESTS. No fractional OP Units or REIT Shares shall be issued in the Merger. All fractional OP Units or REIT Shares that a holder of Non-Contributed Company Interests would otherwise be entitled to receive as a result of the Merger and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole OP Units or REIT Shares resulting from such aggregation and, in lieu of any fractional OP Unit or REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of an OP Unit or REIT Share, as applicable, to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit or REIT Share. In the event that a holder of Non-Contributed Company Interests participates only in the Merger or other mergers alone or in combination with the Contributions, any cash payable to such holder in lieu of fractional OP Units or REIT Shares, as the case may be, shall be paid pursuant to this Agreement or another merger agreement and not pursuant to the Contribution Agreement.
Section 1.09 DISTRIBUTION OF PRE-CLOSING CASH FLOW. During the period from July 1, 2005 through the Closing Date, Owensmouth has distributed or will distribute, from time to time, no more or less than its good faith estimate of Owensmouth's Adjusted Net Operating Income for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Company Interests in accordance with Section 4.2 of the Operating Agreement. Subject to this limitation, Owensmouth may continue to make distributions in accordance with the Operating Agreement. For purposes of this Agreement, " Adjusted Net Operating Income " means, with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of derivatives, i.e. , the line item after deduction for minority interests, if any (but adding back any depreciation or amortization used to calculate such line item), of Owensmouth on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by Owensmouth) less (B) the Capital Expense Allowance.
Section 1.10 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Effective Time, all calculations relating to the Merger Consideration shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the holders of Company Interests.
Section 1.11 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.12 ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE. Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an " Alternative Division "). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative
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Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) The form of payment of the Merger Consideration to each holder of Non-Contributed Company Interests converted pursuant to this Agreement shall be (1) cash as provided in this Agreement, calculated on the basis that the minimum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; (2) a number of REIT Shares or OP Units as provided in this Agreement, calculated on the basis that the maximum amount of cash specified in the final IPO prospectus is included in the Total Formation Transaction Value, which shall be paid as promptly as practicable after the Effective Time; and (3) a right to receive any remaining consideration in cash and/or REIT Shares or OP Units as provided in this Agreement in an amount and/or number calculated on the basis of the final amount of cash included in the Total Formation Transaction Value and reflecting the consideration previously paid pursuant to (1) and (2) of this Section, which shall be paid as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option. Each calculation under the preceding sentence shall reflect the impact, if any, of the cash limitation set forth in the DERF 2005 Merger Agreement.
(C) No cash shall be paid with respect to any fractional REIT Shares or OP Units in the initial distribution pursuant to (B)(2) of this Section, and instead any such fractional REIT Shares or OP Units shall be aggregated with any fractional REIT Shares or OP Units in respect of the subsequent distribution pursuant to (B)(3) of this Section.
(D) The calculations by the REIT of the Merger Consideration shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the Merger Consideration at both of such times.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Merger and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02 PAYMENT OF MERGER CONSIDERATION.
(a) As soon as reasonably practicable after the Effective Time, the Surviving Entity (or its successor in interest) shall deliver to each holder of Non-Contributed Company Interests whose Non-Contributed Company Interests have been converted into the right to receive the Merger Consideration pursuant to Section 1.05(b) hereof, the Merger Consideration payable to such holder in the amounts and form provided in Section 1.05(b) hereof. The issuance of the OP Units pursuant to Section 1.05(b)(ii) shall be evidenced by an amendment to the Operating Partnership Agreement (defined below), and the Operating Partnership shall deliver, or cause to be delivered, an executed
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copy of such amendment to each Pre-Formation Participant receiving OP Units hereunder. Each certificate representing REIT Shares issuable as Merger Consideration shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable law.
(b) The Surviving Entity (or its successor in interest) shall not be liable to any holder of Non-Contributed Company Interests for any portion of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.
(c) The parties hereto intend and agree that, for United States federal income tax purposes, (i) any payment of cash or REIT Shares for Non-Contributed Company Interests of such holder shall be treated as a sale of such Non-Contributed Company Interests by the holder and a purchase of such Non-Contributed Company Interests by the Operating Partnership for the cash and/or REIT Shares so paid under the terms of this Agreement in accordance with the guidelines set forth in Treas. Reg. Sections 1.708-1(c)(3) and 1.708-1(c)(4), and (ii) each such holder of Non-Contributed Company Interests who accepts cash and/or REIT Shares explicitly agrees and consents to such treatment. Any cash and/or REIT Shares paid as the Merger Consideration for Non-Contributed Company Interests to which a holder of Non-Contributed Company Interests is otherwise entitled pursuant to this Agreement shall be paid only after the receipt of a consent from such holder that, for United States federal income tax purposes, such payment of cash and/or REIT Shares shall be treated as a sale of the Non-Contributed Company Interests by the holder and a purchase of such Non-Contributed Company Interests by the Operating Partnership for the cash and/or REIT Shares so paid. For the avoidance of doubt, the provisions of this Section 2.02(c) shall not apply to any Contributed Company Interests.
Section 2.03 TAX WITHHOLDING. The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Non-Contributed Company Interests, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Non-Contributed Company Interests in respect of which such deduction and withholding was made by the Operating Partnership.
Section 2.04 FURTHER ACTION. If, at any time after the Effective Time, the Surviving Entity shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Entity the right, title or interest in, to or under any of the rights, property or assets of Owensmouth acquired or to be acquired by the Surviving Entity as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Entity shall be authorized to execute and deliver, in the name and on behalf of each of the Operating Partnership and Owensmouth or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Operating Partnership and Owensmouth or otherwise, all such other actions and things as
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may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, property or assets in the Surviving Entity or otherwise to carry out this Agreement.
Section 2.05 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Merger shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, the Merger Sub and Owensmouth under this Agreement shall terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired.
If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for Owensmouth is as set forth in clause (i) of the definition of Company Value.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB
Each of the REIT, the Operating Partnership and Merger Sub hereby represents and warrants to and covenants with Owensmouth as follows (representations and warranties made by or in respect of Merger Sub shall be initially made on the Joinder Date (as defined below)):
Section 3.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT, the Operating Partnership and Merger Sub has been duly organized or formed and is validly existing under the Laws of its jurisdiction of incorporation or formation, as applicable, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
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(c) Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the Merger. Except in connection with the transactions contemplated by this Agreement, Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the Operating Partnership and Douglas Emmett, LLC, a Delaware limited liability company and REIT Subsidiary, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT, the Operating Partnership and Merger Sub have been duly and validly authorized by all necessary actions required of each of the REIT, the Operating Partnership and Merger Sub, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT, the Operating Partnership and Merger Sub pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT, the Operating Partnership and Merger Sub, each enforceable against each of the REIT, the Operating Partnership and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT, the Operating Partnership or Merger Sub in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of any of the REIT, the Operating Partnership or Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any of the REIT, the Operating Partnership or Merger Sub, or (C) any other agreement to which the REIT, the Operating Partnership or the Merger Sub is a party thereto.
Section 3.05 VALIDITY OF OP UNITS AND REIT SHARES. The OP Units to be issued pursuant to this Agreement will have been duly authorized and, when issued against the consideration therefor, will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ")). The REIT Shares to be issued pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06 OP AGREEMENT. Attached as Exhibit E hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
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Section 3.07 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 3.08 LITIGATION. There is no action, suit or proceeding pending or, to the knowledge of the REIT or the Operating Partnership, threatened against any of the REIT, the Operating Partnership, Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or the Operating Partnership or which challenges or impairs the ability of any of the REIT, the Operating Partnership or Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.09 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT, the Operating Partnership nor Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
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Section 3.10 INDEMNIFICATION.
(a) From and after the Closing Date, each of the REIT and the Operating Partnership shall indemnify and hold harmless Owensmouth and its directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Company Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Company Indemnified Party (i) in connection with Owensmouth or the Property (defined below) or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT, the Operating Partnership or Merger Sub contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT, the Operating Partnership or Merger Sub pursuant to this Agreement; provided , however , that neither the REIT nor the Operating Partnership shall have any obligation under this Section to indemnify any Company Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares and/or OP Units, (ii) Owensmouth's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) Owensmouth's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Company Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT or the Operating Partnership, it will promptly give written notice (a " Claim Notice ") to the REIT and the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT or the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Company Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Company Indemnified Party shall deliver to the REIT and the Operating Partnership, promptly after the Company Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Company Indemnified Party relating to a Third Party Claim (as defined below). Any Company Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Company Indemnified Party shall in good faith determine that such claim is not frivolous and that the Company Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT and the Operating Partnership shall be entitled, at their own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and the Operating Partnership and reasonably acceptable to the Company Indemnified Parties (or any person authorized by the Company Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Company Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Company Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT or the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Company Indemnified Party shall cooperate with the REIT and/or the Operating Partnership in such defense and make available to the REIT and/or the Operating Partnership (unless prohibited by Law), at the REIT's and/or the Operating Partnership's expense, all witnesses, pertinent records, materials and information in the Company Indemnified Party's possession or under the Company Indemnified Party's control relating
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thereto as is reasonably required by the REIT and/or the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Company Indemnified Party, on the one hand, or the REIT or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Company Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall survive after the Effective Time until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, Owensmouth hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit Owensmouth's right to specific performance or injunctive relief in connection with the breach by either the REIT or the Operating Partnership of its respective covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of Owensmouth under the Operating Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF OWENSMOUTH
Except as disclosed in the Prospectus, Owensmouth hereby represents and warrants to the REIT and the Operating Partnership that as of the Closing Date:
Section 4.01 ORGANIZATION; AUTHORITY.
(a) Owensmouth has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its Property (defined below) and to carry on its business as presently conducted. Owensmouth, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its Property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
(b) Schedule 4.01(b) sets forth as of the date hereof the property owned by Owensmouth (the " Property "). A true and correct copy of the ground lease, and any and all amendments thereto, which the Property is subject to, has been delivered to or made available to the REIT or the Operating Partnership. Owensmouth has no Subsidiaries.
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance by Owensmouth of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of Owensmouth. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of Owensmouth pursuant to this Agreement or the
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other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of Owensmouth, each enforceable against Owensmouth in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03 CAPITALIZATION. Schedule 4.03 sets forth as of the date hereof the ownership of Owensmouth. All of the issued and outstanding equity interests of Owensmouth are validly issued (other than any profits interests in respect of Owensmouth, where the concept of valid issuance is not applicable) and, to Owensmouth's Knowledge, are not subject to preemptive rights.
Section 4.04 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by Owensmouth in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which Owensmouth is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of Owensmouth or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on Owensmouth, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06 TAXES. To Owensmouth's Knowledge, and except as would not have a Material Adverse Effect, (i) Owensmouth has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against Owensmouth, and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.07 NON-FOREIGN STATUS. Owensmouth is not a foreign person (as defined in the Code) and is not, therefore, subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, Owensmouth shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.09 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF OWENSMOUTH. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY OWENSMOUTH
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), Owensmouth shall use commercially reasonable efforts to conduct its businesses and operate and maintain the Property in
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the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, Owensmouth shall not without the prior consent of the REIT:
(a) (i) declare, set aside or pay any distributions in respect of any of the Company Interests, other than as provided in Section 1.09, (ii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Company Interests or make any other changes to the equity capital structure of Owensmouth, or (iii) purchase, redeem or otherwise acquire any Company Interests;
(b) amend its certificate of formation or the Operating Agreement;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping Owensmouth's books, accounts or records or the accounting practices therein reflected; or
(e) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE OPERATING PARTNERSHIP AND OWENSMOUTH. Each of the REIT, the Operating Partnership and Owensmouth shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
Section 6.02 OBLIGATIONS OF MERGER SUB. Subject to the terms of this Agreement, each of the REIT and the Operating Partnership shall take all reasonable action necessary to cause Merger Sub (i) to be formed prior to the Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of Merger Sub herein shall become effective as to Merger Sub as of the Joinder Date.
Section 6.03 TAX AGREEMENT. In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so called "traditional method" described in Treasury Regulation Section 1.704-3(b) with respect to any properties transferred directly or indirectly by the Partnership to the Operating Partnership as a result of the Formation Transactions, and therefore shall not make any curative or remedial allocations with respect to such properties.
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ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(d) FORMATION TRANSACTIONS. The transactions contemplated by the Management Company Merger Agreement, the Contribution Agreement and the Investment Fund Merger Agreements shall have been consummated prior to the Merger, and the other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
Section 7.02 CONDITIONS TO OBLIGATIONS OF OWENSMOUTH. The obligation of Owensmouth to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT, the Operating Partnership and Merger Sub contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT, the Operating Partnership and Merger Sub shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REIT SHARE ELECTIONS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, the REIT shall have performed all agreements and covenants required by the Contribution Agreement to be performed or complied with by it on or prior to the Closing Date.
(d) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into the registration rights agreement substantially in the form attached as Exhibit D . This condition may not be waived by any party.
(e) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the
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IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 7.03 CONDITIONS TO OBLIGATION OF THE REIT, THE OPERATING PARTNERSHIP AND MERGER SUB. The obligations of each of the REIT, the Operating Partnership and Merger Sub to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT, the Operating Partnership and Merger Sub, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of Owensmouth contained in this Agreement, as well as those of the Principals under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY OWENSMOUTH. Owensmouth shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for Owensmouth to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of Owensmouth to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of Owensmouth and the Property, taken as a whole.
(e) TITLE ENDORSEMENTS. Owensmouth shall deliver or cause to be delivered to the REIT and the Operating Partnership title endorsements commonly referred to as the "fairway" endorsement and the non-imputation endorsement to the existing title policy for the Property in a form reasonably satisfactory to the REIT and the Operating Partnership.
(f) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to
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the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT or the Operating Partnership to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to Owensmouth, to:
New
September, LLC
c/o Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for the Property for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Elected Cash Percentage " means, with respect to any Non-Contributed Company Interest, the percentage of the Allocated Share for which the holder thereof has specified in a Valid Election (without any effect of any limitation by virtue of the Maximum Cash Percentage) to receive in the form of cash on such holder's Consent Form.
(h) " Elected OP Unit Percentage " means, with respect to any Non-Contributed Company Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive in the form of OP Units.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
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(j) " IPO Closing Date " means the closing date of the IPO.
(k) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(l) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(m) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(n) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(o) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(p) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(q) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(w) " Valid Election " means, with respect to any Non-Contributed Company Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Non-Contributed Company Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage, or a Consent Form as to which any deficiencies have been waived by DERA.
Section 8.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 8.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, the Contribution Agreement and the Consent Form, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire agreement and supersede each prior agreement and
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understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 8.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 8.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08 DISPUTE RESOLUTION. The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. Each of the Operating Partnership and Owensmouth shall appoint one arbitrator within fifteen (15) days of a demand for arbitration. If the Operating Partnership and Owensmouth cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be
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conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable law, but if any provision is held invalid, illegal or unenforceable under applicable law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT and the Operating Partnership in the event that any of the provisions of this
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Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT and the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by Owensmouth and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT or the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to Owensmouth pursuant to the terms and provisions contained in Section 3.10.
Section 8.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, Owensmouth expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 8.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, member, employee or shareholder of the REIT, the Operating Partnership, Merger Sub and Owensmouth.
Section 8.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of Owensmouth, at any time prior to the Effective Time; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Merger.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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OWENSMOUTH/WARNER, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY |
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By: |
New September, LLC, a California limited liability company Its Manager |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985 Its Manager |
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By: |
/s/ DAN A. EMMETT |
Dan A. Emmett, Trustee |
AGREED AND ACCEPTED as of
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OWENSMOUTH ACQUISITION, LLC |
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By: |
Douglas Emmett GP, LLC Its Managing Member |
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By: |
Douglas Emmett Properties, LP Its Sole Member |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | ||
Title: |
Exhibit A: | List of DERA Funds and Single Asset Entities |
Exhibit B: | List of Formation Transaction Documentation |
Exhibit C: | Form of Contribution Agreement |
Exhibit D: | Form of Registration Rights Agreement |
Exhibit E: | Operating Partnership Agreement |
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DECO ACQUISITION, LLC,
DERA ACQUISITION, LLC,
DOUGLAS, EMMETT AND COMPANY
AND
DOUGLAS EMMETT REALTY ADVISORS
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ARTICLE I THE MERGERS |
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Section 1.01 | THE DECO MERGER | 3 | ||
Section 1.02 | THE DERA MERGER | 5 | ||
Section 1.03 | DISSENTERS' RIGHTS | 6 | ||
Section 1.04 | FRACTIONAL INTERESTS | 7 | ||
Section 1.05 | CALCULATION OF MERGER CONSIDERATION | 7 | ||
Section 1.06 | PRE-CLOSING DISTRIBUTIONS | 7 | ||
Section 1.07 | TRANSACTION COSTS | 7 | ||
ARTICLE II CLOSING; TERM OF AGREEMENT |
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Section 2.01 | CLOSING | 8 | ||
Section 2.02 | PAYMENT OF MERGER CONSIDERATION | 8 | ||
Section 2.03 | TAX WITHHOLDING | 8 | ||
Section 2.04 | FURTHER ACTION | 8 | ||
Section 2.05 | TERM OF THE AGREEMENT | 9 | ||
Section 2.06 | EFFECT OF TERMINATION | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT AND THE MERGER SUBS |
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Section 3.01 | ORGANIZATION; AUTHORITY | 9 | ||
Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF REIT SHARES | 10 | ||
Section 3.06 | LIMITED ACTIVITIES | 10 | ||
Section 3.07 | LITIGATION | 11 | ||
Section 3.08 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 3.09 | INDEMNIFICATION | 11 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT COMPANIES |
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Section 4.01 | ORGANIZATION; AUTHORITY | 12 | ||
Section 4.02 | DUE AUTHORIZATION | 13 | ||
Section 4.03 | CAPITALIZATION | 13 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | TAXES | 13 | ||
Section 4.07 | NON-FOREIGN STATUS | 13 | ||
Section 4.08 | NO IMPLIED REPRESENTATIONS OR WARRANTIES | 13 | ||
Section 4.09 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT COMPANIES | 14 | ||
ARTICLE V COVENANTS REGARDING CONDUCT OF BUSINESS BY THE MANAGEMENT COMPANIES |
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ARTICLE VI ADDITIONAL AGREEMENTS |
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Section 6.01 | COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE MERGER SUBS AND THE MANAGEMENT COMPANIES | 14 | ||
Section 6.02 | OBLIGATIONS OF MERGER SUBS | 15 | ||
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ARTICLE VII CONDITIONS PRECEDENT |
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Section 7.01 | CONDITION TO EACH PARTY'S OBLIGATIONS | 15 | ||
Section 7.02 | CONDITIONS TO OBLIGATIONS OF THE MANAGEMENT COMPANIES | 15 | ||
Section 7.03 | CONDITIONS TO OBLIGATION OF THE REIT AND THE MERGER SUBS | 16 | ||
ARTICLE VIII GENERAL PROVISIONS |
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Section 8.01 | NOTICES | 16 | ||
Section 8.02 | DEFINITIONS | 17 | ||
Section 8.03 | COUNTERPARTS | 18 | ||
Section 8.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 18 | ||
Section 8.05 | GOVERNING LAW | 18 | ||
Section 8.06 | ASSIGNMENT | 18 | ||
Section 8.07 | JURISDICTION | 18 | ||
Section 8.08 | DISPUTE RESOLUTION | 19 | ||
Section 8.09 | SEVERABILITY | 20 | ||
Section 8.10 | RULES OF CONSTRUCTION | 20 | ||
Section 8.11 | EQUITABLE REMEDIES | 20 | ||
Section 8.12 | WAIVER OF SECTION 1542 PROTECTIONS | 20 | ||
Section 8.13 | TIME OF THE ESSENCE | 21 | ||
Section 8.14 | DESCRIPTIVE HEADINGS | 21 | ||
Section 8.15 | NO PERSONAL LIABILITY CONFERRED | 21 | ||
Section 8.16 | AMENDMENTS | 21 |
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TERM
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SECTION
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Accredited Investor | Section 8.02 | |
Additional Contributions | Section 1.01 | |
Affiliate | Section 8.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.05 | |
Applicable Percentage | Section 8.02 | |
Business Day | Section 8.02 | |
Claim | Section 3.09 | |
Claim Notice | Section 3.09 | |
CLLCA | Section 1.01 | |
Closing | Section 2.01 | |
Closing Date | Section 2.01 | |
Code | Section 8.02 | |
Consent Form | Section 8.02 | |
Contribution Agreement | Section 1.09 | |
DE2005 REIT | Recitals | |
DECO | Introduction | |
DECO Certificate of Merger | Section 1.01 | |
DECO Common Stock | Recitals | |
DECO Effective Time | Section 1.01 | |
DECO Merger | Recitals | |
DECO Merger Consideration | Section 1.01 | |
DECO Merger Sub | Introduction | |
DECO Per Share Merger Consideration | Section 1.01 | |
DERA | Introduction | |
DERA Certificate of Merger | Section 1.02 | |
DERA Common Stock | Recitals | |
DERA Effective Time | Section 1.02 | |
DERA Fund Interest Value | Section 1.02 | |
DERA Funds | Recitals | |
DERA Merger | Recitals | |
DERA Merger Consideration | Section 1.02 | |
DERA Merger Sub | Introduction | |
DERA Per Share Merger Consideration | Section 1.02 | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.01 | |
Dispute | Section 8.08 | |
Dissenting Shares | Section 1.03 | |
Douglas Emmett Entities | Recitals | |
Effective Times | Section 1.02 | |
Excess DERA Contribution | Section 1.01 | |
Excluded Assets and Liabilities | Section 1.06 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Governmental Authority | Section 8.02 | |
HBRCT | Section 1.01 | |
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Included Current Liabilities | Section 1.06 | |
Institutional Funds | Recitals | |
Investment Fund Merger Agreement | Recitals | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 8.02 | |
IPO Price | Section 8.02 | |
Joinder Date | Section 6.02 | |
Knowledge | Section 8.02 | |
Laws | Section 8.02 | |
Liens | Section 8.02 | |
Losses | Section 3.09 | |
Management Companies | Introduction | |
Management Company Common Stock | Recitals | |
Management Company Indemnified Party | Section 3.09 | |
Management Company Shareholders | Introduction | |
Material Adverse Effect | Section 8.02 | |
Mergers | Recitals | |
Merger Consideration | Section 1.05 | |
Merger Subs | Introduction | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Outside Date | Section 2.05 | |
Person | Section 8.02 | |
PLE | Recitals | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Prospectus | Section 8.02 | |
Registration Rights Agreement | Section 2.04 | |
Registration Statement | Section 2.05 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 8.02 | |
SEC | Section 2.05 | |
Securities Act | Section 8.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.01 | |
Subsidiary | Section 8.02 | |
Surviving DECO Entity | Section 1.01 | |
Surviving DERA Entity | Section 1.02 | |
Tax | Section 8.02 | |
Third Party Claims | Section 3.09 | |
Total Formation Transaction Value | Section 1.01 |
iv
This AGREEMENT AND PLAN OF MERGER is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas, Emmett and Company, a California corporation (" DECO "), Douglas Emmett Realty Advisors, a California corporation (" DERA " and, together with DECO, the " Management Companies "), and DECO Acquisition, LLC (" DECO Merger Sub ") and DERA Acquisition, LLC (" DERA Merger Sub " and, together with DECO Merger Sub, the " Merger Subs "), in each case, a California limited liability company to be formed prior to the Effective Times (as defined below) and to be wholly owned by the REIT.
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds (collectively, the " Institutional Funds ") and certain investment funds (collectively, the " Investment Funds "), in each case identified as such on Exhibit A hereto (collectively, the " DERA Funds ") for which DERA acts as the general partner, and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities " and, together with the Management Companies, P.L.E. Builders, Inc., a California corporation (" PLE "), and the DERA Funds, the " Douglas Emmett Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership "), will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired indirectly by the REIT pursuant hereto), (ii) an agreement and plan of merger (each, an " Investment Fund Merger Agreement ") with each of the Investment Funds pursuant to which, immediately prior to the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired indirectly by the REIT pursuant hereto) (the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements (including this Agreement) and contribution agreements, substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, the Operating Partnership desires to acquire PLE and, concurrently with the execution of this Agreement, the Operating Partnership and the stockholders of PLE propose to enter into a contribution agreement, pursuant to which such stockholders shall contribute their respective interests in PLE to the Operating Partnership in exchange for units of limited partnership in the Operating Partnership (" OP Units ") with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below);
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " REIT Common Stock "), of the REIT which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, the REIT desires to acquire the Management Companies for the consideration and on the terms set forth herein, pursuant to which the REIT will acquire, among other things, DERA's partnership interests in the DERA Funds;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of this Agreement, (i) DECO will merge with and into DECO Merger Sub (the " DECO Merger "), with DECO Merger Sub as the surviving entity, pursuant to which each share of common stock, no par value per share, of DECO (the " DECO Common Stock ") will be converted automatically as set forth herein into the right to receive shares of REIT Common Stock (" REIT Shares "); and (ii) DERA will merge with and into DERA Merger Sub (the " DERA Merger " and, together with the DECO Merger, the " Mergers "), with DERA Merger Sub as the surviving entity, pursuant to which each share of common stock, no par value per share, of DERA (the " DERA Common Stock " and, together with DECO Common Stock, the " Management Company Common Stock ") will be converted automatically as set forth herein into the right to receive REIT Shares, in each case with an aggregate value equal to its respective share of the Total Formation Transaction Value, and, in the case of DERA, DERA's Allocated Share (defined below) of the value of each DERA Fund (other than the Investment Funds), DERA's share of the respective allocated shares of the Investment Funds as provided in the Investment Fund Merger Agreements, plus the net amount of certain assets of DERA;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO, immediately following the Mergers, the REIT shall contribute the respective assets of DECO Merger Sub and DERA Merger Sub to the Operating Partnership in exchange for that number of OP Units equal to the number of REIT Shares issued hereunder by the REIT to the Management Company Shareholders;
WHEREAS, the Boards of Directors of each of the REIT, DERA and DECO has approved the applicable Merger and determined that each of this Agreement and the applicable Merger is in the best interests of the REIT and the applicable Management Company and their respective shareholders, subject to the terms and conditions set forth herein;
WHEREAS, the Management Company Shareholders own all of the issued and outstanding capital stock of each Management Company, and each Management Company Shareholder owns the same respective proportionate interest in each such Management Company; and
WHEREAS, the Management Company Shareholders have approved the Mergers and the other Formation Transactions.
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NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 THE DECO MERGER.
(a) SURVIVING DECO ENTITY. At the DECO Effective Time (defined below) and subject to and upon the terms and conditions of this Agreement and in accordance with the Beverly-Killea Limited Liability Company Act (" CLLCA "), DECO shall be merged with and into DECO Merger Sub, whereby the separate existence of DECO shall cease, and DECO Merger Sub shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving DECO Entity ") in a transaction intended to qualify as a tax-free reorganization under Section 368(a) of the Code.
(b) DECO EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the REIT, DECO Merger Sub and DECO shall file a certificate of merger as contemplated by the CLLCA, with the Secretary of State of the State of California (the " DECO Certificate of Merger ") providing that the DECO Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA. The DECO Merger shall become effective as of the date set forth in the DECO Certificate of Merger (the " DECO Effective Time "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the DECO Certificate of Merger, the REIT, DECO and DECO Merger Sub shall, prior to the DECO Effective Time, revoke the DECO Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new DECO Certificate of Merger and the other documents detailed above, such new DECO Certificate of Merger to state that the DECO Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a DECO Certificate of Merger, for purposes of this Agreement, from and after the filing of such new DECO Certificate of Merger, the term " DECO Certificate of Merger " shall mean such new DECO Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the REIT, DECO and DECO Merger Sub shall, as soon as practicable after such determination, revoke the DECO Certificate of Merger.
(c) EFFECT OF THE DECO MERGER. At the DECO Effective Time, the effect of the DECO Merger shall be as provided in this Agreement, the DECO Certificate of Merger and Section 17554 of the CLLCA.
(d) ORGANIZATIONAL DOCUMENTS OF SURVIVING ENTITY. At the DECO Effective Time, (i) the certificate of formation of DECO Merger Sub, as in effect immediately prior to the DECO Effective Time, shall be the certificate of formation of the Surviving DECO Entity until thereafter amended as provided therein or in accordance with the CLLCA, and (ii) the operating agreement of DECO Merger Sub, as in effect immediately prior to the DECO Effective Time, shall be the operating agreement of the Surviving DECO Entity until thereafter amended as provided therein or in accordance with the CLLCA.
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(e) MANAGING MEMBER AND OFFICERS. The managing member of DECO Merger Sub immediately prior to the DECO Effective Time shall be, from and after the DECO Effective Time, the managing member of the Surviving DECO Entity. The officers of DECO Merger Sub immediately prior to the DECO Effective Time shall be, from and after the DECO Effective Time, the officers of Surviving DECO Entity until their respective successors are duly elected or appointed and qualify or until their earlier resignation, removal from office or death in accordance with the operating agreement of the Surviving DECO Entity.
(f) CONVERSION OF CAPITAL STOCK OF DECO. Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive upon consummation of the Mergers or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions, which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" DECO Merger Consideration " means the quotient of (I) (i) 0.0521% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount, divided by (II) the IPO Price. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date (the " Excess DERA Contribution ").
At the DECO Effective Time, by virtue of the DECO Merger and without any action on the part of the REIT, DECO Merger Sub, DECO or the holders of any of the following securities, including the Management Company Shareholders:
(i) Subject to Section 1.04, each share of DECO Common Stock issued and outstanding immediately prior to the DECO Effective Time and all rights in respect thereof shall be converted automatically into the right to receive a number of REIT Shares equal to (A) the DECO Merger Consideration divided by (B) the number of issued and outstanding shares of DECO Common Stock (the " DECO Per Share Merger Consideration "). As of the DECO Effective Time, all such shares of DECO Common Stock so converted shall no longer be outstanding and shall
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automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of DECO Common Stock shall cease to have any rights with respect thereto, except for the right to receive upon surrender of the certificate (or delivery of a duly executed affidavit of lost certificate) that formerly evidenced such share of DECO Common Stock, the DECO Per Share Merger Consideration.
(ii) Each membership interest in DECO Merger Sub issued and outstanding immediately prior to the DECO Effective Time shall remain issued and outstanding and constitute all of the issued and outstanding membership interests of the Surviving DECO Entity.
Section 1.02 THE DERA MERGER.
(a) SURVIVING DERA ENTITY. At the DERA Effective Time (defined below) and subject to and upon the terms and conditions of this Agreement and in accordance with the CLLCA, DERA shall be merged with and into DERA Merger Sub, whereby the separate existence of DERA shall cease, and DERA Merger Sub shall continue its existence under California law as the surviving entity (hereinafter sometimes referred to as the " Surviving DERA Entity ") in a transaction intended to qualify as a tax-free reorganization under Section 368(a) of the Code.
(b) DERA EFFECTIVE TIME. Subject to and upon the terms and conditions of this Agreement, concurrently with or as soon as practicable after the execution by the REIT of the IPO underwriting agreement pursuant to which the REIT will issue and sell shares in the IPO and following the satisfaction or waiver of the conditions set forth in Article VII, the REIT, DERA Merger Sub and DERA shall file a certificate of merger as contemplated by the CLLCA with the Secretary of State of the State of California (the " DERA Certificate of Merger "), providing that the DERA Merger shall become effective as of the IPO Closing Date, together with any required related certificates and other required filings or recordings, in such forms as are required by, and executed in accordance with, the relevant provisions of the CLLCA. The DERA Merger shall become effective as of the date set forth in the DERA Certificate of Merger (the " DERA Effective Time " and, together with the DECO Effective Time, the " Effective Times "). In the event that the IPO Closing Date shall be delayed until a date that is later than the date set forth in the DERA Certificate of Merger, the REIT, DERA and DERA Merger Sub shall, prior to the DERA Effective Time, revoke the DERA Certificate of Merger and, as soon as practicable after the REIT and the underwriters shall have determined the new IPO Closing Date pursuant to the IPO underwriting agreement, file with the Secretary of State of the State of California a new DERA Certificate of Merger and the other documents detailed above, such new DERA Certificate of Merger to state that the DERA Merger shall become effective as of the new IPO Closing Date. In the event of any such revocation of a DERA Certificate of Merger, for purposes of this Agreement, from and after the filing of such new DERA Certificate of Merger, the term " DERA Certificate of Merger " shall mean such new DERA Certificate of Merger. Notwithstanding the foregoing, in the event that the IPO is terminated for any reason, the REIT, DERA and DERA Merger Sub shall, as soon as practicable after such determination, revoke the DERA Certificate of Merger.
(c) EFFECT OF THE DERA MERGER. At the DERA Effective Time, the effect of the DERA Merger shall be as provided in this Agreement, the DERA Certificate of Merger and Section 17554 of the CLLCA.
(d) ORGANIZATIONAL DOCUMENTS OF SURVIVING ENTITY. At the DERA Effective Time, (i) the certificate of formation of DERA Merger Sub, as in effect immediately prior to the DERA Effective Time, shall be the certificate of formation of the Surviving DERA Entity until thereafter amended as provided therein or in accordance with the CLLCA, and (ii) the operating agreement of DERA Merger Sub, as in effect immediately prior to the DERA Effective Time, shall be the operating agreement of the Surviving DERA Entity until thereafter amended as provided therein or in accordance with the CLLCA.
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(e) MANAGING MEMBER AND OFFICERS. The managing member of DERA Merger Sub immediately prior to the DERA Effective Time shall be, from and after the DERA Effective Time, the managing member of the Surviving DERA Entity. The officers of DERA Merger Sub immediately prior to the DERA Effective Time shall be, from and after the DERA Effective Time, the officers of Surviving DERA Entity until their respective successors are duly elected or appointed and qualify or until their earlier resignation, removal from office or death in accordance with the operating agreement of the Surviving DERA Entity.
(f) CONVERSION OF CAPITAL STOCK OF DERA. " DERA Merger Consideration " means the quotient of (I) the sum of (A) (i) 5.1052% multiplied by (ii) an amount equal to (1) the Total Formation Transaction Value less (2) the Special Investment Amount, plus (B) the DERA Fund Interest Value, plus (C) the Excess DERA Contribution, divided by (II) the IPO Price. " DERA Fund Interest Value " means an amount equal to (i) the Allocated Share (as that term is defined and calculated in the merger agreement related to the relevant Institutional Fund) in respect of DERA's general and limited partnership interests (but not the promoted profits interests therein, having previously been assigned) in each of the Institutional Funds, (ii) the Percentage Allocated Share (as that term is defined and calculated in the merger agreement related to the relevant Investment Fund) in respect of DERA's partnership interests in each of the Investment Funds, and (iii) the portion of the DERF 2005 Investment Amount arising from the Additional Contributions made by DERA. For all purposes under Section 1.02(f), any REIT Shares paid and issued as DERA Merger Consideration will be valued at the IPO Price.
At the DERA Effective Time, by virtue of the DERA Merger and without any action on the part of the REIT, DERA Merger Sub, DERA or the holders of any of the following securities, including the Management Company Shareholders:
(i) Subject to Section 1.04, each share of DERA Common Stock issued and outstanding immediately prior to the DERA Effective Time and all rights in respect thereof shall be converted automatically into the right to receive a number of REIT Shares equal to (A) the DERA Merger Consideration divided by (B) the number of issued and outstanding shares of DERA Common Stock (the " DERA Per Share Merger Consideration " and, together with the DECO Per Share Merger Consideration, the " Per Share Merger Consideration "). As of the DERA Effective Time, all such shares of DERA Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of DERA Common Stock shall cease to have any rights with respect thereto, except for the right to receive upon surrender of the certificate (or delivery of a duly executed affidavit of lost certificate) that formerly evidenced such share of DERA Common Stock, the DERA Per Share Merger Consideration.
(ii) Each membership interest in DERA Merger Sub issued and outstanding immediately prior to the DERA Effective Time shall remain issued and outstanding and constitute all of the issued and outstanding membership interests of the Surviving DERA Entity.
Section 1.03 DISSENTERS' RIGHTS. Notwithstanding anything in this Agreement to the contrary, any shares of Management Company Common Stock that are issued and outstanding immediately prior to the applicable Effective Time and that are held by a Management Company Shareholder who has properly exercised its appraisal rights under the CGCL (the " Dissenting Shares ") shall not be converted into the right to receive the applicable Per Share Merger Consideration payable under Section 1.01(f) or 1.02(f), as the case may be, but instead such shares shall have been converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to and subject to the requirements of the CGCL. If any such holder shall have failed to perfect, or shall have effectively withdrawn or lost, its right to dissent from the applicable Merger under the CGCL, each share of Management Company Common Stock of such Management
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Company Shareholder shall thereupon be deemed to have been converted into and to have become, as of the applicable Effective Time, the right to receive, without any interest thereon, the applicable Per Share Merger Consideration payable under Section 1.01(f) or 1.02(f), as the case may be.
Section 1.04 FRACTIONAL INTERESTS. No fractional REIT Shares shall be issued in the Mergers. All fractional REIT Shares that a holder of Management Company Stock would otherwise be entitled to receive as a result of the Mergers and the other Formation Transactions shall be aggregated, and each holder shall receive the number of whole REIT Shares resulting from such aggregation and, in lieu of any fractional REIT Share resulting from such aggregation, an amount in cash determined by multiplying that fraction of a REIT Share to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional REIT Share. In the event that a holder of Management Company Stock participates only in the Mergers or other mergers alone or in combination with and pursuant to a contribution agreement, any cash payable to such holder in lieu of fractional REIT Shares shall be paid pursuant to this Agreement or another merger agreement and not pursuant to any contribution agreement.
Section 1.05 CALCULATION OF MERGER CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Effective Times, all calculations relating to the DECO Merger Consideration and DERA Merger Consideration, including the applicable Per Share Merger Consideration, shall be performed in good faith by, or under the direction of, the REIT and shall be final and binding upon the Management Company Shareholders.
Section 1.06 PRE-CLOSING DISTRIBUTIONS. On or prior to the Closing Date, each of the Management Companies shall assign and transfer all of its right, title and interest in and to its cash (excluding the Excess DERA Contribution) and other current assets and liabilities (including any pre-Closing distributions receivable by that Management Company with respect to any interest in the DERA Funds as provided for in the Formation Transaction Documentation but excluding accrued employee benefits and future lease obligations) to the Management Company Shareholders (and/or any other Person designated by a Management Company Shareholder) in accordance with their respective Applicable Percentage (such assets and liabilities being referred to as the " Excluded Assets and Liabilities "); provided however , that other than the distributions by the Institutional Funds and the mergers and contributions contemplated by the Formation Transaction Documentation, the Management Companies have not since July 1, 2005 taken, and shall not take, any action not in the ordinary course consistent with past practice to increase current assets or reduce current liabilities, including by increasing long-term liabilities, decreasing long-term assets, changing reserves or otherwise. The REIT agrees and acknowledges that none of the Excluded Assets and Liabilities, nor any right, title or interest of the Management Companies or the Management Company Shareholders therein, shall be deemed to constitute a part of the Management Companies or their respective assets and liabilities, and that such assets and liabilities will not be owned or retained by the Management Companies at the Closing. Notwithstanding the foregoing, the Management Companies may elect not to assign or transfer certain of their current liabilities prior to the Closing Date (such liabilities, to the extent not covered by insurance or indemnification from the DERA Funds, being referred to as the " Included Current Liabilities "), provided that the Management Companies retain, and the REIT permits the Management Companies to own and retain at the Closing, cash in the amount of the Included Current Liabilities in addition to the amount of the Excess DERA Contribution. The REIT agrees and acknowledges that the Management Companies may transfer or distribute the Excluded Assets and Liabilities at any time and from time to time prior to the Closing, and no such transfer or distribution shall be deemed to violate or breach any provision under this Agreement or any other documents contemplated hereby.
Section 1.07 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating
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Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
ARTICLE II
CLOSING; TERM OF AGREEMENT
Section 2.01 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 2.05, and subject to the satisfaction or waiver of the conditions in Article VII, the closing of the Mergers and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the REIT in its sole discretion. The Closing hereunder and the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.02 PAYMENT OF MERGER CONSIDERATION. As soon as reasonably practicable after the respective Effective Time, the Surviving Corporations shall deliver to each respective Management Company Shareholder the applicable Per Share Merger Consideration payable to such holder in accordance with Section 1.01(f) or 1.02(f), as applicable. Each certificate evidencing the REIT Shares issuable to such Management Company Shareholder as a result of the Mergers shall be registered in the name of such Management Company Shareholder or its designee and shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable Law.
Section 2.03 TAX WITHHOLDING. The REIT shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Management Company Stock, such amounts as the REIT is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the REIT, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Management Company Stock in respect of which such deduction and withholding was made by the REIT.
Section 2.04 FURTHER ACTION. If, at any time after the Effective Times, a Surviving Corporation (or its successor in interest) shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation (or its successor in interest) the right, title or interest in, to or under any of the rights, properties or assets of the Management Company acquired or to be acquired by the Surviving Corporation (or its successor in interest) as a result of, or in connection with, a Merger or otherwise to carry out this Agreement, the Surviving Corporation (or its successor in interest) shall be authorized to execute and deliver, in the name and on behalf of each of
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the REIT and such Management Company or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the REIT and such Management Company or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation (or its successor in interest) or otherwise to carry out this Agreement.
Section 2.05 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the Securities and Exchange Commission (" SEC ") by December 31, 2006, or (ii) the Mergers shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.06 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the REIT, DECO Merger Sub, DERA Merger Sub, DECO and DERA under this Agreement shall terminate, except that the obligations set forth in Article VIII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired. If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for DECO is as set forth in clause (I)(i) of the definition of "DECO Merger Consideration" and for DERA is as set forth in clause (I)(A)(i) of the definition of "DERA Merger Consideration."
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF
THE REIT AND THE MERGER SUBS
Each of the REIT and the Merger Subs hereby represents and warrants to and covenants with the Management Companies as follows (representations and warranties made by or in respect of Merger Subs shall be initially made on the Joinder Date (defined below)):
Section 3.01 ORGANIZATION; AUTHORITY.
(a) Each of the REIT and each of the Merger Subs has been duly organized and is validly existing under the Laws of its jurisdiction of incorporation or formation, and has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required
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under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
(c) Each Merger Sub has not incurred any liabilities or obligations, except those incurred in connection with its organization and with the negotiation of this Agreement and the performance hereof and the consummation of the transactions contemplated hereby, including the applicable Merger. Except in connection with the transactions contemplated by this Agreement, each Merger Sub has not engaged in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any Person, or become subject to or bound by any obligation or undertaking. All of the issued and outstanding equity interests of Merger Sub are beneficially and of record owned by the REIT, free and clear of all Liens (other than Liens created by this Agreement and the transactions contemplated hereby).
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by each of the REIT and the Merger Subs have been duly and validly authorized by all necessary actions required of each of the REIT and the Merger Subs, respectively. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of each of the REIT and Merger Subs pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of the REIT and the Merger Subs, each enforceable against each of the REIT and the Merger Subs in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the REIT or the Merger Subs in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (A) the organizational documents of the REIT or either Merger Sub, (B) any term or provision of any judgment, order, writ, injunction, or decree binding on the REIT or either Merger Sub, or (C) any other agreement to which the REIT or either Merger Sub is a party thereto.
Section 3.05 VALIDITY OF REIT SHARES. The REIT Shares to be issued to the Management Company Shareholders pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT).
Section 3.06 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the REIT and the REIT Subsidiaries have not engaged in any material business or incurred any material obligations.
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Section 3.07 LITIGATION. There is no action, suit or proceeding pending or, to the REIT's knowledge, threatened against any of the REIT, either Merger Sub or any other REIT Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the REIT or which challenges or impairs the ability of any of the REIT or either Merger Sub to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.08 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, neither the REIT nor either Merger Sub shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 3.09 INDEMNIFICATION.
(a) From and after the Closing Date, the REIT shall indemnify and hold harmless the Management Companies and their respective directors, beneficiaries, officers, employees, partners, agents, representatives and Affiliates (each of which is a " Management Company Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Management Company Indemnified Party (i) in connection with the Management Companies or (ii) in connection with or as a result of any breach of a representation, warranty or covenant of the REIT or the Merger Subs contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT or the Merger Subs pursuant to this Agreement; provided , however , that the REIT shall not have any obligation under this Section to indemnify any Management Company Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares, (ii) a Management Company's breach of its obligations under this Agreement, gross negligence, willful misconduct or fraud or (iii) the Management Companies' operation of their respective business or the ownership and operation of their respective assets outside of the ordinary course of business prior to the Closing Date. Nothing contained in this Section 3.09(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Management Company Indemnified Party learns of any potential claim under this Section 3.09 (a " Claim ") against the REIT, it will promptly give written notice (a " Claim Notice ") to the REIT; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Management Company Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Management Company Indemnified Party shall deliver to the REIT promptly after the Management Company Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Management Company Indemnified Party relating to a Third Party Claim (as defined below). Any Management Company Indemnified Party may at its option demand indemnity under this Section 3.09 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Management Company Indemnified Party shall in good faith determine that such claim is not frivolous and that the Management Company Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
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(c) The REIT shall be entitled, at its own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and reasonably acceptable to the Management Company Indemnified Parties (or any person authorized by the Management Company Indemnified Parties to act on their behalf), if they give written notice of their intention to do so to the Management Company Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Management Company Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the REIT exercises the right to undertake any such defense against a Third Party Claim, the Management Company Indemnified Party shall cooperate with the REIT in such defense and make available to the REIT (unless prohibited by Law), at the REIT's expense, all witnesses, pertinent records, materials and information in the Management Company Indemnified Party's possession or under the Management Company Indemnified Party's control relating thereto as is reasonably required by the REIT. No compromise or settlement of such Third Party Claim may be effected by either the Management Company Indemnified Party, on the one hand, or the REIT, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Management Company Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT and the Merger Subs contained in this Agreement shall survive after the Effective Times until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.09 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, each of the Management Companies hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.09. The foregoing sentence shall not limit a Management Company's right to specific performance or injunctive relief in connection with a breach by the REIT of its covenants in this Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the Merger Consideration for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT COMPANIES
Except as disclosed in the Prospectus, each of the Management Companies hereby represents and warrants to the REIT that as of the Closing Date:
Section 4.01 ORGANIZATION; AUTHORITY.
(a) Each of the Management Companies has been duly organized and is validly existing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby, and to own, lease and/or operate its property and to carry on its business as presently conducted. Each of the Management Companies, to the extent required under applicable Laws, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a Material Adverse Effect.
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(b) Other than DERA's interest in the DERA Funds, the Management Companies have no Subsidiaries.
Section 4.02 DUE AUTHORIZATION. The execution, delivery and performance by the Management Companies of this Agreement and the other Formation Transaction Documentation to which it is a party have been duly and validly authorized by all necessary actions required of the Management Companies. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Management Companies pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each Management Company, each enforceable against such Management Company in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
Section 4.03 CAPITALIZATION. Schedule 4.03 sets forth as of the date hereof the ownership of the DECO Common Stock and the DERA Common Stock. All of the issued and outstanding equity interests of each Management Company are validly issued and, to the Management Companies' Knowledge, are not subject to preemptive rights.
Section 4.04 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or any Governmental Authority or under any applicable Laws is required to be obtained by any Management Company in connection with the execution, delivery and performance of this Agreement, the other Formation Transaction Documentation to which such Management Company is a party and the transactions contemplated hereby and thereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) the organizational documents of any Management Company or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on any Management Company, except for, in the case of clause (B), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06 TAXES. To the Management Companies' Knowledge, and except as would not have a Material Adverse Effect, (i) each of the Management Companies has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against any Management Company, and no requests for waivers of the time to assess any such Taxes are pending. Each of the Management Companies has, since its formation, been a validly electing "S corporation" within the meaning of Internal Revenue Code Sections 1361 and 1362.
Section 4.07 NON-FOREIGN STATUS. Neither Management Company is a foreign person (as defined in the Code) and therefore, neither Management Company is subject to the provisions of the Code relating to the withholding of sales proceeds to foreign persons.
Section 4.08 NO IMPLIED REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, neither Management Company
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shall be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 4.09 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT COMPANIES. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV (other than Section 4.07) shall not survive the Closing.
ARTICLE V
COVENANTS REGARDING CONDUCT OF BUSINESS BY THE MANAGEMENT COMPANIES
During the period from the date hereof to the Closing Date (except as otherwise provided for or contemplated by this Agreement or in connection with the Formation Transactions), each of the Management Companies shall use commercially reasonable efforts to conduct its businesses in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its current business organizations and employees and preserve its relationships with customers, suppliers, advertisers and others having business dealings with it, in each case consistent with past practice. In addition, and without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date and except in connection with the Formation Transactions, each of the Management Companies shall not without the prior consent of the REIT:
(a) (1) declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock, other than as provided in Section 1.06, (2) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or make any other changes to its equity capital structure, or (3) other than in the ordinary course of business, purchase, redeem or otherwise acquire any shares of capital stock of such Management Company or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities;
(b) amend its articles of incorporation or bylaws;
(c) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(d) materially alter the manner of keeping such Management Company's books, accounts or records or the accounting practices reflected therein;
(e) take or allow any action (or fail to take any action) that would result in such Management Company failing to be a validly electing "S corporation" within the meaning of Internal Revenue Code Sections 1361 and 1362; or
(f) authorize, commit or agree to take any of the foregoing actions.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 COMMERCIALLY REASONABLE EFFORTS BY THE REIT, THE MERGER SUBS AND THE MANAGEMENT COMPANIES. Each of the REIT, the Merger Subs and the Management Companies shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits and authorizations.
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Section 6.02 OBLIGATIONS OF MERGER SUBS. Subject to the terms of this Agreement, the REIT shall take all reasonable action necessary to cause each Merger Sub (i) to be formed prior to the applicable Effective Time and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the applicable Merger on the terms and conditions set forth in this Agreement. All representations, warranties, covenants, agreements, rights and obligations of each Merger Sub herein shall become effective as to such Merger Sub as of its Joinder Date.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01 CONDITION TO EACH PARTY'S OBLIGATIONS. The respective obligation of each party to effect the respective Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Times, of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. This condition may not be waived by any party.
(b) IPO PROCEEDS. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(c) NO INJUNCTION. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
Section 7.02 CONDITIONS TO OBLIGATIONS OF THE MANAGEMENT COMPANIES. The obligations of the Management Companies to effect the applicable Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following:
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the REIT and the Merger Subs contained in this Agreement shall be true and correct in all respects at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE REIT AND THE MERGER SUBS. Except as would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole, each of the REIT and the Merger Subs shall have performed all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) REGISTRATION RIGHTS AGREEMENT. The REIT shall have entered into substantially in the form attached as Exhibit C . This condition may not be waived by any party.
(d) TOTAL FORMATION TRANSACTION VALUE. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments
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for the preferred equity held by The Prudential Insurance Company of America in the DERA Funds. This condition may not be waived by any party.
Section 7.03 CONDITIONS TO OBLIGATION OF THE REIT AND THE MERGER SUBS. The obligations of the REIT and the Merger Subs to effect the Mergers and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date are further subject to satisfaction of the following conditions (any of which may be waived by the REIT and the Merger Subs, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Except as would not have a Material Adverse Effect, each of the representations and warranties of the Management Companies contained in this Agreement, as well as those of the Management Company Shareholders under the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(b) PERFORMANCE BY THE MANAGEMENT COMPANIES. Each of the Management Companies shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) CONSENTS, ETC. All necessary consents or approvals of Governmental Authorities or third parties (including lenders) for the Management Companies to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Management Companies to consummate the transactions contemplated by this Agreement) shall have been obtained.
(d) NO MATERIAL ADVERSE CHANGE. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of the Management Companies taken as a whole.
(e) REPRESENTATION, WARRANTY AND INDEMNITY AGREEMENT. The Management Company Shareholders shall have entered into the Representation, Warranty and Indemnity Agreement.
(f) DERA CASH MINIMUM. The cash and cash equivalents of DERA at the Closing must be not less than the Excess Contribution Amount plus the Included Current Liabilities.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally, (ii) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (iii) one (1) Business Day after being sent by a nationally recognized overnight courier or (iv) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (i), (ii) or (iii) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the REIT to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
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Facsimile:
(310) 255-7702
Attention: Chief Executive Officer
if to DECO or DERA, to:
c/o
Douglas Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 8.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings:
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Applicable Percentage " means, with respect to the ownership percentage of any Management Company Shareholder in a Management Company, the quotient (expressed as a percentage) of (A) the aggregate number of shares of DECO Common Stock or DERA Common Stock, as the case may be, held by such holder immediately prior to the applicable Effective Time, over (B) the aggregate number of issued and outstanding shares of DECO Common Stock or DERA Common Stock, as the case may be.
(d) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(h) " IPO Closing Date " means the closing date of the IPO.
(i) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(j) " Knowledge " means the actual current knowledge of Dan Emmett, Jordan Kaplan, Kenneth Panzer, William Kamer and Barbara Orr, without the duty of investigation or inquiry.
(k) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(l) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
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(m) " Management Company Shareholders " means, collectively, Chris Anderson, Dan Emmett, Jordan Kaplan and Kenneth Panzer.
(n) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(o) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(p) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(q) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Management Company Shareholders.
(r) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(s) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(t) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
Section 8.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 8.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, including, without limitation, the exhibits and schedules hereto, and the Consent Form constitute the entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 8.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of any laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 8.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided , however , that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the REIT may assign its rights and obligations hereunder to an Affiliate.
Section 8.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute, and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject
18
personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 8.08 DISPUTE RESOLUTION. The parties intend that this Section 8.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 8.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 8.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The REIT and the Management Companies shall appoint one arbitrator within fifteen (15) days following a demand for arbitration. If the REIT and the Management Companies cannot mutually agree upon an arbitrator within such 15-day period, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
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(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 8.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable Law, but if any provision is held invalid, illegal or unenforceable under applicable Law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 8.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any Law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 8.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the REIT in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the REIT shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Management Company and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Management Company pursuant to the terms and provisions contained in Section 3.09.
Section 8.12 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing, each of the Management Companies expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
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RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 8.13 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 8.14 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 8.15 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT, any Merger Sub and any Management Company.
Section 8.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of DECO or DERA, at any time prior to the Effective Times; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered pursuant to the Mergers.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers, all as of the date first written above.
DOUGLAS EMMETT, INC. | |||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT REALTY ADVISORS |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer | ||
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DOUGLAS, EMMETT AND COMPANY |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | Chief Executive Officer |
AGREED AND ACCEPTED as of
, |
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DECO ACQUISITION, LLC |
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By: |
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Name: | ||
Title: | ||
AGREED AND ACCEPTED as of , |
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DERA ACQUISITION, LLC |
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By: |
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Name: | ||
Title: |
Exhibit A: | List of DERA Funds and Single Asset Entities |
Exhibit B: | List of Formation Transaction Documentation |
Exhibit C: | Form of Registration Rights Agreement |
P.L.E. OP CONTRIBUTION AGREEMENT
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT PROPERTIES, LP,
DOUGLAS EMMETT REALTY ADVISORS
AND
THE SHAREHOLDERS OF P.L.E. BUILDERS, INC.
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Page
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ARTICLE I CONTRIBUTION | 2 | |||
Section 1.01 | CONTRIBUTION TRANSACTION | 2 | ||
Section 1.02 | CONSIDERATION | 2 | ||
Section 1.03 | FURTHER ACTION | 3 | ||
Section 1.04 | CALCULATION OF PLE CONSIDERATION | 3 | ||
Section 1.05 | TRANSACTION COSTS | 4 | ||
Section 1.06 | PRE-CLOSING DISTRIBUTIONS | 4 | ||
ARTICLE II CLOSING |
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4 |
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Section 2.01 | CONDITIONS PRECEDENT | 6 | ||
Section 2.02 | TIME AND PLACE | 6 | ||
Section 2.03 | DELIVERY OF OP UNITS | 6 | ||
Section 2.04 | CLOSING DELIVERIES | 6 | ||
Section 2.05 | CLOSING COSTS | 6 | ||
Section 2.06 | TERM OF THE AGREEMENT | 6 | ||
Section 2.07 | EFFECT OF TERMINATION | 6 | ||
Section 2.08 | TAX WITHHOLDING | 6 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE OPERATING PARTNERSHIP |
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7 |
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Section 3.01 | ORGANIZATION; AUTHORITY | 7 | ||
Section 3.02 | DUE AUTHORIZATION | 7 | ||
Section 3.03 | CONSENTS AND APPROVALS | 7 | ||
Section 3.04 | NO VIOLATION | 7 | ||
Section 3.05 | VALIDITY OF OP UNITS | 8 | ||
Section 3.06 | LITIGATION | 8 | ||
Section 3.07 | OP AGREEMENT | 8 | ||
Section 3.08 | LIMITED ACTIVITIES | 8 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 8 | ||
Section 3.10 | INDEMNIFICATION | 8 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTORS |
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10 |
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Section 4.01 | AUTHORITY | 10 | ||
Section 4.02 | OWNERSHIP OF PLE SHARES | 10 | ||
Section 4.03 | CONSENTS AND APPROVALS | 10 | ||
Section 4.04 | NO VIOLATION | 10 | ||
Section 4.05 | NON-FOREIGN PERSON | 10 | ||
Section 4.06 | TAXES | 10 | ||
Section 4.07 | SOLVENCY | 11 | ||
Section 4.08 | LITIGATION | 11 | ||
Section 4.09 | INVESTMENT | 11 | ||
Section 4.10 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | ||
Section 4.11 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 12 | ||
ARTICLE V COVENANTS AND OTHER AGREEMENTS |
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12 |
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Section 5.01 | COVENANTS OF THE CONTRIBUTORS | 12 | ||
Section 5.02 | COMMERCIALLY REASONABLE EFFORTS BY THE OPERATING PARTNERSHIP AND THE CONTRIBUTORS | 12 | ||
Section 5.03 | TAX AGREEMENT | 12 | ||
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ARTICLE VI POWER OF ATTORNEY |
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12 |
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Section 6.01 | GRANT OF POWER OF ATTORNEY | 12 | ||
Section 6.02 | LIMITATION ON LIABILITY | 13 | ||
Section 6.03 | RATIFICATION; THIRD PARTY RELIANCE | 13 | ||
ARTICLE VII GENERAL PROVISIONS |
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13 |
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Section 7.01 | NOTICES | 13 | ||
Section 7.02 | DEFINITIONS | 14 | ||
Section 7.03 | COUNTERPARTS | 15 | ||
Section 7.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 15 | ||
Section 7.05 | GOVERNING LAW | 15 | ||
Section 7.06 | ASSIGNMENT | 15 | ||
Section 7.07 | JURISDICTION | 15 | ||
Section 7.08 | DISPUTE RESOLUTION | 16 | ||
Section 7.09 | SEVERABILITY | 16 | ||
Section 7.10 | RULES OF CONSTRUCTION | 17 | ||
Section 7.11 | EQUITABLE REMEDIES | 17 | ||
Section 7.12 | TIME OF THE ESSENCE | 17 | ||
Section 7.13 | DESCRIPTIVE HEADINGS | 17 | ||
Section 7.14 | NO PERSONAL LIABILITY CONFERRED | 17 | ||
Section 7.15 | WAIVER OF SECTION 1542 PROTECTIONS | 17 | ||
Section 7.16 | AMENDMENTS | 18 |
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TERM
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SECTION
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Additional Contributions | Section 1.02 | |
Affiliate | Section 7.02 | |
Agreement | Introduction | |
Applicable Percentage | Section 1.02 | |
Attorney-in-Fact | Section 6.01 | |
Business Day | Section 7.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
Closing | Section 2.02 | |
Closing Date | Section 2.02 | |
Code | Section 7.02 | |
Consent Form | Section 7.02 | |
Contribution | Recitals | |
Contributor | Introduction | |
Contributor Indemnified Party | Section 3.10 | |
Contributors | Introduction | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Introduction | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Partnership Agreement | Section 1.02 | |
Dispute | Section 7.08 | |
Douglas Emmett Entities | Recitals | |
Excluded Assets and Liabilities | Section 1.06 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Governmental Authority | Section 7.02 | |
HBRCT | Section 1.02 | |
Included Current Liabilities | Section 1.06 | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 7.02 | |
IPO Price | Section 7.02 | |
Laws | Section 7.02 | |
Liens | Section 7.02 | |
Losses | Section 3.10 | |
Material Adverse Effect | Section 7.02 | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
Operating Partnership Subsidiary | Section 3.01 | |
Outside Date | Section 2.06 | |
Person | Section 7.02 | |
PLE | Introduction | |
PLE Consideration | Section 1.02 | |
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PLE Shares | Recitals | |
Power of Attorney | Section 6.01 | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 7.02 | |
Prospectus | Section 7.02 | |
Registration Statement | Section 2.06 | |
REIT | Recitals | |
REIT Common Stock | Recitals | |
Representation, Warranty and Indemnity Agreement | Section 7.02 | |
SEC | Section 2.01 | |
Securities Act | Section 7.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.02 | |
Subsidiary | Section 7.02 | |
Tax | Section 7.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.02 |
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P.L.E. OP CONTRIBUTION AGREEMENT
THIS P.L.E. OP CONTRIBUTION AGREEMENT is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (defined below) (the " Operating Partnership "), Douglas Emmett Realty Advisors, a California corporation (" DERA ") (solely with respect to Article VI), and the shareholders of P.L.E. Builders, Inc., a California corporation (" PLE "), listed on the signature page hereto (each such shareholder a " Contributor " and, collectively, the " Contributors ").
WHEREAS, Douglas Emmett, Inc., a Maryland corporation (the " REIT "), desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which DERA acts as the general partner, and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005 (" DERF 2005 "), a California limited partnership) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired directly or indirectly by the REIT), (ii) an agreement and plan of merger with each of the Investment Funds pursuant to which, immediately prior to the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which, immediately prior to the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired indirectly by the REIT);
WHEREAS, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO " and, together with DERA, PLE, the DERA Funds and the Single Asset Entities, the " Douglas Emmett Entities "), and, concurrently with the execution of this Agreement, the REIT will enter into an agreement and plan of merger, pursuant to which DERA and DECO will merge with and into a wholly owned subsidiary of the REIT in exchange for REIT Shares, in each case with an aggregate value equal to its respective share of the Total Formation Transaction Value (defined below), and, in the case of DERA, DERA's allocated share of the value of each DERA Fund (other than the Investment Funds), DERA's share of the respective allocated shares of the Investment Funds as provided in the Investment Fund merger agreements, plus the net amount of certain assets of DERA;
WHEREAS, the Contributors own all of the issued and outstanding shares of capital stock of PLE (the " PLE Shares "), and, subject to the terms and conditions set forth herein, each Contributor desires to contribute to the Operating Partnership, and the Operating Partnership desires to acquire from such Contributor, all of such Contributor's right, title and interest as a holder of PLE Shares in exchange for units of limited partnership interest in the Operating Partnership (" OP Units ") with an aggregate value
equal to PLE's respective share of the Total Formation Transaction Value in a transaction intended to qualify as a tax-free transaction under Section 721 of the Code (the acquisitions of all of the equity interests in each of the Douglas Emmett Entities are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements and contribution agreements (including this Agreement), substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of certain of the Formation Transaction Documentation, the Pre-Formation Interests of the Pre-Formation Participants, other than those Pre-Formation Interests electing to contribute such interests directly to the REIT in exchange for REIT Shares (the " Contribution "), will be converted in a series of mergers as set forth in the applicable Formation Transaction Documentation into the right to receive cash, OP Units, REIT Shares, or any combination of the foregoing, in exchange for the consideration set forth therein;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (" REIT Common Stock "), of the REIT, which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code; and
WHEREAS, all necessary approvals have been obtained by the parties to this Agreement to consummate the transactions contemplated herein.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 CONTRIBUTION TRANSACTION. At the Closing and subject to the terms and conditions contained in this Agreement, each Contributor hereby assigns, sets over, and transfers to the Operating Partnership, absolutely and unconditionally and free and clear of all Liens, all of its right, title and interest in and to the PLE Shares owned beneficially and of record by such Contributor, in exchange for the consideration set forth in Section 1.02.
Section 1.02 CONSIDERATION. Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive upon consummation of the Contribution or other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions, which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the
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REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. For all purposes under this Section 1.02, any OP Units so paid and issued will be valued at the IPO Price.
" PLE Consideration " means the quotient of (I) (i) 0.0521% multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount, divided by (II) the IPO Price. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) (the " DERF 2005 Partnership Agreement ") made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date.
At Closing, and subject to the terms and conditions contained in this Agreement, the Operating Partnership shall, in exchange for the PLE Shares contributed by each Contributor, issue to such Contributor a number of OP Units with an aggregate value equal to such Contributor's Applicable Percentage of the PLE Consideration. " Applicable Percentage " means, with respect to any Contributor, the quotient (expressed as a percentage) of (A) the aggregate number of PLE Shares held by such Contributor immediately prior to the Closing Date, over (B) the aggregate number of issued and outstanding PLE Shares. No fractional OP Units shall be issued pursuant to this Agreement. If aggregating all OP Units that a Contributor would otherwise be entitled to receive as a result of any of the Formation Transactions would require the issuance of a fractional OP Unit, in lieu of such fractional OP Unit, the holder shall be entitled to receive an amount in cash determined by multiplying the fraction of an OP Unit to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit.
Section 1.03 FURTHER ACTION. If, at any time after the Closing, the Operating Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Operating Partnership the right, title or interest in or to the PLE Shares contributed by a Contributor, each Contributor shall execute and deliver all such deeds, bills of sale, assignments and assurances and take and do all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in the PLE Shares or otherwise to carry out this Agreement; provided , that such Contributor shall not be obligated to take any action or execute any document if the additional actions or documents impose additional liabilities, obligations, covenants, responsibilities, representations or warranties on such Contributor that are not contemplated by this Agreement or reasonably inferable by the terms herein.
Section 1.04 CALCULATION OF PLE CONSIDERATION. As soon as practicable following the determination of the IPO Price and prior to the Closing, all calculations relating to the PLE Consideration shall be performed in good faith by, or under the direction of, the Operating Partnership and shall be final and binding upon the Contributors.
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Section 1.05 TRANSACTION COSTS. If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions.
Section 1.06 PRE-CLOSING DISTRIBUTIONS. On or prior to the Closing Date, PLE shall assign and transfer all of its right, title and interest in and to its cash and other current assets and liabilities (excluding accrued employee benefits and future lease obligations) to the Contributors (and/or any other Person designated by a Contributor) in accordance with their respective Applicable Percentage (such assets and liabilities being referred to as the " Excluded Assets and Liabilities "); provided however , that other than the distributions by the Institutional Funds and the mergers and contributions contemplated by the Formation Transaction Documentation, PLE has not since July 1, 2005 taken, and shall not take, any action not in the ordinary course consistent with past practice to increase current assets or reduce current liabilities, including by increasing long-term liabilities, decreasing long-term assets, changing reserves or otherwise. The Operating Partnership agrees and acknowledges that none of the Excluded Assets and Liabilities, nor any right, title or interest of PLE or the Contributors therein, shall be deemed to constitute a part of PLE or its assets and liabilities, and that such assets and liabilities will not be owned or retained by PLE at the Closing. Notwithstanding the foregoing, PLE may elect not to assign or transfer certain of their current liabilities prior to the Closing Date (such liabilities to the extent not covered by insurance or indemnification from the DERA Funds, being referred to as the " Included Current Liabilities "), provided that PLE retains, and the Operating Partnership permits PLE to own and retain at the Closing, cash in the amount of the Included Current Liabilities. The Operating Partnership agrees and acknowledges that PLE may transfer or distribute the Excluded Assets and Liabilities at any time and from time to time prior to the Closing, and no such transfer or distribution shall be deemed to violate or breach any provision under this Agreement or any other documents contemplated hereby.
Section 2.01 CONDITIONS PRECEDENT.
(a) Condition to Each Party's Obligations. The respective obligation of each party to effect the contributions contemplated by this Agreement and to consummate the other transactions contemplated hereby to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the effective time of the mergers contemplated in the applicable Formation Transaction Documentation, of the closing conditions set forth therein and of the following conditions:
(i) Registration Statement. The Registration Statement (defined below) shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the Securities and Exchange Commission (" SEC ") seeking a stop order. This condition may not be waived by any party.
(ii) IPO Proceeds. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(iii) No Injunction. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
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(iv) Formation Transactions. The other Formation Transactions shall have been consummated not later than concurrently herewith. This condition may not be waived by any party.
(b) Conditions to Obligations of the Operating Partnership. The obligations of the Operating Partnership are further subject to satisfaction of the following conditions (any of which may be waived by the Operating Partnership in whole or in part):
(i) Representations and Warranties. Except as would not have a Material Adverse Effect, the representations and warranties of each Contributor contained in this Agreement, as well as those of the Principals contained in the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(ii) Performance by the Contributors. Each Contributor shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(iii) Consents, Etc. All necessary consents and approvals of Governmental Authorities or third parties (including lenders) for each Contributor to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of such Contributor to consummate the transactions contemplated by this Agreement) shall have been obtained.
(iv) No Material Adverse Change. There shall have not occurred between the date hereof and the Closing Date any material adverse change in any of the assets, business, financial condition, results of operation or prospects of PLE.
(v) Representation, Warranty and Indemnity Agreement. The Principals shall have entered into the Representation, Warranty and Indemnity Agreement.
(c) Conditions to Obligations of the Contributors. The obligation of each Contributor to effect the contribution contemplated by this Agreement and to consummate the other transactions contemplated hereby to occur on the Closing Date are further subject to satisfaction of the following conditions:
(i) Representations and Warranties. Except as would not have a Material Adverse Effect, the representations and warranties of the Operating Partnership contained in this Agreement shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(ii) Performance by the Operating Partnership. The Operating Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(iii) Registration Rights Agreement. The REIT and the Operating Partnership shall have entered into the registration rights agreement substantially in the form attached as Exhibit C hereto. This condition may not be waived by any party.
(iv) Total Formation Transaction Value. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for
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the preferred equity held by The Prudential Insurance Company of America in the DERA Funds. This condition may not be waived by any party.
Section 2.02 TIME AND PLACE. Unless this Agreement shall have been terminated pursuant to Section 2.06 hereof, and subject to satisfaction or waiver of the conditions in Section 2.01 hereof, the closing of the transfer contemplated by Section 1.01 and the other transactions contemplated hereby shall occur on the day on which the REIT receives the proceeds from the IPO from the underwriter(s) (the " Closing " or the " Closing Date "). The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The transfer described in Section 1.01 hereof and all closing deliveries shall be deemed concurrent for all purposes.
Section 2.03 DELIVERY OF OP UNITS. The issuance of the PLE Consideration shall be evidenced by an amendment to the Operating Partnership Agreement (defined below). At the Closing (or as soon as reasonably practicable thereafter), the Operating Partnership shall deliver or cause to be delivered to each Contributor an executed copy of such amendment.
Section 2.04 CLOSING DELIVERIES. At the Closing, the parties shall make, execute, acknowledge and deliver, or cause to be made, executed, acknowledged and delivered through the Attorney-in-Fact (described in Article VI hereof), any other documents reasonably requested by the Operating Partnership or reasonably necessary or desirable to assign, transfer, convey, contribute and deliver the PLE Shares, free and clear of all Liens and to effectuate the transactions contemplated hereby.
Section 2.05 CLOSING COSTS. The Operating Partnership shall pay any documentary transfer taxes, escrow charges, title charges and recording taxes or fees incurred in connection with the transactions contemplated hereby.
Section 2.06 TERM OF THE AGREEMENT. This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO (the " Registration Statement ") has not been filed with the SEC by December 31, 2006, or (ii) the Contributions shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the " Outside Date ").
Section 2.07 EFFECT OF TERMINATION. In the event of termination of this Agreement for any reason, all obligations on the part of the Operating Partnership, DERA and the Contributors under this Agreement shall terminate, except that the obligations set forth in Article VII shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the conditions to a non-breaching party's obligations under this Agreement is not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach will survive such termination unimpaired. If this Agreement shall terminate for any reason prior to completion of the Formation Transactions, the Douglas Emmett Entities shall bear all transaction costs and expenses related thereto in proportion to their respective interest in the Total Formation Transaction Value, which for PLE is as set forth in clause (I)(i) of the definition of "PLE Consideration."
Section 2.08 TAX WITHHOLDING. The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any Contributor, such amounts as the Operating Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Contributor in respect of which such deduction and withholding was made by the Operating Partnership.
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ARTICLE III
REPRESENTATIONS, WARRANTIES AND
INDEMNITIES OF THE OPERATING PARTNERSHIP
The Operating Partnership hereby represents and warrants to and covenants with each Contributor as follows:
Section 3.01 ORGANIZATION; AUTHORITY.
(a) The Operating Partnership is a limited partnership duly organized, validly existing and in good standing under the Laws of the State of Delaware. The Operating Partnership has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the Operating Partnership and the Operating Partnership Subsidiaries (defined below), taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the Operating Partnership (each an " Operating Partnership Subsidiary "), (ii) the ownership interest therein of the Operating Partnership, and (iii) if not wholly owned by the Operating Partnership, the identity and ownership interest of each of the other owners of such Operating Partnership Subsidiary. Each Operating Partnership Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the Operating Partnership and the Operating Partnership Subsidiaries taken as a whole.
Section 3.02 DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by the Operating Partnership have been duly and validly authorized by all necessary action of the Operating Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the Operating Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the Operating Partnership, each enforceable against the Operating Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar Laws relating to creditors' rights and general principles of equity.
Section 3.03 CONSENTS AND APPROVALS. Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by the Operating Partnership in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under (a) the organizational documents of the
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Operating Partnership, (b) any term or provision of any judgment, order, writ, injunction, or decree binding on the Operating Partnership, or (c) any other agreement to which the Operating Partnership is a party thereto.
Section 3.05 VALIDITY OF OP UNITS. The OP Units to be issued to each Contributor pursuant to this Agreement will have been duly authorized by the Operating Partnership and, when issued against the consideration therefor, will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating Partnership (the " Operating Partnership Agreement ").
Section 3.06 LITIGATION. There is no action, suit or proceeding pending or, to the Operating Partnership's knowledge, threatened against the Operating Partnership or any Operating Partnership Subsidiary which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the Operating Partnership or which challenges or impairs the ability of the Operating Partnership to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.07 OP AGREEMENT. Attached as Exhibit D hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
Section 3.08 LIMITED ACTIVITIES. Except for activities in connection with the IPO or the Formation Transactions, the Operating Partnership and the Operating Partnership Subsidiaries have not engaged in any material business or incurred any material obligations.
Section 3.09 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article III, the Operating Partnership shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
Section 3.10 INDEMNIFICATION.
(a) From and after the Closing Date, the Operating Partnership shall indemnify and hold harmless each Contributor and its Affiliates (each of which is a " Contributor Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Contributor Indemnified Party in connection with or as a result of any breach of a representation, warranty or covenant of the Operating Partnership contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the Operating Partnership pursuant to this Agreement; provided , however , that the Operating Partnership shall not have any obligation under this Section to indemnify any Contributor Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in value of OP Units, (ii) a Contributor's breach of this Agreement, gross negligence, willful misconduct or fraud, or (iii) PLE's operation of its business or the ownership and operation of its assets outside of the ordinary course of business prior to the Closing Date. Nothing contained in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Contributor Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the Operating Partnership it will promptly give written notice (a " Claim Notice ") to the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the Operating Partnership shall have
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been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to such Contributor Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, such Contributor Indemnified Party shall deliver to the Operating Partnership, promptly after such Contributor Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by such Contributor Indemnified Party relating to a Third Party Claim (defined below). Any Contributor Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as such Contributor Indemnified Party shall in good faith determine that such claim is not frivolous and that such Contributor Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The Operating Partnership shall be entitled, at its own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the Operating Partnership and reasonably acceptable to such Contributor Indemnified Party (or any person authorized by such Contributor Indemnified Parties to act on its behalf), if it gives written notice of its intention to do so to such Contributor Indemnified Party within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that such Contributor Indemnified Party may at all times participate in such defense at its expense. Without limiting the foregoing, in the event that the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, such Contributor Indemnified Party shall cooperate with the Operating Partnership in such defense and make available to the Operating Partnership (unless prohibited by Law), at the Operating Partnership's expense, all witnesses, pertinent records, materials and information in such Contributor Indemnified Party's possession or under such Contributor Indemnified Party's control relating thereto as is reasonably required by the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either such Contributor Indemnified Party, on the one hand, or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Contributor Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the Operating Partnership contained in this Agreement shall survive after the effective time of the mergers contemplated in the applicable Formation Transaction Documentation until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, each Contributor hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not limit a Contributor's right to specific performance or injunctive relief in connection with the breach by the Operating Partnership of its covenants in this Agreement.
(e) All indemnity payments made hereunder shall be treated as adjustments to the consideration paid hereunder for United States federal income tax purposes.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTORS
Except as disclosed in the Prospectus, each Contributor, jointly and severally, hereby represents, warrants and agrees that as of the Closing Date:
Section 4.01 AUTHORITY. Such Contributor has the legal capacity and authority to execute, deliver and perform its obligations under this Agreement, and no other Person has any community property rights, by virtue of marriage or otherwise, with respect to such Contributor's PLE Shares.
Section 4.02 OWNERSHIP OF PLE SHARES. Such Contributor is the record owner of the PLE Shares owned by it and has the power and authority to transfer, sell, assign and convey to the Operating Partnership such PLE Shares free and clear of any Liens and, upon delivery of the consideration for such PLE Shares as provided herein, the Operating Partnership will acquire good and valid title thereto, free and clear of any Liens. Except as provided for or contemplated by this Agreement or the other applicable Formation Transaction Documentation, there are no rights, subscriptions, warrants, options, conversion rights, preemptive rights, agreements, instruments or understandings of any kind outstanding (i) relating to the PLE Shares owned by such Contributor or (ii) to purchase, transfer or to otherwise acquire, or to in any way encumber, any of the interests which comprise such PLE Shares or any securities or obligations of any kind convertible into any of the interests which comprise such PLE Shares or other equity interests or profit participation of any kind in PLE. All of the issued and outstanding PLE Shares have been duly authorized and are validly issued, fully paid and non-assessable.
Section 4.03 CONSENTS AND APPROVALS. Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any applicable Laws is required to be obtained by such Contributor in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby, except for those consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.04 NO VIOLATION. None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under, (A) any agreement, document or instrument to which such Contributor is a party or by which such Contributor is bound or (B) any term or provision of any judgment, order, writ, injunction, or decree binding on such Contributor (or its assets or properties), except any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.05 NON-FOREIGN PERSON. Such Contributor is a United States person (as defined in the Code) and is, therefore, not subject to the provisions of the Code relating to the withholding of sales or exchange proceeds to foreign persons.
Section 4.06 TAXES. To each Contributor's Knowledge, and except as would not have a Material Adverse Effect, (i) PLE has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so) and all such returns and reports are accurate and complete in all material respects, and has paid (or had paid on its behalf) all Taxes as required to be paid by it, and (ii) no deficiencies for any Taxes have been proposed, asserted or assessed against PLE, and no requests for waivers of the time to assess any such Taxes are pending. PLE has, since its formation, been a validly electing "S corporation" within the meaning of Internal Revenue Code Sections 1361 and 1362.
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Section 4.07 SOLVENCY. Such Contributor has been and will be solvent at all times prior to and for the ninety (90) day period following the transfer of its PLE Shares to the Operating Partnership.
Section 4.08 LITIGATION. To such Contributor's knowledge, there is no action, suit or proceeding pending or threatened against such Contributor affecting all or any portion of the PLE Shares owned by it or such Contributor's ability to consummate the transactions contemplated hereby which, if adversely determined, would adversely affect the Contributor's ability to so consummate the transactions contemplated hereby. Such Contributor knows of no outstanding order, writ, injunction or decree of any Governmental Authority against or affecting all or any portion of the PLE Shares owned by it, which in any such case would impair the Contributors' ability to enter into and perform all of its obligations under this Agreement.
Section 4.09 INVESTMENT. Such Contributor acknowledges that the offering and issuance of the OP Units to be acquired pursuant to this Agreement are intended to be exempt from registration under the Securities Act and that the Operating Partnership's reliance on such exemptions is predicated in part on the accuracy and completeness of the representations and warranties of the Contributors contained herein. In furtherance thereof, such Contributor represents and warrants to the Operating Partnership as follows:
(a) Such Contributor is an "accredited investor" (as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act).
(b) Such Contributor is acquiring the OP Units solely for its own account for the purpose of investment and not as a nominee or agent for any other Person and not with a view to, or for offer or sale in connection with, any distribution of any thereof in violation of the securities Laws.
(c) Such Contributor is knowledgeable, sophisticated and experienced in business and financial matters; such Contributor has previously invested in securities similar to the OP Units and fully understands the limitations on transfer imposed by the federal securities Laws. Such Contributor is able to bear the economic risk of holding the OP Units for an indefinite period and is able to afford the complete loss of its investment in the OP Units; such Contributor has received and reviewed all information and documents about or pertaining to the Operating Partnership and the business and prospects of the Operating Partnership and the issuance of the OP Units as such Contributor deem necessary or desirable, and have been given the opportunity to obtain any additional information or documents and to ask questions and receive answers about such information and documents, the Operating Partnership and the business and prospects of the Operating Partnership which such Contributor deem necessary or desirable to evaluate the merits and risks related to its investment in the OP Units; and such Contributor understands and has taken cognizance of all risk factors related to the purchase of the OP Units. Such Contributor is relying upon its own independent analysis and assessment (including with respect to taxes), and the advice of such Contributor's advisors (including tax advisors), and not upon that of the Operating Partnership or any of the Operating Partnership's Affiliates, for purposes of evaluating, entering into, and consummating the transactions contemplated hereby.
(d) Such Contributor acknowledges that the OP Units have not been registered under the Securities Act and, therefore, may not be sold unless registered under the Securities Act or an exemption from registration is available.
Section 4.10 NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this Article IV, the Contributors shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.
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Section 4.11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND. The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV (other than Sections 4.02, 4.05 and 4.09) shall not survive the Closing.
ARTICLE V
COVENANTS AND OTHER AGREEMENTS
Section 5.01 COVENANTS OF THE CONTRIBUTORS. From the date hereof through the Closing, except as otherwise provided for or as contemplated by this Agreement or the other applicable Formation Transaction Documentation, each Contributor shall not:
(a) sell, transfer or otherwise dispose of all or any portion of such Contributor's PLE Shares;
(b) mortgage, pledge, hypothecate, encumber (or permit to become encumbered) all or any portion of such Contributor's PLE Shares;
(c) authorize or consent to, or cause any Douglas Emmett Entity to take, any of the actions prohibited by the Formation Transaction Documentation;
(d) amend the articles of incorporation or bylaws of PLE;
(e) take or allow any action (or fail to take any action) that would result in PLE failing to be a validly electing "S corporation" with the meaning of Internal Revenue Code Sections 1361 and 1362; or
(f) adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization with respect to PLE.
Section 5.02 COMMERCIALLY REASONABLE EFFORTS BY THE OPERATING PARTNERSHIP AND THE CONTRIBUTORS. Each of the Operating Partnership and each Contributor shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits or authorizations.
Section 5.03 TAX AGREEMENT. In accordance with Section 704(c) of the Code, the Operating Partnership shall adopt and use only the so-called "traditional method" described in Treasury Regulation Section 1.704-3(b) with respect to the PLE Shares, and therefore shall not make any curative or remedial allocations.
Section 6.01 GRANT OF POWER OF ATTORNEY. Each Contributor does hereby irrevocably appoint DERA (or its designee) and each of them individually and any successor thereof from time to time (DERA or such designee or any such successor of any of them acting in his, her or its capacity as attorney-in-fact pursuant hereto, the " Attorney-in-Fact ") as the true and lawful attorney-in-fact and agent of such Contributor, to act in the name, place and stead of such Contributor to make, execute, acknowledge and deliver all such other contracts, orders, receipts, notices, requests, instructions, certificates, consents, letters and other writings, to provide information to the Securities and Exchange Commission and others about the transactions contemplated hereby and, in general, to do all things and to take all actions which the Attorney-in-Fact in its sole discretion may consider necessary or
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proper in connection with or to carry out the transactions contemplated by this Agreement and the other applicable Formation Transaction Documentation, as fully as could such Contributor if personally present and acting.
The power of attorney and all authority granted hereby (such power of attorney is hereinafter referred to as the " Power of Attorney ") shall be coupled with an interest and therefore shall be irrevocable and shall not be terminated by any act of such Contributor making such an appointment or granting such an authority, by operation of law or by the occurrence of any other event or events, and if any other such act or events shall occur before the completion of the transactions contemplated by this Agreement or the other applicable Formation Transaction Documentation, the Attorney-in-Fact shall nevertheless be authorized and directed to complete all such transactions as if such other act or events had not occurred and regardless of notice thereof. Each Contributor agrees that, at the request of DERA, it will promptly execute a separate power of attorney on the same terms set forth in this Article VI, such execution to be witnessed and notarized. Each Contributor hereby authorizes the reliance of third parties on the Power of Attorney.
Each Contributor acknowledges that DERA has, and any designee or successor thereof acting as Attorney-in-Fact may have, an economic interest in the transactions contemplated by this Agreement and the other Formation Transaction Documentation.
Section 6.02 LIMITATION ON LIABILITY. It is understood that the Attorney-in-Fact assumes no responsibility or liability to any Person by virtue of the Power of Attorney granted by each Contributor hereby. The Attorney-in-Fact makes no representations with respect to and shall have no responsibility for the Formation Transactions or the IPO, or the acquisition of the PLE Shares by the Operating Partnership and shall not be liable for any error or judgment or for any act done or omitted or for any mistake of fact or Law except for its own gross negligence or bad faith. Each Contributor agrees to indemnify the Attorney-in-Fact for and to hold the Attorney-in-Fact harmless against any loss, claim, damage or liability incurred on its part arising out of or in connection with it acting as the Attorney-in-Fact under the Power of Attorney created by such Contributor hereby, as well as the cost and expense of investigating and defending against any such loss, claim, damage or liability, except to the extent such loss, claim, damage or liability is due to the gross negligence or bad faith of the Attorney-in-Fact. Each Contributor agrees that the Attorney-in-Fact may consult with counsel of its own choice (who may be counsel for the Operating Partnership or its successors or Affiliates), and it shall have full and complete authorization and protection for any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel. It is understood that the Attorney-in-Fact may, without breaching any express or implied obligation to any Contributor hereunder, release, amend or modify any other power of attorney granted by any other Person under any related agreement.
Section 6.03 RATIFICATION; THIRD PARTY RELIANCE. Each Contributor hereby ratifies and confirms any and all actions that the Attorney-in-Fact shall lawfully do or cause to be done by virtue of the exercise of the powers granted unto it by the Contributor under this Article VI, and each Contributor authorizes the reliance of third parties on the Power of Attorney and waives its rights, if any, as against any such third party for its reliance hereon.
ARTICLE VII
GENERAL PROVISIONS
Section 7.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (a) delivered personally, (b) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (c) one (1) Business Day after being sent by a nationally recognized overnight courier or (d) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (a), (b) or (c) to
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the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
if to the Operating Partnership to:
Douglas
Emmett Properties, LP
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
if to a Contributor, to:
c/o
Douglas Emmett Realty Advisors
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Financial Officer
Section 7.02 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(b) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(c) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(d) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(e) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(f) " IPO Closing Date " means the closing date of the IPO.
(g) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(h) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(i) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(j) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
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(k) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(l) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(m) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(n) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(o) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(p) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(q) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
Section 7.03 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
Section 7.04 ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement, including, without limitation, the exhibits and schedules hereto, and the Consent Form constitute the entire agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 7.05 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of California, regardless of any Laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 7.06 ASSIGNMENT. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided , however , that this Agreement may not be assigned (except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 7.07 JURISDICTION. The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute, and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
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Section 7.08 DISPUTE RESOLUTION. The parties intend that this Section 7.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 7.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 7.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the Laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures. Within fifteen (15) days following a demand for arbitration, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 7.09 SEVERABILITY. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable Law, but if any provision is held invalid, illegal or unenforceable
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under applicable Law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 7.10 RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any Law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 7.11 EQUITABLE REMEDIES. The parties agree that irreparable damage would occur to the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by a Contributor and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the Operating Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Contributor pursuant to the terms and provisions contained in Section 3.10.
Section 7.12 TIME OF THE ESSENCE. Time is of the essence with respect to all obligations under this Agreement.
Section 7.13 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 7.14 NO PERSONAL LIABILITY CONFERRED. This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the Operating Partnership or any of the Contributors.
Section 7.15 WAIVER OF SECTION 1542 PROTECTIONS. As of the Closing Date, each of the Contributors expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby waives and relinquishes all rights and benefits
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afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 7.16 AMENDMENTS. This Agreement may be amended by appropriate instrument, without the consent of any Contributor, at any time prior to the Closing Date; provided , that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the consideration to be delivered to the Contributors.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers or representatives, all as of the date first written above.
DOUGLAS EMMETT PROPERTIES, LP | |||
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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CONTRIBUTORS |
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/s/ DAN A. EMMETT |
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Dan A. Emmett, as Trustee of Dan A. Emmett Revocable Living Trust of November 21, 1985 |
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/s/ JORDAN KAPLAN |
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Jordan Kaplan |
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/s/ CHRISTOPHER ANDERSON |
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Christopher Anderson, as Trustee of C. H. Anderson Family Trust |
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/s/ KENNETH PANZER |
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Kenneth Panzer |
Solely with respect to Article VI | |||
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DOUGLAS EMMETT REALTY ADVISORS |
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By: |
/s/ DAN A. EMMETT |
Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
Exhibit A: | List of DERA Funds and Single Asset Entities |
Exhibit B: |
List of Formation Transaction Documentation |
Exhibit C: |
Form of Registration Rights Agreement |
Exhibit D: |
Operating Partnership Agreement |
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DOUGLAS EMMETT PROPERTIES, LP,
DOUGLAS EMMETT REALTY ADVISORS,
ABERDEEN PROPERTIES, A CALIFORNIA LIMITED PARTNERSHIP,
CORAL REALTY, A CALIFORNIA LIMITED PARTNERSHIP,
EA REALTY, A CALIFORNIA LIMITED PARTNERSHIP,
NEW SEPTEMBER, LLC
AND
THE CONTRIBUTORS SIGNATORY HERETO
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ARTICLE I CONTRIBUTION | ||||
Section 1.01 |
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CONTRIBUTION TRANSACTION; ASSIGNMENT AND ASSUMPTION |
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Section 1.02 | CONSIDERATION | 4 | ||
Section 1.03 | FURTHER ACTION | 5 | ||
Section 1.04 | DISTRIBUTION OF PRE-CLOSING CASH FLOW | 5 | ||
Section 1.05 | CALCULATION OF REIT SHARE CONSIDERATION. | 6 | ||
Section 1.06 | TRANSACTION COSTS | 6 | ||
Section 1.07 | ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE | 6 | ||
ARTICLE II CLOSING |
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Section 2.01 |
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CONDITIONS PRECEDENT |
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Section 2.02 | TIME AND PLACE | 8 | ||
Section 2.03 | DELIVERY OF REIT SHARES | 8 | ||
Section 2.04 | CLOSING DELIVERIES | 8 | ||
Section 2.05 | CLOSING COSTS | 9 | ||
Section 2.06 | TERM OF THE AGREEMENT | 9 | ||
Section 2.07 | EFFECT OF TERMINATION | 9 | ||
Section 2.08 | TAX WITHHOLDING | 9 | ||
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT |
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Section 3.01 |
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ORGANIZATION; AUTHORITY |
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Section 3.02 | DUE AUTHORIZATION | 10 | ||
Section 3.03 | CONSENTS AND APPROVALS | 10 | ||
Section 3.04 | NO VIOLATION | 10 | ||
Section 3.05 | VALIDITY OF REIT SHARES | 10 | ||
Section 3.06 | LITIGATION | 10 | ||
Section 3.07 | ORGANIZATIONAL DOCUMENTS | 10 | ||
Section 3.08 | LIMITED ACTIVITIES | 10 | ||
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 10 | ||
Section 3.10 | INDEMNIFICATION | 10 | ||
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTOR |
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Section 4.01 |
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ORGANIZATION; AUTHORITY |
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Section 4.02 | DUE AUTHORIZATION | 12 | ||
Section 4.03 | OWNERSHIP OF CONTRIBUTED INTEREST | 12 | ||
Section 4.04 | CONSENTS AND APPROVALS | 13 | ||
Section 4.05 | NO VIOLATION | 13 | ||
Section 4.06 | NON-FOREIGN PERSON | 13 | ||
Section 4.07 | SOLVENCY | 13 | ||
Section 4.08 | LITIGATION | 13 | ||
Section 4.09 | INVESTMENT | 13 | ||
Section 4.10 | NO OTHER REPRESENTATIONS OR WARRANTIES | 14 | ||
Section 4.11 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND | 14 | ||
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ARTICLE V COVENANTS AND OTHER AGREEMENTS |
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Section 5.01 |
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COVENANTS OF THE CONTRIBUTORS |
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Section 5.02 | COMMERCIALLY REASONABLE EFFORTS BY THE REIT AND THE CONTRIBUTOR | 14 | ||
ARTICLE VI GENERAL PROVISIONS |
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Section 6.01 |
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NOTICES |
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Section 6.02 | DEFINITIONS | 15 | ||
Section 6.03 | COUNTERPARTS | 16 | ||
Section 6.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 17 | ||
Section 6.05 | GOVERNING LAW | 17 | ||
Section 6.06 | ASSIGNMENT | 17 | ||
Section 6.07 | JURISDICTION | 17 | ||
Section 6.08 | DISPUTE RESOLUTION | 17 | ||
Section 6.09 | SEVERABILITY | 18 | ||
Section 6.10 | RULES OF CONSTRUCTION | 18 | ||
Section 6.11 | EQUITABLE REMEDIES | 19 | ||
Section 6.12 | TIME OF THE ESSENCE | 19 | ||
Section 6.13 | DESCRIPTIVE HEADINGS | 19 | ||
Section 6.14 | NO PERSONAL LIABILITY CONFERRED | 19 | ||
Section 6.15 | CONSENT OF GENERAL PARTNERS OR MANAGER | 19 | ||
Section 6.16 | WAIVER OF SECTION 1542 PROTECTIONS | 19 | ||
Section 6.17 | AMENDMENTS | 19 |
ii
TERM
|
SECTION
|
|
---|---|---|
Accredited Investor | Section 6.02 | |
Additional Contributions | Section 1.02 | |
Adjusted Net Operating Income | Section 1.04 | |
Affiliate | Section 6.02 | |
Agreement | Introduction | |
Allocated Share | Section 1.02 | |
Alternative Division | Section 1.07 | |
Articles | Section 3.05 | |
Business Day | Section 6.02 | |
Capital Expense Allowance | Section 6.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
Closing | Section 2.02 | |
Closing Date | Section 2.02 | |
Code | Section 6.02 | |
Consent Form | Section 6.02 | |
Contributed Interest | Section 6.02 | |
Contributor | Introduction | |
Contributor Indemnified Party | Section 3.10 | |
DE2005 REIT | Recitals | |
DECO | Recitals | |
DERA | Recitals | |
DERA/DECO Mergers | Recitals | |
DERA Funds | Recitals | |
DERF 2005 | Recitals | |
DERF 2005 Investment Amount | Section 1.02 | |
DERF 2005 Partnership Agreement | Section 1.02 | |
Douglas Emmett Entities | Recitals | |
Dispute | Section 6.08 | |
Elected REIT Share Percentage | Section 6.02 | |
Expiration Date | Section 3.10 | |
Formation Transaction Documentation | Recitals | |
Formation Transactions | Recitals | |
Fund Merger | Recitals | |
Fund Value | Section 1.02 | |
Governmental Authority | Section 6.02 | |
HBRCT | Section 1.02 | |
Institutional Funds | Recitals | |
Investment Funds | Recitals | |
Losses | Section 3.10 | |
IPO | Recitals | |
IPO Price | Section 6.02 | |
Laws | Section 6.02 | |
Liens | Section 6.02 | |
Management Companies | Recitals | |
Material Adverse Effect | Section 6.02 | |
Maximum Cash Percentage | Section 6.02 | |
iii
Non-Performing Contributor | Section 1.01 | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Organizational Agreements | Section 1.01 | |
Outside Date | Section 2.06 | |
Percentage Allocated Share | Section 1.02 | |
Person | Section 6.02 | |
Pre-Formation Interest | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 6.02 | |
Properties | Section 6.02 | |
Prospectus | Section 6.02 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
REIT Share Consideration | Section 1.02 | |
REIT Shares | Recitals | |
REIT Subsidiary | Section 3.01 | |
Representation, Warranty and Indemnity Agreement | Section 6.02 | |
Securities Act | Section 6.02 | |
Single Asset Entities | Recitals | |
Special Investment Amount | Section 1.02 | |
Subsidiary | Section 6.02 | |
Tax | Section 6.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.02 | |
Valid Election | Section 6.02 |
iv
REIT CONTRIBUTION AGREEMENT
THIS REIT CONTRIBUTION AGREEMENT is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership and Subsidiary of the REIT (the " Operating Partnership ") (solely with respect to Section 1.01(b)), Douglas Emmett Realty Advisors, a California corporation (" DERA "), acting in its capacity as general partner of the DERA Funds (defined below) (solely with respect to Sections 1.01 and 7.15), Aberdeen Properties, a California limited partnership, Coral Realty, a California limited partnership, EA Realty, a California limited partnership, and New September, LLC, a California limited liability company, each acting in its capacity as general partner or manager, as the case may be, of the Single Asset Entities (defined below) (in each case solely with respect to Sections 1.01 and 6.15), and the contributors whose names appear on Schedule I hereto (each a " Contributor " and, collectively, the " Contributors ").
RECITALS
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds (the " Institutional Funds ") and certain investment funds (the " Investment Funds "), in each case identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities managed by Affiliates of DERA identified as such on Exhibit A hereto (the " Single Asset Entities "), whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, immediately following the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each DERA Fund (other than Douglas Emmett Realty Fund 2005, a California limited partnership (" DERF 2005 ")) pursuant to which a wholly owned subsidiary of the Operating Partnership will merge with and into each DERA Fund, in each case, with the DERA Fund as the surviving entity (each a " Fund Merger " and, collectively, the " Fund Mergers ") and, as a result thereof, the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger with each of the Investment Funds pursuant to which the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities, and (B) the REIT will enter into an agreement and plan of merger with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT;
WHEREAS, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO "), by merger (the " DERA/DECO Mergers "), and the Operating Partnership desires to acquire by contribution P.L.E. Builders, Inc., a California corporation (together with DERA and DECO, the " Management Companies "; the Management Companies, the DERA Funds and the Single Asset Entities are collectively referred to as the " Douglas Emmett Entities "; the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements and contribution
agreements (including this Agreement), substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (" REIT Common Stock "), of the REIT, which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, in the case of a Valid Election to receive shares of REIT Common Stock (" REIT Shares "), pursuant to and in accordance with the terms of the applicable Formation Transaction Documentation, prior to the effective time of the mergers contemplated therein, the holder of any Pre-Formation Interest for which a Valid Election to receive REIT Shares has been made (other than Pre-Formation Interests with respect to DERF 2005 and Pre-Formation Interests held by Non-Performing Contributors (defined below)) will, in lieu of converting such Pre-Formation Interest pursuant to the applicable merger, directly contribute such Pre-Formation Interest to the REIT in exchange for REIT Shares pursuant to this Agreement;
WHEREAS, each Contributor has made a Valid Election to receive REIT Shares with respect to all or a portion of its Pre-Formation Interests as set forth on such Contributor's Consent Form and Schedule I hereto;
WHEREAS, prior to the effective time of the applicable mergers contemplated in certain of the other Formation Transaction Documentation, each Contributor desires to contribute to the REIT, and the REIT desires to acquire from such Contributor, all of such Contributor's right, title and interest as a holder of Pre-Formation Interests, including, without limitation, all of such Contributor's voting rights and interests in the capital, profits and losses of the applicable Douglas Emmett Entity, constituting all of such Contributor's interest in respect of its Contributed Interest, in exchange for REIT Shares, and such exchange is expected to constitute a taxable exchange for United States Federal income tax purposes;
WHEREAS, upon receipt of the Contributed Interests and prior to the effective time of the applicable mergers contemplated in the Formation Transaction Documentation, the REIT shall contribute the Contributed Interests to the Operating Partnership in exchange for that number of units of limited partnership in the Operating Partnership (" OP Units ") equal to the number of REIT Shares issued by the REIT to the Contributors;
WHEREAS, as part of the Formation Transactions, subject to the completion of the IPO and the terms and conditions of certain of the Formation Transaction Documentation, the Pre-Formation Interests of the Pre-Formation Participants, other than the Contributed Interest (which the REIT previously contributed to the Operating Partnership), will be converted in a series of mergers as set forth in the applicable Formation Transaction Documentation into the right to receive cash, OP Units, REIT Shares, or any combination of the foregoing, in exchange for the consideration set forth therein;
WHEREAS, the Board of Directors of the REIT has (i) approved this Agreement and (ii) determined that each of this Agreement and the transactions contemplated hereby are in the best interests of the REIT; and
WHEREAS, all necessary approvals have been obtained by the parties to this Agreement and the other transactions contemplated by the Formation Transaction Documentation.
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NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
CONTRIBUTION
Section 1.01 CONTRIBUTION TRANSACTION; ASSIGNMENT AND ASSUMPTION. At the Closing and subject to the terms and conditions contained in this Agreement, the following transactions shall be consummated:
(a)
Contribution by Contributors.
(i) In consideration of the REIT Share Consideration as provided in Section 1.02, each Contributor hereby assigns, sets over, and transfers to the REIT, absolutely and unconditionally and free and clear of all Liens (other than those arising under the Organizational Agreements governing such Contributor's Contributed Interest), all of its right, title and interest in and to its Contributed Interest, including all rights to indemnification in favor of such Contributor under the partnership, limited liability company or similar agreement(s) of the applicable Douglas Emmett Entities (the " Organizational Agreements ") governing the Contributed Interest; provided , that the REIT accepts the assignment by such Contributor and agrees to be bound by the terms of the Organizational Agreements governing such Contributor's Contributed Interest and undertakes, assumes and agrees punctually and faithfully to perform, pay or discharge when due and otherwise in accordance with its terms, all agreements, covenants, conditions, obligations and liabilities of such Contributor in the applicable Douglas Emmett Entities with respect to such Contributor's Contributed Interest on or after the Closing Date.
(ii) In accordance with the terms of the Organizational Agreements governing such Contributor's Contributed Interest, this Agreement shall serve as notice to the general partner or manager, as the case may be, of each of the applicable Douglas Emmett Entities of the transfer of such Contributor's Contributed Interest, and such general partner or manager, as the case may be, of each of the applicable Douglas Emmett Entities consents to, and agrees and acknowledges that all requirements and conditions for such transfer and the admission of the REIT as a substituted limited partner or member, as the case may be, have been satisfied or otherwise waived.
(iii) All of the parties hereto agree that, as a result of the assignment and assumptions hereunder, for purposes of the Organizational Agreements governing such Contributor's Contributed Interest, the REIT shall be a substituted limited partner or member, as the case may be, of the applicable Douglas Emmett Entity.
(iv) Notwithstanding anything herein to the contrary, in the event that a Contributor fails to perform under this Agreement as a result of a breach by such Contributor hereunder which breach has not been waived by the Closing (a " Non-Performing Contributor "), such Contributor's Contributed Interest shall not be contributed hereunder but shall instead be treated as a .Pre-Formation Interest that is converted into the right to receive REIT Shares in the applicable merger in accordance with the terms of the applicable Formation Transaction Documentation.
(i) Immediately upon receipt of the Contributed Interests from the Contributors and payment of the REIT Share Consideration (defined below) in accordance with Section 1.02, and subject to the terms and conditions contained in this Agreement, the REIT shall contribute and transfer the Contributed Interests to the Operating Partnership, on the same basis as the Contributors contributed such interests to the REIT pursuant to clause (a) above, and the
3
provisions of such clause (a) shall apply mutatis mutandis to such contribution and transfer, and, accordingly, all of the parties hereto agree that the Operating Partnership shall be a substituted limited partner or member, as the case may be, of the applicable Douglas Emmett Entities.
(ii) In exchange for such Contributed Interests, the Operating Partnership shall issue to the REIT that number of OP Units equal to the number of REIT Shares issued to the Contributors as REIT Share Consideration.
(a) Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on a Consent Form submitted by a Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound to accept and entitled to receive, either pursuant to this Agreement or as a result of and upon consummation of the other Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to receive cash, REIT Shares or OP Units. The " Total Formation Transaction Value " means the aggregate dollar value of (i) the cash, (ii) the REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.02, any REIT Shares and OP Units shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. For all purposes under this Section 1.02, any REIT Shares so paid and issued will be valued at the IPO Price.
(b) " Fund Value " means for each Institutional Fund and each Single Asset Entity (i) the respective percentage for such Douglas Emmett Entity set forth in the Duff & Phelps LLC fairness opinion dated February 14, 2006, multiplied by (ii) an amount equal to (A) the Total Formation Transaction Value less (B) the Special Investment Amount. The " Special Investment Amount " means the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the Restated Agreement of Limited Partnership of DERF 2005 dated as of March 10, 2005, as amended) (the " DERF 2005 Partnership Agreement ") made to DERF 2005 by its partners and (y) Capital Contributions (as defined in the Limited Liability Company Agreement of DEGA, LLC, a Delaware limited liability company, dated as of January 3, 2005) made by HBRCT LLC, a Hawaii limited liability company (" HBRCT "), if any (such capital contributions by the DERF 2005 partners and HBRCT, if any, are collectively referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received) (the amounts under clauses (i) and (ii) are collectively referred to as the " DERF 2005 Investment Amount "), plus (iii) the $60,000,000 contributed to DERA on March 15, 2006 less the amount of any Additional Contributions made by DERA to DERF 2005 after such date. An amount (the " Allocated Share ") of the Fund Value of each Institutional Fund or Single Asset Entity, as the case may be, shall be allocated to each Pre-Formation Interest or portion thereof in such Douglas Emmett Entity in accordance with the applicable distribution provisions of the Organizational Agreements of such Institutional Fund or Single Asset Entity (Section 5.3 of each Institutional Fund partnership agreement and the comparable provision of the applicable Single Asset Entity Organizational Agreement), treating the Allocated Share as a distribution of distributable net proceeds
4
from sales in accordance therewith, it being expressly acknowledged and agreed by the parties hereto that such distribution provisions shall apply to such allocations. Each Pre-Formation Participant in each Investment Fund shall be entitled to its Percentage Allocated Share (as defined in the Investment Fund Merger Agreements) of such Investment Fund with respect to its Pre-Formation Interest therein. As used herein with respect to a Pre-Formation Interest in an Investment Fund, "Allocated Share" means the Percentage Allocated Share.
(c) At the Closing, but prior to the effective time of the applicable DERA Fund or Single Asset Entity merger, the REIT shall, in exchange for each Contributed Interest, issue to the Contributor of such Contributed Interest a number of REIT Shares with an aggregate value equal to the Allocated Share in each applicable DERA Fund or Single Asset Entity in respect of that Contributed Interest (the " REIT Share Consideration "). No fractional REIT Shares shall be issued pursuant to this Agreement. If aggregating all REIT Shares that a holder of Contributed Interests would otherwise be entitled to receive as a result of any of the Formation Transactions would require the issuance of a fractional REIT Share, in lieu of such fractional REIT Share the holder shall be entitled to receive an amount in cash determined by multiplying the fraction of a REIT Share to which such holder would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional REIT Share. In the event that a holder of Pre-Formation Interests participates in any of the mergers pursuant to the Formation Transaction Documentation in combination with the contribution contemplated by this Agreement, any cash payable to such holder in lieu of fractional REIT Shares shall be paid pursuant to the applicable merger agreements and not pursuant to this Agreement.
Section 1.03
FURTHER ACTION.
If, at any time after the Closing, the REIT shall determine or be advised that any deeds, bills of sale, assignments, assurances or other actions or things are necessary or desirable to
vest, perfect or confirm of record or otherwise in the REIT or the Operating Partnership the right, title or interest in or to a Contributed Interest, the Contributor of such Contributed Interest
shall execute and deliver all such deeds, bills of sale, assignments and assurances and to take and do all such other actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in such Contributed Interest or otherwise to carry out this Agreement;
provided
, that such Contributor shall not
be obligated to take any action or execute any document if the additional actions or documents impose additional liabilities, obligations, covenants, responsibilities, representations or warranties on
such Contributor that are not contemplated by this Agreement or reasonably inferable by the terms herein; and
provided further
, that the REIT will bear
any out-of-pocket expenses not caused by a material breach of this Agreement by such Contributor.
Section 1.04
DISTRIBUTION OF PRE-CLOSING CASH FLOW.
Immediately prior to the Closing Date, each DERA Fund and each Single Asset Entity shall distribute its good faith estimate of the Adjusted Net Operating Income of such DERA Fund or
Single Asset Entity, as the case may be, for the period commencing on July 1, 2005 and ending on the Closing Date, to holders of Pre-Formation Interests in such DERA Fund or Single
Asset Entity, as the case may be, in accordance with the applicable provisions of the Organization Agreement of such DERA Fund or Single Asset Entity (Section 5.3 of each DERA Fund's
partnership agreement and the comparable provision of the applicable Single Asset Entity Organizational Agreement) (less any such amounts previously distributed to holders of such
Pre-Formation Interests during such period), and no other amount. For purposes of this Agreement, "
Adjusted Net Operating Income
" means,
with respect to any period, (A) net income before unrealized appreciation (depreciation) in real estate investments and the fair value of derivatives,
i.e.,
the line item after deduction for
minority interests, if any (but adding back any depreciation or amortization used to calculate such line item),
of the Fund and the Fund Subsidiaries on a consolidated basis for such period (as determined on the same fair value basis of accounting historically employed by the Fund)
less
(B) the Capital
Expense Allowance.
5
Section 1.05
CALCULATION OF REIT SHARE CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Closing, all calculations relating to the REIT Share Consideration shall be performed in good faith
by, or under the direction of, REIT and shall be final and binding upon the Contributors.
Section 1.06
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions. In no event shall any of the Contributors
have any responsibility for such costs and expenses.
Section 1.07
ALTERNATIVE DIVISION OF TOTAL FORMATION TRANSACTION VALUE.
Notwithstanding anything else to the contrary in this Agreement, the REIT may also set forth in the final IPO prospectus an alternate division of the Total Formation Transaction Value
into a larger amount of cash and correspondingly fewer REIT Shares and OP Units to be used if and to the extent the over-allotment option in the IPO is exercised (an
"
Alternative Division
"). In the event of an Alternative Division, the following provisions shall apply:
(A) The actual amount of cash and number of REIT Shares and OP Units finally allocated to Pre-Formation Participants as part of the Total Formation Transaction Value shall be determined by the REIT based on whether and the extent to which the over-allotment option is exercised, with (1) the final amount of cash in the Total Formation Transaction Value being equal to (i) the minimum cash set forth in the final IPO prospectus plus (ii) the net proceeds from the exercise of the over-allotment option, but in any case not more than the maximum amount of cash specified in such Alternative Division, and (2) the number of REIT Shares and OP Units in the Total Formation Transaction Value being adjusted correspondingly based on the actual amount of cash included pursuant to clause (1) above.
(B) At the Closing, but prior to the effective time of the DERA Fund and Single Asset Entity mergers, the REIT shall issue to each Contributor in exchange for its Contributed Interest (1) a number of REIT Shares that would constitute such Contributor's Contributed Interest if the Elected REIT Share Percentage was were calculated on the basis that the maximum amount of cash specified in the Alternative Division is were included in the Total Formation Transaction Value, and (2) a right to receive, as promptly as practicable after the earlier of the exercise of the over-allotment option in full or the termination of the over-allotment option, (i) such number of additional REIT Shares as is required to bring the aggregate number of REIT Shares issued to such Contributor under this Agreement to the number of REIT Shares that would constitute such Contributor's Contributed Interest if when the Elected REIT Share Percentage was is calculated on the basis that using the maximum actual amount of cash specified in the Alternative Division is included in the Total Formation Transaction Value and (ii) the remainder of the REIT Share Consideration in cash.
(C) No cash shall be paid with respect to any fractional REIT Shares in the initial issuance pursuant to (B)(1) of this Section, and instead any such fractional REIT Shares shall be aggregated with any fractional REIT Shares in respect of the subsequent distribution pursuant to (B)(2) of this Section and paid as provided herein.
(D) The calculations by the REIT of the consideration to be paid for the Contributed Interest shall be done as soon as practicable following each of (i) the determination of the IPO Price and prior to the Effective Time and (ii) the earlier of the exercise of the over-allotment option or the termination of the over-allotment option, and the REIT shall take all necessary action provided in this Agreement with respect to the payment of the REIT Share Consideration at both of such times.
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(E) In exchange for the contribution of Contributed Interests by the REIT to the OP hereunder, the Operating Partnership shall issue to the REIT that number of OP Units equal to the aggregate number of REIT Shares actually issued to the Contributors hereunder.
ARTICLE II
CLOSING
Section 2.01 CONDITIONS PRECEDENT.
(a)
Condition to Each Party's Obligations.
The respective obligation of each party to effect the
contributions contemplated by this Agreement and to consummate the other transactions contemplated hereby to
occur on the Closing Date is subject to the satisfaction or waiver on or prior to the effective time of the mergers contemplated in the applicable Formation Transaction Documentation, of the closing
conditions set forth therein.
(b)
Conditions to Obligations of the REIT.
The obligations of the REIT are further subject to
satisfaction of the following conditions (any of which may be waived by the REIT in whole or in part):
(i) Representations and Warranties. Except as would not have a Material Adverse Effect, the representations and warranties of each Contributor contained in this Agreement, as well as those of the Principals contained in the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(ii) Consents, Etc. All necessary consents and approvals of Governmental Authorities or third parties (including lenders) for each Contributor to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of such Contributor to consummate the transactions contemplated by this Agreement) shall have been obtained.
(c)
Conditions to Obligations of the Contributors.
The obligation of each Contributor to effect the
contribution contemplated by this Agreement and to consummate the other transactions contemplated hereby to occur
on the Closing Date are further subject to satisfaction of the following conditions:
(i) Representations and Warranties. Except as would not have a Material Adverse Effect, the representations and warranties of the REIT contained in this Agreement shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(ii) Performance by the REIT. The REIT shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(iii) Consents, Etc. All necessary consents and approvals of Governmental Authorities or third parties (including lenders) for the REIT to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the REIT to consummate the transactions contemplated by this Agreement) shall have been obtained.
(iv) Registration Rights Agreement. The REIT shall have entered into the registration rights agreement, substantially in the form attached as Exhibit C hereto. This condition may not be waived by any party hereto.
7
(v) Management Company Mergers. The DERA/DECO Mergers shall have been consummated. This condition may not be waived by any party.
Section 2.02
TIME AND PLACE.
Unless this Agreement shall have been terminated pursuant to Section 2.06 hereof, and subject to the satisfaction or waiver of the conditions in Section 2.01 hereof, the
closing of the transfer contemplated by Section 1.01 and the other transactions contemplated by this Agreement shall be the day on which the REIT receives the proceeds from the IPO from the
underwriter(s) (the "
Closing
" or the "
Closing Date
"). The Closing shall take place at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the REIT in its sole discretion. The Closing hereunder and
the closing of the IPO shall be deemed concurrent for all purposes.
Section 2.03
DELIVERY OF REIT SHARES.
At the Closing (or as soon as reasonably practicable thereafter), the REIT shall deliver or cause to be delivered to each Contributor a certificate representing the REIT Shares issuable
hereunder to such Contributor and bearing the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE CORPORATION AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
In addition, each such certificate representing REIT Shares so issuable shall bear a legend reflecting certain transfer and other restrictions for the purpose of maintaining the REIT's status as a real estate investment trust under the Code, in accordance with applicable Law.
Section 2.04
CLOSING DELIVERIES.
At the Closing, the parties shall make, execute, acknowledge and deliver any other documents reasonably requested by the REIT or reasonably necessary or desirable to assign, transfer,
convey, contribute and deliver the Contributed Interests, free and clear of all Liens and to effectuate the transactions contemplated hereby.
8
Section 2.05
CLOSING COSTS.
The REIT shall pay any documentary transfer taxes, escrow charges, title charges and recording taxes or fees incurred in connection with the transactions contemplated hereby.
Section 2.06
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO has not been filed with the Securities and Exchange Commission by
December 31, 2006, or (ii) the contributions contemplated herein shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the
"
Outside Date
").
Section 2.07
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the REIT and any Contributor under this Agreement shall terminate, except that the
obligations set forth in Article VI shall survive; it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more of the
conditions to a non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant, representation,
warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with respect to such breach
will survive such termination unimpaired, provided that no Contributor shall have any liability with respect to any such breach.
Section 2.08
TAX WITHHOLDING.
The REIT shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to any holder of Contributed Interests, such amounts as the REIT is required
to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the REIT, such
withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Contributed Interests in respect of which such deduction and withholding was made by
the REIT.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE REIT
The REIT hereby represents and warrants to and covenants with each Contributor as follows:
Section 3.01
ORGANIZATION; AUTHORITY.
(a) The REIT is a corporation duly organized, validly existing and in good standing under the Laws of the State of Maryland. The REIT has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries (defined below) taken as a whole.
(b) Schedule 3.01(b) sets forth as of the date hereof (i) each Subsidiary of the REIT (each a " REIT Subsidiary "), (ii) the ownership interest therein of the REIT, and (iii) if not wholly owned by the REIT, the identity and ownership interest of each of the other owners of such REIT Subsidiary. Each REIT Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except
9
where the failure to be so qualified would not have a material adverse effect on the REIT and the REIT Subsidiaries taken as a whole.
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by the REIT have been duly and validly authorized by all necessary action of
the REIT. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the REIT pursuant to this Agreement or the
other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of the REIT, each enforceable against the REIT in
accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar Laws relating to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the REIT in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (a) the organizational documents of the REIT, (b) any term or provision of any judgment, order, writ, injunction, or decree binding on the REIT, or
(c) any other agreement to which the REIT is a party thereto.
Section 3.05
VALIDITY OF REIT SHARES.
The REIT Shares to be issued to such Contributor pursuant to this Agreement will have been duly authorized by the REIT and, when issued against the consideration therefor, will be
validly issued, fully paid and non-assessable and free and clear of all Liens created by the REIT (other than Liens created by the Articles of Amendment and Restatement of the REIT (the
"
Articles
")).
Section 3.06
LITIGATION.
There is no action, suit or proceeding pending or, to the REIT's knowledge, threatened against the REIT or any REIT Subsidiary which, if adversely determined, would have a material
adverse effect on the financial condition or results of operations of the REIT or which challenges or impairs the ability of the REIT to execute or deliver, or perform its obligations under, this
Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated hereby or thereby.
Section 3.07
ORGANIZATIONAL DOCUMENTS.
Attached as
Exhibit D
hereto is a true and correct copy of the Articles and Bylaws of the REIT in substantially final form.
Section 3.08
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, none of the REIT and the REIT Subsidiaries has engaged in any material business or incurred any material
obligations.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, the REIT shall not be deemed to have made any other representation or warranty in connection
with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, the REIT shall indemnify and hold harmless each Contributor and its directors, beneficiaries, officers, employees, partners, agents, representatives and
10
Affiliates (each of which is a " Contributor Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Contributor Indemnified Party in connection with or as a result of any breach of a representation, warranty or covenant of the REIT contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the REIT pursuant to this Agreement; provided , however , that the REIT shall not have any obligation under this Section to indemnify any Contributor Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in the value of REIT Shares, or (ii) a Contributor's breach of this Agreement, gross negligence, willful misconduct or fraud. Nothing in this Section 3.10(a) shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Contributor Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the REIT it will promptly give written notice (a " Claim Notice ") to the REIT; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the REIT shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to such Contributor Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, such Contributor Indemnified Party shall deliver to the REIT, promptly after such Contributor Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by such Contributor Indemnified Party relating to a Third Party Claim (defined below). Any Contributor Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as such Contributor Indemnified Party shall in good faith determine that such claim is not frivolous and that such Contributor Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The REIT shall be entitled, at its own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the REIT and reasonably acceptable to such Contributor Indemnified Party (or any person authorized by such Contributor Indemnified Parties to act on its behalf), if it gives written notice of its intention to do so to such Contributor Indemnified Party within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that such Contributor Indemnified Party may at all times participate in such defense at its expense. Without limiting the foregoing, in the event that the REIT exercises the right to undertake any such defense against a Third Party Claim, such Contributor Indemnified Party shall cooperate with the REIT in such defense and make available to the REIT (unless prohibited by Law), at the REIT's expense, all witnesses, pertinent records, materials and information in such Contributor Indemnified Party's possession or under such Contributor Indemnified Party's control relating thereto as is reasonably required by the REIT. No compromise or settlement of such Third Party Claim may be effected by either such Contributor Indemnified Party, on the one hand, or the REIT, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Contributor Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the REIT contained in this Agreement shall survive after the effective time of the mergers contemplated in the applicable Formation Transaction Documentation until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration
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Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, each Contributor hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit a Contributor's right to specific performance or injunctive relief in connection with the breach by the REIT of its covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of a Contributor under the Organizational Agreements governing such Contributor's Contributed Interest.
(e) All indemnity payments made hereunder shall be treated as adjustments to the consideration paid hereunder for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTOR
Except as disclosed in the Prospectus, each Contributor hereby represents, warrants and agrees that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
If such Contributor is an individual, such Contributor has the legal capacity and authority to execute, deliver and perform its obligations under this Agreement, and no Person has any
community property rights, by virtue of marriage or otherwise, with respect to the Contributed Interest. If such Contributor is a Person other than an individual, such Contributor has been duly
organized, is validly existing and in good standing under the Laws of its jurisdiction of organization, and has all requisite power and authority to enter this Agreement, each agreement contemplated
hereby and to carry out the transactions contemplated hereby and thereby.
Section 4.02
DUE AUTHORIZATION.
If such Contributor is a Person other than an individual, the execution, delivery and performance of this Agreement by such Contributor have been duly and validly authorized by all
necessary action required of such Contributor. This Agreement and each agreement, document and instrument executed and delivered by or on behalf of such Contributor pursuant to this Agreement
constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of such Contributor, each enforceable against such Contributor in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar Laws relating to creditors' rights and general principles of equity.
Section 4.03
OWNERSHIP OF CONTRIBUTED INTEREST.
Such Contributor is the record owner of its Contributed Interest and has the power and authority to transfer, sell, assign and convey to the REIT such Contributed Interest free and clear
of any Liens (other than Liens created by the Organizational Agreements governing such Contributed Interest) and, upon delivery of the consideration for such Contributed Interest as provided herein,
the REIT will acquire good and valid title thereto, free and clear of any Liens (other than those Liens created by the Organizational Agreements governing such Contributed Interest). Except as
provided for or contemplated by this Agreement or the other applicable Formation Transaction Documentation, there are no rights, subscriptions, warrants, options, conversion rights, preemptive rights,
agreements, instruments or understandings of any kind outstanding (i) relating to such Contributed Interest or (ii) to purchase, transfer or to otherwise acquire, or to in any way
encumber, any of the interests which comprise such Contributed Interest or any securities or obligations of any kind convertible into any of the interests which comprise such Contributed Interest.
Such Contributor has no equity interest, either direct or indirect, in the Properties, except for such Contributor's Pre-Formation Interests.
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Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any
applicable Laws is required to be obtained by such Contributor in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby, except for those
consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents, if any, of such Contributor, (B) any agreement, document or instrument to
which such Contributor is a party or by which such Contributor or its Contributed Interest is bound or (C) any term or provision of any judgment, order, writ, injunction, or decree binding on
such Contributor (or its assets or properties), except, in the case of clause (B) and (C), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
NON-FOREIGN PERSON.
Unless otherwise indicated on such Contributor's letter of transmittal, such Contributor is a United States person (as defined in the Code) and is, therefore, not subject to the
provisions of the Code relating to the withholding of sales or exchange proceeds to foreign persons.
Section 4.07
SOLVENCY.
Such Contributor has been and will be solvent at all times prior to and for the ninety (90) day period following the transfer of its Contributed Interest to the REIT.
Section 4.08
LITIGATION.
To such Contributor's knowledge, there is no action, suit or proceeding pending or threatened against such Contributor affecting all or any portion of its Contributed Interest or such
Contributor's ability to consummate the transactions contemplated hereby which, if adversely determined, would adversely affect such Contributor's ability to so consummate the transactions
contemplated hereby. Such Contributor knows of no outstanding order, writ, injunction or decree of any Governmental Authority against or affecting all or any portion of such Contributor's Contributed
Interest, which in any such case would impair such Contributor's ability to enter into and perform all of its obligations under this Agreement.
Section 4.09
INVESTMENT.
Such Contributor acknowledges that the offering and issuance of the REIT Shares to be acquired pursuant to this Agreement are intended to be exempt from registration under the Securities
Act and that the REIT's reliance on such exemptions is predicated in part on the accuracy and completeness of the representations and warranties of such Contributor contained herein. In furtherance
thereof, such Contributor represents and warrants to the REIT as follows:
(a) Such Contributor is an "accredited investor" (as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act).
(b) Such Contributor is acquiring the REIT Shares solely for its own account for the purpose of investment and not as a nominee or agent for any other Person and not with a view to, or for offer or sale in connection with, any distribution of any thereof in violation of the securities Laws.
(c) Such Contributor is knowledgeable, sophisticated and experienced in business and financial matters; such Contributor has previously invested in securities similar to the REIT Shares and fully understands the limitations on transfer imposed by the federal securities Laws. Such Contributor is able to bear the economic risk of holding the REIT Shares for an indefinite period and is able to afford the complete loss of its investment in the REIT Shares; such Contributor has received and reviewed all information and documents about or pertaining to the REIT and the business and prospects of the
13
REIT and the issuance of the REIT Shares as such Contributor deems necessary or desirable, and has been given the opportunity to obtain any additional information or documents and to ask questions and receive answers about such information and documents, the REIT and the business and prospects of the REIT which such Contributor deems necessary or desirable to evaluate the merits and risks related to its investment in the REIT Shares; and such Contributor understands and has taken cognizance of all risk factors related to the purchase of the REIT Shares. Such Contributor is relying upon its own independent analysis and assessment (including with respect to taxes), and the advice of such Contributor's advisors (including tax advisors), and not upon that of the REIT or any of the REIT's Affiliates, for purposes of evaluating, entering into, and consummating the transactions contemplated hereby.
(d) Such Contributor acknowledges that the REIT Shares have not been registered under the Securities Act and, therefore, may not be sold unless registered under the Securities Act or an exemption from registration is available.
Section 4.10
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, such Contributor shall not be deemed to have made any other representation or warranty in
connection with this Agreement or the transactions contemplated hereby.
Section 4.11
SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE FUND.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV (other than Sections 4.03, 4.06 and 4.09) shall not survive the
Closing.
ARTICLE V
COVENANTS AND OTHER AGREEMENTS
Section 5.01 COVENANTS OF THE CONTRIBUTORS. From the date hereof through the Closing, except as otherwise provided for or as contemplated by this Agreement or the other applicable Formation Transaction Documentation, each Contributor shall not sell, transfer or otherwise dispose of all or any portion of such Contributor's Contributed Interest.
Section 5.02
COMMERCIALLY REASONABLE EFFORTS BY THE REIT AND THE CONTRIBUTOR.
Each of the REIT and each Contributor shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are required to be
made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in connection
with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any
such consents, approvals, waivers, permits or authorizations.
Section 6.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (a) delivered personally, (b) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (c) one (1) Business Day after being sent by a nationally recognized overnight courier or (d) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (a), (b) or (c) to
14
the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
(a) if to the REIT to:
Douglas
Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
(b) If to a Contributor, to the address set forth opposite such Contributor's name on Schedule I hereto.
Section 6.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Accredited Investor " has the meaning set forth under Regulation D of the Securities Act.
(b) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(c) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(d) " Capital Expense Allowance " means, for any period, an amount equal to $0.33 per rentable square foot per month for all Properties for such period.
(e) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(f) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(g) " Contributed Interest " means for each Pre-Formation Participant who has made a Valid Election to receive REIT Shares with respect to all or a portion of its Pre-Formation Interest, that portion of its Pre-Formation Interest representing the Elected REIT Share Percentage of such Pre-Formation Participant but excluding any such Pre-Formation Interest with respect to DERF 2005 and any such Pre-Formation Interest held by a Non-Performing Contributor; provided , however , that in the event of an Alternative Division, the Elected REIT Share Percentage shall be calculated, for this purpose, on the basis that the minimum amount of cash specified in the Alternative Division is included in the Total Formation Transaction Value.
(h) " Elected REIT Share Percentage " means, with respect to any Pre-Formation Interest, the percentage of the Allocated Share for which the holder thereof has made a Valid Election to receive REIT Shares.
(i) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(j) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
15
(k) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(l) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(m) " Material Adverse Effect " means a material adverse effect on the REIT and the Properties (after giving effect to the Formation Transactions), taken as a whole.
(n) " Maximum Cash Percentage " means that percentage which (when used in all of the Formation Transaction Documentation as the Maximum Cash Percentage) results in an allocation of cash in the Formation Transactions (excluding cash payable under fractional share provisions) equal to the amount of cash, expressed as a percentage, included in the Total Formation Transaction Value, excluding in each case all cash paid pursuant to the Formation Transactions with respect to (i) all Pre-Formation Interests held by Pre-Formation Participants who are not Accredited Investors and (ii) the DERF 2005 Investment Amount.
(o) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(p) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(q) " Properties " means the office, residential or other property owned by the Douglas Emmett Entities or any of their Subsidiaries or leased pursuant to a ground lease.
(r) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(s) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(t) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(u) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
(v) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
(w) " Valid Election " means, with respect to any Pre-Formation Interest, an irrevocable election to receive all or a portion of its Allocated Share in the form of cash and/or OP Units or REIT Shares as indicated on the properly completed and timely received Consent Form of the holder of such Pre-Formation Interest, including through an election made as a backup election if cash is limited to the Maximum Cash Percentage.
Section 6.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
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Section 6.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, the other Formation Transaction Documentation and the Consent Forms, including, without limitation, the exhibits and schedules hereto and thereto, constitute the entire
agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any
rights or remedies on any Person other than the parties hereto.
Section 6.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the Laws of the State of California, regardless of any Laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 6.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns;
provided
,
however
, that this Agreement may not be assigned (except by operation of law) by any
party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the REIT may assign its
rights and obligations hereunder to an Affiliate, and the Contributor may assign its rights and obligations hereunder to anyone to whom it has conveyed its Contributed Interest in accordance with the
provisions of the Organizational Agreements of the applicable Douglas Emmett Entities, provided that such assignee assumes this Agreement in writing and agrees to be bound by the terms hereof and of
the Valid Election of the Contributor.
Section 6.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute, and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 6.08
DISPUTE RESOLUTION.
The parties intend that this Section 6.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 6.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 6.08(a) above shall be submitted to final and binding arbitration in California before one neutral and impartial arbitrator, in accordance with the Laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures. Within fifteen
17
(15) days following a demand for arbitration, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 6.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable Law, but if any provision is held invalid, illegal or unenforceable under applicable
Law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 6.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any Law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto
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and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 6.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the REIT in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the REIT shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by a Contributor and to enforce specifically the
terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the REIT is entitled under this Agreement or otherwise at law or in
equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Contributor pursuant to the terms and provisions contained in Section 3.10.
Section 6.12
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 6.13
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 6.14
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the REIT or any of the
Contributors.
Section 6.15
CONSENT OF GENERAL PARTNERS OR MANAGER.
In accordance with the terms of the agreements governing the Contributed Interests, each general partner or manager, as the case may be, of the applicable Douglas Emmett Entity relating
to each Contributed Interest consents to the applicable transfers contemplated in Section 1.01 hereof and the admission of the REIT as a substituted limited partner or member, as the case may
be, in such applicable Douglas Emmett Entity.
Section 6.16
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing Date, each of the parties hereto expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby
waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such
specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 6.17
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of any Contributor, at any time prior to the Closing Date;
provided
, that no such amendment,
modification or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered to such holders.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers or representatives, all as of the date first written above.
DOUGLAS EMMETT, INC. | ||||
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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Solely with respect to Section 1.01(b) |
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DOUGLAS EMMETT PROPERTIES, LP |
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | |||
Title: | Chief Executive Officer | |||
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Solely with respect to Sections 1.01 and 6.15 |
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DOUGLAS EMMETT REALTY ADVISORS, a California corporation (acting in its capacity as general partner of each of Douglas Emmett Realty Fund, Douglas Emmett Realty Fund No. 2, Douglas Emmett Realty Fund 1995, Douglas Emmett Realty Fund 1996, Douglas Emmett Realty Fund 1997, Douglas Emmett Realty Fund 1998, Douglas Emmett Realty Fund 2000, Douglas Emmett Realty Fund 2002, Douglas Emmett Realty Fund 2005, The Opportunity Fund, The Opportunity Fund 1995 and The Opportunity Fund 1996) |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | |||
Title: | President and Chief Executive Officer | |||
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Solely with respect to Sections 1.01 and 6.15 |
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ABERDEEN PROPERTIES, A CALIFORNIA LIMITED PARTNERSHIP (acting in its capacity as general partner of Barry Properties, Ltd., Kiowa Properties, Ltd. and Barrington/Kiowa Properties) |
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By: |
New September, LLC, a California limited liability company, Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985, Its Manager |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | |||
Title: | Trustee | |||
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Solely with respect to Sections 1.01 and 6.15 |
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CORAL REALTY, A CALIFORNIA LIMITED PARTNERSHIP (acting in its capacity as general partner of Brentwood-San Vicente Medical, Ltd. and Brentwood Court) |
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By: |
New September, LLC, a California limited liability company, Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985, Its Manager |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | |||
Title: | Trustee | |||
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Solely with respect to Sections 1.01 and 6.15 |
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EA REALTY, A CALIFORNIA LIMITED PARTNERSHIP (acting in its capacity as general partner of Brentwood Plaza and San Vicente Plaza, a California limited partnership) |
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By: |
New September, LLC, a California limited liability company, Its General Partner |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985, Its Manager |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | |||
Title: | Trustee | |||
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Solely with respect to Sections 1.01 and 6.15 |
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NEW SEPTEMBER, LLC (acting in its capacity as manager of Owensmouth/Warner, LLC) |
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By: |
Dan A. Emmett Revocable Living Trust of November 21, 1985, Its Manager |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | |||
Title: | Trustee | |||
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CONTRIBUTORS LISTED ON SCHEDULE I HERETO |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | |||
Title: | President and Chief Executive Officer of Douglas Emmett Realty Advisors | |||
As Attorney-in-Fact acting on behalf of each of the Contributors named on Schedule I hereto |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Registration Rights Agreement |
Exhibit D: |
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Articles and Bylaws |
HBRCT OP CONTRIBUTION AGREEMENT
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT PROPERTIES, LP,
DOUGLAS EMMETT REALTY ADVISORS
AND
HBRCT LLC
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Page
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ARTICLE I CONTRIBUTION | 2 | ||
Section 1.01 |
CONTRIBUTION TRANSACTION; ASSIGNMENT AND ASSUMPTION |
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2 |
Section 1.02 | CONSIDERATION | 3 | |
Section 1.03 | FURTHER ACTION | 4 | |
Section 1.04 | CALCULATION OF HBRCT UNIT CONSIDERATION | 4 | |
Section 1.05 | TRANSACTION COSTS | 4 | |
ARTICLE II CLOSING |
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4 |
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Section 2.01 |
CONDITIONS PRECEDENT |
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4 |
Section 2.02 | TIME AND PLACE | 5 | |
Section 2.03 | DELIVERY OF OP UNITS | 5 | |
Section 2.04 | CLOSING DELIVERIES | 6 | |
Section 2.05 | CLOSING COSTS | 6 | |
Section 2.06 | TERM OF THE AGREEMENT | 6 | |
Section 2.07 | EFFECT OF TERMINATION | 6 | |
Section 2.08 | TAX WITHHOLDING | 6 | |
ARTICLE III REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE OPERATING PARTNERSHIP |
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6 |
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Section 3.01 |
ORGANIZATION; AUTHORITY |
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6 |
Section 3.02 | DUE AUTHORIZATION | 7 | |
Section 3.03 | CONSENTS AND APPROVALS | 7 | |
Section 3.04 | NO VIOLATION | 7 | |
Section 3.05 | VALIDITY OF OP UNITS | 7 | |
Section 3.06 | LITIGATION | 7 | |
Section 3.07 | OP AGREEMENT. | 7 | |
Section 3.08 | LIMITED ACTIVITIES | 8 | |
Section 3.09 | NO OTHER REPRESENTATIONS OR WARRANTIES | 8 | |
Section 3.10 | INDEMNIFICATION | 8 | |
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTOR |
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9 |
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Section 4.01 |
ORGANIZATION; AUTHORITY |
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9 |
Section 4.02 | DUE AUTHORIZATION | 9 | |
Section 4.03 | OWNERSHIP OF CONTRIBUTED INTERESTS | 9 | |
Section 4.04 | CONSENTS AND APPROVALS | 10 | |
Section 4.05 | NO VIOLATION | 10 | |
Section 4.06 | NON-FOREIGN PERSON | 10 | |
Section 4.07 | SOLVENCY | 10 | |
Section 4.08 | LITIGATION | 10 | |
Section 4.09 | INVESTMENT | 10 | |
Section 4.10 | NO OTHER REPRESENTATIONS OR WARRANTIES | 11 | |
Section 4.11 | SURVIVAL OF REPRESENTATIONS AND WARRANTIES | 11 | |
ARTICLE V COVENANTS AND OTHER AGREEMENTS |
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11 |
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Section 5.01 |
COVENANTS OF THE CONTRIBUTOR |
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11 |
Section 5.02 | COMMERCIALLY REASONABLE EFFORTS BY THE OPERATING PARTNERSHIP AND THE CONTRIBUTOR | 12 | |
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ARTICLE VI POWER OF ATTORNEY |
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12 |
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Section 6.01 |
GRANT OF POWER OF ATTORNEY |
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12 |
Section 6.02 | LIMITATION ON LIABILITY | 12 | |
Section 6.03 | RATIFICATION; THIRD PARTY RELIANCE | 13 | |
ARTICLE VII GENERAL PROVISIONS |
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13 |
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Section 7.01 |
NOTICES |
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13 |
Section 7.02 | DEFINITIONS | 13 | |
Section 7.03 | COUNTERPARTS | 15 | |
Section 7.04 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 15 | |
Section 7.05 | GOVERNING LAW | 15 | |
Section 7.06 | ASSIGNMENT | 15 | |
Section 7.07 | JURISDICTION | 15 | |
Section 7.08 | DISPUTE RESOLUTION | 15 | |
Section 7.09 | SEVERABILITY | 16 | |
Section 7.10 | RULES OF CONSTRUCTION | 16 | |
Section 7.11 | EQUITABLE REMEDIES | 17 | |
Section 7.12 | TIME OF THE ESSENCE | 17 | |
Section 7.13 | DESCRIPTIVE HEADINGS | 17 | |
Section 7.14 | NO PERSONAL LIABILITY CONFERRED | 17 | |
Section 7.15 | CONSENT OF MANAGER | 17 | |
Section 7.16 | WAIVER OF SECTION 1542 PROTECTIONS | 17 | |
Section 7.17 | AMENDMENTS | 17 |
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TERM
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SECTION
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Additional Contributions | Section 1.02 | |
Affiliate | Section 7.02 | |
Agreement | Introduction | |
Attorney-in-Fact | Section 6.01 | |
Business Day | Section 7.02 | |
Claim | Section 3.10 | |
Claim Notice | Section 3.10 | |
Code | Section 7.02 | |
Consent Form | Section 7.02 | |
Closing | Section 2.02 | |
Closing Date | Section 2.02 | |
Contributed Interests | Recitals | |
Contributor | Introduction | |
Contributor Indemnified Party | Section 3.10 | |
DE2005 REIT | Recitals | |
DEG | Recitals | |
DEG Operating Agreement | Section 7.02 | |
DEG Contributed Interest | Recitals | |
DEGA | Recitals | |
DEGA Contributed Interest | Recitals | |
DEGA Operating Agreement | Section 7.02 | |
DERA | Introduction | |
DERA Funds | Recitals | |
DERF 2002 | Recitals | |
DERF 2002 Value | Section 1.02 | |
DERF 2005 | Recitals | |
DERF 2005 Value | Section 1.02 | |
Dispute | Section 7.08 | |
Douglas Emmett Entities | Recitals | |
Expiration Date | Section 3.10 | |
Formation Transactions | Recitals | |
Formation Transaction Documentation | Recitals | |
Governmental Authority | Section 7.02 | |
HBRCT Unit Consideration | Section 1.02 | |
HBRCT Value | Section 1.02 | |
Investment Funds | Recitals | |
IPO | Recitals | |
IPO Closing Date | Section 7.02 | |
IPO Price | Section 7.02 | |
Laws | Section 7.02 | |
Liens | Section 7.02 | |
Losses | Section 3.10 | |
Management Companies | Recitals | |
Manager | Recitals | |
Material Adverse Effect | Section 7.02 | |
OP Units | Recitals | |
Operating Partnership | Introduction | |
Operating Partnership Agreement | Section 3.05 | |
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Operating Partnership Subsidiary | Section 3.01 | |
Outside Date | Section 2.06 | |
Person | Section 7.02 | |
Power of Attorney | Section 6.01 | |
Pre-Formation Interests | Recitals | |
Pre-Formation Participants | Recitals | |
Principals | Section 7.02 | |
Properties | Section 7.02 | |
Prospectus | Section 7.02 | |
REIT | Introduction | |
REIT Common Stock | Recitals | |
Representation, Warranty and Indemnity Agreement | Section 7.02 | |
SEC | Section 2.01 | |
Securities Act | Section 7.02 | |
Single Asset Entities | Recitals | |
Subsidiary | Section 7.02 | |
Tax | Section 7.02 | |
Third Party Claims | Section 3.10 | |
Total Formation Transaction Value | Section 1.02 |
iv
HBRCT OP CONTRIBUTION AGREEMENT
THIS HBRCT OP CONTRIBUTION AGREEMENT is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett Properties, LP, a Delaware limited partnership (the " Operating Partnership ") and Subsidiary of Douglas Emmett, Inc., a Maryland corporation (the " REIT "), and HBRCT LLC, a Hawaii limited liability company (the " Contributor "), and Douglas Emmett Realty Advisors, Inc., a California corporation (" DERA "), acting in its capacity as manager (the " Manager ") of DEG and DEGA (each as defined below) (solely with respect to Sections 1.01 and 7.15). Certain capitalized terms are defined in Section 7.02 of this Agreement.
RECITALS
WHEREAS, the Contributor owns a two percent (2%) membership interest in DEG, LLC, a Delaware limited liability company (" DEG "), and Douglas Emmett Realty Fund 2002, a California limited partnership (" DERF 2002 "), indirectly owns a ninety-eight percent (98%) membership interest in DEG;
WHEREAS, the Contributor owns a two percent (2%) membership interest in DEGA, LLC, a Delaware limited liability company (" DEGA "), and Douglas Emmett Realty Fund 2005, a California limited partnership (" DERF 2005 "), indirectly owns a ninety-eight percent (98%) membership interest in DEGA;
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned or ground leased, directly or indirectly, by (i) certain institutional funds, including DERF 2002 and DERF 2005, and certain investment funds identified as such on Exhibit A hereto (collectively, the " DERA Funds "), for which DERA acts as the general partner, and (ii) certain single asset entities identified as such on Exhibit A hereto (the " Single Asset Entities ") and managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and the Operating Partnership will enter into (i) an agreement and plan of merger with each other DERA Fund (other than DERF 2005) pursuant to which the REIT will acquire directly or indirectly the profits interests and limited partnership interests in such DERA Funds (other than the interests of three funds identified as the " Investment Funds " in Exhibit A ) in consideration of each such interest's allocated share of the respective value of such DERA Fund (other than the Investment Funds' allocated shares and DERA's allocated shares, which shall have previously been acquired, directly or indirectly, by the REIT), (ii) an agreement and plan of merger with each of the Investment Funds pursuant to which, immediately prior to the Merger (defined below) and the mergers described in clause (i), the REIT will acquire directly or indirectly all interests in the Investment Funds in consideration of each of the Investment Fund's allocated share of the respective value of the DERA Funds in which they own an interest, and (iii) an agreement and plan of merger with each of the Single Asset Entities pursuant to which the REIT will acquire directly or indirectly all interests in the Single Asset Entities in consideration of each such interest's allocated share of the respective value of such Single Asset Entity, and (B) the REIT will enter into an agreement and plan of merger with DERF 2005 and Douglas Emmett 2005 REIT, Inc., a Maryland corporation and Subsidiary of DERF 2005 (" DE2005 REIT "), pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of each DERF 2005 partnership interest's allocated share of DERF 2005 (other than DERA's allocated share, which shall have previously been acquired, directly or indirectly, by the REIT);
WHEREAS, prior to the mergers identified in the preceding paragraph, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (collectively, the " Management Companies ") and, together with the DERA Funds and the Single Asset Entities, the
1
" Douglas Emmett Entities ") (the transactions contemplated by this Agreement and the other Formation Transaction Documentation are hereinafter referred to as the " Formation Transactions "; the " Pre-Formation Participants " are the holders of the equity interests (including the profits interests and the general and limited partnership interests) in all of the Douglas Emmett Entities immediately prior to the Formation Transactions, and such interests held by Pre-Formation Participants are hereinafter referred to as " Pre-Formation Interests "; and the " Formation Transaction Documentation " means all of the merger agreements and contribution agreements (including this Agreement), substantially in the forms accompanying the Request for Consent dated March 24, 2006 and identified in Exhibit B hereto, pursuant to which all of the equity interests in the Douglas Emmett Entities held by the Pre-Formation Participants are to be acquired as part of the Formation Transactions);
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (" REIT Common Stock "), of the REIT, which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, prior to the effective time of the applicable mergers contemplated in certain of the other Formation Transaction Documentation, the Contributor desires to contribute to the Operating Partnership all of its interest in DEG (the " DEG Contributed Interest ") and DEGA (the " DEGA Contributed Interest " and, together with the DEG Contributed Interest, the " Contributed Interests "), and the Operating Partnership desires to acquire from the Contributor, all of the Contributor's right, title and interest as a holder of Pre-Formation Interests, including, without limitation, all of the Contributor's voting rights and interests in the capital, profits and losses of DEG and DEGA, constituting all of the Contributor's interest in respect of the Contributed Interests, in exchange for units of limited partnership in the Operating Partnership (" OP Units ") in a transaction intended to qualify as a tax-free transaction under Section 721 of the Code, subject to the completion of the IPO and the terms and conditions set forth herein; and
WHEREAS, all necessary approvals have been obtained by each of the Operating Partnership and the Contributor to consummate the transactions contemplated herein and by the other Formation Transaction Documentation.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
CONTRIBUTION
Section 1.01 CONTRIBUTION TRANSACTION; ASSIGNMENT AND ASSUMPTION.
(a) At the Closing and subject to the terms and conditions contained in this Agreement, the Contributor hereby assigns, sets over, and transfers to the Operating Partnership, absolutely and unconditionally and free and clear of all Liens (other than those arising under the DEG Operating Agreement and the DEGA Operating Agreement), all of its right, title and interest in and to the Contributed Interests, including all rights to indemnification in favor of the Contributor under the agreements pursuant to which the Contributor acquired the Contributed Interests transferred pursuant to this Agreement; provided , that the Operating Partnership accepts the assignment by the Contributor and agrees to be bound by the terms of the DEG Operating Agreement and the DEGA Operating Agreement and undertakes, assumes and agrees punctually and faithfully to perform, pay or discharge when due and otherwise in accordance with its terms, all agreements, covenants, conditions, obligations and liabilities of the Contributor as a member of DEG and DEGA with respect to the Contributed Interests arising solely on or after the Closing Date.
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(b) In accordance with the respective terms of the DEG Operating Agreement and the DEGA Operating Agreement, this Agreement shall serve as notice to the Manager of the transfer of the Contributor's Contributed Interests, and the Manager consents to, and agrees and acknowledges that all requirements and conditions for such transfer and the admission of the Operating Partnership as a substituted member have been satisfied or otherwise waived.
(c) All of the parties hereto agree that, as a result of the assignment and assumptions hereunder, for purposes of the DEG Operating Agreement and the DEGA Operating Agreement, the Operating Partnership shall be a member of DEG and DEGA.
Section 1.02
CONSIDERATION.
Under and subject to the terms and conditions of the respective Formation Transaction Documentation, as the result of an irrevocable election indicated on Consent Form submitted by a
Pre-Formation Participant or as a result of the failure of a Pre-Formation Participant to submit a Consent Form, each Pre-Formation Participant is irrevocably bound
to accept and entitled to receive upon consummation of the Formation Transactions, a specified share of the pre-IPO equity value of the Douglas Emmett Entities in the form of the right to
receive cash, REIT Shares or OP Units. The "
Total Formation Transaction Value
" means the aggregate dollar value of (i) the cash, (ii) the
REIT Shares and (iii) the OP Units that are allocated to all Pre-Formation Participants in the Formation Transactions (for all purposes under this Section 1.02, any OP Units
shall be valued at the IPO Price), which shall not be less than $1.0 billion, shall be determined by the REIT acting in good faith based upon the pricing in the IPO and the number of REIT
Shares sold in the IPO (excluding the over-allotment option, if any) and shall be specified by the REIT in the final IPO prospectus. The amount of cash included in the Total Formation
Transaction Value shall not be less than 90% of the difference between the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and 100% of the payments for
the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds.
" HBRCT Value " equals the sum of (1) the amount of the DERF 2002 Value allocable to the DEG Contributed Interest in accordance with Section 7.1 of the DEG Operating Agreement, plus (2) the amount of the DERF 2005 Value allocable to the DEGA Contributed Interest in accordance with Section 7.1 of the DEGA Operating Agreement, plus (3) the sum of (i) 100% of the aggregate amount, during the period commencing on July 1, 2005 and ending on the Closing Date (defined below) of (x) Capital Contributions (as defined in the DEGA Operating Agreement) made to DEGA by the Contributor HBRCT, if any (such capital contributions by the Contributor, if any, are referred to as the " Additional Contributions "), plus (ii) a return on such Additional Contributions at an annualized rate of ten percent (10%) for the period commencing on the date on which each such Additional Contribution is made and ending on the Closing Date (for purposes of calculating the return, a capital contribution shall be deemed made on the date due, or if made after the due date, on the date received). " DERF 2002 Value " means the amount equal to 40.5390% of the portion of the Total Formation Transaction Value allocated to DERF 2002, as determined in accordance with the DERF 2002 merger agreement, and " DERF 2005 Value " means the amount equal to 89.9818% of the portion of the Total Formation Transaction Value allocated to DERF 2005, as determined in accordance with the DERF 2005 merger agreement.
At Closing, and subject to the terms and conditions contained in this Agreement, the Operating Partnership shall, in exchange for the Contributed Interests, issue to the Contributor a number of OP Units (the " HBRCT Unit Consideration ") equal to the HBRCT Value divided by the IPO Price. No fractional OP Units shall be issued pursuant to this Agreement. In lieu thereof, the Contributor shall receive an amount in cash determined by multiplying the fraction of an OP Unit to which the Contributor would otherwise have been entitled, by the IPO Price. No interest will be paid or will accrue on any cash paid or payable in lieu of any fractional OP Unit; and provided further , that the Operating Partnership will bear any out-of-pocket expenses not caused by a material breach of this Agreement by the Contributor.
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Section 1.03
FURTHER ACTION.
If, at any time after the Closing, the Operating Partnership shall determine or be advised that any deeds, bills of sale, assignments, assurances or other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the Operating Partnership the right, title or interest in or to the Contributed Interests, the Contributor shall execute and deliver
all such deeds, bills of sale, assignments and assurances and take and do all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and
interest in the Contributed Interests or otherwise to carry out this Agreement;
provided
, that the Contributor shall not be obligated to take any action
or execute any document if the additional actions or documents impose additional liabilities, obligations, covenants, responsibilities, representations or warranties on the Contributor that are not
contemplated by this Agreement or reasonably inferable by the terms herein.
Section 1.04
CALCULATION OF HBRCT UNIT CONSIDERATION.
As soon as practicable following the determination of the IPO Price and prior to the Closing, all calculations relating to the HBRCT Unit Consideration shall be performed in good faith
by, or under the direction of, the Operating Partnership and shall be final and binding upon the Contributor.
Section 1.05
TRANSACTION COSTS.
If the Closing occurs, the REIT and the Operating Partnership shall be solely responsible for all transaction costs and expenses of the REIT, the Operating Partnership and the Douglas
Emmett Entities in connection with the Formation Transactions and the IPO, which include, but are not limited to, the underwriting discounts and commissions. In no event shall the Contributor have any
responsibility for such costs and expenses.
ARTICLE II
CLOSING
Section 2.01 CONDITIONS PRECEDENT.
(a)
Condition to Each Party's Obligations.
The respective obligation of each party to effect the
contribution contemplated by this Agreement and to consummate the other transactions contemplated hereby to
occur on the Closing Date is subject to the satisfaction or waiver on or prior to the effective time of the mergers contemplated in the applicable Formation Transaction Documentation, of the following
conditions:
(i) Registration Statement. The Registration Statement (defined below) shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the Securities and Exchange Commission (" SEC ") seeking a stop order. This condition may not be waived by any party.
(ii) IPO Proceeds. The REIT shall have received the proceeds from the IPO. This condition may not be waived by any party.
(iii) No Injunction. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of any of the transactions contemplated in this Agreement nor shall any of the same brought by a Governmental Authority of competent jurisdiction be pending that seeks the foregoing.
(iv) Formation Transactions. The other Formation Transactions shall have been consummated. This condition may not be waived by any party.
(b)
Conditions to Obligations of the Operating Partnership.
The obligations of the Operating
Partnership are further subject to satisfaction of the following conditions (any of which may be waived by the Operating
Partnership in whole or in part):
(i) Representations and Warranties. Except as would not have a Material Adverse Effect, the representations and warranties of the Contributor contained in this Agreement, as well as those of
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the Principals contained in the Representation, Warranty and Indemnity Agreement, shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(ii) Performance by the Contributor. The Contributor shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(iii) Consents, Etc. All necessary consents and approvals of Governmental Authorities or third parties (including lenders) for the Contributor to consummate the transactions contemplated hereby (except for those the absence of which would not have a material adverse effect on the ability of the Contributor to consummate the transactions contemplated by this Agreement) shall have been obtained.
(iv) Representation, Warranty and Indemnity Agreement. The Principals shall have entered into the Representation, Warranty and Agreement.
(c)
Conditions to Obligations of the Contributor.
The obligation of the Contributor to effect the
contribution contemplated by this Agreement and to consummate the other transactions contemplated hereby to occur
on the Closing Date are further subject to satisfaction of the following conditions:
(i) Representations and Warranties. Except as would not have a Material Adverse Effect, the representations and warranties of the Operating Partnership contained in this Agreement shall be true and correct at the Closing as if made again at that time (except to the extent that any representation or warranty speaks as of an earlier date, in which case it must be true and correct only as of that earlier date).
(ii) Performance by the Operating Partnership. The Operating Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(iii) Registration Rights Agreement. The REIT shall have entered into the registration rights agreement, substantially in the form attached as Exhibit C hereto. This condition may not be waived by any party hereto.
(iv) Total Formation Transaction Value. The Total Formation Transaction Value shall not be less than $1.0 billion and the amount of cash included in the Total Formation Transaction Value shall not be less than 90% of the difference between (i) the aggregate net proceeds from the IPO (excluding the over-allotment option, if any) and (ii) 100% of the payments for the preferred equity held by The Prudential Insurance Company of North America, Inc. in the DERA Funds. This condition may not be waived by any party.
Section 2.02
TIME AND PLACE.
Unless this Agreement shall have been terminated pursuant to Section 2.02 hereof, and subject to satisfaction or waiver of the conditions in Section 2.01 hereof, the
closing of the transfer contemplated by Section 1.01 and the other transactions contemplated hereby shall occur on the day on which the REIT receives the proceeds from the IPO from the
underwriter(s) (the "
Closing
" or the "
Closing Date
"). The Closing shall take place at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The
transfer described in Section 1.01 hereof and all closing deliveries shall be deemed concurrent for all purposes.
Section 2.03
DELIVERY OF OP UNITS.
The issuance of the HBRCT Unit Consideration shall be evidenced by an amendment to the Operating Partnership Agreement (defined below). At the Closing (or as soon as reasonably
practicable thereafter), the Operating Partnership shall deliver or cause to be delivered to the Contributor an executed copy of such amendment.
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Section 2.04
CLOSING DELIVERIES.
At the Closing, the parties shall make, execute, acknowledge and deliver, or cause to be made, executed, acknowledged and delivered through the Attorney-in-Fact
(described in Article VI hereof), any other documents reasonably requested by the Operating Partnership or reasonably necessary or desirable to assign, transfer, convey, contribute and deliver
the Contributed Interests, free and clear of all Liens and to effectuate the transactions contemplated hereby.
Section 2.05
CLOSING COSTS.
The Operating Partnership shall pay any documentary transfer taxes, escrow charges, title charges and recording taxes or fees incurred in connection with the transactions contemplated
hereby.
Section 2.06
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the initial registration statement of the REIT for the IPO has not been filed with the Securities and Exchange Commission by
December 31, 2006, or (ii) the contributions contemplated herein shall not have been consummated on or prior to April 20, 2007 (such date is hereinafter referred to as the
"
Outside Date
").
Section 2.07
EFFECT OF TERMINATION.
In the event of termination of this Agreement for any reason, all obligations on the part of the Operating Partnership, DERA and the Contributor under this Agreement shall terminate,
except that the obligations set forth in Article VII shall survive, it being understood and agreed, however, for the avoidance of doubt, that if this Agreement is terminated because one or more
of the conditions to the non-breaching party's obligations under this Agreement are not satisfied by the Outside Date as a result of the other party's material breach of a covenant,
representation, warranty or other obligation under this Agreement or any other Formation Transaction Documentation, the non-breaching party's right to pursue all legal remedies with
respect to such breach will survive such termination unimpaired.
Section 2.08
TAX WITHHOLDING.
The Operating Partnership shall be entitled to deduct and withhold, from the consideration payable pursuant to this Agreement to the Contributor, such amounts as the Operating
Partnership is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld
by the Operating Partnership, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Contributor in respect of which such deduction and withholding was
made by the Operating Partnership.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNITIES OF THE OPERATING PARTNERSHIP
The Operating Partnership hereby represents and warrants to and covenants with the Contributor as follows:
Section 3.01
ORGANIZATION; AUTHORITY.
(a) The Operating Partnership is a limited partnership duly organized, validly existing and in good standing under the Laws of the State of Delaware. The Operating Partnership has all requisite power and authority to enter this Agreement and the other Formation Transaction Documentation to which it is a party and to carry out the transactions contemplated hereby and thereby, and to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not have a material adverse effect on the Operating Partnership and the Operating Partnership Subsidiaries (defined below) taken as a whole.
6
(b) Schedule 3.01(b) sets forth as of the date hereof, (i) each Subsidiary of the Operating Partnership (each an " Operating Partnership Subsidiary "), (ii) the ownership interest therein of the Operating Partnership, and (iii) if not wholly owned by the Operating Partnership, the identity and ownership interest of each of the other owners of such Operating Partnership Subsidiary. Each Operating Partnership Subsidiary has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization or formation, as applicable, has all power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable Law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the Operating Partnership and the Operating Partnership Subsidiaries taken as a whole.
Section 3.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement and the other Formation Transaction Documentation by the Operating Partnership have been duly and validly authorized by all
necessary action of the Operating Partnership. This Agreement, the other Formation Transaction Documentation and each agreement, document and instrument executed and delivered by or on behalf of the
Operating Partnership pursuant to this Agreement or the other Formation Transaction Documentation constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation
of the Operating Partnership, each enforceable against the Operating Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar Laws relating
to creditors' rights and general principles of equity.
Section 3.03
CONSENTS AND APPROVALS.
Except in connection with the IPO and the consummation of the Formation Transactions, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental
Authority or under any applicable Laws is required to be obtained by the Operating Partnership in connection with the execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
Section 3.04
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, the other Formation Transaction Documentation, any agreement contemplated hereby between the parties to this Agreement
and the transactions contemplated hereby between the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach
of, or constitute a default under (a) the organizational documents of the Operating Partnership, (b) any term or provision of any judgment, order, writ, injunction, or decree binding on
the Operating Partnership, or (c) any other agreement to which the Operating Partnership is a party thereto.
Section 3.05
VALIDITY OF OP UNITS.
The OP Units to be issued to the Contributor pursuant to this Agreement will have been duly authorized by the Operating Partnership and, when issued against the consideration therefor,
will be validly issued by the Operating Partnership, free and clear of all Liens created by the Operating Partnership (other than Liens created by the Agreement of Limited Partnership of the Operating
Partnership (the "
Operating Partnership Agreement
")).
Section 3.06
LITIGATION.
There is no action, suit or proceeding pending or, to the Operating Partnership's knowledge, threatened against the Operating Partnership or any Operating Partnership Subsidiary which,
if adversely determined, would have a material adverse effect on the financial condition or results of operations of the Operating Partnership or which challenges or impairs the ability of the
Operating Partnership to execute or deliver, or perform its obligations under, this Agreement and the documents executed by it pursuant to this Agreement or to consummate the transactions contemplated
hereby or thereby.
Section 3.07
OP AGREEMENT.
Attached as
Exhibit D
hereto is a true and correct copy of the Operating Partnership Agreement in substantially final form.
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Section 3.08
LIMITED ACTIVITIES.
Except for activities in connection with the IPO or the Formation Transactions, the Operating Partnership and the Operating Partnership Subsidiaries have not engaged in any material
business or incurred any material obligations.
Section 3.09
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article III, the Operating Partnership shall not be deemed to have made any other representation or
warranty in connection with this Agreement or the transactions contemplated hereby.
(a) From and after the Closing Date, the Operating Partnership shall indemnify and hold harmless the Contributor and its manager, beneficiaries, officers, employees, partners, members, agents, representatives and Affiliates (each of which is a " Contributor Indemnified Party ") from and against any and all charges, complaints, claims, actions, causes of action, losses, damages, liabilities and expenses of any nature whatsoever, including without limitation, amounts paid in settlement, reasonable attorneys' fees, costs of investigation, costs of investigative judicial or administrative proceedings or appeals therefrom and costs of attachment or similar bonds (collectively, " Losses ") arising out of or relating to, asserted against, imposed upon or incurred by the Contributor Indemnified Party in connection with or as a result of any breach of a representation, warranty or covenant of the Operating Partnership contained in this Agreement or in any schedule, exhibit, certificate or affidavit or any other document delivered by the Operating Partnership pursuant to this Agreement; provided, however, that the Operating Partnership shall not have any obligation under this Section to indemnify any Contributor Indemnified Party against any Losses to the extent that such Losses arise by virtue of (i) any diminution in value of OP Units, or (ii) the Contributor's breach of this Agreement, gross negligence, willful misconduct or fraud. Nothing in this Section 3.10 shall relieve the parties to the Representation, Warranty and Indemnity Agreement of any liability under the express terms thereof.
(b) At the time when any Contributor Indemnified Party learns of any potential claim under this Section 3.10 (a " Claim ") against the Operating Partnership it will promptly give written notice (a " Claim Notice ") to the Operating Partnership; provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the Operating Partnership shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Contributor Indemnified Party giving rise to such Claim, and the amount or good faith estimate of the amount of Losses arising therefrom. Unless prohibited by Law, the Contributor Indemnified Party shall deliver to the Operating Partnership, promptly after the Contributor Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Contributor Indemnified Party relating to a Third Party Claim (defined below). Any Contributor Indemnified Party may at its option demand indemnity under this Section 3.10 as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Contributor Indemnified Party shall in good faith determine that such claim is not frivolous and that the Contributor Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.
(c) The Operating Partnership shall be entitled, at its own expense, to assume and control the defense of any Claims based on claims asserted by third parties (" Third Party Claims "), through counsel chosen by the Operating Partnership and reasonably acceptable to the Contributor Indemnified Parties (or any person authorized by the Contributor Indemnified Parties to act on its behalf), if it gives written notice of its intention to do so to the Contributor Indemnified Parties within thirty (30) days of the receipt of the applicable Claim Notice; provided , however , that the Contributor Indemnified Parties may at all times participate in such defense at their expense. Without limiting the foregoing, in the event that the Operating Partnership exercises the right to undertake any such defense against a Third Party Claim, the Contributor Indemnified Party shall cooperate with the Operating Partnership in such defense and make available to the Operating Partnership (unless prohibited by Law), at the Operating
8
Partnership's expense, all witnesses, pertinent records, materials and information in the Contributor Indemnified Party's possession or under the Contributor Indemnified Party's control relating thereto as is reasonably required by the Operating Partnership. No compromise or settlement of such Third Party Claim may be effected by either the Contributor Indemnified Party, on the one hand, or the Operating Partnership, on the other hand, without the other's consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party and (ii) each Contributor Indemnified Party that is party to such claim is released from all liability with respect to such claim.
(d) All representations, warranties and covenants of the Operating Partnership contained in this Agreement shall survive after the effective time of the mergers contemplated in the applicable Formation Transaction Documentation until the first anniversary of the Closing Date (the " Expiration Date "). If written notice of a claim in accordance with the provisions of this Section 3.10 has been given prior to the Expiration Date, then the relevant representation, warranty and covenant shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived. In furtherance of the foregoing, the Contributor hereby waives, as of the Closing, to the fullest extent permitted under applicable Law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it may have against the other parties hereto arising under or based upon any federal, state, local or foreign Law, other than the right to seek indemnity pursuant to this Section 3.10. The foregoing sentence shall not (i) limit the Contributor's right to specific performance or injunctive relief in connection with the breach by the Operating Partnership of its covenants in this Agreement or (ii) constitute a waiver of any rights or remedies of the Contributor under the DEG Operating Agreement or the DEGA Operating Agreement, as the case may be.
(e) All indemnity payments made hereunder shall be treated as adjustments to the consideration paid hereunder for United States federal income tax purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTOR
Except as disclosed in the Prospectus, the Contributor hereby represents, warrants and agrees that as of the Closing Date:
Section 4.01
ORGANIZATION; AUTHORITY.
The Contributor has been duly organized, is validly existing and in good standing under the Laws of its jurisdiction of organization, and has all requisite power and authority to enter
into this Agreement, each agreement contemplated hereby and to carry out the transactions contemplated hereby and thereby.
Section 4.02
DUE AUTHORIZATION.
The execution, delivery and performance of this Agreement by the Contributor have been duly and validly authorized by all necessary action required of the Contributor. This Agreement and
each agreement, document and instrument executed and delivered by or on behalf of the Contributor pursuant to this Agreement constitutes, or when executed and delivered will constitute, the legal,
valid and binding obligation of the Contributor, each enforceable against the Contributor in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar Laws
relating to creditors' rights and general principles of equity.
Section 4.03
OWNERSHIP OF CONTRIBUTED INTERESTS.
The Contributor is the record owner of the Contributed Interests and has the power and authority to transfer, sell, assign and convey to the Operating Partnership the Contributed
Interests free and clear of any Liens and, upon delivery of the consideration for the Contributed Interests as provided herein, the Operating Partnership will
9
acquire good and valid title thereto, free and clear of any Liens (other than those Liens created by the DEG Operating Agreement and the DEGA Operating Agreement, as the case may be). Except as provided for or contemplated by this Agreement or the other applicable Formation Transaction Documentation, there are no rights, subscriptions, warrants, options, conversion rights, preemptive rights, agreements, instruments or understandings of any kind outstanding (i) relating to the Contributed Interests or (ii) to purchase, transfer or to otherwise acquire, or to in any way encumber, any of the interests which comprise the Contributed Interests or any securities or obligations of any kind convertible into any of the interests which comprise the Contributed Interests or other equity interests or profit participation of any kind in DEG and DEGA. Prior to the Closing, the Contributor will not consent to join in or in any way effect the transfer of, or otherwise encumber, any properties owned directly or indirectly by DEG or DEGA, except as permitted by the Formation Transaction Documentation. The Contributor has no equity interest, either direct or indirect, in the Properties, except for the Contributed Interests.
Section 4.04
CONSENTS AND APPROVALS.
Except as shall have been satisfied on or prior to the Closing Date, no consent, waiver, approval or authorization of, or filing with, any Person or Governmental Authority or under any
applicable Laws is required to be obtained by the Contributor in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby, except for those
consents, waivers, approvals, authorizations or filings, the failure of which to obtain or to file would not have a Material Adverse Effect.
Section 4.05
NO VIOLATION.
None of the execution, delivery or performance of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between
the parties to this Agreement does or will, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others
any right of termination, acceleration, cancellation or other right under, (A) the organizational documents, if any, of the Contributor, (B) any agreement, document or instrument to
which the Contributor is a party or by which the Contributor or the Contributed Interests are bound or (C) any term or provision of any judgment, order, writ, injunction, or decree binding on
the Contributor (or its assets or properties), except, in the case of clause (B) and (C), any such breaches or defaults that would not have a Material Adverse Effect.
Section 4.06
NON-FOREIGN PERSON.
The Contributor is a United States person (as defined in the Code) and is, therefore, not subject to the provisions of the Code relating to the withholding of sales or exchange proceeds
to foreign persons.
Section 4.07
SOLVENCY.
The Contributor has been and will be solvent at all times prior to and for the ninety (90) day period following the transfer of the Contributed Interests to the Operating
Partnership.
Section 4.08
LITIGATION.
To the Contributor's knowledge, there is no action, suit or proceeding pending or threatened against the Contributor affecting all or any portion of the Contributed Interests or the
Contributor's ability to consummate the transactions contemplated hereby which, if adversely determined, would adversely affect the Contributor's ability to so consummate the transactions contemplated
hereby. The Contributor knows of no outstanding order, writ, injunction or decree of any Governmental Authority against or affecting all or any portion of the Contributed Interests, which in any such
case would impair the Contributor's ability to enter into and perform all of its obligations under this Agreement.
Section 4.09
INVESTMENT.
The Contributor acknowledges that the offering and issuance of the OP Units to be acquired pursuant to this Agreement are intended to be exempt from registration under the Securities Act
and that the Operating Partnership's reliance on such exemptions is predicated in part on the accuracy and completeness of the representations and warranties of the Contributor
10
contained herein. In furtherance thereof, the Contributor represents and warrants to the Operating Partnership as follows:
(a) The Contributor is an "accredited investor" (as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act).
(b) The Contributor is acquiring the OP Units solely for its own account for the purpose of investment and not as a nominee or agent for any other Person and not with a view to, or for offer or sale in connection with, any distribution of any thereof in violation of the securities Laws.
(c) The Contributor is knowledgeable, sophisticated and experienced in business and financial matters; the Contributor has previously invested in securities similar to the OP Units and fully understands the limitations on transfer imposed by the federal securities Laws. The Contributor is able to bear the economic risk of holding the OP Units for an indefinite period and is able to afford the complete loss of its investment in the OP Units; the Contributor has received and reviewed all information and documents about or pertaining to the Operating Partnership and the business and prospects of the Operating Partnership and the issuance of the OP Units as the Contributor deems necessary or desirable, and has been given the opportunity to obtain any additional information or documents and to ask questions and receive answers about such information and documents, the Operating Partnership and the business and prospects of the Operating Partnership which the Contributor deems necessary or desirable to evaluate the merits and risks related to its investment in the OP Units; and the Contributor understands and has taken cognizance of all risk factors related to the purchase of the OP Units. The Contributor is relying upon its own independent analysis and assessment (including with respect to taxes), and the advice of the Contributor's advisors (including tax advisors), and not upon that of the Operating Partnership or any of the Operating Partnership's Affiliates, for purposes of evaluating, entering into, and consummating the transactions contemplated hereby.
(d) The Contributor acknowledges that the OP Units have not been registered under the Securities Act and, therefore, may not be sold unless registered under the Securities Act or an exemption from registration is available.
Section 4.10
NO OTHER REPRESENTATIONS OR WARRANTIES.
Other than the representations and warranties expressly set forth in this Article IV, the Contributor shall not be deemed to have made any other representation or warranty in
connection with this Agreement or the transactions contemplated hereby.
Section 4.11
SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The parties hereto agree and acknowledge that the representations and warranties set forth in this Article IV (other than Sections 4.03, 4.06 and 4.09) shall not survive the
Closing.
ARTICLE V
COVENANTS AND OTHER AGREEMENTS
Section 5.01 COVENANTS OF THE CONTRIBUTOR. From the date hereof through the Closing, except as otherwise provided for or as contemplated by this Agreement or the other applicable Formation Transaction Documentation, the Contributor shall not:
(a) sell, transfer or otherwise dispose of all or any portion of the Contributed Interests;
(b) mortgage, pledge, hypothecate, encumber (or permit to become encumbered) all or any portion of the Contributed Interests; or
(c) authorize or consent to, or cause any Douglas Emmett Entity to take, any of the actions prohibited by the Formation Transaction Documentation.
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Section 5.02
COMMERCIALLY REASONABLE EFFORTS BY THE OPERATING PARTNERSHIP AND THE CONTRIBUTOR.
Each of the Operating Partnership and the Contributor shall use commercially reasonable efforts and cooperate with each other in (i) promptly determining whether any filings are
required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained (under any applicable Law or regulation or from any Governmental Authority or third party) in
connection with the transactions contemplated by this Agreement, and (ii) promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to
obtain any such consents, approvals, waivers, permits or authorizations.
Section 6.01 GRANT OF POWER OF ATTORNEY. The Contributor does hereby irrevocably appoint DERA (or its designee) and each of them individually and any successor thereof from time to time (DERA or such designee or any such successor of any of them acting in his, her or its capacity as attorney-in-fact pursuant hereto, the " Attorney-in-Fact ") as the true and lawful attorney-in-fact and agent of the Contributor, to act in the name, place and stead of the Contributor to make, execute, acknowledge and deliver all such other contracts, orders, receipts, notices, requests, instructions, certificates, consents, letters and other writings, to provide information to the Securities and Exchange Commission and others about the transactions contemplated hereby and, in general, to do all things and to take all actions which the Attorney-in-Fact in its sole discretion may consider necessary or proper in connection with or to carry out the transactions contemplated by this Agreement and the other applicable Formation Transaction Documentation, as fully as could the Contributor if personally present and acting.
The power of attorney and all authority granted hereby (such power of attorney is hereinafter referred to as the " Power of Attorney ") shall be coupled with an interest and therefore shall be irrevocable and shall not be terminated by any act of the Contributor making such an appointment or granting such an authority, by operation of law or by the occurrence of any other event or events, and if any other such act or events shall occur before the completion of the transactions contemplated by this Agreement or the other applicable Formation Transaction Documentation, the Attorney-in-Fact shall nevertheless be authorized and directed to complete all such transactions as if such other act or events had not occurred and regardless of notice thereof. The Contributor agrees that, at the request of DERA, it will promptly execute a separate power of attorney on the same terms set forth in this Article VI, such execution to be witnessed and notarized. The Contributor hereby authorizes the reliance of third parties on the Power of Attorney.
The Contributor acknowledges that DERA has, and any designee or successor thereof acting as Attorney-in-Fact may have, an economic interest in the transactions contemplated by this Agreement and the other Formation Transaction Documentation.
Section 6.02
LIMITATION ON LIABILITY.
It is understood that the Attorney-in-Fact assumes no responsibility or liability to any Person by virtue of the Power of Attorney granted by the Contributor
hereby. The Attorney-in-Fact makes no representations with respect to and shall have no responsibility for the Formation Transactions or the IPO, or the acquisition of the
Contributed Interests by the Operating Partnership and shall not be liable for any error or judgment or for any act done or omitted or for any mistake of fact or Law except for its own gross
negligence or bad faith. The Contributor agrees to indemnify the Attorney-in-Fact for and to hold the Attorney-in-Fact harmless against any loss, claim,
damage or liability incurred on its part arising out of or in connection with it acting as the Attorney-in-Fact under the Power of Attorney created by the Contributor hereby,
as well as the cost and expense of investigating and defending against any such loss, claim, damage or liability,
12
except to the extent such loss, claim, damage or liability is due to the gross negligence or bad faith of the Attorney-in-Fact. The Contributor agrees that the Attorney-in-Fact may consult with counsel of its own choice (who may be counsel for the Operating Partnership or its successors or Affiliates), and it shall have full and complete authorization and protection for any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel. It is understood that the Attorney-in-Fact may, without breaching any express or implied obligation to the Contributor hereunder, release, amend or modify any other power of attorney granted by any other Person under any related agreement.
Section 6.03
RATIFICATION; THIRD PARTY RELIANCE.
The Contributor hereby ratifies and confirms any and all actions that the Attorney-in-Fact shall lawfully do or cause to be done by virtue of the exercise of the
powers granted unto it by the Contributor under this Article VI, and the Contributor authorizes the reliance of third parties on the Power of Attorney and waives its rights, if any, as against
any such third party for its reliance hereon.
ARTICLE VII
GENERAL PROVISIONS
Section 7.01 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (a) delivered personally, (b) five (5) Business Days after being mailed by certified mail, return receipt requested and postage prepaid, (c) one (1) Business Day after being sent by a nationally recognized overnight courier or (d) transmitted by facsimile if confirmed within 24 hours thereafter by a signed original sent in the manner provided in clause (a), (b) or (c) to the parties at the following addresses (or at such other address for a party as shall be specified by notice from such party):
Douglas
Emmett Properties, LP
c/o Douglas Emmett, Inc.
808 Wilshire Boulevard, Suite 200
Santa Monica, California 90401
Facsimile: (310) 255-7702
Attention: Chief Executive Officer
HBRCT
LLC
700 Bishop Street, Suite 200
Honolulu, Hawaii 96813
Facsimile: (808) 536-2400
Attention: Richard W. Gushman, II
Section 7.02
DEFINITIONS.
For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
13
(b) " Business Day " means any day that is not a Saturday, Sunday or legal holiday in the State of California.
(c) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(d) " Consent Form " means the forms provided to each holder of Pre-Formation Interests to consent to the Formation Transactions and to make such holder's irrevocable elections with respect to consideration to be received in the Formation Transactions.
(e) " DEG Operating Agreement " means that certain Limited Liability Company Agreement of DEG, LLC, dated as of August 11, 2004, by and between DERF 2002 and HBRCT.
(f) " DEGA Operating Agreement " means that certain Limited Liability Company Agreement of DEGA, LLC, dated as of January 3, 2005, by and between Douglas Emmett 2005 REIT, Inc., a Maryland corporation, and HBRCT.
(g) " Governmental Authority " means any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.
(h) " IPO Closing Date " means the closing date of the IPO.
(i) " IPO Price " means the initial public offering price of a REIT Share in the IPO.
(j) " Laws " means laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority.
(k) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(l) " Material Adverse Effect " means a material adverse effect on the REIT and the properties owned or leased pursuant to a ground lease by the Douglas Emmett Entities (after giving effect to the Formation Transactions), taken as a whole.
(m) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(n) " Principals " means Dan Emmett, Christopher Anderson, Jordan Kaplan, and Kenneth Panzer.
(o) " Properties " means the office, residential or other property owned by the Douglas Emmett Entities or any of their Subsidiaries or leased pursuant to a ground lease.
(p) " Prospectus " means the REIT's final prospectus as filed with the SEC.
(q) " Representation, Warranty and Indemnity Agreement " means the Representation, Warranty and Indemnity Agreement, dated as of the date hereof, by and among the REIT, the Operating Partnership and the Principals.
(r) " Securities Act " means the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder.
(s) " Subsidiary " of any Person means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii)(A) 10% or more of the voting power of the voting capital stock or other equity interests, or (B) 10% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity.
14
(t) " Tax " means all federal, state, local and foreign income, property, withholding, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto.
Section 7.03
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by
each party and delivered to each other party.
Section 7.04
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement, including, without limitation, the exhibits and schedules hereto, constitute the entire agreement and supersede each prior agreement and understanding, whether written or
oral, among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 7.05
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the Laws of the State of California, regardless of any Laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 7.06
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and
assigns;
provided
,
however
, that this Agreement may not be assigned (except by operation of law) by any
party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect, except that the Operating Partnership
may assign its rights and obligations hereunder to an Affiliate.
Section 7.07
JURISDICTION.
The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the County of Los Angeles, with respect to any dispute arising out of
this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute, and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper.
Section 7.08
DISPUTE RESOLUTION.
The parties intend that this Section 7.08 will be valid, binding, enforceable, exclusive and irrevocable and that it shall survive any termination of this Agreement.
(a) Upon any dispute, controversy or claim arising out of or relating to this Agreement or the enforcement, breach, termination or validity thereof (" Dispute "), the party raising the Dispute will give written notice to the other parties to the Dispute describing the nature of the Dispute following which the parties to such Dispute shall attempt for a period of ten (10) Business Days from receipt by the parties of notice of such Dispute to resolve such Dispute by negotiation between representatives of the parties hereto who have authority to settle such Dispute. All such negotiations shall be confidential and any statements or offers made therein shall be treated as compromise and settlement negotiations for purposes of any applicable rules of evidence and shall not be admissible as evidence in any subsequent proceeding for any purpose. The statute of limitations applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defense based on the running of the statute of limitations will be available based upon the passage of time during any such negotiation. Regardless of the foregoing, a party shall have the right to seek immediate injunctive relief pursuant to Section 7.08(c) below without regard to any such 10-day negotiation period.
(b) Any Dispute (including the determination of the scope or applicability of this agreement to arbitrate) that is not resolved pursuant to Section 7.08(a) above shall be submitted to final and binding
15
arbitration in California before one neutral and impartial arbitrator, in accordance with the Laws of the State of California for agreements made in and to be performed in that State. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures. Within fifteen (15) days following a demand for arbitration, the arbitrator shall be appointed by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures, as in effect on the date hereof. The arbitrator shall designate the place and time of the hearing. The hearing shall be scheduled to begin as soon as practicable and no later than sixty (60) days after the appointment of the arbitrator (unless such period is extended by the arbitrator for good cause shown) and shall be conducted as expeditiously as possible. The award, which shall set forth the arbitrator's findings of fact and conclusions of law, shall be filed with JAMS and mailed to the parties no later than thirty (30) days after the close of the arbitration hearing. The arbitration award shall be final and binding on the parties and not subject to collateral attack. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.
(c) Notwithstanding the parties' agreement to submit all Disputes to final and binding arbitration before JAMS, the parties shall have the right to seek and obtain temporary or preliminary injunctive relief in any court having jurisdiction thereof. Such courts shall have authority to, among other things, grant temporary or provisional injunctive relief in order to protect any party's rights under this Agreement. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect.
(d) The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the non-prevailing party shall pay all expenses and fees of JAMS, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrator, and the fees, costs, and expenses of the arbitrator. The arbitrator shall allocate such costs and designate the prevailing party or parties for these purposes.
Section 7.09
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be effective and valid under applicable Law, but if any provision is held invalid, illegal or unenforceable under applicable
Law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been included herein.
Section 7.10
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any Law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument
16
that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 7.11
EQUITABLE REMEDIES.
The parties agree that irreparable damage would occur to the Operating Partnership in the event that any of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the Operating Partnership shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the
Contributor and to enforce specifically the terms and provisions hereof in any federal or state court located in California, this being in addition to any other remedy to which the Operating
Partnership is entitled under this Agreement or otherwise at law or in equity. Notwithstanding the foregoing, this Agreement shall not bar any equitable remedies otherwise available to the Contributor
pursuant to the terms and provisions contained in Section 3.10.
Section 7.12
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under this Agreement.
Section 7.13
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 7.14
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the Operating Partnership or the
Contributor.
Section 7.15
CONSENT OF MANAGER.
In accordance with Section 9.1 of the DEG Operating Agreement in respect of the DEG Contributed Interest and Section 9.1 of the DEGA Operating Agreement in respect of the
DEGA Contributed Interest, the Manager consents to the transfer contemplated in Section 1.01 hereof and the admission of the Operating Partnership as a substituted member in DEG and DEGA.
Section 7.16
WAIVER OF SECTION 1542 PROTECTIONS.
As of the Closing Date, each of the parties hereto expressly acknowledges that it has had, or has had and waived, the opportunity to be advised by independent legal counsel and hereby
waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code and does so understanding and acknowledging the significance and consequence of such
specific waiver of Section 1542 which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR.
Section 7.17
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the consent of the Contributor, at any time prior to the Closing Date;
provided
, that no such amendment,
modification or supplement shall be made that alters the amount or changes the form of the consideration to be
delivered to the Contributor.
[SIGNATURE PAGES FOLLOW]
17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers or representatives, all as of the date first written above.
DOUGLAS EMMETT PROPERTIES, LP | |||
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By: |
Douglas Emmett, LLC Its General Partner |
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|
By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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HBRCT LLC |
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By: |
/s/ RICHARD W. GUSHMAN, II |
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Name: | Richard W. Gushman, II | ||
Title: | Manager | ||
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Solely with respect to Sections 1.01 and 7.15 |
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DOUGLAS EMMETT REALTY ADVISORS, a California corporation (acting in its capacity as manager of DEG, LLC and DEGA, LLC) |
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By: |
/s/ DAN A. EMMETT |
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Name: | Dan A. Emmett | ||
Title: | President and Chief Executive Officer |
EXHIBITS
Exhibit A: | List of DERA Funds and Single Asset Entities | |
Exhibit B: |
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List of Formation Transaction Documentation |
Exhibit C: |
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Form of Registration Rights Agreement |
Exhibit D: |
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Operating Partnership Agreement |
ASSET CONTRIBUTION AGREEMENT
DATED AS OF JUNE 15, 2006
BY AND AMONG
DOUGLAS EMMETT, INC.,
DERA ACQUISITION, LLC,
DECO ACQUISITION, LLC,
DERF 2005 ACQUISITION, LLC
AND
DOUGLAS EMMETT PROPERTIES, LP
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Page
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ARTICLE I
CONTRIBUTIONS |
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Section 1.01 |
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CONTRIBUTION TRANSACTION |
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2 |
Section 1.02 | CONSIDERATION | 2 | ||
Section 1.03 | FURTHER ACTION | 3 | ||
Section 1.04 | CALCULATION OF CONSIDERATION | 3 | ||
ARTICLE II CLOSING |
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Section 2.01 |
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CONDITIONS PRECEDENT |
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3 |
Section 2.02 | TIME AND PLACE | 3 | ||
Section 2.03 | DELIVERY OF OP UNITS | 4 | ||
Section 2.04 | CLOSING DELIVERIES | 4 | ||
Section 2.05 | TERM OF THE AGREEMENT | 4 | ||
ARTICLE III ADDITIONAL AGREEMENTS |
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ARTICLE IV GENERAL PROVISIONS |
||||
Section 4.01 |
|
DEFINITIONS |
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4 |
Section 4.02 | COUNTERPARTS | 4 | ||
Section 4.03 | ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES | 5 | ||
Section 4.04 | GOVERNING LAW | 5 | ||
Section 4.05 | ASSIGNMENT | 5 | ||
Section 4.06 | SEVERABILITY | 5 | ||
Section 4.07 | RULES OF CONSTRUCTION | 5 | ||
Section 4.08 | TIME OF THE ESSENCE | 5 | ||
Section 4.09 | DESCRIPTIVE HEADINGS | 5 | ||
Section 4.10 | NO PERSONAL LIABILITY CONFERRED | 5 | ||
Section 4.11 | AMENDMENTS | 6 |
i
THIS ASSET CONTRIBUTION AGREEMENT is made and entered into as of June 15, 2006 (this " Agreement "), by and among Douglas Emmett, Inc., a Maryland corporation (the " REIT "), Douglas Emmett Properties, LP, a Delaware limited partnership (the " Operating Partnership ") and subsidiary of the REIT, and DERA Acquisition, LLC (" DERA Acquisition ") and DECO Acquisition, LLC (" DECO Acquisition "), each a California limited liability company to be formed and become a party to this Agreement prior to the Closing Date and to be wholly owned by the REIT, and DERF 2005 Acquisition, LLC (" DERF 2005 Acquisition " and, together with the DECO Acquisition and DERA Acquisition, the " Contributors " and each a " Contributor "), a Maryland limited liability company to be formed and become a party to this Agreement prior to the Closing Date and to be wholly owned by the REIT. Certain capitalized terms are defined in Section 4.01 of this Agreement.
WHEREAS, the REIT desires to consolidate the ownership of a portfolio of office, residential and other properties currently owned, directly or indirectly, by (i) certain institutional funds and certain investment funds (collectively, the " DERA Funds "), for which Douglas Emmett Realty Advisors, a California corporation (" DERA "), acts as the general partner, and (ii) certain single asset entities (collectively, the " Single Asset Entities ") managed by Affiliates of DERA, whereby the REIT will acquire directly or indirectly all of the outstanding interests in the DERA Funds and the Single Asset Entities;
WHEREAS, the REIT desires to acquire DERA and Douglas, Emmett and Company, a California corporation (" DECO " and, together with DERA, the " Management Companies "), and the Operating Partnership desires to acquire P.L.E. Builders, Inc., a California corporation (" PLE " and, together with the Management Companies, the DERA Funds and the Single Asset Entities, the " Douglas Emmett Entities "; the acquisitions of the equity interests in the Douglas Emmett Entities are referred to as the " Formation Transactions "; and the "Formation Transaction Documentation" means all of the merger agreements and contribution agreements, pursuant to which all of the equity interests in the Douglas Emmett Entities are to be acquired as part of the Formation Transactions);
WHEREAS, the REIT desires to acquire Douglas Emmett 2005 REIT, Inc. (" DE2005 REIT "), a Maryland corporation and a subsidiary of Douglas Emmett Realty Fund 2005, a California limited partnership;
WHEREAS, the Formation Transactions relate to the proposed initial public offering (the " IPO ") of the common stock, par value $.01 per share (the " Common Stock "), of the REIT, which will operate as a self-administered and self-managed real estate investment trust within the meaning of Section 856 of the Code;
WHEREAS, concurrently with the execution of this Agreement, (A) the REIT and each of DERA and DECO propose to enter into an agreement and plan of merger (the " Management Company Merger Agreement "), pursuant to which DERA will be merged with and into DERA Acquisition and DECO will be merged with and into DECO Acquisition on the Closing Date, in each case, in consideration of a number of shares (" REIT Shares ") of Common Stock, and (B) the REIT will enter into an agreement and plan of merger (" DERF 2005 Merger Agreement ") with DERF 2005 and DE2005 REIT, pursuant to which DERF 2005 would first be merged into DE2005 REIT and then the REIT would acquire the interests in DE2005 REIT by merger in consideration of a number of REIT Shares and/or cash;
WHEREAS, immediately following the Mergers (as defined in the Management Company Merger Agreement), as the case may be, the REIT desires that each of DERA Acquisition and DECO Acquisition contribute to the Operating Partnership all of such Contributor's present and future right, title and interest in the Contributed Assets and the Assumed Liabilities (each as defined below), and the Operating Partnership desires to acquire from such Contributor, all of such Contributor's present and future right, title and interest in such Contributed Assets and Assumed Liabilities, in exchange for units of limited partnership in the Operating Partnership (" OP Units ") in a transaction intended to
qualify as a tax-free transaction under Section 721 of the Code, subject to the completion of the IPO and the terms and conditions set forth herein;
WHEREAS, immediately following the REIT Acquisition Merger (as defined in the DERF 2005 Merger Agreement), the REIT desires that DERF 2005 Acquisition contribute to the Operating Partnership all of such Contributor's present and future right, title and interest in DEGA, LLC (" DEGA ") and Douglas Emmett Residential 2005, LLC (" DE Residential 2005 "), each a Delaware limited liability company and, following the REIT Acquisition Merger, a subsidiary of DERF 2005 Acquisition (" Contributed Interests "), and the Operating Partnership desires to acquire from such Contributor, all of such Contributor's present and future right, title and interest in the Contributed Interests, in exchange for OP Units in a transaction intended to qualify as a tax-free transaction under Section 721 of the Code, subject to the completion of the IPO and the terms and conditions set forth herein; and
WHEREAS, all necessary approvals have been obtained by each of the Operating Partnership and the REIT, acting on behalf of each of the Contributors, to consummate the transactions contemplated herein.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and other terms contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.01 CONTRIBUTION TRANSACTIONS. At the Closing and subject to the terms and conditions contained in this Agreement, (A) each of DERA Acquisition and DECO Acquisition hereby assigns, sets over, and transfers to the Operating Partnership, absolutely and unconditionally and free and clear of all Liens, all of its present and future right, title and interest in and to the Contributed Assets and the Assumed Liabilities (each as defined below) in exchange for the consideration set forth in Section 1.02; and (B) DERF 2005 Acquisition hereby assigns, sets over, and transfers to the Operating Partnership, absolutely and unconditionally and free and clear of all Liens, all of its present and future right, title and interest in and to the Contributed Interests in exchange for the consideration set forth in Section 1.02. On and after the Closing Date, (i) the Operating Partnership hereby undertakes, assumes and agrees punctually and faithfully to perform, pay or discharge when due all of the Assumed Liabilities; and (ii) the Operating Partnership accepts the assignment by DERF 2005 Acquisition and agrees to be bound by the terms of the Limited Liability Company Agreement of DEGA, LLC, dated as of January 3, 2005, and the Limited Liability Company Agreement of DE Residential 2005, dated as of , 2005 (collectively, the " Operating Agreements "), and undertakes, assumes and agrees punctually and faithfully to perform, pay or discharge when due and otherwise in accordance with its terms, all agreements, covenants, conditions, obligations and liabilities of DERF 2005 Acquisition as a member in DEGA and DE Residential 2005 with respect to the Contributed Interests.
" Contributed Assets " means all of the rights, assets and other property of the respective Management Company to which each of DERA Acquisition and DECO Acquisition succeeded as a result of the applicable Merger under the Management Company Merger Agreement. " Assumed Liabilities " means all of the debts and liabilities of the respective Management Company to which each of DERA Acquisition and DECO Acquisition, as the case may be, became subject as a result of the applicable Merger under the Management Company Merger Agreement.
Section 1.02
CONSIDERATION.
At Closing, and subject to the terms and conditions contained in
this Agreement, (A) the Operating Partnership shall, in exchange for the respective
Contributed Assets contributed by DERA Acquisition and DECO Acquisition, as the case may be, issue to
2
(i) DERA Acquisition a number of OP Units equal to the number of REIT Shares issued in the DERA Merger (as defined in the Management Company Merger Agreement) and (ii) DECO Acquisition a number of OP Units equal to the number of REIT Shares issued in the DECO Merger (as defined in the Management Company Merger Agreement); and (B) the Operating Partnership shall, in exchange for the Contributed Interests contributed by DERF 2005 Acquisition, issue to DERF 2005 Acquisition a number of OP Units equal to the number of REIT Shares issued in the REIT Acquisition Merger.
Section 1.03
FURTHER ACTION.
If, at any time after the Closing, the Operating Partnership shall
determine or be advised that any deeds, bills of sale, assignments, assurances or other actions
or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Operating Partnership the right, title or interest in or to the Contributed Assets or the Contributed
Interests or to give effect to the Operating Partnership's assumption of the Assumed Liabilities and to permit the Operating Partnership to exercise any of the franchises, rights, licenses or
privileges intended to be vested, perfected or confirmed to the Operating Partnership hereunder, the applicable Contributor or the Operating Partnership, as the case may be, shall execute and deliver
all such deeds, bills of sale, assignments and assurances and take and do all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and
interest in or to the Contributed Assets or the Contributed Interests or to so give effect to such assumption of the Assumed Liabilities or to so permit the Operating Partnership to so exercise such
franchises, rights, licenses or privileges or otherwise to carry out this Agreement.
Section 1.04
CALCULATION OF CONSIDERATION.
All calculations relating to the consideration payable
pursuant to Section 1.02 shall be performed in good faith by, or under the direction of, the
Operating Partnership and shall be final and binding upon the Contributors.
Section 2.01
CONDITIONS PRECEDENT.
(a) Condition to Each Party's Obligations . The respective obligation of each party to effect the contributions contemplated by this Agreement and to consummate the other transactions contemplated hereby to occur on the Closing Date is subject to the consummation of the Mergers.
(b) Conditions to Obligations of the Operating Partnership . The obligations of the Operating Partnership are further subject to satisfaction of the condition that each of the REIT and the Contributors shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) Conditions to Obligations of the Contributors . The obligation of the Contributors to effect the contribution contemplated by this Agreement and to consummate the other transactions contemplated hereby to occur on the Closing Date are further subject to satisfaction of the condition that the Operating Partnership shall have performed in all material respects all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date.
Section 2.02
TIME AND PLACE.
Unless this Agreement shall have been terminated pursuant to
Section 2.05 hereof, and subject to satisfaction or waiver of the conditions in
Section 2.01 hereof, the closing of the contribution contemplated by Section 1.01 hereof and the other transactions contemplated hereby shall occur on the day on which the Mergers shall
have been consummated (the "
Closing
" or the "
Closing Date
"). The Closing shall take place at the offices
of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071 or such other place as determined by the Operating Partnership in its sole discretion. The
contribution described in Section 1.01 hereof and all closing deliveries shall be deemed concurrent for all purposes.
3
Section 2.03
DELIVERY OF OP UNITS.
The issuance of the consideration payable pursuant to
Section 1.02 hereof shall be evidenced by an amendment to the Agreement of Limited Partnership of the
Operating Partnership. At the Closing (or as soon as reasonably practicable thereafter), the Operating Partnership shall deliver or cause to be delivered to each Contributor an executed copy of such
amendment.
Section 2.04
CLOSING DELIVERIES.
At the Closing, the parties shall make, execute, acknowledge
and deliver any other documents reasonably requested by the Operating Partnership or reasonably
necessary or desirable to assign, transfer, convey, contribute and deliver the Contributed Assets, free and clear of all Liens, to give effect to the Operating Partnership's assumption of the Assumed
Liabilities and to effectuate the transactions contemplated hereby.
Section 2.05
TERM OF THE AGREEMENT.
This Agreement shall terminate automatically if (i) the
initial registration statement of the REIT for the IPO has not been filed with the Securities and
Exchange Commission by December 31, 2006, or (ii) the contributions contemplated herein shall not have been consummated on or prior to April 20, 2007.
ARTICLE III
ADDITIONAL AGREEMENTS
Subject to the terms of this Agreement, the REIT shall take all reasonable action necessary to cause each Contributor (i) to be formed prior to the Closing and become a party to this Agreement by executing a counterpart of this Agreement where indicated on the signature page hereof (the date of such execution, the " Joinder Date ") and (ii) to perform its obligations under this Agreement and to consummate the transactions on the terms and conditions set forth in this Agreement. All covenants, agreements, rights and obligations of each Contributor herein shall become effective as to such Contributor as of its Joinder Date.
Section 4.01 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings.
(a) " Affiliate " means, with respect to any Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
(b) " Code " means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated or issued thereunder.
(c) " Liens " means all pledges, claims, liens, charges, restrictions, controls, easements, rights of way, exceptions, reservations, leases, licenses, grants, covenants and conditions, encumbrances and security interests of any kind or nature whatsoever.
(d) " Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
Section 4.02
COUNTERPARTS.
This Agreement may be executed in counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or more
counterparts have been signed by each party and delivered to each other party.
4
Section 4.03
ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES.
This Agreement constitutes the entire
agreement and supersede each prior agreement and understanding, whether written or oral, among the parties regarding the
subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto.
Section 4.04
GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware, regardless of any laws that might otherwise govern under
applicable principles of conflicts of laws thereof.
Section 4.05
ASSIGNMENT.
This Agreement shall be binding upon, and shall be enforceable by and
inure to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns;
provided
,
however
, that this Agreement may not be assigned
(except by operation of law) by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no force and effect,
except that the Operating Partnership may assign its rights and obligations hereunder to an Affiliate.
Section 4.06
SEVERABILITY.
Each provision of this Agreement will be interpreted so as to be
effective and valid under applicable Law, but if any provision is held invalid, illegal or
unenforceable under applicable Law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
Section 4.07
RULES OF CONSTRUCTION.
(a) The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any Law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
(b) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All terms defined in this Agreement shall have the defined meanings contained herein when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Unless explicitly stated otherwise herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time, amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
Section 4.08
TIME OF THE ESSENCE.
Time is of the essence with respect to all obligations under
this Agreement.
Section 4.09
DESCRIPTIVE HEADINGS.
The descriptive headings herein are inserted for convenience
only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
Section 4.10
NO PERSONAL LIABILITY CONFERRED.
This Agreement shall not create or permit any
personal liability or obligation on the part of any officer, director, partner, employee or shareholder of the
Operating Partnership or the Contributors.
5
Section 4.11
AMENDMENTS.
This Agreement may be amended by appropriate instrument, without the
consent of the Contributors, at any time prior to the Closing Date;
provided
, that no such amendment, modification or supplement shall be made that alters the amount or changes the form of the
consideration to be
delivered to the Contributors.
[SIGNATURE PAGES FOLLOW]
6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers or representatives, all as of the date first written above.
DOUGLAS EMMETT PROPERTIES, LP | |||
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By: |
Douglas Emmett, LLC Its General Partner |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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DOUGLAS EMMETT, INC. |
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By: |
/s/ JORDAN KAPLAN |
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Name: | Jordan Kaplan | ||
Title: | Chief Executive Officer | ||
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AGREED AND ACCEPTED as of , |
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DECO ACQUISITION, LLC |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: | |||
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AGREED AND ACCEPTED as of , |
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DERA ACQUISITION, LLC |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: | |||
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AGREED AND ACCEPTED as of , |
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DERF 2005 ACQUISITION, LLC |
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By: |
Douglas Emmett, Inc. Its Sole Member |
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By: |
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Name: | |||
Title: |
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the captions "Experts" and to the use of our reports dated May 12, 2006 with respect to the balance sheet of Douglas Emmett, Inc. and Subsidiaries as of March 31, 2006; our report dated April 28, 2006 with respect to the consolidated financial statements and schedule of Douglas Emmett Realty Advisors, Inc. and Subsidiaries; our report dated March 31, 2006 with respect to the financial statements of Douglas, Emmett and Company; and our report dated March 31, 2006 with respect to the statements of revenues and certain expenses of the Douglas Emmett Single Asset Entities, all included in the Registration Statement (Form S-11 No. 333- ) and related Prospectus of Douglas Emmett, Inc. for the registration of its common stock.
/s/ Ernst & Young LLP
Los
Angeles, California
June 15, 2006
CONSENT OF EASTDIL SECURED, L.L.C.
To Douglas Emmett, Inc.:
We hereby consent to the use of our information and to all references to our firm and such information included in or made a part of the market studies prepared by us, which are to be filed with the Registration Statement on Form S-11 to be filed by Douglas Emmett, Inc. and the related Prospectus and any amendments thereto, including, without limitation, references to Eastdil Secured's market studies in "Prospectus Summary," "Economic and Market Overview" and "Business and Properties".
Dated June 14, 2006
Eastdil Secured, L.L.C. | ||||
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By: |
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/s/ JEFFREY N. WEBER Name: Jeffrey N. Weber Title: Managing Director |
I hereby consent to being named in the Registration Statement on Form S-11 of Douglas Emmett, Inc., a Maryland corporation (the "Company"), and in all subsequent amendments and post-effective amendments or supplements to the Registration Statement (including the prospectus contained therein), as a director nominee of the Company. I will not become a director of the Company until after the effectiveness of the Registration Statement.
Dated: | June 1, 2006 | |||
Signature: |
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/s/ VICTOR J. COLEMAN Victor J. Coleman |
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I hereby consent to being named in the Registration Statement on Form S-11 of Douglas Emmett, Inc., a Maryland corporation (the "Company"), and in all subsequent amendments and post-effective amendments or supplements to the Registration Statement (including the prospectus contained therein), as a director nominee of the Company. I will not become a director of the Company until after the effectiveness of the Registration Statement.
Dated: | June 1, 2006 | |||
Signature: |
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/s/ THOMAS O'HERN Thomas O'Hern |
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I hereby consent to being named in the Registration Statement on Form S-11 of Douglas Emmett, Inc., a Maryland corporation (the "Company"), and in all subsequent amendments and post-effective amendments or supplements to the Registration Statement (including the prospectus contained therein), as a director nominee of the Company. I will not become a director of the Company until after the effectiveness of the Registration Statement.
Dated: | June 1, 2006 | |||
Signature: |
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/s/ ANDREA L. RICH Andrea L. Rich |
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I hereby consent to being named in the Registration Statement on Form S-11 of Douglas Emmett, Inc., a Maryland corporation (the "Company"), and in all subsequent amendments and post-effective amendments or supplements to the Registration Statement (including the prospectus contained therein), as a director nominee of the Company. I will not become a director of the Company until after the effectiveness of the Registration Statement.
Dated: |
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June 15, 2006 |
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Signature: |
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/s/ WILLIAM WILSON III William Wilson III |
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