Vornado Realty Trust
Extract: Charter Amendment (Plain English Desc) from a DEF 14A on 06/14/2019   Download
SEC Document
SEC Filing

PROPOSAL: APPROVAL OF AN AMENDMENT TO OUR DECLARATION OF TRUST

The Board has adopted and declared advisable, and recommends for your approval, an amendment (the "Proposed Amendment") to the Declaration of Trust of Vornado Realty Trust (the "Declaration") related to Vornado's qualification as a domestically controlled qualified investment entity. Under the Code, a domestically controlled qualified investment entity includes a "real estate investment trust" (a "REIT") in which, at all times during the relevant testing period, less than 50% in value of the REIT's stock was held directly or indirectly by foreign persons, as such term is used in the provision of the Code defining a domestically controlled qualified investment entity. Our qualification as a domestically controlled qualified investment entity (which, in our case, would mean that we would be a domestically controlled REIT) would mean that foreign investors that enter into joint venture structures with us that utilize subsidiary REITs may be able to treat our interest in such subsidiary REITs as being held entirely by U.S. persons for purposes of determining whether the subsidiary REIT is itself a domestically controlled qualified investment entity (and, therefore, a domestically controlled REIT), thereby enabling such foreign investors to avail themselves of certain tax benefits under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") that may not otherwise be available. For a further discussion of these rules, please see below under "Tax Considerations Relating to Domestically Controlled Qualified Investment Entity Status."

As previously announced on April 18, 2019, Vornado Realty L.P. ("VRLP"), the operating partnership through which Vornado conducts its business, entered into a Transaction Agreement (the "Transaction Agreement") with a group of institutional investors (the "Investors") advised by Crown Acquisitions, Inc. The Transaction Agreement provides for a series of transactions pursuant to which (i) prior to April 18, 2019 (the "Closing Date"), VRLP contributed its interests in properties located at 640 Fifth Avenue, 655 Fifth Avenue, 666 Fifth Avenue, 689 Fifth Avenue, 697-703 Fifth Avenue, 1535 Broadway and 1540 Broadway (collectively, the "Properties") to subsidiaries of a newly formed limited partnership (the "New Partnership") and (ii) on the Closing Date a 48.5% common interest in the New Partnership was transferred to the Investors. Vornado continues to own 51.5% of the New Partnership's common equity (collectively, the "Transaction"). The Properties include approximately 489,000 square feet of retail space, 327,000 square feet of office space, signage associated with 1535 and 1540 Broadway, the parking garage at 1540 Broadway and the theatre at 1535 Broadway. Pursuant to the Transaction Agreement, the subsidiaries of the New Partnership to which the Properties were contributed prior to the Closing Date were contributed on the Closing Date to direct subsidiaries of the New Partnership, which subsidiaries will elect to be taxed as real estate investment trusts (the "Subsidiary REITs"). Pursuant to the Partnership Agreement, the VRLP subsidiary that is the general partner of the New Partnership ("VRLPGP"), agreed, among other things, to cause (i) the New Partnership to be managed and operated in a manner such that any partner that is a foreign governmental entity will not be deemed to be engaged in activities which constitute "commercial activities" or a "trade or business within the United States" for U.S. federal income tax purposes and (ii) each Subsidiary REIT to maintain its status as a domestically controlled qualified investment entity. Approval of the Proposal will help us comply with this obligation.

Approval of the Proposal may provide us with greater access to additional amounts of foreign capital. This access could be important to our business, particularly at times when raising capital through sales of our common shares is unattractive because our shares are trading at a discount to our net asset value per share or for other reasons. We believe that we are currently a domestically controlled qualified investment entity, but because our common shares are publicly traded, we cannot assure you that our foreign ownership is, or has been, less than 50%. However, approval of the Proposal will nonetheless assist us prospectively in qualifying as a domestically controlled qualified investment entity. As a result, Non-U.S. Stockholders (as defined below) will not be subject to U.S. federal income tax under FIRPTA with respect to gain on a disposition of our common shares assuming we have maintained less than 50% foreign ownership at all times during the relevant testing period. It is also possible that the Proposed Amendment could result in our shares being less marketable to foreign persons or to certain United States persons that are owned directly or indirectly by foreign persons or that would otherwise acquire our common shares for transfer to foreign persons, which may adversely affect the market price of our common shares.

Regardless of the extent of our foreign ownership, nonresident alien individuals and foreign corporations not otherwise subject to special treatment under the Code (such as qualified foreign pension funds, qualified


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shareholders, persons subject to Section 892 of the Code, such as a foreign sovereign, and persons engaged in a trade or business in the United States) ("Non-U.S. Stockholders") will not incur tax under FIRPTA on a disposition of shares of a class of our capital shares if such class was regularly traded on an established securities market and such Non-U.S. Stockholder owned, actually or constructively, at all times during a specified testing period, 10% or less of the total fair market value of such class of shares. Accordingly, a Non-U.S. Stockholder that holds 10% or less of our common shares will not be subject to U.S. federal income tax under FIRPTA on a disposition of our common shares even if we never qualify as a domestically controlled qualified investment entity. In that regard, the Proposed Amendment will not change the current U.S. federal income tax treatment of gain recognized upon a disposition of our common shares by a Non-U.S. Stockholder that at all times during a specified testing period held 10% or less of our common shares.

The terms of the Proposed Amendment and certain material U.S. federal income tax considerations relating to our and the Subsidiary REITs' qualifications as domestically controlled qualified investment entities are described in more detail below.

Proposed Amendment

The excess share provisions used in the traditional REIT qualification ownership limits that have existed in our Declaration since we became a real estate investment trust will also be used in connection with enforcing the ownership limits included in the Proposed Amendment. In general, these existing limits relate to ownership restrictions designed to prevent us from failing to qualify as a REIT and from causing income that would otherwise qualify as "rents from real property" (for purposes of the gross income tests applicable to REITs) to fail to so qualify.

In this regard, under the Proposed Amendment, if any transfer or non-transfer event involving our capital shares would result in Vornado failing to qualify as a domestically controlled qualified investment entity, the purported transferee or affected holder will be a "prohibited owner" and would not acquire any right or interest in those shares. Pursuant to the Proposed Amendment, the capital shares, the ownership of which caused Vornado to fail to qualify as a domestically controlled qualified investment entity, would instead be automatically exchanged for excess shares pursuant to our Declaration. Excess shares will be transferred, by operation of law, to Vornado as trustee of a trust for the exclusive benefit of a beneficiary. While so held in trust, the holder of excess shares is not entitled to vote (except as required by law) and is not entitled to participate in any dividends or distributions made by Vornado. Any dividends or distributions received by the purported transferee or other purported holder of the excess shares before Vornado discovers the automatic exchange for excess shares must be repaid to Vornado upon demand.

If the purported transferee or purported holder elects to designate a beneficiary of an interest in the trust with respect to the excess shares, the purported transferee or holder may designate only a person whose ownership of the shares will not violate the ownership limits (including, if the Proposal is approved, the proposed foreign ownership limit). When the designation is made, the excess shares will be automatically exchanged for common shares. The Declaration contains provisions designed to ensure that the purported transferee or other purported holder of the excess shares may not receive, in return for transferring an interest in the trust with respect to the excess shares, an amount that reflects any appreciation in the shares for which the excess shares were exchanged during the period that the excess shares were outstanding but will bear the burden of any decline in value during that period. Any amount received by a purported transferee or other purported holder for designating a beneficiary in excess of the amount permitted to be received must be turned over to Vornado. The Declaration provides that Vornado, or its designee, may purchase any excess shares that have been automatically exchanged for shares as a result of a purported transfer or other event. The price at which Vornado, or its designee, may purchase the excess shares will be equal to the lesser of:

in the case of excess shares resulting from a purported transfer for value, the price per share in the purported transfer that resulted in the automatic exchange for excess shares, or in the case of excess shares resulting from some other event, the market price of the shares exchanged on the date of the automatic exchange for excess shares; and

the market price of the shares exchanged for the excess shares on the date that Vornado accepts the deemed offer to sell the excess shares.

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Vornado's right to buy the excess shares will exist for 90 days, beginning on the date that the automatic exchange for excess shares occurred or, if Vornado did not receive a notice concerning the purported transfer that resulted in the automatic exchange for excess shares, the date that the Board determines in good faith that an exchange for excess shares has occurred.

The above restrictions will apply commencing on the date of the effectiveness of the Proposed Amendment and, as a result, will only apply to transfers or other non-transfer events occurring on or after such date that would result in Vornado failing to qualify as a domestically controlled qualified investment entity. The Board has the right to discontinue the enforcement of the ownership limits included in the Proposed Amendment if the Board determines that it is no longer in the best interests of Vornado to attempt to, or continue to, qualify as a domestically controlled qualified investment entity. If the Proposal is approved by the requisite vote, the Proposed Amendment will become effective upon the filing with and acceptance for record by the State Department of Assessments and Taxation of Maryland (the "SDAT") of Articles of Amendment. We intend to file Articles of Amendment promptly following shareholder approval of the Proposal at the Special Meeting or any postponement or adjournment thereof.