PRESIDIO PROPERTY TRUST, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Filed by a Party other than the Registrant o
Check the appropriate box:
| o | Preliminary Proxy Statement | |
| o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
| þ | Definitive Proxy Statement | |
| o | Definitive Additional Materials | |
| o | Soliciting Material Pursuant to §240.14a-12 |
NETREIT
Payment of Filing Fee (Check the appropriate box):
| þ | No fee required. | |
| o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: | ||
| (2) | Aggregate number of securities to which transaction applies: | ||
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | ||
| (4) | Proposed maximum aggregate value of transaction: | ||
| (5) | Total fee paid: | ||
| o | Fee paid previously with preliminary materials. | |
| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
| (1) | Amount Previously Paid: | ||
| (2) | Form, Schedule or Registration Statement No.: | ||
| (3) | Filing Party: | ||
| (4) | Date Filed: | ||
NETREIT
Dear Shareholder,
You are cordially invited to attend the 2010 Annual Meeting of Shareholders of NetREIT to be held
at 9:00 a.m. P.D.T. Friday, May 21, 2010 at the Company’s headquarters, 1282 Pacific Oaks Place,
Escondido, California, 92029. The attached notice of annual meeting and proxy statement describe
the business we will conduct at the annual meeting and provides information about us that you
should consider when you vote your shares.
At the annual meeting, seven (7) persons will be elected to our Board of Directors. In addition,
we will ask shareholders to (i) approve a proposal to change our state of incorporation from
California to Maryland, (ii) to approve as part of this reincorporation certain proposed provisions
of our proposed articles of incorporation under Maryland law in connection with such
reincorporation, (iii) to ratify the selection of Squar, Milner, Peterson, Miranda & Williamson,
LLP as our independent registered public accounting firm for our fiscal year ended December 31,
2010 and (iv) to approve an adjournment of the annual meeting if we deem it necessary to solicit
further proxies. The Board of Directors recommends the approval of each of these proposals. Such
other business will be transacted as may properly come before the annual meeting. These foregoing
items of business are more fully described in the Proxy Statement accompanying this Notice. We
urge you to carefully review the Proxy Statement.
We hope you will be able to attend the annual meeting. Whether you plan to attend the annual
meeting or not, it is important that you cast your vote either in person or by proxy. Therefore,
when you have finished reading the Proxy Statement, you are urged to vote in accordance with the
instructions set forth in this Proxy Statement. We encourage you to vote by proxy so that your
shares will be represented and voted at the meeting, whether or not you can attend. In order to
make it easy to vote your shares, this year in addition to your proxy card(s) we have added the
ability for you to vote by telephone or through the Internet through Morrow & Co., LLC, a
professional proxy solicitation company.
Thank you for your ongoing support of NetREIT. We look forward to seeing you at our annual
meeting.
YOUR VOTE MATTERS. We urge you to either vote via phone, Internet at
http://www.morrowco.com/NetREIT.htm as explained on your proxy card(s), or mark, sign, date
and return your enclosed proxy card(s) in the postage paid envelope so you will be represented at
the meeting. Please note that we have provided for separate proxy cards — one proxy card for
holders of our Common Shares, and one proxy card for holders of our Series AA Preferred Stock. The
proxy card that will be delivered to holders of Series AA Preferred Stock references (by applicable
number) only those proposals and sub-proposals for which the consent of the Series AA Preferred
Stock is required. If you hold both Common Shares and Series AA Preferred Stock, please take the
above-described actions with respect to both proxy cards.
-2-
Please also note that, subsequent to the record date (i.e., March 30, 2010) for determining
our shareholders entitled to vote on the matters set forth in this Proxy Statement, we made the
decision to redeem for cash all of our outstanding shares of Series AA Preferred Stock, or to
allow the holders of such shares (subject to certain conditions) to convert their shares of Series
AA Preferred Stock into Common Stock. We anticipate that this redemption and/or optional
conversion of all of the outstanding Series AA Preferred Stock will occur on or about May 14, 2010,
prior to our annual meeting. Nevertheless, the approval of the holders of Series AA Preferred
Stock is required for Proposal 2 and certain of the Sub-Proposals discussed herein.
BY ORDER OF THE BOARD OF DIRECTORS
Jack K. Heilbron
Chief Executive Officer and Chairman of the Board
April 20, 2010
Chief Executive Officer and Chairman of the Board
April 20, 2010
-3-
NETREIT
NOTICE OF 2010 ANNUAL MEETING OF SHAREHOLDERS
TIME:
|
9:00 a.m. | |
DATE:
|
May 21, 2010 | |
PLACE:
|
1282 Pacific Oaks Place, Escondido, California, 92029 | |
PURPOSE: |
Proposal 1: To elect seven (7) directors to serve on
our Board of Directors until the 2011
annual meeting or until their respective
successors are duly elected and qualified;
Proposal 2: To approve a change in our state of
incorporation from California to Maryland
by means of merger of the Company with and
into a newly formed, wholly owned
subsidiary Maryland corporation (we
sometimes refer to such reincorporation
merger herein as the “Reincorporation”);
Proposal 3: To approve, as part of the Reincorporation,
the adoption of articles of incorporation
and bylaws under the Maryland General
Corporation Law with the following
Sub-Proposals:
Sub-Proposal 3A: A proposal to approve amendment of the range of authorized
Directors and to fix the number of Directors at eight (8);
Sub-Proposal 3B: A proposal to approve the grant of authority to our Board to adjust
our quorum requirements;
Sub-Proposal 3C: A proposal to approve the grant of authority to our Board to amend
our bylaws;
Sub-Proposal 3D: A proposal to approve changes to our charter amendment provisions;
Sub-Proposal 3E: A proposal to approve the modification of the director election
rights of our Series AA Preferred Stock;
Sub-Proposal 3F: A proposal to approve modification of our share transfer
restrictions;
Sub-Proposal 3G: A proposal to approve the addition of certain shareholder
nomination and proposals requirements;
Sub-Proposal 3H: A proposal to approve the removal of the provisions of our bylaws
pertaining to our Investment Policies and our Advisory Contracts;
Sub-Proposal 3I: A proposal to approve a change in the par value of our stock;
-4-
Sub-Proposal 3J: A proposal to approve (i) the removal of the “business
combinations” provisions of our bylaws, and (ii) our election to be subject to the
provisions of the Maryland Business Combination Statute;
Sub-Proposal 3K: A proposal to approve removal of our annual shareholder meeting
deadline;
Proposal
4: To ratify the selection of Squar, Milner, Peterson, Miranda & Williamson, LLP as the Company’s independent
registered public accounting firm for the fiscal year ended December 31, 2010;
Proposal 5: To approve an adjournment of the 2010 Annual Meeting, if necessary, to permit further solicitation of proxies,
regardless of whether there are sufficient shares represented at the meeting to constitute a quorum for transaction
of business; and
Proposal
6: To consider any other business that is properly presented at the meeting.
WHO MAY VOTE:
You may vote if you were the record owner of NetREIT Common Stock or Series AA Preferred Stock at
the close of business on March 30, 2010; provided, however, that if you were a holder of shares of
our Series AA Preferred Stock as of this March 30, 2010 record date, you will be entitled to vote
only on Proposal 2 and on certain Sub-Proposals contained in Proposal 3 (as indicated in such
Sub-Proposals). A list of stockholders of record will be available at the meeting and, during the
10 days prior to the meeting, at the office of the Secretary at the above address.
All stockholders are cordially invited to attend the annual meeting. Whether you plan to attend
the annual meeting or not, you are requested to complete, sign, date and return the enclosed proxy
card(s) as soon as possible in accordance with the instructions on the proxy card(s).
BY ORDER OF THE BOARD OF DIRECTORS
Kenneth Elsberry
Chief Financial Officer
Chief Financial Officer
-5-
NetREIT
1282 Pacific Oaks Place
Escondido, California 92029
1282 Pacific Oaks Place
Escondido, California 92029
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 21, 2010 at 9:00 a.m. P.D.T.
FOR
ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 21, 2010 at 9:00 a.m. P.D.T.
This proxy statement, with the enclosed proxy card(s), is furnished to the shareholders of
NetREIT (the “Company”) in connection with the solicitation by the Board of Directors of the
Company (the “Board”) of your proxy card(s) to be voted at the 2010 annual meeting of the Company’s
shareholders (the “Annual Meeting”) to be held on Friday, May 21, 2010 at 9:00 a.m., at the
Company’s corporate headquarters, 1282 Pacific Oaks Place, Escondido, California, 92029 and at any
adjournments or postponement thereof. The Notice of Annual Meeting, this proxy statement, and the
accompanying proxy/voting instruction card(s) are being mailed to all shareholders on or about
April 21, 2010. The proxy statement and annual report to shareholders will also be available on
the internet at www.netreit.com.
PURPOSE OF THE MEETING
At the Annual Meeting, the shareholders of the Company will be asked:
1. to elect the seven (7) members to serve on the Board until the 2011 annual meeting or until
their respective successors are duly elected and qualified;
2. to approve a change in our state of incorporation from California to Maryland by means of
merger of the Company with and into a newly formed, wholly owned subsidiary Maryland corporation
(we sometimes refer to such reincorporation merger herein as the “Reincorporation”);
3. to approve as part of the Reincorporation, the adoption of articles of incorporation and
bylaws under the Maryland General Corporation Law with the following Sub-Proposals:
| • | Sub-Proposal 3A: A proposal to approve amendment of the range of authorized
Directors and to fix the number of Directors at eight (8) [Vote of Common Stock and
Preferred Stock]; |
| • | Sub-Proposal 3B: A proposal to approve the grant of authority to our Board to
adjust our quorum requirements [Vote of Common Stock Only]; |
| • | Sub-Proposal 3C: A proposal to approve the grant of authority to our Board to
amend our bylaws [Vote of Common Stock Only]; |
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| • | Sub-Proposal 3D: A proposal to approve changes to our charter amendment
provisions [Vote of Common Stock Only]; |
| • | Sub-Proposal 3E: A proposal to approve the modification of the director election
rights of our Series AA Preferred Stock [Vote of Common Stock and Preferred Stock]; |
| • | Sub-Proposal 3F: A proposal to approve modification to our share transfer
restrictions [Vote of Common Stock Only]; |
| • | Sub-Proposal 3G: A proposal to approve the addition of certain shareholder
nomination and proposals requirements [Vote of Common Stock Only]; |
| • | Sub-Proposal 3H: A proposal to approve the removal of the provisions of our
bylaws pertaining to our Investment Policies and our Advisory Contracts [Vote of
Common Stock Only]; |
| • | Sub-Proposal 3I: A proposal to approve a change in the par value of our stock
[Vote of Common Stock and Preferred Stock]; |
| • | Sub-Proposal 3J: A proposal to approve (i) the removal of the “business
combinations” provisions of our bylaws, and (ii) our election to be subject to the
provisions of the Maryland Business Combination Statute [Vote of Common Stock
Only]; |
| • | Sub-Proposal 3K: A proposal to approve removal of our annual shareholder meeting
deadline [Vote of Common Stock Only]; |
4. to ratify the selection of Squar, Milner, Peterson, Miranda & Williamson, LLP as the
Company’s independent registered public accounting firm for the fiscal year ended December 31,
2010;
5. to approve an adjournment of the 2010 Annual Meeting, if deemed necessary, to permit
further solicitation of proxies, regardless of whether there are sufficient shares represented at
the meeting to constitute a quorum for transaction of business; and
6. consider and vote upon the transaction of such other business as may properly come before
the Annual Meeting or any adjournments or postponements of the Annual Meeting.
QUORUM
The presence of the holders of a majority of the outstanding shares of the Company’s common
stock (our “Common Stock” or “Common Shares”) entitled to vote at the Annual Meeting, present in
person or represented by proxy, is necessary and sufficient to constitute a quorum for the
transaction of business at the Annual Meeting other than approval of the Reincorporation, approval
of certain of the Sub-Proposals, and adjournment of the Annual Meeting. The presence of the
holders of a majority of the outstanding Common Shares and the holders of a majority of the
outstanding shares of the Company’s Series AA Preferred Stock (the “Preferred Shares” and, together
with the Common Shares, the “Equity Shares” or “shares”), present in person or represented by
proxy, is necessary to constitute a quorum at the Annual Meeting for the approval of (i) the
Reincorporation, (ii) Sub-Proposal 3A (pertaining to amendment of the range of authorized Directors
and fixing the number of Directors at eight (8)), (iii) Sub-Proposal 3E (pertaining to modification
of the director election rights of the Preferred Shares), and (iv) Sub-Proposal 3I (pertaining to a
change in the par value of the Company’s Common Shares and Preferred Shares). Assuming approval of
Proposal 5, regardless of whether the shareholders present at the Annual Meeting together with
proxies received before the meeting starts are sufficient in number to constitute a quorum under
our Bylaws for transaction of business, the vote of the majority of the shares represented at the
meeting, in person or via proxy, will be sufficient to adjourn the
meeting with respect to such matters to permit further solicitation of proxies. The persons
named as proxies will vote in favor of such adjournment.
-7-
VOTING RIGHTS
Only holders of record of outstanding shares at the close of business on March 30, 2010 are
entitled to receive notice of and to vote their outstanding shares at the Annual Meeting or any
adjournments thereof. As of that date there were issued and outstanding 10,746,555 Common Shares
and 50,200 Preferred Shares. Each Common Share is entitled to one vote on each matter properly
brought before the Annual Meeting. Notwithstanding any redemption or conversion of the Series AA
Preferred Stock effectuated after the record date (March 30, 2010), each Preferred Share is
entitled to one vote with respect to the Reincorporation and Sub-Proposals 3A, 3E and 3I, but not
with respect to any other Proposals (or Sub-Proposals) set forth herein. In addition, even if our
shareholders approve the Reincorporation, we may terminate the Plan and Agreement of Merger and
abandon the Reincorporation if circumstances arise or facts are revealed that make it inadvisable,
in the judgment of Company’s Board, to proceed with the Reincorporation.
VOTING PROCEDURES
Holders of Equity Shares that abstain from voting on any proposal and “broker non-votes” are
counted as present and entitled to vote for purposes of determining a quorum. A “broker non-vote”
occurs when a bank, broker, or other holder of record holding shares for a beneficial owner does
not vote because that holder does not have discretionary voting power and has not received voting
instructions from the beneficial owner. As of January 1, 2010, brokers no longer have the
discretion to vote your shares without receiving voting instructions from you about how to vote
them in an election of directors. This is a very important change to the process that many
investors may have relied on when considering whether to return voting instructions. As a result,
if you don’t complete the voting instructions, your shares will not be considered when determining
whether directors are elected.
If you are a shareholder of record, you may revoke a proxy at any time before it is voted at
the Annual Meeting:
| a) | By delivering a proxy revocation or another duly executed proxy bearing a later
date to the Secretary of the Company at 1282 Pacific Oaks Place, Escondido, CA 92029;
or |
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| b) | By attending the Annual Meeting and voting in person; or |
||
| c) | By re-voting on the Internet or by telephone as instructed. |
Telephone and Internet voting for shareholders of record will be available 24-hours a day, and will
close at 11:59 p.m. P.D.T. on May 20, 2010. Attendance at the Annual Meeting will not revoke a
proxy unless you actually vote in person at the meeting. For shares you hold beneficially in
street name, you may change your vote by submitting a new voting instruction to your broker or
other nominee following the instruction they provided, or, if you have obtained a legal proxy from
your broker or other nominee giving you the right to vote your shares, by attending the Annual
Meeting and voting in person.
-8-
VOTE REQUIRED
Voting for the election of Directors is cumulative. In voting for Directors, you may cumulate
your total votes and cast all of your votes for any one or combination of candidates. Your total
votes equal the
number of candidates multiplied by the number of Common Shares you are entitled to vote. In the
event a quorum of the Common Shares is not present and the meeting is not convened, each of the
Company’s current directors will remain in office and continue to serve until their successors are
duly elected and qualified. By completing the proxy, you give the proxy the right to vote for the
persons named in the table above. You may vote either FOR all of the nominees, WITHHOLD your vote
from all the nominees, or WITHHOLD your vote from any one or more of the nominees. If you elect to
withhold authority for any individual nominee or nominees, you may do so by making an “X” in the
box marked “VOTE FOR NOMINEE(S) NOT LINED OUT,” and by striking a line through the nominees’ name
or names on the applicable proxy card. The seven (7) nominees for the Board who receive the most
votes will be elected.
Approval of Proposal 2 and Sub-Proposals 3A, 3E and 3I requires the affirmative vote of a
majority of all of the Company’s outstanding shares of Common Stock and the affirmative vote of a
majority of all of the Company’s outstanding shares of Series AA Preferred Stock. Therefore, the
failure to submit a proxy or voting instruction card or to vote at the annual meeting will have the
same effect as a vote against Proposal 2 and Sub-Proposals 3A, 3E and 3I. Abstentions will also be
treated as a vote against these proposals. Brokers holding shares of the Company’s stock will not
have discretionary authority to vote those shares in the absence of instructions from the
beneficial owners of those shares, so the failure to provide voting instructions to your broker
will also have the same effect as a vote against the proposal. Even if your shares of Series AA
Preferred Stock are redeemed or converted to Common Stock prior to the annual meeting, the
affirmative vote of a majority of the outstanding shares of Series AA Preferred Stock as of the
record date (March 31, 2010) is required to approve Proposal 2 and Sub-Proposals 3A, 3E and 3I.
Approval of Sub-Proposals 3B, 3C, 3D, 3F, 3G, 3H, 3J and 3K requires the affirmative vote of a
majority of all of the Company’s outstanding shares of Common Stock. Therefore, the failure to
submit a proxy or voting instruction card or to vote at the annual meeting will have the same
effect as a vote against each of these Sub-Proposals. Abstentions will also be treated as a vote
against these proposals. Brokers holding shares of the Company’s stock will not have discretionary
authority to vote those shares in the absence of instructions from the beneficial owners of those
shares, so the failure to provide voting instructions to your broker will also have the same effect
as a vote against the proposal.
Approval of Proposal 4 requires the affirmative vote of at least a majority of the Common
Stock votes cast at the 2010 Annual Meeting. Abstentions and broker non-votes, if any, will be
disregarded and will not affect the outcome.
Approval of Proposal 5 requires the affirmative vote of at least a majority of the shares
represented in person or via proxy at the 2010 Annual Meeting. Abstentions and broker non-votes,
if any, will be disregarded and will not affect the outcome.
SOLICITATION OF PROXIES
If you cannot attend the meeting, the accompanying proxy card(s) should be used to instruct
the persons named as the proxies to vote your shares in accordance with your directions. The
persons named in the accompanying proxy card(s) will vote shares represented by all valid proxies
in accordance with the contained instructions. In the absence of instructions, Common Shares and
Preferred Shares represented by properly executed proxies will be voted FOR the election of those
seven (7) persons designated hereinafter as nominees for the Board, FOR the other proposals and
sub-proposals and in the discretion of the named proxies with respect to any other matters
presented at the Annual Meeting.
-9-
Please note that we have provided for separate proxy cards — one proxy card for holders of our
Common Shares, and one proxy card for holders of our Series AA Preferred Stock as of the record
date (March 30, 2010). The proxy card that will be delivered to holders of Series AA Preferred
Stock references (by applicable number) only those proposals and sub-proposals for which the
consent of the Series AA Preferred Stock is required. If you hold both Common Shares and Series AA
Preferred Stock, please take the actions described on both proxy cards to ensure that you are
represented at the meeting.
Your proxy may be revoked before the meeting by giving written notice of revocation to the
Secretary of the Company at any time prior to voting and it shall be suspended if you are a
shareholder of record or valid proxyholder who attends the Annual Meeting and elects to vote in
person. Unless revoked, properly executed proxies held by the Secretary of the Company will be
voted as recommended by the Board in this Proxy Statement.
The expense of solicitation of proxies, including the cost of preparing and mailing the Notice
of Shareholders’ Meeting and this proxy statement, and the cost of Internet and telephone posting
and voting will be paid by the Company. In addition to solicitation by mail, the Directors,
officers and employees and representatives from Morrow & Co., LLC, 470 West Avenue, Stamford, CT
06902, may solicit proxies by telephone, Internet or otherwise. The Directors, officers and
employees will not be additionally compensated for the solicitation, but may be reimbursed for
their out-of-pocket expenses. The Company will pay Morrow & Co., LLC, a fee to maintain the
Internet and telephone voting services and perform the solicitation of proxies. Brokerage firms,
fiduciaries and other custodians who forward soliciting material to the beneficial owners of shares
held of record by them will be reimbursed for their reasonable expenses incurred in forwarding such
material. Morrow & Co., LLC charges the following per shareholder for proxy solicitation services.
The Company has advanced a payment of $12,500 in anticipation of incurring those costs.
CONFIDENTIALITY
The Company will keep all the proxies and voting tabulations private. Only the Inspector of
Elections and Morrow & Co., LLC will examine these documents. The Company will not need to know
how you voted on a specific proposal unless it is necessary to meet legal requirements. The
Company will, however, disclose the total votes received for and against each proposal (and
sub-proposal) in a Form 8-K filing following the Annual Meeting as required by law.
ELECTRONIC DELIVERY OF COMPANY SHAREHOLDER COMMUNICATIONS
Company Shareholders can elect to view future proxy statements and annual reports over the
Internet instead of receiving paper copies in the mail. You can choose this option and save the
Company the cost of producing and mailing these documents by following the instructions provided on
your proxy card(s), or the instructions provided when you vote over the Internet, or by going to
the website http://www.morrowco.com/NetREIT.htm and following the provided instructions.
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to
Be Held on May 21, 2010. The proxy statement and annual report to shareholders are available at
http://www.morrowco.com/NetREIT.htm.
ANNUAL REPORT AND FINANCIAL STATEMENTS OF THE COMPANY
The annual report of the Company containing financial statements for the fiscal year ended
December 31, 2009 is included with this proxy statement.
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PROPOSAL 1
ELECTION OF DIRECTORS
Pursuant to a resolution adopted by at least a majority of the authorized number of Directors,
the authorized number of members of the Board has been set at seven (7).
At the meeting, you will be asked to elect seven (7) members to the Board. The seven (7)
current Directors will be up for election at the Annual Meeting. For your review and
consideration, a biography of each nominee for Director is contained in this proxy under the
section titled Corporate Governance, Director Nominees. The term of office of each person elected
to be a Director of the Company will be until the next regular or annual meeting of the
shareholders at which election of Directors is an agenda item, and until such person’s successor is
duly elected and qualified. If any unforeseen event prevents one or more of the nominees from
serving as a Director, your votes will be cast for the election of a substitute or substitutes
selected by the Board. In no event, however, can the proxies be voted for a greater number of
persons than the number of nominees named. Unless otherwise instructed, the proxies will vote for
the election of each current Director and the nominees to serve as a Director of the Company.
Please note that if you approve Proposal Two (the Reincorporation), upon consummation of the
Reincorporation, the Company will be governed by the charter and bylaws of NetREIT, Inc.
(“NetREIT-MD”). NetREIT-MD is the Company’s wholly owned subsidiary and, upon consummation of the
contemplated merger of the Company with and into NetREIT-MD in connection with the Reincorporation,
NetREIT-MD will continue the business and operations of the Company (see Proposal 2 for a
discussion of the Reincorporation). The articles of incorporation of NetREIT-MD, which are
included on Appendix B hereto, provide that our Board will consist of eight (8) directors (that is,
our existing slate of seven directors plus Kenneth Elsberry, our Chief Financial Officer).
However, if Proposal 2 is not approved by the Company’s shareholders, or if the Board determines
that it is the best interests of the Company and its shareholders to abandon the Reincorporation at
any time prior to its consummation, our Board will remain at seven (7) and the Company shall
continue to be governed by its existing articles of incorporation and it existing bylaws.
Vote Required
For the election of directors, the director nominees who receive the greatest number of votes
cast by holders of Common Shares in person or by proxy at the Annual Meeting (up to the number of
directors to be elected) will be elected.
The Board recommends a vote “FOR” the election of each of the Directors nominated.
-11-
PROPOSAL 2
PROPOSAL TO APPROVE REINCORPORATION IN MARYLAND
The Board has unanimously approved the proposal to reincorporate from California to Maryland
and, for the reasons discussed below, believes that changing our state of incorporation to Maryland
is in the Company’s best interests and the best interests of our shareholders. We may hereinafter
refer to us prior to our proposed reincorporation as “NetREIT (CA)”, and after our proposed
reincorporation as “NetREIT (MD)”. We will hereinafter refer to our proposed reincorporation as
the “Reincorporation”. The effect of the Reincorporation will be to change the law applicable to
our corporate affairs from California law to Maryland law. Following the Reincorporation:
| • | The Company’s corporate name will largely remain unchanged (whereas our
current name is “NetREIT”, upon consummation of the Reincorporation our name will be
“NetREIT, Inc.”); |
| • | The Company’s corporate office will continue to be located in Escondido,
California — we will not establish any offices or operations in Maryland as a result
of the Reincorporation; |
| • | The Company’s business and management will continue to be the same as
immediately before the Reincorporation; |
| • | Assuming approval of Sub-Proposal 3A, the Board will increase from seven
(7) Directors immediately prior to the Reincorporation to eight (8) Directors
immediately after the Reincorporation; and |
| • | The Company’s fiscal year, assets, liabilities and dividend policies will
be the same as immediately before the Reincorporation. |
The Board believes that because of Maryland’s more comprehensive laws governing REITs and the
number of REITs domiciled in that state, Maryland courts have developed a greater expertise than
California courts in dealing with REITs and REIT issues and thus have developed a greater body of
relevant case law. The Board believes that the comprehensive Maryland statutes, Maryland’s
policies with respect to REITs and the established body of relevant case law are more conducive to
the operations of a REIT than the laws and policies of California and they provide the directors
and management of a REIT with greater certainty and predictability in managing its affairs. That
this belief is commonly held is evidenced by, among other things, the fact that over 70% of
publicly owned REITs are currently organized under Maryland law.
The number of REITs organized under Maryland law may be attributable to the fact that for many
years Maryland has encouraged REITs to establish their legal domicile in Maryland. In furtherance
of that policy, Maryland has adopted comprehensive, modern and flexible laws that are periodically
updated and revised to meet changing business needs (including a separate statute governing REITs
that are organized as trusts). As compared to the California General Corporation Law (“CGCL”) and
other state corporation’s statutes, the Maryland General Corporation Law (“MGCL”) and other
provisions of Maryland law are considered to be favorable to REITs for numerous reasons, including
more favorable provisions under the MGCL permitting charter restrictions on the transferability of
stock, which are necessary to satisfy REIT tax requirements.
As a result of the above (and the other anticipated benefits of Reincorporation, discussed
below and in Proposal 3), the Board believes that being incorporated in Maryland and being governed
by Maryland law, like the majority of REITs in the Company’s peer group, would be in the best
interest of the Company and its
shareholders.
-12-
What are the Benefits of the Reincorporation?
The Board believes that we will benefit in several ways by changing our state of incorporation
from California to Maryland:
| • | upon consummation of the Reincorporation, NetREIT (MD) will be governed by
the MGCL, which contains provisions conducive to the operations of a REIT; |
| • | Maryland offers additional protections for director and officer
indemnification, which should facilitate our efforts to attract and retain qualified
directors and officers; |
| • | Maryland law offers additional protections in the event of an unsolicited
takeover attempt that we believe should better protect shareholder interests; |
| • | the fact that the large majority of public reporting REITs are currently
organized under the laws of Maryland has resulted in the development of a more
comprehensive and clearer body of law and practice relating to Maryland REITs than is
available to a REIT that is organized as a California corporation; and |
| • | being governed by Maryland law will bring our corporate governance more in
line with that of other REITs. |
What are the Disadvantages of the Reincorporation?
While the Board believes that the Reincorporation is in the best interests of the Company and
its shareholders, California and Maryland law differ in some respects. The rights of shareholders
and the powers of our Board and our officers under California and Maryland law, as well as the
rights of our shareholders and the powers of our Board and our officers under the existing NetREIT
(CA) charter (the “Company Charter”) and the existing NetREIT (CA) Bylaws (the “Company Bylaws”),
as compared to the rights of our shareholders and the powers of our Board and our officers under
the proposed NetREIT (MD) charter (the “Surviving Charter”) and the proposed NetREIT (MD) bylaws
(the “Surviving Bylaws”), are discussed in more detail below.
In addition, we are asking you to consider approval of a number of Sub-Proposals set forth
under Proposal 3 below. The purpose of certain of these Sub-Proposals is to provide the Board with
certain powers and authority that are customarily exercised by boards of directors of Maryland
REITS. Although some of these Sub-Proposals do affect shareholder rights, we have structured our
Surviving Charter and Surviving Bylaws such that after the Reincorporation (assuming approval
thereof) the rights of our shareholders will not be materially changed. For instance, we have (i)
declined to create a “staggered” Board; (ii) retained cumulative voting; (iii) voluntarily elected
to become subject to the Maryland Business Combination Act; and (iv) inserted many of the remaining
substantive provisions of our Company Charter and Company Bylaws in the Surviving Charter and
Surviving Bylaws that are not required under the MGCL (including provisions pertaining to removal
of directors, Board vacancies, calling of special shareholder meetings, shareholder actions by
written consent, and similar provisions). We believe that upon consummation of the
Reincorporation, our Surviving Charter and Surviving Bylaws will continue to be materially more
restrictive with regard to the powers of our Board than the large majority of the charter documents
of the REITs in our
peer group with respect to grants of authority to our Board and officers.
-13-
How will the Reincorporation be Accomplished?
The Reincorporation will be accomplished by means of the merger of NetREIT (CA) with and into
NetREIT (MD) pursuant to a Plan and Agreement of Merger (the “Agreement”), a copy of which is
attached to this proxy statement/prospectus as Appendix A. The Reincorporation and the Agreement
have been unanimously approved by our Board. Following approval by our shareholders, the
Reincorporation will become effective when articles of merger are filed with and accepted for
record by the State Department of Assessments and Taxation of the State of Maryland and when the
certificate of merger is accepted for record by the Secretary of State of the State of California.
We anticipate that these filings will be made as soon as practicable after the annual meeting and
after satisfaction of any remaining conditions precedent to the Reincorporation. At the effective
time of the Reincorporation:
| • | NetREIT (MD) will succeed to all of the assets and liabilities of NetREIT
(CA) and continue to possess all of our rights and powers and will continue to
operate our business under the name “NetREIT, Inc.”; |
| • | NetREIT (CA) will cease to exist as a California corporation; |
| • | we will be governed by the Surviving Charter and Surviving Bylaws of
NetREIT (MD), in substantially the form attached to this proxy statement/prospectus
as Appendices B and C, respectively (provided, that the content of the Surviving
Charter and Surviving Bylaws may change depending upon and subject to our
shareholders’ approval of the Sub-Proposals contained in Proposal 3 below); |
| • | all of the Directors of NetREIT (CA) will become Directors of NetREIT (MD); |
| • | the size of our Board will increase from seven (7) Directors (of NetREIT
(CA)) prior to the Reincorporation to eight (8) Directors (of NetREIT (MD)) after
the Reincorporation (and Kenneth Elsberry will be appointed to serve as our eighth
director); |
| • | the officers of NetREIT (CA) will become the officers of NetREIT (MD); |
| • | all issued and outstanding shares of our Common Stock will be converted
into an equal number of shares of Common Stock of NetREIT (MD); and |
| • | unless redeemed or converted into Common Stock of NetREIT (CA) prior to the
Reincorporation, all issued and outstanding shares of Series AA Preferred Stock of
NetREIT (CA) will be converted into an equal number of shares of Series AA Preferred
Stock of NetREIT (MD). |
In addition, if the Reincorporation is approved and the merger of NetREIT (CA) with and into
NetREIT (MD) is completed, we will take necessary action to provide that all rights of participants
in our stock option and other equity incentive plans prior to the merger will be substantially
identical to their rights following the merger. Accordingly, the participants’ new rights will be
on substantially identical terms and conditions contained in our existing plans.
-14-
In consummating the Reincorporation, we are relying on the “no sale” exception set forth in
Rule 145(a)(2) promulgated under the Securities Act of 1933, as amended, and accompanying
exemptions and/or
exceptions under applicable state laws. We have not sought a “no-action” letter from the
Securities and Exchange Commissions agreeing that the Reincorporation fits within the scope of Rule
145(a)(2)’s “no sale” exception. Thus, although we believe that we come under this “no sale”
exception, we cannot represent that the Securities and Exchange Commission would concur in this
assessment.
A vote to approve the Reincorporation will also be deemed a vote to approve, among other
things: (i) the rights, preferences, privileges and restrictions of the capital stock of NetREIT
(MD) that will be held our shareholders after consummation of the Reincorporation, as set forth in
MGCL and as contained in the Surviving Charter and Surviving Bylaws of NetREIT (MD), attached
hereto as Appendices B and C hereto, as such Surviving Charter and Surviving Bylaws may be deemed
modified depending on whether (and which of) the Sub-Proposals contemplated in Proposal 3 below are
approved; and (ii) the corresponding changes required to our existing stock option and other
employee benefit plans and arrangements. See “How do the Rights of Our Shareholders and our
Corporate Governance Compare Before and After the Reincorporation” below for a comparison of
corporate governance provisions and shareholder rights under California and Maryland law and under
our current and proposed charters and bylaws.
Will the Reincorporation Affect My Investment in NetREIT Shares?
No, although after the Reincorporation your investment will be in shares of a Maryland
corporation instead of a California corporation. Except for differences in shareholders’ rights
that are attributable to being governed by the MGCL instead of the CGCL (see “How do the Rights of
Our Shareholders and our Corporate Governance Compare Before and After the Reincorporation” below)
and except with respect to those differences in the Company Charter and Company Bylaws as compared
to the Surviving Charter and Surviving Bylaws as discussed in Proposal 3 below (and the
Sub-Proposals set forth therein), it is our intention that the capital stock of NetREIT (MD) mirror
in all material respects the voting, dividend rights liquidation and other rights attributable to
the various classes and series of our stock prior to the effective time of the Reincorporation,
subject to any difference in such rights due to differences between the CGCL and the MGCL.
Following the Reincorporation, all share certificates representing shares of our capital stock
immediately prior to then effective time of the merger effecting the Reincorporation will continue
to represent a like number and kind of shares of capital stock in NetREIT (MD) without any action
on the part of the holder thereof. It will not be necessary for shareholders to exchange their
existing stock certificates for certificates representing shares of NetREIT (MD). However, if you
so choose, you will have the ability to exchange your old NetREIT (CA) share certificates for new
share certificates of NetREIT (MD) by delivering their old stock certificates to ACS Securities
Services, Inc., our exchange agent, together with the required paperwork.
Will the Reorganization Change My Voting Rights?
Except as specifically discussed in Proposal 3 below, generally, the voting rights of holders
of our capital stock will not change after the Reincorporation, although the voting rights of
holders of our Common Shares and Preferred Shares will be reduced, including to the extent that
California law provides for shareholder votes in circumstances where such votes are not required
under the MGCL. For instance, the CGCL provides for separate class votes for holders of different
classes of shares (i.e., Common Stock and Preferred Stock) for certain extraordinary transactions
such as mergers and reorganizations, regardless of whether such shares are given voting rights
under the corporation’s charter, while Maryland law has no comparable provisions. Please see “How
do the Rights of Our Shareholders and our Corporate Governance Compare Before and After the
Reincorporation” below.
-15-
What are the Federal Income Tax Consequences of the Reincorporation?
None. We believe that the Reincorporation will be a tax-free reorganization under the
Internal Revenue Code. Assuming the Reincorporation qualifies as a reorganization, no gain or loss
will be recognized to the holders of the Company’s stock as a result of the Reincorporation, and no
gain or loss will be recognized by NetREIT (CA) or NetREIT (MD). Each former holder of stock of
NetREIT (CA) will have the same basis in the stock of NetREIT (MD) received by such holder pursuant
to the Reincorporation as such holder has in the stock of NetREIT (CA) held by such holder prior
to the Reincorporation. Each shareholder’s holding period with respect to the NetREIT (CA) stock
will include the period during which such holder held the corresponding NetREIT (CA) stock,
provided the latter was held by such holder as a capital asset at the time of the Reincorporation.
We have not obtained a ruling from the IRS or an opinion of legal counsel or tax advisor with
respect to the tax consequences of the Reincorporation, and the IRS could reach a different
conclusion as to the federal income tax consequences of the Reincorporation. We urge our
shareholders to consult their own tax advisors as to any federal, state, local and foreign tax
consequences of the Reincorporation.
Will the Company’s Business Change after the Reincorporation?
No, the Reincorporation will not result in any change in the Company’s business, management
team, fiscal year, assets, liabilities, or dividend policies. The number of Directors on the Board
will increase from seven (7) Directors currently to eight (8) Directors after the Reincorporation,
and Kenneth Elsberry, the Company’s Chief Financial Officer, will be appointed as the eighth member
of the Board.
Are There Any Conditions to Completion of the Reincorporation?
The Reincorporation is subject to a number of customary closing conditions, including receipt
of all necessary governmental and other consents and approvals as well as the approval of the
holders of at least a majority of: (a) the outstanding shares of our Common Stock as of March 30,
2010, (b) the outstanding shares of our Series AA Preferred Stock as of March 30, 2010, and (c) the
outstanding shares of our Common Stock and Series AA Preferred Stock as of March 30, 2010, voting
together as a single class. Notwithstanding shareholder approval of the Reincorporation, we may
terminate the Agreement and abandon the Reincorporation if circumstances arise or facts are
revealed that make it inadvisable, in the judgment of the Board, to proceed with the
Reincorporation.
Do I Have Dissenters’ Rights in the Reincorporation?
No, you do not have dissenter’s rights in connection with the Reincorporation. Section
1300(a) of the CGCL provides for dissenter’s rights under certain circumstances. However, as the
shareholders of NetREIT (MD) prior to the Reincorporation will own more than 5/6ths (83 1/3%) of
the voting power of NetREIT (MD), the appraisal procedures of Section 1300 of the CGCL will not be
triggered.
Is separate class vote required to approve the Reincorporation?
Yes, as noted above, we are required to obtain the approval of the holders of at least a
majority of: (a) the outstanding shares of our Common Stock voting together as a single class,
(b) the outstanding shares of our Series AA Preferred Stock, if any, voting together as a single
class, and (c) the outstanding shares of our
Common Stock and Series AA Preferred Stock, voting together as a single class.
-16-
Because the affirmative vote required to approve the Reincorporation is based on the total
number of outstanding shares of Common Stock and Preferred Stock, the failure to submit a proxy or
voting instructions card or to vote at the annual meeting will have the same effect as a vote
against the Reincorporation. Brokers holding shares of our stock will not have
discretionary authority to vote those shares in the absence of instructions from the beneficial
owners of such shares, so the failure to provide voting instructions to your broker will also have
the same effect as a vote against the Reincorporation.
Remember, regardless of whether the outstanding shares of Series AA Preferred Stock are
redeemed for cash or converted to Common Stock prior to the annual meeting, since such shares were
outstanding as of the record date (i.e., March 30, 2010) for determining our shareholders entitled
to vote on the matters to be presented at the annual meeting, the holders of such shares are
entitled to vote with respect to the Reincorporation.
How do the Rights of Our Shareholders and Our Corporate Governance Compare Before and After the
Reincorporation?
Upon completion of the merger effecting the Reincorporation, shareholders in NetREIT (CA) will
become shareholders in NetREIT (MD). The rights of the shareholders of NetREIT (MD) will be
governed by the applicable laws of the State of Maryland, including the MGCL, and by the Surviving
Charter and Surviving Bylaws. Since NetREIT (CA) is a California corporation, the rights of the
shareholders of NetREIT (CA) are governed by the applicable laws of the State of California,
including the CGCL (“CGCL”), and by the Company Charter and Company Bylaws.
The following is a summary comparison of:
| • | the current rights of NetREIT (CA) shareholders under the CGCL, Company
Charter and Company Bylaws; and |
| • | the future rights of NetREIT (MD) stockholders under the MGCL, the
Surviving Charter and Surviving Bylaws. |
The statements in this section are qualified in their entirety by reference to, and are
subject to, the detailed provisions of the MGCL, the CGCL, the Company Charter, the Company Bylaws,
the Surviving Charter and the Surviving Bylaws. Copies of the Company Charter and the Company
Bylaws are incorporated by reference in this proxy statement/prospectus. The Company will send
copies of the Company Charter, Surviving Charter, Company Bylaws and Surviving Bylaws to
shareholders upon request without charge.
In addition, the statements in this section assume that there will be shares of Series AA
Preferred Stock outstanding immediately prior to, and immediately after, consummation of the
Reincorporation. This in fact may not be the case if all of the shares of Series AA Preferred
Stock outstanding as of the record date for determination of our shareholders entitled to vote on
the matters to be presented at our annual meeting (i.e., March 30, 2010) are redeemed for cash or
are converted into shares of our Common Stock prior to consummation of the Reincorporation. We
presently intend that this redemption or conversion of the shares of Series AA Preferred Stock will
occur on or about May 14, 2010.
-17-
General Corporate Governance Matters
Governing Statutes
California: The rights of NetREIT (CA) shareholders are governed by the CGCL and the Company
Charter and Company Bylaws.
Maryland; The rights of NetREIT (MD) stockholders will be governed by the MGCL and the
Surviving Charter and Surviving Bylaws.
Authorized Capital Stock
California: The authorized capital stock of NetREIT (CA) currently consists of (i)
100,001,000 shares of Common Stock, no par value, of which (A) 100,000,000 shares are Common Stock,
Series A (the Common Stock, Series A will hereinafter be referred to as the “Series A Common
Stock”), and (B) 1,000 shares are Common Stock, Series B (the “Series B Common Stock”) and (ii)
10,000,000 shares are Preferred Stock, no par value, of which (X) 5,000 are Series A Preferred
Stock, and (Y) 1,000,000 are Series AA Preferred Stock (the “Series AA Preferred”). Each reference
to our “Common Shares” or our “Common Stock” shall be deemed to be a reference to the Series A
Common Stock. There are no shares of Series B Common Stock or Series A Preferred Stock outstanding.
Maryland: The authorized capital stock of NetREIT (MD) will consist of the same amount of
authorized capital stock of NetREIT (CA), except that there will be no authorized shares of Series
A Preferred Stock. The Common Stock, Series A of NetREIT (MD) will hereinafter be referred to as
the “Series A Common Stock”), the Common Stock, Series B of NetREIT (MD) will hereinafter be
referred to as the “Series B Common Stock”) and the Series AA Preferred Stock will hereinafter be
referred to as the “Series AA Preferred”). Each reference to “Common Shares” or “Common Stock”
shall be deemed to be a reference to the Series A Common Stock of NetREIT (MD). All shares of
authorized capital stock of NetREIT (MD) shall have a par value of $0.01 per share.
Blank Check Preferred
California: The Board of NetREIT (CA) is authorized to fix the number of shares of any series
of Preferred Stock and to determine the designation of any such series. The Board is also
authorized to determine or alter the rights granted to or imposed upon any wholly unissued series
or preferred shares (including, without limitation, the dividend rights and the liquidation
preference of such shares), and, within the limits and restrictions stated in any resolution or
resolutions of the Board originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares then outstanding) the number of shares of
any such series subsequent to the issuance of shares of that series. The approval of the holders
of at least a majority of the Series AA Preferred is necessary for creation of a series of stock
with dividend rights pari passu with or senior to the dividend rights of the Series AA Preferred.
Maryland: The Board of Directors of NetREIT (MD) may classify any unissued shares of
preferred stock by setting the preferences, conversion or other rights, voting powers,
restrictions, limitations on dividends or other distributions, qualifications or terms or
conditions of redemption of the stock.
-18-
Voting Rights
California: The CGCL provides that, except as provided in Section 708 of the CGCL (cumulative
voting) and except as otherwise provided in a corporation’s articles of incorporation, each
outstanding share shall be entitled to one vote on each matter submitted to a vote of shareholders.
The Company Charter does not contain special voting provisions pertaining to the Series A Common
Stock or the Series B Common Stock.
Under the Company Charter, the holders of the Series AA Preferred Stock do not have the right
to vote except as required by law; provided, however, that as long as any shares of Series AA
Preferred remain outstanding, we may not, without the affirmative vote of at least a majority of
the Series AA Preferred Stock then outstanding, voting separately as a class, effect any of the
following:
| (i) | Amend or repeal any provisions of our articles of incorporation or bylaws so as
to adversely affect the relative rights, preferences, qualifications, limitations or
restrictions of the Series AA Preferred; |
| (ii) | Authorize or issue any class of stock having superior or equal rights to that
of the Series AA Preferred with respect to dividends or liquidation preferences; |
||
| (iii) | Effect any reclassification of the Series AA Preferred; or |
| (iv) | Cause or effect any merger, exchange of shares or sale of assets of the Company
if the shareholders of the Company prior to such merger, exchange or sale own less than
50% of the shares of the surviving (or acquiring) entity following such merger,
exchange or sale. |
In addition, as long as any shares of Series AA Preferred remain outstanding, in the event
that four (4) consecutive quarterly dividends payable on the Series AA Preferred are in arrears on
the date of any meeting of our shareholders in which Directors are to be elected, the holders of
Series AA Preferred, voting separately as a class (together with the holders of shares of any other
class of stock upon which like voting rights have been conferred and are then exercisable), will be
entitled to elect two (2) of our seven (7) Directors, provided, however, that no provision of the
Company Charter shall be construed as either increasing or decreasing the number of directors
authorized by the Company Charter. Any Directors so elected by the holders of Series AA Preferred
Stock will serve until such time, if any, as payments on dividends on the Series AA Preferred are
brought current.
In all matters in which it is entitled to vote, the Series AA Preferred shall have one vote
per share, and, unless otherwise expressly provided or as otherwise required by law, the Series AA
Preferred will vote as a separate class.
In addition, under the CGCL, our holders of Common Stock and Series AA Preferred Stock are
entitled to separate class votes with respect to certain extraordinary transactions (e.g., certain
amendments to our articles of incorporation), mergers, consolidations or other extraordinary
business combinations, and distribution of property rather than cash in connection with a
dissolution of NetREIT (CA), regardless of whether our articles of incorporation provide for or
prohibit such voting rights.
-19-
Maryland: Under Maryland law, unless the charter provides for a greater or lesser number of
votes per share or limits or denies voting rights, each outstanding share of stock, regardless of
class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders.
Under the Surviving Charter, shares of our Series A Common Stock would vote together as a single
class and each share is entitled to one vote on each matter to be voted upon by the holders of
common stock, and shares of our Series AA Preferred Stock would vote together as a single class and
each share is entitled to one vote on each matter to be voted upon by the holders of Series AA
Preferred Stock to the extent such voting rights are expressly granted by NetREIT (MD)’s charter or
otherwise required under the MGCL. The holders of the Series AA Preferred Stock issued
by NetREIT (CA) will generally have the same such rights, limitations, restrictions,
privileges and preferences under and as designated in the Surviving Charter.
Amendment of the Articles of Incorporation
California: The CGCL requires the approval of shareholders of a California corporation for
any amendment to its articles of incorporation, except that certain immaterial amendments specified
in the CGCL may be made by our Directors. Unless a specific section of the CGCL or a California
corporation’s articles of incorporation require a greater vote, an amendment to a California
corporation’s articles of incorporation generally must be approved by a majority of the outstanding
shares entitled to vote on the amendment. Under the CGCL, there are certain amendments that
require the approval of at least a majority of the outstanding shares of each class of shares,
whether or not entitled to vote thereon by our articles of incorporation, if, with respect to such
class, such amendment would effect (among other things): (i) a change in the aggregate number of
shares of such class, (ii) an exchange, reclassification or cancellation of the shares of such
class (including a reverse stock split but excluding a forward stock split); (iii) an exchange, or
creation of a right of exchange, of all or part of the shares of another class into the shares of
such class; (iv) creation of a new class of shares having senior rights, preferences and privileges
(or giving a junior class of shares such senior rights); (v) changing the rights, preferences or
privileges of such class; or (vi) cancelling or otherwise affecting the dividends on the shares of
such class which have accrued but not been paid.
The Company Charter specifically provides that, as long as any shares of Series AA Preferred
are outstanding, the affirmative vote of holders of at least a majority of the Series AA Preferred
then outstanding (voting separately as a class) is required to effect any amendment to the Company
Charter that adversely affects the relative rights, preferences, qualifications, limitations or
restrictions of the Series AA Preferred.
Maryland: Maryland law provides that a corporation may amend its charter. NetREIT (MD) has
reserved the right to make any amendment from time to time to the Surviving Charter, including any
amendment altering the terms or contract rights, as expressly set forth in the Surviving Charter,
of any shares of outstanding stock, other than the outstanding shares of Series AA Preferred Stock
which shall have and retain all of the rights provided for in Section 6.4(i) of the charter. Except
as otherwise provided in the NetREIT (MD) Charter and except for those amendments permitted to be
made without stockholder approval under Maryland law, any amendment to the Surviving Charter is
valid only if approved by the NetREIT (MD) stockholders by the affirmative vote of a majority of
all the votes entitled to be cast on the matter.
Amendment of the Bylaws
California: The large majority of the provisions of the Company Bylaws, insofar as they
relate to certain other specified articles of the Company Bylaws, may only be amended or repealed
by the holders of at least a majority of our outstanding shares entitled to vote thereon. In
addition, any amendment to the Company Bylaws which would change any rights with respect to any
outstanding class of our securities, by reducing the amount payable thereon upon liquidation, or by
diminishing or eliminating any voting rights pertaining thereto, requires the approval of holders
of at least two-thirds (2/3) of the outstanding securities of such class. Subject to the foregoing,
the Company Bylaws may be amended or repealed upon the approval of holders of at least a majority
of the outstanding shares entitled to vote thereon.
-20-
Subject to the rights of the shareholders to amend the Company Bylaws, and the requirements of
approval of certain matters by the Company’s independent Directors, the Company Bylaws may be
amended by the Board, provided, however, that the Board may adopt a bylaw or amendment of a bylaw
changing the
authorized number of directors only for the purpose of fixing the exact number of Directors
within the limits authorized by the shareholders.
The Company Charter specifically provides that, as long as any shares of Series AA Preferred
Stock are outstanding, the affirmative vote of holders of at least a majority of the Series AA
Preferred Stock then outstanding (voting separately as a class) is required to amend, alter or
repeal any provision of the Company Bylaws that would adversely affect the relative rights,
preferences, qualifications, limitations or restrictions of the Series AA Preferred Stock.
Maryland: Maryland law provides that after the organizational meeting of the board of
directors the power to alter and repeal bylaws is vested with the stockholders except to the extent
the charter or the bylaws vest such power with the Board of Directors. The Surviving Bylaws provide
that the Board and stockholders shall have the power to adopt, alter, amend, restate or repeal the
Surviving Bylaws, however, any amendment, alteration or repeal of any provision of these bylaws
that affects adversely the relative rights, preferences, qualifications, limitations or
restrictions of the Series AA Preferred Stock requires the consent of the holders of at least a
majority of the outstanding Series AA Preferred Stock. Any change to the Surviving Bylaws made by
the stockholders may not be altered in any manner by the Board prior to the next annual meeting of
our stockholders.
Matters Relating To Directors And Officers
Number of Directors
California: The Company Charter provides that the number of Directors on our Board must be at
least four (4) but no more than seven (7). The exact number of Directors within this specified
range may be set by a majority of Directors or by the shareholders. The Board is currently set at
seven (7) members. The Company does not have a classified board (i.e., the Board is not divided
into classes), nor are we permitted to install a classified board until such time that our shares
are “listed” on a national market or exchange. The Company Bylaws provide that a majority of the
Directors must be “independent directors” (as defined in the Company Bylaws).
Maryland: Maryland law provides that each Maryland corporation must have at least one
director, with the number specified in or fixed in accordance with the charter or bylaws of the
corporation. The Surviving Bylaws provide for no fewer than six (6) directors and no more than
eleven (11) directors, which numbers may be increased or decreased by a majority vote of
stockholders entitled to cast a majority of all votes entitled to be cast on the matter. The
NetREIT (MD) charter fixes the initial number of Directors at eight (8). The Surviving Bylaws
provide that a majority of the Directors must be “independent directors” (as defined in the
Surviving Bylaws).
Election of Directors; Term
California: Our Directors are elected at each annual meeting of the shareholders and hold
office until (i) the next annual meeting and until their successors are elected and qualified, or
(ii) until their earlier resignation, removal or death.
-21-
In the event we fail to pay accrued dividends on the Series AA Preferred Stock for four (4)
consecutive quarters, the holders of Series AA Preferred Stock would be entitled to elect two (2)
directors to our Board while such accrued dividends remain unpaid.
Maryland: Unless a corporation has elected to divide its directors into classes, the directors
are elected at each annual meeting of the stockholders and hold office until (i) the next annual
meeting and until their successors are elected and qualified, or (ii) until their earlier
resignation, removal or death. Our holders of the Series AA Preferred Stock will have the right to
elect two directors to our Board if NetREIT (MD) fails to pay such holders four consecutive
quarterly dividends.
Removal of Directors
California: The Directors may be removed, with or without cause, by the vote or written
consent of the holders of at least a majority of the outstanding shares, and may be removed at a
special meeting called in a manner consistent with the applicable provisions of the Company Bylaws;
provided, however, that no Director may be removed when the votes cast against removal, or not
consenting in writing to the removal, would be sufficient to elect such Director if voted
cumulatively.
Maryland: Maryland law provides that, unless otherwise provided in the charter, the
stockholders of a corporation may remove any director, with or without cause, by the affirmative
vote of a majority of all the votes entitled to be cast generally for the election of directors,
except if a corporation has cumulative voting for the election of directors and less than the
entire board is to be removed, a director may not be removed without cause if the votes cast
against his removal would be sufficient to elect him if then cumulatively voted at an election of
the entire board of directors or, if there is more than one class of directors, at an election of
the class of directors of which he is a member.
Vacancies
California: Vacancies on the Board may be filled by a majority of the remaining Directors,
though less than a quorum, or by a sole remaining Director (or, if the Directors fail to act, by
the majority vote of the shareholders), except that a vacancy created as a result of removal of a
Director by the shareholders or by court order may be filled only by majority vote or written
consent of the shareholders. The nomination for the filling of a vacancy of an independent Director
position will be made by the remaining independent Directors.
Vacancies affecting the Directors elected by the holders Series AA Preferred may be filled
(while the limited director election right of the Series AA Preferred remains in force) by majority
vote of the Series AA Preferred Stock.
Maryland: Maryland law provides that unless the charter or bylaws provide otherwise, any
vacancy on the NetREIT (MD) Board may be filled by the affirmative vote of a majority of the
remaining directors in office, even if the remaining directors do not constitute a quorum, except
that a majority of the entire board of directors is required to fill a vacancy resulting from an
increase in the number of directors. The provisions in the Surviving Charter regarding the filling
of vacancies on the NetREIT (MD) Board, except those resulting from removal of a director,
generally follow Maryland law, except that a vacancy with respect to any Series AA Director shall
be filled by the holders of the Series AA Preferred Stock and any vacancy created by the removal of
a director (other than a Series AA Director, who shall be subject to removal only by a vote of the
Series AA Preferred) by the Common Stock holders may be filled only by the vote of a majority of
the Common Stock. Any director elected to fill a vacancy shall serve until the next annual meeting
of the stockholders and until a successor is elected and qualifies.
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Director Quorum
California: A majority of the authorized number of Directors constitutes a quorum for the
transaction of business. In addition, a meeting at which a quorum is initially present may
continue to transact business, notwithstanding the withdrawal of Directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
Maryland: The Surviving Bylaws provide that a majority of our directors shall constitute a
quorum for transaction of business at any meeting of the NetREIT (MD) Board. The directors present
at a meeting which has been duly called and convened may continue to transact business until
adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. Less
than a majority of directors present at a meeting may adjourn the meeting from time to time without
further notice.
Indemnification of Directors and Officers
California: Under the CGCL, a corporation may generally indemnify its officers, directors,
employees and agents against expenses (including attorneys’ fees), judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with any proceeding (other than
actions by or in the right of corporation to procure a judgment in its favor), if they acted in
good faith and in a manner they reasonably believed to be in the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. A similar standard is applicable in actions, against expenses actually and
reasonably incurred in connection with the defense or settlement of the action, except that no
indemnification may be made (1) if the person is adjudged liable to the corporation unless the
court determines upon application that the person is fairly and reasonably entitled to indemnity
for expenses and then only to the extent determined by the court, (2) for amounts paid in settling
or otherwise disposing a pending action without court approval, or (3) for expenses incurred in
defending a pending action which is settled or otherwise disposed of without court approval. The
CGCL provides that to the extent that such persons have been successful in defense of any
proceeding, they must be indemnified by the corporation against expenses actually and reasonably
incurred in connection therewith. Additionally, the CGCL provides that, the corporation may only
indemnify the person if authorized in the specific case, upon a determination that indemnification
is proper because the person has met the applicable standard of conduct, (1) by a majority vote of
a quorum consisting of directors who are not parties to the proceeding, (2) if such a quorum is not
obtainable, by independent legal counsel in a written opinion, (3) by approval of a majority of the
outstanding shares entitled to vote, or (4) by the court in which the proceeding is or was pending
upon application by the corporation or the person. Expenses incurred in defending any proceeding
may be advanced by the corporation prior o the final disposition of the proceeding upon the
corporation’s receipt of an undertaking by or on behalf of the person to repay that amount if it is
ultimately determined that the person is not entitled to be indemnified.
In addition, the Company Bylaws provide that (i) no “affiliate” (as defined in the Company
Bylaws) of an “advisor” (also as defined in the Company Bylaws), shall receive indemnification
unless the terms and conditions of such indemnification are first approved by a majority of the
Directors as well as a majority of the Company’s “independent directors” (as defined in the Company
Bylaws), each of whom shall be disinterested in the transaction, and (ii) notwithstanding the other
indemnification provisions of the Company Bylaws, we may only indemnify a Director or an “advisor”
(as defined in the Company Bylaws) or losses arising from the operation of NetREIT (CA) only if:
(A) such director or “advisor” has determined, in good faith, that the course of conduct which
caused the loss or liability was in best interests of the Company and its shareholders; and
(B) such liability or loss was not the result of negligence or misconduct by such Director or
“advisor”. Also, the Company Bylaws provide that the Company may advance funds for the expenses of
defending any
proceeding hereunder initiated against a Director or “advisor” only if the following
conditions are satisfied: (1) the legal action relates to the performance of duties or services by
such Director or “advisor” on behalf of the program; (2) the legal action is initiated by a third
party who is not one of the Company’s shareholders; and (3) such Director or “advisor” undertakes
to repay the advanced funds to the Company in cases in which such Director or “advisor” would not
be entitled to indemnification.
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Maryland: In Maryland, reasonable expenses may be advanced to a director, or to an officer,
employee, or agent who is not a director to the same extent that they may be advanced to a director
unless limited by the charter. Advances to directors, officers, employees, and agents prior to the
final adjudication of a proceeding may be generally authorized in the corporation’s charter or
bylaws, by action of the board of directors, or by contract. The director, officer, employee, or
agent must give to the corporation a written affirmation of his good faith belief that the standard
of conduct necessary for indemnification by the corporation has been met, and a written undertaking
providing that if it is ultimately determined that the standard of conduct has not been met, said
director, officer, employee, or agent will repay the amount advanced.
Under Maryland law, unless limited by the charter, indemnification is mandatory if a director
or officer has been successful on the merits or otherwise in the defense of any proceeding arising
from his service as a director or officer unless such indemnification is not otherwise permitted as
described in the following sentence. Indemnification is permitted unless it is established that
(i) the act or omission of the director or officer was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and deliberate dishonesty;
(ii) the director or officer actually received an improper personal benefit in money, property or
services; or (iii) in the case of a criminal proceeding, the director or officer had reasonable
cause to believe his act or omission was unlawful. In addition to the foregoing, a court of
appropriate jurisdiction may, under certain circumstances, order indemnification if it determines
that the director or officer is fairly and reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not the director or officer has met the standards of conduct
set forth in the preceding sentence or has been adjudged liable on the basis that a personal
benefit was improperly received in a proceeding charging improper personal benefit to the director
or the officer. If the proceeding was an action by or in the right of the corporation or involved a
determination that the director or officer received an improper personal benefit, however, no
indemnification may be made if the individual is adjudged liable to the corporation, except to the
extent of expenses approved by a court of appropriate jurisdiction.
Maryland law also provides that, where indemnification is permissible, it must be authorized
for a specific proceeding after a determination has been made that indemnification of the director
is permissible in the circumstances because the director has met the standard of care described
above. Such determination must be made by (i) the board of directors by a majority vote of a quorum
consisting of directors not, at the time, parties to the proceeding, or, if such a quorum cannot be
obtained, then by a majority vote of a committee of the board consisting solely of one or more
directors not, at the time, parties to such proceeding and who were duly designated to act in the
matter by a majority vote of the full board in which the designated directors who are parties may
participate; (ii) special legal counsel selected by the board of directors or a committee of the
board by vote as set forth in clause (i) or, if the requisite quorum of the full board cannot be
obtained and the committee cannot be established, by a majority vote of the full board of directors
in which directors who are parties may participate; or (iii) a vote of the stockholders.
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Limitations on Liability for Directors and Officers
California: The Company Charter limits the liability of the Directors for monetary damages to
the fullest extent permissible under California law. In addition, the Company Charter authorizes
the Company to provide indemnification of its Directors, officers and employees for breach of their
duty to the Company and its
shareholders (through bylaw provision or agreements, or both) in excess of the indemnification
otherwise permitted under Section 317 of the CGCL, subject to the limitations on such excess
indemnification set forth in Section 204 of the CGCL. Section 204 of the CGCL provides that such
excess indemnification may not eliminate or limit the liability of directors (i) for acts or
omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for
acts or omissions that a director believes to be contrary to the best interests of the corporation
or its shareholders or that involve the absence of good faith on the part of the director, (iii)
for any transaction from which a director derived an improper personal benefit, (iv) for acts or
omissions that show a reckless disregard for the director’s duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director’s duties, of a risk of serious injury to the corporation
or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director’s duty to the corporation or its shareholders, (vi)
violations of the CGCL requirements governing company contracts in which the director has a
material interest, or (vii) corporate actions for which the director and the Company are jointly
and severally liable. The Company Charter limits the liability of our Directors to the maximum
extent permitted by the CGCL.
In general, the liability of officers may not be eliminated or limited under California law.
Maryland: Maryland law permits a Maryland corporation to limit the liability of its directors
and officers to the corporation and its stockholders for money damages by provision in its charter,
except for liability resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty which is established by a final
judgment and is material to the cause of action.
The Surviving Charter limits the liability of its directors and officers to the fullest extent
permissible under Maryland law.
Matters Relating To Shareholders
Advance Notice Requirement for Shareholder Proposals and Director Nominations
California: The Company Bylaws do not contain any advance notice permissions with respect
matters to be presented at its annual meeting.
Maryland: Maryland law provides that the corporation’s charter or bylaws may require any
stockholder proposing a nominee for election as a director or any other matter for consideration at
a meeting of the stockholders to provide advance notice of the nomination or proposal to the
corporation of not more than 90 days before the date of the meeting, or, in the case of an annual
meeting, 90 days before the first anniversary of the preceding year’s annual meeting or the mailing
date of the notice of the preceding year’s annual meeting. The charter or bylaws may specify
another time.
The Surviving Bylaws provide that in order for director nominations or stockholder proposals
to be properly brought before the meeting, the stockholder must have delivered timely notice to our
Secretary. Under the Surviving Bylaws, to be timely, notice generally must have been delivered not
earlier than 90 days nor later than 60 days prior to the first anniversary of the date of mailing
of the notice for the previous year’s annual meeting.
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Cumulative Voting for Directors
California: Subject to compliance with the relevant provisions of the CGCL and our Company
Charter and Company Bylaws, our shareholders are entitled under the CGCL to cumulate their shares
to elect our Directors.
Maryland: Maryland law provides that a corporation’s charter may include a provision for
cumulative voting in the election of directors and the terms on which cumulative voting rights may
be exercised. The Surviving Bylaws provide for cumulative voting in the election of directors.
Quorum at Shareholder Meetings
California: The Company Bylaws provide that the presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a
quorum for the transaction of business.
Maryland: The Surviving Charter provides that the presence in person or by proxy of the
holders of shares of stock of the Company entitled to cast a majority of the votes entitled to be
cast on a matter (without regard to class) shall constitute a quorum at any meeting of stockholders
with respect to such matter, except with respect to any such matter that, under applicable statutes
or regulatory requirements or the charter, requires approval by a separate vote of the holders of
one or more classes of stock, in which case the presence in person or by proxy of the holders of
shares entitled to cast a majority of the votes entitled to be cast by each such class on such a
matter shall constitute a quorum. Notwithstanding the foregoing, to the extent permitted by the
MGCL, the Company Bylaws may provide for a greater or lesser quorum requirement, provided that such
requirement shall not be less than forty percent (40%) nor more than sixty-six and two-thirds
percent (66 2/3rds%) of the votes entitled to be cast (without regard to class) on matters
submitted for a vote of the stockholders.
Actions by Written Consent of Shareholders
California: The Company Bylaws provide that any action required or permitted to be taken by
our shareholders may be taken without a meeting upon the written consent of the holders of
outstanding shares having not less than the minimum number of votes that would be necessary to take
that action at a meeting at which all shares entitled to vote were present and voted. In the case
of election of our Directors, such a consent shall be effective only if signed by the holders of
all outstanding shares entitled to vote for the election of Directors; provided, however, that a
Director may be elected pursuant to written consent at any time by the holders of a majority of the
outstanding shares entitled to vote for the election of Directors to fill a vacancy on the Board
that has not been filled by the Directors.
Maryland: Under Maryland law, stockholders may act without a meeting if a consent in writing
or by electronic transmission, which describes the action, is given by each stockholder entitled to
vote on the matter or, if authorized by the charter of the corporation, by the stockholders
entitled to cast not less than the minimum number of votes that would be necessary to authorize or
take the action at a stockholders’ meeting if the corporation gives notice of the action to each
holder of the class of stock not later than 10 days after the effective time of the action. In the
case of election of directors, such consent shall be effective only if signed by the holders of all
outstanding shares entitled to vote for the election of directors.
While we are a reporting company required to file reports under the Securities Exchange Act of
1934, we will provide notice of such action to our stockholders pursuant to a Schedule 14C
information statement
that will be filed with the SEC.
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Shareholder Power to Call Special Meeting
California: The Company Bylaws provide that a special meeting of the shareholders may be
called at any time by a majority of our independent Directors, or by our Board, or by the chairman
of our Board, or by our president, or by one or more shareholders holding not less than ten percent
(10%) of the shares entitled to vote at such meeting.
Maryland: Under Maryland law, a special meeting may be called by (i) the president; (ii) the
board of directors; or (iii) any person designated in the charter or bylaws. Maryland law provides
that special meetings of the stockholders may also be called by the secretary of the corporation
upon the written request of stockholders entitled to cast at least 25% of all the votes entitled to
be cast at the meeting. However, unless requested by stockholders entitled to cast a majority of
all the votes entitled to be cast at the meeting, the secretary is not required to call a special
meeting if the matter to be considered at the meeting is substantially the same as a matter
considered at a special meeting during the preceding 12 months. The charter or bylaws may increase
or decrease the percentage of votes stockholders must possess to request a special meeting,
provided that the percentage may not be greater than a majority of the votes entitled to be cast at
the meeting.
Under the Surviving Bylaws, stockholders may call a special meeting upon the written request
of stockholders entitled to cast at least 10% of all the votes entitled to be cast at the meeting.
Additionally, the Surviving Bylaws allow for the Chairman of the Board, the Chief Executive
Officer, the President or the NetREIT (MD) Board to call special meetings of stockholders.
Preemptive Rights
California: None of the CGCL, the Company Charter nor the Company Bylaws provide our
shareholders with a preemptive right to purchase or subscribe for any additional shares of stock or
any other security of ours which we may issue or sell.
Maryland: The Surviving Charter provides that that the stockholders have no preemptive right
to purchase or subscribe for any additional shares of stock or any other security of NetREIT (MD)
which it may issue or sell.
Appraisal Rights
California: Section 1300 of the CGCL extends dissenters’ rights to shareholders of a
California corporation that engage in certain types of reorganizations that require shareholder
approval.
The Reincorporation requires shareholder approval (by class) but will not give rise to
appraisal rights to objecting shareholders.
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Maryland: Under Maryland law, stockholders have the right to dissent and to demand and to
receive payment of the fair value of their stock in the event of (i) a merger or consolidation;
(ii) a share exchange; (iii) a transfer of assets in a manner requiring stockholder approval;
(iv) an amendment to the charter altering contract rights of outstanding stock, as expressly set
forth in the charter, and substantially adversely affecting the stockholder’s rights (unless the
right to do so is reserved in the charter); or (v) certain business
combinations with interested stockholders which are subject to or exempted from the Maryland
business combination statute (as discussed below) and in connection with the approval of voting
rights of certain stockholders under the Maryland control share acquisition statute. Except with
respect to certain business combinations and in connection with appraisal and dissenter’s rights
existing as a result of the Maryland control share statute, the right to demand and receive payment
of fair value does not apply (a) to stock listed on a national securities exchange or a national
market system security designated on an interdealer quotation system by the National Association of
Securities Dealers, Inc., or designated for trading on the NASDAQ Small Cap Market; (b) to stock of
the successor in a merger (unless the merger alters the contract rights of the stock or converts
the stock in whole or in part into something other than stock of the successor, cash or other
interests); (c) to stock that is not entitled (other than because the transaction is a merger
between the corporation and a 90% or more owned subsidiary) to be voted on the transaction or the
stockholder did not own the shares of stock on the record date for determining stockholders
entitled to vote on the transaction; (d) if the charter provides that the holders of the stock are
not entitled to exercise the rights of an objecting stockholders; or (e) stock of an open-end
investment company registered with the SEC under the Investment Company Act of 1940 and the stock
is valued in the transaction at its net asset value. Except in the case of appraisal and
dissenter’s rights existing as a result of the Maryland control share acquisition statute, these
rights are available only when the stockholder files with the corporation a timely, written
objection to the transaction, and does not vote in favor of the transaction. In addition, the
stockholder must make a demand on the successor corporation for payment of the stock within 20 days
of the acceptance of articles by the Maryland State Department of Assessments and Taxation.
Inspection of Shareholder Lists
California: Under the CGCL and the Company Bylaws, a shareholder or shareholders holding an
aggregate of at least 5% of the Company’s outstanding voting shares (or who hold at least 1% of
such voting shares and have filed a Schedule 14B with the SEC relating to the election of the
Directors) shall have an absolute right to do either or both of the following: (i) inspect and copy
shareholders’ names and addresses during usual business hours upon five (5) days’ prior written
demand to the Company, and (ii) obtain from the Company’s transfer agent, on written demand and on
the tender of such transfer agent’s usual charges for such list (the amount of which charges shall
be stated to the Shareholder by the transfer agent upon request), a list of shareholders’ names and
addresses who are entitled to vote for the election of directors, and their shareholdings. In
addition, any shareholder of record may inspect and copy the accounting books and records and
minutes of proceeding of the shareholders and the Board and any committee of the Board, at any time
during usual business hours, for any purpose reasonably related to such holder’s interests as a
shareholder.
Maryland: Under Maryland law, stockholders of a Maryland corporation, irrespective of how
long they have held stock, may inspect and copy, during usual business hours, the bylaws, minutes
of the proceedings of the stockholders, annual statements of affairs, and voting trust agreements
on file at the corporation’s principal office. If a stockholder makes a written request, the
stockholder may obtain a statement showing all stock and securities issued by the corporation
within the previous twelve months. In addition, a person who has owned for at least six months at
least 5% of the outstanding stock of any class of the corporation may inspect and copy the
corporation’s books of account and stock ledger during usual business hours, and may make a written
request for a statement of the corporation’s affairs.
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Dividends and Redemptions
California: Under the CGCL, a company may only make a distribution to shareholders if (a) its
retained earnings immediately prior to payment of the distribution are at least equal to the amount
of the
distribution, or (b) generally, its total assets (exclusive of certain intangible assets and
certain other charges and expenses) are equal to at least 1 1/4 times its total liabilities
(excluding certain deferred items) immediately after giving effect to the distribution and, in the
case of a company that classifies its assets into current and fixed assets under GAAP, its current
assets are at least equal to its current liabilities. The CGCL also prohibits a California
corporation from making any distribution to shareholders if the corporation is or, as a result
thereof, would be likely to be unable to meet its liabilities as they mature. The CGCL also imposes
limitations on distributions on any class or series of stock if capital stock with a preference on
distributions of assets upon liquidation is outstanding if, after giving effect to the
distributions, the excess of its assets over its liabilities would be less than the liquidation
preference of all shares having a preference on liquidation over the class or series on which the
distribution is to be made.
Maryland: A Maryland corporation generally may make distributions to its stockholders unless,
after giving effect to the distribution, the corporation would not be able to pay its debts as they
come due in the ordinary course of business or the corporation’s total assets would be less than
its total liabilities, plus, unless the charter permits otherwise, the amount that would be needed,
if the corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights of stockholders whose preferential rights on dissolution are superior to those
receiving the distribution.
Anti-Takeover Measures
As discussed below, certain provisions of the Surviving Charter could be considered to be
anti-takeover measures. Although the Board does not have knowledge that any attempts to gain
control of the Company or, after the Reincorporation, are being contemplated, numerous differences
between California and Maryland law, effective without additional action by us, could have a
bearing on unapproved takeover attempts.
Business Combinations
California: Under the CGCL, the affirmative vote of a majority of the outstanding shares of
each class is generally needed to approve a merger or similar business combination. A shareholder
vote is generally not required for reorganizations where the corporation, or the shareholders of
the corporation immediately prior to the reorganization, will own equity securities constituting
over five-sixths of the voting power of the surviving corporation and the vote of the holders of
preferred stock is generally not required where the corporation is the survivor in the merger and
the rights of those holders remain unchanged. Notwithstanding the foregoing, even if the
shareholders of a corporation immediately prior to the reorganization will own equity securities
constituting over five-sixths of the voting power of the surviving corporation, the CGCL will
require that such reorganization be approved by the affirmative vote of at least a majority of the
outstanding shares of each class that receives shares of the surviving or acquiring corporation or
parent corporation having different rights, preferences, privileges or restrictions than those
surrendered (shares in a “foreign corporation”, i.e. a non-California corporation, received in
exchange for shares in a domestic corporation are deemed under the CGCL to have different rights,
preferences, privileges and restrictions). The CGCL also imposes conditions on certain business
combinations with interested shareholders.
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Under the Company Bylaws, without the prior vote or written consent of the holders of at least
two-thirds of the outstanding shares, NetREIT (CA) is not permitted to enter into any business
combination with a shareholder (or group of shareholders acting in concert) holding 10% or more of
our outstanding shares (such holder or group of holders, hereinafter an “Interested Shareholder”).
The Company Bylaws define a “business combination” to mean (i) a merger or consolidation between or
with NetREIT (CA) and the Interested Shareholder and/or its affiliates; (ii) any sale, lease,
exchange, mortgage, pledge, transfer of assets to an Interested Shareholder and/or its affiliates
having an aggregate fair market value of at least $1,000,000; (iii)
any reclassification or reorganization, the effect of which would be to increase the
proportion of outstanding shares of any class of our equity securities convertible into a class of
equity securities owned by an Interested Shareholder and/or its affiliates; and (iv) the adoption
of any plan for the liquidation or dissolution of NetREIT (CA), proposed by or on behalf of the
Interested Shareholder and/or its affiliates.
However, the foregoing provisions requiring two-thirds or greater vote of the outstanding
shares shall not apply, and instead, only majority shareholder approval shall be required, if: (i)
at the time the business combination is consummated or during the prior twelve months, NetREIT (CA)
beneficially owned a majority of the outstanding equity securities of the Interested Shareholder;
or (ii) the business combination was approved by all of our “disinterested Directors (i.e.
Directors unaffiliated with the Interested Shareholder).
Maryland: The Maryland Business Combination Act prohibits a business combination between a
corporation and any interested stockholder or any affiliate of an interested stockholder for five
years following the most recent date upon which the stockholder became an interested stockholder. A
business combination includes a merger, consolidation, share exchange or, in circumstances
specified in the statute, an asset transfer or issuance or reclassification of equity securities.
Generally, an interested stockholder is anyone who owns 10% or more of the voting power of the
corporation’s shares or an affiliate or associate 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. A person is not an interested
stockholder under the statute if the board of directors approved in advance the transaction by
which he otherwise would have become an interested stockholder. However, in approving a
transaction, the board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the board. After the
five-year period has elapsed, a corporation subject to the statute may not consummate a business
combination with an interested stockholder unless (i) the transaction has been recommended by the
board of directors and (ii) the transaction has been approved by (a) 80% of the outstanding 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 other than shares owned
by the interested stockholder with whom or with whose affiliate the business combination is to be
effected or held by an affiliate or associate of the interested stockholder. This approval
requirement need not be met if certain fair price and terms criteria have been satisfied.
The Maryland Business Combination Act applies to any corporation incorporated in Maryland.
However, any corporation may elect to “opt out” of the Act. NetREIT (MD), in the Surviving Bylaws,
has expressly elected to be governed by the provisions of the Maryland Business Combination Act.
Duties of Directors
California: The CGCL requires a director of a California corporation to perform his or her
duties as a director in good faith, in a manner believed to be in the best interests of the
corporation and its shareholders with the care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
In addition, under the Company Bylaws, our Directors have a fiduciary duty to the Company and
its shareholders to supervise the Company’s relationships with any “advisors” (i.e., any
individuals or entities providing real estate investment advisory services to the Company on an
ongoing basis). The Company does not presently use the services of an “advisor” nor does it have
any present intention to do so.
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Maryland: The MGCL requires a director of a Maryland corporation to perform his or her duties
as a director (including his or her duties as a member of a committee of the board on which (s)he
serves): (i) in
good faith; (ii) in a manner (s)he reasonably believes to be in the best interests of the
corporation; and (iii) with the care that an ordinarily prudent person in a like position would use
under similar circumstances. Maryland law provides that a person who performs his or her duties in
accordance with the above standard has no liability by reason of being or having been a director of
a corporation. An act of a director is presumed to satisfy the standard.
In addition, the MGCL provides protection for Maryland corporations against unsolicited
takeovers by protecting boards of directors with regard to actions taken in a takeover context. The
MGCL provides that the duties of directors will not require them to:
| • | Accept, recommend or respond to any proposal by a person seeking to acquire control, |
||
| • | Make a determination under the Maryland Business Combination Act or the Maryland Control
Share Acquisition Act, |
||
| • | Elect to be subject to any or all of the “elective provisions” of Title 3, Subtitle 8 of
the MGCL, or |
||
| • | Act or fail to act solely because of (i) the effect the act or failure to act may have on
an acquisition or potential acquisition of control or (ii) the amount or type of
consideration that may be offered or paid to stockholders in an acquisition. |
The MGCL also provides that an act of a director relating to or affecting an acquisition
or a potential acquisition of control is not subject under the MGCL to a higher duty or greater
scrutiny than is applied to any other act of a director. This provision creates a Maryland rule
that is less exacting than case law in many other jurisdictions which imposes an enhanced level of
scrutiny when a board implements anti-takeover measures in a change of control context and shifts
the burden of proof to the board to show that the defensive mechanism adopted by a board is
reasonable in relation to the threat posed.
Control Share Acquisitions
California: The CGCL contains no provisions governing acquisitions of control shares.
Maryland: 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 by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares of stock as to which
the acquiring person, officers of the corporation, and employees of the corporation who are
directors of the corporation are entitled to exercise or direct the exercise of the voting power of
the shares in the election of directors. “Control shares” are voting shares of stock which, if
aggregated with all other shares of stock previously acquired by a person, would entitle the
acquirer 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
that the acquiring person is entitled to vote as a result of having previously obtained stockholder
approval. A “control share acquisition” means the acquisition, directly or indirectly, 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 the board of directors to
call a special meeting of stockholders to be held within fifty (50) days of such demand to consider
the voting rights of the shares.
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If voting rights are not approved at the meeting or if the acquirer 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 voting rights, as of the
date of the last control share acquisition or of any special 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 acquirer 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 in the control share acquisition. The “control share acquisition” statute does
not apply to shares acquired in a merger, consolidation, or share exchange if the corporation is a
party to the transaction or to acquisitions approved or exempted by the charter or the bylaws of
the corporation.
The charter or bylaws of a Maryland corporation may include a provision opting out of the
control share acquisition statute of the MGCL; however, neither the Surviving Charter nor the
Surviving Bylaws presently contain such an opt out provision. Accordingly, the control share
acquisition statute of the MGCL will apply to any acquisition by any person of stock of NetREIT
(MD).
Title 3, Subtitle 8 of the MGCL
Maryland: Subtitle 8 of Title 3 of the MGCL allows publicly held Maryland corporations to
elect to be governed by all or any part of Maryland law provisions relating to extraordinary
actions and unsolicited takeovers. The election to be governed by one or more of these provisions
can be made by a Maryland corporation in its charter or bylaws or by resolution adopted by the
board of directors so long as the corporation has at least three directors who, at the time of
electing to be subject to the provisions, are not:
| • | Officers or employees of the corporation; |
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| • | Persons seeking to acquire control of the corporation; |
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| • | Directors, officers, affiliates or associates of any person seeking to acquire control; or |
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| • | Nominated or designated as directors by a person seeking to acquire control. |
Articles supplementary must be filed with the Maryland State Department of Assessments and
Taxation if a Maryland corporation elects to be subject to any or all of the provisions by board
resolution or bylaw amendment. Stockholder approval is not required for the filing of articles
supplementary.
Subtitle 8 provides that a Maryland corporation can elect to be subject to all or any portion
of the following provisions notwithstanding any contrary provisions contained in its existing
charter or bylaws:
| • | A classified board; |
||
| • | A two-thirds vote requirement for removing a director; |
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| • | A requirement that the number of directors be fixed only by vote of the directors; |
||
| • | A requirement that a vacancy on the board be filled only by the majority vote of the
remaining directors and for the remainder of the full term of the class in which the
vacancy occurred; or |
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| • | A majority requirement for the calling of a special meeting of stockholders. |
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Issuance of Additional Shares
California: Under the Company Charter and the CGCL, the Board is authorized to designate a
series of Preferred Stock and to determine the dividend rights, dividend rate, conversion rights,
voting rights, rights and terms of redemption (including sinking fund provisions), the redemption
price or prices and the liquidation preference with regards to any such series. The Board may also
increase or decrease the number of shares authorized in a series (but not below the number of
shares in such series which have already been issued). However, neither the Company Charter nor
the CGCL permits the Board to increase or decrease the authorized shares of a class of stock. Any
increase or decrease in the authorized shares of Preferred Stock or Common Stock under the Company
Charter would require the approval of the Company’s shareholders. Furthermore, the Company Charter
does not specifically provide that the Board may designate series of shares within the class of
Common Stock authorized under the Company Charter and, as a result, the Board lacks the authority
to designate the rights, preferences or privileges of a class of Common Stock under the Company
Charter.
Maryland: The Surviving Charter allows the NetREIT (MD) Board to authorize the issuance of
shares of our stock of any class or series, whether now or hereafter authorized, or securities or
rights convertible into shares of its stock of any class or series, whether now or hereafter
authorized, for such consideration as the NetREIT (MD) Board deems advisable. The NetREIT (MD)
Board could authorize the Company issue shares of unissued Common Stock and Preferred Stock (within
the limits imposed by applicable law) in one or more transactions, or issue such unissued shares
with terms, provisions and rights which would make more difficult and, therefore, less likely, a
takeover of NetREIT (MD). The NetREIT (MD) Board may classify any unissued shares of preferred
stock by setting the preferences, conversion or other rights, voting powers, restrictions,
limitations on dividends or other distributions, qualifications or terms or conditions of
redemption of the stock. Any such issuance of additional stock could have the effect of diluting
the earnings per share and book value per share of our existing shares of our Common Stock, and
such additional shares could be used to dilute the stock ownership of persons seeking to obtain
control of the NetREIT (MD).
We offer no assurances that the NetREIT (MD) Board will not adopt further anti-takeover
measures available under Maryland law (some of which may not require stockholder approval).
Moreover, the availability of such measures under Maryland law, whether or not implemented, may
have the effect of discouraging a future takeover attempt which a majority of our stockholders may
deem to be in their best interests or in which stockholders may receive a premium for their shares
over then current market prices. As a result, stockholders who might desire to participate in such
transactions may not have the opportunity to do so. Stockholders should recognize that, if adopted,
the effect of such measures, along with the possibility of discouraging takeover attempts, may be
to limit in certain respects the rights of stockholders in NetREIT (MD) compared with the rights of
stockholders of the Company.
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Mergers, Consolidations and Transfers of Assets
California: The Company may merge, enter into a share exchange or sell, lease, exchange or
otherwise dispose of all or substantially all of its property only if such action is approved by
the Board and, except as described below, by the affirmative vote of a majority of all the votes of
shareholders of each series of shares, whether or not such series is entitled to be cast on the
matter pursuant to the Company Charter or Company Bylaws. Approval of a merger by shareholders is
not required if:
| • | (i) the charter of the surviving corporation does not differ from its
charter before the merger; (ii) each shareholder of the surviving
corporation whose shares were outstanding immediately before the
effective date of the merger will hold the same number of shares with
identical designations, preferences, limitations and relative rights
immediately after the effective date of the merger; and (iii) the
number of shares of such class or series outstanding immediately after
the effective time of the merger does not increase by more than 20% of
the number of shares of such class or series outstanding immediately
before the effective time of the merger; or |
||
| • | The merger is between the Company and a subsidiary in which the
Company owns at least 90% of the outstanding shares of each class of
stock. |
Shareholder approval is not required for the transfer of any or all of the Company’s property
to a corporation all the shares of which are owned by the Company.
Maryland: The Company may merge, enter into a share exchange or sell, lease, exchange or
otherwise dispose of all or substantially all of its property only if such action is approved by
the NetREIT (MD) Board and, except as described below, by the affirmative vote of a majority of all
the votes of stockholders entitled to be cast on the matter pursuant to the Surviving Charter and
Surviving Bylaws. Approval of a merger by stockholders is not required if:
| • | (i) the charter of the surviving corporation does not differ from its
charter before the merger; (ii) each stockholder of the surviving
corporation whose shares were outstanding immediately before the
effective date of the merger will hold the same number of shares with
identical designations, preferences, limitations and relative rights
immediately after the effective date of the merger; and (iii) the
number of shares of such class or series outstanding immediately after
the effective time of the merger does not increase by more than 20% of
the number of shares of such class or series outstanding immediately
before the effective time of the merger; or |
||
| • | The merger is between the Company and a subsidiary in which the
Company owns at least 90% of the outstanding shares of each class of
stock. |
Stockholder approval is not required for the transfer of any or all of the Company’s property
to a corporation all the shares of which are owned by the Company.
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NetREIT (MD) may merge, consolidate or sell, lease, exchange or otherwise transfer all or
substantially all of its assets only if such action is approved by the NetREIT (MD) Board and,
except as described below, by the affirmative vote of a majority of all the votes entitled to be
cast on the matter. Approval of a merger by stockholders is not required if:
| • | (i) the merger does not reclassify or change the terms of any class or
series of shares that is outstanding immediately before the merger
becomes effective or otherwise amend the charter and (ii) the number
of shares of such class or series outstanding immediately after the
effective time of the merger does not increase by more than 20% of the
number of shares of such class or series outstanding immediately
before the effective time of the merger; or |
||
| • | The merger is between NetREIT (MD) and a 90%-or-more owned subsidiary
and (i) the charter of the successor is not amended in the merger
other than to change its name, the name or other designation or the
par value of any class or series of its stock or the aggregate par
value of its stock and (ii) the contract rights of any stock of the
successor issued in the merger in exchange for stock of the other
corporation participating in the merger are identical to the contract
rights of the stock for which the stock of the successor was
exchanged. |
Stockholder approval is not required for the transfer of all or substantially all of NetREIT
(MD)’s assets to one or more persons if all of the equity interests of the person or persons are
owned, directly or indirectly, by NetREIT (MD).
Dissolution
California: Under the CGCL, a proposal for voluntary dissolution may be recommended and
approved by the affirmative vote of stockholders representing fifty percent (50%) or more of the
voting power of the corporation, voting together as a single-class on an as converted basis. The
board of directors may make an election for voluntary dissolution in very limited circumstances -
when the corporation has not conducted business in the past five years, upon an order for relief
entered under Chapter 7 of the federal bankruptcy law, or if no shares have been issued.
Maryland: Under Maryland law, a proposal for dissolution recommended by a majority of the
entire board of directors must be approved by stockholders by the affirmative vote of two-thirds of
all the votes entitled to be cast on the matter, unless the corporation provides in its charter for
approval of such dissolution by a lesser percentage, but not less than a majority of all of the
votes entitled to be cast on the matter. The Surviving Charter requires that a dissolution of
NetREIT (MD) be approved by the affirmative vote of a majority of all the votes entitled to be cast
on the matter at a meeting at which a quorum is present.
Ownership Limitations and Restrictions on Transfer
California: For the Company to continue to qualify as a REIT under the Code, not more than
50% of our common stock may be owned by five (5) or fewer individuals during the last half of our
taxable year, and our common stock must be owned by 100 or more persons during at least 335 days of
a taxable year of twelve months or during a proportionate part of a shorter taxable year. To meet
these requirements, the Directors have the power under the bylaws to prevent the transfer of and/or
to call for redemption a number of the shares sufficient, in the opinion of the Directors, to
maintain or bring the direct or indirect ownership thereof into conformity with the requirements of
such a real estate investment trust under the REIT Rules.
-35-
The Company Charter provides that the Board shall have the power to prevent the transfer of,
or may call for redemption, in any manner approved by the Board, a number of the shares of the
Company’s Common Stock sufficient in the opinion of the board to maintain or bring the direct or
indirect ownership of such shares into conformity with the REIT Rules. Particularly, the Board has
adopted a policy of refusing any transfer of its Common Stock that would result in the transferee
becoming the beneficial owner of more than 9.8% of the outstanding Common Stock of the Company.
The Board may require, whenever they deem it reasonably necessary to protect our tax status,
statements or affidavits from any shareholder setting forth the number of shares already owned by
it and any related person. Should the Board determine a proposed transfer would jeopardize our
status as a REIT under the REIT Rules, the Board may refuse to permit the transfer.
Maryland: The Surviving Charter provides that no person or entity may own, directly or
indirectly, more than 9.8% in economic value of our aggregate outstanding shares of stock or 9.8%
in economic value or number of shares, whichever is more restrictive, of our aggregate outstanding
shares of our Common Stock (“ownership limit”). This ownership limit is not applicable to the
acquisition of shares by an underwriter with the purpose of distributing such shares in a public
offering. The Surviving Charter requires every stockholder who owns more than 5 of our outstanding
stock to give written notice, within thirty (30) days after the end of each taxable year, setting
forth such stockholder’s direct and indirect ownership of our stock.
If any transfer of our shares results in any person or entity owning more than the ownership
limit (“prohibited owner”), then the number of shares of stock of which otherwise would cause such
prohibited owner to violate the ownership limit will automatically be transferred to a charitable
beneficiary. The transfer of such shares will be deemed to have been transferred to a trustee of a
trust for the exclusive benefit of one or more charitable beneficiaries. The trustee will be
appointed by us, and will be a person unaffiliated with NetREIT (MD) and the prohibited owner. The
prohibited owner will not have any economic benefit, rights to dividends or distributions and will
not possess any rights to vote or other rights attributable to the shares of stock held in trust.
The trustee will have all voting rights and rights to dividends or other distributions with respect
to shares of stock held in trust, which rights will be exercised for the exclusive benefit of the
charitable beneficiary.
No person or entity may own, directly or indirectly, our shares of stock that would result in
us failing to qualify as a REIT. Additionally, no stockholder may transfer our shares of the stock
if the result of such transfer is ownership of our stock by less than 100 stockholders. To the
extent a transfer of shares of stock results in ownership by less than 100 stockholders, such
shares of stock will be transferred to that number of trusts, each having a distinct trustee and a
charitable beneficiary or beneficiaries that are distinct from those of each other trust, such that
there is no violation. In the event the our Board determines a proposed transfer or transfer will
or has violated any of the aforementioned ownership limitations or transfer restrictions, the Board
of Directors will take action it deems advisable to refuse to give effect to or to prevent such
transfer.
The foregoing discussion is an attempt to summarize the material differences in the Company
Bylaws and Company Charter as compared to the Surviving Charter and Surviving Bylaws, as well as
the corporation laws of California and Maryland, and does not purport to be an exhaustive
discussion of all of the differences. Such differences can be determined in full by reference to
copies of those documents as well as the CGCL and the MGCL.
Vote Required
Approval of this Proposal 2 requires that we obtain the approval of the holders of at least a
majority of: (a) the outstanding shares of our Common Stock voting together as a single class,
(b) the outstanding shares of our Series AA Preferred Stock voting together as a single class, and
(c) the outstanding shares of our Common Stock and Series AA Preferred Stock, voting together as a
single class.
The Board recommends a vote “FOR” the approval of Proposal 2.
-36-
PROPOSAL 3 — SUB-PROPOSALS 3A THROUGH 3K:
A PROPOSAL TO APPROVE AND ADOPT THE SURVIVING CORPORATION’S CHARTER AND BYLAWS AS A PART OF THE
REINCORPORATION
In connection with the Reincorporation, subject to the approval of our shareholders, the
Company would adopt the Charter and Bylaws of NetREIT (MD), the surviving entity in the
Reincorporation. The proposed Charter of NetREIT (MD) (the “Surviving Charter”) and the proposed
Bylaws of NetREIT (MD) (the “Surviving Bylaws”) implement certain changes as compared to our
current Charter (the “Company Charter”) and our current Bylaws (the “Company Bylaws”), as
described below. Pursuant to this Proposal 3, you will be asked to consider, and vote to approve
and adopt, certain provisions of the Surviving Charter and Surviving Bylaws. Reference to the
“Company Charter” shall be deemed to include (i) the Company’s original Articles of Incorporation,
effective as of January 29, 1999 (the “Original Articles”), and (ii) the Company’s Certificate of
Determination of Preferences of Shares of the Company, effective as of April 6, 2005, creating the
Series AA Preferred Stock (the “Certificate of Determination”).
To comply with applicable “unbundling” rules of the SEC relating to proxy statements, we are
presenting Sub-Proposals 3A through 3K to our shareholders as separate proposals for approval. As a
matter of state law, only the approval of the Reincorporation (Proposal 2) is required. However,
because we are required to present the Sub-Proposals separately and because the differences between
the Company Charter and Company Bylaws, on one hand, and the Surviving Charter and Surviving
Bylaws, on the other hand, are considered to be integral parts of the Reincorporation, each of the
Sub-Proposals set forth below is discussed separately. Approval of the Sub-Proposals is not a
condition to consummation of the Reincorporation. Accordingly, a vote against any of Sub-Proposals
will not count as a vote against the Reincorporation. Nevertheless, should we obtain approval of
less than all of the Sub-Proposals, we may elect not to proceed with the Reincorporation.
Except as otherwise provided below, each reference to our “Common Stock” and “Common Shares”
shall be deemed to refer to our Common Stock, Series A and Common Stock, Series B. None of our
Common Stock, Series B is presently outstanding.
Upon effectiveness of our Reincorporation in Maryland, we will cease to be governed by the
California General Corporation Law (“CGCL”) and will instead be governed by the Maryland General
Corporation Law (“MGCL”). The MGCL is viewed as containing provisions conducive to the operation
of a REIT, but also differs in some respects from the CGCL in ways that will affect our
shareholders’ rights. Please see the comparison of the material provisions of the MGCL and the
CGCL above.
Background
The Company was incorporated in 1999, and after its formation, we elected to operate as a
“real estate investment trust” (“REIT”), as defined under the Internal Revenue Code. We are a self
administered REIT, meaning that our operations are under the control of our Board of Directors.
Since our inception we have been governed by the CGCL.
We have primarily funded our operations since inception through sales of our securities in
private placements. In particular, since 2005 the Company has conducted multiple private
placements through selected FINRA member broker-dealer firms. We believe that that the securities
we sold in these private placements are exempt from registration under Section 4(2) and Regulation
D promulgated under the Securities Act of 1933, as amended (the “Act”) and applicable state
securities laws. As a result of these
offerings, we currently have in excess of 2,200 shareholders, and this number of shareholders
is expected to grow, as we anticipate that we will continue to fund our operations in the near-term
in significant part from the proceeds of our continued offerings of our securities.
-37-
A consequence of our successful fund raising efforts is that we have a broad and varied
shareholder base in which no single shareholder holds in excess of 1.1% of our outstanding
securities. This lack of concentration of ownership has led to difficulty in obtaining enough votes
(whether in person or via proxy) to achieve quorum at our annual shareholder meetings, and, at
meetings where we achieve quorum, to pass measures that require the approval of holders of at least
a majority of our outstanding shares entitled to vote on such measures (such vote, hereinafter
“Majority Vote”). In particular, many of the provisions of the Company Bylaws cannot be amended
without Majority Vote. This Majority Vote requirement has made it difficult for us to make certain
changes to the Company Charter and Company Bylaws that the Board deems advisable and in the best
interests of the Company and its shareholders. For instance, at our last annual shareholders
meeting, held in October 2009, we were unable to obtain sufficient shareholder vote to pass the
proposals presented for consideration at the meeting that required approval by Majority Vote. This
inability to obtain Majority Vote approval was not due to shareholder opposition to such measures
(each of such measures was approved by over 85% of the our shareholders who voted on such
measures), but rather, was primarily due to difficulties in obtaining sufficient shareholder
response to our proxy solicitations.
We anticipate that we will continue to face difficulties in soliciting sufficient shareholder
vote to approve measures that our Board of Directors deems to be in the best interests of the
Company and its shareholders. To address these anticipated difficulties, a number of the
Sub-Proposals set forth below (i) are intended to amend or remove provisions of our bylaws that we
believe are unnecessary for the protection of the Company or our shareholders, or are not
appropriate for inclusion in our bylaws (see, for instance, Sub-Proposals 3H and 3K), and (ii) are
intended to provide our Board certain flexibility to take actions that it believes to be in our
best interest and the best interests of our shareholders (see, for instance, Sub-Proposals 3B and
3C). We believe that it is appropriate to vest in our Board powers sufficient to provide it with
the flexibility it needs to timely and effectively direct our policies, management and growth.
Please note that should our shareholders approve each of the Sub-Proposals set forth below, we
believe that the Surviving Charter will still be considerably more restrictive with respect to our
Board’s exercise of authority (and the scope of such authority) than the charters of the large
majority of other Maryland REITs.
In addition, we have intentionally retained in the Surviving Charter and Surviving Bylaws many
shareholder rights granted under the CGCL, as well as under the Company Charter and the Company
Bylaws, that are not required by the MGCL and which we believe are not included in the charters of
the large majority of other Maryland REITS. In particular, the Surviving Charter (i) provides that
our shareholders will continue to have the right to amend our bylaws (though the MGCL provides that
such power may be vested solely in a board of directors), (ii) provides that our shareholders will
continue to have the right to vote their shares cumulatively in the election of directors, (iii)
does not include provisions establishing a “classified” (or staggered) board, since we are
presently not permitted to establish a “classified” board under the CGCL; and (iv) affirmatively
elects to become subject to the Maryland Business Combination Act, which provides certain
protections and safeguards against transactions between us and certain “interested shareholders”
that are similar to the protections currently set forth in the Company Bylaws. There are numerous
additional provisions of the Surviving Charter and Surviving Bylaws that are designed to track the
language and intent of the Company Charter, Company Bylaws and the CGCL, including provisions
pertaining to removal of directors, filling of director vacancies and actions by written consent of
the shareholders.
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If the Reincorporation is approved by the shareholders and subsequently consummated, we
anticipate that we will continue to review the terms and provisions of the Surviving Charter and
the Surviving Bylaws on an ongoing basis to ensure that our Board maintains appropriate corporate
governance flexibility while
simultaneously ensuring that we maintain appropriate shareholder protections. These periodic
reviews could result in our Board making the determination that addition of certain provisions to,
deletion of certain provisions from, or amendment of certain provisions in, the Surviving Charter
or the Surviving Bylaws would be in our best interest. Depending on the provisions that are being
added, amended or deleted, shareholder approval may not be required. In particular, if you approve
our proposal to vest in our Board the power to amend our bylaws (see Sub-Proposal 3C below), our
Board will be entitled to amend the provisions of our Surviving Bylaws without your consent
(including provisions that are the subject of the sub-proposals hereunder), subject to the
provisions of the MGCL that may require shareholder consent. Of course, the Surviving Bylaws
provide you the authority to amend the Surviving Bylaws as well. In addition, any decisions the
Board makes with respect to amendment of the Surviving Charter or the Surviving Bylaws are subject
to express statutory duties under the MGCL which require that each of our Directors, in carrying
out his or her responsibilities as a director, must act (1) in good faith, (2) with a reasonable
belief that his or her actions are in the Company’s best interests, and (3) with the care of an
ordinarily prudent person in a like position under similar circumstances.
Although the Reincorporation must be approved by a separate vote of each outstanding class of
our stock (including our Series AA Preferred Stock), except in those Sub-Proposals where we
indicate to the contrary, the approval of the holders of Series AA Preferred Stock voting together
as a separate class will not be required to approve the Sub-Proposals. Please note that,
regardless of whether you hold any shares of Series AA Preferred Stock as of the annual meeting
date, if you held shares of Series AA Preferred Stock as of record date set by our Board (March 30,
2010), you are entitled to vote on any Sub-Proposal for which the approval of the holders of Series
AA Preferred Stock is required.
Attached hereto as Appendices B and C are the Surviving Charter and Surviving Bylaws. These
forms assume that all of the amendments described in the Sub-Proposals below will be approved.
Each Sub-Proposal describes the effect on the Surviving Charter or the Surviving Bylaws, as
applicable, if such Sub-Proposal is not approved.
Sub-Proposal 3A: A proposal to approve amendment of the range of authorized Directors and to
fix the number of Directors at eight (8).
Section 2 of Article IV of the Company Bylaws provide:
“The number of Directors of the Corporation shall be not less than five (5) nor more
than nine (9). The exact number of Directors may be changed, from time to time,
within the limits specified above, by approval of the majority of the Board of
Directors or by the shareholders. A majority of the Directors shall be Independent
Directors.
The indefinite number of Directors may be changed, or a definite number fixed
without provision for an indefinite number, by a duly adopted amendment to the
Articles of Incorporation or by an amendment to this Bylaw duly adopted by the vote
or written consent of holders of a majority of the outstanding shares entitled to
vote; provided, however, that an amendment reducing the fixed number or the minimum
Directors to a number less than five (5) cannot be adopted if the votes cast against
its adoption at a meeting, or the shares not consenting in the case of an action by
written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of
the outstanding shares entitled to vote thereon. No amendment may change the stated
maximum number of authorized Directors to a number greater than two times the stated
minimum number minus one.”
-39-
Article V of the Company Charter provides:
“The number of directors of this corporation shall not be less than four (4) nor
more than seven (7) directors, the exact number of directors to be determined from
time to time by resolution adopted by the Board of Directors.”
Section 5.1 of Article V of the Surviving Charter provides:
“The business and affairs of the Corporation shall be managed under the direction of
the Board of Directors. The number of directors of the Corporation initially shall
be eight (8), which number may be increased or decreased only by the Board of
Directors pursuant to the Bylaws of the Corporation, but shall never be less than
the minimum number required by the Maryland General Corporation Law (the “MGCL”).
The names of the directors who shall serve until their successors are duly elected
and qualified are:
Jack K. Heilbron
|
Larry G. Dubose | |
David T. Bruen
|
Thomas Schwartz | |
Sumner J. Rollings
|
William Allen | |
Bruce A. Staller
|
Kenneth Elsberry |
Section 2 of Article III of the Surviving Bylaws provides:
“The Corporation shall have eight (8) directors, which number may be increased or
decreased from time to time by the Board of Directors pursuant to a resolution
adopted by a majority of the entire Board of Directors, but the number of directors
shall never be less than six (6) nor more than eleven (11), unless otherwise
approved by the majority vote of the stockholders entitled to cast a majority of all
the votes entitled to be cast on the matter. No reduction in the number of
Directors by resolution of the Board of Directors shall have the effect of removing
any director from office prior to the expiration of his or her term.”
The provisions of the Company Charter and the Company Bylaws conflict with respect to the
authorized range of Directors. Under the CGCL, the terms and provisions of the Company Charter
will govern. Therefore, we are presently permitted to have a maximum of seven (7) directors on our
Board. We do not believe that this restriction on the maximum number of our Directors is advisable.
We believe it is appropriate to provide our Board the flexibility to adjust the authorized number
of our Directors with in a range that is more reflective of the intended future composition of our
Board. As we continue to grow, we anticipate that there will be additional opportunities to attract
strong director candidates to our Board. We believe that it is appropriate for us to have the
ability to increase the authorized number of seats on the Board and appoint such individuals to
serve as Directors, if such appointments are deemed by our then-existing Board members to be in our
best interest. Otherwise, we may be required to decline to appoint any such individual or ask an
existing Board member to step down to make room for such individual, either of which alternatives
may be undesirable.
Although not required under the MGCL, we have provided in the Surviving Bylaws that our Board
may not adjust the range of Directors set forth in the Surviving Bylaws without the approval of our
shareholders. In addition, we have determined the minimum and maximum number of our Directors in
this range in accordance with the CGCL (which requires that the maximum number of directors not
exceed twice the minimum number of directors minus one).
-40-
Please note that the Surviving Charter provides for eight (8) directors. So by approving this
Sub-Proposal 3A, you will be allowing NetREIT (MD) to have an eight-person Board immediately upon
consummation of the Reincorporation and you will be facilitating the reappointment of Ken Elsberry,
our Chief Financial Officer, to our Board. We intend that Mr. Elsberry and our existing seven
directors will be appointed by the current sole director of NetREIT (MD) to the NetREIT (MD) Board
effective immediately as of (and contingent upon) consummation of the Reincorporation and approval
of this Sub-Proposal. Assuming that you approve this Sub-Proposal 3A, no further action will be
required on your behalf to either fix the Board of NetREIT at eight (8) or to approve the
appointment of Kenneth Elsberry to the Board of NetREIT (MD), as these actions will be permissible
under the Surviving Charter and Surviving Bylaws and may be taken by the NetREIT (MD) Board.
The separate approval of this Sub-Proposal 3A by the holders of Series AA Preferred Stock,
will constitute consent to the grant of authority to our Board to adjust the authorized number of
our Directors within the shareholder-approved range as deemed appropriate by the Board.
If this Sub-Proposal 3A is not approved by our shareholders, we anticipate that we will revise
the Surviving Charter and Surviving Bylaws to provide for a range of between four (4) and seven (7)
directors, as currently provided in the Company Charter.
Required Vote:
Approval of Sub-Proposal 3A requires the affirmative vote of (i) a majority of all of the
Company’s outstanding shares of Common Stock, and (ii) a majority of all of the Company’s
outstanding shares of Series AA Preferred Stock.
The Board recommends a vote “FOR” the approval of Proposal 3A.
Sub-Proposal 3B: A proposal to approve the grant of authority to our Board to adjust our
quorum requirements.
Section 6 of Article III of the Company Bylaws provides:
“The presence in person or by proxy of the holders of a majority of the shares
entitled to vote at any meeting of shareholders shall constitute a quorum for the
transaction of business. The shareholders present at a duly called or held meeting
at which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a quorum,
if any action taken (other than adjournment) is approved by at least a majority of
the shares required to constitute a quorum.”
In addition, the last sentence of Section 8 of Article III of the Company Bylaws provides:
“If a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of Directors) shall be the act of the shareholders, unless the vote of a
greater number or voting by classes is required by California Corporations Code, by
these Bylaws or by the Articles of Incorporation.”
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Section 5.2.1 of the Surviving Charter provides:
“Except with respect to the election of directors provided for in Section 5.2.2 by
the holders of Common Stock, the presence in person or by proxy of the holders of
shares of stock of the Corporation entitled to cast a majority of the votes entitled
to be cast on a matter (without
regard to class) shall constitute a quorum at any meeting of stockholders with
respect to such matter, except with respect to any such matter that, under
applicable statutes or regulatory requirements or the charter, requires approval by
a separate vote of the holders of one or more classes of stock, in which case the
presence in person or by proxy of the holders of shares entitled to cast a majority
of the votes entitled to be cast by each such class on such a matter shall
constitute a quorum. Notwithstanding the foregoing, to the extent permitted by the
MGCL, the Bylaws may provide for a greater or lesser quorum requirement, provided
that such requirement shall not be less than forty percent (40%) nor more than
sixty-six and two-thirds percent (66 2/3rds%) of the votes entitled to be cast
(without regard to class) on matters submitted for a vote of the stockholders.”
Section 7 of Article II of the Surviving Bylaws provides:
“At any meeting of stockholders, the presence in person or by proxy of stockholders
entitled to cast entitled to cast a majority of the votes entitled to be cast on a
matter (without regard to class) shall constitute a quorum; but this section shall
not affect any requirement under any statute or the charter of the Corporation for
the vote necessary for the adoption of any measure. If, however, such quorum shall
not be present at any meeting of the stockholders, the stockholders entitled to vote
at such meeting, present in person or by proxy, shall have the power to adjourn the
meeting from time to time to a date not more than forty-five (45) days after the
original record date without notice other than announcement at the meeting. At such
adjourned meeting at which a quorum shall be present, any business may be transacted
which might have been transacted at the meeting as originally notified.”
Except as discussed below, the Surviving Charter provides the Board the ability to adjust the
Company’s quorum requirement in the Surviving Bylaws to as low as forty percent (40%) (and as high
as two-thirds) of the votes entitled to be cast on the matter. The Company Charter provides that
“holders of a majority of the shares entitled to vote” at a particular meeting shall constitute
quorum, and does not specifically contemplate a lowering of such quorum requirement. However, we
are entitled under the CGCL to adjust our requirement to as low as one-third of the votes entitled
to be cast on the matter (and allowed to institute a super-majority quorum requirement as well),
assuming receipt of the required shareholder consent to such amendment, which under the Company
Bylaws is Majority Vote. However, under the Surviving Charter and assuming that our Board is given
the authority to amend all our bylaws (see Sub-Proposal 3C), our Board will be provided the
authority to lower our quorum requirement without having to solicit shareholder consent. We
believe that it is in the Company’s best interest and the best interest of our shareholders to
provide the Board the authority to lower our quorum requirement should the Board, in the exercise
of its fiduciary duty to us and our shareholders, feel that it is appropriate to do so. The
hurdles we have faced in the past in achieving quorum at our annual meetings could be avoided by
lowering such quorum requirement.
Even if this Sub-Proposal is approved, the Board would only exercise its authority to reduce
our shareholder quorum requirement judiciously and only after analysis of reasonable alternatives.
In addition, we have provided in Section 8.2 of the Surviving Charter that the affirmative vote of
the holders of shares entitled to cast a majority of all the votes entitled to be cast on the
matter shall be required to authorize a merger, consolidation, share exchange, dissolution or sale
of substantially all of the assets of the Company (thus rendering a reduction in our quorum
requirement ineffective with respect to the required vote on any such matters).
If this Sub-Proposal 3B is not approved by our shareholders, we anticipate that we will revise
the Surviving Charter and Surviving Bylaws to require that amendments to our shareholder quorum
requirement may only be made upon receipt of Majority Vote.
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Required Vote:
Approval of Sub-Proposals 3B requires the affirmative vote of a majority of the Company’s
outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3B.
Sub-Proposal 3C: A proposal to approve the grant of authority to our Board to amend our
bylaws.
Section 1 of Article XII of the Company Bylaws provides:
“The provisions of Article I, insofar as it relates to Article VIII and Article IX,
Sections 1, 2 and 3 of Article III; Sections 1 through 6 of Article IV, Article VII,
Article VIII and Article IX, Article X, Article XI, and Article XII of these Bylaws
may only be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that no
amendment which would change any rights with respect to any outstanding class of
Securities of the Corporation, by reducing the amount payable thereon upon
liquidation of the Corporation, or by diminishing or eliminating any voting rights
pertaining thereto, may be made unless also approved by the vote or written consent
of the holders of at least sixty-six and two-thirds percent (66-2/3 %) of the
outstanding Securities of such class. Subject to the foregoing, new Bylaws may be
adopted or these Bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided, however,
that the amendment of any provision which contains a requirement for a greater vote
for any action shall require a vote equal to such greater vote for approval.”
Article XIV of the Surviving Bylaws provide:
“Section 1. POWER OF DIRECTORS TO AMEND. The Board of Directors shall have the
power to adopt, alter or repeal these bylaws not inconsistent with the Corporation’s
charter or applicable law for the regulation and management of the affairs of the
Corporation; provided, however, that the Board of Directors may adopt a bylaw or an
amendment to a bylaw changing the authorized number of directors only for the
purpose of fixing the exact number of directors of the Corporation as provided in
Article III, Section 2 of these bylaws; and, provided, further, that no amendment
that would change any rights with respect to any outstanding class of common stock
by reducing the amount payable thereon upon liquidation of the Corporation, or
diminishing or eliminating any voting rights pertaining thereto, may be made unless
also approved by sixty-six and two-thirds percent (66-2/3rds%) of the outstanding
shares of such class.”
Section 2. POWER OF STOCKHOLDERS TO AMEND. Unless the Corporation’s charter
provides otherwise, the holders of the Corporation’s common stock, at any annual
meeting or at a special meeting called for the purpose, may adopt, alter or repeal
the bylaws of the Corporation; provided, however, that the holders of the Series AA
Preferred Stock shall have the right, pursuant to Section 6.4(i)(1) of the charter,
to approve an amendment, alteration or repeal of any provision of these bylaws that
affects adversely the relative rights, preferences, qualifications, limitations or
restrictions of the Series AA Preferred Stock. Any change to the bylaws made by the
stockholders may not be altered in any manner by the directors prior to
the next annual meeting of stockholders.”
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The impact of the provisions of the Surviving Bylaws quoted above would be to give our Board
the ability to amend the Surviving Bylaws, subject only to the limitations quoted immediately
above. At present, the Company Bylaws reserve to our shareholders the blanket ability to amend all
of our bylaws, and provides the Board the authority to amend only a very limited number of our
current bylaws. We believe that this limitation on the authority of our Board is very unusual
amongst our peers and is not in the best interests of the Company or its shareholders. We believe
the Board should be in a position to effect prompt bylaws changes in response to changes in
corporate governance practices, identification of perceived risks to us that could be addressed by
changes to our bylaws, and similar matters. If Majority Vote were to continue to be required to
amend practically all of the substantive provisions of our Bylaws, we will likely face future
difficulties in obtaining such Majority Vote in light of our number of shareholders and lack of
concentration of share ownership in a single shareholder (or small group of shareholders). And even
if we obtain such Majority Vote, the time lapse between calling a special meeting and receiving the
required Majority Vote could be significant, thus preventing prompt Board action to address matters
that require expedited amendment of our bylaws.
Although it is common practice for other REITs incorporated in Maryland to vest the authority
to amend bylaws solely in their boards of directors, we have provided that our shareholders will
continue to have the right to amend our bylaws. The practical effect of this is that our
shareholders will have the concurrent ability to amend the Surviving Bylaws and may also repeal
bylaws amendments effected by our Board. Although our shareholders’ concurrent ability to amend
the Surviving Bylaws could theoretically lead to a circular situation in which our Board and
shareholders repeatedly repeal each other’s changes and subsequent repeals, we are not aware of any
instances in which this has actually happened, and we believe the likelihood of this happening is
low.
If this Sub-Proposal 3C is not approved by our shareholders, we anticipate that we will revise
the Surviving Charter and Surviving Bylaws, to the extent practicable in light of the differences
in their provisions as compared to the provisions of the Company Bylaws (and the differences
between the CGCL and the MGCL), to limit our Board’s authority to amend Bylaws to the same
substantive extent that it is limited under the Company Bylaws.
Required Vote:
Approval of Sub-Proposal 3C requires the affirmative vote of a majority of all of the
Company’s outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3C.
Sub-Proposal 3D: A proposal to approve modifications to our charter amendment provisions.
Amendment to Charter
The Company Charter is silent regarding amendment of the Company Charter. Under the CGCL,
Majority Vote is required to amend any provision of the Company Charter, except that the approval
of shares of an outstanding class of our stock will be required (hereinafter, a “Class Vote”),
whether or not such class entitled to vote under the terms of the Company Charter, to effect any of
the following amendments (the “Class Vote Amendments”):
| • | a change in the aggregate number of shares of such class; |
| • | an exchange, reclassification or cancellation of the shares of such class
(including a reverse stock split but excluding a forward stock split); |
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| • | an exchange, or creation of a right of exchange, of all or part of the shares of
another class into the shares of such class; |
| • | in the case of preferred shares, dividing the shares of any class into series
having different rights, preferences, privileges or restrictions or authorizing the
board of directors to do so; |
| • | creation of a new class of shares having rights, preferences and privileges
senior to such class (or increasing the rights, preferences and privileges or the
number of authorized shares of any class having rights, preferences and privileges
senior to such class); |
| • | changing the rights, preferences or privileges of such class; or |
| • | cancelling or otherwise affecting the dividends on the shares of such class
which have accrued but not been paid. |
Article VIII of the Surviving Charter provides:
“Section 8.1 AMENDMENTS TO CHARTER. The Corporation reserves the right
from time to time to make any amendment to its charter now or hereafter authorized
by law, including any amendment altering the terms or contract rights, as expressly
set forth in this charter, of any shares of outstanding stock, other than the
outstanding shares of Series AA Preferred Stock which shall have and retain all of
the rights provided for in Section 6.4(i). All rights and powers conferred by the
charter on stockholders, directors and officers are granted subject to the
reservation set forth in the previous sentence. Except as otherwise provided in the
charter and except for those amendments permitted to be made without stockholder
approval under Maryland law, any amendment to the charter shall be valid only if
approved by the stockholders of the Corporation by the affirmative vote of a
majority of all the votes entitled to be cast on the matter.
Section 8.2 APPROVAL OF CERTAIN EXTRAORDINARY ACTIONS. The affirmative vote
of the holders of shares entitled to cast a majority of all the votes entitled to be
cast on the matter shall be required to authorize a merger, consolidation, share
exchange, dissolution or sale of substantially all of the assets of the
Corporation.”
As the MGCL does not have the same Class Vote requirements upon amendment of the charter that
the CGCL has, upon approval of the Reincorporation our shareholders will cease to have any separate
Class Vote with respect to the Class Vote Amendments, though our shareholders will have such
separate class vote rights as are provided in the Surviving Charter. In addition, the Surviving
Charter specifically reserves the right for us to amend the Surviving Charter (subject to the
provisions of the MGCL and any shareholder amendment rights); the Company Charter does not provide
for a similar reservation.
If this Sub-Proposal 3D is not approved by our shareholders, we anticipate that we will revise
the Surviving Charter and Surviving Bylaws to reflect substantively the same charter amendment
rights as set forth in the Company Charter.
Required Vote:
Approval of Sub-Proposal 3D requires the affirmative vote of a majority of all of the
Company’s outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3D.
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Sub-Proposal 3E: A proposal to approve the modification of the director election rights of our
Series AA Preferred Stock.
The Company Charter provides that the holders of Series AA Preferred do not have the right to
vote in elections of directors except in certain limited circumstances. Specifically, Section
3(h)(ii) of our Certificate of Determination provides as follows:
“In the event that four (4) consecutive quarterly dividends payable on the Series AA
Preferred are in arrears on the date of any meeting of the corporation’s
shareholders at which directors are to be elected, the holders of Series AA
Preferred Stock, voting separately as a class (together with the holders of shares
of any other class of stock upon which like voting rights have been conferred and
are then exercisable), shall be entitled to elect two (2) directors of the
corporation, provided, however, that nothing herein shall be construed as either
increasing or decreasing the number of directors that the corporation’s articles of
incorporation then authorize. Any directors so elected by the holders of the Series
AA Preferred Stock shall serve until payment of dividends on the Series AA Preferred
Stock are brought current. In connection with any such vote by the Series AA
Preferred Stock, each outstanding share of Series AA Preferred Stock shall be
entitled to one vote. Except as provided herein, the holders of the Series AA
Preferred Stock shall have no voting rights except as required by law.”
The last paragraph of Section 6.4(i) of the Surviving Charter provides:
“Except as provided below in this Section 6.4(i), holders of Series AA Preferred
Stock shall not have the right to vote for the election of directors. If dividends
on the Series AA Preferred Stock have accrued and remain unpaid for a period of one
year, the Board of Directors shall call and hold a meeting of the Board of Directors
within thirty (30) days to consider and adopt a resolution to increase the number of
directors of the Corporation by two (2) (such additional directors, the “Series AA
Preferred Directors”), name nominees for positions as Series AA Preferred Directors
and call a special meeting of the holders of the Series AA Preferred Stock for the
sole purpose of electing Series AA Preferred Directors. Series AA Preferred
Directors elected by the holders of the Series AA Preferred Stock pursuant to this
Section 6.4(i) shall serve until the earlier of (1) the date the Corporation pays a
dividend sufficient to retire all accrued and unpaid dividends on the Series AA
Preferred Stock, (2) their resignation or removal by a vote of the majority of the
Series AA Preferred Stock, or (3) the date their respective successors are duly
elected and qualify. If any Series AA Preferred Director shall resign or be removed
from office, the holders of the Series AA Preferred Stock shall have the right to
elect such Series AA Preferred Directors as are required to fill any such
vacancy(ies) until such time that the director election rights of the holders of
Series AA Preferred Stock terminate.”
If this Sub-Proposal 3E is adopted, the holders of Series AA Preferred stock will maintain the
right to elect two (2) of our Directors, which right would be triggered at such point that accrued
dividends on the Series AA Preferred Stock remain unpaid for a period of one year. However, rather
than require at the next meeting of our shareholders at which directors are to be elected that two
of the authorized Directors be elected by the holders of Series AA Preferred Stock, the Board will
have the authority to increase the size of the Board within the shareholder-approved range and then
name nominees and call a meeting of the holders of the Series AA Preferred Stock to elect two
directors. At the time of sale and issuance of the Series AA Preferred Stock, there were five (5)
Directors on our Board, as of the date of this Proxy, there are seven (7) Directors on our
Board, and it is our intention that upon consummation of the Reincorporation, there will be eight
(8) Directors of the Company. Thus, for example, if the director election rights of the Series AA
Preferred Stock were triggered after the Reincorporation and while the authorized number of
Directors on the NetREIT Board was eight (8), the size of the NetREIT (MD) Board would be increased
to ten (10) Directors and the holders of Series AA Preferred Stock would be entitled to elect two
(2) Directors to this ten-person Board (assuming there are then any shares of Series AA Preferred
Stock outstanding).
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By approving this Sub-Proposal 3E, the holders of Series AA Preferred Stock will be approving
the amendments to the limited director election rights of the Series AA Preferred Stock under the
Surviving Charter, as described above. Aside from the amendments to the limited director election
rights of the Series AA Preferred Stock, the provisions of the Surviving Charter pertaining
specifically to the Series AA Preferred Stock will be the same as the provisions of the Company
Charter pertaining specifically to the Series AA Preferred Stock.
If the holders of Series AA Preferred Stock do not approve this Sub-Proposal 3E, we anticipate
that we will revise the limited director election rights of the holders of Series AA Preferred
Stock set forth in the Surviving Charter to provide that if such election rights are triggered, the
holders of Series AA Preferred Stock will be entitled to replace two existing members of the
NetREIT (MD) Board with their designees.
Required Vote:
Approval of Sub-Proposal 3E requires the affirmative vote of (i) a majority of all of the
Company’s outstanding shares of Common Stock and (ii) a majority of all of the Company’s
outstanding shares of Series AA Preferred Stock.
The Board recommends a vote “FOR” the approval of Proposal 3E.
Sub-Proposal 3F: A proposal to approve modification of our share transfer restrictions.
The Company Charter provides:
“The Board of Directors of this corporation shall have the power to prevent the
transfer of the Common Stock, Series A, or may call for redemption, in a manner
approved by the Board of Directors, of a number of the shares of Common Stock,
Series A from any holder or holders, directly or indirectly, of nine and eight
tenths percent (9.8%) or more of the then issued and outstanding Common Stock,
Series A, sufficient in the opinion of the Board of Directors to maintain or bring
the direct or indirect ownership of such shares of this corporation into conformity
with the requirements for a Real Estate Investment Trust under the provisions of the
Internal Revenue Code of 1986, as amended (the “Code”). In the event less than all
of the shares held by such persons are called for redemption, the amount redeemed
from each shall bear the same proportion to each other as the number of shares of
Common Stock, Series A held by each as of the redemption date. The redemption price
shall be (i) the last reported sales price of the shares of Common Stock, Series A
on the last business day prior to the redemption date on the principal national
securities exchange on which the shares of Common Stock, Series A are listed or
admitted to trading, (ii) if the shares of Common Stock, Series A are not so listed
or admitted to trading, the average of the highest bid and lowest asked prices on
such last business day as reported by the NASDAQ, National Quotation Bureau
Incorporated or a similar organization selected by this corporation for the purpose,
or (iii) if no such independent quotations exist, as determined in good faith by the
Board of Directors to be the fair market value of said shares on the last
business day prior to the redemption date. The holders of any shares of Common
Stock, Series A so called for redemption shall be
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entitled to payment of such
redemption price within a reasonable time of the date fixed for redemption. From and
after the date fixed for redemption by the Board of Directors, the holders of any
shares of Common Stock, Series A so called for redemption shall cease to be entitled
to dividends, distributions, voting rights and other benefits with respect to such
shares of Common Stock, Series A, excepting only the right to payment of the
redemption price fixed as subscribed above. The Board of Directors may require,
whenever it is deemed by them reasonably necessary to protect the tax status of this
corporation, statements or affidavits from any holder of shares of Common Stock,
Series A or proposed transferee of shares of Common Stock, Series A, setting forth
the number of shares of Common Stock, Series A already owned by him and any related
person specified in the form prescribed by the Board of Directors for that purpose.
If, in the opinion of the Board of Directors, which shall be conclusive upon any
proposed transferor or proposed transferee of shares of Common Stock, Series A, any
proposed transfer would jeopardize the status of this corporation as a Real Estate
Investment Trust under the code, the Board of Directors may refuse to permit the
transfer. Any attempted transfer as to which the Board of Directors have refused
their permission shall be void and of no effect to transfer any legal or beneficial
interest in the shares of Common Stock, Series A. All contracts for the sale or
other transfer or exercise of shares of Common Stock, Series A shall be subject to
this provision.”
Article VII of the Surviving Charter provides in pertinent part as follows:
| • | Except as described below in this Sub-Proposal, no person shall hold
more than 9.8% of our outstanding capital stock our 9.8% of our outstanding
common stock (i.e., our Common Stock, Series A); |
||
| • | No person shall own shares of our common stock to the extent such
ownership would result in us being “closely held” within the meaning of
Section 856(h) of the Internal Revenue Code or otherwise failing to qualify
as a REIT; and |
||
| • | Any transfer of our common stock that would result in our common stock
being owned by fewer than one hundred (100) persons shall be void and of no
force or effect. |
The foregoing restrictions are required to ensure that we retain our status as a REIT.
The Surviving Charter further provides that if any transfer of shares of our capital stock is
effected which results in the transferee owning more than 9.8% of our shares or which results in us
being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code, then that
number of shares that would cause such violation shall automatically be transferred to a non-profit
organization designated by us (though the prohibited transferee will be entitled to the proceeds of
the sale of such shares).
We believe that these provisions of the Surviving Charter regarding restrictions on transfer
and ownership of shares are common in the charter documents of Maryland REITs. Whereas the Company
Charter provides that we may prohibit transfers in violation of our aggregate ownership threshold
or redeem such shares (at our own expense), the provisions of the Surviving Charter do not require
us to either seek to prohibit (and rescind) a transfer of our capital stock or redeem the
applicable shares out of our own capital. We believe that the provisions of the Surviving Charter
regarding restrictions on transfer and ownership of shares are preferable to the comparable
provisions of the Company Charter. From a practical perspective, the provisions of the Surviving
Charter regarding restrictions on transfer and ownership of shares are unlikely to affect any of
our current shareholders, as our largest single shareholder owns only 1.1% of our outstanding
stock.
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If you do not approve the inclusion of the provisions of the Surviving Charter regarding
restrictions on transfer and ownership of shares, we anticipate that we will remove them from the
Surviving Charter and replace them with substantively similar provisions as currently provided
under the Company Charter.
Required Vote:
Approval of Sub-Proposal 3F requires the affirmative vote of a majority of all of the
Company’s outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3F.
Sub-Proposal 3G: A proposal to approve the addition of certain shareholder nomination and
proposals requirements.
None of the Company Charter, the Company Bylaws nor the CGCL contains any advance notice
permissions with respect matters to be presented at a corporation’s shareholder meetings.
Section 12 of Article II of the Surviving Bylaws contains provisions that provide us the
ability to require any of our shareholders proposing a nominee for election as a director or any
other matter for consideration at a meeting of the shareholders to provide advance notice of the
nomination or proposal to us not more than 90 days before the date of the meeting, or, in the case
of an annual meeting, not more than 90 days before the first anniversary of the preceding year’s
annual meeting or the mailing date of the notice of the preceding year’s annual meeting (such
provisions, the “Advance Notice Provisions”). The charter or bylaws may specify another time. For
director nominations or shareholder proposals to be properly brought before the meeting, the
shareholder must have delivered timely notice to our Secretary. Under the Surviving Bylaws, to be
timely, notice generally must have been delivered not earlier than 90 days nor later than 60 days
prior to the first anniversary of the date of mailing of the notice for the previous year’s annual
meeting. Such shareholder’s notice shall set forth (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a director all information relating to such
person that is required to be disclosed in solicitations of proxies for election of directors in an
election contest, or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including such person’s written consent to being named
in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other
business that the shareholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and of the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the shareholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and
address of such shareholder, as they appear on the Corporation’s books, and of such beneficial
owner and (y) the number of shares of each class of stock of the Corporation which are owned
beneficially and of record by such shareholder and such beneficial owner
The purpose of these Advance Notice Provisions is to ensure that we receive sufficient advance
notice of shareholder nominations and proposals, and the nature of such nominations and proposals.
The Advance Notice Provisions are procedural in nature (though they do have the ability to serve as
an anti-takeover measure) and we believe that inclusion of such provisions is standard practice for
our peers incorporated in Maryland. These provisions do not serve to limit the substantive rights
of our shareholders to nominate directors or propose other matters for consideration at our
shareholder meetings.
If you do not approve the inclusion of the Advance Notice Provisions, we anticipate that we
will
remove them from the Surviving Bylaws to the extent they are inconsistent with the CGCL and
the Company Bylaws.
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Required Vote:
Approval of Sub-Proposal 3G requires the affirmative vote of a majority of all of the
Company’s outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3G.
Sub-Proposal 3H: A proposal to approve the removal of the provisions of our bylaws pertaining
to our Investment Policies and our Advisory Contracts.
Article VIII of the Company Bylaws sets forth our general investment policy (that is, to
invest in equity interests in real property) and then sets forth certain restrictions on our
investment abilities, including prohibitions and restrictions on (i) certain types of investments;
(ii) certain transactions with our affiliates; (iii) certain securities issuances; and (iv) certain
corporate borrowings. Article VIII also contains certain provisions pertaining to our distribution
policies and distribution reinvestment policies. Inclusion of these policies in our bylaws is
unusual as compared to our peers, and we believe it is unnecessary. We believe that it is in the
best interest of the Company and its shareholders for our Board to have the ability to change our
investment policies from time to time as deemed appropriate by our Board in light of changes in
investment objectives, market conditions, results of operations, changes in applicable laws, rules
and regulations and other factors. However, under the Company Bylaws, we are not permitted to
change any of these investment policies, except upon receipt of Majority Vote. Due to difficulties
in soliciting sufficient shareholder votes, this Majority Vote requirement has thus far prevented
us from effecting changes to (o removal of) our investment policies, or certain portions thereof,
that the Board believes would be in the best interests of the Company and its shareholders.
Article IX of the Company Bylaws contain provisions pertaining to use of “advisors” (advisors,
as defined in the Company Bylaws, are individuals or firms providing real estate investment
advisory services to us), entry into contracts with advisors, limitations of and disclosures
related to advisors and similar provisions (collectively, the “Advisor Provisions”). As we are a
self-administered REIT, meaning that all major real estate functions are performed in-house by our
personnel, we do not employ or rely on outside advisors to present investment opportunities to the
Board. Additionally, we do not intend to work with advisors in the future. Since our Board believes
that a self-advised structure is more efficient and provides the potential for better performance
and growth, we do not believe that continued inclusion of the Advisor Provisions is necessary.
If you approve this Sub-Proposal 3H, our Surviving Charter will not contain our investment
policies, nor, except for Section 5.10 of the Surviving Charter, will the Surviving Charter or
Surviving Bylaws contain any reference to “advisors” or “advisor contracts”. Please note that we
will still continue to maintain our investment policies outside of our bylaws (with such
modifications that our Board may deem appropriate from time to time in the discharge of its
fiduciary duties), and will make such investment policies available to our shareholders as
appropriate.
If you do not approve the removal of the Advisor Provisions and the provisions of the Company
Bylaws pertaining to our investment policies, we anticipate that we will cause such provisions to
be inserted into our Surviving Articles and Surviving Bylaws, as appropriate.
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Required Vote:
Approval of Sub-Proposals 3H requires the affirmative vote of a majority of all of the
Company’s outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3H.
Sub-Proposal 3I: A proposal to approve a change in the par value of our stock.
The Company Charter does not assign a par value to our authorized shares of capital stock, as
the CGCL does not require that we do so. Traditionally, the aggregate par value of all outstanding
capital stock of a corporation has been intended to correspond to the total consideration received
by the corporation for all of its issued shares, and to be equivalent to the concept of “capital”
of a corporation which was considered to be a “trust fund” to be maintained for the benefit of the
corporations creditors. The par value concept has undergone considerable change since then. In
fact, the CGCL contains only one reference to par value (Section 205 of the CGCL provides that
shares of a California corporation with no par value shall be deemed to have a par value of $1.00,
or such other par value as may be determined by the corporation’s board of directors to satisfy the
requirements of other state statutes or regulations imposing fees based on a California
corporation’s capitalization).
Article VI of the Surviving Charter provides that each share of our authorized will have a par
value of $0.01. This $0.01 per share par value is common for Maryland REITS. Were we to provide
for no par value for our shares under the Surviving Charter, the MGCL would assign a “default” par
value of $20.00 per share, which would result in assessment by the State of Maryland of much larger
capitalization fees than if we have a par value per share of $0.01.
If this Sub-Proposal 3I is not approved, we may be forced to revise the Surviving Charter to
provide for capital stock with no par value, which would significantly increase our
capitalization-based fees. Therefore, should we fail to receive approval of this Sub-Proposal 3I,
we will investigate all options available to us before revising the Surviving Charter to provide
for no par value, as such revision would clearly not be in our best interest or the best interest
of our shareholders.
Required Vote:
Approval of Sub-Proposal 3I requires the affirmative vote of (i) a majority of all of the
Company’s outstanding shares of Common Stock and (ii) a majority of all of the Company’s
outstanding shares of Series AA Preferred Stock.
The Board recommends a vote “FOR” the approval of Proposal 3I.
Sub-Proposal 3J: A proposal to approve (i) the removal of the “business combinations”
provisions of our bylaws, and (ii) our election to be subject to the provisions of the Maryland
Business Combination Statute.
Section 3 of Article XII of the Company Bylaws provides:
“Without the prior vote or written consent of the holders of at least sixty-six and
two- thirds percent (66-2/3%) of the outstanding shares, the Corporation shall not
enter into any business combination with a holder, or group of holders acting in
concert, holding, of record and/or beneficially, ten percent (10%) or more of the
outstanding shares (such holder or
holders shall be referred to as an “Interested Shareholder”).
-51-
For the purposes hereof, a “business combination” shall mean (i) a merger or
consolidation between or with the Corporation and the Interested Shareholder and/or
its Affiliates; (ii) any sale, lease, exchange, mortgage, pledge, transfer of assets
to an Interested Shareholder and/or its Affiliates having an aggregate fair market
value of at least $1,000,000; (iii) any reclassification or reorganization, the
effect of which would be to increase the proportion of outstanding shares of any
class of the Corporation’s equity Securities convertible into a class of equity
Securities owned by an Interested Shareholder and/or its Affiliates; and (iv) the
adoption of any plan for the liquidation or dissolution of the Corporation, proposed
by or on behalf of the Interested Shareholder and/or its Affiliates.
The foregoing provisions requiring a sixty-six and two-thirds percent (66-2/3%) or
greater vote of the outstanding shares shall not apply, however, in any event if:
(i) at the time the business combination is consummated or during the prior twelve
(12) months the Corporation beneficially owned a majority of the outstanding equity
Securities of the Interested Shareholder; (ii) the business combination was approved
by all of the Directors, who at the time such approval was given were not Affiliates
or nominees of the Interested Shareholder or were Directors prior to the time the
Interested Shareholder became an Interested Shareholder (“Disinterested Directors”)
or successors of Disinterested Directors who were not Affiliates or nominees of the
Interested Shareholder and who were recommended to succeed the Disinterested
Directors by a majority vote of the Disinterested Directors. If these requirements
are satisfied or a majority of the Disinterested Directors approve the business
combination and recommend it to the Shareholders, the approval or consent of the
Shareholders holding a majority of the outstanding shares of the Corporation’s
common stock will be required to approve the business combination.”
Article XIV of the Surviving Bylaws provides:
“The Corporation elects to be governed by the provisions of Sections 3-601 through
3-604 of the MGCL (the “Maryland Business Combination Act”) as in effect on the date
these bylaws are adopted (“Effective Date”). The Corporation elects not to be
governed by any amendment to the Maryland Business Combination Act after the
Effective Date unless the Board of Directors, pursuant to a resolution approved by a
majority of the directors then in office, determines that such amendment shall apply
to the Corporation. In the event that the Maryland Business Combination Act is
repealed or, in the sole discretion of the Board of Directors, amended or
substantially altered to the detriment of the Corporation, the Corporation shall
continue to be governed by the provisions of the Maryland Business Combination Act
in effect on the Effective Date, together with any amendments to the Maryland
Business Combination Act that the Board of Directors has determined shall apply to
the Corporation.”
Under the Maryland Business Combination Act (the “MBCA”), business combinations between the
Company and an interested stockholder or an affiliate of an interested stockholder are prohibited
for 5 years after the most recent date on which the interested stockholder becomes an interested
stockholder. These business combinations include a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or reclassification of equity
securities. An “interested stockholder” is defined as any person who beneficially owns 10% or more
of the voting power of our voting stock; or an affiliate or associate of ours 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 our then-outstanding voting stock. A person is not an interested stockholder
under the MBCA if the board of directors approved in advance the transaction by which
such person otherwise would have become an interested stockholder. In approving such a
transaction, however, the board of directors may provide that its approval is subject to
compliance, at or after the time of approval, with any terms and conditions determined by the
board. After the 5-year moratorium, any business combination between us and an interested
stockholder must be recommended by the
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board of directors and
approved by the affirmative vote of
at least: (a) 80% of the votes entitled to be cast by holders of our outstanding voting stock,
voting together as a single voting class, and (b) two-thirds of the votes entitled to be cast by
holders of our voting stock, other than voting stock held by the interested stockholder with whom
or with whose affiliate the business combination is to be effected or held by an affiliate or
associate of the interested stockholder. These supermajority vote requirements do not apply if
holders of our common stock receive a minimum price, as defined under Maryland law, for their
shares in the form of cash or other consideration in the same form as previously paid by the
interested stockholder for its shares. The statute permits various exemptions from its provisions,
including business combinations that are exempted by the board of directors prior to the time that
the interested stockholder becomes an interested stockholder. The approval of the board of
directors may be altered or repealed at any time unless the resolution adopted by the board of
directors is made irrevocable by its terms.
Although the provisions of the MBCA do not necessarily track the provisions Section 3 of
Article XII of the Company Bylaws, the substantive protections of the MBCA are the same (except for
the 66 2/3% vote requirement in Section 3 of Article XII of the Company Bylaws).
If you do not approve this Sub-Proposal 3J, we anticipate that we will remove the existing
provisions of Article XIV of the Surviving Bylaws pertaining to our election to be governed by the
MBCA, and replace it with provisions substantially similar to Section 3 of Article XII of the
Company Bylaws (subject to any differences required by the MGCL).
Required Vote:
Approval of Sub-Proposal 3J requires the affirmative vote of a majority of all of the
Company’s outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3J.
Sub-Proposal 3K: A proposal to approve removal of our annual shareholder meeting deadline.
Section 2 of Article III of the Company Bylaws provides:
“The annual meeting of shareholders shall be held at least once each year on a date
and at a time designated by the Board of Directors at a location convenient to the
shareholders. The date so designated shall be within fifteen (15) months after the
last annual meeting. At each annual meeting directors shall be elected and any other
proper business may be transacted.”
Section 2 of Article II of the Surviving Bylaws provides:
“Regular meetings of the stockholders for the election of directors and the
transaction of any other business that is proper for stockholder action under the
charter of the Corporation, these bylaws and applicable law and as may properly come
before the meeting shall be held once each calendar year (each such meeting an
“annual meeting”). Annual meetings may only be called by the Board of Directors.
The Board of Directors shall determine the date, time and place for any annual
meeting, which place may be within or without the State of Maryland, or any
adjournments or postponements thereof. Any annual meeting so called
may be postponed by the directors prior to the meeting with notice to the
stockholders entitled to vote at that meeting.”
-53-
Section 2 of Article III of the Company Bylaws currently requires the Company to hold its
annual shareholder meetings within five (5) months after the end of each calendar year, and within
fifteen (15) months after the last annual meeting. It is the Company’s intention to hold annual
shareholder meetings at approximately the same time each year with updated and current Company
information. However, the firm deadline of five (5) months after calendar year’s end may have the
effect of not allowing the Company sufficient time to prepare its annual report and proxy materials
in light of the additional filings and requirements that are required of a public company. The
Board believes that it is not necessary for the protection of the Company’s shareholders, and
potentially burdensome, to include this five (5) month deadline. In addition, it is unnecessary to
specifically provide that each annual meeting will be held within fifteen (15) month of the
previous meeting. These five (5) and fifteen (15) month periods were included in the Company Bylaws
at the Company’s inception, when it was a very small, non-public reporting company. The Company
now has a large shareholder base and is now subject to the public reporting requirements of the
Securities Exchange Act of 1934, and as such, is not in a position to ignore (and has no intention
of ignoring) the requirement that it regularly hold annual shareholder meetings.
We believe that the provisions of Section 2 of Article II of the Surviving Bylaws are
sufficiently protective of the Company and its shareholders while simultaneously ensuring that the
Company has sufficient time to adequately prepare for its annual shareholder meetings in light of
the other obligations of the Company’s management.
If you do not approve this Sub-Proposal 3K, we anticipate that we will replace the existing
provisions of Article II, Section 2 of the Surviving Bylaws with the existing provisions of Section
2 of Article III of the Company Bylaws.
Required Vote:
Approval of Sub-Proposal 3K requires the affirmative vote of a majority of all of the
Company’s outstanding shares of Common Stock.
The Board recommends a vote “FOR” the approval of Proposal 3K.
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PROPOSAL 4
RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS
The Company seeks the ratification by the shareholders of the selection of Squar, Milner,
Peterson, Miranda & Williamson, LLP as the Company’s independent registered public accounting firm
for the fiscal year ended December 31, 2010.
Representatives of Squar, Milner, Peterson, Miranda & Williamson, LLP are expected to be
present at the Annual Meeting and will be available to make a statement if they desire to do so and
to respond to appropriate questions.
On August 31, 2009, the Audit Committee of the Board of Directors agreed to engage Squar,
Milner, Peterson, Miranda & Williamson, LLP to perform the audit of the Company’s financial
statements as of and for the year ended December 31, 2009. For the fiscal year ended December 31,
2008, JH Cohn, LLP was our independent registered accounting firm.
On August 28, 2009, the Audit Committee of the Board of Directors of NetREIT (the “Company”),
on behalf of the Company and its subsidiaries, dismissed J.H. Cohn LLP as the Company’s independent
registered public accounting firm. The reports of J.H. Cohn LLP on the Company’s financial
statements for the past two fiscal years prior to such dismissal did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. However, the report filed with the financial statements included in the
Annual Report on Form 10-K/A, as filed with the SEC on July 29, 2009 contained a reference to Note
7 and stated that the Company was not in compliance with certain terms of certain loan agreements.
The change of independent registered public accounting firm was approved by the Audit Committee of
the Company’s Board of Directors. In connection with its audits for the two most recent fiscal
years prior to the dismissal of J.H. Cohn LLP and through August 28, 2009, there were no
disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions)
with J.H. Cohn LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of J.H. Cohn LLP, would have caused them to make reference to such disagreements in
their reports on the Company’s financial statements for such years. During the two most recent
fiscal years prior to the dismissal of J.H. Cohn LLP and through August 28, 2009, there were no
reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K) with J.H. Cohn LLP. The
Company requested that J.H. Cohn LLP furnish a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the above statements, and if not, stating the respects in
which they do not agree. A copy of J.H. Cohn LLP’s letter, dated September 3, 2009, was filed as
Exhibit 16 to the Company’s Current Report on Form 8-K filed with the SEC on September 3, 2009.
Shareholder ratification of the selection of Squar, Milner, Peterson, Miranda & Williamson,
LLP as the Company’s independent registered public accounting firm is not required by the Company’s
bylaws or otherwise. However, the Audit Committee is submitting the selection of Squar, Milner,
Peterson, Miranda & Williamson, LLP to shareholders for ratification as a matter of good corporate
practice. If the shareholders fail to ratify the selection, the Board will reconsider whether to
retain Squar, Milner, Peterson, Miranda & Williamson, LLP. Even if the selection is ratified, the
Board, in its discretion, may direct the appointment of different independent registered public
accounting firm at any time during the year if it determines that such a change would be in the
best interests of the Company and its shareholders.
-55-
The Audit Committee has determined that the rendering of the services other than audit
services by Squar, Milner, Peterson, Miranda & Williamson, LLP is compatible with maintaining the
principal independent registered public accounting firm’s independence.
Audit Fees and Pre-Approval Policies
The following table presents fees for professional services for fiscal years 2008 and 2009.
Squar, Milner, Peterson, Miranda & Williamson, LLP rendered services for the audit of our annual
consolidated financial statements for fiscal 2009 and the reviews of the financial statements
included in our Quarterly Reports on Form 10-Q for the third and fourth quarters of 2009, and fees
billed for all other services rendered in 2009. JH Cohn LLP rendered all services for fiscal year
2008 and for the first and second quarters of 2009.
| 2008 | 2009 | |||||||
Audit Fees |
$ | 143,500 | $ | 125,500 | ||||
Audit Related Fees |
— | — | ||||||
Tax Fees |
— | — | ||||||
All Other Fees |
$ | 33,000 | $ | 16,200 | ||||
Total |
$ | 176,500 | $ | 141,700 | ||||
“Audit Fees” consisted of fees for the audit of our annual consolidated financial
statements included in our Form
10-K, the review of consolidated financial statements
included in the Company’s 10-Q filings. Of the $125,500 in audit fees that we paid in 2009,
$31,000 was paid to J.H. Cohn LLP, and $94,500 was paid to Squar, Milner, Peterson, Miranda &
Williamson, LLP.
“All Other Fees” consisted of fees for audit of a Statement of Rental Revenue and
Certain Expenses of a property acquisitions as required by the SEC.
As provided in the Audit Committee charter, the Audit Committee reviews, and in its sole
discretion pre-approves, the Independent Auditors’ annual engagement letter including proposed fees
and all audit and non-audit services provided by the Independent Auditors. All of the above
services and estimates of the expected fees were reviewed and approved by the Audit Committee
before the respective services were rendered. The Audit Committee is barred from engaging the
Independent Auditors to perform the specific non-audit services proscribed by law or regulation.
The Audit Committee may delegate pre-approval authority to a member of the Audit Committee, and
decisions delegated in such manner must be reported at the next scheduled meeting of the Audit
Committee.
Vote Required
The affirmative vote of the holders of at least a majority of Common Stock votes cast at the
2010 Annual Meeting is required for the ratification of the appointment of Squar, Milner, Peterson,
Miranda & Williamson, LLP as the Company’s independent registered public accounting firm for the
fiscal year ending December 31, 2010.
The Board recommends a vote “FOR” the approval of Proposal 4.
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PROPOSAL 5
APPROVAL OF ADJOURNMENTS OF THE ANNUAL MEETING
If the Company fails to receive a sufficient number of votes to approve one or more of the
Proposals or Sub-Proposals described above, the Company may propose to adjourn the 2010 Annual
Meeting, regardless of whether a quorum is present, for a period of not more than 45 days for the
purpose of soliciting additional proxies. The Company currently does not intend to propose
adjournment at the 2010 Annual Meeting if there are sufficient votes to approve the Proposals and
Sub-Proposals described above.
Vote Required
The affirmative vote of the holders of a majority of the shares represented at the annual
meeting is required for the approval of adjournments of the annual meeting.
The Board recommends a vote “FOR” the approval of Proposal 5.
CORPORATE GOVERNANCE
Management does not intend to present any business at the meeting not mentioned in this proxy
statement, and at the time of preparation of this proxy statement knows of no other business to be
presented. If any other matters are properly brought before the meeting, the appointed proxies
will vote all proxies on such matters in accordance with their judgment of the best interests of
the Company.
-57-
DIRECTOR NOMINEES
Set forth below are the names of the persons nominated as directors, their ages, their offices
in the Company, if any, their principal occupations or employment for at least the past five years,
the length of their tenure as directors and the names of other public companies in which such
persons hold or have held directorships during the past five years.
| Positions with the Company | ||||
| Name and (Age) | and Principal Occupations | Business Address | ||
| Bruce Staller (73) | Mr. Staller has served as
a Director of the Company
since June 2004 and is
the current Chair of the
Compensation Committee
and the Lead Independent
Director. Prior to his
retirement on December
31, 2005, Mr. Staller was
an investment counselor
registered as an
Investment Advisor under
California Law. From
2000 to 2009, Mr. Staller
was President of the
Monrovia Schools
Foundations, Inc., a
non-profit education
corporation based in
Monrovia, California, and
has been a Trustee of the
Foundation since 1987.
From 1988 through May
2003, Mr. Staller served
as a Director of New Plan
Excel Realty Trust, Inc.,
and its predecessor Excel
Realty Trust, a New York
Stock Exchange traded
REIT. From 1988 until
1994, Mr. Staller served
as President and
Compliance Officer of
First Wilshire Securities
Management, Inc., a
Pasadena based investment
advisory firm. Because
of his experience as an
Investment Adviser under
California Law and his
work with Excel Realty
Trust, the Nominating and
Corporate Governance
Committee determined that
Mr. Staller is a
qualified candidate for
the Board.
|
3229 Elda Street Duarte, CA 91010 |
||
| Sumner J. Rollings (61) | Mr. Rollings has served
as a Director of the
Company since April 2001
and is the current Chair
of the Nominating and
Corporate Governance
Committee. He also served
as a director of the
Centurion Counsel Funds,
an investment company
registered under the
Investment Company Act of
1940, from March 10, 2001
until 2005. Since 2001,
Mr. Rollings has owned
and operated the Wagon
Wheel Restaurant as the
CEO of Rolling Wheel
Restaurant, Inc., in
Escondido, California.
From May 1999 to May 2001
Mr. Rollings served as
sales executive for
Joseph Webb Foods of
Vista, California and
previously from 1985 to
1999, sales executive for
Alliant Food Service
Sales. Because of his
experience owning and
operating a business, the
Nominating and Corporate
Governance Committee
determined that Mr.
Rollings is a qualified
candidate for the Board.
|
1282 Pacific Oaks Place, Escondido, CA 92029 |
||
| Thomas E. Schwartz (69) | Mr. Schwartz has served
as a Director of the
Company since April 2001.
He also served as a
Director of the Centurion
Counsel Funds, an
investment company
registered under the
Investment Company Act of
1940, from March 10, 2001
until 2005. Mr. Schwartz
is currently a member of
the Financial Planning
Association and the
National Association of
Insurance and Financial
Advisors. Since March
1999 he has served as a
Director of Gold Terra,
Inc., a closely-held
Nevada corporation which
participates in mining
operations for gold,
silver and other valuable
mineral deposits Mr.
Schwartz has been a
Certified Financial
Planner since 1990 and an
Independent Certified
Financial Planner since
2001. Because of his
prior experience as a
director and his
extensive financial
qualifications, the
Nominating and Corporate
Governance Committee
determined that Mr.
Schwartz is a qualified
candidate for the Board.
|
1282 Pacific Oaks Place, Escondido, California |
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| Positions with the Company | ||||
| Name and (Age) | and Principal Occupations | Business Address | ||
| Jack K. Heilbron (59) | Mr. Heilbron has served
as a Director and officer
of the Company since its
inception. Mr. Heilbron
presently holds a license
as a registered
securities principal with
Centurion Institutional
Services, Inc., a FINRA
member broker-dealer. Mr.
Heilbron is a founding
officer, Director,
shareholder of CI Holding
Group, Inc. and of its
subsidiary corporations
(Centurion Group, Inc.,
Centurion Counsel, Inc.,
Bishop Crown Investment
Research Inc., PIM
Financial Securities
Inc., Centurion
Institutional Services
Inc. and CHG Properties,
Inc.) and currently
serves as Chairman of
these companies. Mr.
Heilbron also serves as
Chairman of Centurion
Counsel, Inc., a licensed
investment advisor. He
also served as a director
of the Centurion Counsel
Funds, an investment
company registered under
the Investment Company
Act of 1940, from March
10, 2001 until 2005.
From 1994 until its
dissolution in 1999, Mr.
Heilbron served as the
Chairman and/or Director
of Clover Income and
Growth REIT (“Clover
REIT”). Mr. Heilbron
graduated with a B.S.
degree in Business
Administration from
California Polytechnic
College, San Luis Obispo,
California. Because of
his prior experience as a
director and his
experience with other
REITs, the Nominating and
Corporate Governance
Committee determined that
Mr. Heilbron is a
qualified candidate for
the Board.
|
1282 Pacific Oaks Place, Escondido, California 92029 |
||
| Larry G. Dubose (60) | Mr. Dubose has served as
a Director of the Company
since June 2005 and was
Chairman of the Audit
Committee until March
2010. In connection with
NetREIT entering into a
management agreement with
Dubose Model Homes, USA,
Mr. Dubose became an
employee of NetREIT on
March 1, 2010. From 2008
to 2010, Mr. Dubose was
President of Dubose Model
Homes, USA, a residential
real estate investment
company headquartered in
Houston, Texas that he
founded in 1985, a
position he also held
until 2004. Prior to
forming that company, Mr.
Dubose served as Vice
President and Chief
Financial Officer of a
full service real estate
brokerage company in
Houston for six years.
From June 1973 to
February 1976, he served
as a staff accountant
with
PricewaterhouseCoopers
f/k/a Price Waterhouse.
Mr. Dubose graduated with
a B.A. degree in
Accounting from Lamar
University in 1973.
Although not active at
present, Mr. Dubose was a
Certified Public
Accountant in the state
of Texas. He also holds
a real estate brokerage
license. Because of his
prior experience in real
estate and his extensive
financial background, the
Nominating and Corporate
Governance Committee
determined that Mr.
Dubose is a qualified
candidate for the Board.
|
14405 Walters Road Suite 310, Houston, Texas 77014 |
-59-
| Positions with the Company | ||||
| Name and (Age) | and Principal Occupations | Business Address | ||
| David Bruen (65) | Mr. Bruen has served as a
Director of the Company
since 2008. Mr. Bruen
retired in January 2008
from San Diego National
Bank after 6 years as a
senior commercial lending
officer. During the
previous seventeen years,
Mr. Bruen was in
commercial lending for
mid-size businesses in
San Diego County for
First Interstate Bank,
Wells Fargo Bank, Mellon
1st Business Bank, and
San Diego National Bank.
He is a Life Member of
the Pacific Life Holiday
Bowl Committee and has
been a member of the
Presidents Association
for Palomar College,
Financial Executives
International, San Diego
MIT Enterprise Forum, and
the Association for
Corporate Growth. Mr.
Bruen is a graduate of
San Diego State
University and has an
M.B.A. from the
University of Southern
California. Because of
his prior experience with
banks and his
achievements in the
community, the Nominating
and Corporate Governance
Committee determined that
Mr. Bruen is a qualified
candidate for the Board.
|
1282 Pacific Oaks Place, Escondido, CA 92029 |
||
| William Allen (64) | Mr. Allen was elected
Director of the Company
in 2009 and has served as
the Chair of the Audit
Committee since March
2010. For 28 years, Mr.
Allen was employed with
PricewaterhouseCoopers
and was the tax partner
in charge of the San
Diego, California office
until his retirement in
2000. From 2002 to 2006,
Mr. Allen served as
Chairman of the Board of
Directors for Arrowhead
General Insurance, and
was on the Board of
Directors for The Copley
Press, Inc. until January
2010. He is a member of
the American Society of
Certified Public
Accountants, and the
California Society of
Certified Public
Accountants. Mr. Allen
graduated from the
University of Arizona
with a Bachelor of
Science degree in
accounting. Because of
his prior experience as a
director and his
extensive financial
background, the
Nominating and Corporate
Governance Committee
determined that Mr. Allen
is a qualified candidate
for the Board.
|
1282 Pacific Oaks Place, Escondido, CA 92029 |
The Board has concluded that each of the members of the Board and each nominee for election to
the Board should serve as a member of the Board at the time of filing the proxy statement based on
their particular experience, qualifications, attributes, and skills each afford the Company’s
business structure and plan.
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INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board Committees
The Board has adopted a charter for each of the Audit Committee, the Compensation Committee,
and the Nominating and Corporate Governance Committee. The Board may, from time to time, establish
certain other committees to facilitate the management of the Company. The Company has also adopted
Corporate Governance Guidelines. The Committee Charters and Corporate Governance Guidelines are
posted on the Company’s website at www.netreit.com and will be provided without charge upon
request to the Corporate Secretary, NetREIT, 1282 Pacific Oaks Place, Escondido, California, 92029.
The information contained on the Company’s website is not incorporated by reference into and does
not form a part of this proxy statement.
Board Independence
Prior to March 1, 2010, the Board determined that each of the Company’s current Directors and
nominees, except for Mr. Heilbron and Mr. Elsberry, has no material relationship with the Company
(either directly or as a partner, shareholder or officer of an organization that has a relationship
with the Company) and is “independent” within the meaning of the NYSE Amex Rules and the Company’s
Director independence standards. On March 1, 2010 Mr. Dubose became an employee of the Company and
therefore is no longer considered “independent” within the meaning of the NYSE Amex Rules and the
Company’s Director independence standards. The Board established and employed the following
categorical standards (which are at least as restrictive as the “independent” standards of the NYSE
Amex Rules) in determining whether a relationship is material and thus would disqualify such
Director from being independent but opting for certain stricter interpretations:
| • | The Director is, or has been within the last three (3) years, an employee of the
Company or of any of its subsidiaries; |
| • | An immediate family member of the Director is, or has been within the last three (3)
years, an executive officer of the Company or any of its subsidiaries; |
| • | The Director (or an immediate family member of the Director) received during any
twelve-month period within the last three (3) years, more than $60,000 in direct
compensation from the Company and/or any of its subsidiaries, other than Director and
committee fees and pension or other forms of deferred compensation for prior service
(provided such compensation is not contingent in any way on continued service); |
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| • | The Director was affiliated with or employed within the last three (3) years by the
Company’s present or former (internal or external) auditor or an immediate family
member of the Director was affiliated with or employed in a professional capacity by
the Company’s present or former (internal or external) auditor; |
| • | The Director (or an immediate family member of the Director) is, or has been within
the last three (3) years, employed as an executive officer of another company where any
of the Company’s executives served on that company’s compensation committee; |
| • | The Director is a current employee, or an immediate family member of the Director is
a current executive officer of another company that made payments to, or received
payments from the Company or any of its subsidiaries for property or services in an
amount which, in any of the last three (3) fiscal years, exceeds the greater of
$200,000, or two percent (2%) of such other company’s consolidated gross revenue; |
| • | The Director (or an immediate family member of the Director) was, within the last
three (3) years, an affiliate or executive officer of another company which was
indebted to the Company, or to which the Company was indebted, where the total amount
of either company’s indebtedness to the other was five percent (5%) or more of the
Company’s total consolidated assets or the total consolidated assets of the company he
or she served as an affiliate or executive officer; |
| • | The Director (or an immediate family member of the Director) was, within the last
three (3) years, an officer, Director or trustee of a charitable organization where the
Company’s (or an affiliated charitable foundation’s) annual discretionary charitable
contributions to the charitable organization exceeded the greater of $1 million or five
percent (5%) of that organization’s revenues; |
| • | Within the last three (3) fiscal years has been an officer, Director or trustee of a
charitable organization where the Company’s contributions (or an affiliated charitable
foundation’s annual discretionary charitable contributions to the charitable
organization) exceeded the greater of One Hundred Thousand Dollars ($100,000) or five
percent (5%) of that organization’s consolidated gross revenue. |
An “Affiliate” includes any person beneficially owning in excess of 10% of the voting power
of, or a general partner or managing member of, a company.
Meetings and Attendance
The Board met six (6) times during 2009 and the various committees of the Board met a total of
seven (7) times. For the 2009 fiscal year, all Directors attended at least 75% of the total number
of meetings of the Board and of the committees of the Board on which he served during the year.
Although the Company has no policy with regard to board members’ attendance at the Company’s annual
meeting of shareholders, it is customary for, and the Company expects, all board members to attend.
To ensure free and open discussion among the Independent Directors of the Board, the
Independent Directors meet prior to each full board meeting.
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Communications with the Board
Shareholders and other interested parties may communicate with the Lead Independent Director
or with the non-management Directors, as a group, by sending an email to
krichman@netreit.com or by regular mail addressed to the Lead Independent Director, c/o the
Corporate Secretary, NetREIT, 1282 Pacific Oaks
Place, Escondido, California, 92029. All correspondence will be forwarded promptly by the
corporate secretary to the Lead Independent Director.
Board Leadership Structure and Role in Risk Oversight
The Company believes the chosen Board leadership structure is the most appropriate for its
size and business. Since our inception, Mr. Jack K. Heilbron has served as both Chairman of the
Board and Chief Executive Officer. As a result, the Company also has a Lead Independent Director,
currently Mr. Bruce Staller, a member of the Audit Committee. As Lead Independent Director, Mr.
Staller is able to monitor and address any compliance issues, improprieties, or ethical
considerations, including anonymous submissions by Company employees, outside of the chain of
Senior Management.
The Board believes the combined role of Chairman and Chief Executive Officer, together with a
Lead Independent Director, is in the best interest of shareholders because it provides the
appropriate balance between strategic development and independent oversight of management.
The Company has delegated the authority of risk management to the Audit Committee as further
discussed below under “Audit Committee”.
Audit Committee
Prior to March 1, 2010, the Audit Committee of the Board was comprised of Mr. Larry Dubose
(Chairman), Mr. David Bruen and Mr. Bruce Staller. On February 10, 2010, Mr. William Allen was
appointed to the Audit Committee and became the Chairman of the Committee. The Board has
determined that Mr. Allen qualifies as an audit committee financial expert, as defined by the
Securities and Exchange Commission (SEC). Previously, the Board determined that Mr. Dubose
qualified as an audit committee financial expert, as defined by the regulations of the SEC. All of
the members of the Audit Committee are “independent” within the meaning of the NYSE Amex Rules, the
Company’s director independence standards and the audit committee requirements of the SEC.
The Audit Committee is responsible for the performing risk assessment within the Company. The
Audit Committee is responsible for discussing with management the guidelines, policies and
processes relied upon and used by management to assess and manage the Company’s exposure to risk.
The Audit Committee also monitors the audit risk assessment process and the proposed scope of
the internal auditing for the upcoming year and the coordination of that scope with independent
auditors. The Audit Committee ensures that procedures have been established for the receipt,
retention and treatment of complaints from Company employees on accounting, internal accounting
controls or auditing matters, as well as for the confidential, anonymous submissions by Company
employees of concerns regarding questionable accounting or auditing matters or other potentially
material risks.
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In addition to risk oversight, the Audit Committee’s principal responsibilities include:
| • | Assisting the Board in fulfilling its responsibility for oversight of the quality
and integrity of the Company’s accounting, auditing and reporting practices; |
||
| • | The ultimate authority over the appointment, retention, compensation, oversight and
evaluation of the work of the Company’s certified public accounting firm, and; |
||
| • | The selection, approval and engagement of the Company’s independent certified public
accounting firm, including approving any special assignments given to the independent
accounting firm and reviewing: |
| • | The scope and results of the audit engagement with the independent
accounting firm and management, including the independent accounting firm’s
letters to the Audit Committee; |
||
| • | The independence of the independent accounting firm; |
||
| • | The effectiveness and efficiency of the Company’s internal accounting function; and |
||
| • | Any proposed significant accounting changes. |
AUDIT COMMITTEE REPORT
The Audit Committee of the Board is comprised of Independent Directors. During 2009, the
Committee was comprised of Mr. Larry Dubose, Chairman, Mr. Bruce Staller, and Mr. David Bruen. As
of March, 2010, Larry Dubose has resigned from the Audit Committee because he is no longer an
Independent Director under our Independent Director policy, and Mr. Bill Allen is Chairman of the
Audit Committee. The Audit Committee met four (4) times during 2009.
The role of the Audit Committee is risk oversight and to oversee the Company’s financial
reporting process on behalf of the Board and operates under a written charter, which was adopted by
the Audit Committee in 2005 and is available on the Company’s corporate website at
www.netreit.com. Management of the Company has the primary responsibility for the
preparation of the financial statements as well as executing the financial reporting process,
principles and internal controls. The independent registered public accounting firm is responsible
for performing an audit of the Company’s financial statements and expressing an opinion as to the
conformity of such financial statements with accounting principles generally accepted in the United
States.
In this context, the Audit Committee has reviewed and discussed the audit of the financial
statements and the management letter concerning internal controls, as of and for the year ended
December 31, 2009, with Squar, Milner, Peterson, Miranda & Williamson, LLP, our independent
registered public accounting firm, with and without management present. The Audit Committee has
discussed with the independent registered public accounting firm the matters required by Statement
on Auditing Standard No. 61 (Communication with Audit Committees), as currently in effect. In
addition, the Audit Committee has received the written disclosures and the letter from the
independent registered public accounting firm required by Independence Standards Board Standard No.
1 (Independence Discussions with Audit Committees), as currently in effect, and it has discussed
the with the auditors their independence from NetREIT. The Audit Committee has also considered
whether the independent registered accounting firm’s other non-audit service to the Company is
compatible with maintaining the registered public accounting firm’s independence.
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In reliance on the review and discussions referred to above, the Audit Committee recommended
to the Board that the audited financial statements be included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009.
Submitted on March 15, 2010 by the members of the Audit Committee of the Board.
Bill Allen, Chairman
David Bruen
Bruce Staller
David Bruen
Bruce Staller
Compensation Committee
The Compensation Committee of the Board is comprised of Mr. Bruce Staller (Chairman), and Mr.
Sumner Rollings. All of the members of the Compensation Committee are “independent” within the
meaning of the NYSE Amex Rules and the Company’s Director independence standards. The Compensation
Committee met two times during 2009. The Compensation Committee’s principal responsibilities
include:
| • | Assessing the Company’s financial and non financial performance against a number of
factors it considers significant and relevant, evaluate the executive officers
performance and set their compensation levels; |
||
| • | Reviewing and provide oversight of the Company’s compensation philosophy and shall
approve the establishment of competitive targets for all equity-based plans requiring
shareholder approval; |
||
| • | Reviewing the design and management of the significant employee benefits programs;
and |
||
| • | Reviewing eligibility criteria and award guidelines for corporate-wide compensation
programs that management level employees participate in including bonus plans, stock
option and other equity-base programs, deferred compensation plans and any other cash
or stock incentive programs. |
The Compensation Committee regularly reviews and approves the executive compensation
philosophy to ensure that it is aligned with the Company’s business strategy and objectives,
encourages high performance, promotes accountability and assures that employee interests are
aligned with the interests of the Company’s shareholders.
The Compensation Committee has the authority to determine and approve the individual elements
of total compensation paid to the chief executive officer and other executives holding the title of
vice president or higher. The Compensation Committee reviews the performance and compensation of
the chief executive officer, and all of the executive officers named in this Proxy Statement. The
chief executive officer and president annually assist in the review of the compensation of the
Company’s other executive officers. The chief executive officer makes recommendations with respect
to salary adjustments and annual bonus and nonvested stock awards to the Compensation Committee
based on his review and market data.
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Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee of the Board is comprised of Mr. Sumner
Rollings (Chairman) and Mr. Thomas Schwartz. All the members of the Nominating and Corporate
Governance Committee are “independent” within the meaning of the NYSE Amex Rules and the Company’s
Director independence standards. The Nominating and Corporation Governance Committee met once
during 2009. The Corporate Governance Committee’s principal purpose is to provide counsel to the
Board with respect to:
| • | purpose, structure and membership of the committees of the Board; |
| • | reviewing the succession planning for the Company’s executive management; |
| • | assisting the Board in developing and implementing the Company’s corporate
governance guidelines; |
| • | considering questions of possible conflicts of interest of the Board members, as
such questions arise; |
| • | determining the size, needs and composition of the Board and its committees; |
| • | monitoring a process to assess the effectiveness of the Board; and |
| • | recommending nominations to the full Board. |
When assessing potential nominees for election to the Board, the Nominating and Corporate
Governance Committee considers a variety of factors, such as the candidates’ education, experiences
and knowledge of the Company’s industry and experience in other industries that are relevant to the
Company, understanding real estate investing and financing, prior service as a director of other
companies and relevant commercial experience. While the Nominating/Corporate Governance Committee
does not have a formal diversity policy, it does strive to achieve a diverse background of
perspective and knowledge by seeking candidates who represent both large and small businesses,
within and outside of commercial entities, and who have served on non-profit boards that can
provide the Nominating and Corporate Governance Committee with additional insight. The Nominating
and Corporate Governance Committee may consider candidates recommended by shareholders, as well as
recommendations from other sources, such as other directors or officers, third-party search firms
or other appropriate sources. See Shareholders’ Nominations for Directors below for procedures.
Director Qualifications
The director qualifications currently focus on what the Nominating and Corporate Governance
Committee believes to be essential competencies to effectively serve on the Board. In reviewing
and considering potential nominees for the board, the Nominating and Corporate Governance Committee
looks at the following qualities, skills and attributes:
| • | Experience in corporate governance, such as an officer or former officer of a
publicly held company; |
| • | Experience in the real estate industry; |
| • | Experience as a board member; |
| • | Personal and professional integrity, ethics and values; |
| • | Practical and mature business judgment, including the ability to make independent
analytical inquiries; |
| • | Academic expertise in an area of the Company’s operations; and |
| • | Background in financial and accounting matters. |
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Shareholder Nominations for Directors
The Nominating and Corporate Governance Committee’s policy is to consider candidates
recommended by shareholders. The shareholder must submit a resume of the candidate and an
explanation of the reasons why such shareholder believes the candidate is qualified for service on
the Board and how the candidate satisfies the Board Criteria. The shareholder must also provide
such other information about the candidate as would be required by the SEC rules to be included in
a proxy statement. In addition, the shareholder must include the consent of the candidate and
describe any arrangements or undertakings between
the shareholder and the candidate regarding the nomination. The shareholder must submit proof of
ownership of the Company’s shares. The shareholder must also comply with the advance notice
provisions of the Company’s Bylaws. See “Shareholder Proposals for 2011 Annual Meeting” in this
proxy statement. All communications are to be directed to the Chairman of the Nominating/Corporate
Governance Committee, c/o the Corporate Secretary, NetREIT, 1282 Pacific Oaks Place, Escondido,
California, 92029. Properly submitted shareholder recommendations will be evaluated by the
Nominating/Corporate Governance Committee using the same criteria used to evaluate other director
candidates.
Compensation of the Company’s Directors
The Company compensates the Directors with awards of restricted stock and/or stock options.
The Company may also compensate them with cash or other future payments. The Directors receive
reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at
meetings of the Board. Where a Director is also an officer of the Company, such Director is not
paid separate compensation for services rendered as a Director.
None of the Company’s officers receive or will receive any compensation for serving as a
member of the Board or any of its committees. The Directors received the following aggregate
amounts of compensation for the year ended December 31, 2009.
Director Compensation
| Fees | ||||||||||||||||||||||||||||||
| Earned or | Non-Equity | Nonqualified | ||||||||||||||||||||||||||||
| Paid in | Stock | Incentive | Deferred | All Other | ||||||||||||||||||||||||||
| Cash | Awards | Option | Plan | Compensation | Compensation | |||||||||||||||||||||||||
| Name | (1) | (2) | Awards | Compensation | Earnings | (3) | Total | |||||||||||||||||||||||
Bruce Staller |
2009 | — | $ | 32,250 | — | — | — | $ | 3,965 | $ | 36,215 | |||||||||||||||||||
Sumner Rollings |
2009 | — | 32,250 | — | — | — | 3,765 | 36,015 | ||||||||||||||||||||||
Thomas Schwartz |
2009 | — | 32,250 | — | — | — | 3,765 | 36,015 | ||||||||||||||||||||||
Larry Dubose |
2009 | — | 32,250 | — | — | — | 3,845 | 36,095 | ||||||||||||||||||||||
David Bruen |
2009 | — | 32,250 | — | — | — | 2,625 | 34,875 | ||||||||||||||||||||||
| (1) | The Company pays no cash fees to any of its nonaffiliated Directors to
attend Directors’ meetings but does reimburse such Directors for their
travel expenses. |
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| (2) | The amounts shown represent the aggregate grant date value of awards
made during 2009. For a discussion of the valuation assumptions used
to determine the grant date fair values of these awards, see Note 3 to
the Financial Statements included in the Company’s annual report on
Form 10-K for the year ended December 31, 2009. |
|
| (3) | For all Directors, the amount represents distributions declared on
shares of restricted stock during the year ended December 31, 2009. |
The Company does not have a written policy regarding Director compensation. The Company’s
Compensation Committee meets at least annually to review, and determine and approve as appropriate,
director compensation for the next fiscal year, including cash and equity compensation,
reimbursement for travel and related expenses, and similar matters. The Compensation Committee
will also meet during the year, as appropriate, to discuss compensation matters such as grants of
restricted stock to our Directors in connection with their services as chairs of our committees,
and related matters. The Company does not currently pay its Directors any cash fees for service on
the Board or any of its committees or in consideration for attendance of Board or committee
meetings by such Directors, although it may decide to pay such cash fees in the future. However,
the Company does reimburse non-affiliated Directors for their travel expenses incurred in
connection with attendance at Board or committee meetings. The Company granted 3,750 shares of
restricted stock on January 1, 2009 to each Director, and also granted on such date an additional
500 shares and 200 shares of restricted stock to its Lead Director, Mr. Staller, and to Mr. Dubose
(who was Chairman of the Audit Committee at the time of such grant), respectively.
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EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the current executive officers of the Company is set forth below,
including their ages, their offices in the Company, their principal occupations or employment for
at least the past five years, the length of their tenure as officers and the names of other public
companies in which such persons hold or have held directorships during the past five years. Each
executive officer of the Company may be removed from office at any time by a majority of the Board
with or without cause.
| Position | ||||
| Name of Officer (Age) | With The Company | Business Experience | ||
Jack K. Heilbron (59)
|
Chairman of the Board, President and Director | Please see “Director Nominees” for a description of Mr. Heilbron’s principal occupations. | ||
Kenneth W. Elsberry
(71)
|
Chief Financial Officer | Mr. Elsberry has served as the Company’s chief financial officer since its inception. He is a member of the California Society of Certified Public Accountants, American Institute of Certified Public Accountants and National Association of Accountants. From December 2004 to October 2007, Mr. Elsberry served as chief financial officer of Trusonic, Inc., a startup technology company based in San Diego, California. Mr. Elsberry also served as a Director of the Centurion Counsel Funds, an investment company registered under the Investment Company Act of 1940, from March 10, 2001 until 2005. Mr. Elsberry presently holds a license as a registered securities principal with Centurion Institutional Services, Inc., a FINRA member broker-dealer. He also has served as chief financial officer and a Director of Centurion Institutional Services, CI Holding Group, Inc. and CHG Properties, Inc. From 1994 until 1998, Mr. Elsberry served as chief financial officer of Clover REIT. Since 1990, Mr. Elsberry has operated his own consulting firm, which provides financial and administrative consultation services to small and medium-sized companies. Mr. Elsberry received his Bachelor of Science degree in accounting from Colorado State University and is a registered securities principal. |
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation earned by the Company’s
Chief Executive Officer and Chief Financial Officer for the fiscal years ended December 31, 2009
and 2008.
Summary Compensation Table
| All Other | ||||||||||||||||||||||||||||
| Stock | Options | Compensation | ||||||||||||||||||||||||||
| Name and Principal Position | Year | Salary | Bonus (1) | Awards (2) | Awards | (3) | Total | |||||||||||||||||||||
Jack K. Heilbron |
2009 | $ | 183,750 | $ | 100,000 | $ | 32,250 | — | $ | 21,730 | $ | 337,730 | ||||||||||||||||
President/CEO |
2008 | 133,583 | 135,000 | 25,800 | — | 20,584 | 314,967 | |||||||||||||||||||||
Kenneth Elsberry |
2009 | 150,000 | 75,000 | 32,250 | — | 10,798 | 261,598 | |||||||||||||||||||||
CFO |
2008 | 132,583 | 100,000 | 25,800 | — | 9,615 | 267,998 | |||||||||||||||||||||
| (1) | The bonuses shown were earned in the year in which they are listed, but were paid in January of the
following year. |
|
| (2) | The amounts shown represent the aggregate grant date value of awards made during each fiscal year shown.
This does not represent the compensation expense recognized for the fiscal years shown for financial
statement reporting purposes. For a discussion of the valuation assumptions used to determine the grant
date fair values for awards granted in 2009 and 2008, see Note 3 to the Financial Statements included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. |
|
| (3) | The following table sets forth the components of Other Compensation included above paid by the Company: |
| Distributions | Group Term | |||||||||||||||||||||||||||
| Paid on | Matching | Life | Total of All | |||||||||||||||||||||||||
| Restricted | Contributions | Insurance | Auto | Country | Other | |||||||||||||||||||||||
| Name | Year | Stock | to IRA Plan | Payments | Allowance | Club | Compensation | |||||||||||||||||||||
Jack K. Heilbron, |
2009 | $ | 3,765 | $ | 5,126 | $ | 2,054 | $ | 8,735 | $ | 7,176 | $ | 26,856 | |||||||||||||||
President/CEO |
2008 | 2,799 | 3,288 | 1,945 | 8,776 | 7,064 | 23,872 | |||||||||||||||||||||
Kenneth W. Elsberry, |
2009 | 3,765 | 0 | 1,033 | 6,000 | 0 | 10,798 | |||||||||||||||||||||
CFO |
2008 | 2,799 | 0 | 816 | 6,000 | 0 | 9,615 | |||||||||||||||||||||
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Employment and Severance Agreements
We employ Mr. Heilbron as President and Chief Executive Officer and Mr. Elsberry as Chief
Financial Officer pursuant to Employment Agreements dated January 28, 1999. Under their respective
employment agreement, Messrs Heilbron and Elsberry are entitled to (a) a base annual salary as
described in greater detail below, (b) an annual bonus compensation in at least the amount
necessary to raise the employee’s annual salary to the median level of salaries paid to comparable
executives of comparable sized REITs, (c) group medical plan, and (d) an automobile allowance. The
bonus compensation is awarded as reasonably determined by the Compensation Committee. However, the
award of any bonus compensation is dependent on the Company attaining certain minimum performance
levels, as determined by the Compensation Committee.
In 2005, Mr. Elsberry and Mr. Heilbron’s annual compensation was set at $20,000 and was
subject to increases upon the closing of escrow of the Company’s 2006 Private Placement with
increases of $4,000 annually for each million of capital raised up to ten million. After an
aggregate of ten million in new capital was raised, the salaries were increased by $2,000 annually
for each additional million of capital raised with a maximum salary for Mr. Heilbron of $200,000
and for Mr. Elsberry of $150,000. At December 31, 2009, Mr. Heilbron’s annual salary rate was
$200,000 and Mr. Elsberry’s annual salary rate was $150,000.
Long-Term Incentive Compensation Awards
Stock awards are issued to our executive officers under our 1999 Incentive Award Plan at the
Compensation Committee meeting in December of each year. Such stock awards are effective as of
January of the following year. Our stock awards generally vest evenly, on each anniversary of the
grant date, over three (3) years or five (5) years. Distributions are paid on the entirety of the
grant from the grant date.
In 2009, the Board approved adopting a Simple IRA plan. All employees were eligible to
participate except for part time employees. The Company matched the employee’s elective deferral
up to three percent (3%) of the employee’s compensation. Employees could contribute up to $11,500
of their salary, subject to annual limits under the IRS Code of 1986, as amended (“Code”). On
December 4, 2009 the Board approved adopting a 401K plan and discontinuing the Simple IRA plan
effective January 1, 2010. All employees are eligible to participate except for part time
employees. The Company matches the employee’s elective deferral up to four percent (4%) of the
employee’s compensation. Employees may contribute up to $16,500 of their salary, subject to annual
limits under the Code.
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Outstanding Equity Awards at Fiscal Year End
The following table shows information regarding grants of stock options and grants of unvested
stock awards outstanding on the last day of our fiscal year ended December 31, 2009 to each of the
executive officers named in the Summary Compensation Table.
Outstanding Awards at Fiscal Year End
| Option Awards (1) |
Stock Awards (2)(3)(4) |
|||||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||||||
| Equity | Incentive | |||||||||||||||||||||||||||||||||||
| Incentive | Plan | |||||||||||||||||||||||||||||||||||
| Plan | Awards: | |||||||||||||||||||||||||||||||||||
| Awards: | Market | |||||||||||||||||||||||||||||||||||
| Equity | Number | or Payout | ||||||||||||||||||||||||||||||||||
| Incentive | of | Value of | ||||||||||||||||||||||||||||||||||
| Plan | Unearned | Unearned | ||||||||||||||||||||||||||||||||||
| Awards: | Number | Shares, | Shares, | |||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | of Shares | Market | Units or | Units or | ||||||||||||||||||||||||||||||
| Securities | Securities | Securities | or | Value of | Other | Other | ||||||||||||||||||||||||||||||
| Underlying | Underlying | Underlying | Units | Shares or | Rights | Rights | ||||||||||||||||||||||||||||||
| Unexercised | Unexercisable | Unexercised | Option | Option | That | Units That | That Have | That | ||||||||||||||||||||||||||||
| Options (#) | Options (#) | Unearned | Exercise | Expiration | Have Not | Have Not | Not | Have Not | ||||||||||||||||||||||||||||
| Name | Exercisable | Unexercisable | Options (#) | Price ($) | Date | Vested (3) | Vested (4) | Vested | Vested | |||||||||||||||||||||||||||
Jack K. Heilbron |
3,021 | 0 | 0 | $ | 8.64 | 6/30/2010 | 3,675 | $ | 31,605 | 0 | $ | 0 | ||||||||||||||||||||||||
Kenneth W. Elsberry |
232 | 0 | 0 | $ | 8.64 | 6/30/2010 | 3,675 | $ | 31,605 | 0 | $ | 0 | ||||||||||||||||||||||||
| (1) | Options were granted in 2005. No options have been granted since 2005. |
|
| (2) | The amounts in these columns represent the stock awards held at December 31, 2009 that were granted on January 1, 2008 and 2009. |
|
| (3) | Each restricted stock award vest according to the following schedule: 2,363 shares vest on December 31, 2010 and 1,312 shares vest on December 31, 2011. |
|
| (4) | Market value has been calculated using $8.60 per share which represents the approximate amount of net proceeds per share received from the offering price of $10 in the Company’s
ongoing private placement offering by the outstanding restricted stock awards for each named executive officer. |
Code of Ethics and Business Conduct
The Board has adopted a Code of Ethics and Business Conduct (Code) for the Company that
applies to all officers and employees, including its principal executive officer, principal
financial officer, vice-president finance, and controller. The Code is posted under the “Company”
section of the Company’s web site at www.netreit.com.
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SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 30, 2010, relating to the
beneficial ownership of the Company’s Common Shares by (1) each Director, Director nominee and each
executive officer named in the Summary Compensation Table, and (2) all Executive Officers and
Directors of the Company as a group. The Company is not aware of any persons who beneficially own
more than 5% of the outstanding common stock. Beneficial ownership is determined in accordance
with the rules of the SEC and includes voting or investment power with respect to the securities.
Except as indicated in footnotes to this table, the Company believes that the shareholders named in
this table have sole voting and investment power with respect to all shares of Common Stock shown
to be beneficially owned by them based on information provided to the Company by these
shareholders.
| Number of Common | % of Total Outstanding | |||||||||
| Name of Beneficial Owner | Position | Shares* | Shares (1) | |||||||
Sumner Rollings |
Director | 26,075 | (2) | 0.24 | % | |||||
Thomas Schwartz |
Director | 19,108 | (3) | 0.18 | % | |||||
Jack K. Heilbron |
Officer and Director | 41,325 | (4) | 0.38 | % | |||||
Bruce Staller |
Lead Director | 19,911 | (5) | 0.19 | % | |||||
Larry Dubose |
Director | 17,768 | (6) | 0.17 | % | |||||
Kenneth W. Elsberry |
Officer | 40,056 | (8) | 0.37 | % | |||||
William Allen |
Director | 57,328 | (9) | 0.53 | % | |||||
David Bruen |
Director | 9,941 | (7) | 0.09 | % | |||||
All Directors and
Executive Officers as a
Group (8) |
231,513 | 2.13 | % | |||||||
| * | No Preferred Shares are held by any Officer or Director. |
|
| (1) | Assumes 10,746,555 Common Shares issued and outstanding as of March 30, 2010, which
includes 95,475 shares of nonvested restricted shares that vest annually during the five
years ended December 31, 2015. As of March 30, 2010, the Company had stock options
outstanding for 51,579 shares exercisable on or within 60 days of March 31, 2010. |
|
| (2) | Includes an aggregate of 18,200 Common Shares and 7,875 shares of nonvested restricted
stock that vests equally annually at December 31, 2010 through 2013. |
|
| (3) | Includes an aggregate of 11,233 Common Shares and 7,875 shares of nonvested restricted
stock that vests equally on an annual basis at December 31, 2010 through 2013. |
|
| (4) | Includes (i) an aggregate of 462 Common Shares held by CI Holding Group, Inc. (“CI
Holding”), (ii) 28,93 Common Shares held by Mr. Heilbron (iii) 7,875 shares on nonvested
restricted stock that vests equally on an annual basis at
December 31, 2010 through 2013 and
(iii) 4,068 Common Shares held by Ms. Limoges (his wife). |
|
| (5) | Includes an aggregate of 11,861 Common Shares and 8,050 shares of nonvested restricted
stock that vests equally on an annual basis at December 31, 2010 through 2013. |
|
| (6) | Includes an aggregate of 9,823 Common Shares and 7,945 shares of nonvested restricted
stock that vests equally on an annual basis at December 31, 2010 through 2013. |
|
| (7) | Includes an aggregate of 1,543 Common Shares and 8,400 shares of nonvested restricted
stock that vests equally on an annual basis at December 31, 2010 through 2013. |
|
| (8) | Includes an aggregate of 32,182 Common Shares and 7,875 shares of nonvested restricted
stock that vests equally on an annual basis at December 31, 2010 through 2013. |
|
| (9) | Includes (i) an aggregate of 565 Common Shares, (ii) 5,184 shares of nonvested
restricted stock that vests equally on an annual basis at December 31, 2010 through 2013
and (ii) an option to acquire up to 51,579 Common Shares at a price of $9.30 in exchange
for Mr. Allen’s interest in the NetREIT 01 LP. |
-73-
Related Party Transactions
In the last two fiscal years, there have not been any transactions or series of similar
transactions to which the Company was or is to be a party in which the amount involved exceeds
$120,000 and in which any Director, executive officer, holder of 5% of the Company’s common stock
or any member of the immediate family of any of the foregoing persons had or will have a direct or
indirect material interest.
It is the Company’s policy that the Audit Committee approve or ratify transactions involving
Directors, executive officers or principal shareholders or members of their immediate families or
entities controlled by any of them or in which they have a substantial ownership interest. Such
transactions include employment of immediate family members of any Director or executive officer.
Management advises the Audit Committee on a regular basis of any such transaction that is proposed
to be entered into or continued and seeks approval.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, and SEC rules requires the
Company’s officers and Directors, and persons who own more than 10% of a registered class of our
equity securities (collectively, “Insiders”), to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock and other equity securities. Insiders are
required by regulation of the SEC to furnish us with copies of all Section 16(a) forms they file.
Effective with the filing of Form 10 with the Securities and Exchange Commission in May 2008
the officers and Directors, and persons who own more than 10% of a registered class of our equity
securities were required to file the initial report of ownership and reports of changes in
ownership. We have reviewed copies of reports provided to us, as well as other records and
information for the fiscal year ended December 31, 2009. Based on that review, we concluded that
the following reports were not timely filed. The Initial Form 3 was filed late for Mr. Bill Allen,
and the Form 4 disclosing a stock option exercise and sale in connection with a cashless exercise
of a stock option for Mr. Allen also was filed late. Upon discovery, these matters were promptly
reported.
Other Information Regarding the Company’s Proxy Solicitation
SHAREHOLDER PROPOSALS
To be considered for inclusion in the proxy statement relating to the Company’s 2011 Annual
Meeting of Shareholders, shareholder proposals must be received no
later than December 22, 2010.
To be considered for presentation at the 2011 Annual Meeting, although not included in the proxy
statement, proposals must be received no earlier than February 5, 2011 and no later than
March 7,
2011. Proposals that are not received in a timely manner will not be voted on at the 2011 Annual
Meeting. If a proposal is received on time, the proxies that management solicits for the meeting
may still exercise discretionary voting authority on the proposal under circumstances consistent
with the proxy rules of the SEC. All shareholder proposals should be marked for the attention of
the Secretary of the Company at 1282 Pacific Oaks Place, Escondido, California 92029.
-74-
ANNUAL REPORT ON FORM 10-K
This proxy statement incorporates by reference the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009. These forms are included in the annual report mailed with this proxy
statement and contain important information about the Company and its financial condition that is
not included in this proxy statement. It is also available on the Company’s website at
www.netreit.com. You may obtain a printed copy of the Company’s Annual Report on Form
10-K, including the financial statements, free of charge, by sending a written request to the
Secretary of the Company at 1282 Pacific Oaks Place, Escondido, CA 92029. Exhibits will be
provided upon written request and payment of an appropriate processing fee.
BY ORDER OF THE BOARD OF DIRECTORS
KENNETH W. ELSBERRY,
Chief Financial Officer
Dated: April 20, 2010
Chief Financial Officer
Dated: April 20, 2010
-75-
Appendix A
PLAN AND AGREEMENT OF MERGER
THIS
PLAN AND AGREEMENT OF MERGER (this “Agreement”), dated as
of May [_____], 2010, is made and
entered into by and between NETREIT, INC., a Maryland corporation (“NetREIT-MD”), and NETREIT, a
California corporation (the “Company”).
W I T N E S S E T H:
WHEREAS, NetREIT-MD is a corporation duly organized and existing under the laws of the State
of Maryland, having been incorporated on [_____], 2010;
WHEREAS, the Company is a corporation duly organized and existing under the laws of the State
of California, having been incorporated on January 28, 1999; and
WHEREAS, the Boards of Directors and the shareholders representing at least a majority of the
outstanding shares of capital stock entitled to vote of NetREIT-MD and at least a majority of the
outstanding shares of Series AA Preferred Stock and Common Stock, Series A of the Company, each
voting as a separate class and on a combined basis, have approved this Agreement under which the
Company shall be merged with and into NetREIT-MD with NetREIT-MD being the surviving corporation
(such merger being hereinafter referred to as the “Merger”).
NOW, THEREFORE, in consideration of the premises, the mutual covenants herein contained and
other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree that the Company shall be merged with and into NetREIT-MD on
the terms and conditions hereinafter set forth.
ARTICLE I
MERGER
MERGER
Effective
the later to occur of (i) 12:01 a.m. Eastern Standard time, on or about May [_____],
2010, or (ii) the time the Certificate of Merger is accepted for filing in California and the
Articles of Merger are accepted for filing in Maryland (the “Effective Time”), the Company shall be
merged with and into NetREIT-MD in accordance with the Maryland General Corporations Law and the
California Corporations Code, and the separate existence of the Company shall cease and NetREIT-MD
(hereinafter sometimes referred to as the “Surviving Corporation”) shall continue to exist under
the name of NetREIT, Inc. by virtue of, and shall be governed by, the laws of the State of
Maryland. The address of the registered office of the Surviving Corporation in the State of
Maryland will be 715 St. Paul Street, Baltimore, Maryland 21202. The name of the Surviving
Corporation’s registered agent at such address is HIQ Corporate Services, Inc.
ARTICLE II
ARTICLES OF INCORPORATION
OF THE SURVIVING CORPORATION
ARTICLES OF INCORPORATION
OF THE SURVIVING CORPORATION
The Charter of the Surviving Corporation, as in effect immediately prior to the Effective
Time, shall be the Charter of NetREIT-MD without change unless and until thereafter amended as
provided by applicable law.
ARTICLE III
BYLAWS OF THE SURVIVING CORPORATION
BYLAWS OF THE SURVIVING CORPORATION
The Bylaws of NetREIT-MD, as in effect immediately prior to the Effective Time, shall be the
Bylaws of the Surviving Corporation without change, unless and until amended or repealed in
accordance with applicable law.
ARTICLE IV
EFFECT OF MERGER ON STOCK
OF CONSTITUENT CORPORATIONS
EFFECT OF MERGER ON STOCK
OF CONSTITUENT CORPORATIONS
4.01 At the Effective Time, each authorized share of Series A Common Stock of the Company, no
par value per share (the “Company Common Stock”), of which [_____] shares are, as of the date
hereof, issued and outstanding shall be converted into one (1) share of Series A Common Stock,
$0.01 par value per share, of the Surviving Corporation, par value $0.01 per share (the “NetREIT-MD
Common Stock”). There are no shares of Series B Common Stock of the Company, no par value per
share, issued and outstanding as of the date hereof.
4.02 At and after the Effective Time, each share of the Company Common Stock shall be
cancelled and retired and, by virtue of the Merger and without further action, shall cease to
exist.
4.03 At the Effective Time, each authorized share of Series AA Preferred Stock of the Company,
no par value per share (the “Company Preferred Stock”), of which 50,200 shares are, as of the date
hereof, issued and outstanding shall be converted into one (1) share of Series AA Preferred Stock
of the Surviving Corporation, par value $0.01 per share (the “NetREIT-MD Preferred Stock”). There
are no shares of Series A Preferred Stock of the Company, no par value per share, issued and
outstanding as of the date hereof and there will be no shares of Series A Preferred Stock
authorized under the charter of the Surviving Corporation.
4.04 At and after the Effective Time, each share of the Company Preferred Stock shall be
cancelled and retired and, by virtue of the Merger and without further action, shall cease to
exist.
4.05 At and after the Effective Time, all documentation which prior to that time evidenced and
represented the Company Common Stock or the Company Preferred Stock, as applicable, shall be deemed
for all purposes to evidence ownership of and to represent those shares of NetREIT-MD Common Stock
or NetREIT-MD Preferred Stock, as applicable, into which the Company Common Stock or the Company
Preferred Stock, as applicable, represented by such documentation has been converted as herein
provided and shall be so registered on the books and records of NetREIT-MD. The registered owner
of any outstanding stock certificate evidencing the Company Common Stock or the Company Preferred
Stock, as applicable, shall, until such certificate shall have been surrendered for transfer or
conversion or otherwise accounted for to NetREIT-MD or its transfer agent, have and be entitled to
exercise any voting
and other rights with respect to and to receive any dividend and other distributions upon the
shares of NetREIT-MD Common Stock or NetREIT-MD Preferred Stock, as applicable, evidenced by such
outstanding certificate as above provided.
ARTICLE V
CORPORATE EXISTENCE, POWERS AND
LIABILITIES OF SURVIVING CORPORATION
CORPORATE EXISTENCE, POWERS AND
LIABILITIES OF SURVIVING CORPORATION
5.01 At the Effective Time, the separate existence of the Company shall cease and the Company
shall be merged with and into the Surviving Corporation in accordance with the provisions of this
Agreement. Thereafter, the Surviving Corporation shall possess all of the rights, privileges,
powers and franchises as well of a public as of a private nature, and shall be subject to all the
restrictions, disabilities and duties of the Company; and all rights, privileges, powers and
franchises of the Company, and all property, real, personal and mixed, and all debts due to each of
them on whatever account, as well as stock subscriptions and all other things in action or
belonging to the Company shall be vested in the Surviving Corporation; and all property, rights,
privileges, powers and franchises, and all and every other interest shall be thereafter effectually
the property of the Surviving Corporation as they were of the Company, and the title to any real
estate, whether by deed or otherwise, vested in the Company shall not revert or be in any way
impaired by reason of the Merger; but all rights of creditors and all liens upon any property of
the Company shall be preserved unimpaired, and all debts, liabilities and duties shall thenceforth
attach to the Surviving Corporation and may be enforced against it to the same extent as if said
debts, liabilities and duties had been incurred or contracted by it.
5.02 The Company agrees that it will execute and deliver (or cause to be executed and
delivered) all such deeds, assignments and other instruments, and will take or cause to be taken
such further or other action as the Surviving Corporation may deem necessary or desirable in order
to vest in and confirm to the Surviving Corporation title to and possession of all the property,
rights, privileges, immunities, powers, purposes and franchises, and all and every other interest,
of the Company and otherwise to carry out the intent and purposes of this Agreement.
ARTICLE VI
OFFICERS AND DIRECTORS
OF SURVIVING CORPORATION
OFFICERS AND DIRECTORS
OF SURVIVING CORPORATION
At the Effective Time, the officers and directors of the Company shall become the officers and
directors of the Surviving Corporation, and such persons shall hold office in accordance with the
Bylaws of the Surviving Corporation or until their respective successors shall have been appointed
or elected and qualified.
ARTICLE VII
APPROVAL BY SHAREHOLDERS;
AMENDMENT; EFFECTIVE TIME
APPROVAL BY SHAREHOLDERS;
AMENDMENT; EFFECTIVE TIME
7.01 This Agreement and the Merger contemplated hereby are subject to approval by the
requisite vote of the shareholders of the Company in accordance with California law. As
promptly as practicable after approval of this Agreement by such shareholders in accordance with
applicable law, duly authorized officers of NetREIT-MD and the Company shall make and execute
Articles of Merger or other applicable certificates or documentation effecting this Agreement and
shall cause such document or documents to be filed with the Department of Assessments and Taxation
for the State of Maryland and the Secretary of State for the State of California, respectively, in
accordance with the applicable Maryland and California law.
7.02 The respective Boards of Directors of NetREIT-MD and the Company may amend this Agreement
at any time prior to the Effective Time, provided that an amendment made subsequent to the approval
of the Merger by the shareholders of the Company shall not (1) alter or change the amount or kind
of shares, securities, cash, property or rights to be received in exchange for or on conversion of
all or any the Company Common Stock or the Company Preferred Stock; (2) alter or change any term of
the Charter of the Surviving Corporation; or (3) alter or change any of the terms and conditions of
this Agreement if such alteration or change would adversely affect the holders of any the Company
Common Stock or the Company Preferred Stock.
ARTICLE VIII
PAYMENT OF FEES AND FRANCHISE TAXES
PAYMENT OF FEES AND FRANCHISE TAXES
The Surviving Corporation shall be responsible for the payment of all fees and franchise taxes
of the Company relating to or required to be paid in connection with the Merger.
ARTICLE IX
TERMINATION OF MERGER
TERMINATION OF MERGER
This Agreement may be terminated and the Merger abandoned at any time prior to the Effective
Time, whether before or after shareholder approval of this Agreement, by the consent of the Board
of Directors of NetREIT-MD and the Board of Directors of the Company.
[Signature page to follow]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their
respective officers, all as of the day and year first above written.
| NETREIT, INC. a Maryland corporation |
||||
| By: | ||||
| Name: | Jack K. Heilbron | |||
| Title: | President and CEO | |||
| NETREIT a California corporation |
||||
| By: | ||||
| Name: | Jack K. Heilbron | |||
| Title: | President and CEO | |||
[Signature page to Plan and Agreement of Merger]
Appendix B
ARTICLES OF AMENDMENT AND RESTATEMENT
OF THE
ARTICLES OF INCORPORATION
OF
NetREIT, INC.
(a Maryland corporation)
OF THE
ARTICLES OF INCORPORATION
OF
NetREIT, INC.
(a Maryland corporation)
The undersigned, being authorized to execute and file these Articles of Amendment and
Restatement of the Articles of Incorporation of NetREIT, Inc., hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation desires to amend and restate its charter as currently in
effect pursuant to these Articles of Amendment and Restatement. The provisions set forth in these
Articles of Amendment and Restatement are all the provisions of the charter of the Corporation as
currently in effect.
SECOND: The charter of the Corporation is hereby amended by striking in their
entirety Articles I through IX, inclusive, and by substituting the following in lieu thereof:
ARTICLE I
INCORPORATION
The undersigned, being at least eighteen (18) years of age and duly authorized to execute and
file these Articles of Incorporation does hereby form a corporation under and by virtue of the
general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (which is hereinafter called the “Corporation”) is:
NetREIT, Inc.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any lawful act or activity
(including, without limitation or obligation, engaging in business as a real estate investment
trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the “Code”)) for which corporations may be organized under the general laws of the State of
Maryland as now or hereafter in force. For purposes of these Articles, “REIT” means a real estate
investment trust under Sections 856 through 860 of the Code.
ARTICLE IV
PRINCIPAL OFFICE; RESIDENT AGENT
The address of the principal office of the Corporation in the State of Maryland is 715 St.
Paul Street, Baltimore, Maryland 21202. The name and address of the resident agent of the
Corporation in the State of Maryland is HIQ Corporate Services, Inc., 715 St. Paul Street,
Baltimore, Maryland 21202. Said Resident Agent is a Maryland corporation duly authorized to act as
resident agent in the State of Maryland.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND
OF ITS STOCKHOLDERS AND DIRECTORS
Section 5.1 NUMBER OF DIRECTORS. The business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. The number of directors of the Corporation initially
shall be eight (8), which number may be increased or decreased only by the Board of Directors
pursuant to the Bylaws of the Corporation, but shall never be less than the minimum number required
by the Maryland General Corporation Law (the “MGCL”). The names of the directors who shall serve
until their successors are duly elected and qualified are:
Jack K. Heilbron
|
Larry G. Dubose | |
David T. Bruen
|
Thomas Schwartz | |
Sumner J. Rollings
|
William Allen | |
Bruce A. Staller
|
Kenneth W. Elsberry |
Section 5.2 ACTIONS BY STOCKHOLDERS.
Section 5.2.1. Quorum. Except with respect to the election of directors provided for
in Section 5.2.2 by the holders of Common Stock, the presence in person or by proxy of the holders
of shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast
on a matter (without regard to class) shall constitute a quorum at any meeting of stockholders with
respect to such matter, except with respect to any such matter that, under applicable statutes or
regulatory requirements or the charter, requires approval by a separate vote of the holders of one
or more classes of stock, in which case the presence in person or by proxy of the holders of shares
entitled to cast a majority of the votes entitled to be cast by each such class on such a matter
shall constitute a quorum. Notwithstanding the foregoing, to the extent permitted by the MGCL, the Bylaws may provide for a greater or lesser quorum requirement, provided that such
requirement shall not be less than forty percent (40%) nor more than sixty-six and two-thirds
percent (66 2/3rds%) of the votes entitled to be cast (without regard to class) on matters
submitted for a vote of the stockholders.
2
Section 5.2.2 Election of Directors. Except as otherwise provided in Section 6.4(i)
with respect to the holders of the Corporation’s Preferred Stock or in the Bylaws of the
Corporation, directors shall be elected by the affirmative vote of holders of Common Stock entitled
to cast a majority of all the votes entitled to be cast at a meeting at which a quorum is present.
As provided in the Bylaws, stockholders shall have the right to cumulate votes for the election of
directors where the names of candidates are placed in nomination prior to commencement of the
voting and a stockholder gives notice prior to commencement of the voting of the stockholder’s
intention to cumulate votes. In that circumstance, every stockholder entitled to vote may cumulate
votes for candidates in nomination and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which such stockholder’s shares are
entitled, or distribute votes on the same principle among any or all of the candidates standing for
election.
Section 5.3 AUTHORIZATION BY BOARD OF STOCK ISSUANCES. The Board of Directors may
authorize the issuance from time to time of shares of stock of the Corporation of any class or
series, whether now or hereafter authorized, or securities or rights convertible into shares of its
stock of any class or series, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable (or without consideration in the case of a stock split or
stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the
charter or the Bylaws.
Section 5.4 PREEMPTIVE RIGHTS. Except as may be provided by the Board of Directors in
setting the terms of classified shares of stock pursuant to Section 6.5 or as may be otherwise
agreed by contract, no holder of shares of stock of the Corporation shall, as such holder, have any
preemptive right to purchase or subscribe for any additional shares of stock of the Corporation or
any other security of the Corporation which it may issue or sell.
Section 5.5 INDEMNIFICATION. The Corporation shall have the power, to the maximum
extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and
to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any
individual who is a present or former director or officer of the Corporation or (b) any individual
who, while a director of the Corporation and at the request of the Corporation, serves or has
served as a director, officer, managing member, partner or trustee of another corporation, real
estate investment trust, partnership, joint venture, trust, employee benefit plan or any other
enterprise, from and against any claim or liability to which such person may become subject or
which such person may incur by reason of his status as a present or former director or officer of
the Corporation. The Corporation shall have the power, with the approval of the Board of Directors,
to provide such indemnification and advancement of expenses to a person who served a predecessor of
the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent
of the Corporation or a predecessor of the Corporation.
3
Section 5.6 DETERMINATIONS BY BOARD. The determination as to any of the following
matters, made in good faith by or pursuant to the direction of the Board of Directors consistent
with the charter and in the absence of actual receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established by a court, shall be final and conclusive
and shall be binding upon the Corporation and every holder of shares of its stock: the amount of
the net income of the Corporation for any period and the amount of assets at any time legally
available for the payment of dividends, redemption of its stock or the payment of other
distributions on its stock; the amount of paid-in surplus, net assets, other surplus, annual or
other net profit, net assets in excess of capital, undivided profits or excess of profits over
losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration
or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation
or liability for which such reserves or charges shall have been created shall have been paid or
discharged); the fair value, or any sale, bid or asked price to be applied in determining the fair
value, of any asset owned or held by the Corporation; any matter relating to the acquisition,
holding or disposition of any assets by the Corporation; or any other matter relating to the
business and affairs of the Corporation or required or permitted by applicable law, the charter or
Bylaws or otherwise to be determined by the Board of Directors.
Section 5.7 REIT QUALIFICATION. The Corporation has elected to qualify for federal
income tax treatment as a REIT. The Board of Directors shall use its reasonable best efforts to
take such actions as are necessary or appropriate to preserve the status of the Corporation as a
REIT; however, if the Board of Directors determines that it is no longer in the best interests of
the Corporation to continue to be qualified as a REIT, then upon receipt of a recommendation to
such effect from the Board of Directors, the holders of Common Stock, by a vote of such
stockholders as are entitled to cast a majority of all the votes entitled to be cast on the matter,
may cause the Corporation to revoke or otherwise terminate the Corporation’s REIT election pursuant
to Section 856(g) of the Code. The holders of Common Stock, upon receipt of a recommendation from
the Board of Directors, may determine that compliance with any restriction or limitation on stock
ownership and transfers set forth in Article VII is no longer required for REIT qualification and
cause the Corporation to amend the charter to remove such restriction or limitation.
Section 5.8 VACANCIES ON THE BOARD. A majority of the Board of Directors shall have
the power to fill any and all vacancies on the Board of Directors, even if the remaining directors
do not constitute a quorum, except that a vacancy with respect to any Series AA Director shall be
filled by the holders of the Series AA Preferred Stock and any vacancy created by the removal of a
director other than a Series AA Director may be filled only by the vote of holders of a majority of
the Common Stock. Any director elected to fill a vacancy shall serve until the next annual meeting
of the stockholders and until a successor is elected and qualifies.
Section 5.9 REMOVAL OF DIRECTORS. Any director (other than a Series AA Preferred
Director, who may be removed from office only by vote of the Series AA Preferred Stock as provided
in Section 6.4(i)), or the entire Board of Directors, may be removed from office at any time, with
or without cause, by the affirmative vote or the written consent of a majority of the shares of
Common Stock outstanding or by vote at a special meeting of the stockholders called in the manner provided for in the Bylaws, provided, however, that no director
may be removed when the votes cast against such removal, or not consenting in writing to such
removal, would be sufficient to elect such director if voted cumulatively in accordance with the
provisions of the Bylaws.
4
Section 5.10 ADVISOR AGREEMENTS. Subject to such approval of stockholders and other
conditions, if any, as may be required by any applicable statute, rule or regulation, the Board of
Directors may authorize the execution and performance by the Corporation of one or
more agreements with any person, corporation, association, company, trust, partnership (limited or
general) or other organization whereby, subject to the supervision and control of the Board of
Directors, any such other person, corporation, association, company, trust, partnership (limited or
general) or other organization shall render or make available to the Corporation managerial,
investment, advisory and/or related services, office space and other services and facilities
(including, if deemed advisable by the Board of Directors, the management or supervision of the
investments of the Corporation) upon such terms and conditions as may be provided in such agreement
or agreements (including, if deemed fair and equitable by the Board of Directors, the compensation
payable thereunder by the Corporation).
Section 5.11 ACTION BY WRITTEN CONSENT. Subject to compliance with the notice and
other requirements of Section 2-505 of the MGCL and any procedures adopted by the Board of
Directors from time to time, the holders of Common Stock entitled to vote generally in the election
of directors may take action or consent to any action by delivering a consent, in writing or by
electronic transmission, of the stockholders entitled to cast not less than the minimum number of
votes that would be necessary to authorize or take the action at a stockholders meeting.
ARTICLE VI
STOCK
Section 6.1 AUTHORIZED SHARES. The Corporation shall have the authority to issue one
hundred ten million one thousand (110,001,000) shares of stock, consisting of one hundred million
one thousand (100,001,000) shares of Common Stock, par value $0.01 per share (“Common Stock”), and
ten million (10,000,000) shares of Preferred Stock, par value $0.01 per share (“Preferred Stock”).
The aggregate par value of all authorized shares of stock having par value is $1,100,010.
Section 6.2 COMMON STOCK. The one hundred million one thousand (100,001,000) shares
of Common Stock shall be divided into two (2) classes: (i) one hundred million (100,000,000)
shares of Series A Common Stock (“Series A Common”), and (ii) one thousand (1,000) shares of Series
B Common Stock (“Series B Common”). Subject to the provisions of Article VII, each share of Common
Stock shall entitle the holder thereof to one vote. The Corporation’s Series A Common and Series B
Common shall be identical with respect to all preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions, qualifications and terms
and conditions of redemption, except that the Series A Common shall enjoy a liquidation preference to the exclusion of Series B Common, which preference
shall be junior to the Liquidation Preference enjoyed by the Series AA Preferred Stock, but which
shall entitle the holders of Series A Common Stock, on liquidation, dissolution or winding up of
the Corporation, to share ratably in all of the Corporation’s assets that are legally available for
distribution after all debts and other liabilities of the Corporation are retired and the
Liquidation Preference, including accrued dividends, if any, enjoyed by the Series AA Preferred
Stock paid to the holders of the Series AA Preferred Stock.
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Section 6.3 PREFERRED STOCK. The Board of Directors may classify any unissued shares
of Preferred Stock from time to time, in one or more classes or series of stock having such
preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as determined by the Board of Directors. One
million (1,000,000) shares of the Corporation’s authorized Preferred Stock shall be designated as
Series AA Preferred Stock (“Series AA Preferred Stock”). The rights, preferences and privileges
and other terms and conditions of the Series AA Preferred Stock shall be as set forth in Section
6.4 below.
Section 6.4 SERIES AA PREFERRED STOCK. The Series AA Preferred Stock shall have the
following rights, preferences and privileges:
(a) Liquidation Preference. The Liquidation Preference of the Series AA
Preferred Stock is twenty-five dollars ($25.00) per share (“Liquidation Preference”).
(b) Dividends. Each share of the Series AA Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds at the time legally
available therefore, an annual cash dividend equal to seven percent (7%) of the Liquidation
Preference, which dividends shall be declared in equal monthly installments in arrears on the 25th
day of each month. Dividends duly declared shall be paid on March 31, June 30, September 30 and
December 31 of each year, provided that if any such day shall be a Saturday, Sunday or a or a legal
holiday (any of the foregoing a “Non-Business Day”), then such dividend shall be payable on the
next succeeding day which is not a Non-Business Day. Dividends shall be cumulative and accrue for
each share of the Series AA Preferred Stock from the date of its first issuance and shall be
payable to holders of record as they appear on the stock books of the Corporation on such record
dates as they are fixed by the Board of Directors. No interest shall be payable with respect to
any dividend payment on the Series AA Preferred Stock which may be in arrears.
(c) Preference to Dividends. The Series AA Preferred Stock shall have
priority as to dividends over the Corporation’s Common Stock and any series or class of the
Corporation’s stock hereafter issued (referred to as “junior dividend stock”), except such
Preferred Stock which the Corporation may issue which is, by its express terms, senior to the
Series AA Preferred Stock “senior dividend stock”) or on parity with the Series AA Preferred Stock
(“parity dividend stock”), provided, however, the issuance of such senior dividend stock or parity
dividend stock shall first be approved by the affirmative vote of a majority of the outstanding
shares of the Series AA Preferred Stock (a “Majority Vote”). No dividend (other than dividends
payable solely in Common Stock or any series or class of junior
dividend stock) shall be declared, paid or set apart for payment on, and no
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purchase or other acquisition shall be
made by the Corporation of any Common Stock or junior dividend stock, unless all accrued and unpaid
dividends on the Series AA Preferred Stock shall have been declared and paid or set apart for
payment. No dividend shall be paid on any parity dividend stock unless the Corporation shall have
declared and paid or set aside for payment, or shall have contemporaneously declared and paid or
set apart for payment, all accrued and unpaid dividends for all prior periods on the Series AA
Preferred Stock. The Corporation shall not pay dividends on the Series AA Preferred Stock unless
it shall have declared and paid or set aside for payment or shall have contemporaneously declared
and paid or set apart for payment all accrued and unpaid dividends for all prior periods on the
parity dividend stock. Whenever all accrued dividends are not paid in full on the Series AA
Preferred Stock, or any parity dividend stock, all dividends declared on the Series AA Preferred
Stock and such parity dividend stock shall be declared and made pro rata so that the amount of
dividends declared per share on the Series AA Preferred Stock and such parity dividend stock shall
bear the same ratio that accrued and unpaid dividends per share on the Series AA Preferred Stock
and such parity dividend stock bear to each other.
(d) Preference Upon Liquidation. In the event of any liquidation, dissolution or
winding up of the Corporation, each share of Series AA Preferred Stock shall be entitled to
receive, out of legally available assets, an amount equal to the Liquidation Preference, plus an
amount equal to any accrued and unpaid dividends on such share to the date such liquidation payment
is made, and no more, before payment or distribution is made to the holders of the Corporation’s
Common Stock or any series or class of the Corporation’s stock hereafter issued that ranks junior
as to the liquidation rights of the Series AA Preferred Stock. The holders of the Series AA
Preferred Stock shall not be entitled to receive the Liquidation Preference on shares of the Series
AA Preferred Stock until the liquidation preferences of any other series or class of the
Corporation’s stock hereinafter issued that ranks senior as to liquidation rights of the Series AA
Preferred Stock (“senior liquidation stock”) has been paid in full. The holders of the Series AA
Preferred Stock and all other series or classes of the Corporation’s stock hereafter issued that
rank on a parity as to liquidation rights with the Series AA Preferred Stock shall share ratably,
in accordance with the respective preferential amounts payable on such stock, in any distribution
(after payment of the liquidation preferences of the senior liquidation stock) which is not
sufficient to pay in full the aggregate of the amounts payable thereon. After payment in full of
the Liquidation Preference of the shares of Series AA Preferred Stock (and the payment of dividends
thereon as provided above), the holders of the Series AA Preferred Stock shall not receive any
further participation in any distribution of the Corporation’s assets. Neither a consolidation,
merger or other business combination of the Corporation with or into another corporation or other
entity, nor a sale or transfer of all or part of the Corporation’s assets for cash, securities or
other property shall be considered a liquidation, dissolution or winding up of the Corporation.
For purposes of the Series AA Preferred Stock liquidation rights, a consolidation or a merger
of the Corporation into any other corporation or corporations or a sale of all or substantially all
of the assets of the Corporation shall be deemed not to be a liquidation, dissolution or winding up
of the Corporation.
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(e) Corporation’s Optional Redemption Rights. The Series AA Preferred Stock shall be redeemable at the election of the Corporation in whole, or in part, at any time or
from time to time, by giving written notice to the holders of the Series AA Preferred Stock not
less than thirty (30) days nor more than sixty (60) days prior to the date set for such redemption
(the “Redemption Date”). The Series AA Preferred Stock shall be redeemable for the sum equal to
the Liquidation Preference per share, plus a cash payment equal to all accrued but unpaid dividends
(the “Call Price”). Dividends shall cease to accrue on the Redemption Date for the Series AA
Preferred Stock so called for redemption. If fewer than all outstanding shares of Series AA
Preferred Stock shall be called for redemption, the Series AA Preferred Stock redeemed shall be
selected by the Corporation by lot or pro rata (as nearly as may be possible) or by and other
method determined by the Board of Directors in its sole discretion, to be equitable.
(f) Holders’ Optional Conversion. At any time prior to any Redemption Date,
each share of the Series AA Preferred Stock shall be convertible, in whole or part only, at the
election of the holder thereof, into two (2) shares of the Corporation’s Series A Common Stock (the
“Conversion Rate”). This right of optional conversion shall terminate immediately before the close
of business on any Redemption Date. Any such conversion shall be effected by delivery of the
certificate evidencing such Series AA Preferred Stock, together with written notice of conversion
and a proper assignment of such certificate to the Corporation or in blank (and, if applicable,
cash payment of an amount equal to the dividend attributable to the current quarterly dividend
period payable on such shares), to the office of the transfer agent, if any, for the Series AA
Preferred Stock (or to any other office or agency maintained by the Corporation) for that purpose
and otherwise in accordance with conversion procedures established by the Corporation. Any such
conversion shall be deemed to have been effected immediately before the close of business on the
date on which the foregoing requirements have been satisfied.
(g) Adjustments. The Conversion Rate shall be adjusted in accordance with
the following provisions:
(1) Mandatory Adjustments. In the event the Corporation (A) pays a stock
dividend or makes a distribution with respect to its Common Stock in shares of Common Stock; (B)
subdivides or splits its outstanding Common Stock; (C) combines its outstanding Common Stock into a
smaller number of shares; (D) issues any shares of Common Stock by reclassification of its shares
of Common Stock; or (E) pays a dividend or distributes to all holders of its Common Stock evidences
of its indebtedness, cash or other assets (including capital stock of the Corporation but excluding
any Permitted Cash Dividends (as defined below) or distributions and dividends referred to in
Section 6.4(g)(1) above), the Conversion Rate shall be adjusted as of the date such event first
becomes effective.
(2) Discretionary Adjustments. The Corporation will be entitled (but will not be
required) to make upward adjustments in the Conversion Rate as the Corporation, in its discretion,
shall determine to be advisable in order that any stock dividend, subdivisions of shares,
distribution of rights to purchase stock or securities, or distribution of securities convertible
into or exchangeable for stock (or any transaction which could be treated as any of the events
described in Section 6.4(g)(1) above under Section 305 of the Internal Revenue Code of 1986, as
amended) hereafter made by the Corporation to its stockholders will not be taxable.
8
(3) Permitted Cash Dividends. “Permitted Cash Dividends” shall mean, with respect
to any consecutive 12-month period, all cash dividends and cash distributions on the Common Stock
(other than cash dividends and cash distributions for which an adjustment to the Conversion Rate
was previously made) not in excess of an amount equal to ten percent (10%) per annum on the Share
Price of the Corporation’s Common Stock, excepting any dividends paid with funds from capital gains
within the meaning of federal income tax law.
The Share Price shall be the average of the closing share price of the Common Stock in any public
market as reported over such period, or if the Corporation’s Common Stock was not traded in a
public market during such period, the price at which the Common Stock was last sold by the
Corporation to any unaffiliated person during such period, or if no such sale occurred, the value
of the Common Stock determined by the Corporation’s Board of Directors, in which event, the Board
of Directors’ decision will be final.
(4) Reclassification, Consolidation or Merger. Unless sooner redeemed or
converted, in case of any reclassification of the Common Stock, any consolidation of the
Corporation with, or merger of the Corporation into, any other entity, any merger of any entity
into the Corporation (other than a consolidation or merger that does not result in a
reclassification, conversion, exchange or cancellation of the outstanding shares of Common Stock),
any sale or transfer of all or substantially all of the assets of the Corporation or any compulsory
share exchange whereby the Common Stock is converted into other securities, cash or other property
(a “Transaction”), each share of Series AA Preferred Stock shall, after consummation of such
Transaction, be entitled to be converted (A) on the Conversion Date into the kind and amounts of
securities, cash or other property receivable upon consummation of such Transaction by a holder of
the number of shares of Common Stock into which such Series AA Preferred Stock would have been
converted if the conversion on the Conversion Date had occurred immediately before the date of
consummation of such Transaction, plus the right to receive cash in an amount equal to all accrued
and unpaid dividends on such Series AA Preferred Stock (other than previously declared dividends
payable to a holder of record as of a prior date); or (B) at the option of the holder, into the
kinds and amount of securities, cash or other property receivable upon consummation of such
Transaction by a holder of the number of shares of Common Stock into which such Series AA Preferred
Stock might have been converted immediately before consummation of such Transaction. The kind and
amount of securities into or for which the Series AA Preferred Stock will be convertible or
redeemable after consummation of such Transaction will be subject to adjustment as described above
in Section 6.4(g), following the date of consummation of such Transaction. No fractional shares of
Common Stock will be issued upon redemption or conversion of Series AA Preferred Stock. In lieu of
any fractional share otherwise issuable in respect of the aggregate number of shares of Series AA
Preferred Stock of any holder that are redeemed or converted, such holder will be entitled to
receive an amount in cash equal to the same fraction of the share value of the Common Stock,
determined as of the Conversion Date in the case of a mandatory conversion, or the effective date
of the conversion in the case of an optional conversion by a holder.
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(h) Calculation and Documentation of Adjustments. All adjustments to the Conversion
Rate shall be calculated to the nearest 1/100th of a share of Common Stock. No adjustment in the
Conversion Rate shall be required unless such adjustment would require any increase or decrease of at least one percent (1%) therein; provided, however, that any adjustments
which, by reason of this Section 6.4(h), shall not be required to be made will be carried forward
and taken into account in any subsequent adjustment. All adjustments shall be made successively.
Whenever the Conversion Rate shall be so adjusted, the Corporation shall file with its transfer
agent, if any, for the Series AA Preferred Stock a certificate with respect to such adjustment, and
shall make a prompt public announcement of such adjustment on its web site or by such other means
as the Board of Directors may determine.
(i) Voting Rights. The Series AA Preferred Stock shall have only the voting
rights set forth in this Section 6.4(i), except as may otherwise be required by law. So long as
any Series AA Preferred Stock is outstanding, the Corporation shall not, without the Majority Vote
of the holders of record of the Series AA Preferred Stock then outstanding, voting separately as a
class:
(1) amend, alter or repeal any provision of the charter or the Bylaws of the
Corporation so as to affect adversely the relative rights, preferences,
qualifications, limitations or restrictions of the Series AA Preferred
Stock;
(2) authorize or issue, or increase the authorized amount of, any additional
class or series of stock, or any security convertible into any senior
dividend stock, senior liquidation stock, parity dividend stock or parity
liquidation stock;
(3) affect any reclassification of the Series AA Preferred Stock; or
(4) effect the merger of the Corporation with another corporation, exchange of
shares or sale of all or substantially all of the assets of the Corporation if the
stockholders of the Corporation prior to such merger, share exchange or sale will
own less than fifty percent (50%) of the shares of the surviving (in case of a
merger) or acquiring (in the case of an exchange of shares or sale of assets)
corporation immediately following such merger, share exchange or sale.
Except as provided below in this Section 6.4(i), holders of Series AA Preferred Stock shall
not have the right to vote for the election of directors. If dividends on the Series AA Preferred
Stock have accrued and remain unpaid for a period of one year, the Board of Directors shall call
and hold a meeting of the Board of Directors within thirty (30) days to consider and adopt a
resolution to increase the number of directors of the Corporation by two (2) (such additional
directors, the “Series AA Preferred Directors”), name nominees for positions as Series AA Preferred
Directors and call a special meeting of the holders of the Series AA Preferred Stock for the sole
purpose of electing Series AA Preferred Directors. Series AA Preferred Directors elected by the
holders of the Series AA Preferred Stock pursuant to this Section 6.4(i) shall serve until the
earlier of (1) the date the Corporation pays a dividend sufficient to retire all accrued and unpaid
dividends on the Series AA Preferred Stock, (2) their resignation or removal by a vote of the
majority of the Series AA Preferred Stock, or (3) the date their respective successors are duly
elected and qualify. If any Series AA Preferred Director shall resign or be removed from office, the holders of the Series AA Preferred Stock shall
have the right to elect such Series AA Preferred Directors as are required to fill any such
vacancy(ies) until such time that the director election rights of the holders of Series AA
Preferred Stock terminate.
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(j) Notice of Corporate Action. The Corporation shall give the holders of
record of the Series AA Preferred Stock at least twenty (20) days prior written notice of: (1) the
granting by the Corporation to all holders of its Common Stock of rights to purchase any shares of
capital stock or other rights; (2) any reclassification of Common Stock, or consolidation of the
Corporation with, or merger of the Corporation into, any other persons, any merger of any person
into the Corporation (other than a merger that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock); or (3) any sale or transfer of all
or substantially all of the assets of the Corporation.
Section 6.5 CLASSIFIED SHARES. Prior to issuance of shares of any class or series, the
Board of Directors by resolution shall: (a) designate that particular class or series to
distinguish it from all other classes and series of stock of the Corporation; (b) specify the
number of shares to be included in the class or series; (c) set, subject to the provisions of
Article VII and subject to the express terms of any class or series of stock of the Corporation
outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms and conditions of
redemption for each class or series; and (d) cause the Corporation to file articles supplementary
with the State Department of Assessments and Taxation of Maryland (“SDAT”). Any of the terms of any
class or series of stock set or changed pursuant to clause (c) of this Section 6.5 may be made
dependent upon facts or events ascertainable outside the charter (including determinations by the
Board of Directors or other facts or events within the control of the Corporation) and may vary
among holders thereof, provided that the manner in which such facts, events or variations shall
operate upon the terms of such class or series of stock is clearly and expressly set forth in the
articles supplementary filed with the SDAT.
Section 6.6 CHARTER AND BYLAWS. All persons who shall acquire stock in the Corporation
shall acquire the same subject to the provisions of the charter and the Bylaws.
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
Section 7.1 DEFINITIONS. For the purpose of this Article VII, (i) terms defined
elsewhere in these Articles of Incorporation are incorporated by reference, and (ii) the following
terms shall have the following meanings:
AGGREGATE STOCK OWNERSHIP LIMIT. The term “Aggregate Stock Ownership Limit” shall mean
not more than nine and 8/10ths percent (9.8%) in value of the aggregate outstanding shares of
Capital Stock. The value of the outstanding shares of Capital Stock shall be determined by the
Board of Directors of the Corporation in good faith, which determination shall be conclusive for all purposes hereof.
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BENEFICIAL OWNERSHIP. The term “Beneficial Ownership” shall mean ownership of Capital
Stock by a Person, whether the interest in the shares of Capital Stock is held directly or
indirectly (including by a nominee), and shall include interests that would be treated as owned
through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the
Code. The terms “Beneficial Owner”, “Beneficially Owns” and “Beneficially Owned” shall have the
correlative meanings.
BUSINESS DAY. The term “Business Day” shall mean any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions in California are
authorized or required by law, regulation or executive order to close.
CAPITAL STOCK. The term “Capital Stock” shall mean all classes or series of stock of
the Corporation, including, without limitation, Common Stock and Preferred Stock.
CHARITABLE BENEFICIARY. The term “Charitable Beneficiary” shall mean one or more
beneficiaries of the Charitable Trust as determined pursuant to Section 7.3.6, provided that each
such organization must be described in Section 501(c)(3) of the Code and contributions to each such
organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of
the Code.
CHARITABLE TRUST. The term “Charitable Trust” shall mean any trust provided for in
Section 7.3.1.
CHARTER. The term “charter” shall mean the charter of the Corporation, as that term is
defined in the MGCL.
CODE. The term “Code” shall mean the Internal Revenue Code of 1986, as amended from
time to time.
COMMON STOCK OWNERSHIP LIMIT. The term “Common Stock Ownership Limit” shall mean not
more than nine and 8/10ths percent (9.8%) (in value or in number of shares, whichever is more
restrictive) of the aggregate outstanding shares of Common Stock of the Corporation. The number and
value of outstanding shares of Common Stock of the Corporation shall be determined by the Board of
Directors of the Corporation in good faith, which determination shall be conclusive for all
purposes hereof.
CONSTRUCTIVE OWNERSHIP. The term “Constructive Ownership” shall mean ownership of
Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or
indirectly (including by a nominee), and shall include interests that would be treated as owned
through the application of Section 318(a) of the Code, as modified by
Section 856(d)(5) of the Code. The terms “Constructive Owner”, “Constructively Owns” and
“Constructively Owned” shall have the correlative meanings.
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EXCEPTED HOLDER. The term “Excepted Holder” shall mean a stockholder of the Corporation for whom an Excepted Holder Limit is created by the charter or by the Board of
Directors pursuant to Section 7.2.7.
EXCEPTED HOLDER LIMIT. The term “Excepted Holder Limit” shall mean, provided that the
affected Excepted Holder agrees to comply with the requirements established by the Board of
Directors pursuant to Section 7.2.7, and subject to adjustment pursuant to Section 7.2.8, the
percentage limit established by the Board of Directors pursuant to Section 7.2.7.
INITIAL DATE. The term “Initial Date” shall mean the date upon which the Articles of
Amendment and Restatement of the Articles of Incorporation containing this Article VII are filed
with the SDAT.
MARKET PRICE. The term “Market Price” on any date shall mean, with respect to any
class or series of outstanding shares of Capital Stock, the Closing Price for such Capital Stock on
such date. The “Closing Price” on any date shall mean the last sale price for such Capital Stock,
regular way, or, in case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, for such Capital Stock, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or admitted to trading
on the NYSE or, if such Capital Stock is not listed or admitted to trading on the NYSE, as reported
on the principal consolidated transaction reporting system with respect to securities listed on the
principal national securities exchange on which such Capital Stock is listed or admitted to trading
or, if such Capital Stock is not listed or admitted to trading on any national securities exchange,
the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System or, if such system is no longer in use, the principal other automated
quotation system that may then be in use or, if such Capital Stock is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a professional market
maker making a market in such Capital Stock selected by the Board of Directors of the Corporation
or, in the event that no trading price is available for such Capital Stock, the fair market value
of the Capital Stock, as determined in good faith by the Board of Directors of the Corporation.
NYSE. The term “NYSE” shall mean the New York Stock Exchange.
PERSON. The term “Person” shall mean an individual, corporation, partnership, estate,
trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a
trust permanently set aside for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity and also includes a group as that term s used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to
which an Excepted Holder Limit applies.
PROHIBITED OWNER. The term “Prohibited Owner” shall mean, with respect to any
purported Transfer, any Person who, but for the provisions of Section 7.2.1, would Beneficially Own
or Constructively Own shares of Capital Stock, and if appropriate in the context, shall also mean any Person who would have been the record owner of the shares that the
Prohibited Owner would have so owned.
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REIT. The term “REIT” shall mean a real estate investment trust within the meaning of
Section 856 of the Code.
RESTRICTION TERMINATION DATE. The term “Restriction Termination Date” shall mean the
first day after the Initial Date on which pursuant to Section 5.7 of the charter the Board of
Directors determines that it is no longer in the best interests of the Corporation to continue to
be qualified as a REIT and the holders of Common Stock, by a vote of such stockholders as are
entitled to cast a majority of all the votes entitled to be cast on the matter, causes the
Corporation to revoke or otherwise terminate the Corporation’s REIT election pursuant to Section
856(g) of the Code or that compliance with the restrictions and limitations on Beneficial
Ownership, Constructive Ownership and Transfers of shares of Capital Stock set forth herein is no
longer required in order for the Corporation to qualify as a REIT.
TENANT. The term “Tenant” shall mean a tenant, subtenant or any other Person that is a
subtenant through a chain of subtenancies of a property owned by the Corporation.
TRANSFER. The term “Transfer” shall mean any issuance, sale, transfer, gift,
assignment, devise or other disposition, as well as any other event that causes any Person to
acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions
or cause any such events, of Capital Stock or the right to vote or receive dividends on Capital
Stock, including (a) the granting or exercise of any option (or any disposition of any option), (b)
any disposition of any securities or rights convertible into or exchangeable for Capital Stock or
any interest in Capital Stock or any exercise of any such conversion or exchange right and (c)
Transfers of interests in other entities that result in changes in Beneficial or Constructive
Ownership of Capital Stock; in each case, whether voluntary or involuntary, whether owned of
record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise.
The terms “Transferring” and “Transferred” shall have the correlative meanings.
TRUSTEE. The term “Trustee” shall mean a Person unaffiliated with the Corporation and
Prohibited Owner that is appointed by the Corporation to serve as trustee of a Charitable Trust.
Section 7.2 CAPITAL STOCK.
Section 7.2.1 OWNERSHIP LIMITATIONS. During the period commencing on the Initial Date
and prior to the Restriction Termination Date:
(a) BASIC RESTRICTIONS.
(i) (1) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own
shares of Capital Stock in excess of the Aggregate Stock Ownership Limit, (2) no Person, other than
an Excepted Holder, shall Beneficially Own or Constructively
Own shares of Common Stock in excess of the Common Stock Ownership Limit and (3) no Excepted Holder
shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Excepted
Holder Limit for such Excepted Holder.
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(ii) No Person shall Beneficially or Constructively Own shares of Capital Stock to the extent
that such Beneficial or Constructive Ownership of Capital Stock would result in the Corporation
being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether
the ownership interest is held during the last half of a taxable year), or otherwise failing to
qualify as a REIT (including, but not limited to, Beneficial or Constructive Ownership that would
result in the Corporation owning (actually or Constructively (substituting, solely for purposes of
this determination, “Section 856(d)(5)” for Section 897(c)(6)(C)” in the definition of Constructive
Ownership)) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the
income derived by the Corporation from such tenant would cause the Corporation to fail to satisfy
any of the gross income requirements of Section 856(c) of the Code).
(iii) Subject to Section 7.4 of the charter, any Transfer of shares of Capital Stock (whether
or not such Transfer is the result of a transaction entered into through the facilities of the NYSE
or any other national securities exchange or automated inter-dealer quotation system) that, if
effective, would result in the Capital Stock being beneficially owned by fewer than one hundred
(100) Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab
initio, and the intended transferee shall acquire no rights in such shares of Capital Stock.
(b) TRANSFER IN TRUST. Subject to Section 7.4 of the charter, if any Transfer of
shares of Capital Stock (whether or not such Transfer is the result of a transaction entered into
through the facilities of the NYSE or any other national securities exchange or automated
inter-dealer quotation system) occurs which, if effective, would result in any Person Beneficially
Owning or Constructively Owning shares of Capital Stock in violation of Section 7.2.1(a)(i) or
(ii),
(i) then that number of shares of the Capital Stock the Beneficial or Constructive Ownership
of which otherwise would cause such Person to violate Section 7.2.1(a)(i) or (ii) (rounded to the
nearest whole share) shall be automatically transferred to a Charitable Trust for the benefit of a
Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the
Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such
shares; or
(ii) if the transfer to the Charitable Trust described in clause (i) of this sentence would
not be effective for any reason to prevent the violation of Section 7.2.1(a)(i) or (ii), then the
Transfer of that number of shares of Capital Stock that otherwise would cause any Person to violate
Section 7.2.1(a)(i) or (ii) shall be void ab initio, and the intended transferee
shall acquire no rights in such shares of Capital Stock.
15
Section 7.2.2 REMEDIES FOR BREACH. If the Board of Directors of the Corporation or any
duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2.1 or that
a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of
any shares of Capital Stock in violation of Section 7.2.1 (whether or not such violation is
intended), the Board of Directors or a committee thereof shall take such action as it deems
advisable to refuse to give effect to or to prevent such Transfer or other event, including,
without limitation, causing the Corporation to redeem shares, refusing to give effect to such
Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or
other event; provided, however, that any Transfer or attempted Transfer or other
event in violation of Section 7.2.1 shall automatically result in the transfer to the Charitable
Trust described above, and, where applicable, such Transfer (or other event) shall be void
ab initio as provided above irrespective of any action (or non-action) by the Board
of Directors or a committee thereof.
Section 7.2.3 NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts or
intends to acquire Beneficial Ownership or Constructive Ownership of shares of Capital Stock that
will or may violate Section 7.2.1(a) or any Person who would have owned shares of Capital Stock
that resulted in a transfer to the Charitable Trust pursuant to the provisions of Section 7.2.1(b)
shall immediately give written notice to the Corporation of such event, or in the case of such a
proposed or attempted transaction, give at least fifteen (15) days prior written notice, and shall
provide to the Corporation such other information as the Corporation may request in order to
determine the effect, if any, of such Transfer on the Corporation’s status as a REIT.
Section 7.2.4 OWNERS REQUIRED TO PROVIDE INFORMATION. From the Initial Date and prior
to the Restriction Termination Date:
(a) every Person who Beneficially Owns more than five percent (5%) (or such lower percentage
as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding
shares of Capital Stock, within 30 days after the end of each taxable year, shall give written
notice to the Corporation stating the name and address of such owner, the number of shares of
Capital Stock Beneficially Owned and a description of the manner in which such shares are held.
Each such Person shall provide to the Corporation such additional information as the Corporation
may request in order to determine the effect, if any, of such Beneficial Ownership on the
Corporation’s status as a REIT and to ensure compliance with the Aggregate Stock Ownership Limit;
and
(b) each Person who is a Beneficial or Constructive Owner of Capital Stock and each Person
(including the stockholder of record) who is holding Capital Stock for a Beneficial or Constructive
Owner shall provide to the Corporation such information as the Corporation may request, in good
faith, in order to determine the Corporation’s status as a REIT and to comply with requirements of
any taxing authority or governmental authority or to determine such compliance and ensure
compliance with Aggregate Stock Ownership Limit.
Section 7.2.5 REMEDIES NOT LIMITED. Subject to Section 5.7 of the charter, nothing
contained in this Section 7.2 shall limit the authority of the Board of Directors of the
Corporation to take such other action as it deems necessary or advisable to protect the Corporation
and the interests of its stockholders in preserving the Corporation’s status as a REIT.
16
Section 7.2.6 AMBIGUITY. In the case of an ambiguity in the application of any of the
provisions of this Article VII, including any definition contained in Section 7.1, the Board of
Directors of the Corporation shall have the power to determine the application of the provisions of
this Article VII with respect to any situation based on the facts known to it. In the event
Article VII requires an action by the Board of Directors and the charter fails to provide specific
guidance with respect to such action, the Board of Directors shall have the power to determine the
action to be taken so long as such action is not contrary to the provisions of this Article VII.
Section 7.2.7 EXCEPTIONS.
(a) Subject to Section 7.2.1(a)(ii), the Board of Directors of the Corporation, in its sole
discretion, may exempt (prospectively or retroactively) a Person from the Aggregate Stock Ownership
Limit and the Common Stock Ownership Limit, as the case may be, and may establish or increase an
Excepted Holder Limit for such Person if:
(i) the Board of Directors obtains such representations and undertakings from such Person as
are reasonably necessary to ascertain that no individual’s Beneficial or Constructive Ownership of
such shares of Capital Stock will violate Section 7.2.1(a)(ii);
(ii) such Person does not and represents that it will not own, actually or Constructively, an
interest in a Tenant of the Corporation (or a Tenant of any entity owned or controlled by the
Corporation) that would cause the Corporation to own, actually or Constructively, more than a nine
and 8/10ths percent (9.8%) interest in such Tenant and the Board of Directors obtains such
representations and undertakings from such Person as are reasonably necessary to ascertain this
fact (for this purpose, a Tenant from whom the Corporation (or an entity owned or controlled by the
Corporation) derives (and is expected to continue to derive) a sufficiently small amount of revenue
such that, in the opinion of the Board of Directors of the Corporation, rent from such Tenant would
not adversely affect the Corporation’s ability to qualify as a REIT need not be treated as a Tenant
of the Corporation); and
(iii) such Person agrees that any violation or attempted violation of such representations or
undertakings (or other action which is contrary to the restrictions contained in Sections 7.2.1
through 7.2.6) will result in such shares of Capital Stock being automatically transferred to a
Charitable Trust in accordance with Sections 7.2.1(b) and 7.3.
(b) Prior to granting any exception pursuant to Section 7.2.7(a), the Board of Directors of
the Corporation may require a ruling from the Internal Revenue Service, or an opinion of counsel,
in either case in form and substance satisfactory to the Board of Directors in its sole discretion,
as it may deem necessary or advisable in order to determine or ensure the Corporation’s status as a
REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such
conditions or restrictions as it deems appropriate in connection with granting such exception.
17
(c) Subject to Section 7.2.1(a)(ii), an underwriter or placement agent that participates in a
public offering or a private placement of Capital Stock (or securities convertible into or
exchangeable for Capital Stock) may Beneficially Own or Constructively Own shares of Capital Stock
(or securities convertible into or exchangeable for Capital Stock) in excess of the Aggregate Stock
Ownership Limit, the Common Stock Ownership Limit, or both such limits, but only to the extent
necessary to facilitate such public offering or private placement and provided that the
restrictions contained in Section 7.2.1(a) will not be violated following the distribution of such
underwriter or placement agent of such shares of Capital Stock.
(d) The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder:
(1) with the written consent of such Excepted Holder at any time, or (2) pursuant to
the terms and conditions of the agreements and undertakings entered into with such Excepted Holder
in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No
Excepted Holder Limit shall be reduced to a percentage that is less than the Common Stock Ownership
Limit.
Section 7.2.8 INCREASE IN AGGREGATE STOCK OWNERSHIP AND COMMON STOCK OWNERSHIP LIMITS.
The Board of Directors may from time to time increase the Common Stock Ownership Limit and the
Aggregate Stock Ownership Limit.
Section 7.2.9 LEGEND. Each certificate for shares of Capital Stock shall bear
substantially the following legend:
The shares represented by this certificate are subject to restrictions on
Beneficial and Constructive Ownership and Transfer for the purpose of the
Corporation’s maintenance of its status as a Real Estate Investment Trust
under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to
certain further restrictions and except as expressly provided in the
Corporation’s charter, (i) no Person may Beneficially or Constructively Own
shares of the Corporation’s Common Stock in excess of nine and 8/10ths
percent (9.8%) (in value or number of shares) of the outstanding shares of
Common Stock of the Corporation unless such Person is an Excepted Holder (in
which case the Excepted Holder Limit shall be applicable); (ii) no Person
may Beneficially or Constructively Own shares of Capital Stock of the
Corporation in excess of nine and 8/10ths percent (9.8%) of the value of the
total outstanding shares of Capital Stock of the Corporation, unless such
Person is an Excepted Holder (in which case the Excepted Holder Limit shall
be applicable); (iii) no Person may Beneficially or Constructively Own
Capital Stock that would result in the Corporation being “closely held”
under Section 856(h) of the Code or otherwise cause the Corporation to fail
to qualify as a REIT; and (iv) no Person may Transfer shares of Capital
Stock if such Transfer would result in the Capital Stock of the Corporation
being owned by fewer than 100 Persons. Any Person who Beneficially or
Constructively Owns or attempts to Beneficially or Constructively Own shares
of Capital Stock which causes or will cause a Person to Beneficially or
Constructively Own shares of Capital Stock in excess or in violation
of the above limitations must
18
immediately notify the Corporation. If any of the restrictions on transfer
or ownership are violated, the shares of Capital Stock represented hereby
will be automatically transferred to a Trustee of a Charitable Trust for the
benefit of one or more Charitable Beneficiaries. In addition, upon the
occurrence of certain events, attempted Transfers in violation of the
restrictions described above may be void ab initio. All
capitalized terms in this legend have the meanings defined in the charter,
as the same may be amended from time to time, a copy of which, including the
restrictions on transfer and ownership, will be furnished to each holder of
Capital Stock of the Corporation on request and without charge.
Instead of the foregoing legend, the certificate may state that the Corporation will furnish a
full statement about certain restrictions on transferability to each holder of Capital Stock of the
Corporation on request and without charge.
Section 7.3 TRANSFER OF CAPITAL STOCK IN TRUST.
Section 7.3.1 OWNERSHIP IN TRUST. Upon any purported Transfer or other event described
in Section 7.2.1(b) that would result in a transfer of shares of Capital Stock to a Charitable
Trust, such shares of Capital Stock shall be deemed to have been transferred to the Trustee as
trustee of a Charitable Trust for the exclusive benefit of one or more Charitable Beneficiaries.
Such transfer to the Trustee shall be deemed to be effective as of the close of business on the
Business Day prior to the purported Transfer or other event that results in the transfer to the
Charitable Trust pursuant to Section 7.2.1(b). The Trustee shall be appointed by the Corporation
and shall be a Person unaffiliated with the Corporation and any Prohibited Owner. Each Charitable
Beneficiary shall be designated by the Corporation as provided in Section 7.3.6.
Section 7.3.2 STATUS OF SHARES HELD BY THE TRUSTEE. Shares of Capital Stock held by
the Trustee shall be issued and outstanding shares of Capital Stock of the Company. The Prohibited
Owner shall have no rights in the shares held by the Trustee. The Prohibited Owner shall not
benefit economically from ownership of any shares held in trust by the Trustee, shall have no
rights to dividends or other distributions and shall not possess any rights to vote or other rights
attributable to the shares held in the Charitable Trust.
Section 7.3.3 DIVIDEND AND VOTING RIGHTS. The Trustee shall have all voting rights and
rights to dividends or other distributions with respect to shares of Capital Stock held in the
Charitable Trust, which rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary. Any dividend or other distribution paid prior to the discovery by the Corporation that
the shares of Capital Stock have been transferred to the Trustee shall be paid by the recipient of
such dividend or distribution to the Trustee upon demand and any dividend or other distribution
authorized but unpaid shall be paid when due to the Trustee. Any dividend or distribution so paid
to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall
have no voting rights with respect to shares held in the Charitable Trust and, subject to Maryland
law, effective as of the date that the shares of Capital Stock have
been transferred to the Trustee, the Trustee shall have the authority
(at the Trustee’s
19
sole discretion)
(i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the
Corporation that the shares of Capital Stock have been transferred to the Trustee and (ii) to
recast such vote in accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary; provided, however, that if the Corporation has already taken irreversible
corporate action, then the Trustee shall not have the authority to rescind and recast such vote.
Notwithstanding the provisions of this Article VII, until the Corporation has received notification
that shares of Capital Stock have been transferred into a Charitable Trust, the Corporation shall
be entitled to rely on its share transfer and other stockholder records for purposes of preparing
lists of stockholders entitled to vote at meetings, determining the validity and authority of
proxies and otherwise conducting votes of stockholders.
Section 7.3.4 SALE OF SHARES BY TRUSTEE. Within twenty (20) days of receiving notice
from the Corporation that shares of Capital Stock have been transferred to the Charitable Trust,
the Trustee of the Charitable Trust shall sell the shares held in the Charitable Trust to a person,
designated by the Trustee, whose ownership of the shares will not violate the ownership limitations
set forth in Section 7.2.1(a). Upon such sale, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3.4. The
Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in connection with the event
causing the shares to be held in the Charitable Trust (e.g., in the case of a gift, devise or other
such transaction), the Market Price of the shares on the day of the event causing the shares to be
held in the Charitable Trust and (2) the price per share received by the Trustee from the sale or
other disposition of the shares held in the Charitable Trust. Any net sales proceeds in excess of
the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary.
If, prior to the discovery by the Corporation that shares of Capital Stock have been transferred to
the Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed
to have been sold on behalf of the Charitable Trust and (ii) to the extent that the Prohibited
Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was
entitled to receive pursuant to this Section 7.3.4, such excess shall be paid to the Trustee upon
demand.
Section 7.3.5 PURCHASE RIGHT IN STOCK TRANSFERRED TO THE TRUSTEE. Shares of Capital
Stock transferred to the Trustee shall be deemed to have been offered for sale to the Corporation,
or its designee, at a price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the Charitable Trust (or, in the case of a devise or
gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date
the Corporation, or its designee, accepts such offer. The Corporation shall have the right to
accept such offer until the Trustee has sold the shares held in the Charitable Trust pursuant to
Section 7.3.4. Upon such a sale to the Corporation, the interest of the Charitable Beneficiary in
the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to
the Prohibited Owner.
20
Section 7.3.6 DESIGNATION OF CHARITABLE BENEFICIARIES. By written notice to the
Trustee, the Corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that (i) the shares of
Capital Stock held in the Charitable Trust would not violate the restrictions set forth in Section
7.2.1(a) in the hands of such Charitable Beneficiary and (ii) each such organization must be
described in Section 501(c)(3) of the Code and contributions to each such organization must be
eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
Section 7.4 NYSE TRANSACTIONS. Nothing in this Article VII shall preclude the
settlement of any transaction entered into through the facilities of the NYSE or any other national
securities exchange or automated inter-dealer quotation system. The fact that the settlement of any
transaction occurs shall not negate the effect of any other provision of this Article VII and any
transferee in such a transaction shall be subject to all of the provisions and limitations set
forth in this Article VII.
Section 7.5 ENFORCEMENT. The Corporation is authorized specifically to seek equitable
relief, including injunctive relief, to enforce the provisions of this Article VII.
Section 7.6 NON-WAIVER. No delay or failure on the part of the Corporation or the
Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the
Corporation or the Board of Directors, as the case may be, except to the extent specifically waived
in writing.
ARTICLE VIII
AMENDMENTS TO CHARTER; APPROVAL OF CERTAIN EXTRAORDINARY ACTIONS
Section 8.1 AMENDMENTS TO CHARTER. The Corporation reserves the right from time to
time to make any amendment to its charter now or hereafter authorized by law, including any
amendment altering the terms or contract rights, as expressly set forth in this charter, of any
shares of outstanding stock, other than the outstanding shares of Series AA Preferred Stock which
shall have and retain all of the rights provided for in Section 6.4(i). All rights and powers
conferred by the charter on stockholders, directors and officers are granted subject to the
reservation set forth in the previous sentence. Except as otherwise provided in the charter and
except for those amendments permitted to be made without stockholder approval under Maryland law,
any amendment to the charter shall be valid only if approved by the stockholders of the Corporation
by the affirmative vote of a majority of all the votes entitled to be cast on the matter.
Section 8.2 APPROVAL OF CERTAIN EXTRAORDINARY ACTIONS. The affirmative vote of the
holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter
shall be required to authorize a merger, consolidation, share exchange, dissolution or sale of
substantially all of the assets of the Corporation.
21
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time permits limitation of the
liability of directors and officers of a corporation, no director or officer of the Corporation
shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor
repeal of this Article IX, nor the adoption or amendment of any other provision of the charter or
Bylaws inconsistent with this Article IX, shall apply to or affect in any respect the applicability
of the preceding sentence with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
THIRD: The foregoing amendment and restatement to the charter does not increase the
authorized capital stock of the Corporation. The preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and conditions for
redemption of the classes of capital stock are not changed by the foregoing amendment and
restatement
FOURTH: The Corporation was originally incorporated in the State of Maryland on
_____, 2010, and foregoing amendment and restatement to the charter of the Corporation shall
amend, restate and supersede in their entirety any and all prior Articles of Incorporation and any
and all amendments and restatements thereto filed with the State Department of Assessments and
Taxation of Maryland from the date of the Corporation’s original incorporation through the date
hereof.
FIFTH: The foregoing amendment and restatement to the charter of the Corporation has
been advised by resolution adopted by the Board of Directors of the Corporation and approved by the
stockholders of the Corporation.
[Signatures Appear On The Following Page.]
22
IN WITNESS WHEREOF, NetREIT, Inc. has caused these Articles of Amendment and Restatement to be
signed and acknowledged in its name and on its behalf by its President and attested to by its
Secretary on this
_____
day of
_____, 20_____, and its President acknowledges that these Articles
of Amendment and Restatement are the act of NetREIT, Inc. and he further acknowledges that, as to
all matters or facts set forth herein which are required to be verified under oath, such matters
and facts are true in all material respects to the best of his knowledge, information and belief,
and that this statement is made under the penalties for perjury.
ATTEST:
|
NetREIT, INC. | |||||
| By: | ||||||
Title: Chief Financial Officer
|
Title: President and CEO | |||||
23
CONSENT TO SERVE AS RESIDENT AGENT
Having been named as registered agent and to accept service of process for NetREIT, Inc. at
the place designated in these Articles of Incorporation, the undersigned, a Maryland corporation
duly authorized to act as a resident agent in the state of Maryland, hereby accepts the appointment
as registered agent and agrees to act in this capacity.
| HIQ CORPORATE SERVICES, INC. | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
Date: __________ __, 2010
24
Appendix C
NetREIT, Inc.
AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation shall be located at such
place or places as the Board of Directors may designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional offices at such places as
the Board of Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the principal office of the
Corporation or at such other place within the United States as shall be stated in the notice of the
meeting.
Section 2. ANNUAL MEETING. Regular meetings of the stockholders for the election of directors
and the transaction of any other business that is proper for stockholder action under the charter
of the Corporation, these bylaws and applicable law and as may properly come before the meeting
shall be held once each calendar year (each such meeting an “annual meeting”). Annual meetings may
only be called by the Board of Directors. The Board of Directors shall determine the date, time
and place for any annual meeting, which place may be within or without the State of Maryland, or
any adjournments or postponements thereof. Any annual meeting so called may be postponed by the
Board of Directors prior to the meeting with notice to the stockholders entitled to vote at that
meeting.
Section 3. SPECIAL MEETINGS. The chairman of the board, chief executive officer, president or
the Board of Directors may call special meetings of the stockholders. Special meetings of
stockholders may also be called by the secretary of the Corporation upon the written request of
holders of shares constituting at least ten percent (10%) of the votes entitled to be cast at such
meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted
on at such meeting. A special meeting may be called only for the purpose of transacting of such
business that is proper for stockholder action under the charter of the Corporation, these bylaws
and applicable law and as may properly come before such meeting. The secretary shall inform such
requesting stockholders of the reasonably estimated cost of preparing and mailing notice of the
meeting and, upon payment to the Corporation by such stockholders of such costs, the secretary
shall give notice to each stockholder entitled to receive notice of the meeting.
Section 4. NOTICE. Not less than ten (10) nor more than sixty (60) days before each meeting
of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and
to each stockholder not entitled to vote who is entitled to notice of the meeting, written or
printed notice stating the time and place of the meeting and, in the case of a special meeting or
as otherwise may be required by any applicable statute, the purpose for which the meeting is
called, either by mail or by presenting it to such stockholder personally or by leaving it at his
residence or usual place of business. If mailed, such notice shall be deemed to be given when
deposited in the United States mail addressed to the stockholder at his post office address as it
appears on the records of the Corporation, with postage thereon prepaid. The notice of any meeting
of stockholders may be accompanied by a form of proxy approved by the Board of Directors in favor
of the actions or persons as the Board of Directors may select. Notice of any meeting of
stockholders shall be deemed waived by any stockholder who attends the meeting in person or by
proxy or who before or after the meeting submits a signed waiver of notice that is filed with the
records of the meeting.
Section 5. SCOPE OF NOTICE. Except for action on (i) a contract or transaction in which a
director has a direct or indirect financial interest, (ii) an amendment to the charter, (iii) a
reorganization of the Corporation, (iv) a voluntary dissolution of the Corporation, or (v) a
distribution in dissolution other than in accordance with the rights of outstanding shares of
preferred stock, as to any of which such notice shall state the general nature of any proposed
action, any business of the Corporation may be transacted at an annual meeting of stockholders
without being specifically designated in the notice, except such business as is required by any
statute to be stated in such notice. No business shall be transacted at a special meeting of
stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the chairman of the board, if
there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the
chairman of the board, one of the following officers present shall conduct the meeting in the order
stated: the vice chairman of the board, if there be one, the chief executive officer, the
president, the vice presidents in their order of rank and seniority, or a chairman chosen by the
stockholders entitled to cast a majority of the votes which all stockholders present in person or
by proxy are entitled to cast, shall act as chairman, and the secretary, or, in his absence, an
assistant secretary, or in the absence of both the secretary and assistant secretaries, a person
appointed by the chairman shall act as secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in person or by proxy of
stockholders entitled to cast entitled to cast a majority of the votes entitled to be cast on a
matter (without regard to class) shall constitute a quorum; but this section shall not affect any
requirement under any statute or the charter of the Corporation for the vote necessary for the
adoption of any measure. If, however, such quorum shall not be present at any meeting of the
stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from time to time to a date not more than sixty (60)
days after the original record date without notice other than announcement at the meeting. At such
adjourned meeting at which a quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally notified.
2
Section 8. VOTING. Directors shall be elected (1) by the affirmative vote of the holders of
a majority of the shares of common stock outstanding and entitled to vote thereon, or (2) in the
case of directors elected by the holders of preferred stock voting separately as a class, by the
affirmative vote of the holders of a majority of the shares of preferred stock outstanding and
entitled to vote thereon, unless otherwise set forth in these bylaws or the Corporation’s charter.
Each outstanding share of the Corporation’s common stock entitles the holder thereof to one
vote on all matters presented to the holders of common stock for a vote with the exception that the
holders of common stock have cumulative voting rights with respect to the election of the Board of
Directors as described in the following paragraph of this Section 8. The stockholders’ vote may be
by voice vote or by ballot; provided, however, that any election for directors must be by ballot if
demanded by any stockholder before the voting has begun. If a quorum is present, the affirmative
vote of the majority of the shares represented at the meeting and entitled to vote on any matter
(other than the election of directors) shall be the act of the stockholders, unless otherwise set
forth in these bylaws or the Corporation’s charter.
At a stockholders’ meeting at which directors are to be elected, no stockholder shall be
entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater
than the number of the stockholder’s shares), unless the candidates’ names have been placed in
nomination prior to commencement of the voting and a stockholder has given notice prior to
commencement of the voting of the stockholder’s intention to cumulate votes. If any stockholder
has given such a notice, then every stockholder entitled to vote may cumulate votes for candidates
in nomination and give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which that stockholder’s shares are entitled, or
distribute the stockholder’s votes on the same principle among any or all of the candidates, as the
stockholder thinks fit. The candidates receiving the highest number of votes, up to the number of
directors to be elected, shall be elected.
Section 9. PROXIES. A stockholder may cast the votes entitled to be cast by the shares of
the stock owned of record by him either in person or by proxy executed in writing by the
stockholder or by his duly authorized agent. Such proxy shall be filed with the secretary of the
Corporation before or at the time of the meeting. A proxy shall be deemed signed if the
stockholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the stockholder or the stockholder’s attorney-in-fact. A validly
executed proxy which does not state that it is irrevocable shall continue in full force and effect
unless (a) revoked by the person executing it, or by a subsequent proxy executed by, or attendance
at the meeting and voting in person by, the person executing the proxy; or (b) written notice of
the death or incapacity of the maker of the proxy is received by the Corporation before the vote
pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless otherwise provided in the proxy.
The revocability of a proxy that states on its face that it is revocable shall be governed by the
provisions of Section 2-507 of the Maryland General Corporation Law (“MGCL”).
3
Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Corporation registered in the
name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by
the president or a vice president, a general partner or trustee thereof, as the case
may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such
corporation or other entity or agreement of the partners of a partnership presents a certified copy
of such bylaw, resolution or agreement, in which case such person may vote such stock. Any
director or other fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at
any meeting and shall not be counted in determining the total number of outstanding shares entitled
to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case
they may be voted and shall be counted in determining the total number of outstanding shares at any
given time.
The Board of Directors may adopt by resolution a procedure by which a stockholder may certify
in writing to the Corporation that any shares of stock registered in the name of the stockholder
are held for the account of a specified person other than the stockholder. The resolution shall
set forth the class of stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be contained in it; if
the certification is with respect to a record date or closing of the stock transfer books, the time
after the record date or closing of the stock transfer books within which the certification must be
received by the Corporation; and any other provisions with respect to the procedure which the Board
of Directors considers necessary or desirable. On receipt of such certification, the person
specified in the certification shall be regarded as, for the purposes set forth in the
certification, the stockholder of record of the specified stock in place of the stockholder who
makes the certification.
Section 11. INSPECTORS. At any meeting of stockholders, the chairman of the meeting may
appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their determination of the
validity and effect of proxies, count all votes, report the results and perform such other acts as
are proper to conduct the election and voting with impartiality and fairness to all the
stockholders.
Each report of an inspector shall be in writing and signed by him or by a majority of them if
there is more than one inspector acting at such meeting. If there is more than one inspector, the
report of a majority shall be the report of the inspectors. The report of the inspector or
inspectors on the number of shares represented at the meeting and the results of the voting shall
be PRIMA FACIE evidence thereof.
4
Section 12. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS.
(a) ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Except as otherwise provided for in the charter of the Corporation with respect to Series
AA Preferred Directors, nominations of persons for election to the Board of Directors and the
proposal of business to be considered by the stockholders may be made at an annual meeting of
stockholders (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record both at the time of giving of notice provided for in this Section 12(a) and
at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 12(a).
(2) For nominations or other business to be properly brought before an annual meeting by a
stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 12, the stockholder must
have given timely notice thereof in writing to the secretary of the Corporation and such other
business must otherwise be a proper matter for action by stockholders. To be timely, a
stockholder’s notice shall be delivered to the secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year’s annual meeting;
provided, however, that in the event that the date of the annual meeting is advanced by more than
thirty (30) days or delayed by more than sixty (60) days from such anniversary date or if the
Corporation has not previously held an annual meeting, notice by the stockholder to be timely must
be so delivered not earlier than the close of business on the 90th day prior to such annual meeting
and not later than the close of business on the later of the 60th day prior to such annual meeting
or the tenth day following the day on which public announcement of the date of such meeting is
first made by the Corporation. In no event shall the public announcement of a postponement or
adjournment of an annual meeting to a later date or time commence a new time period for the giving
of a stockholder’s notice as described above. Such stockholder’s notice shall set forth (i) as to
each person whom the stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in solicitations of proxies
for election of directors in an election contest, or is otherwise required, in each case pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
(including such person’s written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (ii) as to any other business that the stockholder proposes to
bring before the meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any material interest in such
business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they
appear on the Corporation’s books, and of such beneficial owner and (y) the number of shares of
each class of stock of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 12 to
the contrary, in the event that the number of directors to be elected to the Board of Directors is
increased and there is no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least 50 days prior to the
first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this
Section 12(a) shall also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the secretary at the principal
executive offices of the Corporation no later than the close of business on the tenth day following
the day on which such public announcement is first made by the Corporation.
5
(b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of the stockholders as shall have been brought before the meeting
pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board
of Directors may be made at a special meeting of stockholders at which directors are to be elected
(i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that directors shall be
elected at such special meeting, by any stockholder of the Corporation who is a stockholder of
record both at the time of giving of notice provided for in this Section 12(b) and at the time of
the special meeting, who is entitled to vote at the meeting and who complied with the notice
procedures set forth in this Section 12(b). In the event the Corporation calls a special meeting
of stockholders for the purpose of electing one or more directors to the Board of Directors, any
such stockholder entitled to vote at the meeting may nominate a person or persons (as the case may
be) for election to such position as specified in the Corporation’s notice of meeting, if the
stockholder’s notice containing the information required by paragraph (a)(2) of this Section 12
shall be delivered to the secretary at the principal executive offices of the Corporation not
earlier than the close of business on the 90th day prior to such special meeting and not later than
the close of business on the later of the 60th day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board of Directors to be elected at such meeting. Only holders of
Series AA Preferred Stock shall be entitled to vote at a special meeting called for the purpose of
electing one or more Series AA Preferred Directors, as provided in Section 6.4(i) of the charter of
the Corporation. In no event shall the public announcement of a postponement or adjournment of a
special meeting to a later date or time commence a new time period for the giving of a
stockholder’s notice as described above.
(c) GENERAL.
(1) Only such persons who are nominated in accordance with the procedures set forth in this
Section 12 or, in the case of Series AA Preferred Directors, Section 6.4(i) of the charter of the
Corporation, shall be eligible to serve as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the meeting in accordance with the
procedures set forth in this Section 12. The chairman of the meeting shall have the power and duty
to determine whether a nomination or any business proposed to be brought before the meeting was
made or proposed, as the case may be, in accordance with the procedures set forth in this Section
12 and, if any proposed nomination or proposed business is not in compliance with this Section 12,
to declare that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 12, “public announcement” shall mean disclosure in a press
release reported by the Dow Jones News Service, Associated Press or comparable news service or in a
document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also
comply with all applicable requirements of state law and of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth in this Section 12. Nothing in this
Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals
in, or the right of the Corporation to omit a proposal from, the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.
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Section 13. VOTING BY BALLOT. Voting on any question or in any election may be viva voce
unless the presiding officer shall order or any stockholder shall demand that voting be by ballot.
Section 14. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be
taken at any annual or special meeting of stockholders may be taken without a meeting and without
prior notice if a consent, in writing, setting forth the action so taken is signed by the holders
of outstanding shares having not less than the minimum number of votes that would be necessary to
authorize or to take that action at a meeting at which all the shares entitled to vote on that
action were present and voted. In the case of election of directors, such a consent shall be
effective only if signed by the holders of all outstanding shares entitled to vote for the election
of directors. All such consents shall be delivered to the Corporation by delivery to the secretary
of the Corporation and shall be maintained among the corporate records. No written consent of any
stockholder, or the stockholder’s proxy holders, or a transferee of the shares, or a personal
representative of the stockholder or their respective proxy holders shall take effect unless
written consents signed by a sufficient number of stockholders to take the proposed action are
delivered to the secretary of the Corporation within sixty (60) days after the date on which the
earliest consent is dated.
If the consents of all stockholders entitled to vote have not been solicited in writing and if
the unanimous written consent of all stockholders shall not have been received, the secretary shall
give prompt notice of the corporate action approved by the stockholders without a meeting. This
notice shall be given in the manner specified in Section 4 of this Article, the notice shall be
given not later than ten (10) days after the effective date of such action to each holder of common
stock and to each stockholder who, if the action had been taken at a meeting, would have been
entitled to notice of the meeting.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under
the direction of its Board of Directors.
Section 2. NUMBER AND TENURE. The Corporation shall have eight (8) directors, which number
may be increased or decreased from time to time by the Board of Directors pursuant to a resolution
adopted by a majority of the entire Board of Directors, but the number of directors shall never be
less than six (6) nor more than eleven (11), unless otherwise approved by the majority vote of the
stockholders entitled to cast a majority of all the votes entitled to be cast on the matter. No
reduction in the number of directors by resolution of the Board of Directors shall have the effect
of removing any director from office prior to the expiration of his or her term.
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Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors shall be
held immediately after and at the same place as the annual meeting of stockholders, no notice other
than this Bylaw being necessary. The Board of Directors may provide, by resolution, the time and
place, either within or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or
at the request of the chairman of the board, president or by a majority of the directors then in
office. The person or persons authorized to call special meetings of the Board of Directors may
fix any place, either within or without the State of Maryland, as the place for holding any special
meeting of the Board of Directors called by them.
Section 5. NOTICE. Notice of any special meeting of the Board of Directors shall be delivered
personally or by telephone, facsimile transmission, United States mail or courier to each director
at his business or residence address. Notice by personal delivery, by telephone or a facsimile
transmission shall be given at least two (2) days prior to the meeting. Notice by mail shall be
given at least five (5) days prior to the meeting and shall be deemed to be given when deposited in
the United States mail properly addressed, with postage thereon prepaid. Telephone notice shall be
deemed to be given when the director is personally given such notice in a telephone call to which
he is a party. Facsimile transmission notice shall be deemed to be given upon completion of the
transmission of the message to the number given to the Corporation by the director and receipt of a
completed answer-back indicating receipt. Neither the business to be transacted at, nor the
purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the
notice, unless specifically required by statute or these bylaws.
Section 6. QUORUM. A majority of the authorized directors shall constitute a quorum for
transaction of business at any meeting of the Board of Directors, provided that, if less than a
majority of such directors are present at said meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice, and provided further that if,
pursuant to the charter of the Corporation or these bylaws, the vote of a majority of a particular
group of directors is required for action, a quorum must also include a majority of such group.
The directors present at a meeting which has been duly called and convened may continue to
transact business until adjournment, notwithstanding the withdrawal of enough directors to leave
less than a quorum.
Section 7. VOTING. The action of the majority of the directors present at a meeting at which
a quorum is present shall be the action of the Board of Directors, unless the concurrence of a
greater proportion is required for such action by the Company’s charter, these bylaws or applicable
statute.
Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons participating in the
meeting can hear each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
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Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in
writing to such action is signed by each director and such written consent is filed with the
minutes of proceedings of the Board of Directors.
Section 10. COMPENSATION. Directors shall not receive any stated salary for their services as
directors but, by resolution of the Board of Directors, may receive compensation per year and/or
per meeting and/or per visit to real property or other facilities owned or leased by the
Corporation and for any service or activity they performed or engaged in as directors. Directors
may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of
the Board of Directors or of any committee thereof and for their expenses, if any, in connection
with each property visit and any other service or activity they performed or engaged in as
directors; but nothing herein contained shall be construed to preclude any directors from serving
the Corporation in any other capacity and receiving compensation therefor.
Section 11. LOSS OF DEPOSITS. No director shall be liable for any loss which may occur by
reason of the failure of a bank, trust company, savings and loan association, or other institution
with whom moneys or stock of the Corporation have been deposited.
Section 12. SURETY BONDS. Unless required by law, no director shall be obligated to give any
bond or surety or other security for the performance of any of his duties.
Section 13. RELIANCE. Each director, officer, employee and agent of the Corporation shall, in
the performance of his duties with respect to the Corporation, be fully justified and protected
with regard to any act or failure to act in reliance in good faith upon the books of account or
other records of the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants, appraisers or other
experts or consultants selected by the Board of Directors or officers of the Corporation,
regardless of whether such counsel or expert may also be a director.
Section 14. CERTAIN DUTIES OF THE DIRECTORS. The directors shall have a fiduciary duty to
the Corporation and the stockholders to supervise the relationship between the Corporation and any
Advisor. The Board of Directors, by a majority vote (including a majority vote of the Independent
Directors), shall approve the form and content of any reports provided to the Corporation’s
stockholders as required by these bylaws or the Corporation’s charter and shall take reasonable
steps to insure that the requirements regarding such reports and the calling of the annual meeting
of the stockholders, as provided for in Article II, Section 2 of these bylaws, are met. For
purposes of these bylaws, the term “Advisor” shall mean a person or firm providing real estate
investment advisory services to the Corporation on an ongoing basis. For purposes of these bylaws,
the term “Independent Director” shall mean a director of the Corporation who is not affiliated,
directly or indirectly, with an Advisor (other than in his capacity as a trustee or a director of
another real estate investment entity being advised by an Advisor), whether by ownership of,
ownership interest in, employment by, any business or professional relationship with or service as
an officer or director of such Advisor or any of its Affiliates, and who performs no other services
for the Corporation at the time his or her independence is being determined. A director, however,
will not be considered independent if he or she is serving as a director for more than three real
estate investment entities organized by or affiliated with an Advisor of the Corporation, or any
director who is not an Independent Director. The term “Independent Director” shall also mean an individual who performs no other service for the
Corporation, except service as a director. For purposes of these bylaws, the term “Affiliate”
shall mean (i) any person directly or indirectly controlling, controlled by or under common control
with another person, (ii) any person owning or controlling ten percent (10%) or more of the
outstanding voting securities of such other person, (iii) any officer, director, trustee, or
general partner of such person, and (iv) if such person is an officer, director, trustee or general
partner of another entity, then the entity for which that person acts in any capacity.
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Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The directors shall
have no responsibility to devote their full time to the affairs of the Corporation. Any director
or officer, employee or agent of the Corporation, in his personal capacity or in a capacity as an
affiliate, employee, or agent of any other person, or otherwise, may have business interests and
engage in business activities similar to or in addition to or in competition with those of or
relating to the Corporation.
Section 16. INDEPENDENT DIRECTORS. A majority of the directors of the Corporation shall be
Independent Directors.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may appoint from among
its members an Executive Committee, an Audit and Review Committee, a Compensation Committee and
other committees, composed of one or more directors, to serve at the pleasure of the Board of
Directors.
Section 2. POWERS. The Board of Directors may delegate to committees appointed under Section
1 of this Article any of the powers of the Board of Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in the same manner as notice
for special meetings of the Board of Directors. A majority of the members of the committee shall
constitute a quorum for the transaction of business at any meeting of the committee. The act of a
majority of the members present at a meeting shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any two members of any
committee (if there are at least two members of the committee) may fix the time and place of its
meeting unless the Board of Directors shall otherwise provide. In the absence of any member of any
such committee, the members thereof present at any meeting, whether or not they constitute a
quorum, may appoint another director to act in the place of such absent member. Each committee
shall keep minutes of its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of Directors may
participate in a meeting by means of a conference telephone, video conference or similar
communications equipment if all persons participating in the meeting can hear each other at the
same time. Participation in a meeting by these means shall constitute presence in person at the
meeting.
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Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any
meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in
writing to such action is signed by each member of the committee and such written consent is filed
with the minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all vacancies, to designate
alternate members to replace any absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall include a chairman of
the board, a chief executive officer, a president, a secretary and a treasurer and may include a
vice chairman of the board, one or more vice presidents, a chief operating officer, a chief
financial officer, one or more assistant secretaries and one or more assistant treasurers. In
addition, the Board of Directors may from time to time appoint such other officers with such powers
and duties as they shall deem necessary or desirable. The officers of the Corporation shall be
elected annually by the Board of Directors at the first meeting of the Board of Directors held
after each annual meeting of stockholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall
hold office until his successor is elected and qualified or until his death, resignation or removal
in the manner hereinafter provided. Any two or more offices except president and vice president
may be held by the same person. In its discretion, the Board of Directors may leave unfilled any
office except that of president, treasurer and secretary. Election of an officer or agent shall
not of itself create contract rights between the Corporation and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Corporation may be removed by
the Board of Directors if in its judgment the best interests of the Corporation would be served
thereby, but such removal shall be without prejudice to the contract rights, if any, of the person
so removed. Any officer of the Corporation may resign at any time by giving written notice of his
resignation to the Board of Directors, the chairman of the board, the chief executive officer, the
president or the secretary. Any resignation shall take effect at any time subsequent to the time
specified therein or, if the time when it shall become effective is not specified therein,
immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it
effective unless otherwise stated in the resignation. Such resignation shall be without prejudice
to the contract rights, if any, of the Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the Board of Directors for the
balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate a chief executive
officer. In the absence of such designation, the chairman of the board shall be the chief
executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of
Directors, and for the management of the business and affairs of the Corporation.
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Section 5. CHIEF OPERATING OFFICER. The Board of Directors may designate a chief operating
officer. The chief operating officer shall have the responsibilities and duties as set forth by
the Board of Directors and the chief executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may designate a chief financial
officer. The chief financial officer shall have the responsibilities and duties as set forth by
the Board of Directors and the chief executive officer.
Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall designate a chairman of the
board. The chairman of the board shall preside over the meetings of the Board of Directors and of
the stockholders at which he shall be present. The chairman of the board shall perform such other
duties as may be assigned to him or them by the Board of Directors.
Section 8. PRESIDENT. The president shall have the responsibilities and duties as set forth
by the Board of Directors and the chief executive officer. In the absence of a designation of a
chief operating officer by the Board of Directors, the president shall be the chief operating
officer.
Section 9. VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in
such office, the vice president (or in the event there be more than one vice president, the vice
presidents in the order designated at the time of their election or, in the absence of any
designation, then in the order of their election) shall perform the duties of the president and
when so acting shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time to time may be assigned to him by the
president or by the Board of Directors. The Board of Directors may designate one or more vice
presidents as executive vice president or as vice president for particular areas of responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the
stockholders, the Board of Directors and committees of the Board of Directors in one or more books
provided for that purpose; (b) see that all notices are duly given in accordance with the
provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of
the seal of the Corporation; (d) keep a register of the post office address of each stockholder
which shall be furnished to the secretary by such stockholder; (e) have general charge of the share
transfer books of the Corporation; and (f) in general perform such other duties as from time to
time may be assigned to him by the chief executive officer, the president or by the Board of
Directors.
Section 11. TREASURER. The treasurer shall have the custody of the funds and securities of
the Corporation and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated by the Board of
Directors. In the absence of a designation of a chief financial officer by the Board of Directors,
the treasurer shall be the chief financial officer of the Corporation.
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The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to the president and
Board of Directors, at the regular meetings of the Board of Directors or whenever it may so
require, an account of all his transactions as treasurer and of the financial condition of the
Corporation.
If required by the Board of Directors, the treasurer shall give the Corporation a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his office and for the restoration to the Corporation, in
case of his death, resignation, retirement or removal from office, of all books, papers, vouchers,
moneys and other property of whatever kind in his possession or under his control belonging to the
Corporation.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries and
assistant treasurers, in general, shall perform such duties as shall be assigned to them by the
secretary or treasurer, respectively, or by the president or the Board of Directors. The assistant
treasurers shall, if required by the Board of Directors, give bonds for the faithful performance of
their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of
Directors.
Section 13. SALARIES. The salaries and other compensation of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from receiving such salary
or other compensation by reason of the fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer or agent to enter into
any contract or to execute and deliver any instrument in the name of and on behalf of the
Corporation and such authority may be general or confined to specific instances. Any agreement,
deed, mortgage, lease or other document executed by one or more of the directors or by an
authorized person shall be valid and binding upon the Board of Directors and upon the Corporation
when authorized or ratified by action of the Board of Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money,
notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by
such officer or agent of the Corporation in such manner as shall from time to time be determined by
the Board of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation in such banks, trust companies or other
depositories as the Board of Directors may designate.
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ARTICLE VII
STOCK CERTIFICATES, RECORDS AND REPORTS
Section 1. CERTIFICATES. Each stockholder shall be entitled to a certificate or certificates
which shall represent and certify the number of shares of each class of stock held by him in the
Corporation. Each certificate shall be signed by the chief executive officer, the president or a
vice president and countersigned by the secretary or an assistant secretary or the treasurer or an
assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures
may be either manual or facsimile. Certificates shall be consecutively numbered; and if the
Corporation shall, from time to time, issue several classes of stock, each class may have its own
number series. A certificate is valid and may be issued whether or not an officer who signed it is
still an officer when it is issued. Each certificate representing shares which are restricted as
to their transferability or voting powers, which are preferred or limited as to their dividends or
as to their allocable portion of the assets upon liquidation or which are redeemable at the option
of the Corporation, shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated on the certificate. If the Corporation
has authority to issue stock of more than one class, the certificate shall contain on the face or
back a full statement or summary of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of each class of stock and, if the
Corporation is authorized to issue any preferred or special class in series, the differences in the
relative rights and preferences between the shares of each series to the extent they have been set
and the authority of the Board of Directors to set the relative rights and preferences of
subsequent series. In lieu of such statement or summary, the certificate may state that the
Corporation will furnish a full statement of such information to any stockholder upon request and
without charge. If any class of stock is restricted by the Corporation as to transferability, the
certificate shall contain a full statement of the restriction or state that the Corporation will
furnish information about the restrictions to the stockholder on request and without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the
Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, the Corporation shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any share of stock as the
holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in
all respects to the charter of the Corporation and all of the terms and conditions contained
therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board of Directors may
direct a new certificate to be issued in place of any certificate previously issued by the
Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that
fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or the owner’s legal representative to advertise the same in such
manner as he shall require and/or to give bond, with sufficient surety, to the Corporation to
indemnify it against any loss or claim which may arise as a result of the issuance of a new
certificate.
14
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of Directors may
set, in advance, a record date for the purpose of determining stockholders entitled to notice of or
to vote at any meeting of stockholders or determining stockholders entitled to receive payment of
any dividend or the allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close
of business on the day the record date is fixed and shall be not more than ninety (90) days and, in
the case of a meeting of stockholders, not less than ten days, before the date on which the meeting
or particular action requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide that the stock transfer
books shall be closed for a stated period but not longer than twenty (20) days. If the stock
transfer books are closed for the purpose of determining stockholders entitled to notice of or to
vote at a meeting of stockholders, such books shall be closed for at least ten days before the date
of such meeting.
If no record date is fixed and the stock transfer books are not closed for the determination
of stockholders, (a) the record date for the determination of stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the day on which the
notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders entitled to receive payment
of a dividend or an allotment of any other rights shall be the close of business on the day on
which the resolution of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of stockholders has been
made as provided in this section, such determination shall apply to any adjournment thereof, except
when (i) the determination has been made through the closing of the transfer books and the stated
period of closing has expired or (ii) the meeting is adjourned to a date more than one hundred
twenty (120) days after the record date fixed for the original meeting, in either of which case a
new record date shall be determined as set forth herein.
Section 5. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors may issue fractional
stock or provide for the issuance of scrip, all on such terms and under such conditions as they may
determine. Notwithstanding any other provision of the charter or these bylaws, the Board of
Directors may issue units consisting of different securities of the Corporation. Any security
issued in a unit shall have the same characteristics as any identical securities issued by the
Corporation, except that the Board of Directors may provide that for a specified period securities
of the Corporation issued in such unit may be transferred on the books of the Corporation only in
such unit.
15
Section 6. STOCK LEDGER. The Corporation shall maintain at its principal office or at the
office of its counsel, accountants or transfer agent, an original or duplicate share ledger
containing the name and address of each stockholder and the number of shares of each class held by
such stockholder.
Section 7. ANNUAL REPORT TO STOCKHOLDERS. The Board of Directors shall cause an annual
report to be sent to the stockholders not later than one hundred twenty (120) days after the close
of each fiscal year. This report shall be sent at least fifteen (15) days before the annual
meeting of stockholders to be held during the next fiscal year and in the manner specified in
Article II, Section 4 of these bylaws. The annual report shall contain financial statements
(balance sheet, statement of income, statement of changes of financial position) prepared in
accordance with generally accepted accounting principles and accompanied by an auditor’s report
containing the opinion of an independent certified public accountant or independent public
accountant or, if there is no such report, the certificate of an authorized officer of the
Corporation that the statements were prepared without audit from the Corporation’s books and
records. The foregoing requirement of an annual report shall be waived so long as the shares of
common stock of the Corporation are held by fewer than one hundred (100) holders of record.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix the fiscal year of the
Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the stock of the Corporation
may be authorized and declared by the Board of Directors, subject to the provisions of law and the
charter of the Corporation. Dividends and other distributions may be paid in cash, property or
stock of the Corporation, subject to the provisions of law and the charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other distributions, there may
be set aside out of any assets of the Corporation available for dividends or other distributions
such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think
proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for
repairing or maintaining any property of the Corporation or for such other purpose as the Board of
Directors shall determine to be in the best interest of the Corporation, and the Board of Directors
may modify or abolish any such reserve in the manner in which it was created.
Section 3. DISCLOSURE ON DISTRIBUTION. Any distribution of income or capital assets of the
Corporation to holders of securities of the Corporation other than its promissory notes shall be
accompanied by a written statement disclosing the source of the funds distributed. If, at the time
of distribution, this information is not available, a written explanation of the relevant circumstances shall accompany the distribution and the written statement disclosing the
sources of the funds distributed shall be sent to such holders not later than sixty (60) days after
the close of the year in which the distribution was made.
16
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board of Directors may from
time to time adopt, amend, revise or terminate any policy or policies with respect to investments
by the Corporation as it shall deem appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a seal by the
Corporation. The seal shall contain the name of the Corporation and the year of its incorporation
and the words “Incorporated Maryland.” The Board of Directors may authorize one or more duplicate
seals and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or required to affix its seal
to a document, it shall be sufficient to meet the requirements of any law, rule or regulation
relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to
execute the document on behalf of the Corporation.
ARTICLE XII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of the Corporation or
these bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically required by statute.
The attendance of any person at any meeting shall constitute a waiver of notice of such meeting,
except where such person attends a meeting for the express purpose of objecting to the transaction
of any business on the ground that the meeting is not lawfully called or convened.
ARTICLE XIII
AMENDMENT OF BYLAWS
Section 1. POWER OF DIRECTORS TO AMEND. The Board of Directors shall have the power to
adopt, alter or repeal these bylaws not inconsistent with the Corporation’s charter or applicable
law for the regulation and management of the affairs of the Corporation; provided, however, that
the Board of Directors may adopt a bylaw or an amendment to a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of
directors of the Corporation as provided in Article III, Section 2 of these bylaws; and, provided,
further, that no amendment that would change any rights with respect to any outstanding class of
common stock by reducing the amount payable thereon upon liquidation of the Corporation, or
diminishing or eliminating any voting rights pertaining thereto, may be made unless also approved
by sixty-six and two-thirds percent (66-2/3rds%) of the outstanding shares of such class.
17
Section 2. POWER OF STOCKHOLDERS TO AMEND. The holders of the Corporation’s common stock, at
any annual meeting or at a special meeting called for the purpose, may adopt, alter or repeal the
bylaws of the Corporation; provided, however, that the holders of the Series AA Preferred Stock
shall have the right, pursuant to Section 6.4(i)(1) of the charter, to approve an amendment,
alteration or repeal of any provision of these bylaws that affects adversely the relative rights,
preferences, qualifications, limitations or restrictions of the Series AA Preferred Stock. Any
change to the bylaws made by the stockholders may not be altered in any manner by the directors
prior to the next annual meeting of stockholders.
ARTICLE XIV
MARYLAND BUSINESS COMBINATION STATUTE
The Corporation elects to be governed by the provisions of Sections 3-601 through 3-604 of the
MGCL (the “Maryland Business Combination Act”) as in effect on the date these bylaws are adopted
(“Effective Date”). The Corporation elects not to be governed by any amendment to the Maryland
Business Combination Act after the Effective Date unless the Board of Directors, pursuant to a
resolution approved by a majority of the directors then in office, determines that such amendment
shall apply to the Corporation. In the event that the Maryland Business Combination Act is
repealed or, in the sole discretion of the Board of Directors, amended or substantially altered to
the detriment of the Corporation, the Corporation shall continue to be governed by the provisions
of the Maryland Business Combination Act in effect on the Effective Date, together with any
amendments to the Maryland Business Combination Act that the Board of Directors has determined
shall apply to the Corporation.
18
P
R
O
X
Y
R
O
X
Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF
DIRECTORS OF
NetREIT
The undersigned shareholder of NETREIT, a California corporation, hereby
acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy
Statement for the Annual Meeting of Shareholders to be held on Friday, May 21,
2010 at 9:00 a.m. Pacific Daylight Time, at 1282 Pacific Oaks Place, Escondido,
California 92029, telephone (760) 471-8536, and hereby appoints Jack K. Heilbron
and Kenneth W. Elsberry, and each of them, proxies and attorneys-in-fact, with
full power to each of substitution, on behalf and in the name of the
undersigned, to represent the undersigned at said Annual Meeting and at any
adjournment or adjournments thereof, and to vote all shares of Common Stock
which the undersigned would be entitled to vote if then and there personally
present, on the matters set forth on the reverse side.
This Proxy will be voted as directed or, if no direction is indicated, will be
voted FOR all of the Director nominees in proposal 1 and FOR adoption of
proposals 2 through 5, including all of the sub-proposals, inclusive, on the
other side, and as said proxies deem advisable on such other matters as may
properly come before the meeting.
Instead of mailing your proxy, you may choose to vote on the Internet or by
telephone. Validation details including the Control Number are located on this
form.
Please vote immediately. Your vote is important.
(Continued and to be on the reverse side)
AUTHORIZED SIGNATURES—if you vote by
mail, this section must be completed
for your vote to be counted. Date and
Sign Below.
If voting by mail, this proxy should be
marked, dated, signed by the
shareholder(s) exactly as his or her
name appears and returned promptly in
the enclosed envelope. Persons signing
in a fiduciary capacity should so
indicate. If shares are held by joint
tenants or as community property, both
should sign.
Date: |
, 2010 | |||
| Signature | ||||
| Signature | ||||
(Joint owners must sign. Please sign
exactly as your name(s) appear(s) on
this proxy. When signing as an
attorney, trustee executer,
administrator or guardian, please give
your full title. If signer is a
corporation, please sign the full
corporation name and full title of
signing officer.)
SEE REVERSE SIDE
5 TO VOTE BY MAIL, PLEASE DETACH HERE 5
YOUR VOTE IS IMPORTANT!
You can vote in one of three ways:
| 1. | Call toll-free 1-888-216-1330 on a Touch-Tone telephone and follow the instructions on the
reverse side. There is NO CHARGE to you for this call. |
or
| 2. | Vote by Internet at our Internet Address: http://www.morrowco.com/NetREIT.htm. |
or
| 3. | Mark, sign and date your proxy card and return it promptly in the enclosed envelope. |
PLEASE VOTE
| o | Change of address: Please print your new address below.
|
o | Annual Report Mailing—Mark this box with an “X” to discontinue
receiving the annual report mailing for this account. |
|||
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE NOMINEES LISTED BELOW AND PROPOSALS 2 TO 5.
|
Please mark vote as indicated in this example |
x |
Proposal 1: To elect seven (7) directors to serve on our Board of Directors;
| Nominees: | FOR | WITHHOLD | ||||
| 1. William Allen | ALL | ALL | ||||
| 2. David Bruen | o | o | ||||
| 3. Larry G. Dubose | ||||||
| 4. Jack K. Heilbron | ||||||
| 5. Sumner J. Rollings | ||||||
| 6. Thomas E. Schwartz | ||||||
| 7. Bruce Staller | ||||||
FOR ALL EXCEPT |
o | |||
| (Except nominee(s) written above) |
| FOR | AGAINST | ABSTAIN | ||||
Proposal 2: To approve
our reincorporation as
a Maryland corporation
by merging with and
into a newly formed,
wholly owned
subsidiary Maryland
corporation (we
sometimes refer to
such reincorporation
merger herein as the
“Reincorporation”);
|
o | o | o | |||
Sub-Proposal 3A: A
proposal to approve
amendment of the range
of authorized Directors
and to fix the number
of Directors at eight
(8).
|
o | o | o | |||
Sub-Proposal 3B: A
proposal to approve the
grant of authority to
our Board to adjust our
quorum requirements.
|
o | o | o |
| FOR | AGAINST | ABSTAIN | ||||
Sub-Proposal 3C: A proposal to approve the
grant of authority to our
Board to amend our bylaws.
|
o | o | o | |||
Sub-Proposal 3D: A proposal
to approve changes to our
charter amendment provisions.
|
o | o | o | |||
Sub-Proposal 3E: A proposal
to approve the modification
of the director election
rights of our Series AA
Preferred Stock.
|
o | o | o | |||
Sub-Proposal 3F: A
proposal to approve
modification of our share
transfer restrictions.
|
o | o | o | |||
Sub-Proposal 3G: A proposal
to approve the addition of
certain shareholder
nomination and proposals
requirements.
|
o | o | o | |||
Sub-Proposal 3H: A proposal to
approve the removal of the
provisions of our bylaws
pertaining to our Investment
Policies and our Advisory
Contracts.
|
o | o | o | |||
Sub-Proposal 3I: A proposal
to approve a change in the
par value of our stock.
|
o | o | o | |||
Sub-Proposal 3J: A proposal
to approve (i) the removal of
the “business combinations”
provisions of our bylaws, and
(ii) our election to be
subject to the provisions of
the Maryland Business
Combination Statute.
|
o | o | o | |||
Sub-Proposal 3K: A proposal
to approve removal of our
annual shareholder meeting
deadline.
|
o | o | o | |||
Proposal 4: To ratify the
selection of Squar, Milner,
Peterson, Miranda &
Williamson, LLP as the
Company’s independent
registered public
accounting firm for the
fiscal year ended December
31, 2010;
|
o | o | o | |||
Proposal 5: To approve an
adjournment of the 2010
Annual Meeting, if deemed
necessary, to permit further
solicitation of proxies
regardless of whether there
are sufficient shares
represented at the meeting to
constitute a quorum for
transaction of business.
|
o | o | o |
(Please see the reverse side to sign this card)
PLEASE SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
5 TO VOTE BY MAIL, PLEASE DETACH HERE 5
|
VOTE BY TELEPHONE OR INTERNET
QUICK * * * EASY * * * IMMEDIATE |
 |
Your telephone or internet vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
VOTE BY PHONE: You will be asked to enter a CONTROL NUMBER which is located in the lower right hand
corner of this form.
OPTION A: To vote as the Board of Directors recommends on ALL proposals; Press 1.
OPTION B: If you choose to vote on each proposal separately, press 2. You will hear instructions to
follow:
VOTE BY INTERNET: THE WEB ADDRESS IS www.morrowco.com/NetREIT.htm. You will need your CONTROL
NUMBER to access this system
IF YOU VOTE BY PHONE OR INTERNET — DO NOT MAIL THE PROXY CARD.
THANK YOU FOR VOTING.
THANK YOU FOR VOTING.
Call * * Toll Free * * On a Touch-Telephone 1-888-216-1330 There is NO CHARGE to you for this call |
||
CONTROL
NUMBER |
||
| for Telephone/Internet Voting |
P
R
O
X
Y
R
O
X
Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
NetREIT
The undersigned shareholder of NETREIT, a California corporation, hereby acknowledges receipt of
the Notice of Annual Meeting of Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be held on Friday, May 21, 2010 at 9:00 a.m. Pacific Daylight Time, at 1282 Pacific
Oaks Place, Escondido, California 92029, telephone (760) 471-8536, and hereby appoints Jack K.
Heilbron and Kenneth W. Elsberry, and each of them, proxies and attorneys-in-fact, with full power
to each of substitution, on behalf and in the name of the undersigned, to represent the undersigned
at said Annual Meeting and at any adjournment or adjournments thereof, and to vote all shares of
Series AA Preferred Stock which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth on the reverse side.
This Proxy will be voted as directed or, if no direction is indicated, will be voted FOR adoption
of proposal 2 and sub-proposals 3A, 3E and 3I, on the other side, and as said proxies deem
advisable on such other matters as may properly come before the meeting.
Instead of mailing your proxy, you may choose to vote on the Internet or by telephone. Validation
details including the Control Number are located on this form.
Please note that the contemplated redemption or conversion of the outstanding Series AA Preferred
Stock prior to the Annual Meeting does NOT effect the right of holders of Series AA Preferred Stock
to vote on the proposal and sub-proposals referenced herein.
Please vote immediately. Your vote is important.
(Continued and to be on the reverse side)
SEE REVERSE SIDE
5 TO VOTE BY MAIL, PLEASE DETACH HERE 5
YOUR VOTE IS IMPORTANT!
Mark, sign and date your proxy card and return it promptly in the enclosed envelope.
PLEASE VOTE
| o | Change of address: Please print your new address below.
|
o | Annual Report Mailing—Mark this box with an “X” to discontinue
receiving the annual report mailing for this account. |
|||
THE BOARD OF DIRECTORS
RECOMMENDS A VOTE “FOR”
PROPOSAL 2 AND SUB-PROPOSALS 3A, 3E AND 3I. |
Please mark vote as indicated in this example |
x |
Proposal 2: To approve our
reincorporation as a Maryland corporation by merging with and into a newly formed,
wholly owned subsidiary Maryland corporation.
|
FOR |
AGAINST |
ABSTAIN |
|||||
| o | o | o | ||||||
Sub-Proposal 3A: A proposal to approve amendment of the range of authorized
Directors and to fix the number of Directors at eight (8).
|
o | o | o | |||||
Sub-Proposal 3E: A proposal to approve the modification of the director
election rights of our Series AA Preferred Stock.
|
o | o | o | |||||
Sub-Proposal 3I: A proposal to approve a change in the par value of our stock.
|
o | o | o |
AUTHORIZED SIGNATURES—if you vote by mail, this section
must be completed for your vote to be counted. Date and Sign
Below. |
||||||||
If voting by mail, this proxy should be marked, dated, signed by
the shareholder(s) exactly as his or her name appears and
returned promptly in the enclosed envelope. Persons signing in
a fiduciary capacity should so indicate. If shares are held by
joint tenants or as community property, both should sign. |
||||||||
| Date: | , 2010 | |||||||
| Signature | ||||||||
| Signature | ||||||||
(Joint owners must sign. Please sign exactly as your name(s)
appear(s) on this proxy. When signing as an attorney, trustee
executer, administrator or guardian, please give your full title. If
signer is a corporation, please sign the full corporation name and
full title of signing officer.) |
||||||||
PLEASE SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
5 TO VOTE BY MAIL, PLEASE DETACH HERE 5
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