AvalonBay Communities, Inc.
2900 Eisenhower Avenue
Alexandria, VA 22314
September 24, 2002
Via e-mail - email@example.com
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-22-02
Dear Mr. Katz:
I am the Chairman, Chief Executive Officer and President of AvalonBay Communities, Inc., a leading real estate investment trust that owns and manages over 125 apartment communities in eleven states and the District of Columbia. The common and preferred shares of AvalonBay are listed on the New York Stock Exchange. AvalonBay is pleased to have the opportunity to respond to the Securities and Exchange Commission ("Commission") regarding the proposals set forth in Release Nos. 33-8106 and 34-46084.
Item 1.01--Entry into a Material Agreement
AvalonBay supports the Commission's efforts to provide investors with enhanced and "real-time" disclosure of important corporate events. We are writing to express our concern, however, that one aspect of the proposals could be counterproductive to the interests of investors. AvalonBay believes that requiring companies to disclose terms of material non-binding agreements could severely hinder the negotiating positions and competitiveness of companies, and that compliance with a requirement that such disclosure be made on a "real-time" basis would be an undue administrative burden.
Our principal concerns are the following:
- In the ordinary course, a non-binding agreement may not be communicated to senior officers with the urgency that would be required if a Form 8-K filing announcing the agreement were required within days. This is because in many instances a non-binding agreement may not be immediately followed by the final review process by senior management and the Board. For example, the department or division that is sponsoring the agreement may prepare a summary of the agreement or other investment memorandum, or may conduct further due diligence, before formally requesting definitive approval to move ahead. Therefore, a burdensome internal disclosure and reporting system would need to be imposed in order to collect information that the organization itself has not yet digested and does not yet consider material (even though the agreement might be deemed material once approved). In some instances, this could even lead to a requirement that an agreement be disclosed even though the company's Board of Directors, upon review, may determine not to pursue the transaction.
- The fact that a public company could not promise the counterparty confidentiality could put public companies at a competitive disadvantage when negotiating with a seller. Many sellers will not want a potential transaction publicized unless the other party is contractually committed, because if the other party walks away the result can be reputational harm (e.g., a sense of "damaged goods" can follow) and internal business disruption (employees now know that a transaction is possible and therefore may diminish their commitment to the company).
- We do not believe that non-binding agreements should be deemed to be of such materiality that disclosure is mandatory. Contracts to purchase real estate typically contain many due diligence conditions that allow the purchaser to walk away from the contract if its due diligence is not completed to its satisfaction in its sole and absolute discretion. Until such due diligence is satisfactorily concluded, these contracts are not binding and therefore should not have to be disclosed.
- We are also concerned that disclosure of non-binding agreements would cause companies to disclose competitive terms during the negotiating process and could therefore disrupt the ability of companies to negotiate agreements on their own behalf and for the benefit of their investors. Public companies would be at a particular competitive disadvantage relative to privately held companies that are not required to disclose the terms of non-binding agreements. Furthermore, AvalonBay feels that the confidentiality provisions that normally apply to such non-binding agreements would be rendered ineffective.
In order to promote uniform standards, we believe that Item 1.01 should be kept consistent with the current requirements of Exhibit 10 under Regulation S-K, Item 6.01(b)(10) which does not require the filing of non-binding agreements.
AvalonBay thanks the Commission for the opportunity to comment on this proposal. Please contact me if you have any questions regarding this letter.