DEF 14A 1 d843134ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549 

 

 

SCHEDULE 14A

(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 

 

 

Filed by the Registrant  x                             Filed by a party other than the Registrant  ¨

Check the appropriate box:

 

¨   Preliminary Proxy Statement
¨   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x   Definitive Proxy Statement
¨   Definitive Additional Materials
¨   Soliciting Material under §240.14a-12

COLONY FINANCIAL, INC.

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other than Registrant)

Payment of Filing Fee (Check the appropriate box):

x   No fee required.
¨   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:

 

     

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Aggregate number of securities to which transaction applies:

 

     

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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):

 

     

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Proposed maximum aggregate value of transaction:

 

     

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Total fee paid:

 

     

¨   Fee paid previously with preliminary materials:
¨   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:

 

     

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Form, Schedule or Registration Statement No.:

 

     

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Filing Party:

 

     

  4)  

Date Filed:

 

     

 

 

 


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LOGO

February 24, 2015

Dear Stockholder:

You are cordially invited to attend a special meeting of stockholders of Colony Financial, Inc. (the “Company”) to be held at 10:00 a.m., Eastern Time, on March 31, 2015 at the offices of Morgan Stanley, located at 1585 Broadway, 27th Floor, New York New York 10036 (the “Special Meeting”).

At the Special Meeting, you will be asked to consider and vote upon proposals that will allow us to acquire substantially all of the real estate investment management businesses and operations of Colony Capital, LLC (“Colony Capital”), the parent company of our external manager (the “Combination”). The Combination is described briefly below and in greater detail in the enclosed materials, which we urge you to read carefully.

The Company and Colony Capital, the parent company of the Company’s external manager, have signed a definitive agreement for the acquisition by the Company of substantially all of Colony Capital’s real estate investment management businesses and operations for aggregate potential consideration of up to 3,937,147 shares of common stock of the Company, newly reclassified as Class A common stock (“Class A Common Stock”), 665,593 shares of newly created Class B common stock of the Company (“Class B Common Stock”) and 25,215,854 units of membership interest (“OP Units”) in a subsidiary of the Company.

The aggregate potential consideration consists of:

 

    fixed upfront consideration to be paid in a combination of 2,826,000 shares of Class A Common Stock, 566,635 shares of Class B Common Stock and 21,437,297 OP Units; and

 

    contingent consideration to be paid in a combination of up to an additional 1,111,147 shares of Class A Common Stock, 98,958 shares of Class B Common Stock and 3,778,558 OP Units, subject to multi-year performance targets for the achievement of certain funds from operations (“FFO”) per share targets and capital-raising thresholds from the funds management businesses. If the minimum performance target for either of the FFO or the capital-raising from funds management metric is not met or exceeded, the contingent consideration paid in respect of the other metric would not be paid out in full.

Up to 151,520 shares of Class A Common Stock, 13,494 shares of Class B Common Stock and 515,258 OP Units may be reallocated to upfront consideration if the volume-weighted average closing price of the Company’s common stock over the 10 trading days prior to the tenth calendar day preceding the date of the Special Meeting were to exceed $24.05, with the full amount reallocated if such volume-weighted average closing price of the Company’s common stock were to equal or exceed $27.05.

The combined company will be led by the same highly experienced management team that has been integral to the growth and success of our Company and Colony Capital. Our Executive Chairman, Thomas J. Barrack, Jr., and our Chief Executive Officer and President, Richard B. Saltzman, have both entered into five-year employment agreements with the Company to become effective at the closing of the Combination to continue in such roles and to oversee and manage the day-to-day business operations of the group. Following the consummation of the Combination, we will no longer be managed externally and will become an internally managed real estate investment trust.

Each of our officers is an employee of or otherwise affiliated with Colony Capital and certain of its affiliates. These relationships result in those officers having material financial interests in the Combination. To address these potential conflicts of interests, our Board of Directors (the “Board”) has formed a special committee comprised entirely of independent and disinterested directors in connection with the proposed Combination (the “Special Committee”). No member of the Special Committee is affiliated with Colony Capital and none has a financial interest in the proposed Combination that differs from that of our stockholders. Our Board has authorized the Special Committee to review, consider and negotiate the terms and conditions of the


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Combination and to recommend to our entire Board whether to pursue the Combination and, if so, on what terms and conditions. In evaluating the Combination, the Special Committee has engaged independent legal and financial advisors and received a fairness opinion from its independent financial advisor, as more fully described in the accompanying proxy statement.

You are being asked to vote on the following proposals:

 

  1. to approve the issuance, pursuant to the Contribution and Implementation Agreement, dated as of December 23, 2014 (the “Contribution Agreement”), and the Colony Mark Transfer Agreement, dated as of December 23, 2014 (the “Colony Mark Transfer Agreement”), of (i) shares of the Company’s Class A Common Stock, (ii) shares of the Company’s Class B Common Stock, and shares of Class A Common Stock to be issued upon conversion of such shares of Class B Common Stock, and (iii) OP Units in Colony Capital Operating Company, LLC, a subsidiary of the Company (“OP”), and shares of Class A Common Stock to be issued upon redemption of such OP Units in certain circumstances in each case to the applicable transferor and its affiliates and related persons in the Combination, which includes certain of the Company’s directors and officers or affiliates thereof (collectively, the “Issuances”);

 

  2. to approve amendments to the Company’s Articles of Amendment and Restatement (the “Charter”) relating to (i) the designation of, and the setting of the express terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of conversion and redemption of, the Company’s Class B Common Stock, which entitles the holders to thirty-six and one-half (36.5) votes per share on all matters on which Class A common stockholders are entitled to vote and is designed to give the holders thereof voting rights that are proportional to the economic interests in the Company attributable to such holders or their affiliates that are issued pursuant to the Contribution Agreement in the form of OP Units, and the corresponding re-designation of the Company’s common stock as Class A Common Stock, and conforming and immaterial changes and modifications related thereto, and (ii) revising the Company’s stock ownership limitations to (a) lower the common stock ownership limit from 9.8% to 8.0% of value or share number, whichever is more restrictive, subject to a “grandfather provision” applicable to certain pre-existing holdings, and (b) establish a separate “designated investment entity” ownership limit of 9.9% in value or share number, whichever is more restrictive, with respect to certain investment entities and, in each case, conforming and immaterial changes and modifications related thereto ((i) and (ii) collectively, the “Charter Amendments”); and

 

  3. to approve the adjournment of the Special Meeting, if necessary or appropriate in the discretion of the chairman of the Special Meeting, to solicit additional proxies if there are not sufficient votes at the time of the Special Meeting to approve either the Issuances or the Charter Amendments (the “Adjournment Proposal”).

After careful consideration and the recommendation of the Special Committee that the Issuances and the Charter Amendments are advisable to, and in the best interests of, the Company and its stockholders, THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT YOU VOTE TO (1) APPROVE THE ISSUANCES, (2) APPROVE THE CHARTER AMENDMENTS, AND (3) APPROVE THE ADJOURNMENT PROPOSAL.

The accompanying proxy statement provides a detailed description of these proposals, including information about the Company, OP, Colony Capital, the Combination, the Issuances, the Charter Amendments and the Special Meeting. We urge you to read the entire proxy statement carefully so that you will be informed about the business to be addressed at the Special Meeting. You may also obtain more information about the Company and Colony Capital from documents the Company has filed with the Securities and Exchange Commission. Shares of the Company’s common stock are listed on the New York Stock Exchange under the ticker symbol “CLNY.”

The affirmative vote of (i) a majority of the votes cast, and (ii) a majority of the votes cast, excluding votes of shares cast by Colony Capital Holdings, LLC (“CC Holdings”), Colony Capital, CCH Management Partners I,


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LLC (“CCH I”), Colony Realty Partners LLC (“CRP”) and their respective subsidiaries and Affiliates (as defined below), is required to approve the Issuances. The affirmative vote of (a) two-thirds of the shares outstanding and entitled to be cast, and (b) two-thirds of the shares outstanding and entitled to be cast, excluding shares held by CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates, is required to approve the Charter Amendments. For purposes of this voting standard, an “Affiliate” means any person or entity that directly or indirectly controls, is controlled by, or is under common control with, a specified entity. It is important that your shares be represented at the Special Meeting, regardless of the number of shares you hold and whether or not you plan to attend the Special Meeting in person. Accordingly, whether or not you plan to attend the Special Meeting, you are requested to promptly grant a proxy for your shares by completing, signing and dating the enclosed proxy card and returning it in the envelope provided. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote FOR approval of the Issuances, FOR approval of the Charter Amendments and FOR approval of the Adjournment Proposal.

Granting a proxy will not prevent you from voting your shares in person if you choose to attend the Special Meeting.

Very truly yours,

John L. Steffens

Independent Director and Chairman of the Special Committee of the Board of Directors of Colony Financial, Inc.

Questions and requests for assistance in voting your common shares may be directed to D.F. King & Co., Inc., which is assisting us with the solicitation of proxies, at (866) 751-6311 (toll-free) if you are a stockholder or, if you are a bank, broker or other nominee, at (212) 269-5550.


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LOGO

2450 Broadway, 6th Floor

Santa Monica, CA 90404

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on March 31, 2015

Dear Stockholder:

You are cordially invited to attend a special meeting of stockholders to be held on March 31, 2015, at 10:00 a.m., Eastern Time, at the offices of Morgan Stanley, located at 1585 Broadway, 27th Floor, New York, New York 10036 (the “Special Meeting”) for the following purposes:

 

  1. to approve the issuance, pursuant to the Contribution and Implementation Agreement, dated as of December 23, 2014 (the “Contribution Agreement”), and the Colony Mark Transfer Agreement, dated as of December 23, 2014 (the “Colony Mark Transfer Agreement”), of (i) shares of the Company’s common stock, par value $0.01 per share, as newly reclassified Class A Common Stock (“Class A Common Stock”), (ii) shares of the Company’s newly designated Class B common stock, par value $0.01 per share (“Class B Common Stock”), and shares of Class A Common Stock to be issued upon conversion of such shares of Class B Common Stock, and (iii) membership interests (“OP Units”) in Colony Capital Operating Company, LLC, a subsidiary of the Company, and shares of Class A Common Stock to be issued upon redemption of such OP Units in certain circumstances, in each case to the applicable transferor and its affiliates and related persons in the Combination, which includes certain of the Company’s directors and officers or affiliates thereof (collectively, the “Issuances”);

 

  2. to approve amendments to the Company’s Articles of Amendment and Restatement relating to (i) the designation of, and the setting of the express terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of conversion and redemption of, the Company’s Class B Common Stock, which entitles the holders to thirty-six and one-half (36.5) votes per share on all matters on which Class A common stockholders are entitled to vote and is designed to give the holders thereof voting rights that are proportional to the economic interests in the Company attributable to such holders or their affiliates that are issued pursuant to the Contribution Agreement in the form of OP Units, and the corresponding re-designation of the Company’s common stock as Class A Common Stock, and conforming and immaterial changes and modifications related thereto, and (ii) revising the Company’s stock ownership limitations to (a) lower the common stock ownership limit from 9.8% to 8.0% of value or share number, whichever is more restrictive, subject to a “grandfather provision” applicable to certain pre-existing holdings, and (b) establish a separate “designated investment entity” ownership limit of 9.9% in value or share number, whichever is more restrictive, with respect to certain investment entities and, in each case, conforming and immaterial changes and modifications related thereto ((i) and (ii) collectively, the “Charter Amendments”); and

 

  3. to approve the adjournment of the Special Meeting, if necessary or appropriate in the discretion of the chairman of the Special Meeting, to solicit additional proxies if there are not sufficient votes at the time of the Special Meeting to approve either the Issuances or the Charter Amendments (the “Adjournment Proposal”).

Only stockholders of record at the close of business on February 18, 2015 will be entitled to notice of and to vote at the Special Meeting or any adjournments or postponements thereof.

This notice and the enclosed proxy statement are first being made available to our stockholders on or about February 24, 2015.


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YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE URGED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.

By Order of the Board of Directors,

 

LOGO

Ronald M. Sanders

February 24, 2015


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GENERAL INFORMATION ABOUT THE SPECIAL MEETING AND VOTING

     1   

The Special Meeting

     1   

Purpose of the Special Meeting

     1   

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

     2   

SUMMARY

     10   

The Combination

     10   

Organizational Charts

     21   

Amending and Restating the Charter of our Company

     23   

Special Meeting

     23   

FORWARD-LOOKING STATEMENTS

     25   

RISK FACTORS

     27   

OUR COMPANY

     41   

General

     41   

The Manager and the Management Agreement

     41   

THE BUSINESS OF COLONY CAPITAL

     43   

INTRODUCTORY NOTE TO PROPOSALS 1 AND 2

     48   

PROPOSAL 1: THE ISSUANCES

     48   

The Issuances

     48   

Reasons for the Issuances

     50   

Background of the Issuances

     52   

Recommendations of the Special Committee and the Board

     59   

Opinion of the Special Committee’s Financial Advisor

     59   

Certain Projections

     70   

No Appraisal or Approval Rights

     73   

Interests of Certain Persons in the Combination

     73   

Regulatory Approval Required for the Combination and Other Regulatory Matters

     84   

Vote Required and Recommendation

     85   

Federal Securities Laws Consequences

     85   

PROPOSAL 2: THE CHARTER AMENDMENTS

     86   

Proposal 2(a)—Amendment to Create Class B Common Stock

     86   

Proposal 2(b)—Amendment to Revise the Company’s Stock Ownership Limitations

     88   

Vote Required and Recommendation

     91   

DESCRIPTION OF THE COMBINATION

     92   

Overview of the Combination

     92   

Consideration to be Paid in the Combination

     93   

THE CONTRIBUTION AGREEMENT

     100   

The Contribution

     100   

Conditions to the Closing of the Combination

     101   

Representations and Warranties

     102   

Conduct of Business Prior to the Closing

     105   

Change in Board Recommendation

     106   

Other Covenants

     107   

Termination

     107   

Indemnification

     108   

Amendment; Waiver

     109   

Expenses

     109   

COLONY MARK TRANSFER AGREEMENT

     110   

General

     110   

Conditions to the Closing

     110   

Representations and Warranties

     110   

 

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Covenants and Other Agreements

     111   

Termination

     111   

Indemnification

     111   

Amendment

     111   

CERTAIN AGREEMENTS TO BE ENTERED INTO PURSUANT TO THE CONTRIBUTION AGREEMENT

     112   

OP Operating Agreement

     112   

Registration Rights Agreement

     119   

CAH License Agreement

     120   

PROPOSAL 3: THE ADJOURNMENT PROPOSAL

     121   

General

     121   

Vote Required and Recommendation

     121   

CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION

     122   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     124   

SELECTED HISTORICAL PER SHARE MARKET PRICE AND DIVIDEND INFORMATION

     126   

SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY

     127   

SELECTED HISTORICAL FINANCIAL DATA OF COLONY CAPITAL

     128   

PRO FORMA SELECTED FINANCIAL DATA

     129   

HISTORICAL AND PRO FORMA PER SHARE DATA

     130   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COLONY CAPITAL

     131   

Overview

     131   

Results of Operations

     132   

Liquidity and Capital Resources and Colony Capital’s Future Sources of Cash and Liquidity Needs

     135   

Critical Accounting Policies

     137   

Contractual Obligations, Commitments and Contingencies

     137   

Off-Balance Sheet Arrangements

     138   

Quantitative and Qualitative Disclosures about Market Risk

     138   

Foreign Currency Risk

     138   

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     139   

OTHER MATTERS

     150   

OTHER INFORMATION

     150   

Stockholders Proposals and Nominations for the 2015 Annual Meeting

     150   

Householding of Proxy Materials

     150   

Additional Copies of Materials

     150   

WHERE YOU CAN FIND MORE INFORMATION

     151   

INDEX TO COMBINED FINANCIAL STATEMENTS OF COLONY CAPITAL, LLC AND AFFILIATES

     F-1   

 

Appendix A     Contribution and Implementation Agreement, dated as of December 23, 2014
Appendix B     Colony Mark Transfer Agreement, dated as of December 23, 2014
Appendix C     Form of Charter Amendment (marked to show changes from current charter)
Appendix D     Fairness Opinion of Morgan Stanley & Co. LLC, dated as of December 22, 2014

 

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LOGO

2450 Broadway, 6th Floor

Santa Monica, CA 90404

PROXY STATEMENT

Important Notice Regarding the Availability of Proxy Materials for the

Stockholder Meeting to be Held on March 31, 2015.

This proxy statement is available

at http://www.colonyfinancial.com/ and

http://www.astproxyportal.com/ast/40005/

The Board of Directors (the “Board”) of Colony Financial, Inc., a Maryland corporation, is using this proxy statement to solicit your proxy for use at a special meeting of stockholders (the “Special Meeting”). We expect to commence mailing of the proxy materials for the Special Meeting on or about February 24, 2015, to our stockholders of record as of the close of business on February 18, 2015.

All references in this proxy statement to the “Company,” “we,” “us,” “our” and similar terms refer to Colony Financial, Inc.

GENERAL INFORMATION ABOUT THE SPECIAL MEETING AND VOTING

The Special Meeting

The Special Meeting will be held on March 31, 2015, at 10:00 a.m. Eastern Time at the offices of Morgan Stanley, located at 1585 Broadway, 27th Floor, New York, New York 10036. For information on how to obtain directions to attend the Special Meeting and vote in person, please contact our Investor Relations general inquiries line at (310) 282-8820.

Purpose of the Special Meeting

The purpose of the Special Meeting is to vote on the following proposals:

 

  1. to approve the issuance, pursuant to the Contribution and Implementation Agreement, dated as of December 23, 2014 (the “Contribution Agreement”), and the Colony Mark Transfer Agreement, dated as of December 23, 2014 (the “Colony Mark Transfer Agreement”), of (i) shares of the Company’s common stock, par value $0.01 per share, as newly reclassified Class A Common Stock (“Class A Common Stock”), (ii) shares of the Company’s newly designated Class B common stock, par value $0.01 per share (“Class B Common Stock”), and shares of Class A Common Stock to be issued upon conversion of such shares of Class B Common Stock, and (iii) membership interests (“OP Units”) in Colony Capital Operating Company, LLC, a subsidiary of the Company (“OP”), and shares of Class A Common Stock to be issued upon redemption of such OP Units in certain circumstances, in each case to the applicable transferor and its affiliates and related persons in the Combination, which includes certain of the Company’s directors and officers or affiliates thereof (collectively, the “Issuances”);

 

  2.

to approve amendments to the Company’s Articles of Amendment and Restatement (the “Charter”) relating to (i) the designation of, and the setting of the express terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of conversion and redemption of, the Company’s Class B Common Stock, which entitles the holders to thirty-six and one-half (36.5) votes per share on all matters on which Class A

 

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  common stockholders are entitled to vote and is designed to give the holders thereof voting rights that are proportional to the economic interests in the Company attributable to such holders or their affiliates that are issued pursuant to the Contribution Agreement in the form of OP Units, and the corresponding re-designation of the Company’s common stock as Class A Common Stock, and conforming and immaterial changes and modifications related thereto, and (ii) revising the Company’s stock ownership limitations to (a) lower the common stock ownership limit from 9.8% to 8.0% of value or share number, whichever is more restrictive, subject to a “grandfather provision” applicable to certain pre-existing holdings, and (b) establish a separate “designated investment entity” ownership limit of 9.9% in value or share number, whichever is more restrictive, with respect to certain investment entities and, in each case, conforming and immaterial changes and modifications related thereto ((i) and (ii) collectively, the “Charter Amendments”); and

 

  3. to approve the adjournment of the Special Meeting, if necessary or appropriate in the discretion of the chairman of the Special Meeting, to solicit additional proxies if there are not sufficient votes at the time of the Special Meeting to approve either the Issuances or the Charter Amendments (the “Adjournment Proposal”).

The Board is not aware of any other matter to be presented for action at the Special Meeting. Should any other matter requiring a vote of stockholders arise, it is intended that the persons named in the enclosed proxy card and acting thereunder will vote the proxies in accordance with their discretion on any such matter.

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

Why am I receiving this proxy statement?

We have sent you this proxy statement because the Board is soliciting your proxy to vote at the Special Meeting. You are invited to attend the Special Meeting to vote in person on the proposals described in this proxy statement. However, you do not need to attend the Special Meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card as described below.

What am I voting on?

At the Special Meeting, you will be asked to vote on the following proposals:

 

  1. to approve the issuance, pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement, of (i) shares of the Class A Common Stock, (ii) shares of the Class B Common Stock and shares of Class A Common Stock to be issued upon conversion of such shares of Class B Common Stock, and (iii) OP Units, and shares of Class A Common Stock to be issued upon redemption of such OP Units in certain circumstances, in each case to the applicable transferor and its affiliates and related persons in the Combination, which includes certain of the Company’s directors and officers or affiliates thereof;

 

  2.

to approve amendments to the Company’s Charter relating to (i) the designation of, and the setting of the express terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of conversion and redemption of, the Company’s Class B Common Stock, which entitles the holders to thirty-six and one-half (36.5) votes per share on all matters on which Class A common stockholders are entitled to vote and is designed to give the holders thereof voting rights that are proportional to the economic interests in the Company attributable to such holders or their affiliates that are issued pursuant to the Contribution Agreement in the form of OP Units, and the corresponding re-designation of the Company’s common stock as Class A Common Stock, and conforming and immaterial changes and modifications related thereto, and (ii) revising the Company’s stock ownership limitations to (a) lower the common stock ownership limit from 9.8% to 8.0% of value or share number, whichever is more restrictive, subject to a “grandfather provision” applicable to certain pre-existing holdings, and (b) establish a separate

 

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  “designated investment entity” ownership limit of 9.9% of value or share number, whichever is more restrictive, with respect to certain investment entities and, in each case, conforming and immaterial changes and modifications related thereto; and

 

  3. to approve the adjournment of the Special Meeting, if necessary or appropriate in the discretion of the chairman of the Special Meeting, to solicit additional proxies if there are not sufficient votes at the time of the Special Meeting to approve either the Issuances or the Charter Amendments.

Why is the Company proposing to acquire substantially all of the real estate investment management businesses and operations of Colony Capital, LLC?

We believe that we can acquire substantially all of the real estate investment management businesses and operations of Colony Capital with minimal disruption to our operations and with compelling benefits to the Company and our stockholders. The Combination will benefit our stockholders, partly through anticipated reduced expense in the combined general, administrative and advisory management fee expense categories, improved cash flow and a simplified corporate structure.

We believe that potential benefits of the Combination include:

 

    the Combination being accretive to net income and FFO per share;

 

    the internalization of the Company’s external manager resulting in an elimination of perceived or actual conflicts of interest, alignment of the interests of certain of our officers and directors with those of our current stockholders and the simplification our corporate structure;

 

    the Company’s ability, through the internalization of our external manager, to control key functions that are important to the growth of our business;

 

    efficiencies arising from the elimination of profits that were previously being realized by the manager and the Company’s ability to raise additional equity without a proportionate increase in the cost of managing the Company;

 

    the ability to deploy managed third-party, fee-bearing capital and reduce reliance on public equity capital;

 

    the enhanced ability to attract new investors to the Company and raise private capital;

 

    a reduction in the Company’s operating expenses, including as a result of replacing management fees paid to Colony Capital with directly incurred costs;

 

    enhanced revenue to the Company from the addition of Colony Capital’s in-place, fee-generating arrangements with third parties;

 

    the high growth potential of the investment management business;

 

    asset level returns on investments made through future investment funds should be enhanced by third-party management fees and carried interest; and

 

    diminished reliance on the public markets to raise capital to meet the Company’s investment and other needs.

What are the potential risks relating to the Company involved in the Combination?

In addition to those risk factors listed in “Risk Factors” beginning on page 27 and discussed elsewhere in this proxy statement, the Combination presents some potential disadvantages and risks to our Company and its stockholders, including:

 

    potential conflicts of interest in the Combination between the Company and our directors and current and future executive officers;

 

    the significant costs involved in connection with completing the Issuances and the other transactions contemplated by the Contribution Agreement;

 

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    the potential liabilities associated with the direct employment of personnel; and

 

    the potential liabilities that the Company may inherit from Colony Capital as a result of the Combination that would not be covered by the indemnities in the Contribution Agreement.

What is the effect of the Combination?

Upon consummation of the Combination, we will become an integrated real estate investment management platform. We will no longer be externally managed by Colony Financial Manager, LLC and will become an internally managed company. In addition, we will be able to integrate and potentially expand Colony Capital’s existing investment management business and, as a result, diversify our revenue sources by receiving all in-place fees payable to Colony Capital from the various programs it is currently managing. We will also be able to sponsor new investment vehicles as general partner under the Colony name and receive all fees. In connection with the Combination, the Company will receive carried interest from future investment programs (net of carried interest that we expect will be allocated to members of our management team, investment professionals and other individuals, which, consistent with market terms, we expect to be 40% of the carried interest earned).

In addition, the Company will change its name from Colony Financial, Inc. to Colony Capital, Inc., but the Company’s Class A Common Stock will continue to be listed on the New York Stock Exchange (the “NYSE”) under the ticker symbol “CLNY.”

How were the terms of the Combination determined?

The terms of the Combination were determined through negotiation between the principals of Colony Capital and the Special Committee, comprised of independent and disinterested directors who are not affiliated with Colony Capital. To assist with this process, the Special Committee hired its own independent financial advisor, Morgan Stanley & Co. LLC (“Morgan Stanley”), and its own independent counsel, Wachtell, Lipton, Rosen & Katz (“Wachtell Lipton”).

On December 22, 2014, Morgan Stanley delivered a written fairness opinion stating that, based upon and subject to the qualifications, limitations and assumptions of the fairness opinion, and, as of the date of the fairness opinion, the consideration to be paid by us pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement is fair to the Company from a financial viewpoint.

Are there any conflicts in connection with the Combination?

Yes. Many of the executive officers of Colony Capital are either our directors or executive officers. In connection with the structuring of the Combination, we have engaged in transactions with these individuals, as set forth in this proxy statement. These individuals may have different interests in the consummation of the Combination than the interests of our other stockholders.

How did you address these conflicts?

In May 2014, our Board agreed to form the Special Committee, which is comprised of independent and disinterested directors, to explore strategic alternatives for managing our Company, including the potential internalization of management, as well as ways to further diversify our revenue sources. The Special Committee hired its own independent financial advisor, Morgan Stanley, and its own independent counsel, Wachtell Lipton, to assist it in this process. After considering other alternatives and discussing and negotiating the terms and conditions of the Combination for seven months, the Special Committee determined that the Combination is fair and reasonable to, and in the best interests of, our Company and its stockholders.

What kind of company is Colony Capital?

Colony Capital is a privately held, independent, global real estate investment firm founded in 1991 by Thomas J. Barrack, Jr. (“Mr. Barrack”). Colony Capital’s business is the sponsorship and management of

 

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investment funds and vehicles, which business historically has primarily focused on real estate and real estate-related assets. Colony Capital has an extensive global footprint and corresponding infrastructure, with approximately 300 employees operating in a total of 13 offices in the following 10 countries: China, England, France, Germany, Italy, Lebanon, Luxembourg, South Korea, Spain and the U.S. This global infrastructure provides Colony Capital’s acquisition team with proprietary market knowledge, sourcing capabilities and the local presence required to identify and execute complex transactions.

In the 24 years since its inception, Colony Capital has managed investments in diverse and complex property, corporate and portfolio transactions across five continents through varied economic cycles. Since its inception, Colony Capital has managed $60 billion of investments in over 37,000 assets and loans and currently has approximately $19 billion of assets under management (gross) with more than 300 investor relationships.

What are Colony Capital’s revenue streams?

Colony Capital is entitled to investment management and asset management advisory fees associated with the ongoing administration of each investment program that it sponsors.

What would the management team look like after the Combination is completed?

We expect that the Company will be led by the same highly experienced management team, all of which have been integral to the growth and success of our Company and Colony Capital to date. Mr. Barrack will continue to be our Executive Chairman, Mr. Richard B. Saltzman will continue to be our Chief Executive Officer and President, Mr. Ronald M. Sanders will continue to be our Chief Legal Officer, Mr. Darren J. Tangen will continue to be our Chief Financial Officer and Mr. Kevin P. Traenkle will continue to be our Chief Investment Officer, but in each case will, following consummation of the Combination, be employed by the Company. We expect that post-Combination, substantially all of Colony Capital’s approximately 300 employees will become our employees. After the Closing of the Combination, we, through our subsidiaries, will have over 300 employees in 13 offices worldwide.

Both Messrs. Barrack and Saltzman have entered into five-year employment agreements with the Company to become effective at the Closing. We anticipate that Messrs. Sanders, Tangen and Traenkle will each also enter into three-year employment agreements with the Company, at or prior to the Closing, to become effective at the Closing.

In addition, Mr. Mark Hedstrom will become an Executive Director and the Chief Operating Officer of the Company as of the date of completion of the Combination. Mr. Hedstrom, age 55, currently serves as a Vice President of the Company. Mr. Hedstrom also currently serves as Principal and Chief Financial Officer of Colony Capital, and in that role he is responsible for all of Colony Capital’s financial and treasury functions and has primary responsibility for Colony Capital’s risk management and investor reporting. Prior to joining Colony Capital in 1993, Mr. Hedstrom served in senior financial roles with The Koll Company and Castle Pines Land Company and served as a Senior Manager of Ernst & Young. Except as described in this paragraph, none of Mr. Hedstrom’s previous employers are affiliated with the Company. This disclosure, together with the information regarding Mr. Hedstrom included below in the section entitled “—Interests of Certain Persons in the Combination,” which includes the information required by Item 404(a) of Regulation S-K of the Securities Exchange Act, is intended to meet all of the applicable requirements of Item 5.02 of Form 8-K with respect to Mr. Hedstrom’s appointment as an Executive Director and the Chief Operating Officer of the Company.

What are the Issuances?

In connection with the Combination, we will issue up to approximately 3.94 million shares of Class A Common Stock and up to 665,593 shares of Class B Common Stock, and OP will issue up to approximately 25.22 million OP Units. Each share of Class B Common Stock will be, at the holder’s option, convertible into one share of Class A Common Stock. Each OP Unit will be redeemable, subject to the terms and conditions set forth in the operating agreement of OP, at the holder’s option, for cash equal to the average closing price of

 

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Class A Common Stock for the ten consecutive trading days immediately preceding the date we receive a notice of redemption; provided, that we may choose, at our sole discretion, to satisfy this redemption right by exchanging such OP Units for shares of Class A Common Stock on a one-for-one basis, in lieu of cash. As of February 13, 2015, there were 110,251,922 shares of our common stock outstanding.

What are the Charter Amendments?

We have agreed in the Contribution Agreement to make certain amendments to our Charter, which consist of changes that are intended to accomplish two primary purposes:

 

    to create and designate, and set the express terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of conversion and redemption of, the Company’s Class B Common Stock and make conforming and immaterial changes and modifications related thereto; and

 

    to revise the Company’s stock ownership limitations to (i) lower the common stock ownership limit from 9.8% to 8.0% of value or share number, whichever is more restrictive, subject to a “grandfather provision” applicable to certain pre-existing holdings, and (ii) to establish a separate “designated investment entity” ownership limit of 9.9% of value or share number, whichever is more restrictive, with respect to certain investment entities and, in each case, make conforming and immaterial changes and modifications related thereto.

In addition, if the proposed Charter Amendments are approved by our stockholders, we will change the Company’s name from “Colony Financial, Inc.” to “Colony Capital, Inc.” If our stockholders approve the Charter Amendments, we will implement such amendments through the adoption of an amended and restated charter (the “Amended and Restated Charter”), which would become effective upon filing with, and acceptance for record by, the State Department of Assessments and Taxation of the State of Maryland.

What is the Adjournment Proposal?

The Special Meeting may be adjourned to another time or place, if necessary or appropriate, to permit further solicitation of proxies to obtain additional votes in favor of either the Issuances or the Charter Amendments. If, at the Special Meeting, the number of shares of common stock present or represented and voting in favor of the proposal to approve either the Issuances or the Charter Amendment is insufficient to approve such proposal, the Company intends to adjourn the Special Meeting in order to enable the Board to solicit additional proxies to approve such proposal. In addition, as permitted by the Maryland General Corporation Law, prior to the Special Meeting being convened, it may be postponed by the Board to a date not more than 120 days after the record date for the Special Meeting. Moreover, pursuant to the Company’s bylaws, the chairman of the Special Meeting may adjourn the Special Meeting without any action by the stockholders and without regard to whether a quorum is present. We are asking our stockholders to approve this adjournment if necessary or appropriate in the discretion of the Chairman of the Special Meeting.

What are the Board’s recommendations?

After careful consideration and based in part on the recommendation of the Special Committee, the Special Committee and the Board recommend that you vote:

 

    FOR approving the Issuances;

 

    FOR approving the Charter Amendments; and

 

    FOR approving the adjournment of the Special Meeting, if necessary or appropriate.

What vote is required to approve the Issuances, the Charter Amendments and the Adjournment Proposal?

The Issuances. The affirmative vote of (i) a majority of the votes cast by holders of our common stock entitled to vote on such matters, and (ii) a majority of the votes cast by holders of our common stock entitled to

 

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vote on such matters, excluding votes of shares cast by CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates, is required to approve the Issuances. For the purpose of the vote on this proposal, abstentions will be counted as votes cast and will have the same effect as votes against the proposal, while broker non-votes and other shares not voted will not be counted as votes cast and will have no effect on the result of the vote. However, both abstentions and broker non-votes will be considered present for the purpose of determining the presence of a quorum.

The Charter Amendments. The affirmative vote of (i) two-thirds of the shares of our common stock outstanding and entitled to be cast, and (ii) two-thirds of each of the shares of our common stock outstanding and entitled to be cast, excluding shares held by CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates, is required to approve the Charter Amendments. For the purpose of the vote on this proposal, abstentions, broker non-votes and other shares not voted will have the same effect as votes against the proposal, although they will be considered present for the purpose of determining the presence of a quorum.

The Adjournment Proposal. The affirmative vote of a majority of the votes cast is required for approval of the Adjournment Proposal. For the purpose of the vote on this proposal, abstentions, broker non-votes and other votes not cast will not be counted as votes cast and will have no effect on the result of the vote, although they will be considered present for the purpose of determining the presence of a quorum.

Who is entitled to vote at the Special Meeting?

Only holders of record of our common stock at the close of business on February 18, 2015, the record date of the Special Meeting, are entitled to receive notice of and vote at the Special Meeting. Our common stock constitutes the only class of securities entitled to vote at the Special Meeting.

What are the voting rights of stockholders?

Each share of common stock outstanding on the record date entitles its holder to cast one vote on each matter to be voted on.

Who can attend the Special Meeting?

All holders of our common stock at the close of business on February 18, 2015, the record date of the Special Meeting, or their duly appointed proxies, are authorized to attend the Special Meeting. If you attend the Special Meeting, you may be asked to present valid picture identification, such as a driver’s license or passport, before being admitted. Cameras, recording devices and other electronic devices will not be permitted at the Special Meeting.

Please also note that if you hold your shares in “street name” (that is, your shares are held through a bank, broker, trustee or other nominee), you will need to bring a copy of a recent bank or brokerage statement evidencing your ownership of our common stock.

Are holders of our common stock entitled to dissenters’ rights of appraisal?

No. Under Maryland law, stockholders will not have appraisal rights in connection with the Combination or the stockholder vote to approve the Issuances and the Charter Amendments.

What will constitute a quorum at the Special Meeting?

The presence at the Special Meeting, in person or by proxy, of stockholders entitled to cast a majority of all the votes entitled to be cast on February 18, 2015 will constitute a quorum. We will include abstentions and broker non-votes (as described below) in the calculation of the number of shares considered to be present at the Special Meeting for the purpose of determining the presence of a quorum at the Special Meeting. Under

 

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applicable rules of the NYSE (the exchange on which shares of our common stock are traded), banks, brokers or other nominees holding shares of our common stock for beneficial owners in nominee or street name must vote those shares according to the specific instructions they receive from the beneficial owners. However, banks, brokers or other nominees holding shares for a beneficial owner who do not receive voting instructions from the beneficial owner may not under the NYSE’s rules have discretionary voting power on non-routine matters. In these cases, if no specific voting instructions are provided by the beneficial owner, the broker may not vote on non-routine proposals. This results in a “broker non-vote.” Broker non-votes may arise in the context of voting for approval of the Issuances and the Charter Amendments, because such proposals are considered non-routine matters. Unless specific voting instructions are provided by the beneficial owner, the bank, broker or other nominee will be unable to vote for approval of the Issuances or the Charter Amendments. Accordingly, we urge stockholders who hold their shares through a bank, broker or other nominee to provide voting instructions so that your shares of common stock may be voted on these proposals.

Approval of the Adjournment Proposal is considered to be a routine matter under applicable NYSE rules. A bank, broker or other nominee may generally vote on routine matters and, therefore, no broker non-votes are expected to exist in connection with this proposal.

As of February 13, 2015, there were 110,251,922 shares of our common stock outstanding.

How do I vote shares that are held in my name?

You may vote by any of the following means:

In Person at the Special Meeting: You may vote by attending the Special Meeting and voting in person.

By Mail: You may vote by mail by completing and signing your proxy card and returning it in the enclosed, prepaid and addressed envelope.

How do I vote shares that are held by my bank, broker or other nominee?

If your shares are held by a bank, broker or other nominee, you should follow the instructions provided to you by the bank, broker or other nominee. Although most banks and brokers now offer voting by mail, telephone and on the internet, availability and specific procedures will depend on such bank, broker or other nominee’s individual voting arrangements.

How are votes counted?

If the accompanying proxy card is properly signed and returned to us and not subsequently revoked, it will be voted as directed by you. If your properly signed proxy card does not provide specific voting instructions, the persons designated as proxy holders on the proxy card will vote (1) “FOR” the Issuances, (2) “FOR” the Charter Amendments, and (3) “FOR” the Adjournment Proposal.

May I revoke my proxy after I return my proxy card?

Yes. You may revoke a previously granted proxy at any time before it is exercised by (i) filing with Mr. Sanders, our Chief Legal Officer and Secretary, a notice of revocation or a duly executed proxy bearing a later date, or (ii) attending the Special Meeting and voting in person. Attendance at the Special Meeting alone (without voting by ballot) will not revoke a prior proxy. Notice of revocation or later dated proxies should be sent to the following address: Ronald M. Sanders, Chief Legal Officer and Secretary, Colony Financial, Inc., 2450 Broadway, 6th Floor, Santa Monica, CA 90404.

What rights do I have if I oppose the Combination or any of the Issuances or the Charter Amendments?

You can vote against the Issuances and the Charter Amendments by indicating a vote against the proposals on your proxy card and signing and mailing your proxy card, or by voting against the proposals in person at the Special Meeting. Stockholders are not, however, entitled to dissenters’ rights of appraisal under Maryland law.

 

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Who pays the cost of soliciting proxies?

The Company will pay the cost of soliciting proxies. In addition to soliciting proxies by mail, our officers, directors and other employees, without additional compensation, may solicit proxies personally or by other appropriate means. It is anticipated that banks, brokers, fiduciaries, custodians and nominees will forward proxy soliciting materials to their respective principals, and that we will reimburse such persons’ out-of-pocket expenses. We have retained D.F. King & Co., Inc. at an aggregate estimated cost of $15,000, plus out-of-pocket expenses, to assist in the solicitation of proxies.

What happens if the Special Meeting is postponed or adjourned?

If the Special Meeting is postponed or adjourned, your proxy will still be good and may be voted at the postponed or adjourned Special Meeting. You will be able to change or revoke your proxy until it is voted.

What are the consequences if any of the Issuances or the Charter Amendments are not approved by stockholders?

If either the Issuances or the Charter Amendments are not approved by stockholders, the Combination will not be consummated.

What are the consequences if the Combination is not consummated?

If the Combination is not consummated for any reason, including if stockholders fail to approve either the Issuances or the Charter Amendments, we expect to continue to be managed by Colony Capital, a subsidiary of which would continue to serve as our external manager. We would continue to pay fees and cost reimbursements to Colony Capital under our existing management agreement.

Whom should I call with questions about the matters being voted on at the Special Meeting?

You should call our proxy solicitor, D.F. King & Co., Inc., at (866) 751-6311 (toll-free) if you are a stockholder or, if you are a bank, broker or other nominee, at (212) 269-5550.

How can I find out the results of the voting at the Special Meeting?

Preliminary voting results will be announced at the Special Meeting. The Company will publish the final voting results in a Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”), which we are required to file within four business days after the Special Meeting.

How can I contact the Company or Colony Capital?

The Company’s and Colony Capital’s principal executive offices are located at 2450 Broadway, 6th Floor, Santa Monica, CA 90404; their telephone number is (310) 282-8820.

Even if you currently plan to attend the Special Meeting, we recommend that you also submit your proxy as described above so that your vote will be counted in case you later decide not to attend the Special Meeting. Submitting your proxy in advance of the Special Meeting does not affect your right to attend the Special Meeting and vote in person.

You should rely only on the information provided in, or incorporated into, this proxy statement. We have not authorized anyone to provide you with different or additional information. You should not assume that the information in this proxy statement is accurate as of any date other than the date of this proxy statement or, where information relates to another date set forth in this proxy statement, then as of that date.

 

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SUMMARY

This summary highlights selected information contained in this proxy statement and does not contain all of the information you should consider in making your decision as to how to vote your shares. To better understand the matters discussed in this summary, and for a more complete description of the terms of and risks related to the Combination, you should read this entire proxy statement and the other documents that are referred to in this proxy statement.

The Combination

Parties Involved in the Combination

The parties involved in the Combination include the following:

 

The Company and OP:

Colony Financial, Inc. (Together with its subsidiaries, “we,” “us,” “our,” “our Company” or “the Company”)

General. We are a Maryland corporation and have elected to be taxed as a real estate investment trust for U.S. federal income tax purposes (a “REIT”). We are a diversified commercial real estate and investment management company that owns a portfolio of real estate equity and debt investments at attractive risk-adjusted returns.

 

External management. Currently, we are externally managed and advised by Colony Financial Manager, LLC (our “Manager”) pursuant to the terms of a management agreement. Our Manager is a wholly owned subsidiary of Colony Capital.

 

Role in the Combination. Pursuant to the terms and conditions of the Contribution Agreement, we will, among other things as described in this proxy statement, contribute substantially all of our assets (including entities) and liabilities not directly or indirectly held by OP (defined below) to OP, so that after the consummation of the Combination, OP will own substantially all of the assets and liabilities of the combined business.

Colony Capital Operating Company, LLC (“OP”)

General. OP is a Delaware limited liability company and is currently a wholly owned subsidiary of the Company. It was formerly known as CFI RE Masterco, LLC. Currently, OP holds, directly or indirectly, a substantial majority of the Company’s business and assets.

 

Role in the Combination. Pursuant to the terms and conditions of the Contribution Agreement, (i) the Company will contribute to OP or one or more of OP’s subsidiaries substantially all of its assets and liabilities not directly or indirectly held by OP other than certain indebtedness, and (ii) Colony Capital and CCH I (as defined below) will contribute to OP the equity interests of NewCo (as defined below), the entity that will hold substantially all of Colony Capital’s business, assets and liabilities (as described elsewhere in this proxy statement). Following the consummation of the Combination, OP will become our operating subsidiary and

 

 

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will own substantially all of the assets and liabilities of the Company and Colony Capital’s combined business (other than the Company’s 5.00% Convertible Senior Notes and 3.875% Convertible Senior Notes, which will be retained at the parent company).
The Contributors and NewCo:

Colony Capital Holdings, LLC (“CC Holdings”)

General. CC Holdings is a Delaware limited liability company controlled by Mr. Barrack and is the parent company of Colony Capital.

 

Role in the Combination. Together with Colony Capital and CCH I (as defined below), CC Holdings will directly and/or indirectly, pursuant to the terms and conditions of the Contribution Agreement, contribute all the assets and liabilities held by it that consist of CC Contributed Assets or CC Assumed Liabilities (each as defined and described below) to NewCo prior to the contribution of NewCo to OP.

Colony Capital, LLC (“Colony Capital”)

General. Colony Capital is a Delaware limited liability company and a wholly owned subsidiary of CC Holdings. Colony Capital is a privately held, independent, global real estate investment firm and registered investment advisor founded in 1991 by Mr. Barrack. Colony Capital has an extensive global footprint and corresponding infrastructure, with approximately 300 direct employees operating in a total of 13 offices worldwide.

 

Role in the Combination. Together with CC Holdings and CCH I, Colony Capital will directly and/or indirectly, pursuant to the terms and conditions of the Contribution Agreement, contribute all the assets and liabilities held by it that consist of CC Contributed Assets or CC Assumed Liabilities to NewCo (which constitute substantially all of Colony Capital’s business and assets other than certain of Colony Capital’s interest in Colony American Homes, Inc. (“CAH”)) prior to the contribution of NewCo to OP.

Colony Capital OP Subsidiary, LLC (“NewCo”)

General. NewCo is a Delaware limited liability company and wholly owned subsidiary of Colony Capital.

 

Role in the Combination. NewCo is formed solely for the purpose of holding the CC Contributed Assets and CC Assumed Liabilities being transferred to us by CC Holdings, Colony Capital and CCH I prior to the consummation of the transactions contemplated in the Contribution Agreement (the “Closing”). At the Closing, the interests in NewCo will be contributed by CC Holdings, Colony Capital and CCH I to OP.

CCH Management Partners I, LLC (“CCH I”)

General. CCH I is a Delaware limited liability company controlled by CC Holdings.

 

Role in the Combination. Together with CC Holdings and Colony Capital, CCH I will directly and/or indirectly contribute all the assets and liabilities held by it that consist of CC Contributed Assets or CC Assumed Liabilities to NewCo prior to the contribution of NewCo to OP.

 

 

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FHB Holding LLC (“FHB LLC”)

General. FHB LLC is a newly formed Delaware limited liability company and is controlled by Scott D. Freeman, Mark M. Harmeling and Henry G. Brauer, employees of Colony Realty Partners LLC (“CRP”). CRP is a Delaware limited liability company organized as a private real estate firm to sponsor and manage a series of funds engaged in the acquisition, management and disposition of real estate investments.

 

Role in the Combination. FHB LLC will contribute to OP its interests in CRP, which, in the aggregate, equal 50.0% of the outstanding membership interests of CRP (the remaining 50.0% of the outstanding membership interests of CRP being owned by Colony Realty Member, LLC (“CRM”), which currently is a 60.0% owned subsidiary of Colony Capital (with the remaining 40.0% interest held by Mr. Saltzman)).

Richard B. Saltzman

(“Mr. Saltzman” and, together with CC Holdings, Colony Capital, CCH I, FHB LLC, the “Contributors”)

General. Mr. Saltzman is our Chief Executive Officer and President and an employee and executive officer of Colony Capital.

 

Role in the Combination. Mr. Saltzman will contribute to OP his membership interests in CRM, which, in the aggregate equal 40.0% of the outstanding membership interests of CRM (the remaining 60.0% being owned by Colony CRP Managing Member, LLC, a wholly owned subsidiary of Colony Capital).

The Mark Transferor:

New Colony Holdings LLC (the “Mark Transferor”)

General. The Mark Transferor is a Delaware limited liability company and wholly owned by Mr. Barrack.

 

Role in the Combination. The Mark Transferor will contribute the “COLONY” trademark and all variations thereof and all goodwill connected with the use thereof and symbolized thereby (the “Colony Mark”) to OP.

Overview of the Combination (p. 92)

The following are the principal features of the Combination:

Combination with Colony Capital. OP, currently a wholly owned subsidiary of the Company, will acquire substantially all of Colony Capital’s real estate investment management business and operations (other than Colony American Homes), as well as ownership of the Colony Mark. We will continue substantially all of the businesses currently conducted by Colony Capital and receive in-place management fees, which accrue in the future and that are payable from the various investment vehicles and funds that Colony Capital has sponsored. Following the Combination, we will be empowered to form and invest as a general partner in new funds under the Colony name and receive management fees and carried interest in connection therewith.

Internally Managed REIT. We will acquire our external manager, Colony Financial Manager, LLC, a wholly owned subsidiary of Colony Capital, and effectively become internally managed. Mr. Barrack, who will continue to serve as our Executive Chairman and the Chairman of our Board following the Combination, and Mr. Saltzman, who will continue to serve as our Chief Executive Officer and a member of our Board following

 

 

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the Combination, have both entered into five-year employment agreements, to become effective at the Closing, with the Company. We expect that, post-Combination, substantially all of Colony Capital’s approximately 300 employees will become our employees.

Company Contribution to OP. OP currently holds a substantial majority of the Company’s assets and liabilities. In connection with the Combination, OP will acquire substantially all of the assets and liabilities of the Company that are not currently held by OP or its subsidiaries. Following the Combination, OP will directly or indirectly hold substantially all of our assets and directly or indirectly conduct substantially all of our business.

Ownership and Management of OP. Immediately following the Combination, we expect that we will directly own approximately 84.1% of the aggregate OP Units in OP and the Contributors will directly own, collectively, approximately 15.9% of the aggregate OP Units in OP. The Company, as the sole managing member in OP, will have sole responsibility and discretion in the management and control of OP, and the non-managing members of OP, in such capacity, will have no authority to transact business for, or take part in the operations, management or control of, OP.

Consideration to be Paid in the Combination (p. 93)

In connection with the Combination, we will issue up to approximately 3.94 million shares of Class A Common Stock and up to 665,593 shares of Class B Common Stock, and OP will issue up to approximately 25.22 million OP Units. Each share of Class B Common Stock will be, at the holder’s option, convertible into one share of Class A Common Stock and will convert automatically into one share of Class A Common Stock upon the transfer of such share or of certain OP Units to one or more non-qualified transferees or any qualified transferee of such share or OP Units ceasing to be a qualified transferee. See “Proposal 2(a)—Amendment to Create Class B Common Stock” beginning on page 86 for a more detailed description of the terms of the Class B Common Stock. Each OP Unit will be redeemable, subject to the terms and conditions set forth in the operating agreement of OP, at the holder’s option, for cash equal to the average closing price of Class A Common Stock for the ten consecutive trading days immediately preceding the date we receive a notice of redemption; provided, that we may choose, at our sole discretion, to satisfy this redemption right by exchanging such OP Units for shares of Class A Common Stock on a one-for-one basis, in lieu of cash.

The above consideration represented a value of $657.5 million at the time of the announcement of the transaction based on a reference price that equated to $22.05 per share (the “Reference Price”) (which would have a current value of approximately $738.3 million when using the volume-weighted average closing price on the NYSE of the Company’s common stock over a 10-day trading period ending February 13, 2015 of $24.76 (the “VWAP”)). Pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement, the Reference Price was used to determine the number of shares and OP Units to be issued to the Contributors and the Mark Transferor in the Combination. The Reference Price was the higher of (x) the volume-weighted average closing price of the Company’s common stock over the 30 trading days prior to the initial announcement of the transaction, and (y) the third quarter 2014 “fair value” Company share price, which the parties agreed would be the fair value of the Company’s net assets on a per share basis as of September 30, 2014, or $22.05 per share. Because the volume-weighted average closing price of the Company’s common stock over the 30 trading days prior to the initial announcement of the transaction was lower than $22.05 per share, the Reference Price was $22.05 per share.

The aggregate potential consideration consists of:

 

    fixed upfront consideration to be paid in a combination of up to approximately 2.83 million shares of Class A Common Stock, 566,635 shares of Class B Common Stock and approximately 21.44 million OP Units, representing a value of $547.5 million at the time of the announcement of the Combination based on the Reference Price (and which would have a current value equal to approximately $614.8 million when using the VWAP), subject to certain adjustments as described below; and

 

 

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    contingent consideration to be paid in a combination of up to approximately 1.11 million shares of Class A Common Stock, 98,958 shares of Class B Common Stock and approximately 3.78 million OP Units, representing a value of up to approximately $110.0 million at the time of announcement based on the Reference Price (and which would have a current value of up to approximately $123.5 million when using the VWAP), subject to multi-year performance targets for achievement of certain FFO per share targets and capital-raising thresholds from the funds management businesses. If the minimum performance target for either of these metrics is not met or exceeded, a portion of the contingent consideration paid in respect of the other metric would not be paid out in full.

In connection with the Combination, the upfront consideration is subject to upward and downward adjustments at the Closing in respect of cash, indebtedness and net working capital. If the closing adjustment results in an increase to the upfront consideration, such adjustment will, subject to the applicable cap, be paid in cash and to the extent such adjustment exceeds the applicable cap, will increase the number of OP Units to be issued in the Combination. If the closing adjustment results in a decrease to the upfront consideration, such adjustment will reduce the number of OP Units to be issued in the Combination.

Up to 151,520 shares of Class A Common Stock, 13,494 shares of Class B Common Stock and 515,258 OP Units, representing $15.0 million of the contingent consideration at the time of announcement based on the Reference Price (and which would have a current value of approximately $16.8 million when using the VWAP) may be reallocated to upfront consideration if the volume-weighted average closing price of the Company’s common stock over the 10 trading days prior to the tenth calendar day preceding the date of the Special Meeting were to exceed $24.05, with the full amount reallocated if such volume-weighted average closing price of the Company’s common stock were to equal or exceed $27.05. For example, if the 10-day volume-weighted average closing price of our common stock for such period were $24.76 (VWAP) upfront consideration would be increased, and contingent consideration decreased, by 35,860 shares of Class A Common Stock, 3,194 shares of Class B Common Stock, and 121,944 OP Units representing $3.6 million of the re-allocated consideration based on the Reference Price (and which would have a current value of approximately $4.0 million when using the VWAP).

The number of shares of Class A Common Stock, shares of Class B Common Stock and OP Units issuable as consideration will be subject to reduction for a portion of any transaction expenses of Colony Capital paid on its behalf by the Company.

In connection with the Combination, the Company and OP have entered into the Colony Mark Transfer Agreement with the Mark Transferor pursuant to which the Mark Transferor will transfer the Colony Mark to OP in exchange for consideration to be paid in the form of up to 151,355 shares of our Class A Common Stock and up to 665,593 shares of our Class B Common Stock, including (i) fixed upfront consideration with a value of $15.0 million based on the Reference Price (and $16.8 million based on the VWAP) to be paid at the closing under the Colony Mark Transfer Agreement, subject to certain adjustments, and (ii) contingent consideration with a value of up to approximately $3.0 million based on the Reference Price (and $3.4 million based on the VWAP) if earned over time under the same multi-year performance targets required for receipt of the contingent consideration under the Contribution Agreement. Contingent consideration with a value of up to $410,959 based on the Reference Price (and $461,467 based on the VWAP) will be reallocated to upfront consideration if the volume-weighted average closing price of the Company’s common stock over the 10 trading days prior to the tenth calendar day preceding the date of the Special Meeting were to exceed $24.05.

 

 

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Allocation of Consideration to be Paid in the Combination (p. 50)

An illustrative allocation of the upfront consideration and contingent consideration to certain of the Contributors and the Mark Transferor is provided below. Such illustrative allocation does not reflect any adjustment for transaction expenses that may be paid by the Company on behalf of the Contributors and the Mark Transfer or at the Closing, and does not reflect the potential reallocation of contingent consideration to upfront consideration at the Closing.

Upfront Consideration

 

     OP Units      Class A Common Stock      Class B Common Stock  

Colony Capital

     18,475,972         —           —     

CCH I

     1,639,580         —           —     

FHB LLC

     944,103         —           —     

Mr. Saltzman

     377,642         2,712,363         —     

New Colony Holdings, LLC

     —           113,637         566,635   
  

 

 

    

 

 

    

 

 

 

Total

  21,437,297      2,826,000      566,635   
  

 

 

    

 

 

    

 

 

 

Contingent Consideration

 

     OP Units      Class A Common Stock      Class B Common Stock  

Colony Capital

     2,850,899         —           —     

CCH I

     662,103         —           —     

FHB LLC

     189,683         —           —     

Mr. Saltzman

     75,873         1,073,429         —     

New Colony Holdings, LLC

     —           37,718         98,958   
  

 

 

    

 

 

    

 

 

 

Total

  3,778,558      1,111,147      98,958   
  

 

 

    

 

 

    

 

 

 

Regulatory Approval Required for the Combination and Other Regulatory Matters (p. 84)

U.S. Consents. The expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), is a condition to each party’s obligation to complete the Combination. Each of the parties to the Contribution Agreement has pledged to use its reasonable best efforts to cause the waiting period under the HSR Act to expire or terminate. The parties filed the requisite HSR Notification and Report Form and related materials with the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice on January 15, 2015. The applicable waiting period under the HSR Act expired on February 17, 2015.

The registration of a subsidiary of NewCo with the SEC as an investment adviser under the Investment Company Act of 1940, as amended (the “1940 Act”), is a condition to each party’s obligation to complete the Combination. The parties expect to file a successor application for registration as an investment advisor on Form ADV promptly following the Closing. It is anticipated that the registration will become effective 45 days after filing.

Other Consents. Approval from the U.K. Financial Conduct Authority is required for the contribution of the ownership of Colyzeo Investment Management Limited, a subsidiary of Colony Capital, to NewCo, and ministerial consents from certain authorities in Luxembourg and Lebanon must also be sought in connection with the indirect contribution of Colony Luxembourg, S.à.r.l., Colony Capital S.A.R.L., and Colony Capital (Offshore) S.A.L. Colony Capital agreed in the Contribution Agreement to use its reasonable best efforts to seek such approval from the U.K. Financial Conduct Authority. If such approval is denied by the U.K. Financial Conduct Authority, Colony Capital’s obligation to obtain such approval will terminate. Colyzeo Investment Management Limited will not be contributed unless we receive the consent of both the U.K. Financial Conduct Authority and the Advisory Committees of Colyzeo Investors, L.P. and Colyzeo Investors II, L.P., although we expect the Company to provide management services to these funds regardless of whether such consents are obtained.

 

 

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Interests of Certain Persons in the Combination (p. 73)

In considering the recommendation of the Board to vote for the proposal to approve the transactions described in this proxy statement, you should be aware that certain of our current directors and executive officers, along with Mr. Hedstrom, who will become an executive officer as of the completion of the Combination, have interests in the transactions that may be different from or in addition to, the interests of our stockholders generally and that may create potential conflicts of interest. These interests include:

 

    the payment of consideration in connection with the Combination to certain of these individuals, including Messrs. Barrack, Saltzman, Sanders, Tangen, Traenkle and Hedstrom and the entry by the applicable individuals into arrangements relating to the payment of that consideration;

 

    the grant or anticipated grant of membership interests to these individuals in one or more of CC Holdings, CCH I and CCH Management Partners II, LLC (“CCH II”); and

 

    the entry or anticipated entry into employment agreements and restrictive covenant agreements with certain of these individuals, including Messrs. Barrack, Saltzman, Sanders, Traenkle and Tangen, that will become effective upon the consummation of the Combination.

In addition, you should also be aware that Mr. Barrack owns a controlling interest in, and is the sole managing member of, CC Holdings, which is the managing member and sole member of Colony Capital, and that our current executive officers, Messrs. Barrack, Saltzman, Sanders, Tangen and Traenkle, along with Mr. Hedstrom are also executive officers or principals of Colony Capital. The respective roles of these individuals in Colony Capital may create additional conflicts of interest in respect of the Combination and the other transactions described in this proxy statement.

The Special Committee was aware of each of these interests in reviewing, considering and negotiating the terms of the Combination and in recommending to the entire Board to pursue the Combination. The Board was also aware of these interests in approving the Contribution Agreement, the Colony Mark Transfer Agreement and the transactions described in this proxy statement, and in recommending the approval of the Contribution Agreement, the Colony Mark Transfer Agreement and those transactions to the Company’s stockholders.

Description of the Combination (p. 92)

On December 23, 2014, we entered into the Contribution Agreement, pursuant to which we will acquire substantially all of the business operated by Colony Capital and its subsidiaries other than certain ownership interests and assets (and the liabilities associated with those interests and assets) held by CC Holdings, Colony Capital and CCH I described below, which we refer to as the CC Retained Assets. The CC Retained Assets include Colony Capital’s interest in CAH and certain general partnership interests held by Colony Capital, which are held by CC Holdings, Colony Capital or CCH I through the following entities, which we will not acquire: (i) Colony AH Member LLC, (ii) Manager HoldCo LLC, (iii) CAH Holdings II Onshore GP, LLC, (iv) Colony CRP Managing Member, LLC, (v) CRM, (vi) CRP, (vii) Colony CP Member, LLC, (viii) Colony Global Holdings Parent, LLC, (ix) Colony Capital MENA, LLC, (x) Colony Smeralda Co-Investment Genpar, LLC, (xi) Colony Axle Co-Investment Genpar, LLC, (xii) Colony Milestone Co-Investment Genpar, LLC, (xiii) any subsidiaries of any of the foregoing, and (xiv) Colony Capital.

On the same date, we also entered in the Colony Mark Transfer Agreement, pursuant to which the Mark Transferor will transfer the Colony Mark to OP in exchange for a number of our shares of Class A Common Stock and Class B Common Stock.

 

 

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Certain Agreements to be Entered into Pursuant to the Contribution Agreement (p. 112)

In addition to the Contribution Agreement and the Colony Mark Transfer Agreement, the parties thereto have entered or will enter into the following agreements:

CAH License Agreement. OP will grant to CAH, a non-exclusive, non-transferable, perpetual, revocable (under specified conditions), royalty-free, and worldwide license to use the Colony Mark only in connection with its business of engaging in debt and equity investments in North American residential properties and related operational activities.

OP Operating Agreement. In connection with consummation of the Combination, we will amend and restate the limited liability company agreement of OP. This Amended and Restated Limited Liability Company Agreement of OP will reflect the entry of each of Colony Capital, CCH I, FHB LLC and Mr. Saltzman as non-managing members of OP and will set forth the terms relating to its members following the consummation of the Combination. In exchange for OP Units in OP, (i) Colony Capital and CCH I will contribute to OP all of their respective ownership interests in NewCo, (ii) FHB LLC will contribute to OP all of its ownership interests in CRP, and (iii) Mr. Saltzman will contribute to OP all of his ownership interests in CRM. In addition, the OP Operating Agreement will reflect the change in OP’s name from CFI RE Masterco, LLC to Colony Capital Operating Company, LLC, a Delaware limited liability company. For a description of the Amended and Restated Limited Liability Company Agreement of OP, see “Certain Agreements to be Entered into Pursuant to the Contribution Agreement—OP Operating Agreement” beginning on page 112.

Registration Rights Agreement. We have agreed to file a shelf registration statement registering the resale of shares of the Company’s Class A Common Stock, and shares of the Company’s Class A Common Stock issued or issuable upon conversion of Class B Common Stock or upon exchange of OP Units, in each case, issued pursuant to the Contribution Agreement or the Colony Mark Transfer Agreement.

Conditions to the Closing of the Combination (p. 101)

Each of our and the Contributors’ obligations to consummate the Combination are subject to a number of conditions, as described more fully in the proxy statement. For example, the Closing is conditioned upon, among other things:

 

    the expiration or termination of the waiting period under the HSR Act with respect to the transactions contemplated by the Contribution Agreement;

 

    no law, regulation, authorization, permit, order or judgment shall have been enacted, entered, or promulgated by a governmental, or administrative authority after the date of the Contribution Agreement that prohibits or makes illegal the consummation of the transactions contemplated by the Contribution Agreement, and no order or judgment preventing the consummation of the transactions contemplated by the Contribution Agreement shall be in effect; and

 

    receiving the requisite stockholder approvals from the Company’s common stockholders for the Issuances and the Charter Amendments.

Closing

The Closing of the Combination will occur no later than three business days following the satisfaction or waiver of the conditions to the Combination set forth in the Contribution Agreement and the Colony Mark Transfer Agreement (other than those conditions that by their nature can be satisfied only at the Closing, but subject to the satisfaction or waiver of such conditions), or on such other time and at such other place as we and Colony Capital agree in writing.

 

 

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Indemnification (p. 108)

In the Contribution Agreement, the Contributors on the one hand, and the Company and OP on the other hand, have agreed to indemnify the other and their affiliates for losses arising from certain matters following the Closing, subject to certain limitations, including a maximum indemnification amount of $75.0 million for each of the Contributors on the one hand, and the Company and OP on the other hand for breaches of most representations and warranties in the Contribution Agreement.

Termination of the Contribution Agreement (p. 107)

The Contribution Agreement may be terminated and the Combination may be abandoned prior to the Closing for a number of reasons, as described more fully in this proxy statement.

Colony Mark Transfer Agreement (p. 110)

The Mark Transferor will transfer the Colony Mark to OP in exchange for a number of our shares of Class A Common Stock and Class B Common Stock as described in “Description of the Combination—Consideration to be Paid in the Combination” beginning on page 93.

Features of Class B Common Stock (p. 86)

The Class B Common Stock has been structured to provide rights that are equivalent to the rights of Class A Common Stock. However, each share of Class B Common Stock entitles the holder to thirty-six and one-half (36.5) votes per share, which is intended to mirror the aggregate number of shares of Class B Common Stock issued pursuant to the Colony Mark Transfer Agreement and the OP Units (which are redeemable for cash or Class A Common Stock of our Company, on a one-to-one basis) issued to Colony Capital and CCH I pursuant to the Contribution Agreement. In addition, each share of Class B Common Stock will be, at the holder’s option, convertible into one share of Class A Common Stock and will convert automatically into one share of Class A Common Stock upon the transfer of such share or of certain OP Units to one or more non-qualified transferees or any qualified transferee of such share or OP Units ceasing to be a qualified transferee. See “Proposal 2(a)—Amendment to Create Class B Common Stock” beginning on page 86 for a more detailed description of the terms of the Class B Common Stock.

Restrictions on Exchange and Ownership of Class B Common Stock (p. 88)

In connection with the Combination, the Board has proposed that the Charter be amended to prohibit any person (other than a person who has been granted an exemption by the Board pursuant to the Charter or a “designated investment entity”) from actually or constructively owning more than 8.0% of the aggregate of the outstanding shares of our common stock (by value or by number of shares, whichever is more restrictive). In addition, the Board has proposed that the Charter be amended to prohibit any “designated investment entity” (other than a person who has been granted an exemption) from actually or constructively owning more than 9.9% of the aggregate of the outstanding shares of our common stock (by value or by number of shares, whichever is more restrictive). These limits are subject to a “grandfather provision” and exemptions granted by the Board in certain circumstances.

Risk Factors (p. 27)

There are risks involved in the Combination. You should carefully consider these risks before voting on the proposals to issue securities and amend our Charter in connection with the Combination.

 

 

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Recommendation of the Special Committee and our Board (p. 59)

The Special Committee and the Board recommend that you vote (1) “FOR” the Issuances, (2) “FOR” the Charter Amendments, and (3) “FOR” the Adjournment Proposal.

Fairness Opinion (p. 59)

In connection with the Combination, at a meeting of the Special Committee on December 22, 2014, the Special Committee’s financial advisor, Morgan Stanley, rendered its oral opinion to the Special Committee, subsequently confirmed by delivery of a written opinion dated December 22, 2014 that, as of that date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken as set forth in the written opinion, the consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement was fair from a financial point of view to the Company.

The full text of the written opinion of Morgan Stanley to the Special Committee, dated December 22, 2014, is attached to this proxy statement as Appendix D and is incorporated herein by reference in its entirety. The summary of the opinion of Morgan Stanley in this proxy statement is qualified in its entirety by reference to the full text of the opinion. You should read Morgan Stanley’s opinion, this section and the summary of Morgan Stanley’s opinion carefully and in their entirety for a discussion of the assumptions made, procedures followed, matters considered and qualifications and limitations upon the review undertaken by Morgan Stanley in rendering its opinion. Morgan Stanley’s opinion was directed to the Special Committee, in its capacity as such, and addressed only the fairness from a financial point of view to the Company of the consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement as of the date of such opinion and does not address any other aspect of the Combination.

Morgan Stanley’s opinion did not address any other aspects or implications of the Combination. It was not intended to, and does not, constitute advice or a recommendation to any holder of shares of the Company’s common stock as to how to vote at the Special Meeting to be held in connection with the Combination or whether to take any other action with respect to the Combination.

NYSE Listing of our Common Shares

We will seek approval from the NYSE for the listing of (i) Class A Common Stock issued as consideration in the Combination, and (ii) Class A Common Stock reserved for the issuance upon conversion of Class B Common Stock and upon exchange of OP Units. Shares of our Class A Common Stock will continue to trade under the “CLNY” ticker symbol.

Accounting Treatments

We will account for the Combination as a business combination in which the Company is the accounting acquirer. In accordance with the acquisition method proscribed by U.S. generally accepted accounting principles (“U.S. GAAP”) applicable to business combinations, we will recognize and measure the identifiable assets acquired, liabilities assumed and noncontrolling interests in the acquired businesses at their estimated fair values at the acquisition date. Any excess of (i) the acquisition date fair value of the aggregate consideration transferred (including the estimated fair value of the contingent consideration) plus (ii) the fair value of any noncontrolling interests in the acquired businesses minus (iii) the aggregate fair value of the identifiable assets acquired and liabilities assumed will be recognized as goodwill.

Subsequent to the Combination, we will reconsider whether we are the primary beneficiary of certain joint ventures previously accounted for using the equity method because another variable interest holder was deemed to be the party most closely associated with the variable interest entity. We expect, upon reconsideration, that we

 

 

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will be the primary beneficiary of certain joint ventures where we are co-invested with investment funds previously managed by Colony Capital (the “Co-Investment Funds”). We are not acquiring any economic interests in the Co-Investment Funds or any additional economic interests in the joint ventures as a result of the Combination. In accordance with U.S. GAAP, the net assets of the consolidated joint ventures will be measured and recorded at fair value, which is expected to result in a remeasurement gain of our interest calculated as the excess of (i) the remeasurement date fair value of the assets of the joint ventures minus (ii) the remeasurement date fair value of the liabilities and noncontrolling interests of the joint ventures minus (iii) the carrying value of our interests in the joint ventures.

Certain U.S. Federal Income Tax Considerations (p. 122)

The Combination is not expected to result in the recognition of taxable income by us or the holders of shares of our common stock for U.S. federal income tax purposes and is not expected to adversely affect our qualification as a REIT. See “Certain U.S. Federal Income Tax Consequences of the Contribution” beginning on page 122.

Federal Securities Laws Consequences (p. 85)

All of the shares of Class A Common Stock, shares of Class B Common Stock and OP Units to be issued in the Combination will be offered and sold pursuant to an exemption from the registration provisions of the Securities Act of 1933, as amended (the “Securities Act”), and, therefore, will be subject to restrictions on their transferability in addition to the transfer restrictions contained in lock-up agreements between the Contributors and the Company.

Rights of Dissenting Stockholders (p. 73)

Stockholders are not entitled to dissenters’ rights of appraisal under Maryland law.

 

 

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Organizational Charts

The following diagrams show the organizational structure of:

 

    our Company before the Combination; and

 

    our Company after the Combination.

The Company: Pre-Combination

 

LOGO

 

(1) Prior to the Closing, CLNY will contribute to OP substantially all of CLNY’s other subsidiaries, assets and liabilities in exchange for additional OP Units.
(2) The ownership percentage represented excludes preferred stock.

 

 

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The Company: Post-Combination

 

LOGO

 

(1) The Class B Common Stock to be issued to the Mark Transferor under the Colony Mark Transfer Agreement will represent approximately 0.5% of the economic ownership, and approximately 15.5% of the voting power of the Company’s common stock.
(2) The ownership percentages represented exclude preferred stock.

 

 

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Amending and Restating the Charter of our Company

Amendments to Reflect the Terms of the Transaction (p. 86)

In order to issue the shares to the Mark Transferor at the closing of the Colony Mark Transfer Agreement, we agreed in the Contribution Agreement to amend our Charter to create our Class B Common Stock and, consequently, re-classify our common stock into our Class A Common Stock. No action by our common stockholders is required by reason of the re-classification into Class A Common Stock, which will continue to trade under the “CLNY” ticker on the NYSE. The Class B Common Stock has been structured to provide rights that are equivalent to the rights of Class A Common Stock. However, each share of Class B Common Stock entitles the holder to thirty-six and one-half (36.5) votes per share, which is intended to mirror the aggregate number of shares of Class B Common Stock issued pursuant to the Colony Mark Transfer Agreement and the OP Units (which are redeemable for cash or Class A Common Stock of our Company, on a one-to-one basis) issued to Colony Capital and CCH I pursuant to the Contribution Agreement. In addition, each share of Class B Common Stock will be, at the holder’s option, convertible into one share of Class A Common Stock and will convert automatically into one share of Class A Common Stock upon the transfer of such share or of certain OP Units to one or more non-qualified transferees or any qualified transferee of such share or OP Units ceasing to be a qualified transferee.

Text of Amendments/Effectiveness

The form of the Charter Amendments for stockholder approval containing these above-summarized amendments is attached, with changes marked, to this proxy statement as Appendix C and is incorporated herein by reference in its entirety. These amendments will only be effective if we consummate the Combination.

Special Meeting

Date, Time and Place of Meeting

The Special Meeting will be held on March 31, 2015 at 10:00 a.m. Eastern Time at the offices of Morgan Stanley, located at 1585 Broadway, 27th Floor, New York, New York 10036. This proxy statement is furnished in connection with the solicitation of proxies by our Board.

Record Date; Shares Entitled to Vote

Holders of record of our common stock at the close of business on February 18, 2015 are entitled to notice of and to vote at the Special Meeting.

Voting; Vote Required

Voting. You may vote by completing, signing and mailing the enclosed proxy card in the enclosed return envelope. Even if you plan to attend the Special Meeting in person, we urge you to return your proxy card to assure the representation of your shares at the Special Meeting.

Vote Required. The affirmative vote, in person or by proxy, of (i) a majority of the votes cast, and (ii) a majority of the votes cast, excluding votes of shares cast by CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates, to approve the Issuances. The affirmative vote of (a) two-thirds of the shares outstanding and entitled to be cast, and (b) two-thirds of each of the shares outstanding and entitled to be cast, excluding shares held by CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates, is required to approve the Charter Amendments. For purposes of the voting standard in this proxy statement, “Affiliate” means any person or entity that directly or indirectly controls, is controlled by, or is under common control with, a specified entity.

 

 

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Security Ownership of Management and Other Persons (p. 124)

As of February 13, 2015, there were issued and outstanding 110, 251, 922 shares of our common stock, of which 1, 515,102 shares of our common stock, or approximately 1.4%, were beneficially owned by our executive officers and the executive officers of Colony Capital.

Quorum

The presence at the Special Meeting, in person or by proxy, of stockholders entitled to cast a majority of all the votes entitled to be cast on February 18, 2015 will constitute a quorum. We will include abstentions and broker non-votes in the calculation of the number of shares considered to be present at the Special Meeting for the purpose of determining the presence of a quorum at the Special Meeting. Broker non-votes may arise in the context of voting for approval of the Issuances and the Charter Amendments, because such proposals are considered non-routine matters. Unless specific voting instructions are provided by the beneficial owner, the bank, broker or other nominee will be unable to vote for approval of the Issuances or the Charter Amendments. Accordingly, we urge stockholders who hold their shares through a bank, broker or other nominee to provide voting instructions so that your shares of common stock may be voted on these proposals.

 

 

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FORWARD-LOOKING STATEMENTS

Some of the statements contained in this proxy statement constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend such statements to be covered by the safe harbor provision contained therein. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology, such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this proxy statement reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking:

 

    market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy or the demand for commercial real estate loans;

 

    our business and investment strategy, including the ability of CAH Operating Partnership, L.P. (“CAH OP”), in which we have a significant investment, to execute its single-family home rental strategy;

 

    our projected operating results;

 

    actions, initiatives and policies of the U.S. government and changes to U.S. government policies and the execution and impact of these actions, initiatives and policies;

 

    the state of the U.S. and global economy generally or in specific geographic regions;

 

    our ability to obtain and maintain financing arrangements, including securitizations;

 

    the amount and value of commercial mortgage loans requiring refinancing in future periods;

 

    the availability of attractive investment opportunities;

 

    the availability and cost of debt financing from traditional lenders;

 

    the volume of short-term loan extensions;

 

    the demand for new capital to replace maturing loans;

 

    the amount of capital we intend to invest pursuant to our single-family home rental strategy in the near term;

 

    our expected leverage;

 

    the general volatility of the securities markets in which we participate;

 

    changes in the value of our assets;

 

    interest rate mismatches between our target assets and any borrowings used to fund such assets;

 

    changes in interest rates and the market value of our target assets;

 

    changes in prepayment rates on our target assets;

 

    effects of hedging instruments on our target assets;

 

    rates of default or decreased recovery rates on our target assets;

 

    the degree to which our hedging strategies may or may not protect us from interest rate volatility;

 

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    the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

 

    our ability to maintain our qualification as a REIT for U.S. federal income tax purposes;

 

    our ability to maintain our exemption from registration as an investment company under the 1940 Act;

 

    the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities;

 

    the availability of qualified personnel;

 

    estimates relating to our ability to make distributions to our stockholders in the future;

 

    our understanding of our competition;

 

    failure to timely receive the required approvals by our stockholders, governmental or other regulatory agencies or third parties;

 

    the potential that a condition to the parties’ obligations to consummate the Combination may not be satisfied;

 

    our ability to consummate the Combination;

 

    the potential that operating costs and business disruption may be greater than expected; and

 

    the ability of Colony Capital to retain its senior executives and maintain relationships with business partners pending consummation of the Combination.

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. We caution investors not to place undue reliance on these forward-looking statements and urge you to carefully review the disclosures we make concerning risks in sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as amended by Amendment No. 1 to the Form 10-K, and other risks and uncertainties detailed in such annual report and our other reports and filings with the SEC.

 

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RISK FACTORS

In addition to the other information contained or incorporated by reference in this proxy statement, readers should carefully consider the following risk factors:

RISKS RELATED TO THE COMBINATION

The issuance of shares of our common stock in the Combination or upon exchange of OP Units received in the Combination will have a dilutive effect and will reduce the voting power and relative percentage interests of current common stockholders in our earnings and market value.

The consideration payable in the Combination includes up to an aggregate of approximately 3.94 million shares of our Class A Common Stock, 665,593 shares of our Class B Common Stock and approximately 25.22 million OP Units. The number of shares of our common stock and OP units to be issued upon consummation of the Combination will be equal to approximately 18.4% of the then total issued and outstanding shares of our common stock and OP units (which does not include any contingent consideration and assumes no reallocation of contingent consideration and no additional issuances of shares or OP units). The issuance of shares of our common stock in the Combination will have a dilutive effect and will reduce the voting power and relative percentage interests of current common stockholders in our earnings and market value.

Additionally, part of the consideration payable in the Combination consists of OP Units, which may have a dilutive effect on the voting power and percentage interests of the current common stockholders. OP Units generally will be redeemable, subject to the terms and conditions set forth in the operating agreement of OP, at the holder’s option, for cash equal to the average closing price of Class A Common Stock for the ten consecutive trading days immediately preceding the date we receive a notice of redemption; provided, that we may choose, at our sole discretion, to satisfy this redemption right by exchanging such OP Units for shares of Class A Common Stock on a one-for-one basis, in lieu of cash. If the recipients of OP Units in the Combination exercise their redemption rights and part or all of their outstanding OP Units are exchanged for shares of our Class A Common Stock, such exchange will have a dilutive effect on our common stock and reduce the relative percentage interests of existing common stockholders in our earnings, voting power and market value.

Future sales of our stock by stockholders of the Company may adversely affect the market price of our stock.

Future sales of our stock by stockholders of the Company may adversely affect the market price of our stock. These sales also might make it more difficult for us to sell equity securities in the future at a time and price we deem appropriate. Upon consummation of the Combination, we will issue up to approximately 2.83 million shares of Class A Common Stock and 566,635 shares of Class B Common Stock to parties to the Contribution Agreement and the Colony Mark Transfer Agreement and may issue up to approximately 1.11 million shares of Class A Common Stock and 98,958 shares of Class B Common Stock to them upon the satisfaction of performance targets. In addition, upon consummation of the Combination, OP will issue approximately 21.44 million OP Units to parties to the Contribution Agreement and may issue up to approximately 3.78 million OP Units to them upon the satisfaction of certain performance targets. Sales of a substantial number of shares by these stockholders of the Company, the perception or expectation that these sales may occur, or sales of shares to cover tax obligations some of which may occur shortly after the Closing, could have a material adverse effect on our business, financial condition, results of operations and the prevailing market price for shares of our stock.

The Combination was negotiated between the Special Committee, which is comprised of independent and disinterested members of our Board, and Colony Capital, which is affiliated with certain of our officers and directors.

The Combination was negotiated with Colony Capital, which is affiliated with certain of our directors and officers. As a result, those officers and directors may have different interests than the Company as a whole. This potential conflict would not exist in the case of a transaction negotiated with unaffiliated third parties. Moreover,

 

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if Colony Capital or any other Contributor breaches any of the representations, warranties or covenants made by it in the Contribution Agreement or the Colony Mark Transfer Agreement, we may choose not to enforce, or to enforce less vigorously, our rights because of our desire to maintain our ongoing relationship with Colony Capital and the interests of certain of our directors and officers. Moreover, the representations, warranties, covenants and indemnities in the Contribution Agreement are subject to limitations and qualifiers, which may also limit our ability to enforce any remedy under the Contribution Agreement or the Colony Mark Transfer agreement.

Certain of our directors and executive officers have interests in the Combination that are different from, and may potentially conflict with, the interests of us and our stockholders.

Certain of our directors and executive officers have interests in the Combination and the other transactions described in this proxy statement that may be different from, or in addition to, the interests of our stockholders generally and that may create potential conflicts of interest, including (i) the payment of consideration in connection with the Combination directly or indirectly to certain of these individuals, including Messrs. Barrack and Saltzman, and the entry by the applicable individuals into arrangements relating to the payment of that consideration, (ii) the grant or anticipated grant of membership interests to certain of these individuals in CC Holdings, CCH I and CCH II and (iii) the entry or anticipated entry into employment agreements and restrictive covenant agreements with certain of these individuals, including Messrs. Barrack and Saltzman, that will become effective following the Combination. See “Proposal 1: The Issuances—Interests of Certain Persons in the Combination” beginning on page 73 for a description of the consideration to be received by these individuals.

In addition, Mr. Barrack owns a controlling interest in, and is the sole managing member of, CC Holdings, which is the managing member and sole member of Colony Capital, and Messrs. Barrack, Saltzman, Sanders, Tangen and Traenkle, are also executive officers or principals of Colony Capital. The respective roles of these individuals in Colony Capital may create additional conflicts of interest in respect of the Combination and the other transactions described in this proxy statement

Following the Combination, Mr. Barrack will control a significant number of votes in any matter presented to our stockholders for approval, including the election of directors.

Although, as further discussed in “Proposal 2: The Charter Amendments” beginning on page 86 below, the Class B Common Stock to be issued in the Combination is not designed to provide for disproportionate voting rights, the issuance of the Class B Common Stock will result in Mr. Barrack controlling a significant number of votes in matters submitted to a vote of stockholders as a result of his beneficial ownership of Class B Common Stock (which will give him voting power equal to the economic interest in the Company issued to Colony Capital and CCH I in the form of OP Units as if all of those OP Units were exchanged for shares of Class A Common Stock), including the election of directors. Mr. Barrack may have interests that differ from our other stockholders, including by reason of his direct or indirect interest in OP, and may accordingly vote in ways that may not be consistent with the interests of those other stockholders.

Our net income and FFO may decrease in the near term as a result of the Combination.

Our net income and FFO may decrease in the near term as a result of the Combination and our transition to internal management. We will expense all cash and non-cash costs involved in the Combination. As a result, our net income and FFO may decrease in the period in which the Combination closes, driven predominately by the non-cash charge related to the issuance of OP Units and, to a lesser extent, other transaction-related costs. In addition, while we will no longer bear the costs of the various fees and expense reimbursements previously paid to our manager if and after we become internally managed pursuant to the Combination, our expenses will include the compensation and benefits of our officers, employees and consultants, as well as overhead previously paid by our Manager or its affiliates. There are no assurances that, following the Combination, these employees will be able to or incentivized to provide services at the same level or for the same costs as were previously

 

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provided to us by our Manager, and there may be other unforeseen costs, expenses and difficulties associated with operating as an internally managed company. If the expenses we assume as a result of the Combination are higher than the fees that we currently pay our Manager or otherwise higher than we anticipate, we may not achieve our anticipated cost savings from the Combination and our net income and FFO could decrease further, which could have a material adverse effect on our business, financial condition and results of operations. In addition, if revenue from the Colony Capital management business decreases, our net income and FFO could decrease further, which would have a material adverse effect on our business, financial condition and results of operations.

The Combination may not be accretive to our stockholders.

The Combination may not be accretive to our stockholders. While it is intended that the Combination be accretive to our earnings per share and FFO per share, there can be no assurance that this will be the case, as, among other things, the expenses we assume as a result of the Combination may be higher than we anticipate and we may not achieve our anticipated cost savings from the Combination, or revenue from the Colony Capital management business may decrease. The failure of the Combination to be accretive to our stockholders could have a material adverse effect on our business, financial condition and results of operations.

We may not manage the Combination effectively.

We may not manage the Combination effectively. The Combination could be a time-consuming and costly process. The combined company may encounter potential difficulties in the integration process including, among other things:

 

    the inability to successfully combine Colony Capital’s business with our Company in a manner that permits the combined company to achieve the cost savings anticipated to result from the Combination, which could result in the anticipated benefits of the Combination not being realized in the timeframe currently anticipated or at all;

 

    the risk of not realizing all of the anticipated operational efficiencies or other anticipated strategic and financial benefits of the Combination within the expected timeframe or at all;

 

    potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Combination; and

 

    performance shortfalls as a result of the diversion of management’s attention caused by completing the Combination and integrating the companies’ operations.

For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s operations, services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to maintain relationships with vendors and employees or to achieve the anticipated benefits of the Combination, or could otherwise adversely affect the business and financial results of the combined company. Therefore, the failure to plan and manage the Combination effectively could have a material adverse effect on our business, financial condition and results of operations, and we may not realize the anticipated cost savings benefits.

We depend on our key employees. There is no guarantee that our key employees will remain employed with us for any specified period of time, and will not engage in competitive activities if they cease to be employed with us.

We depend on our key employees. It is expected that, following the consummation of the Combination, we will continue to substantially depend on the services of Messrs. Barrack and Saltzman, who are each entering into five-year employment agreements with us, and the services of the other members of our senior management team, including Messrs. Sanders, Tangen and Traenkle, who are each expected to enter into three-year employment agreements with us. As is presently the case under our current management arrangements with

 

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Colony Capital, the departure or the loss of the services of Messrs. Barrack or Saltzman or a number of senior management personnel and other employees following the Combination could have a material adverse effect on our business, financial condition, results of operations and ability to effectively operate our business.

Further, the employment and restrictive covenant agreements we entered into with each of Messrs. Barrack and Saltzman and the employment and restrictive covenant agreements that we expect to enter into with other members of our senior management team contain certain restrictions on these executives, including a restriction on engaging in activities that are deemed competitive to our business. Although we believe these covenants to be enforceable under current law in the states in which we do business, including California, there can be no guarantee that if our executives were to breach these covenants and engage in competitive activities, a court of law would fully enforce these restrictions. If our executives were to terminate their employment with us and engage in competitive activities, such activities could have a material adverse effect on our business, financial condition and results of operations.

Messrs. Barrack and Saltzman and the other members of our senior management team will have competing demands on their time and attention.

Mr. Barrack, who will continue to serve as our Executive Chairman and the Chairman of our Board following the Combination, and Mr. Saltzman, who will continue to serve as our Chief Executive Officer and President and a member of our Board following the Combination, will have competing demands on their respective time and attention, including with respect to the provision of services to Colony Capital and certain outside entities following the Combination. These competing demands may result in these individuals devoting time to these outside entities in a manner that could affect our business. Under their respective employment agreements, Messrs. Barrack and Saltzman are permitted to devote time to certain outside activities, so long as those duties and activities do not unreasonably interfere with the performance of Mr. Barrack’s or Mr. Saltzman’s, respectively, duties to us.

We will become exposed to risks to which we have not historically been exposed, including liabilities with respect to the assets we will acquire from Colony Capital and ongoing liabilities and business risks inherent to Colony Capital’s business.

The Combination will expose us to risks to which we have not historically been exposed. Pursuant to the Contribution Agreement, we will incur liabilities with respect to the assets we will acquire from Colony Capital and certain of its affiliates and be subject to ongoing liabilities and business risks inherent to the business of Colony Capital and its affiliates. In addition, our overhead will increase as a result of our becoming internally managed, as the responsibility for overhead relating to management of our business currently is borne by our manager, Colony Financial Manager, LLC, which will be contributed to us in the Combination. Also, we could be subject to additional liabilities as a result of employing the approximately 300 employees who are currently employed by Colony Capital. The employment of approximately 300 additional persons could subject us to additional potential liabilities that employers commonly face, such as workers’ disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances, and we will bear the costs of the establishment and maintenance of employee benefit plans, if established.

Finally, we may incur other liabilities to which we are not currently subject. For example, we could be subject to liabilities to investors in investment funds, programs or vehicles that were previously sponsored or managed by Colony Capital, or to third parties, as a result of our becoming and serving as manager or advisor to such funds, programs or vehicles. These liabilities could include unfunded pension or withdrawal liability from single employer or multiemployer pension plans if we are considered a member of a controlled group of companies that includes a portfolio company that has incurred such liability. In addition, even when we are not required to do so, we may advance funds to allow investment funds, programs or vehicles to meet their expenses. The assumption of Colony Capital’s liabilities and the incurrence by us of ongoing liabilities and business risks inherent to Colony Capital’s business could have a material adverse effect on our business, financial condition, results of operations and ability to effectively operate our business.

 

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The fairness opinion is subject to qualifications and its valuation of the business acquired may not represent the business’s true worth or realizable value.

The fairness opinion is subject to qualifications and its valuation of the business acquired may not represent the business’s true worth or realizable value. The opinion delivered to the Special Committee by Morgan Stanley on December 22, 2014 is based on and subject to certain assumptions, qualifications and limitations described in such opinion, and is based on economic and market conditions and other circumstances as they existed and could be evaluated by Morgan Stanley on the date of such opinion. Changes in our or Colony Capital’s operations or prospects or changes in general market or economic conditions since the date of such opinion could, among other things, alter the relevance of the opinion. We do not intend to obtain an updated opinion.

Conflicts of interest may exist or could arise in the future with OP and its members, which may impede business decisions that could benefit our stockholders.

Following the implementation of our Company’s structure as a result of the Combination, conflicts of interest may exist or could arise as a result of the relationships between us and our affiliates, on the one hand, and OP or any member thereof, on the other. Our directors and officers have duties to our Company and our stockholders under applicable Maryland law in connection with their management of our Company. At the same time, we, as sole managing member of OP, have fiduciary duties to OP and to its members under Delaware law in connection with the management of OP. Our duties to OP and its members as the sole managing member may come into conflict with the duties of our directors and officers to our Company and our stockholders. These conflicts may be resolved in a manner that is not in the best interest of our stockholders.

In addition, non-managing members in our operating partnership have the right to vote on certain amendments to the OP agreement, as well as on certain other matters. Persons holding such voting rights may exercise them in a manner that conflicts with our stockholders’ interests.

If the OP is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.

We believe that OP will, commencing with the Closing of the Combination, qualify as a partnership for U.S. federal income tax purposes. Assuming that OP qualifies as a partnership for U.S. federal income tax purposes, OP will not be subject to U.S. federal income tax on its income. Instead, its partners, including us, generally would be required to pay tax on their respective allocable share of OP’s income. No assurance can be provided, however, that the IRS will not challenge OP’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating OP as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income and asset tests applicable to REITs and, therefore, cease to qualify as a REIT, and OP would become subject to U.S. federal, state and local income tax. The payment by OP of income tax would reduce significantly the amount of cash available to OP to satisfy obligations to make principal and interest payments on its debt and to make distribution to its partners, including us. In addition, any change in the status of OP for tax purposes might be treated as a taxable event, in which case we might incur a tax liability without any related cash distributions.

The Combination may have adverse tax consequences.

The formation of OP as part of the Combination is intended to constitute, for U.S. federal income tax purposes, a tax-deferred contribution by us to a partnership. As a result, neither we nor holders of our common stock, in respect of those common stock holdings, are expected to recognize significant gain or loss for U.S. federal income tax purposes as a result of the Combination. In addition, the Combination is not expected to adversely affect our ability to continue to qualify as a REIT. Notwithstanding the foregoing, under the “investment company” rules under Section 721 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), the Combination generally would not qualify for tax-deferred treatment to the extent it is treated under such rules as a contribution by us to an “investment company.” The investment company rules are

 

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complex, and there also is uncertainty regarding other aspects of the U.S. federal tax treatment of the Combination. If the Combination failed to qualify for tax-deferred treatment under the investment company rules or otherwise, we generally would recognize taxable gain for U.S. federal income tax purposes, possibly up to the extent that the fair market value of our assets immediately prior to the Combination exceeded their adjusted tax basis. If and to the extent that we were unable to make distributions for the year in which the Combination occurred at least equal to our taxable income (including our net long term capital gain and also any taxable income or gain recognized in connection with the Combination), we would be subject to U.S. federal income tax (and potentially excise tax) on any undistributed amounts and may also be unable to satisfy the distribution requirements applicable to REITs.

In addition, as a general matter, as a REIT, we generally will be unable to conduct directly a portion of the third-party management business of Colony Capital that we are acquiring in connection with the Combination. We therefore intend to conduct those operations through one or more taxable REIT subsidiaries (each, a “TRS”). A TRS is subject to regular corporate income tax on its net income. As a result, the net income generated by those operations generally will be subject to regular corporate income tax. Moreover, as a REIT, stock and other securities of a TRS constitute nonqualifying assets for purposes of the 75% asset test applicable to REITs, and, thus, no more than 25% of our total gross assets may be comprised of the stock or other securities of one or more taxable REIT subsidiaries and other nonqualifying assets (including goodwill and similar assets we are acquiring as a result of the Combination). In addition, dividends payable by taxable REIT subsidiaries constitute qualifying income for purposes of the 95% gross income test applicable to REITs, but nonqualifying income for purposes of the 75% gross income test applicable to REITs. Accordingly, if the value of the business we are acquiring in connection with the Combination and the income generated thereby increases relative to the value of our other, REIT-compliant assets and the income produced thereby, we may fail to satisfy one or more of the requirements applicable to REITs.

The stock ownership limits imposed by the Internal Revenue Code for REITs and our Charter may restrict our business combination opportunities, and if the Charter Amendments are approved, the current stock ownership limits will be reduced, which could further restrict business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year following our first year. Our Charter, with certain exceptions, authorizes our Board to take those actions that are necessary and desirable to preserve our qualification as a REIT. In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue Code, our current Charter generally prohibits any person (other than a person who has been granted an exemption) from actually or constructively owning more than 9.8% of the aggregate of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding shares of such class or series of our preferred stock by value or by number of shares, whichever is more restrictive. In connection with the Combination, the Board has proposed that the Charter be amended to lower our stock ownership limits and prohibit any person (other than a person who has been granted an exemption or a “designated investment entity”) from actually or constructively owning more than 8.0% of the aggregate of the outstanding shares of our common stock (by value or by number of shares, whichever is more restrictive). Our Board may, in its sole discretion, grant, and has in certain circumstances granted, an exemption to the common stock ownership limits, subject to such conditions and the receipt by our Board of certain representations and undertakings. Our current Charter and proposed amended Charter also prohibits (or would continue to prohibit) any person from (a) beneficially or constructively owning, as determined by applying certain attribution rules of the Internal Revenue Code, our stock that would result in us being “closely held” under Section 856(h) of the Internal Revenue Code or that would otherwise cause us to fail to qualify as a REIT or to have not insignificant non-qualifying income from “related” parties or (b) transferring stock if such transfer would result in our stock being owned by fewer than 100 persons. The ownership limits imposed under the Internal Revenue Code are

 

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based upon direct or indirect ownership by “individuals,” but only during the last half of a tax year. The ownership limits contained in our current Charter and our proposed amended Charter key off of the ownership at any time by any “person,” which term includes entities. These ownership limitations are common in REIT charters and are intended to provide added assurance of compliance with the tax law requirements, and to minimize administrative burdens. However, the ownership limit on our common stock might also delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders, and the proposed reduction in the ownership limit could further restrict such transactions that may otherwise not be so delayed or prevented.

RISKS RELATED TO THE BUSINESS OF COLONY CAPITAL ACQUIRED IN THE COMBINATION

Because advisory agreements with Colony Capital’s investment funds are subject to termination in certain circumstances, any such termination could have a material adverse effect on our business, results of operations and financial condition.

The advisory agreements under which Colony Capital or its affiliates provide and, following consummation of the Combination, we will provide, services to Colony Capital’s investment funds and the general partners of those investment funds may generally be terminated by the general partner or the applicable fund, as the case may be, with cause (subject to certain notice and cure periods) and, in certain circumstances, may be terminated without cause on limited notice.

In addition, such advisory agreements terminate automatically in certain circumstances, including if the limited partners of any of the funds remove the general partner of that fund, which they generally may do with or without cause subject to certain consent thresholds and other conditions. The advisory agreements also generally terminate automatically upon dissolution of the applicable investment fund. The investment funds generally may be dissolved (i) in the case of certain funds, by limited partners if Mr. Barrack fails to adhere to certain “key man” provisions of that fund’s (and, in some cases, other funds’) organizational documents requiring him to be actively involved and devote a substantial majority of his business time and attention to such fund and its affiliated partnerships, (ii) in the case of certain funds, by the limited partners if neither Mr. Barrack nor any individual named as a Colony Capital “principal” continue to control Colony Capital following a change in control of Colony Capital, (iii) by election of the general partner and the limited partners, and (iv) upon certain other events, such as bankruptcy and expiration of the applicable fund.

Finally, we expect that advisory agreements with our future investment funds also will be terminable upon relatively short notice, with or without cause. Any termination of a material advisory agreement could have a material adverse effect on our business, results of operations and financial condition.

Failure to deal appropriately with conflicts of interest in Colony Capital’s investment business could damage our reputation and adversely affect our businesses.

Following consummation of the Combination, we may confront potential conflicts of interest relating to our funds’ investment activities and our allocation of investment opportunities among our funds or among our direct investment programs and our funds. Colony Capital’s investment funds and our future investment funds may have overlapping investment objectives, including funds that have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds or how to allocate investment opportunities among us and those funds. For example, we may allocate an investment opportunity that is appropriate for two or more investment funds in a manner that excludes one or more funds or results in a disproportionate allocation based on factors or criteria that we determine, such as sourcing of the transaction, the relative amounts of capital available for investment in each fund, the nature and extent of involvement in the transaction on the part of the respective teams of investment professionals dedicated to the respective funds and other considerations deemed relevant by us. In the case of any future funds that we may sponsor, we may implement any allocation methodology that we deem appropriate (including retaining the right to allocate investment opportunities in our sole discretion), and there can be no assurance that our allocation

 

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procedures will adequately address all of the conflicts that may arise or that they will address such conflicts in a manner that is more favorable to us than to our investment funds. Also, our decision to pursue a fund investment opportunity could preclude our ability to obtain a related advisory assignment, and vice versa. In addition, conflicts of interest may exist in the valuation of our investments and regarding decisions about the allocation of specific investment opportunities among us and our funds and the allocation of fees and costs among us and our funds. To the extent we fail to appropriately deal with any such conflicts, it could negatively impact our reputation and ability to raise additional funds or result in potential litigation against us.

Although we will seek to make allocation decisions in a manner that we believe is fair and consistent with our allocation policies, our allocation of investment opportunities may give rise to investor dissatisfaction, litigation or regulatory enforcement. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business and our ability to attract investors for future vehicles.

Our executive officers control or have equity interests in the general partner of each of Colony Capital’s investment funds, which may expose us to conflicts of interest that could have a material adverse effect on our business, results of operations and financial condition.

Mr. Barrack controls the general partner of each of Colony Capital’s investment funds. At the same time, Mr. Barrack serves as our Executive Chairman. As a result, Mr. Barrack directly or indirectly owes fiduciary duties both to us and to Colony Capital’s investment funds that may from time to time come into conflict. In addition, our executive officers have equity interests in the general partner of each of Colony Capital’s investment funds. These duties and interests may put our executive officers in a position to influence decisions or actions to be taken by Colony Capital’s investment funds in a manner that may be viewed as being in the best interest of that investment fund’s general partner but not being in our best interest. In addition, if the general partner of any investment fund breaches an advisory agreement, we may choose not to enforce, or to enforce less vigorously, our rights because of our desire to maintain our ongoing relationship with our executive officers (including if they cease to be executive officers) who hold interests in that fund general partner. Should these conflicts result in decisions that are not in our best interest, it could have a material adverse effect on our business, results of operations and financial condition.

With respect to new investment vehicles that we sponsor following consummation of the Combination, unlike with Colony Capital’s investment funds, we expect to serve as general partner under the Colony name and receive all fees and therefore do not expect our new investment vehicles to have similar conflicts to those described in the prior paragraph for Colony Capital’s existing investment funds, although there can be no assurance that this will be the case. We expect to receive carried interest from future investment programs (net of carried interest that we expect will be allocated to members of our management team, investment professionals and other individuals, which, consistent with market terms, we expect to be 40.0% of the carried interest earned).

Extensive regulation of Colony Capital’s businesses could affect our activities, result in additional burdens on our business and create the potential for significant liabilities and penalties.

Colony Capital’s business is subject to extensive regulation, including periodic examinations, by governmental and self-regulatory organizations in the jurisdictions in which it operates around the world. Many of these regulators, including U.S. and foreign government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders, the suspension or expulsion of a broker-dealer or investment adviser from registration or memberships or the commencement of a civil or criminal lawsuit against us or our personnel. Even if an investigation or proceeding did not result in a sanction or the sanction imposed against us or our personnel by a

 

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regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing clients or fail to gain new asset management or financial advisory clients.

In addition, Colony Capital regularly relies on exemptions from various requirements of the U.S. Securities Act of 1933, as amended, or “Securities Act,” the Exchange Act, the 1940 Act and the U.S. Employee Retirement Income Security Act of 1974, as amended, in conducting its asset management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third party claims and our business could be materially and adversely affected. For example, the SEC recently amended Rule 506 of Regulation D under the Securities Act to impose “bad actor” disqualification provisions which ban an issuer from offering or selling securities pursuant to the safe harbor rule in Rule 506 if the issuer, or any other “covered person,” is the subject of a criminal, regulatory or court order or other “disqualifying event” under the rule which has not been waived. The definition of “covered person” under the rule includes an issuer’s directors, general partners, managing members and executive officers; affiliates who are also issuing securities in the offering; beneficial owners of 20% or more of the issuer’s outstanding equity securities; and promoters and persons compensated for soliciting investors in the offering. Accordingly, our ability to rely on Rule 506 to offer or sell securities would be impaired if we or any “covered person” is the subject of a disqualifying event under the rule and we are unable to obtain a waiver. The requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our investment funds and are not designed to protect us. Consequently, these regulations could serve to limit our activities and impose burdensome compliance requirements.

Regulatory changes in the United States could adversely affect our business.

As a result of recent highly publicized financial scandals, investors, regulators and the general public have exhibited concerns over the integrity of both the U.S. financial markets and the regulatory oversight of these markets. As a result, the business environment in which Colony Capital operates and in which, following consummation of the Combination, we will operate, is subject to heightened regulation. With respect to alternative asset management funds, in recent years, there has been debate in both U.S. and foreign governments about new rules or regulations, including increased oversight or taxation. As calls for additional regulation have increased, there may be a related increase in regulatory oversight of the trading and other investment activities of alternative asset management funds, including Colony Capital’s investment funds and our future investment funds. Such oversight may cause us to incur additional expense and may result in fines if we are deemed to have violated any regulations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) recently enacted by the U.S. Congress has changed and is expected to continue changing the regulatory environment for alternative investment funds, including Colony Capital’s investment funds and our future investment funds. Dodd-Frank expands the registration requirements for investment advisers managing such funds, as well as subjecting large funds to supervisory oversight for purposes of assessing their potential to contribute to systemic risk. Although the SEC and other U.S. regulatory agencies have begun issuing rules and regulations to implement the requirements of Dodd-Frank, many of the provisions of Dodd-Frank still require the adoption of implementing regulations by the applicable agencies. Accordingly, it is not possible finally to assess Dodd-Frank’s full impact on us, our investment funds or, in some cases, the instruments in which our investment funds may invest. As the regulatory environment evolves, compliance with any new laws or regulations could be difficult and may adversely affect the value of instruments held by our investment funds or the ability of our investment funds to pursue their investment strategies.

Although the full scope of these potential regulatory changes are not yet known, such changes could have a meaningful impact on the financial industry. We may be adversely affected if new or revised legislation or regulations are enacted, or by changes in the interpretation or enforcement of existing rules and regulations

 

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imposed by the SEC, other U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets and their participants. Such changes could place limitations on the type of investor that can invest in our investment funds or on the conditions under which our investment funds may acquire investments. Further, such changes may limit the scope of investing activities we may undertake for our investment funds. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Any changes in the regulatory framework applicable to our business, including the changes described above, may impose additional costs on us, require the attention of our senior management or result in limitations on the manner in which we conduct our business. Moreover, as calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and other investment activities of alternative asset management funds, including our funds. Compliance with any new laws or regulations could make compliance more difficult and expensive, affect the manner in which we conduct our business and adversely affect our profitability.

Poor performance of Colony Capital’s investment funds or our future investment funds could cause a decline in our revenue, income and cash flow and could adversely affect our ability to raise capital for future investment funds.

In the event that any of Colony Capital’s investment funds or our future investment funds were to perform poorly, our revenue, income and cash flow could decline because the value of our assets under management would decrease, which, depending on the terms of the applicable fund, could result in a reduction in investment management and other fees, and our investment returns would decrease, resulting in a reduction in the carried interest and incentive fees we earn. Moreover, we could experience losses on our investments of our own principal as a result of poor investment performance by our investment funds.

Poor performance of our investment funds could make it more difficult for us to raise new capital. Potential investors might decline to invest in future investment funds we raise and current investors might withdraw their investments as a result of poor performance of the investment funds in which they are invested. Investors and potential investors in our funds continually assess our investment funds’ performance, and our ability to raise capital for existing and future investment funds and avoid excessive redemption levels will depend on our investment funds’ continued satisfactory performance. Accordingly, poor fund performance may deter future investment in our funds and thereby decrease the capital invested in our funds and potentially, our investment management and other fee revenue. Alternatively, in the face of poor fund performance, investors could demand lower fees or fee concessions for existing or future funds which would likewise decrease our revenue. A significant number of fund sponsors have recently decreased the amount of fees they charged investors for managing existing or successor funds as a direct result of poor fund performance.

A decline in the pace or size of investment by Colony Capital’s investment funds would result in our receiving less revenue from our investment management and other fees and lower return from our investments in the investment funds.

The investment management and other fees that we earn are driven in part by the pace at which our funds make investments and the size of those investments. Any decline in that pace or the size of such investments would reduce our revenue from our investment management and other fees and would also lower our return from our investments in the investment funds. Many factors could cause such a decline in the pace of investment or the transaction and management or monitoring fees we receive, including:

 

    the inability of our investment professionals to identify attractive investment opportunities;

 

    competition for such opportunities among other potential acquirers;

 

    decreased availability of capital or financing on attractive terms;

 

    our failure to consummate identified investment opportunities because of business, regulatory or legal complexities and adverse developments in the U.S. or global economy or financial markets;

 

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    terms we may agree with our fund investors to increase the percentage of transaction or other fees we may share with them; and

 

    new regulations or actions of regulatory authorities.

Our inability to raise additional or successor investment funds (or raise successor investment funds of a comparable size as Colony Capital’s current investment funds) could have a material adverse effect on our business, results of operations and financial condition.

Colony Capital’s current investment funds have a finite life and a finite amount of commitments from fund investors. Once a fund nears the end of its investment period, our success depends on our ability to raise additional or successor funds in order to keep making investments and, over the long term, earning investment management and other fees. Even if we are successful in raising successor funds, to the extent we are unable to raise successor funds of a comparable size to Colony Capital’s current funds or the extent that we are delayed in raising such a successor fund, our revenues may decrease as the investment period of our predecessor funds expire and associated fees decrease.

Furthermore, in order to raise capital for new strategies and funds without drawing capital away from our existing funds, we will need to seek new sources of capital. Institutional investors in funds that have suffered from decreasing returns, liquidity pressure, increased volatility or difficulty maintaining targeted asset allocations, may materially decrease their fund investments or temporarily suspend making new fund investments. Such investors may elect to reduce their overall portfolio allocations to alternative investments such as our funds, resulting in a smaller overall pool of available capital in our industry. In addition, the asset allocation rules or regulations or investment policies to which such third-party investors are subject could inhibit or restrict the ability of third-party investors to make investments in our investment funds. To the extent that the available pool of new capital is reduced or limited, we may be unable to raise successor funds, and the decrease of our revenues as the investment period of our predecessor funds expire and associated fees decrease could have a material adverse impact on our business, results of operations and financial condition.

Investors in our future funds may negotiate to pay us lower investment management and other fees and the economic terms of our future funds may be less favorable to us than those of Colony Capital’s existing funds, which could have a material adverse effect on our business, results of operations and financial condition.

In connection with raising new investment funds or securing additional investments in existing funds, we will negotiate terms for such funds and investments with investors. The outcome of such negotiations could result in our agreement to terms that are materially less favorable to us than the terms of Colony Capital’s existing investment funds or funds advised by our competitors. For example such terms could restrict our ability to raise investment funds with investment objectives or strategies that compete with existing funds, reduce fee revenues we earn, reduce the percentage of profits on third-party capital in which we share, include a performance hurdle that requires us to generate a specified return on investment prior to our right to receive carried interest or add expenses and obligations for us in managing the fund or increase our potential liabilities. Furthermore, as institutional investors increasingly consolidate their relationships with investment firms and competition becomes more acute, we may receive more of these requests to modify the terms in our new funds. Agreement to terms that are materially less favorable to us could result in a decrease in our profitability, which could have a material adverse effect on our business, results of operations and financial condition.

The investments held by Colony Capital’s investment funds are subject to a number of inherent risks.

Colony Capital’s results are highly dependent on its continued ability to generate attractive returns from its funds’ investments. Investments made by Colony Capital’s investment funds involve a number of significant risks inherent to private equity, credit and other investing, including, but not limited to, the following:

 

    real estate assets are subject to risks particular to real property, including lease terminations and/or tenant defaults, any of which could reduce its return from an affected property or asset;

 

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    non-performing and sub-performing commercial mortgage loans, or loans that may become non-performing and sub-performing, are subject to increased risks relative to performing loans;

 

    the supply of commercial mortgage loans that meet’s Colony Capital’s investment objectives and strategies will probably decrease as the economy improves, which may cause it to adjust its investment strategies;

 

    commercial mortgage loans and the mortgage loans underlying Colony Capital’s CMBS investments are subject to the ability of the property owner to generate net income from operating the property as well as the risks of delinquency and foreclosure;

 

    CMBS investments are subject to the risks of the securitization process, as well as all of the risks of the underlying mortgage loans;

 

    investments in non-investment grade rated loans, corporate bank debt and debt securities of commercial real estate operating or finance companies will be subject to the specific risks relating to the particular company and to the general risks of investing in real estate-related loans and securities, which may result in significant losses;

 

    derivative instruments, credit default swaps and construction loans would subject Colony Capital to increased risk of loss;

 

    residential mortgage loans are subject to risks particular to investments secured by mortgage loans on residential property;

 

    investments may be concentrated and will be subject to risk of default;

 

    equity investments and mezzanine debt investments often rank junior to senior loans or investments made by others, which presents an increased risk of loss of the investment; and

 

    limited numbers of investments, or investments concentrated in certain geographic regions or asset types, could negatively affect a fund’s performance to the extent those concentrated investments perform poorly.

We are subject to risks and liabilities in connection with sponsoring, investing in and managing new investment funds.

Following consummation of the Combination, we expect to sponsor, manage and serve as general partner of new investment funds. Investment in these funds may involve risks not otherwise present with a direct investment in the fund’s target assets, including, for example:

 

    the possibility that investors might become bankrupt or otherwise be unable to meet their capital contribution obligations;

 

    that fund agreements often restrict our ability to transfer or liquidate our interest when we desire or on advantageous terms;

 

    that our relationships with the investors will be generally contractual in nature and may be terminated or dissolved under the terms of the agreements, or we may be removed as general partner, and in such event, we may not continue to manage or invest in the applicable fund underlying such relationships;

 

    that disputes between us and the investors may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the investments owned by the applicable investment fund to additional risk; and

 

    that we may incur liability for obligations of a partnership by reason of being its general partner.

 

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The investment management business is intensely competitive, which could have a material adverse impact on our business.

The investment management business is highly fragmented, with Colony Capital’s competitors consisting primarily of sponsors of public and private investment funds, real estate development companies, business development companies, investment banks, commercial finance companies and operating companies acting as strategic buyers of businesses. A number of factors serve to increase our competitive risks:

 

    a number of our competitors in some of our businesses may have greater financial, technical, marketing and other resources and more personnel than we do, and, in the case of some asset classes, longer operating histories, more established relationships or greater experience;

 

    fund investors may materially decrease their allocations in new funds due to their experiences following an economic downturn, the limited availability of capital, regulatory requirements or a desire to consolidate their relationships with investment firms;

 

    some of our competitors may have better expertise or be regarded by fund investors as having better expertise in a specific asset class or geographic region than we do;

 

    some of our competitors have agreed to terms on their investment funds or products that may be more favorable to fund investors than our funds or products, such as lower management fees, greater fee sharing, or performance hurdles for carried interest, and therefore we may be forced to match or otherwise revise our terms to be less favorable to us than they have been in the past;

 

    some of our funds may not perform as well as competitors’ funds or other available investment products;

 

    our competitors have raised or may raise significant amounts of capital, and many of them have similar investment objectives and strategies to our funds, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit;

 

    some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities;

 

    some of our competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments;

 

    some of our competitors may be subject to less regulation or less regulatory scrutiny and accordingly may have more flexibility to undertake and execute certain businesses or investments than we do and/or bear less expense to comply with such regulations than we do;

 

    there are relatively few barriers to entry impeding the formation of new funds, including a relatively low cost of entering these businesses, and the successful efforts of new entrants into our various lines of business, including major commercial and investment banks and other financial institutions, have resulted in increased competition;

 

    some fund investors may prefer to invest with an investment manager that is not publicly traded, is smaller, or manages fewer investment products; and

 

    other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

We may lose investment opportunities in the future if we do not match investment prices, structures and terms offered by competitors. Alternatively, we may experience decreased investment returns and increased risks of loss if we match investment prices, structures and terms offered by competitors. Moreover, as a result, if we are forced to compete with other investment firms on the basis of price, we may not be able to maintain our

 

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current fund fee, carried interest or other terms. There is a risk that fees and carried interest in the alternative investment management industry will decline, without regard to the historical performance of a manager. Fee or carried interest income reductions on existing or future funds, without corresponding decreases in our cost structure, would adversely affect our revenues and profitability. In addition, if interest rates were to rise or if market conditions for competing investment products become or are favorable and such products begin to offer rates of return superior to those achieved by our funds, the attractiveness of our funds relative to investments in other investment products could decrease. This competitive pressure could adversely affect our ability to make successful investments and limit our ability to raise future funds, either of which would adversely impact our business, results of operations and cash flow.

Following our acquisition of Colony Capital’s business, we will be subject to substantial litigation risks and may face significant liabilities and damage to our professional reputation as a result of litigation allegations and negative publicity.

The investment decisions we will make in our investment management business and the activities of our investment professionals on behalf of our portfolio companies may subject them and us to the risk of third-party litigation arising from dissatisfaction of fund investors with the performance of their funds and a variety of other litigation claims. We also will be exposed to risks of litigation or investigation in the event of any transactions that presented conflicts of interest that were not properly addressed. Additionally, to the extent investors in Colony Capital’s investment funds suffer losses resulting from fraud, gross negligence, willful misconduct or other similar misconduct, such investors may have remedies against us, our investment funds, our principals or our affiliates under federal securities law and state law.

If any civil or criminal lawsuits are brought against us and result in a finding of substantial legal liability or culpability, the lawsuit could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could seriously impact our business. Colony Capital depends to a large extent on its business relationships and its reputation for integrity and high-caliber professional services to attract and retain fund investors and qualified professionals and to pursue investment opportunities for its funds. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about Colony Capital, its investment activities or its industry in general, whether or not valid, may harm its reputation, which may be more damaging to its business than to other types of businesses.

Third party investors in Colony Capital’s funds with commitment-based structures may not satisfy their contractual obligations to fund capital calls when requested, which could have a material adverse effect on our business, results of operations and financial condition.

Investors in certain of Colony Capital’s investment funds make capital commitments to those funds that the funds are entitled to call from those investors at any time during prescribed periods. We will depend on fund investors fulfilling their commitments when we call capital from them in order for such funds to consummate investments and otherwise pay their obligations (for example, management fees) when due. Any fund investor that did not fund a capital call would generally be subject to several possible penalties. However, investors may in the future negotiate for lesser or reduced penalties at the outset of the fund, thereby inhibiting our ability to enforce the funding of a capital call. If our fund investors were to fail to satisfy a significant amount of capital calls for any particular fund or funds, the operation and performance of those funds could be materially and adversely affected.

 

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OUR COMPANY

General

Colony Financial, Inc. is a diversified commercial real estate and investment management company that owns a portfolio of real estate equity and debt investments at attractive risk-adjusted returns. The total return profile of our investments is composed of both current yield, which is distributed through regular-way dividends, and capital appreciation potential, which is distributed through regular-way and/or special dividends. Our investment portfolio and target assets are primarily composed of interests in (i) real estate equity, including direct property and real estate platform investments and (ii) real estate and real estate-related debt, including new originations and loans acquired at a discount to par in the secondary market. Secondary debt purchases may include performing, sub-performing or non-performing loans (including loan-to-own strategies).

On December 18, 2014, certain subsidiaries of the Company, including a U.S. light industrial co-investment partnership formed and managed by the Company, completed the acquisition of a portfolio of 256 light industrial real estate assets and associated operating platform from Cobalt Capital Partners, L.P. and its affiliates for an aggregate purchase price of approximately $1.6 billion.

We are organized and conduct our operations to qualify as a REIT, and generally are not subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our taxable income to stockholders and maintain qualification as a REIT, although we are subject to U.S. federal income tax on income earned through our taxable subsidiaries. We also operate our business in a manner that will permit us to maintain our exemption from registration as an investment company under the 1940 Act.

The Manager and the Management Agreement

At the closing of our initial public offering on September 29, 2009, we entered into a management agreement (the “Management Agreement”) with our Manager, pursuant to which our Manager provides the day-to-day management of our operations. In November 2011 and March 2013, we amended and restated the Management Agreement. The Management Agreement, as amended, requires our Manager to manage our business affairs in conformity with the policies and the investment guidelines that are approved and monitored by our Board. The initial term of the Management Agreement expired on September 29, 2012, and has been, and will continue to be, renewed for one-year terms thereafter unless terminated by either us or our Manager. Our Manager is entitled to receive a termination fee from us under certain circumstances.

Pursuant to the terms of the Management Agreement, our Manager is entitled to receive from us a base management fee and, if earned, an incentive fee. Each quarterly installment of the incentive fee is payable in shares of our common stock so long as the ownership of such additional number of shares of our common stock by our Manager would not result in a violation of the ownership limits set forth in our charter, after giving effect to any waiver from such limit that our Board may grant in the future. We are also obligated to reimburse certain costs incurred by our Manager on our behalf. For the fiscal year ended December 31, 2013, we incurred base management fees of approximately $22.3 million and reimbursed our Manager approximately $3.6 million for expenses and investment-related costs, including reimbursing an asset manager affiliate of the Manager pursuant to a cost allocation agreement for compensation, overhead and other direct costs incurred for the benefit of certain loan portfolio investments owned by the Company.

Each of our officers is also an employee of Colony Capital and/or certain of its affiliates. Mr. Tangen, our Chief Operating Officer, Chief Financial Officer and Treasurer, is seconded exclusively to us pursuant to a secondment agreement with Colony Capital. As a result, the Management Agreement between us and our

 

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Manager was negotiated between related parties and the terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

The Management Agreement is intended to provide us with access to our Manager’s pipeline of investment opportunities, personnel and experience in capital markets, credit analysis, debt structuring and risk and asset management, as well as assistance with corporate operations, legal and compliance functions and governance.

 

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THE BUSINESS OF COLONY CAPITAL

General

Pursuant to the Combination, we will acquire, among other things, the business of Colony Capital. Colony Capital is a privately held, independent, global real estate investment firm founded in 1991 by Mr. Barrack. Colony Capital’s business is the sponsorship and management of investment funds and vehicles, which business historically has primarily focused on real estate and real estate-related assets. Colony Capital has an extensive global footprint and corresponding infrastructure, with approximately 300 employees operating in a total of 13 offices in the following 10 countries: China, England, France, Germany, Italy, Lebanon, Luxembourg, South Korea, Spain and the U.S. This global infrastructure provides Colony Capital’s acquisition team with proprietary market knowledge, sourcing capabilities and the local presence required to identify and execute complex transactions. In the 24 years since its inception, Colony Capital has managed investments in diverse and complex property, corporate and portfolio transactions across five continents through varied economic cycles. Since its inception, Colony Capital has managed $60 billion of investments in over 37,000 assets and loans and currently has approximately $19 billion of assets under management (gross) with more than 300 investor relationships.

Since inception, Colony Capital has adapted its investment strategy to the different market opportunities that have arisen from time to time. Beginning in 1991, Colony Capital became one of the pioneering purchasers of distressed assets from the Resolution Trust Corporation (“RTC”), and the Federal Deposit Insurance Corporation (the “FDIC”). In the mid-1990s, it identified comparable investment opportunities in Europe. As a result, Colony Capital began to build a significant European presence with an initial investment focus on distressed real estate. As the market opportunities again shifted in the mid- to late-1990s, Colony Capital broadened its focus to include equity investments in real estate and real estate-related assets in the U.S., Europe and Asia, and expanded its global presence by setting up operations in Asia to capitalize on opportunities arising from the Asian financial crisis of the late 1990s. Since then, Colony Capital has established several closed-end investment funds primarily focused on equity investments in real estate and operating businesses significantly dependent on real estate. As the global economy suffered a significant downturn beginning in late 2007 and commercial real estate fundamentals began to deteriorate, Colony Capital leveraged its prior experiences to capitalize on distressed real estate debt opportunities. In 2008, Colony Capital established Colony Distressed Credit Fund, L.P. (“CDCF I”), a distressed credit private investment fund that has invested $909 million of equity in 21 transactions involving the acquisition of multiple loan portfolios from a variety of financial institutions comprising approximately 3,500 commercial mortgage loans and other commercial real estate-related debt investments. In 2011, Colony Capital established Colony Distressed Credit Fund II, L.P. (“CDCF II”), the follow-on distressed credit private investment fund that has invested and committed over $884 million of equity in 38 transactions, involving the acquisition of multiple portfolios comprising approximately 3,400 commercial mortgage loans and other commercial real estate-related debt investments. Most recently, Colony Capital established Colony Distressed Credit and Special Situations Fund III, L.P. (“CDCF III”), a distressed credit private investment fund expected to pursue transactions that are thematically similar to the investments of CDCF I and CDCF II that raised $1.2 billion in capital commencing in 2013. CDCF III is currently in the process of deploying its capital.

Competitive Strengths

Colony Capital leverages the following sources of competitive strengths to help achieve its investment objectives:

Experienced Management Team with Expertise in Real Estate and Real Estate-Related Debt Investments. Colony Capital’s principals have worked at Colony Capital for an average of 13 years with an average of 27 years of experience in real estate investing and financing, including experience in distressed real estate investments.

Access to Extensive Pipeline of Investment Opportunities. Colony Capital has extensive long-term relationships with real estate owners, developers and financial intermediaries, including primary dealers, leading

 

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investment and commercial banks, brokerage firms, public and private real estate investment companies, mortgage lenders and many strategic partners. Colony Capital believes these relationships, together with our global infrastructure, will provide access to an ongoing pipeline of attractive investment opportunities, both domestic and international, many of which may not be available to its competitors.

Strong Asset Level Underwriting Capabilities. Colony Capital has a fully integrated in-house underwriting platform, which has extensive experience underwriting, conducting due diligence and valuing real estate and real estate-related assets. The foundation of this underwriting platform is the in-depth, asset level evaluation of each investment opportunity using rigorous quantitative and qualitative analysis. Colony Capital believes that these tools enable it to better identify attractive investment opportunities and assess the performance, risk and returns that we should expect from any particular investment. Colony Capital believes that its underwriting, credit, financing and asset management experience will enable it to generate attractive risk-adjusted returns by expeditiously resolving performance issues associated with the loans acquired from the FDIC, commercial banks and other governmental and financial institutions through work-outs, refinancings, negotiated repayments with borrowers or foreclosure and subsequent sale of the underlying property.

Proven Value-Added Execution and Asset Management Experience. Colony Capital’s asset management team has extensive experience maximizing current income and creating capital appreciation opportunities through active management of real estate and real estate-related assets. Working collaboratively with the underwriting team, the asset management team formulates a strategic plan designed to extract maximum value from each asset through, among other measures, repositioning, restructuring and intensive management. Colony Capital believes that it has been successful in formulating and executing various asset management strategies through a variety of economic cycles across multiple global markets and in complex capital structures, having resolved over 11,500 loans over its history. In the past, such strategies have included the restructuring of non-performing or sub-performing loans, the negotiation of discounted pay-offs (“DPO”) or other modification of the terms governing a loan, and the foreclosure and intense management of assets underlying non-performing loans in order to reposition them for profitable disposition. We expect this expertise to benefit our “loan-to-own” and real estate owned (“REO”) property investments in particular.

Colony Capital has an established track record in distressed investments that have generated attractive returns for its investors. Given its global reach, sourcing capabilities, proven investment strategies, and experienced management team, Colony Capital believes that the current outlook for investing is especially attractive within the U.S. and is becoming increasingly promising around the globe and Europe in particular.

Colony Capital believes that markets are generally efficient in the long run and that deviations from intrinsic value eventually regress to the mean. Colony Capital’s philosophy is to seek attractive risk-adjusted returns by farming both efficient markets, primarily through niche strategies, and inefficient markets where arbitrage opportunities may be available. Colony Capital’s expertise in distressed investing equips it with a unique advantage in either circumstance. Colony Capital’s long-standing investment philosophy has proven effective across geographic regions and throughout a variety of market conditions. This strategy is based on three related tenets:

 

  (i) exploitation of inefficiencies: capitalizing on informational advantages to identify micro-market imbalances and secure investments on favorable terms;

 

  (ii) value-added executions: creating capital appreciation opportunities through repositioning, restructuring, development, and intensive management; and

 

  (iii) cautious contrarianism: during downturns or secular changes, investing in out-of-favor sectors or markets to exploit capital or product misalignments.

Exploitation of Inefficiencies

In efficient markets, many fully informed and qualified buyers achieve market returns. Exploiting circumstances that impede other investors puts one in a position to realize above-average, risk-adjusted returns

 

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that can result from situations that are less than fully competitive. These competitive impediments include: (i) structural and situational complexity, including transaction size, which inhibits many other investors, (ii) information advantages, which optimize assessment of the risks and rewards inherent in a prospective investment, (iii) local market expertise, without which property-based investments cannot be confidently executed, (iv) proprietary transaction sourcing, which can yield investment opportunities that are secured without enduring an auction process, and (v) financial sophistication, which can be an important skill in arbitraging financial market inefficiencies. Colony’s network of in-country offices and strategic partners enhances its competitive advantage by contributing specialized expertise, expanding its local presence in important geographic markets and providing access to proprietary deal flow.

Value-Added Executions

Successful execution of a contrarian investment strategy that exploits inefficiencies requires a commitment to value-enhancing management consistent with a defined business plan. Equally important is the early identification of multiple prospective exit strategies integrated into the investment thesis. While financial arbitrage alone can produce compelling returns, mastering transactional complexities and enhancing an investment’s value through hands-on management can produce outsized returns relative to the arbitrage opportunity. Only through such intensive stewardship can many investments achieve the cash flow characteristics that permit optimal financings and ultimate exit into more liquid markets. Whether through its in-house property repositioning capabilities, its development expertise or operational management of its strategic partners, or its active corporate board representation, Colony is directly involved in the value maximization of a substantial majority of its investments. Having invested in 37,000 assets since Colony Capital’s inception, Colony Capital possesses extensive transactional experience, which serves to optimize dispositions, whether in private or public markets.

Cautious Contrarianism

Colony Capital is generally guided by a contrarian, opportunistic investment philosophy that has allowed it to identify and capitalize on situations not yet fully understood or exploited by others. Colony Capital views the market as a set of interdependent and independent cycles constantly redefining opportunities within distinct product types, geographic areas, industries, and capital markets. Low points within these respective cycles often present highly attractive acquisition opportunities, as sellers outnumber buyers in relatively illiquid markets. In such periods, Colony Capital has shown conviction in the face of strong countervailing market sentiment. We believe that the early recognition of capital misalignments, recapitalization and restructuring opportunities can produce extraordinary profits as liquidity returns and valuation multiples expand during times of cyclical recovery. Since its original RTC portfolio acquisition in 1991, Colony Capital has demonstrated its ability to invest ahead of the market, as illustrated through its early acquisitions of non-performing loan portfolios from the FDIC in 2009, among the first of the current cycle, as well as the formation of Colony American Homes in March 2012, among the first, and now one of the largest, aggregators and operators of single-family residential rentals in the United States.

Investment Process

Colony Capital’s successful track record in making distressed investments, including investments by CDCF I and CDCF II, is the result of a thorough investment process structured around the experience, resources and professionals of Colony Capital. This process initially involves:

 

  i. identifying investment opportunities;

 

  ii. assessing the opportunities to ensure that they meet preliminary screening criteria, i.e., suitability of the potential investment in light of our investment guidelines; and

 

  iii. reviewing the opportunities to determine whether to incur costs associated with more in-depth diligence.

 

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If the decision is made to proceed with full-scale diligence, the next phase of Colony Capital’s investment process involves assessing the risk-reward profile of the investment through, among other things:

 

  i. intensive data collection by Colony Capital’s in-house acquisition, asset management and loan-servicing personnel and third-party providers, including, as appropriate, financial, physical, legal and environmental due diligence of the assets underlying the investment opportunities;

 

  ii. data consolidation and quantitative analyses of the key drivers affecting value, such as cash flows and collateral performance, lease analysis, and credit and prepayment risk; and

 

  iii. thorough review of the investment capital structure, borrower and tenant analysis, servicer and originator information, legal structure and deal documentation.

Structure

Colony Capital provides the general partners of its sponsored investment funds with the personnel, facilities and other resources they reasonably require to manage the business and affairs of their respective investment funds.

Colony Capital conducts the sponsorship and management of these investment funds primarily through a partnership structure in which limited partnerships are organized by general partners, which accept commitments for investment from institutional investors and (to a limited extent) high-net worth individuals. Such commitments are generally drawn down from investors on an as-needed basis to fund investments over a specified term. Substantially all of the responsibility for the day-to-day operations of each investment fund is typically delegated by the general partner of such investment fund to Colony Capital pursuant to an investment management (or similar) agreement, and Colony Capital receives all investment management fees paid by the investment fund to its general partner. Investment management fees paid to the general partner, and then to Colony Capital, typically are paid quarterly and are equal to a specified percentage of partners’ net funded capital contributions. In addition to these investment management services, an affiliate of Colony Capital generally provides asset management services to the investment funds in exchange for asset management fees.

In addition to having an investment adviser, each investment fund that is a limited partnership also has a general partner that makes all operational and investment decisions relating to the conduct of the investment fund’s business. Mr. Barrack controls the general partner of all Colony Capital’s investment funds. Furthermore, all decisions concerning the making, monitoring and disposing of investments are made by the general partner. The limited partners of the partnership funds take no part in the conduct or control of the business of the investment funds, have no right or authority to act for or bind the investment funds and have no influence over the voting or disposition of the securities or other assets held by the investment funds. These decisions are made by the investment fund’s general partner in its sole discretion. Subject to certain conditions in the case of some of the investment funds, investors in Colony Capital’s investment funds generally have the right to remove the general partner of the fund or to accelerate the liquidation date of the investment fund with cause by a simple majority vote or without cause with a certain higher percentage of limited partners.

Historically, Colony Capital professionals have funded a significant portion of the capital contributions of the general partners of the investment funds and have been entitled to receive any carried interest to which such general partners are entitled. In certain instances, Colony Capital or its affiliates have invested in or held relatively minor interests in the general partners of its investment funds. Interests in these general partners are not being transferred to the Company in the Combination.

Description of Investment Platforms

Colony Capital has historically targeted three major investment strategies, each executed from separate platforms, but all leveraging Colony’s back office infrastructure, which is largely located in Santa Monica, California. Each investment platform benefits from its synergistic relationship with one another. Because the

 

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platforms target different strategies and return profiles, the potential conflicts of interest are reduced. The platforms comprise:

 

    Debt funds that seek primarily distressed investments that Colony Capital believes can generate gross mid-teens returns using moderate leverage, with a focus on opportunities emanating from the dislocation in the credit markets, including investments in FDIC loan portfolios, other loan portfolios, originated and acquired loans, special situation investments and CMBS debt securities.

 

    Opportunity funds focused on equity investment opportunities that Colony Capital believes may generate levered gross returns in excess of 20%, including asset-specific real estate funds and global and regional opportunity funds focused on, among other things, investments in single family residential rental homes, investments in operating companies with a significant dependence upon real estate, investments in commercial developments, direct investments in real estate and investments in performing and non-performing senior and junior mortgages.

 

    U.S. value-added real estate funds that are managed by CRP and focused on real estate investments in industrial, office, multifamily and retail properties located in the United States that Colony Capital believes can generate levered gross returns of 12-15%.

Regulation as an Investment Adviser

Colony Capital is a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”). As a result of our acquisition of Colony Capital’s business pursuant to the Combination, we or one or more of our subsidiaries will register with the SEC as an investment advisor under the Investment Advisers Act. Therefore, we will become subject to the anti-fraud provisions of the Investment Advisers Act and to fiduciary duties derived from these provisions that apply to our relationships with the investment funds that we manage. These provisions and duties impose restrictions and obligations on us with respect to our dealings with our fund investors and our investments, including, for example, restrictions on agency, cross and principal transactions. We or our registered investment adviser subsidiaries will be subject to periodic SEC examinations and other requirements under the Investment Advisers Act and related regulations primarily intended to benefit advisory clients. These additional requirements relate, among other things, to maintaining an effective and comprehensive compliance program, recordkeeping and reporting requirements and disclosure requirements. The Investment Advisers Act generally grants the SEC broad administrative powers, including the power to limit or restrict an investment adviser from conducting advisory activities in the event it fails to comply with federal securities laws. Additional sanctions that may be imposed for failure to comply with applicable requirements include the prohibition of individuals from associating with an investment adviser, the revocation of registrations and other censures and fines.

 

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INTRODUCTORY NOTE TO PROPOSALS 1 AND 2

Pursuant to the Contribution Agreement, the Company has prepared this proxy statement with input from Colony Capital under the direction of the Special Committee, which is comprised of independent and disinterested directors who are not affiliated with Colony Capital. The Special Committee unanimously recommends, and the Board recommends by unanimous vote of those present, that you vote to (1) approve the Issuances, (2) approve the Charter Amendments, and (3) approve the Adjournment Proposal. If any of the Issuances or Charter Amendments are not approved by stockholders, the Combination will not be consummated.

PROPOSAL 1: THE ISSUANCES

The Consideration that will be paid in the Combination, including pursuant to the Colony Mark Transfer Agreement, includes equity to be issued by us and equity to be issued by OP. In particular, in order to effect the Combination, the Contribution Agreement and the Colony Mark Transfer Agreement require the issuance of (i) shares of our Class A Common Stock, (ii) shares of our Class B Common Stock, which under certain circumstances may convert into shares of Class A Common Stock on a one-for-one basis, and (iii) OP Units, which under certain circumstances may be redeemed for shares of Class A Common Stock on a one-for-one basis. These Issuances will be made without registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act. This Proposal 1 is to consider and vote upon the proposal to make these Issuances, which the Special Committee has determined are advisable to, and in the best interests of, the Company and its stockholders. The Special Committee has recommended the submission of the proposal to make the Issuances for stockholder approval at the Special Meeting.

The Issuances

In connection with the Combination, we will issue up to approximately 3.94 million shares of Class A Common Stock and up to 665,593 shares of Class B Common Stock, and OP will issue up to approximately 25.22 million OP Units. Each share of Class B Common Stock will be, at the holder’s option, convertible into one share of Class A Common Stock and will convert automatically into one share of Class A Common Stock upon the transfer of such share or of certain OP Units to one or more non-qualified transferees or any qualified transferee of such share or OP Units ceasing to be a qualified transferee. See “Proposal 2(a)—Amendment to Create Class B Common Stock” beginning on page 86 for a more detailed description of the terms of the Class B Common Stock. Each OP Unit will be redeemable, subject to the terms and conditions set forth in the operating agreement of OP, at the holder’s option, for cash equal to the average closing price of Class A Common Stock for the ten consecutive trading days immediately preceding the date we receive a notice of redemption; provided, that we may choose, at our sole discretion, to satisfy this redemption right by exchanging such OP Units for shares of Class A Common Stock on a one-for-one basis, in lieu of cash.

The above consideration represented a value of $657.5 million at the time of the announcement of the transaction based on a reference price that equated to $22.05 per share (the “Reference Price”) (which would have a current value of approximately $738.3 million when using the volume-weighted average closing price on the NYSE of the Company’s common stock over a 10-day trading period ending February 13, 2015 of $24.76 (the “VWAP”)). Pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement, the Reference Price was used to determine the number of shares and OP Units to be issued to the Contributors and the Mark Transferor in the Combination. The Reference Price was the higher of (x) the volume-weighted average closing price of the Company’s common stock over the 30 trading days prior to the initial announcement of the transaction, and (y) the third quarter 2014 “fair value” Company share price, which the parties agreed would be the fair value of the Company’s net assets on a per share basis as of September 30, 2014, or $22.05 per share. Because the volume-weighted average closing price of the Company’s common stock over the 30 trading days prior to the initial announcement of the transaction was lower than $22.05 per share, the Reference Price was $22.05 per share.

 

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The aggregate potential consideration consists of:

 

    fixed upfront consideration to be paid in a combination of up to approximately 2.83 million shares of Class A Common Stock, 566,635 shares of Class B Common Stock and approximately 21.44 million OP Units, representing a value of $547.5 million at the time of the announcement of the Combination based on the Reference Price (and which would have a current value equal to approximately $614.8 million when using the VWAP), subject to certain adjustments as described below; and

 

    contingent consideration to be paid in a combination of up to approximately 1.11 million shares of Class A Common Stock, 98,958 shares of Class B Common Stock and approximately 3.78 million OP Units, representing a value of up to approximately $110.0 million at the time of announcement based on the Reference Price (and which would have a current value of up to approximately $123.5 million when using the VWAP), subject to multi-year performance targets for achievement of certain FFO per share targets and capital-raising thresholds from the funds management businesses. If the minimum performance target for either of these metrics is not met or exceeded, the contingent consideration paid in respect of the other metric would not be paid out in full.

In connection with the Combination, the upfront consideration is subject to upward and downward adjustments at the Closing in respect of cash, indebtedness and net working capital. If the closing adjustment results in an increase to the upfront consideration, such adjustment will, subject to the applicable cap, be paid in cash and to the extent such adjustment exceeds the applicable cap, will increase the number of OP Units to be issued in the Combination. If the closing adjustment results in a decrease to the upfront consideration, such adjustment will reduce the number of OP Units to be issued in the Combination.

Up to 151,520 shares of Class A Common Stock, 13,494 shares of Class B Common Stock and 515,258 OP Units, representing $15.0 million of the contingent consideration at the time of announcement based on the Reference Price (and which would have a current value of approximately $16.8 million when using the VWAP) may be reallocated to upfront consideration if the volume-weighted average closing price of the Company’s common stock over the 10 trading days prior to the tenth calendar day preceding the date of the Special Meeting were to exceed $24.05, with the full amount reallocated if such volume-weighted average closing price of the Company’s common stock were to equal or exceed $27.05. For example, if the 10-day volume-weighted average closing price of our common stock for such period were $24.76 (VWAP) upfront consideration would be increased, and contingent consideration decreased, by 35,860 shares of Class A Common Stock, 3,194 shares of Class B Common Stock, and 121,944 OP Units representing $3.6 million of the re-allocated consideration based on the Reference Price (and which would have a current value of approximately $4.0 million when using the VWAP).

The number of shares of Class A Common Stock, shares of Class B Common Stock and OP Units issuable as consideration will be subject to reduction for a portion of any transaction expenses of Colony Capital paid on its behalf by the Company.

In connection with the Combination, the Company and OP have entered into the Colony Mark Transfer Agreement with the Mark Transferor pursuant to which the Mark Transferor will transfer the Colony Mark to OP in exchange for consideration to be paid in the form of up to 151,355 shares of our Class A Common Stock and up to 665,593 shares of our Class B Common Stock, including (i) fixed upfront consideration with a value of $15.0 million based on the Reference Price (and $16.8 million based on the VWAP) to be paid at the closing under the Colony Mark Transfer Agreement, subject to certain adjustments, and (ii) contingent consideration with a value of up to approximately $3.0 million based on the Reference Price (and $3.4 million based on the VWAP) if earned over time under the same multi-year performance targets required for receipt of the contingent consideration under the Contribution Agreement. Contingent consideration with a value of up to $410,959 based on the Reference Price (and $461,467 based on the VWAP) will be reallocated to upfront consideration if the volume-weighted average closing price of the Company’s common stock over the 10 trading days prior to the tenth calendar day preceding the date of the Special Meeting were to exceed $24.05.

 

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An illustrative allocation of the upfront consideration and contingent consideration to certain of the Contributors and the Mark Transferor is set forth below. Such illustrative allocation does not reflect any adjustment for transaction expenses that may be paid by the Company on behalf of the Contributors and the Mark Transfer at the Closing, and does not reflect the potential reallocation of contingent consideration to upfront consideration at the Closing.

Upfront Consideration

 

     OP Units      Class A
Common
Stock
     Class B
Common
Stock
 

Colony Capital

     18,475,972         —           —     

CCH I

     1,639,580         —           —     

FHB LLC

     944,103         —           —     

Mr. Saltzman

     377,642         2,712,363         —     

New Colony Holdings, LLC

     —           113,637         566,635   
  

 

 

    

 

 

    

 

 

 

Total

  21,437,297      2,826,000      566,635   
  

 

 

    

 

 

    

 

 

 

Contingent Consideration

 

     OP Units      Class A
Common
Stock
     Class B
Common
Stock
 

Colony Capital

     2,850,899         —           —     

CCH I

     662,103         —           —     

FHB LLC

     189,683         —           —     

Mr. Saltzman

     75,873         1,073,429         —     

New Colony Holdings, LLC

     —           37,718         98,958   
  

 

 

    

 

 

    

 

 

 

Total

  3,778,558      1,111,147      98,958   
  

 

 

    

 

 

    

 

 

 

Reasons for the Issuances

The Special Committee

In evaluating the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement, and the other transactions contemplated by the Contribution Agreement, the Special Committee consulted with its legal and financial advisors. In reaching its determination, the Special Committee considered a number of factors, including the following material factors which the Special Committee viewed as supporting its decisions with respect to the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement, and the other transactions contemplated by the Contribution Agreement.

 

    the belief that the Combination would be accretive to net income and FFO per share on an annualized basis after excluding non-cash purchase accounting adjustments;

 

    the positive market reaction on November 4, 2014 to the announcement of a non-binding agreement regarding the Issuances, including positive coverage by research analysts and the Company’s share price outperformance of its peers and the broader market since the announcement;

 

    the belief that internalization of the Company’s external Manager could eliminate perceived or actual existing conflicts of interest between the Company and Colony Capital;

 

    the belief that increased ownership of the Company by certain of the Company’s officers and directors would more directly align the interests of such officers and directors with those of current stockholders;

 

   

the belief that the internalization of its external Manager would enable the Company to realize efficiencies arising from an internally managed structure in that the Company will pay for

 

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management, advisory, acquisition and development services directly rather than paying a third-party fees for such services, thereby enabling the Company to both eliminate the profits that were previously being realized by the Manager for providing such services and potentially allowing the Company in the future to raise additional equity without a proportionate increase in the cost of managing the Company that would likely result had the Company continued to be externally managed;

 

    the belief that the Combination would result in a reduction in the Company’s operating expenses, including as a result of replacing management fees paid to Colony Capital with directly incurred costs;

 

    the Company’s ability, through the internalization of its external Manager, to control key functions that are important to the growth of its business;

 

    enhanced revenue to the Company from the addition of Colony Capital’s in-place, fee-generating arrangements with third parties;

 

    enhanced simplicity by virtue of unifying all of the Company’s and Colony Capital’s investment activity and resources under a single, transparent corporate structure;

 

    the belief that the transactions may attract new investors to the Company and improve the Company’s ability to raise capital;

 

    the terms and conditions of the Contribution Agreement and related agreements, including the type and amount of consideration to be paid and the representations, warranties, covenants, conditions to the Closing and indemnification obligations set forth therein, together with the material terms of the ancillary agreements entered into or to be entered into in connection with the Combination;

 

    the employment agreements and restrictive covenant agreements entered into by Messrs. Barrack, Saltzman, Freeman, Harmeling, and Brauer, and the expectation that additional key executives, including Messrs. Sanders, Tangen and Traenkle would enter into employment and restrictive covenant agreements between signing and closing;

 

    the lock-up agreements entered into by Mr. Barrack and Colony Capital, CCH I, Mr. Saltzman, and FHB LLC;

 

    the belief that as the Company continues its expansion into equity or equity-like investments, an internal management structure (which predominates for equity REITs, as opposed to traditional mortgage REITs) would become more expected and retaining an external management structure would be more likely to lead to resistance from existing and potential investors;

 

    the fact that the approval of the Issuances is subject to the approval of the Company’s common stockholders and the right of the Company’s common stockholders to vote against the Issuances for any reason;

 

    the right of the Special Committee to withdraw or alter its recommendation in favor of the Issuances, subject to the standards, procedures and termination and expense reimbursement provisions of the Contribution Agreement; and

 

    the opinion of Morgan Stanley, dated December 22, 2014, to the Special Committee as to the fairness to the Company, from a financial point of view and as of such date, of the consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement, which opinion was subject to the qualifications, assumptions and limitations and other matters Morgan Stanley considered relevant, as more fully described in “—Opinion of the Special Committee’s Financial Advisor” beginning on page 59.

The Special Committee also took into account the following material factors. Although the Special Committee viewed these as potentially negative factors with respect to the Combination, the Special Committee believed these factors were outweighed by the positive factors set forth above:

 

   

existing potential conflicts of interest between the Company and Colony Capital, including the respective positions of the Company’s management team and certain directors with the Company and

 

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Colony Capital and the compensation and/or other benefits to be received by such persons, either directly or indirectly, as a result of the transactions, as well as the fact that each of Messrs. Barrack and Saltzman will have a direct or indirect interest in the consideration paid and could make substantial profits as a result of the Combination;

 

    the significant costs involved in connection with completing the Issuances and other transactions contemplated by the Contribution Agreement, the substantial management time and effort required to complete the Issuances and the related disruption to operations of the Company;

 

    the potential liabilities associated with the direct employment of personnel; and

 

    the potential liabilities that the Company may inherit from Colony Capital as a result of the Combination that would not be covered by the indemnities in the Contribution Agreement.

The foregoing discussion of the factors considered by the Special Committee is not intended to be exhaustive and is not provided in any specific order or ranking, but rather includes material factors considered by the Special Committee. In reaching its decision regarding the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement and the other transactions contemplated by the Contribution Agreement, the Special Committee did not quantify or assign any relative weights to the factors considered and individuals may have given different weights to different factors. The Special Committee conducted an overall review of the factors considered and determined that, in the aggregate, the potential benefits considered outweighed the potential risks or possible negative consequences of approving the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement and the other transactions contemplated by the Contribution Agreement.

The Board

The Board approved the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement and the other transactions contemplated by the Contribution Agreement, having determined that they are advisable to, and in the best interests of, the Company and its stockholders. The Board based its determination primarily on:

 

    the factors considered by and the recommendation of the Special Committee; and

 

    the extensive negotiations of the Special Committee with Colony Capital and their respective advisors.

The foregoing discussion of the factors considered by the Board is not intended to be exhaustive and is not provided in any specific order or ranking, but rather includes material factors considered by the Board. In reaching its decision regarding the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement and the other transactions contemplated by the Contribution Agreement, the Board did not quantify or assign any relative weights to the factors considered and individuals may have given different weights to different factors.

Background of the Issuances

At this time, the Company is managed by our Manager, a wholly owned subsidiary of Colony Capital, in exchange for a fee pursuant to a management agreement. On May 6, 2014, Thomas J. Barrack, Jr., the Founder, Chairman and Chief Executive Officer of Colony Capital and Executive Chairman of the Company, sent a letter to our Board proposing, among other things, that the Company (i) internalize the Manager, including all key senior management, into the Company and cancel the Company’s management agreement with the Manager, (ii) acquire the management contracts of substantially all of Colony Capital’s direct real estate and credit funds and related investment and co-investment vehicles, including each Colony Distressed Credit Fund, as well as funds managed by CRP, (iii) acquire the right to conduct future real estate activities under the Colony brand and (iv) acquire Colony Capital’s asset management company. The May 6 letter indicated that the only material assets that would be retained were certain legacy opportunity funds that were beyond their commitment periods, Colony Capital’s 53.0% stake in the external manager of CAH, and certain corporate investments made by Colony Capital.

 

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On May 8, 2014, immediately following the regularly-scheduled quarterly Board meeting, the Board met in executive session to discuss the May 6 letter. At that meeting, the Board discussed the formation of the Special Committee, which would be comprised of all of the then-current independent directors of the Board at such time, namely George G. C. Parker, John A. Somers and John L. Steffens. The Board also discussed the necessity for the Special Committee to have the power to retain its own legal counsel and financial advisors and to have other powers typical of an independent special committee, and acknowledged that prospective members of the Special Committee would begin the process of engaging the Special Committee’s own legal counsel and financial advisors.

On May 19, 2014, the independent directors met with attorneys from Wachtell Lipton to discuss the general role and responsibilities of a special committee and the engagement of Wachtell Lipton as legal counsel to the independent directors and the Special Committee for purposes of evaluating the proposed transaction. The independent directors resolved that Wachtell Lipton would serve as legal counsel to the independent directors and the Special Committee and discussed potentially engaging Morgan Stanley as financial advisor to the Special Committee, including a review of Morgan Stanley’s qualifications and past engagements.

On May 28, 2014, Mr. Barrack sent a letter to the independent directors proposing a valuation of $610.0 million for the business proposed to be sold in the May 6 letter. The proposed consideration would be paid entirely in equity of the Company and would be subject to a lock-up consistent with transactions of this type. That same day, the independent directors met with Morgan Stanley to discuss the May 6 letter and the May 28 letter. The next day, the independent directors met again to elect Mr. Steffens as the chairman of the Special Committee, including a deliberation of Morgan Stanley’s expertise, competence and prior experience.

On June 4, 2014, the Board, including all of the then-current independent directors, executed a unanimous written consent resolving to formally establish the Special Committee and give that committee the full power to investigate, evaluate, develop, explore, and negotiate the proposed transaction or any alternative transactions. The Board also agreed not to recommend, authorize, approve, or otherwise endorse the proposed transaction unless such transaction had been recommended by the Special Committee. The Special Committee met again on June 6, 2014 and June 19, 2014 with Wachtell Lipton to further discuss the formal retention of Morgan Stanley as financial advisor to the Special Committee. The Board also ratified all actions that had been taken by the independent directors and the Special Committee up to that time.

The following week, on June 11, 2014, the Company publicly disclosed in a current report on Form 8-K the receipt of Colony Capital’s proposal and the formation of the Special Committee.

On June 19, 2014, the Special Committee, accompanied by its advisors, Morgan Stanley and Wachtell Lipton, met with representatives from Colony Capital, Goldman, Sachs & Co., Colony Capital’s financial advisor (“Goldman Sachs”), and Skadden, Arps, Slate, Meagher & Flom LLP, Colony Capital’s legal advisor (“Skadden”), to discuss the proposed transaction. At the meeting, Colony Capital and Goldman Sachs provided additional information regarding the proposed structure of the transaction, including assets and personnel proposed to be contributed and excluded, the strategic rationale for the proposed transaction, and certain assumptions underlying Colony Capital’s valuation of the proposed transaction.

Following this meeting, Morgan Stanley and Wachtell Lipton sent Goldman Sachs and Skadden a list of diligence requests in connection with the proposed transaction. Skadden also sent Wachtell Lipton a proposed non-disclosure agreement governing the exchange of information in connection with the transaction. An online data site for the proposed transaction was opened on June 25, 2014 and, following negotiations, the non-disclosure agreement was executed on July 1, 2014. For the next several months through signing, both Morgan Stanley and Wachtell Lipton conducted financial and legal due diligence regarding the Colony Capital assets and engaged in numerous discussions with Goldman Sachs, management of Colony Capital and Skadden on these matters. On July 9, 2014, the Special Committee, Morgan Stanley, and Wachtell Lipton met telephonically to discuss initial due diligence findings and analyses in process.

 

 

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On August 5, 2014, the Special Committee met with Morgan Stanley and Wachtell Lipton to discuss the proposed transaction. At that meeting, the Special Committee and its advisors discussed, among other things, diligence findings and observations to-date, the strategic rationale of the combined business, preliminary valuations of the proposed transaction, an overview of the Company’s management contract with its Manager, structural considerations, and a summary of Colony Capital’s private funds business. Following that meeting and during the rest of the month of August, Morgan Stanley and Wachtell Lipton continued to request additional transaction detail and conduct due diligence investigations.

On September 4, 2014, the Special Committee met again with Morgan Stanley and Wachtell Lipton to discuss the proposed transaction. Specifically, Morgan Stanley and Wachtell Lipton presented an update on diligence, financial analysis, an overview of the CRP business and potential next steps. Based on these discussions, the Special Committee directed Morgan Stanley to prepare a counter-offer that would include details surrounding the structure and would also include in the transaction previously excluded aspects of the Colony Capital business (e.g., legacy opportunity funds). On September 8, 2014, the Special Committee, Morgan Stanley and Wachtell Lipton held a telephonic discussion to discuss the counter-proposal.

On September 11, 2014, Morgan Stanley sent Colony Capital and Goldman Sachs a counter-proposal. This counter-proposal offered upfront consideration of $425.0 million, base contingent consideration of up to $100.0 million, and additional contingent consideration of up to $50.0 million, for total potential consideration of $575.0 million. This counter-proposal also offered incremental consideration of $25.0 million for the 50% ownership interest in CRP that was not owned by CRM. The proposed contingent consideration could be earned by achieving certain performance targets related to private capital fundraising, opportunity capital fundraising, and cumulative core earnings excluding realized promotes and incentive fees. The counter-proposal also proposed that Colony Capital use its best efforts to include certain legacy real estate funds and the Company’s purchase of the Colony trademark, both at valuations to be agreed upon (the consideration referenced in this paragraph was not inclusive of any consideration for the certain legacy real estate funds and the Colony trademark). The counter-proposal also proposed a lock-up and vesting of the consideration, and employment agreements with Mr. Barrack, Richard Saltzman, Darren Tangen, and Kevin Traenkle. In the following week, Morgan Stanley, Goldman Sachs and representatives of Colony Capital had detailed discussions concerning the September 11 counter-proposal.

On September 17, 2014, the Special Committee, Morgan Stanley and Wachtell Lipton met with representatives of Colony Capital, including Mr. Barrack and Mr. Saltzman, Goldman Sachs, and Skadden to discuss the September 11 counter-proposal, including the rationale for the transaction, the amount and target thresholds for the contingent consideration and the scope of the assets to be sold. Morgan Stanley and Goldman Sachs had subsequent discussions concerning the September 11 counter-proposal over the next several days.

On September 23, 2014, Goldman Sachs sent a revised proposal to the Special Committee and its advisors. That same day, Goldman Sachs and representatives of Colony Capital met with Morgan Stanley to discuss the September 23 proposal and explain the revised terms. The September 23 proposal included upfront consideration of $575.0 million, contingent consideration of $60.0 million to be earned based on the achievement of certain capital raising targets for real estate funds, additional contingent consideration of $15.0 million for exceeding such real estate capital raise targets, and an additional $15.0 million of contingent consideration for achieving certain capital raising targets for non-real estate funds. The scope of the September 23 proposal included the 50% of CRP not owned by CRM and all management agreements and related personnel, assets and liabilities associated with Colony Capital’s legacy opportunity funds and other businesses (excluding Colony American Homes), including Colony Capital’s non-real estate related businesses. The September 23 proposal provided for a 3-year lock-up period applicable to the recipients of the Company’s shares in the transaction and additional exceptions to the lock-up, including for sales to cover taxes.

Finally, the September 23 proposal provided detailed terms of Messrs. Barrack, Saltzman, Tangen and Traenkle’s employment agreements, including compensation, non-competition provisions and five-year terms for

 

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Messrs. Barrack and Saltzman and three year terms for Messrs. Tangen and Traenkle. The proposed base compensation for the executives included an annual base salary of $7.5 million for Mr. Barrack, $2 million for Mr. Saltzman and $350,000 for Messrs. Tangen and Traenkle, plus annual and long-term incentive compensation as determined by the Board.

Morgan Stanley and Wachtell Lipton continued to have discussions with Goldman Sachs and Skadden regarding the proposed transaction, as well as with Hogan Lovells US LLP, the Company’s REIT counsel (“Hogan”), to discuss tax issues related to the proposed transaction, including tax structuring and the Company’s ability to maintain its REIT status. In late September, the Special Committee also engaged the Semler Brossy Consulting Group, LLC (“Semler Brossy”), an independent executive compensation consulting firm, to advise the Special Committee on the proposed terms of the employment agreements.

On October 6, 2014, the Special Committee met with Morgan Stanley and Wachtell Lipton to discuss the proposed transaction. The members of the Special Committee received an update on the diligence process, reviewed proposals received from Colony Capital and discussed possible counter-proposals. The Special Committee also discussed potential elements of the existing Colony Capital business that would not be transferred as part of the proposed transaction (and the effect that such non-transferred businesses would have on the valuation of Colony Capital’s business).

On October 8, 2014, Morgan Stanley circulated a revised counter-proposal to Goldman Sachs, which proposed the inclusion of 100% of Colony Realty Partners, all legacy real estate funds, all non-real estate activities of Colony Capital, and the Colony trademark, in addition to the components included in all prior proposals referenced herein. The components of this proposal are the same as included in all subsequent proposals outlined herein. The counter-proposal proposed total potential consideration for the transaction of $635.0 million, consisting of $500.0 million of upfront consideration and $135.0 million of contingent consideration. The contingent consideration consisted of $40.0 million to be earned based on achievement of a target tied to FFO, $40.0 million based on achievement of real estate capital raise targets and $15.0 million based on achievement of non-real-estate capital raise targets. In addition, the counter-proposal contained provisions for additional consideration of up to $20.0 million for exceeding certain FFO targets and additional consideration of $20.0 million for exceeding certain real estate capital raise targets.

On October 15, 2014, Goldman Sachs sent Morgan Stanley a revised proposal from Colony Capital proposing total potential consideration of $655.0 million, consisting of $560.0 million of upfront consideration and $95.0 million of contingent consideration. The contingent consideration consisted of $30.0 million to be earned based on achievement of a target tied to FFO, $30.0 million based on achievement of real estate capital raise targets, and $15.0 million based on achievement of non-real-estate capital raise targets. In addition, the proposal contained provisions for additional consideration of up to $10.0 million tied to exceeding FFO targets and additional consideration of $10.0 million tied to exceeding real estate capital raise targets.

On October 20, 2014, the Special Committee met with Semler Brossy, Morgan Stanley and Wachtell Lipton. Semler Brossy presented its preliminary analysis of the proposed terms of the employment agreements for Messrs. Barrack, Saltzman, Tangen and Traenkle and the preliminary results of their market compensation benchmarking analysis of the Company’s peer group. The Special Committee and Semler Brossy discussed these analyses and a possible counter-proposal to the September 23 proposal, based on these preliminary analyses.

On October 20, 2014, Mr. Steffens met with Mr. Saltzman to discuss the amount and structure of the consideration and the scope of the assets to be transferred in the proposed transaction. On October 21, Mr. Steffens and Mr. Barrack discussed the acquisition of the Colony Capital trademark and associated intellectual property in association with the proposed transaction.

On October 23, 2014, Morgan Stanley provided Goldman Sachs with a revised term sheet, in which the Special Committee proposed total potential consideration of $647.5 million, consisting of $532.5 million of

 

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upfront consideration and $115.0 million of contingent consideration. The contingent consideration consisted of $33.3 million to be earned based on achievement of a target tied to FFO, $33.3 million based on achievement of real estate capital raise targets, and $15.0 million based on achievement of non-real-estate capital raise targets. In addition, the counter-proposal contained provisions for additional consideration of up to $16.7 million tied to exceeding FFO targets and additional consideration of $16.7 million tied to exceeding real estate capital raise targets. The term sheet also proposed a value of $15.0 million for the Colony Capital name, trademark, and related intellectual property, and a compensation counter-proposal for Mr. Barrack of a total annual base salary plus target annual bonus totalling $5.0 million.

On October 24, 2014, the Special Committee met with Semler Brossy, Morgan Stanley and Wachtell Lipton specifically to discuss compensation-related items. Semler Brossy provided their final market compensation benchmarking analysis summarizing the compensation practices among the Company’s peer companies, including with respect to base salary, annual target bonus opportunities, long-term target equity compensation opportunities, as well as severance and change in control arrangements at the Company’s peers. Semler Brossy and Wachtell Lipton also reviewed the proposed compensation terms for each of Messrs. Barrack, Saltzman, Tangen and Traenkle with the Special Committee in light of Semler Brossy’s benchmarking analysis. Semler Brossy also presented its recommendations relating to the proposed compensation arrangements and terms of employment for Mr. Barrack and Mr. Saltzman, as well as Messrs. Tangen, Traenkle and Ronald Sanders, which the Special Committee then discussed.

On October 28, 2014, Mr. Steffens held a telephonic meeting with Mr. Saltzman to discuss the latest proposals, including the amount and structure of the consideration and the scope of the assets to be included.

On October 29, 2014, Colony Capital provided the Special Committee with an updated term sheet reflecting Mr. Steffens’ and Mr. Saltzman’s discussions. The term sheet provided for total consideration of consisting of $547.5 million of upfront consideration (including the value of the Colony Capital intellectual property) and $110.0 million of contingent consideration, for an aggregate consideration of approximately $657.5 million. The contingent consideration consisted of $31.6 million to be earned based on achievement of a target tied to FFO, $31.6 million based on achievement of real estate capital raise targets, and $15.0 million based on achievement of non-real-estate capital raise targets. In addition, the term sheet contained provisions for additional consideration of up to $16.0 million tied to exceeding FFO targets and additional consideration of $16.0 million tied to exceeding real estate capital raise targets. The term sheet also provided that Ronald M. Sanders, the Company’s Chief Legal Officer and Secretary, will enter into employment agreements with the Company on terms similar to Darren Tangen and Kevin Traenkle. The term sheet also proposed a closing net working capital balance of negative $5.0 million to be referenced in closing adjustments. Furthermore, the term sheet specified that the reference price for the Consideration would be the higher of the 30 day volume-weighted average price prior to the initial announcement of the transaction or the Company’s reported fair value as of September 30, 2014. Consistent with the October 23 proposal, the term sheet reflected an annual base salary and annual target bonus of $5.0 million totaling for Mr. Barrack.

On October 30, 2014 Skadden provided Wachtell Lipton with a draft memorandum of understanding (“MOU”), which was intended to make the negotiated term sheet a binding agreement and was intended to be filed publicly.

On October 31, 2014, the Special Committee held a telephonic meeting with Morgan Stanley and Wachtell Lipton in attendance. The Special Committee and its advisors discussed the need for, and advantages and disadvantages of, entering into a binding agreement on a term sheet basis, advantages and disadvantages of publicly disclosing the existence and terms of the term sheet and key terms that would be disclosed, if any public announcement were to occur. The Special Committee concluded that the term sheet should remain a non-binding agreement in principle, but that the public disclosure of the existence and material terms of the proposed transaction was in the best interests of the Company and its stockholders. Over the next few days, Morgan Stanley and Wachtell Lipton discussed with Goldman Sachs and Skadden the content of the potential public disclosure, subject to final review by the Special Committee.

 

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On November 4, 2014, the Special Committee met with representatives of Morgan Stanley and Wachtell Lipton in person at Colony Capital’s offices to review the term sheet and the public disclosures regarding the proposed transaction. Wachtell Lipton and Morgan Stanley provided the Special Committee with an overview of the proposed transaction process to-date. Morgan Stanley reviewed key terms of the MOU, summarized the Colony Capital assets to be included in the proposed transaction, and discussed the amount and structure of consideration (including the contingent nature of much of the consideration). Morgan Stanley also orally presented its preliminary financial analysis of the consideration to be paid by the Company in the Combination, which valued Colony Capital’s business using a number of valuation methodologies, including a discounted cash flow analysis, a precedent transactions and comparable companies analysis, and a sum-of-the-parts analysis. The Special Committee and its advisors then discussed the content of the public announcement of the proposed transaction, confirming that the announcement reflected the non-binding nature of the agreement, and the Special Committee unanimously decided to announce that the parties had reached a non-binding agreement in principle. Shortly following the decision reached at the meeting, a press statement announcing the non-binding agreement was released.

On November 10, 2014, Skadden provided Wachtell Lipton with the first draft version of the Contribution Agreement. Drafts of additional, ancillary transaction documents were provided over the next six weeks.

On November 16, 2014, Skadden provided Wachtell Lipton with draft employment agreements for key employees (and other ancillary agreements relating to such key employees). Between this date and the date of signing, Skadden and Wachtell Lipton, along with counsel representing individual employees, reviewed these agreements and exchanged additional drafts.

On November 20, 2014, the Special Committee met with Morgan Stanley and Wachtell Lipton to discuss the material terms of the draft Contribution Agreement.

Following this discussion with the Special Committee, on November 21, 2014, Wachtell Lipton provided an updated version of the Contribution Agreement to Skadden, which included, among other things, changes to details of the amount and structure of the consideration not fully specified in the term sheet, the scope of representations and warranties, constraints on the Special Committee’s ability to change its recommendation or terminate the proposed transaction, and indemnity provisions. Over the next four weeks, Wachtell Lipton and Skadden continuously exchanged drafts of the Contribution Agreement and ancillary transaction documents.

Between November 20, 2014 and mid-December, 2014, Morgan Stanley had several conversations with Goldman Sachs to discuss the reference metrics for the contingent consideration and the associated documentation and calculations.

On December 10, 2014, the Special Committee held a telephonic meeting, with Morgan Stanley and Wachtell Lipton in attendance, to discuss outstanding issues in the transaction agreements.

On December 15, 2014, Mr. Steffens held a telephonic meeting with Mr. Saltzman to discuss these remaining issues, including, among other things, the terms of fund raising that would count towards the capital raise targets, the allocation of certain tax risks, scope of and limitations on indemnification obligations, whether the Company would be obliged to reimburse Colony Capital expenses if its stockholders decline to approve the proposed transaction, the conduct of the business to be transferred prior to the Closing, employment agreements with the principals of CRP, CEO succession and the compensation and perquisites of Messrs. Barrack and Saltzman. In its review of the proposed compensation and perquisites of Messrs. Barrack and Saltzman, the Special Committee considered additional market benchmarking data provided by Semler Brossy that summarized the typical compensation and perquisites provided to executives in the Company’s peer group. The parties continued to exchange revised drafts of the Contribution Agreement and ancillary transaction documents from December 15 to December 17.

On December 17, 2014, Mr. Steffens held a meeting with, and on December 18, 2014, Mr. Steffens held a telephonic meeting with, Mr. Saltzman, to discuss these open points further, as well as matters relating to the

 

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scope of outside activities that Messrs. Barrack and Saltzman would be permitted to undertake and the consequences of breaching such obligations.

On December 19, 2014, Mr. Steffens, Morgan Stanley and Wachtell Lipton held a telephonic meeting with Mr. Saltzman and other representatives from Colony Capital, Skadden, Goldman Sachs, and counsel to Mr. Barrack and Mr. Saltzman, to resolve open transaction issues. During that call, the parties reached agreement on the majority of the outstanding open items in the manner reflected in the final transaction agreements, including with respect to the terms of funds that would be counted towards the capital raise targets, the absence of an expense reimbursement obligation if the Company’s stockholders fail to approve the transaction, the scope of and limits on indemnification obligations, the closing condition that employment agreements be entered into with four of six named executives (including the principals of CRP), that Mr. Barrack would have no contractual rights regarding CEO succession, and that Messrs. Barrack and Saltzman’s outside passive investment activities would be less regulated and give rise to fewer remedies than active management of competitive enterprises. Following the meeting, Wachtell Lipton provided Skadden with updated drafts of the transaction documents, including the draft Contribution Agreement.

From December 20, 2014 until signing, Skadden and Wachtell continued to exchange multiple drafts of the transaction documents, including forms of employment agreements with Messrs. Barrack, Saltzman and the principals of CRP.

On December 22, 2014, Mr. Steffens, Morgan Stanley and Wachtell Lipton held a telephonic meeting with Mr. Saltzman and other representatives from Colony Capital, Goldman Sachs, Skadden and counsel to the various executives. In this meeting, the material remaining issues were resolved, including an agreement by the OP to maintain a fixed amount of liabilities on its balance sheet to ameliorate certain tax risks and details of Messrs. Barrack and Saltzman’s permitted outside activities and consequences of breaching such obligations.

Subsequently, the Special Committee met telephonically and in person at the offices of Mr. Steffens, along with representatives of Morgan Stanley and Wachtell Lipton. Mr. Steffens provided the group with an update of the transaction process and relevant business issues. Representatives of Wachtell Lipton provided the Special Committee with an overview of its fiduciary duties, reviewed the process that the Special Committee used in order to evaluate and negotiate the contemplated transaction, and reviewed the terms of the proposed transaction. Morgan Stanley then presented its financial analysis of the proposed transaction and delivered to the Special Committee an oral opinion, which was subsequently confirmed by delivery of a written opinion, dated December 22, 2014, addressed to the Special Committee, to the effect that, as of the date of the opinion and based upon and subject to the conditions and limitations set forth therein, the consideration to be paid by the Company pursuant to the transaction agreements is fair from a financial point of view to the Company. The Special Committee then unanimously resolved that the entry into and performance of the transaction documents and the consummation of the transactions contemplated thereby were advisable to, and in the best interests of, the Company and recommended that the Board approve the Company’s execution, delivery and performance of the transaction documents and the consummation of the transactions contemplated thereby. Immediately following the Special Committee meeting, the Board held a telephonic discussion, where all of the members of the Board were present other than Ms. Nancy A. Curtin. Following a report of the Special Committee as to its recommendation and the factors taken into account by the Special Committee, the Board also resolved that the entry into and performance of the transaction documents and the consummation of the transactions contemplated thereby were advisable to, and in the best interests of, the Company and approved the Company’s execution, delivery and performance of the transaction documents and the consummation of the transactions contemplated thereby.

Following these meetings, and extending into December 23, 2014, Wachtell Lipton, Skadden and individual executives’ counsels finalized the transaction documents in preparation for signing. In the morning of December 23, 2014, the parties signed the transaction documents and the Company and Colony Capital released a joint press statement announcing entry into the definitive Contribution Agreement.

 

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Recommendations of the Special Committee and the Board

After careful consideration and upon the unanimous recommendation of the Special Committee, our Board has approved the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement and the other transactions contemplated by the Contribution Agreement and has determined that the Issuances, the Contribution Agreement, the Colony Mark Transfer Agreement, and the other transactions contemplated by the Contribution Agreement are advisable to, and in the best interests of, the Company and its stockholders. The Special Committee and our Board recommends that you vote (1) “FOR” the Issuances, (2) “FOR” the Charter Amendments, and (3) “FOR” the Adjournment Proposal.

Opinion of the Special Committee’s Financial Advisor

The Special Committee retained Morgan Stanley to provide it with financial advisory services in connection with the proposed Combination. The Special Committee selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise and reputation, its knowledge of and involvement in recent transactions in the Company’s industry and its knowledge of the business and affairs of the Company, and its recent involvement in transactions involving real estate alternative asset managers. As part of this engagement, the Special Committee requested that Morgan Stanley evaluate the fairness from a financial point of view to the Company of the Consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement (as described in “Description of the Combination—Consideration to be Paid in the Combination,” beginning on page 93, the “Consideration”). On December 22, 2014, at a meeting of the Special Committee, Morgan Stanley rendered its oral opinion, subsequently confirmed by delivery of a written opinion dated December 22, 2014 that, as of that date and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in the written opinion, the Consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement was fair from a financial point of view to the Company.

The full text of the written opinion of Morgan Stanley to the Special Committee, dated as of December 22, 2014, is attached to this proxy statement as Appendix D and is incorporated herein by reference in its entirety. You should read Morgan Stanley’s opinion and this summary of Morgan Stanley’s opinion carefully and in their entirety for a discussion of the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. This summary is qualified in its entirety by reference to the full text of such opinion. Morgan Stanley’s opinion was directed to the Special Committee, in its capacity as such, and addressed only the fairness from a financial point of view of the Consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement as of the date of such opinion and does not address any other aspects of the Combination. Morgan Stanley’s opinion did not address any other aspects or implications of the Combination. It was not intended to, and does not, constitute advice or a recommendation to any holder of shares of the Company’s common stock as to how to vote at the Special Meeting to be held in connection with the Combination or whether to take any other action with respect to the Combination.

In connection with rendering its opinion, Morgan Stanley, among other things:

 

  (a) reviewed certain publicly available financial statements and other business and financial information of the Company;

 

  (b) reviewed certain internal financial statements and other financial and operating data concerning Colony Capital and the Company, respectively;

 

  (c) reviewed certain financial projections prepared by the managements of the Company and Colony Capital, respectively;

 

  (d) reviewed information relating to certain strategic, financial and operational benefits anticipated from the Combination prepared by the management of the Company;

 

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  (e) discussed the past and current operations and financial condition and the prospects of the Company, including information relating to certain strategic, financial and operational benefits anticipated from the Combination, with senior executives of the Company;

 

  (f) discussed the past and current operations and financial condition and the prospects of the CC Contributed Business, including information relating to certain strategic, financial and operational benefits anticipated from the Combination, with senior executives of Colony Capital;

 

  (g) reviewed the pro forma impact of the Combination on the Company’s earnings per share, cash flow, consolidated capitalization and financial ratios;

 

  (h) reviewed the reported prices and trading activity for the Company’s common stock;

 

  (i) compared the financial performance of the Company and the prices and trading activity of the Company’s common stock with that of certain other publicly traded companies comparable with the Company and its securities;

 

  (j) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions;

 

  (k) participated in certain discussions and negotiations between the Special Committee and Colony Capital, as well as their financial and legal advisors;

 

  (l) reviewed the Contribution Agreement and the Colony Mark Transfer Agreement and certain related documents; and

 

  (m) performed such other analyses and reviewed such other information and considered such other factors as Morgan Stanley deemed appropriate.

In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to it by the Company and Colony Capital, and formed a substantial basis for its opinion. With respect to the financial projections discussed in “Certain Projections” beginning on page 70, including information relating to certain strategic, financial and operational benefits anticipated from the Combination, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best then available estimates and judgments of the respective managements of the Company and Colony Capital of the future financial performance of the Company and Colony Capital. In addition, Morgan Stanley assumed that the Combination would be consummated in accordance with the terms set forth in the Contribution Agreement and the Colony Mark Transfer Agreement without any waiver, amendment or delay of any terms or conditions. Morgan Stanley assumed that, in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed Combination, no delays, limitations, conditions or restrictions would be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed Combination. As discussed with the Special Committee, although Morgan Stanley included the aggregate contingent Consideration in certain of its analyses, Morgan Stanley expressed no opinion as to the likelihood that the milestones upon which these payments are conditioned would be achieved or whether the aggregate contingent Consideration would be paid. Morgan Stanley is not a legal, tax or regulatory advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of the Company and Colony Capital and their legal, tax or regulatory advisors with respect to legal, tax or regulatory matters. Morgan Stanley expressed no opinion with respect to the fairness of the amount or nature of any compensation to any of the Company’s officers, directors or employees, or any class of such persons, relative to any amounts to be paid in the Combination. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of the Company or Colony Capital, nor was it furnished with any such valuations or appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of the date of the opinion. Events occurring after such date may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm its opinion.

 

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Summary of Financial Analyses of Morgan Stanley

The following is a summary of the material financial analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion letter to the Special Committee dated December 22, 2014. The following summary is not a complete description of the financial analyses performed and factors considered by Morgan Stanley in connection with its opinion, nor does the order of analyses described represent the relative importance or weight given to those analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before December 19, 2014, the most recent trading day prior to the presentation of the fairness opinion. Some of these summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. The analyses listed in the tables and described below must be considered as a whole. Assessing any portion of such analyses and of the factors reviewed, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Morgan Stanley’s respective opinion. Furthermore, mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using the data referred to below.

For the purposes of Morgan Stanley analyses described below, Morgan Stanley assumed that the equity value of the Consideration to be paid in the Combination is $657,500,000, which is comprised of $547,500,000 in upfront Consideration paid at the Closing, (including $15,000,000 for the Colony Mark) plus contingent Consideration equal to $110,000,000 and that no adjustments will be made to any component of the Consideration. See “Description of the Combination—Consideration to be Paid in the Combination” beginning on page 93 for a description of the components of Consideration that are, or may be, payable in the Transaction.

In performing its analyses, Morgan Stanley separately analyzed three components of the value being obtained or acquired by the Company as part of the Combination: (i) the estimated cost savings or increase in value to the Company resulting from the Combination, (ii) the private real estate funds business of Colony Capital, and (iii) the non-real estate businesses of Colony Capital. Morgan Stanley then compared the implied value in aggregate of these components to the Consideration being paid in the Combination.

Analyses Relating to Cost Savings or Increase in Value from the Combination

Perpetuity Method—Cost Savings Resulting from the Combination

Morgan Stanley determined the estimated net cost savings to the Company from the Combination by comparing the compensation estimated to be paid to Colony Capital, as its external manager, determined (i) on an annualized basis based on the Company’s total stockholders’ equity as of November 30, 2014 and the estimated core earnings for 2014, and (ii) based on the estimated weighted average total stockholders’ equity for the calendar year 2015 and the estimated core earnings for the same period, with both periods adjusted to normalize the impact of a large, non-traditional investment expected to be monetized in the next 12 to 24 months. The adjustment was calculated by assuming the capital invested in the large, non-traditional investment had been invested in an investment with a return profile more consistent with the Company’s traditional investments and resulted in adjusted incentive fees of $13 million and $16 million for the annualized period and estimated 2015 calendar year, respectively. Morgan Stanley then compared the compensation estimated to be paid by the Company to Colony Capital, as its external manager, as adjusted as described in the previous sentence, against estimates of internal compensation expenses and operating expenses under the pro forma business plan that would be incurred if the Company operated with internal management during each of such periods, assuming, based on guidance from Colony Capital management, that an allocation of the total investment management expenses (including compensation expenses and operating expenses) of the combined businesses on an internalized basis would be attributable to the management of the Company’s business. This comparison resulted in a range of net cost savings of $25 million to $35 million on an annual basis. Morgan Stanley then derived an implied value reference range of total cost savings over time by dividing by a discount rate of 7.2%, which was the weighted average cost of capital of the Company determined on a standalone basis calculated using the capital asset pricing model.

 

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This analysis resulted in an implied reference range for the total cost savings resulting from the Combination over time of $352 million to $485 million.

Discounted Cash Flow Analysis—Cost Savings Resulting from the Combination

Morgan Stanley performed a discounted cash flow analysis to calculate a reference range of implied values for the Company’s estimated cost savings resulting from the Combination based on the present value of the estimated annual cost savings forecasted to be generated during the fiscal years ending December 31, 2015 through December 31, 2020 utilizing internal estimates of the Company’s management and Colony Capital’s management. Morgan Stanley derived a range of implied terminal values by applying a range of multiples of 9.0x to 13.0x, which represented a 2.0x range around the average price to estimated earnings for calendar year 2015 for the comparable companies discussed below in “Comparable Public Companies Analysis—Illustrative Value of the Combination” beginning on page 62 to the cost savings forecasted to result from the Combination in calendar year 2021, assuming 2021 cost savings would be consistent with those in 2020. Present values (as of December 31, 2014) of the forecasted cost savings and the terminal values were then calculated by Morgan Stanley using a discount rate range of 6.2% to 8.2%, representing a 1.0% range around the Company’s weighted average cost of capital of 7.2% determined on a standalone basis using the capital asset pricing model.

This analysis resulted in an implied value reference range for the total cost savings resulting from the Combination of $910 million to $1,271 million.

Comparable Public Companies Analysis—Illustrative Value of the Combination

Morgan Stanley reviewed and compared certain internal financial information and ratios relating to the Company, both on a standalone basis and on a pro forma basis after the Combination, with equivalent publicly available data for companies that share similar business characteristics with the Company to derive an implied value reference range for the equity value to be created as a result of the Combination. For this analysis, Morgan Stanley reviewed the following externally managed mortgage REITs that are publicly traded:

 

    Apollo Commercial Real Estate Finance, Inc.

 

    Ares Commercial Real Estate Corp.

 

    Blackstone Mortgage Trust Inc.

 

    Starwood Property Trust Inc.

For purposes of this analysis, Morgan Stanley analyzed the ratio of share price to consensus estimated earnings for the calendar year 2015 for each of these companies. For each of the comparable companies, this ratio was calculated using its closing price on December 19, 2014 and was based on the most recent publicly available information and Street consensus estimates. Based on the results of this analysis, Morgan Stanley selected a range of 10.0x to 12.0x, representing a 1.0x range around the average of 11.0x price to 2015 estimated earnings of the comparable companies, which it then applied to the Company’s estimated core earnings for the calendar year 2015 determined on a standalone basis of $380 million to derive an implied reference range of the equity value of the Company, as a standalone externally managed company, of $3,793 million to $4,552 million. Morgan Stanley also evaluated the price to 2015 estimated funds from operations multiples of internally managed companies as compared to externally managed companies by comparing the average multiples of price to estimated funds from operations for the calendar year 2015 of a representative set of externally managed REITs from various REIT industry sub-sectors to the corresponding average multiples of a comparable set of internally managed peers from the same REIT industry sub-sector. From this analysis, Morgan Stanley observed that internally managed peer companies typically trade at a price to funds from operations multiple more than 2.0x higher than externally managed companies. Based on the foregoing, Morgan Stanley then applied a range of 12.0x to 14.0x to the Company’s estimated earnings for the calendar year 2015 of $398 million, determined on a standalone basis after an adjustment to reflect the Combination to derive an implied reference range of the equity value of the Company, as an internally managed company, of $4,775 million to $5,572 million.

 

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Based on this analysis, Morgan Stanley compared the implied reference range of equity values for the Company as an externally managed company to those derived as if it were an internally managed company and determined an implied value reference range for the value created by transitioning to an internally managed company of $982 million to $1,019 million.

No company utilized in the comparable company analysis is identical to the Company. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the Company’s control such as the impact of competition on the Company and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of the Company or the industry, or in the financial markets in general.

Analysis of Selected Precedent Transactions—Cost Savings Resulting from the Combination

Morgan Stanley also performed an analysis of selected precedent transactions involving either the internalization of management companies or the acquisition of publicly traded asset management companies that shared certain characteristics with the Combination. Based on publicly available information, Morgan Stanley identified (i) the following twenty publicly announced and completed management internalization transactions occurring since June 1, 2000, and (ii) the following twelve publicly announced and completed transactions involving asset management companies occurring since October 1, 2010:

Selected Precedent Management Internalization Transactions

 

Transaction Announcement Date

  

Acquirer

  

Target

April 2007

   Piedmont Office Realty Trust, Inc.    Wells Real Estate Advisory Services

October 2003

   Cedar Shopping Centers Inc.    Cedar Bay, SKR, Brentway

November 2003

   Centerline Capital Group    Related Capital Company

July 2000

   Inland Real Estate Corporation    Inland Combined Advisory and Management Companies

November 2007

   Retail Properties of America, Inc.    Inland Western Combined Management Companies

October 2006

   Dividend Capital Trust Inc.    Dividend Capital Advisors

June 2000

   Carey Diversified    W.P. Carey & Co.

December 2004

   Inland Retail Real Estate Trust    Inland Combined Management Companies

June 2006

   CNL Hotels & Resorts, Inc.    CNL Hospitality Group

June 2014

   Westfield Retail Trust    Westfield Australia/New Zealand

June 2014

   H&R Real Estate Trust    H&R Property Management

September 2014

   Silver Bay Realty Trust Corp.    Pine River Domestic Management, L.P. and Provident Real Estate Advisors LLC

June 2013

   Cole Credit Property Trust III, Inc.    Cole Holdings Corp.

June 2013

   American Homes 4 Rent    American Homes LLC

February 2012

   American Realty Capital Trust, Inc.    AR Capital

February 2012

   W.P. Carey & Co.    Corporate Property Associates 15, Incorporated

May 2011

   RLJ Lodging Trust    RLJ Development

April 2011

   Predecessor Entities    STAG

February 2011

   Predecessor Entities    Pacific Office Properties Trust, Inc.

September 2009

   Predecessor Entities    Healthcare Trust of America, Inc.

 

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Selected Precedent Asset Management Transactions

 

Transaction Announcement Date

  

Acquirer

  

Target

October 2010

   Royal Bank of Canada    BlueBay Asset Management

December 2010

   Religare Enterprises Ltd.    Landmark Partners

February 2013

   Crestview Partners    Victory Capital Management Inc.

July 2011

   BT Investment Management Ltd.    J O Hambro Capital Management

February 2011

   CBRE Group, Inc.    ING Group, N.V.’s European Real Estate Investment Management operations

December 2013

   Affiliated Managers Group, Inc.    SouthernSun Asset Management LLC

February 2011

   Ashmore Group Plc    Emerging Markets Management LLC

May 2013

   Warburg Pincus/General Atlantic    Santander Asset Management

July 2013

   Ares Management LLC    AREA Property Partners, L.P.

April 2012

   Lee Equity Partners    Edelman Financial Group, Inc.

February 2011

   Lightyear Capital    ING Clarion

April 2014

   KKR & Co., LP    KKR Financial Holdings LLC

Morgan Stanley reviewed the ratio of transaction value to reported or estimated EBITDA for each of the target companies in the selected precedent transactions, which was based on the most recent publicly available information at or before December 19, 2014, the most recent trading day prior to the presentation of the fairness opinion. Based on this analysis, Morgan Stanley selected a range of transaction value to EBITDA multiples of (i) 5.8x to 7.8x for the selected precedent management internalization transactions based on its determination of the transactions sharing the most relevant characteristics with the Combination with Colony Capital, and (ii) 7.3x to 9.8x for the selected asset management company transactions based on the 25% and 75% percentile of the selected precedent transactions. An implied value reference range for the value obtained by the Company in the Combination was then calculated based on applying those multiple ranges to the forecasted net cost savings to the Company resulting from the Combination for calendar year 2015, adjusted for a large non-traditional investment as described in “Perpetuity Method—Cost Savings Resulting from the Combination” beginning on page 61. This analysis indicated an implied value reference range for the total cost savings of $201 million to $271 million based on the selected precedent management internalization transactions and an implied value reference range for the total cost savings of $253 million to $341 million based on the selected precedent asset management company transactions.

No company or transaction utilized as a comparison in the analysis of selected precedent transactions is identical to the Company or directly comparable to the Combination in business mix, timing and size. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of the Company and other factors that would affect the value of the companies to which the Company is being compared. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to industry performance, global business, economic, market and financial conditions and other matters, many of which are beyond the Company’s control, such as the impact of competition on the Company and the industry generally, industry growth and the absence of any adverse material change in the financial conditions and prospects of the Company or the industry or the financial markets in general.

Analyses Relating to Colony Capital

In performing its analyses, Morgan Stanley separately analyzed Colony Capital’s private real estate funds business and its non-real estate related businesses because of the differing nature of these businesses and their relative contribution to its earnings and value.

 

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Discounted Cash Flow Analysis—Private Real Estate Funds Business

Morgan Stanley performed a discounted cash flow analysis to calculate a reference range of implied equity values for Colony Capital’s private real estate funds business based on the present value of the cash flows that Colony Capital’s private real estate funds business was forecasted to generate during the fiscal years ending December 31, 2015 through December 31, 2020 utilizing internal estimates of Colony Capital’s management. Morgan Stanley derived an implied terminal value using the perpetuity growth method based on the sum of estimated net fee related earnings (“FRE”) (representing Colony Capital’s estimate of Private Funds Business—FRE Pre-tax that includes base management fees, transaction and advisory fees less operating expenses and base bonuses, and an assumed 35% tax rate) for the calendar year 2020 and average annual net realized carried interest for the calendar years 2015 through 2020, an assumed 2% growth rate and the midpoint of the discount rate range used in the overall analysis. Present values (as of December 31, 2014) of estimated after tax free cash flows and the terminal value were then calculated by Morgan Stanley using a discount rate range of 9.5% to 11.5%, representing a 1.0% range around the median weighted average cost of capital calculation for the comparable companies discussed in “Comparable Public Companies Analysis—Private Real Estate Funds Business” beginning on page 65 utilizing the capital asset pricing model.

This analysis resulted in an implied equity value reference range for Colony Capital’s private real estate funds business of $416 million to $527 million.

Sum-of-the-Parts—Private Real Estate Funds Business

Morgan Stanley performed a sum-of-the-parts valuation of Colony Capital’s private real estate funds business utilizing internal estimates of Colony Capital’s management. Morgan Stanley utilized two different methodologies in its analysis of the estimated sum-of-the-parts value of Colony Capital’s private real estate funds business. In both methodologies, Morgan Stanley applied a range of price to earnings multiples of 14.2x to 16.2x to Colony Capital’s net fee related earnings to imply an equity value reference range for the private real estate funds business before taking into account the estimated carried interest distributions from Colony Capital’s managed funds. This multiple range was derived from the average price to 2015 estimated earnings multiples for traditional asset managers based on share prices as of December 19, 2014 and the latest published earnings estimates for calendar year 2015. Under both methodologies, when applying a multiple to net fee related earnings, Morgan Stanley excluded from its calculation of net fee related earnings from Colony Capital’s private real estate funds business $10.5 million of income for calendar year 2015 that is expected to be non-recurring, and added the nominal $10.5 million (or the post-tax value depending on the analysis) back to the implied equity value.

Morgan Stanley then analyzed the value of the estimated carried interest distributions from its managed funds using two different methods. First, Morgan Stanley applied a 20% reduction to the estimated realized carried interest for the calendar years 2015 through 2020 and determined the present value of the discounted realized carry using a 15% discount rate, which was derived from Wall Street research for the valuation of realized carried interest distributions for alternative asset managers. This analysis, when added to the applied range of price to net fee related earnings multiples indicated an implied equity value reference range for Colony Capital’s private real estate funds business of $359 million to $421 million.

In the second methodology, Morgan Stanley utilized an average multiple to net unrealized carry based on the implied carry multiples for alternative asset management companies. This analysis, when added to the applied range of price to net fee related earnings multiples indicated an implied equity value reference range for Colony Capital’s private real estate funds business of $310 million to $356 million.

Comparable Public Companies Analysis—Private Real Estate Funds Business

Morgan Stanley reviewed and compared certain internal financial information and ratios relating to Colony Capital’s private real estate funds business with equivalent publicly available data for companies that share similar business characteristics with Colony Capital’s private real estate funds business to derive an implied

 

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equity value reference range for Colony Capital’s private real estate funds business. For this analysis, Morgan Stanley reviewed the following alternative asset management companies that are publicly traded:

 

    The Blackstone Group L.P.;

 

    KKR & Co. L.P.;

 

    Apollo Global Management, LLC;

 

    The Carlyle Group L.P.;

 

    Oaktree Capital Group, LLC;

 

    Och-Ziff Capital Management Group, LLC;

 

    Ares Capital Corporation; and

 

    Fortress Investment Group LLC.

For purposes of this analysis, Morgan Stanley analyzed certain statistics for each of these companies for comparison purposes, including the ratio of the company’s share price as of December 19, 2014 to estimated economic net income for the calendar year 2015. Economic net income is a measure of operating performance commonly used by alternative asset managers because it includes changes in net unrealized carried interest and changes in the value of principal assets, which are primary indicators of performance for alternative asset managers but are not typically captured in GAAP income metrics. For each of the comparable companies, this ratio was calculated based on the most recent publicly available information and Street consensus estimates. After excluding the highest and lowest multiple resulting from this analysis to avoid outliers, Morgan Stanley then derived a selected range of 8.5x to 10.3x from the comparable companies using the highest and lowest multiples of share price to economic net income in the remaining data set. Morgan Stanley then applied this selected range to Colony Capital’s estimated economic net income from its private real estate funds business for the calendar year 2015 of $23 million, adjusted to exclude income for the calendar year 2015 that is expected to be non-recurring. Estimated 2015 economic net income from Colony Capital’s private real estate funds business is inclusive of net fee related earnings plus approximately $3 million of unrealized incentive fees before taxes.

Based on this analysis, Morgan Stanley derived an implied equity value reference range for Colony Capital’s private real estate fund business of $200 million to $241 million.

No company utilized in the comparable company analysis is identical to Colony Capital’s private real estate funds business. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, which are beyond Colony Capital’s control such as the impact of competition on Colony Capital and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Colony Capital or the industry, or in the financial markets in general.

Analysis of Selected Precedent Transactions—Private Real Estate Funds Business

Morgan Stanley also performed an analysis of the selected precedent transactions involving the acquisition of the twelve publicly traded alternative asset management companies in transactions referred to as the Selected Precedent Asset Management Transactions and discussed above in “Analysis of Selected Precedent Transactions—Cost Savings Resulting from the Combination” beginning on page 63.

Morgan Stanley reviewed the ratio of transaction value to reported or estimated EBITDA for each of the target companies, which was based on the most recent publicly available information at or before December 19, 2014. The overall observed fourth quartile and first quartile multiples of transaction value to EBITDA reviewed were 7.3x and 9.8x, respectively. An implied equity value reference range for Colony Capital’s private real estate funds business was then calculated based on applying that multiple range to the forecasted EBITDA for Colony

 

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Capital’s private real estate funds business for calendar year 2015. This analysis indicated an implied equity value reference range for Colony Capital’s private real estate funds business of $242 million to $323 million based on the selected precedent asset management company transactions.

No company or transaction utilized as a comparison in the analysis of selected precedent transactions is identical to Colony Capital’s private real estate funds business or directly comparable to the Combination in business mix, timing and size. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of Colony Capital’s private real estate funds business and other factors that would affect the value of the companies to which Colony Capital’s private real estate funds business is being compared. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to industry performance, global business, economic, market and financial conditions and other matters, many of which are beyond Colony Capital’s control, such as the impact of competition on Colony Capital and the industry generally, industry growth and the absence of any adverse material change in the financial conditions and prospects of Colony Capital or the industry or the financial markets in general.

Discounted Cash Flow Analysis—Non-Real Estate Businesses

Morgan Stanley performed a discounted cash flow analysis to calculate a reference range of implied equity values for Colony Capital’s non-real estate businesses based on the present value of the after tax unlevered cash flows that Colony Capital’s non-real estate businesses were forecasted to generate during the fiscal years ending December 31, 2015 through December 31, 2019 utilizing internal estimates of Colony Capital’s management. Present values (as of December 31, 2014) of estimated after tax unlevered free cash flows through 2019 were then calculated by Morgan Stanley using a discount rate range of 8.0% to 13.0%, representing a 2.5% range around the median weighted average cost of capital for the alternative asset manager peer group referenced in “Comparable Public Companies Analysis—Private Real Estate Funds Business” beginning on page 65. For the low end of the range, Morgan Stanley assumed that Colony Capital would make no new investments and, for the high end of the range, Morgan Stanley assumed that Colony Capital would make one new investment per year for each of 2015 through 2019.

This analysis resulted in an implied equity value reference range for Colony Capital’s private real estate funds business of $0 to $66.6 million.

Analysis of Aggregate Value of Cost Savings Resulting from, and Assets Acquired in, the Combination

Based on the foregoing analyses, Morgan Stanley derived an implied aggregate value reference range for the costs savings or increase in value resulting from the Combination, the private real estate funds business of Colony Capital being acquired and the non-real estate businesses of Colony Capital being acquired. For the cost savings and the private real estate funds business, after excluding the highest and lowest implied values resulting from the analyses described above to avoid outliers, Morgan Stanley selected a range of values for each component using the highest and lowest implied values in the remaining data set, resulting in an implied value reference range of $253 million to $1,019 million for the cost savings or increase in value resulting from the Combination and $242 million to $421 million for the private real estate funds business. For the non-real estate business, Morgan Stanley used the highest and lowest implied equity values to derive a reference range of implied equity value of $0 to $66.6 million. Morgan Stanley then combined the selected reference ranges of implied values for each of the components to derive an implied aggregate equity value reference range for estimated cost savings or increase in value resulting from the Combination combined with the businesses and assets obtained by the Company in the Combination of $495 million to $1,507 million. Morgan Stanley compared this aggregate value reference range implied by its analyses to the Consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement, which it assumed for these purposes to be valued at $657.5 million.

 

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Pro Forma Valuation of Combined Company

Morgan Stanley also conducted selected financial analyses of the pro forma company resulting from the Combination, which we refer to as the pro forma company, to derive an implied pro forma valuation of the Company and its common stock post-Combination and compared that implied pro forma valuation to the implied valuations used in Morgan Stanley financial analyses summarized above.

Comparable Public Companies Analysis. Morgan Stanley reviewed and compared certain internal financial information and ratios relating to the Company and Colony Capital with equivalent publicly available data for companies that share similar business characteristics with the Company or Colony Capital to derive an implied per share equity value reference range for the pro forma company. To account for both the Company and Colony Capital’s business, Morgan Stanley analyzed two sets of comparable companies, the selected publicly traded mortgage REITs analyzed in “Comparable Public Companies Analysis—Illustrative Value of the Combination” beginning on page 62 and the selected alternative asset managers analyzed in “Comparable Public Companies Analysis—Private Real Estate Funds Business” beginning on page 65. For purposes of this analysis, Morgan Stanley analyzed the ratios of share price to consensus estimated earnings for calendar year 2015 for the selected publicly traded mortgage REITs and applied a selected range of 9.2x to 12.8x derived from this set of comparable companies to the Company’s estimated earnings for the calendar year 2015, after adjusting to account for cost savings from the Combination. Morgan Stanley then analyzed the ratios of share price to economic net income for calendar year 2015 for the selected alternative asset managers and applied a selected range of 7.5x to 14.5x derived from this set of comparable companies to Colony Capital’s estimated economic net income for the calendar year 2015, after adjusting to account for cost savings from the Combination. Based on this analysis, Morgan Stanley derived an implied per share equity value reference range of $23.18 to $33.56 for the pro forma company by applying these selected ranges derived from the comparable companies to the corresponding metrics for the Company or Colony Capital, as applicable, and combining the results. Observing that internally managed peer companies typically trade at earnings multiples more than 2.0x higher than externally managed companies (see “Comparable Public Companies Analysis—Illustrative Value of the Combination” beginning on page 62), Morgan Stanley applied a price to earnings multiple of 2.0x higher than the selected multiple ranges to the Company’s estimated earnings for the calendar year 2015 and added the results to the product of Colony Capital’s 2015 estimated economic net income and the selected peer multiple range for alternative asset managers described above to derive an implied per share equity value reference range for the pro forma company of $27.61 to $37.99 for the pro forma company that reflected the increase in value resulting from the Combination.

Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash flow analysis to calculate a reference range of implied present values per share for the pro forma company based on unlevered cash flow the pro forma company was forecasted to generate during the fiscal years ending December 31, 2015 through December 31, 2020 utilizing internal estimates of Colony Capital’s management. Morgan Stanley derived a range of implied terminal values for the calendar year 2020 using a sum-of-the-parts method. Present values (as of December 31, 2014) of the annual cash flows and the terminal value were then calculated by Morgan Stanley using a discount rate range of 7.6% to 8.6%, which represented a 0.5% range around the weighted average cost of capital for the pro forma company of 8.1% calculated using the capital asset pricing model. This analysis resulted in an implied per share equity value reference range for the pro forma company of $35.00 to $40.57.

In addition, Morgan Stanley performed a discounted cash flow analysis to calculate a reference range of implied present values per share based on the unlevered cash flows of the pro forma company that would result in the full amount of contingent Consideration potentially payable under the Contribution Agreement and the Colony Mark Transfer Agreement using the same methodology and discount rates. This analysis resulted in an implied per share equity value reference range of $38.34 to $44.53.

General

In connection with the review of the proposed Combination by the Special Committee, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation

 

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of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of these analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of the Company or Colony Capital or the cost savings or increase in value resulting from the Combination.

In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters. Many of these assumptions are beyond the control of the Company and Colony Capital. These include, among other things, the impact of competition on the businesses of the Company and Colony Capital and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of the Company and Colony Capital and the industry, and in the financial markets in general. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.

Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness from a financial point of view to the Company of the Consideration to be paid by the Company pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement, and in connection with the delivery of its opinion to the Special Committee. These analyses do not purport to be appraisals or to reflect the prices at which the Company common stock might actually trade.

The Consideration was determined through arm’s-length negotiations between the Company and Colony Capital and was approved by the Special Committee. Morgan Stanley was not authorized to solicit, and did not solicit, interest from any party with respect to the acquisition, business combination or other extraordinary transaction, involving the Company or Colony Capital, nor did Morgan Stanley negotiate with any party regarding the possible acquisition of the Company or certain of its constituent businesses (other than with respect to negotiations with Colony Capital). Morgan Stanley did not recommend any specific form or amount of transaction consideration to the Company or the Special Committee, nor that any specific transaction consideration constituted the only consideration for the Combination. Morgan Stanley’s opinion did not address the relative merits of the transactions contemplated by the Contribution Agreement and the Colony Mark Transfer Agreement as compared to other business or financial strategies that might be available to the Company, nor did it address the underlying business decision of the Company to enter into the Contribution Agreement and the Colony Mark Transfer Agreement or proceed with any other transaction contemplated by the Contribution Agreement and the Colony Mark Transfer Agreement. In addition, Morgan Stanley’s opinion was not intended to, and does not, in any manner address the prices at which the Colony Capital common stock would trade following consummation of the Combination or at any time and Morgan Stanley expressed no opinion or recommendation as to how holders of the Company’s common stock should vote at the Special Meeting to be held in connection with the Combination.

Morgan Stanley’s opinion and its oral presentation to the Special Committee was one of many factors taken into consideration by the Special Committee in deciding to approve, adopt and authorize the Contribution Agreement and the Colony Mark Transfer Agreement. Consequently, the analyses as described above should not be viewed as determinative of the opinion of the Special Committee with respect to the transaction consideration or of whether the Special Committee would have been willing to agree to a different transaction consideration.

Morgan Stanley’s opinion was approved by a committee of Morgan Stanley investment banking and other professionals in accordance with its customary practice. Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses. Its securities

 

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business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading, prime brokerage, as well as providing investment banking, financing and financial advisory services. Morgan Stanley, its affiliates, trustees and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions, finance positions, and may trade or otherwise structure and effect transactions, for its own account or the accounts of its customers, in debt or equity securities or loans of the Company, Colony Capital or any other company, or any currency or commodity, that may be involved in the Combinations contemplated by the Contribution Agreement and the Colony Mark Transfer Agreement, or any related derivative instrument.

Under the terms of its engagement letter, Morgan Stanley provided the Special Committee with financial advisory services and a financial opinion described in this section and attached to this proxy statement as Appendix D in connection with the Combination and the Company has agreed to pay Morgan Stanley (i) an advisory fee comprised of a $1.0 million initial payment and quarterly payments of $250,000 until the Combination is completed, which will be a minimum of $2.0 million, and (ii) a contingent fee of $10.0 million for its services, $2.0 million of which was payable upon the public announcement of the non-binding agreement entered into and setting forth preliminary terms of the Combination and the remainder of which is payable upon and is contingent upon the consummation of the Combination. The Company has also agreed to reimburse Morgan Stanley for its expenses incurred from time to time in connection with providing its professional services, including fees of outside counsel and other professional advisors, incurred in performing its services. In addition, the Company has agreed to indemnify Morgan Stanley, its affiliates, its officers, directors, employees and agents and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including certain liabilities under the federal securities laws, relating to or arising out of Morgan Stanley’s engagement. In the two years prior to the date of Morgan Stanley’s opinion, Morgan Stanley and its affiliates have provided financing services to the Company and have received an aggregate of approximately $3.4 million in fees in connection with such services. In the two years prior to the date of Morgan Stanley’s opinion, Morgan Stanley and its affiliates have provided financing services to an entity affiliated with Colony Capital (other than the Company) and have received an aggregate of approximately $1.4 million in fees in connection with such services. Morgan Stanley may also seek to provide financial advisory and financing services to the Company and Colony Capital and their affiliates in the future and would expect to receive fees for the rendering of those services.

Certain Projections

Neither Colony Capital nor the Company discloses long-term projections as to future revenues, earnings or other results due to, among other reasons, the uncertainty and subjectivity of the underlying assumptions and estimates. As a result, the Company does not endorse the projections below as a reliable indication of future results. The Company is including these projections in this document solely because it was among the financial information made available to the Special Committee and Morgan Stanley in connection with their respective evaluations of the Combination. Moreover, we have been informed that these projections were based on estimates and assumptions made by Colony Capital and the Company’s management at the time of their preparation and speak only as of such time. Except to the extent required by applicable law, neither Colony Capital nor the Company has any obligation to update projections included in this proxy statement and, except as provided below, has not done so and does not intend to do so.

The inclusion of this information should not be regarded as an indication that any of Colony Capital, the Company, the Board, the Special Committee, Morgan Stanley or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future results. There can be no assurance that the prospective results will be realized or that actual results will not be significantly higher or lower than estimated.

Since the projections below cover multiple years, such information by its nature becomes less predictive with each successive year. The Company’s stockholders are urged to review the risk factors and other factors

 

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described in “Risk Factors” and “Forward-Looking Statements” beginning on pages 27 and 25, respectively, and in the periodic reports filed by the Company with the SEC, which reports can be found under the heading “Where You Can Find More Information” beginning on page 151. The projections were not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or GAAP. Neither of the independent registered public accounting firms of the Company and of Colony Capital have audited, reviewed, compiled or performed any procedures with respect to the accompanying projections for the purpose of its inclusion herein, and accordingly, neither of the independent registered public accounting firms of the Company and of Colony Capital express an opinion or provide any form of assurance with respect thereto for the purpose of this proxy statement/prospectus. Furthermore, the projections do not take into account any circumstances or events occurring after the date it was prepared. The projections, except where noted, do not give effect to the Combination.

The following table presents selected projections associated with the cost savings associated with termination of the Company’s management agreement. The external management fee projections were provided by the Company’s management to the Special Committee and its advisors in September 2014 based on the Company’s actual performance as of June 30, 2014, and do not reflect any potential impact of the Combination. The estimated internal management costs from Colony Capital’s combination with the Company were provided by Colony Capital management to the Special Committee and its advisors in September 2014 and per Colony Capital management guidance, represent an allocation of the total investment management expenses (including compensatory expenses and operating expenses) of the combined business on an internalized basis that would be attributable to the management of the Company’s business.

Management Contract—Net Cost Savings

 

($ in millions)

   2015E     2016E     2017E     2018E     2019E     2020E  

External Management Fees to Colony Capital

   $ 87      $ 118      $ 108      $ 135      $ 136      $ 154   

Less: Internal Management Costs from Combination

     (35     (41     (45     (50     (51     (56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management Contract—Net Cost Savings

$ 52    $ 77    $ 63    $ 86    $ 85    $ 98   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents selected projections associated with Colony Capital’s private funds business. The projections were provided by Colony Capital management to the Special Committee and its advisors in September 2014 based on Colony Capital’s actual performance as of June 30, 2014 and do not reflect any potential impact of its combination with the Company. The projections also include 50% of CRP not owned by Colony Capital and the related estimated synergy resulting from inclusion in the Colony Capital platform.

Private Funds Business—FRE Pre-Tax

 

($ in millions)

   2015E     2016E     2017E     2018E     2019E     2020E  

Base Management Fees from Private Funds

   $ 111      $ 102      $ 97      $ 85      $ 85      $ 87   

Less: Private Funds Management Costs

     (67     (65     (49     (41     (40     (43
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Private Funds Business—FRE Pre-Tax

$ 44    $ 37    $ 47    $ 44    $ 45    $ 44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

“External Management Fees to Colony Capital” includes projected Company management fees, incentive fees, and stock grants that otherwise would be paid to Colony Capital if the transaction does not consummate. This projection was based on CLNY standalone forecast.

“Internal Management Costs from Combination” represents projected Colony Capital costs associated with managing the Company including direct overhead, G&A, and stock grants. This projection was based on an allocation of Colony Capital’s investment management business expense forecast for the combined entity should the transaction consummate and does not include any costs reimbursable from the Company’s affiliates on a net basis.

 

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“Base Management Fees from Private Funds” reflects projected fees from existing funds, new opportunity funds, new CDCF funds, and new value-added funds in the Colony Capital private fund business on a gross fee basis. This projection was based on Colony Capital standalone forecast for its private funds business.

“Private Funds Management Costs” reflects projected costs associated with managing Colony Capital’s private funds business, including direct overhead and G&A. Per Colony Capital management’s guidance, this projection was based on an allocation of Colony Capital standalone expense forecast for Colony Capital’s business and does not include any costs reimbursable from the Company’s affiliates on a net basis. It also reflects the expenses with potential synergies in managing 100% of CRP business.

“Private Funds Business—FRE Pre-Tax” is defined as fee related earnings (pre-tax) from the Colony Capital standalone private fund business, which includes base management fees less associated management costs, pre-tax. This projection was based on Colony Capital’s standalone forecast for its private fund business.

Although presented with numerical specificity, the above projections reflect numerous assumptions and estimates as to future events made by the Company and by the management of Colony Capital, respectively, who, at the respective times the projections were prepared, believed that such assumptions and estimates were reasonable. In preparing the foregoing unaudited projected financial information, assumptions were made regarding, among other things, fundraising, fee structure, associated expense and future investments.

No assurances can be given that the assumptions made in preparing the above projections will accurately reflect future conditions. The estimates and assumptions underlying the projections involve judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions which may not be realized and that are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, including, among others, risks and uncertainties described under “Risk Factors” and “Forward-Looking Statements” beginning on pages 27 and 25, respectively, and in the periodic reports filed by the Company with the SEC, which reports can be found under the heading “Where You Can Find More Information” beginning on page 151, all of which are difficult to predict and many of which are beyond the control of the Company or Colony Capital and will be beyond the control of the Company or Colony Capital following the Combination. There can be no assurance that the underlying assumptions will prove to be accurate or that the projected results will be realized, and actual results likely will differ, and may differ materially, from those reflected in the projections, whether or not the Combination is completed.

The above projections do not give effect to the Combination (except for the estimates of Internal Management Costs from Combination). The Company’s stockholders are urged to review the most recent SEC filings of the Company for a description of the reported and anticipated results of operations and financial condition and capital resources during 2013, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and any subsequent quarterly reports on Form 10-Q, which are incorporated by reference into this proxy statement.

Readers of this document are cautioned not to place undue reliance on the projections set forth above. No representation is made by the Company, by Colony Capital or any other person to any of the Company’s stockholders regarding the ultimate performance of the Company compared to the information included in the above projections. The inclusion of projections in this document should not be regarded as an indication that such prospective financial information will be an accurate prediction of future events, and such information should not be relied on as such.

THE COMPANY DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE ABOVE PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO

 

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REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH PROSPECTIVE FINANCIAL INFORMATION ARE NO LONGER APPROPRIATE, EXCEPT AS MAY BE REQUIRED BY LAW.

No Appraisal or Approval Rights

Under Maryland law, stockholders will not have appraisal rights in connection with the Combination or the right to vote to approve the Combination.

Interests of Certain Persons in the Combination

In considering the recommendation of the Board to vote for the proposals described in this proxy statement, you should be aware that certain of our current directors and executive officers, along with Mr. Hedstrom, who will become an executive officer as of the completion of the Combination, have interests in those transactions that may be different from, or in addition to, the interests of our stockholders generally and that may create potential conflicts of interest.

These interests are described in more detail below. In addition, you should be aware that Messrs. Barrack, Saltzman, Traenkle, Tangen, Sanders and Hedstrom are also executive officers or principals of Colony Capital. The respective roles of these individuals in Colony Capital may create additional conflicts of interest in respect of the Combination and the other transactions described in this proxy statement.

The Special Committee was aware of each of these interests in reviewing, considering and negotiating the terms of the Combination and in recommending to the entire Board to pursue the Combination. The Board was also aware of these interests in approving the Contribution Agreement, the Colony Mark Transfer Agreement and the transactions described in this proxy statement, and in recommending the approval of the Contribution Agreement, the Colony Mark Transfer Agreement and those transactions to our stockholders.

Arrangements with Thomas J. Barrack, Jr.

Payment of Combination Consideration to Colony Capital. The Contribution Agreement provides that Colony Capital will receive as consideration in respect of the Combination (i) OP Units at the Closing with a total value of approximately $407.4 million based on the Reference Price (and $457.5 million based on the VWAP), subject to certain adjustments, and (ii) if all contingent consideration payable under the Contribution Agreement is actually paid, additional OP Units with a total value of approximately $62.9 million based on the Reference Price (and $70.6 million based on the VWAP), subject to certain adjustments. Colony Capital is a wholly owned subsidiary of CC Holdings. Mr. Barrack owns a controlling interest in, and is the sole managing member of, CC Holdings, and therefore will have an indirect interest in the OP Units that are received by Colony Capital as consideration in the Combination.

The values in the prior paragraph are estimates that are subject to reduction for a portion of any transaction expenses of Colony Capital paid on its behalf by the Company, and assume that (1) all of the OP Units received by Colony Capital as consideration in the Combination are exchanged for shares of Class A Common Stock, (2) the value of a share of Class A Common Stock is either (i) $22.05 (the Reference Price), which is the value used for purposes of determining the number of shares to be issued in the Combination, or (ii) $24.76 (the VWAP), as indicated, and (3) no portion of the contingent consideration is reallocated to upfront consideration to be issued at the Closing. The actual value of the OP Units received by Colony Capital will be based on the value of such OP Units at the time they are delivered and may be less or more than the amounts listed in the prior paragraph.

Colony Capital may also be eligible to receive a payment in respect of a specified portion of certain closing adjustments under the Contribution Agreement, including in respect of net working capital. While the actual amount that may become payable to Colony Capital in respect of such closing adjustments is not yet determinable, we estimate that the amount that will become payable is between $15.0 million and $20.0 million.

 

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The amounts detailed above reflect the full amount of Mr. Barrack’s interest in the consideration that Colony Capital is entitled to receive as consideration in the Combination, which is the only means by which Mr. Barrack will have any such interest, except as described in the immediately following paragraph. The amounts so described are without reduction for (1) any amounts that will be transferred to Mr. Saltzman as described in “—Arrangements with Richard B. Saltzman” beginning on page 76 or to CCH I or CCH II as described in “—Interests of Executive Officers in CCH I and CCH II” beginning on page 81, (2) any amounts attributable to the interests of minority holders of membership units in CC Holdings, or (3) any amounts that will be transferred to vehicles in which Colony Capital professionals unrelated to Mr. Barrack will hold an interest. Mr. Barrack’s resulting interest in the consideration to be received by Colony Capital after such attribution to minority interest holders and transferees is detailed below in “—Interests of Executive Officers in CC Holdings” beginning on page 83 and “—Interests of Executive Officers in CCH I and CCH II” beginning on page 81.

Payment of Consideration Under Colony Mark Transfer Agreement. In addition, as described in more detail in “—Agreements to be Entered Into Pursuant to the Contribution Agreement—Colony Mark Transfer Agreement” beginning on page 110, the Company and OP have entered into the Colony Mark Transfer Agreement with the Mark Transferor, which is wholly owned by Mr. Barrack, pursuant to which the “Colony” name and mark will be transferred to OP in exchange for (i) shares of Class A Common Stock and shares of Class B Common Stock with a total value of $15.0 million based on the Reference Price (and $16.8 million based on the VWAP) to be paid at the Closing, subject to certain adjustments, and (ii) additional shares of Class A Common Stock and shares of Class B Common Stock with a total value of approximately $3.0 million based on the Reference Price (and $3.4 million based on the VWAP), subject to certain adjustments, if earned over time under the same multi-year performance targets required for receipt of the contingent consideration under the Contribution Agreement.

The values in the prior paragraph are estimates and assume that all of the shares of Class B Common Stock are converted into shares of Class A Common Stock, that the value of a share of Class A Common Stock is either (i) $22.05 (the Reference Price), which is the value used for purposes of determining the number of shares to be issued in the Combination, or (ii) $24.76 (the VWAP), as indicated, and that no portion of the contingent consideration is reallocated to upfront consideration to be issued at the Closing. The actual value of the shares received by Mr. Barrack will be based on the value of such shares at the time they are delivered and may be less or more than the amounts listed in the prior paragraph.

Employment Agreement. We entered into an employment agreement with Mr. Barrack on December 23, 2014, which sets forth the terms and conditions of Mr. Barrack’s service as our Executive Chairman and Chairman of the Board following the Closing. The agreement will become effective as of the Closing and will continue in effect for an initial term of five years following the Closing, subject to automatic renewals of additional successive one-year periods unless either party provides at least 180 days’ advance notice of non-renewal.

The agreement provides that, in his role as our Executive Chairman, Mr. Barrack will perform duties and provide services to us that are reasonably consistent with those he provided to us in that role prior to the Closing. The agreement further provides that Mr. Barrack will devote substantially all of his business time and attention to the performance of his duties to us, but will be permitted to perform duties for CC Holdings and its affiliates and engage in certain other outside activities, so long as those duties and activities do not unreasonably interfere with the performance of his duties to us.

In addition, the agreement provides that Mr. Barrack’s principal place of business during the term of the agreement will generally be in Los Angeles, California. However, the agreement provides that, if Mr. Barrack is required to engage in travel during the term of the agreement that results in him having to perform a significant portion of his duties at a location other than Los Angeles, California, and Mr. Barrack determines to relocate his principal place of residence to a city in proximity to that other location, then we will pay for all reasonable relocation and return expenses that he incurs on a basis which is grossed up for taxes, with such payments subject to the Board’s approval, not to be unreasonably withheld.

 

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The agreement further provides that Mr. Barrack will receive an annual base salary of $1,000,000 and will be eligible to receive an annual cash bonus with a target amount of no less than $4,000,000, which may be based on achievement of reasonable performance measures established by the Board (or a committee thereof). In addition, Mr. Barrack will be eligible to receive annual grants of equity-based awards with a target value of 350% of his base salary. Mr. Barrack will also continue to receive allocations in respect of carried interests in respect of funds managed by us that were granted to Mr. Barrack prior to the Closing, and will be eligible to be granted new allocations in respect of carried interests in respect of funds managed by us as is determined by the Board from time to time in consultation with Mr. Barrack. Mr. Barrack will also be eligible to participate in our benefit plans made available to our senior executive officers from time to time and to receive certain perquisites that he was entitled to immediately prior to the Closing, each as described in the agreement.

The agreement provides that, if Mr. Barrack’s employment is terminated by us without “cause” (as defined in the agreement and including non-renewal of the agreement by us) or by Mr. Barrack for “good reason” (as defined in the agreement and described below), and Mr. Barrack executes a release of claims, he will be eligible to receive (i) a lump sum cash payment equal to three times the sum of his base salary and average annual bonus with respect to the three prior calendar years (or, if any such termination of employment occurs prior to Mr. Barrack receiving his annual bonus in respect of calendar year 2017, then his target annual bonus), (ii) a lump sum cash payment in respect of the annual bonus payable in respect of the year prior to the year of termination, if unpaid as of the date of termination, (iii) a pro-rated target bonus for the year of termination, (iv) continued medical, dental and vision benefits at active employee rates for 24 months following termination, (v) the continuation of certain benefits for 24 months following termination (or in certain cases, until the end of the term of the employment agreement then in effect (if later)), and (vi) full vesting of all equity-based awards, carried interests and other like compensation that he holds, to the extent unvested upon his termination.

The agreement also provides that if Mr. Barrack provides notice to us of his intention not to renew the agreement upon the scheduled expiration of the initial term or any renewal term, then he will receive (i) a lump sum cash payment in respect of the annual bonus payable in respect of the year prior to the year of termination, if unpaid as of the date of termination, (ii) a pro-rated target bonus for the year of termination, and (iii) if such termination occurs upon his retirement on or after his attainment of age 72, full vesting of all equity-based awards, carried interests and other like compensation that he holds, to the extent unvested upon his termination.

For purposes of the agreement, “good reason” means, in summary, (i) a material diminution in Mr. Barrack’s duties, authority or responsibilities (including failing to maintain Mr. Barrack as a member of the Board) or causing Mr. Barrack to no longer report to the Board or a diminution in his title, (ii) a reduction in Mr. Barrack’s base salary, target annual cash bonus or target annual equity incentive grant, (iii) a 25-mile relocation of Mr. Barrack’s principal place of business, or (iv) a material breach of the agreement by us, including the failure to appoint Mr. Barrack as our Chief Executive Officer if Mr. Saltzman’s employment terminates while Mr. Barrack is serving as our Executive Chairman.

If any payments to be made to Mr. Barrack, whether under the agreement or otherwise, would subject Mr. Barrack to the excise tax on so-called “golden parachute payments” in accordance with Sections 280G or 4999 of the Internal Revenue Code, then the payments will be reduced to the extent necessary to avoid the excise tax, but only if the amount of the payments after such reduction would result in Mr. Barrack receiving a greater net after-tax benefit than if all of the payments were provided and the excise tax were imposed.

The agreement, through a restrictive covenant agreement included as an exhibit to the agreement, also provides that Mr. Barrack will not, subject to certain listed exceptions for permitted and personal activities, compete with us, or solicit our investors or customers or employees or those of our subsidiaries during his employment with us and for the one-year period following the termination of his employment with us unless his employment is terminated by us without cause (as defined in the agreement and including non-renewal of the agreement by us) or by Mr. Barrack for “good reason” (as defined in the agreement and described above). The agreement also contains covenants relating to the treatment of confidential information and intellectual property matters and restrictions on the ability of Mr. Barrack and us to disparage the other.

 

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Lock-Up and Liquidated Damages Agreement. We entered into a Lock-Up and Liquidated Damages Agreement on December 23, 2014 with each of OP, Colony Capital and Mr. Barrack, who holds a controlling interest in Colony Capital. The agreement will become effective as of the Closing and sets forth certain restrictions on the transfer of, and other terms and conditions relating to, the OP Units issued to Colony Capital pursuant to the Contribution Agreement.

The agreement provides that the OP Units issued to Colony Capital pursuant to the Contribution Agreement will be fully vested as of the date on which they are issued, but will generally be subject to restrictions on transfer following their issuance. At each anniversary of the Closing, a portion of the OP Units will be released from the transfer restrictions resulting in an approximately ratable release across a five-year lock-up period, such that all of the OP Units will be freely transferable on the fifth anniversary of the Closing. In addition, the agreement provides for the earlier transferability of OP Units for certain limited purposes, including transfers in respect of pledging activities, gifts, transfers to family estate planning vehicles, transfers required by law, transfers to cover tax obligations relating to the receipt of OP Units and transfers to past or present employees (generally subject to specified vesting conditions and a ratable three-year lock-up so long as the transfer is not made to Messrs. Barrack or Saltzman), among others. While Colony Capital and Mr. Barrack are permitted to make these transfers, they are required to retain sufficient OP Units to satisfy any amount that may come due under the liquidated damages provision described below, as applied to Mr. Barrack.

The agreement generally provides that if Mr. Barrack materially violates or fails to perform his obligations under the restrictive covenant contained in the agreement under certain circumstances prior to the earlier of the fifth anniversary of the Closing and the termination of his employment by us without “cause” (as defined in his employment agreement with us, which is described above, and including non-renewal of his employment agreement by us) or by Mr. Barrack for “good reason” (as defined in his employment agreement with us and described above), and fails to cure and cease the violation within 60 days following the date on which he receives written notice of the violation, then Colony Capital will be required to remit a specified number of OP Units issued to it at the Closing to the OP as liquidated damages for the violation. If the violation occurs prior to the first anniversary of the Closing, then a total of 9,692,058 OP Units will be required to be so remitted to the OP. The amount of OP Units required to be remitted as liquidated damages decreases by 20% upon each anniversary of the Closing, such that no OP Units will be required to be remitted to OP upon any non-competition violation that occurs on or after the fifth anniversary of the Closing. The restrictive covenant contained in the agreement generally restricts Mr. Barrack from directly or indirectly engaging in our business in specified locations in which we carry on our business, subject to certain listed exceptions.

Arrangements with Richard B. Saltzman

Payment of Combination Consideration. In accordance with the terms and conditions of the Share Transfer and Liquidated Damages Agreement and Current Saltzman Agreement, each as described below, and after estimated transaction expenses, Mr. Saltzman will receive (i) shares of Class A Common Stock at the Closing with a total value of approximately $57.7 million based on the Reference Price (and $64.8 million based on the VWAP), subject to certain adjustments, and (ii) if all contingent consideration payable under the Contribution Agreement is actually paid, additional shares of Class A Common Stock with a total value of approximately $23.3 million based on the Reference Price (and $26.2 million based on the VWAP), subject to certain adjustments. These amounts are estimates that are subject to reduction for a portion of any transaction expenses of Colony Capital paid on its behalf by the Company, and assume that the value of a share of Class A Common Stock is either (i) $22.05 (the Reference Price), which is the value used for purposes of determining the number of shares to be issued in the Combination, or (ii) $24.76 (the VWAP), as indicated, and that no portion of the contingent consideration is reallocated to upfront consideration to be issued at the Closing. The actual value of the shares of Class A Common Stock received by Mr. Saltzman will be based on the value of such shares at the time they are delivered and may be less or more than the amounts listed above.

In addition, in accordance with the terms of the Contribution Agreement and as described in “—Description of the Combination—Overview of the Combination—Combination with Colony Capital” beginning on page 92,

 

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Mr. Saltzman will contribute to OP his membership interests in CRM in the aggregate equal to 40% of the outstanding membership interests of CRM and in exchange, Mr. Saltzman will receive after estimated transaction expenses (1) OP Units at the Closing with a total value of approximately $8.2 million based on the Reference Price (and $9.2 million based on the VWAP), subject to certain adjustments, and (2) if all contingent consideration payable under the Contribution Agreement is actually paid, additional OP Units with a total value of approximately $1.6 million based on the Reference Price (and $1.8 million based on the VWAP), subject to certain adjustments. These values are estimates and assume that all of the OP Units are exchanged for shares of Class A Common Stock, that the value of a share of Class A Common Stock is either (i) $22.05 (the Reference Price), which is the value used for purposes of determining the number of shares to be issued in the Combination, or (ii) $24.76 (the VWAP), as indicated, and that no portion of the contingent consideration is reallocated to upfront consideration to be issued at the Closing. The actual value of the OP Units received by Mr. Saltzman will be based on the value of such OP Units at the time they are delivered and may be less or more than the amounts listed above.

Mr. Saltzman may also be eligible to receive a payment in respect of a specified portion of certain closing adjustments under the Contribution Agreement, including in respect of net working capital, as a result of the contribution of his membership interests in CRM. While the actual amount that may become payable to Mr. Saltzman in respect of such closing adjustment is not yet determinable, we estimate that the amount that will become payable is less than $1,000,000.

In addition, Mr. Saltzman will have an interest in the OP Units received by Colony Capital following the Closing through his interest in CC Holdings, as described in “—Interests of Executive Officers in CC Holdings” beginning on page 83 and his interest in certain other entities holding OP Units, as described in “—Interests of Executive Officers in CCH I and CCH II beginning on page
81.”

Employment Agreement. We entered into an employment agreement with Mr. Saltzman on December 23, 2014 that sets forth the terms and conditions of Mr. Saltzman’s service as our Chief Executive Officer and President following the Closing. Mr. Saltzman’s current employment and equity agreement by and among Mr. Saltzman, Mr. Barrack and Colony Capital, as amended (the “Current Saltzman Agreement”) provided for, among other compensatory terms, carried interests issued by Colony Capital in connection with his prior employment, certain interests in general partners of funds and entities managed by Colony Capital, and equity interests in certain businesses of the Company. The new employment agreement, along with the Share Transfer and Liquidated Damages Agreement described below, generally replaces the Current Saltzman Agreement, except with respect to Mr. Saltzman’s right to fund incentives or other interests granted in connection with his prior employment, including any rights to the payment of combination consideration under the Contribution Agreement, as described in “—Arrangements with Richard B. Saltzman—Payment of Combination Consideration” beginning on page 76. Mr. Saltzman’s employment agreement will become effective as of the Closing and will continue in effect for an initial term of five years following the Closing, subject to automatic renewals of additional successive one-year periods unless either party provides at least 180 days’ advance notice of non-renewal.

The agreement also provides that, in his role as our Chief Executive Officer and President, Mr. Saltzman will perform duties and provide services to us that are reasonably consistent with those he provided to us in that role prior to the Closing. The agreement further provides that Mr. Saltzman will devote substantially all of his full business time and attention to the performance of his duties to us, but will be permitted to engage in certain other outside activities so long as they do not unreasonably interfere with the performance of his duties to us.

In addition, the agreement provides that Mr. Saltzman’s principal place of business during the term of the agreement will be in New York City. However, the agreement provides that if Mr. Saltzman is required to engage in travel during the term of the agreement that results in him having to perform a significant portion of his duties at a location other than in New York City, and Mr. Saltzman determines to relocate his principal place of residence to a city in proximity to such other location, then we will pay for all relocation and return expenses that he incurs on a basis which is grossed up for taxes, with such payments subject to the Board’s approval, not to be unreasonably withheld.

 

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The agreement further provides that Mr. Saltzman will receive an annual base salary of $800,000 and will be eligible to receive an annual cash bonus with a target amount of no less than $2,400,000, which may be based on achievement of reasonable performance measures established by the Board (or a committee thereof). In addition, Mr. Saltzman will be eligible to receive annual grants of equity-based awards with a target value of 350% of his base salary. Mr. Saltzman will also continue to receive allocations in respect of carried interests in respect of funds managed by us that were granted to him prior to the Closing and will be eligible to be granted new allocations in respect of carried interests in respect of funds managed by us as is determined by the Board from time to time in consultation with Mr. Saltzman. Mr. Saltzman will also be eligible to participate in our benefit plans made available to our senior executive officers from time to time and will be entitled to receive certain perquisites that he was entitled to immediately prior to the Closing, each as described in the agreement.

The agreement provides that if Mr. Saltzman’s employment is terminated by us without “cause” (as defined in the agreement and including non-renewal of the agreement by us) or by Mr. Saltzman for “good reason” (as defined in the agreement and described below), and Mr. Saltzman executes a release of claims, he will be eligible to receive (i) a lump sum cash payment equal to three times the sum of his base salary and average annual bonus with respect to the three prior calendar years (or, if any such termination of employment occurs prior to Mr. Saltzman receiving his annual bonus in respect of calendar year 2017, then his target annual bonus), (ii) a lump sum cash payment in respect of the annual bonus payable in respect of the year prior to the year of termination, if unpaid as of the date of termination, (iii) a pro-rated target bonus for the year of termination, (iv) continued medical, dental and vision benefits at active employee rates for 24 months following termination, and (v) full vesting of all equity-based awards, carried interests and other like compensation that he holds, to the extent unvested upon his termination.

The agreement also provides that if Mr. Saltzman provides notice to us of his intention not to renew the agreement upon the scheduled expiration of the initial term or any renewal term, then he will receive (i) a lump sum cash payment in respect of the annual bonus payable in respect of the year prior to the year of termination, if unpaid as of the date of termination, (ii) a pro-rated target bonus for the year of termination, and (ii) if such termination occurs upon his retirement on or after his attainment of age 65, full vesting of all equity-based awards, carried interests and other like compensation that he holds, to the extent unvested upon his termination.

For purposes of the agreement, “good reason” means, in summary, (i) a material diminution in Mr. Saltzman’s duties, authority or responsibilities (including failing to maintain Mr. Saltzman as a member of the Board) or a diminution in his title, (ii) a change in reporting structure such that Mr. Saltzman no longer reports to the Executive Chairman or the Board (or a sub-committee of the Board), (iii) a reduction in Mr. Saltzman’s base salary, target annual cash bonus or target annual equity incentive grant, (iv) a 25-mile relocation of his principal place of business, or (iv) a material breach of the agreement by us.

If any payments to be made to Mr. Saltzman, whether under the agreement or otherwise, would subject Mr. Saltzman to the excise tax on so-called “golden parachute payments” in accordance with Sections 280G or 4999 of the Internal Revenue Code, then the payments will be reduced to the extent necessary to avoid the excise tax, but only if the amount of the payments after such reduction would result in Mr. Saltzman receiving a greater net after-tax benefit than if all of the payments were provided and the excise tax were imposed.

The agreement, through a restrictive covenant agreement included as an exhibit to the agreement, also provides that Mr. Saltzman will not, subject to certain listed exceptions for permitted and personal activities, compete with us, or solicit our investors or our customers or employees or those of our subsidiaries during his employment with us and for the one-year period following the termination of his employment with us unless his employment is terminated by us without cause (as defined in the agreement and including non-renewal of the agreement by us) or by Mr. Saltzman for “good reason” (as defined in the agreement and described above). The agreement also contains covenants relating to the treatment of confidential information and intellectual property matters and restrictions on the ability of Mr. Saltzman and us to disparage the other.

 

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Share Transfer and Liquidated Damages Agreement. We entered into a Share Transfer and Liquidated Damages Agreement with Colony Capital, CC Holdings and Mr. Saltzman on December 23, 2014, which will become effective as of the Closing. The agreement provides that Mr. Saltzman will receive the shares of Class A Common Stock described above in “—Arrangements with Richard B. Saltzman—Payment of Combination Consideration” beginning on page 76, from Colony Capital in accordance with the terms of the Contribution Agreement and the Current Saltzman Agreement. Certain of the shares will be delivered to Mr. Saltzman on or as soon as practicable after the Closing and additional shares may be delivered to Mr. Saltzman in respect of the payment of contingent consideration in accordance with the terms of the Contribution Agreement.

The shares of Class A Common Stock delivered to Mr. Saltzman pursuant to the agreement and the Contribution Agreement will be fully vested as of the date on which they are delivered, but will generally be subject to restrictions on transfer following their delivery. At each anniversary of the date on which they are issued, a portion of the shares delivered to Mr. Saltzman will be released from the transfer restrictions resulting in an approximately ratable release across a five-year lock-up period, such that all of the shares delivered to Mr. Saltzman under the agreement will be freely transferable on the fifth anniversary of the Closing. In addition, the agreement provides for the earlier transferability of the shares delivered to Mr. Saltzman under the agreement and the Contribution Agreement for certain limited purposes, including transfers in respect of pledging activities, gifts, transfers to family estate planning vehicles, transfers required by law and transfers to cover tax obligations relating to the shares, among others. While Mr. Saltzman is permitted to make these transfers, he is required to retain a sufficient number of shares to satisfy any amount that may come due under the liquidated damages provision described below.

The agreement generally provides that if Mr. Saltzman materially violates or fails to perform his obligations under the restrictive covenant contained in the agreement under certain circumstances prior to the earlier of the fifth anniversary of the Closing and the termination of his employment by us without “cause” (as defined in his employment agreement with us and including non-renewal of the employment agreement by us) or by Mr. Saltzman for “good reason” (as defined in his employment agreement with us and described above), and fails to substantially cure and cease the violation within 60 days following the date on which he receives written notice of the violation, then he will be required to remit to us a specified number of shares of Class A Common Stock issued to him at the Closing as liquidated damages for the violation. If the violation occurs prior to the first anniversary of the Closing, then a total of 1,645,810 shares of Class A Common Stock will be required to be so remitted to us.

The amount of shares required to be remitted as liquidated damages decreases by 20% upon each anniversary of the Closing, such that no shares will be required to be remitted to us upon any non-competition violation that occurs on or after the fifth anniversary of the Closing. The restrictive covenant contained in the agreement generally restricts Mr. Saltzman from directly or indirectly engaging in our business in specified locations in which we carry on our business, subject to certain listed exceptions.

In addition, the agreement provides that if Colony Capital is obligated for any applicable losses under the Contribution Agreement, then Mr. Saltzman will be responsible for his pro-rata portion of those losses in accordance with a formula set forth in the agreement.

Employment Agreements with Other Executive Officers

We anticipate that we will enter into employment agreements prior to the Closing, to become effective as of the Closing, with each of (i) Darren J. Tangen, who is expected to continue to serve as our Chief Financial Officer following the Closing, (ii) Kevin P. Traenkle, who is expected to continue to serve as our Chief Investment Officer following the Closing, and (iii) Mr. Sanders, who is expected to continue to serve as our Chief Legal Officer and Secretary following the Closing. These agreements have not yet been executed and their terms have not yet been finalized and there is no assurance that any of these executives will ultimately enter into

 

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an employment agreement with us, although the Contribution Agreement does contain certain provisions relating to the requirement that some or all of these or certain other employment and related agreements be executed as a condition to the Closing.

It is anticipated that each of these employment agreements will be in effect for an initial term of three years following the Closing, subject to automatic renewals of additional successive one-year periods unless either party provides at least 180 days’ advance notice of non-renewal. Each agreement is expected to require that the executive will devote his full business time and attention to the performance of his duties to us, but will be permitted to engage in certain other outside activities so long as they do not unreasonably interfere with the performance of the executive’s duties to us.

The agreements are expected to provide for the payment of a specified base salary to each executive, which is expected to be equal to $447,000 for Mr. Tangen, $472,000 for Mr. Traenkle and $432,000 for Mr. Sanders. In addition, the agreements are expected to provide that each executive will be eligible to receive a discretionary annual cash bonus with a target amount of $1,300,000 for Mr. Tangen, $1,575,000 for Mr. Traenkle and $1,062,500 for Mr. Sanders and annual grants of equity-based awards with a target value of $1,000,000 for Mr. Tangen, $990,000 for Mr. Traenkle and $680,000 for Mr. Sanders. In addition, the executives are expected to continue to receive allocations in respect of carried interests in respect of funds managed by us that were granted to them prior to the Closing and to be eligible to be granted new allocations in respect of carried interests in respect of funds managed by us as is determined by the Board from time to time in consultation with the applicable executive. The executives are also expected to be eligible to participate in certain of our benefit plans made available to our senior executive officers from time to time and to receive certain perquisites that the executives were entitled to receive immediately prior to the Closing.

The agreements are expected to provide that if the executive’s employment is terminated by us without “cause” (as defined in the agreements and including non-renewal of the employment agreements by us) or by the executive for “good reason” (as defined in the agreement and described below), and the executive executes a release of claims, he will be eligible to receive (i) a lump sum cash payment equal to two times the sum of his base salary and average annual bonus with respect to the three prior calendar years (or, if any such termination of employment occurs prior to the executive receiving his annual bonus in respect of calendar year 2017, then his target annual bonus), (ii) a lump sum cash payment in respect of the annual bonus payable in respect of the year prior to the year of termination, if unpaid as of the date of termination, (iii) a pro-rated target bonus for the year of termination, (iv) continued medical, dental and vision benefits at active employee rates for 24 months following termination, and (v) full vesting of all equity-based awards, carried interests and other like compensation that he holds, to the extent unvested upon his termination.

The agreements are also expected to provide that if an executive provides notice to us of his intention not to renew the agreement upon the scheduled expiration of the initial term or any renewal term, then he will receive (i) a lump sum cash payment in respect of the annual bonus payable in respect of the year prior to the year of termination, if unpaid as of the date of termination and (ii) a pro-rated target bonus for the year of termination.

For purposes of the agreements, “good reason” is expected to include, in summary, (i) a material diminution in the executive’s duties, authority or responsibilities, (ii) a requirement that the executive report to any person other than our Chief Executive Officer or Executive Chairman, (iii) a reduction in the executive’s base salary, target annual cash bonus or target annual equity incentive grant, (iv) a 25-mile relocation of the executive’s principal place of business, or (v) a material breach of the agreement by us.

The agreements are expected to include a provision providing that if any payments to be made to the executive, whether under the agreement or otherwise, would subject the executive to the excise tax on so-called “golden parachute payments” in accordance with Sections 280G or 4999 of the Internal Revenue Code, then the payments will be reduced to the extent necessary to avoid the excise tax, but only if the amount of the payments after such reduction would result in the executive receiving a greater net after-tax benefit than if all of the payments were provided and the excise tax were imposed.

 

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It is also anticipated that the agreements, through a restrictive covenant agreement that is expected to be included as an exhibit to the agreements, will provide that the executives will not, subject to certain exceptions, compete with us, or solicit our investors or customers or employees or those of our subsidiaries during their employment with us and for the one-year period following the termination of their employment with us unless their employment is terminated by us without cause (as defined in the agreement and including non-renewal of the employment agreement by us) or by the executive for “good reason” (as defined in the agreement and described above). The agreements are also expected to contain covenants relating to the treatment of confidential information and intellectual property matters and restrictions on the ability of the executives and us to disparage the other.

Interests of Executive Officers in CCH I and CCH II

Overview. As described in more detail below, certain of our current executive officers and Mr. Hedstrom will receive Combination proceeds indirectly in the form of membership interests in each of CCH I and CCH II at or prior to the Closing. In addition to Mr. Hedstrom, these potential recipients consist of Messrs. Barrack, Saltzman, Tangen, Traenkle and Sanders.

Description of Membership Interests. The assets of CCH I will consist of OP Units. The assets of CCH II will consist of membership units in CC Holdings representing an indirect interest in OP Units and certain other assets held by CC Holdings and not related to the Combination. The membership interests in these entities that are held by the executive officers (other than Mr. Barrack) are being granted as consideration for past services provided to Colony Capital and for future services to be provided to CC Holdings and its affiliates related to the CC Retained Businesses, and will represent an economic right to each such officer’s respective allocation of the OP Units, as well as the other assets held by the applicable entity, and to the income and earnings on each of those interests.

Following vesting, if applicable, of an executive officer’s membership interests in CCH I or CCH II, the executive officer will be eligible to receive a distribution of OP Units or cash or other property in accordance with the terms and conditions of the OP Operating Agreement (which is described in more detail in the section entitled “—Certain Agreements to be Entered Into in Connection with the Contribution Agreement—OP Operating Agreement” beginning on page 112), and the executive officer will be eligible to request that all or part of any distributed OP Units be redeemed for shares of our Class A Common Stock (or cash in accordance with the terms of the OP Operating Agreement).

The executive officers will receive quarterly distributions of the earnings distributed by OP with respect to their vested interests. Upon the vesting of any membership interests held by an executive officer in CCH I and CCH II that are subject to vesting, the executive officer will receive a payment equal to all applicable earnings distributed by OP prior to the vesting date (net of operating expenses and an allocable share of any transaction expenses) in respect of the executive officer’s membership interests in CCH I and CCH II, and will thereafter receive the quarterly distributions described in the prior sentence.

Vesting of Membership Interests. The membership interests in CCH I and CCH II that are granted to Messrs. Tangen, Traenkle and Sanders will vest ratably over a three-year period based on services to be provided by each of them to the CC Retained Businesses and other factors provided for in the definitive documentation (which will not include continued employment by us), but the vesting may be accelerated in certain circumstances in accordance with the terms of the definitive documentation, including upon a change in control of OP.

In addition, certain of the membership interests held by the executive officers in CCH I and CCH II (but not any OP Units or shares of our common stock which the executive officer has received in respect of his vested equity interests in CCH I or CCH II) will be forfeited (i) if the executive officer competes with or solicits employees or customers of any affiliate of CCH I or CCH II during the time that the executive officer holds membership interests in CCH I or CCH II in violation of certain restrictive covenants to which the executive officer is subject, or (ii) upon the occurrence of an event constituting “cause,” in each case as will be more fully

 

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set forth in applicable definitive documentation. Any interests that are so forfeited will revert to CC Holdings and be subject to reallocation by Mr. Barrack in his capacity as the owner of a controlling interest in, and in his capacity as the sole managing member of, CC Holdings.

Allocation of Membership Interests. The potential recipients described above will receive membership interests in CCH I and CCH II (some of which may be held indirectly) at or prior to the Closing. The estimated value of the amounts attributable to the Combination net of estimated transaction costs is set forth below:

 

Name

  Estimated Value of Membership
Interests in CCH I ($)(1)
    Estimated Value of Membership
     Interests in CCH II ($)(2)     
    Total
Estimated Value of Membership
Interests ($)(3)
 
  Reference
Price
    VWAP     Reference
Price
    VWAP     Reference
Price
    VWAP  

Thomas J. Barrack, Jr.(4)

  $ 587,840      $ 660,087      $ 181,032      $ 203,281      $ 768,872      $ 863,368   

Richard B. Saltzman(4)

  $ 183,301      $ 205,829      $ 56,450      $ 63,388      $ 239,751      $ 269,217   

Mark M. Hedstrom

  $ 62,983      $ 70,724      $ 19,396      $ 21,780      $ 82,379      $ 92,504   

Kevin P. Traenkle

  $ 8,956,725      $ 10,057,529      $ 2,758,323      $ 3,097,328      $ 11,715,048      $ 13,154,857   

Darren J. Tangen

  $ 6,039,876      $ 6,782,192      $ 1,860,047      $ 2,088,651      $ 7,899,923      $ 8,870,843   

Ronald M. Sanders

  $ 3,527,838      $ 3,961,418      $ 1,086,437      $ 1,219,963      $ 4,614,275      $ 5,181,381   

 

(1) For purposes of the presentation in this table, the estimated value of the membership interests in CCH I received by the applicable executive officer (net of estimated transaction costs) is equal to the sum of (i) the product of (A) $22.05 (the Reference Price) or $24.76 (the VWAP), as indicated, which assumes that the OP Unit to which the membership interest relates is redeemed for a share of Class A Common Stock at the Closing, and (B) the total number of OP Units allocated to the executive officer, which is estimated to be 26,659 for Mr. Barrack, 8,313 for Mr. Saltzman, 2,856 for Mr. Hedstrom, 159,993 for Mr. Sanders, 273,917 for Mr. Tangen and 406,201 for Mr. Traenkle and (ii) the amount of any contingent consideration that may become payable to the executive officers in respect of these interests, which is equal to the following, assuming that all contingent consideration payable under the Contribution Agreement is actually paid: 11,002 for Mr. Barrack, 3,431 for Mr. Saltzman, 1,179 for Mr. Hedstrom, 66,029 for Mr. Sanders, 113,046 for Mr. Tangen and 167,640 for Mr. Traenkle.
(2) For purposes of the presentation in this table, the estimated value of the membership interests in CCH II received by the applicable executive officer (net of estimated transaction costs) is equal to the sum of (i) the product of (A) $22.05 (the Reference Price) or $24.76 (the VWAP), as indicated, which assumes that the OP Unit to which the membership interest relates is redeemed for a share of Class A Common Stock at the Closing, and (B) the total number of OP Units allocated to the executive officer, which is estimated to be 8,210 for Mr. Barrack, 2,560 for Mr. Saltzman, 880 for Mr. Hedstrom, 49,272 for Mr. Sanders, 84,356 for Mr. Tangen and 125,094 for Mr. Traenkle, (ii) the value, as estimated by Colony Capital, of the other assets held by CCH II and notionally allocated to the applicable executive officer, and (iii) the amount of any contingent consideration that may become payable to the executive officer in respect of the OP Units allocated to the executive officer, which is equal to the following, assuming that all contingent consideration payable under the Contribution Agreement is actually paid: 10,590 for Mr. Barrack, 3,302 for Mr. Saltzman, 1,135 for Mr. Hedstrom, 63,552 for Mr. Sanders, 108,805 for Mr. Tangen and 161,351 for Mr. Traenkle.
(3) The amounts in this column represent only an estimated value. The actual value on the date of the Closing of the membership interests in CCH I and CCH II that are held by any executive officer will be based on the value of OP Units and the other assets allocated to the executives at the date of the Closing (which are subject to adjustment) and may be less or more than the amounts listed in this column. In addition, an estimated total of approximately $6.0 million of membership interests based on the Reference Price (and $6.7 million based on the VWAP) in CCH I and CCH II remains unallocated (with the respective values determined in accordance with footnotes (1) and (2) above). While no determination has been made regarding whether or how these membership interests will be allocated, it is possible that they will be allocated in whole or in part to one or more of the individuals listed in the table.

 

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(4) A portion of the membership interests held indirectly by Messrs. Barrack and Saltzman may be reallocated by them at or following the Closing to other holders of membership interests in CCH I and CCH II, including our executive officers.

Interests of Executive Officers in CC Holdings

In addition to interests in CC Holdings held indirectly by our current executive officers and Mr. Hedstrom through CCH II, Messrs. Barrack, Saltzman and Hedstrom hold interests in CC Holdings, which owns Colony Capital. Their ownership of these interests entitles them to a portion of the OP Units received by Colony Capital at the Closing, along with additional OP Units in respect of the contingent consideration payable to Colony Capital under the Contribution Agreement, as set forth in the table below (net of estimated transaction costs).

 

Name

   Number of OP Units(1)      Estimated Value of OP Units ($)(2)  
      Reference Price      VWAP  

Thomas J. Barrack, Jr.

     16,072,224       $ 354,392,534       $ 397,948,266   

Richard B. Saltzman

     74,800       $ 1,649,350       $ 1,852,048   

Mark M. Hedstrom

     1,884,854       $ 41,561,020       $ 46,668,985   

 

(1) The number in this column does not include any interests in OP Units that are held indirectly by the individual through the membership interests he indirectly holds in CCH I.
(2) The estimated value of the OP Units held by the applicable individual as listed in the “Number of OP Units” column, and assuming that all contingent consideration payable under the Contribution Agreement is actually paid, is equal to the product of (i) $22.05 (the Reference Price) or $24.76 (the VWAP), as indicated, which assumes that the OP Unit to which the membership interest relates is redeemed for a share of Class A Common Stock at the Closing, and (ii) the number of OP Units listed in the “Number of OP Units” column. The amounts in this column represent only an estimated value. The actual value on the date of the Closing of the applicable OP Units will be based on the value of OP Units at the date of the Closing (which are subject to adjustment) and may be less or more than the amounts listed in this column.

Quantification of Potential Payments to Our Named Executive Officers in Connection with the Combination

In accordance with Item 402(t) of Regulation S-K, the table below sets forth the estimated amounts of compensation that is based on or otherwise relates to the Combination that may become payable or realized by each of our named executive officers (as identified in accordance with SEC regulations).

The estimated amounts below are based on multiple assumptions that may not actually occur, including assumptions described in this proxy statement. In addition, the amounts may vary depending on the actual date the Combination is completed. As a result, the actual amounts receive may differ in material respects from the amounts set forth below. The disclosures in the table below and the accompanying footnotes should be read in conjunction with the narrative description of the compensation arrangements set forth above in this section.

Golden Parachute Compensation

 

Named Executive Officer

   Cash
($)
     Equity
($)
    Pension /
Non-qualified
Deferred
Compensation
Benefit
($)
     Perquisites
/Benefits
($)
     Tax
Reimbursement
($)
     Other
($)
     Total
($)(1)
 

Thomas J. Barrack, Jr.(2)

     —           —          —           —           —           —           —     

Richard B. Saltzman

     —           89,769,134 (3)      —           —           —           —           89,769,134   

Kevin P. Traenkle(4)

     —           —          —           —           —           —           —     

Darren J. Tangen(4)

     —           —          —           —           —           —           —     

Ronald M. Sanders(4)

     —           —          —           —           —           —           —     

 

(1) The amount listed in this column represents only an estimated value. The actual value of the shares of Class A Common Stock received by Mr. Saltzman will be based on the value of such shares at the time they are delivered to him and may be less or more than the amount listed in this column.

 

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(2) Mr. Barrack is not entitled to receive the payment of any compensation as set forth in Item 402(t) of Regulation S-K in connection with the Combination. The arrangements that Mr. Barrack has entered into in connection with the Combination and his continuing employment with us following the Combination are described in “—Arrangements with Thomas J. Barrack, Jr.” beginning on page 73.
(3) The amount listed in this column represents the estimated value of the shares of Class A Common Stock that Mr. Saltzman may receive in connection with the Combination in accordance with the terms and conditions of the Current Saltzman Agreement, as described above in “—Arrangements with Richard B. Saltzman—Payment of Combination Consideration” beginning on page 76, and the Share Transfer and Liquidated Damages Agreement by and between us, Mr. Saltzman, Colony Capital and CC Holdings, which is described above in “—Arrangements with Richard B. Saltzman—Share Transfer and Liquidated Damages Agreement” beginning on page 79 (a “single-trigger” arrangement). The amount listed is based on an estimate that (i) Mr. Saltzman receives 2,616,913 shares of Class A Common Stock on or soon as practicable after the Closing and an additional 1,057,632 shares of Class A Common Stock in respect of the contingent consideration payable under the Contribution Agreement, assuming that all contingent consideration payable under the Contribution Agreement is actually paid, and (ii) the value of a share of Class A Common Stock is equal to $24.43 (the average closing market price of the Company’s securities over the first five business days following the first public announcement of the transaction). Mr. Saltzman is not entitled to receive the payment of any other compensation as set forth in Item 402(t) of Regulation S-K in connection with the Combination, and the other arrangements that Mr. Saltzman has entered into in connection with the Combination and his continuing employment with us following the Combination are described in “—Arrangements with Richard B. Saltzman” beginning on page 76 and “—Interests of Executive Officers in CCH I and CCH II” beginning on page 81.
(4) Messrs. Traenkle, Tangen and Sanders are not entitled to receive the payment of any compensation as set forth in Item 402(t) of Regulation S-K in connection with the Combination. The arrangements that Messrs. Traenkle, Tangen and Sanders are expected to enter into in connection with the Combination and their continuing employment with us following the Combination are described in “—Employment Agreements with Other Executive Officers” beginning on page 79 and “—Interests of Executive Officers in CCH I and CCH II” beginning on page 81.

Regulatory Approval Required for the Combination and Other Regulatory Matters

U.S. Consents. The expiration or termination of the waiting period under the HSR Act is a condition to each party’s obligation to complete the Combination. Each of the parties to the Contribution Agreement has pledged to use its reasonable best efforts to cause the waiting period under the HSR Act to expire or terminate. The parties filed the requisite HSR Notification and Report Form and related materials with the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice on January 15, 2015. The applicable waiting period under the HSR Act expired on February 17, 2015.

The registration of a subsidiary of NewCo with the SEC as an investment adviser under the 1940 Act is a condition to each party’s obligation to complete the Combination. The parties expect to file a successor application for registration as an investment advisor on Form ADV promptly following the Closing. It is anticipated that the registration will become effective 45 days after filing.

Other Consents. Approval from the U.K. Financial Conduct Authority is required for the contribution of the ownership of Colyzeo Investment Management Limited, a subsidiary of Colony Capital, to NewCo, and ministerial consents from certain authorities in Luxembourg and Lebanon must also be sought in connection with the indirect contribution of Colony Luxembourg, S.a.r.l., Colony Capital S.A.R.L., and Colony Capital (Offshore) S.A.L. Colony Capital agreed in the Contribution Agreement to use reasonable best efforts to seek such approval from the U.K. Financial Conduct Authority. If such approval is denied by the U.K. Financial Conduct Authority, Colony Capital’s obligation to obtain such approval will terminate. Colyzeo Investment Management Limited will not be contributed unless we receive the consent of both the U.K. Financial Conduct Authority and the Advisory Committees of Colyzeo Investors, L.P. and Colyzeo Investors II, L.P., although we expect the Company to provide management services to these funds regardless of whether such consents are obtained.

 

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Vote Required and Recommendation

Pursuant to Maryland law, transactions in which directors have a material financial interest are not void or voidable solely because of such fact if, among other things, disinterested director approval or ratification occurs, stockholder approval or ratification is obtained or the transaction is otherwise fair and reasonable to the corporation. The Combination was recommended by the Special Committee, which consists of independent and disinterested directors and which retained its own legal and financial advisors. Upon the recommendation by the Special Committee, our Board approved the Combination. In reaching its conclusion to recommend the Combination, the Special Committee determined the Combination was advisable to, and in the best interests of, us and our stockholders, taking into account the factors described in “Recommendations of the Special Committee and the Board,” beginning on page 59, which factors should be read in their entirety.

Because the consideration in connection with the Combination is issuable to a director, officer or substantial security holder of the Company or a company or entity in which any such person has a substantial direct or indirect interest and constitutes the issuance of common stock, or securities exchangeable for common stock, which in the aggregate would total more than 1% of the Company’s outstanding shares, Section 312.03(b) of the New York Stock Exchange Listed Company Manual requires the approval by a majority of votes cast on the Issuances at the Special Meeting, assuming that a quorum is present. If such approval is not received, then the Combination will not be consummated. In addition, we are requiring that the Issuances be approved without the votes of CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates. Therefore, the Issuances must be approved by the affirmative vote of (i) a majority of the votes cast, and (ii) a majority of the votes cast, excluding votes of shares cast by CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates. For the purpose of the vote on this proposal, abstentions will be counted as votes cast and will have the same effect as votes against the proposal, while broker non-votes and other shares not voted will not be counted as votes cast and will have no effect on the result of the vote. However, both abstentions and broker non-votes will be considered present for the purpose of determining the presence of a quorum.

Federal Securities Laws Consequences

All of the shares of Class A Common Stock, shares of Class B Common Stock and OP Units to be issued in the Combination will be offered and sold pursuant to an exemption from the registration provisions of the Securities Act and, therefore, will be subject to restrictions on their transferability in addition to the transfer restrictions contained in lock-up agreements between the Contributors and the Company.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVING THE ISSUANCES.

 

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PROPOSAL 2: THE CHARTER AMENDMENTS

We have agreed in the Contribution Agreement to make certain amendments to our Charter, consisting of the Charter Amendments described below, which each of the Special Committee and the Board has determined are advisable to, and in the best interests of, the Company and its stockholders. Each of the Special Committee and the Board has recommended the submission of the Charter Amendments for stockholder approval at the Special Meeting.

The Charter Amendments consist of changes to our current Charter that are intended to accomplish two primary purposes: (1) to designate, and set the express terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of conversion and redemption of, the Company’s Class B Common Stock, as described in more detail in Proposal 2(a) below, and (2) to revise the Company’s stock ownership limitations to (i) lower the common stock ownership limit subject to a “grandfather provision” applicable to certain pre-existing holdings, and (ii) to establish a separate “designated investment entity” ownership limit with respect to certain investment entities, each as described in more detail in Proposal 2(b) below. In addition, to the extent that the proposed Charter Amendments are approved by the stockholders, various ministerial changes and other changes not requiring stockholder approval will be made to our Charter, including changing the Company’s name from “Colony Financial, Inc.” to “Colony Capital, Inc.”

To the extent approved by our stockholders, we will implement the Charter Amendments through the adoption of the Amended and Restated Charter, which would become effective upon filing with, and acceptance for record by, the State Department of Assessments and Taxation of the State of Maryland. The full text of the proposed Amended and Restated Charter containing the proposed Charter Amendments is attached to this proxy statement as Appendix C and is incorporated herein by reference in its entirety, and has been marked to reflect the amendments contemplated by this Proposal 2, including various additional conforming and other immaterial changes. The summary of the proposed Charter Amendments set forth in this Proposal 2 is qualified in its entirety by reference to Appendix C, which you should read in its entirety.

If the Charter Amendments are approved, we intend to amend and restate our Charter as part of the Combination. We are under no obligation, however, to effectuate either or both of the Charter Amendments, and we would not expect to do so, if the Combination is not consummated.

Proposal 2(a)—Amendment to Create Class B Common Stock

Pursuant to the Colony Mark Transfer Agreement, as described in “Colony Mark Transfer Agreement,” beginning on page 110, which was entered into concurrently with the Contribution Agreement, the Mark Transferor will transfer the Colony Mark to OP in exchange for shares of our Class A Common Stock and our newly created Class B Common Stock. In order to issue these shares to the Mark Transferor at the closing of the Colony Mark Transfer Agreement, we agreed in the Contribution Agreement to amend our Charter to create our Class B Common Stock and, consequently, re-classify our common stock into our Class A Common Stock. The Class B Common Stock is intended to be equivalent, economically, to the Class A Common Stock but will have thirty-six and one-half (36.5) votes per share, which is intended to mirror the aggregate number of shares of Class B Common Stock issued pursuant to the Colony Mark Transfer Agreement and the OP Units (which are redeemable for cash or our Class A Common Stock, on a one-to-one basis) issued to Colony Capital and CCH I pursuant to the Contribution Agreement. Therefore, the Class B Common Stock is designed to give the holders thereof a right to vote that reflects the aggregate outstanding non-voting economic interest in our Company attributable to such holders or their affiliates issued pursuant to the Contribution Agreement in the form of OP Units and therefore does not provide any disproportionate voting rights.

The Company’s Charter currently authorizes 500 million shares of stock, consisting of 450 million shares of common stock, $0.01 par value per share, and 50 million shares of preferred stock, $0.01 par value per share.

 

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Pursuant to the current Charter, the Company’s common stock entitles its holders to one vote per share and to participation in the distribution upon liquidation of the Company’s assets remaining after payment of the Company’s debts and liabilities and distributions to holders of shares having a preference over the Company’s common stock. The Board has proposed that the Charter be amended to re-designate the Company’s common stock as the Company’s Class A Common Stock, with 449 million shares authorized, to continue under the same terms as previously, to create the Company’s Class B Common Stock with the terms described below and authorize one million shares of Class B Common Stock, to provide that, other than as described below, the Class A Common Stock and Class B Common Stock will have the same rights and privileges and rank equally, share ratably and be identical in all respects as to all matters and to make conforming and immaterial changes and modifications related to the foregoing.

Furthermore, the Board has proposed that the Charter be amended to provide the following terms for the Class B Common Stock:

 

    Each share of the newly created Class B Common Stock will entitle the holder thereof to thirty-six and one-half (36.5) votes on each matter on which holders of Class A Common Stock are entitled to vote and that the Class B Common Stock and Class A Common Stock will vote together as a single class.

 

    The Board may reclassify any unissued shares of Class B Common Stock from time to time in one or more classes or series of common stock or preferred stock.

 

    Subject to any preferences on other outstanding shares of the Company, if and when the Board of Directors authorizes or declares a dividend or distribution with respect to the Class A Common Stock, such authorization or declaration also shall constitute a simultaneous authorization or declaration of an equivalent dividend or distribution with respect to each share of Class B Common Stock.

 

    In the event of any liquidation, dissolution or winding up of the Company or any distribution of the Company’s assets, each holder of Class B Common Stock will be entitled to participate, together with the Class A Common Stock and any other class of stock not having a preference over Class B Common Stock, in the distribution of any remaining assets after payment of the Company’s debts and liabilities and distributions to holders of shares having a preference over the Class B Common Stock.

 

   

Each share of Class B Common Stock, which shall only be issued in conjunction with the issuance of OP Units (in a ratio of no more than one (1) share of Class B Common Stock for every thirty-five and one-half (35.5) OP Units), shall convert automatically into one fully-paid and non-assessable share of Class A Common Stock (i) if Mr. Barrack or any of his family members (or trusts for the benefit of his family members) directly or indirectly transfers beneficial ownership of Class B Common Stock other than among each other, and (ii) if Mr. Barrack directly or indirectly transfers beneficial ownership of OP Units directly or indirectly held by him, other than to a “Qualified Transferee,” any Qualified Transferee directly or indirectly transfers beneficial ownership of OP Units directly or indirectly held by it other than to Mr. Barrack or to another Qualified Transferee, or a Qualified Transferee that beneficially owns OP Units ceases at any time to continue to be a “Qualified Transferee” (which, as described below, may include the failure of a Qualified Transferee that is an executive of ours to be employed by us or a divorce or annulment), in each case for every group of between one (1) and thirty-five and one-half (35.5) OP Units involved in such transfer or cessation. In other words, with respect to clause (ii), one share of Class B Common Stock will convert automatically for every group of between one (1) and thirty-five and one-half (35.5) OP Units involved in any transfer or cessation. “Qualified Transferee” means Colony Capital and CC Holdings and any member of CCH I, CCH II, Colony Capital or CC Holdings for so long as any such person remains employed by us or our affiliates, any family member or affiliate of such persons or any person controlled by any combination of one or more of such persons or their family members. The purpose of this automatic conversion feature is to ensure that the holders of Class B Common Stock do not at any time have votes in excess of the number of OP Units then held by them (or the other permitted holders described above); to the extent that a share of Class B Common Stock or any group of up to thirty-five and one-half (35.5) OP Units is transferred or

 

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ceases to be held by a permitted holder, a share of Class B Common Stock will convert into one share Class A Common Stock, thereafter carrying only one vote.

 

    Each holder of Class B Common Stock shall have the right, at the holder’s option at any time and from time to time, to convert all or a portion of such holder’s Class B Common Stock into an equal number of fully paid and non-assessable shares of Class A Common Stock by delivering the certificates (if any) representing the shares of Class B Common Stock to be converted, duly endorsed for transfer, together with a written conversion notice to the transfer agent for the Class B Common Stock.

 

    Any share certificates will bear a legend, as set forth in the Charter, describing the conversion features of the Class B Common Stock.

All of the foregoing terms of the Class B Common Stock will be subject to operation of the Charter’s stock ownership limitation provisions.

The purpose and effect of this amendment, therefore, is to create a class of common stock that gives certain holders a right to vote that is proportional to the outstanding non-voting economic interest in our company attributable to such holders or their affiliates issued pursuant to the Contribution Agreement in the form of OP Units as if such holders had exchanged all of the OP units for shares of Class A Common Stock (without providing any disproportionate voting rights). This new class of common stock will enable us to comply with our obligations under the Colony Mark Transfer Agreement to issue shares of Class B Common Stock at closing under the Colony Mark Transfer Agreement. In addition, this amendment will enable us to comply with our obligation under the Contribution Agreement to file the Charter Amendments prior to the closing of the Contribution Agreement. Although, as described above, the Class B Common Stock will not provide for disproportionate voting rights, the issuance of the Class B Common Stock pursuant to the Colony Mark Transfer Agreement will result in Mr. Barrack controlling a significant number of votes in matters submitted to a vote of stockholders as a result of his beneficial ownership of Class B Common Stock (which will give him voting power equal to the economic interest in the Company issued to Colony Capital and CCH I in the form of OP Units as if all of those OP Units were exchanged for shares of Class A Common Stock), including the election of directors. Mr. Barrack may have interests that differ from our other stockholders, including by reason of his interest in OP, and may accordingly vote in ways that may not be consistent with the interests of those other stockholders.

Although our current Charter gives us the power, without stockholder approval, to reclassify any unissued shares of common stock from time to time into one or more classes or series of common stock, we are choosing to seek stockholder approval for the Charter amendment described in this Proposal 2(a) to create the Class B Common Stock rather than creating the Class B Common Stock without stockholder approval through a supplement to our current Charter filed with the State of Maryland. Given the important role of the Class B Common Stock in providing Mr. Barrack voting rights that are proportional to his economic interests in the Company, and given that Mr. Barrack is our Executive Chairman, we believe that that it is appropriate for the terms of the Class B Common Stock to be included in the text of our Charter itself.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF PROPOSAL 2(a).

Proposal 2(b)—Amendment to Revise the Company’s Stock Ownership Limitations

In order for us to qualify as a REIT under the Internal Revenue Code, shares of our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of stock (after taking into account options to acquire shares of common stock) may be owned, directly, indirectly or through attribution, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of a taxable year (other than the first year for which an election to be a REIT has been made).

 

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In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue Code, our current Charter generally prohibits any person (other than a person who has been granted an exception) from actually or constructively owning more than 9.8% of the aggregate of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding shares of such class or series of our preferred stock by value or by number of shares, whichever is more restrictive. In addition, pursuant to the articles supplementary setting forth the terms of our Series A Preferred Stock and Series B Preferred Stock, no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.8% (by value or number of shares, whichever is more restrictive) of our Series A Preferred Stock, or Series B Preferred Stock, respectively. However, our charter permits, and the Amended and Restated Charter would continue to permit, exceptions to be made for stockholders; provided, that our Board determines such exceptions will not jeopardize our qualification as a REIT.

In connection with the Combination, the Board has proposed that the Charter be amended to prohibit any person (other than a person who has been granted an exemption or a “designated investment entity” (as described below)) from actually or constructively owning more than 8.0% of the aggregate of the outstanding shares of our common stock (by value or by number of shares, whichever is more restrictive) (such limit, the “New Common Stock Ownership Limit”) and to make conforming and immaterial changes and modifications related to the foregoing. The New Common Stock Ownership Limit is being proposed so as, among other things, to assist subsidiary and other REITs in which the Company invests (the Company’s direct and indirect interests in which are contemplated to be transferred to OP in connection with the Combination) in complying with the limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue Code.

In addition, the Board has proposed that the Charter be amended to prohibit any “designated investment entity” (other than a person who has been granted an exemption) from actually or constructively owning more than 9.9% of the aggregate of the outstanding shares of our common stock (by value or by number of shares, whichever is more restrictive) and to make conforming and immaterial changes and modifications related to the foregoing. “Designated investment entity” would be defined in the Amended and Restated Charter as:

 

    an entity that is a pension trust that qualifies for look-through treatment under Section 856(h)(3) of the Internal Revenue Code;

 

    an entity that qualifies as a regulated investment company under Section 851 of the Internal Revenue Code; or

 

    a “qualified investment manager”, which is defined in the Amended and Restated Charter to mean an entity (i) who for compensation engages in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing or selling securities, (ii) who purchases securities in the ordinary course of its business and not with the purpose or effect of changing or influencing control of us, nor in connection with or as a participant in any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) of the Securities Exchange Act of 1934, as amended, and (iii) who has or shares voting power and investment power under Rule 13d-3(a) of the Securities Exchange Act of 1934, as amended;

provided, that in each case, so long as each beneficial owner of such designated investment entity or, in the case of a designated investment entity that is a qualified investment manager, of the shares owned by such designated investment entity, would satisfy the New Common Stock Ownership Limit if those beneficial owners owned directly their proportionate share of our common stock owned by the designated investment entity.

If and to the extent a person (other than a designated investment entity) actually or constructively would own, on the effective date of the Amended and Restated Charter, shares of our common stock in excess of the New Common Stock Ownership Limit, such person will be treated as not owning shares of our common stock in violation of the New Common Stock Ownership Limit. Instead, such person will generally be prohibited from actually or constructively owning our common stock in excess of the more restrictive of either (a) the Existing

 

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Common Stock Ownership Limit or (b) such person’s lowest actual or constructive percentage ownership, at any time following the effective date of the Amended and Restated Charter, of our common stock (by value or by number of shares, whichever is more restrictive, but not less than the New Common Stock Ownership Limit). This “grandfather provision” would not limit the application of the other restrictions on ownership of our stock set forth in the Amended and Restated Charter, including the restrictions described in the following paragraph.

Our current Charter also prohibits, and the Amended and Restated Charter will continue to prohibit, any person from (1) beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Internal Revenue Code, (2) transferring shares of our capital stock if such transfer would result in our being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution), (3) beneficially or constructively owning shares of our capital stock that would result in our owning (directly or indirectly) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if income derived by us (either directly or indirectly through one or more partnerships or limited liability companies) from such tenant for our taxable year, during which such determination is being made would reasonably be expected to equal or exceed the lesser of (a) one percent (1%) of our gross income (as determined for purposes of Section 856(c) of the Code), or (b) an amount that would cause us to fail to satisfy any of the gross income requirements of Section 856(c) of the Code, and (4) beneficially or constructively owning shares of our capital stock that would cause us otherwise to fail to qualify as a REIT. Any person who acquires or attempts or intends to acquire beneficial ownership of shares of our capital stock that will or may violate any of the foregoing restrictions on transferability and ownership is required to give notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfers on our qualification as a REIT. The foregoing restrictions on transferability and ownership will not apply if our Board determines that it is no longer in our best interest to attempt to qualify, or to qualify, or to continue to qualify, as a REIT. In addition, our Board may determine that compliance with the foregoing restrictions is no longer required for our qualification as a REIT.

Under the Amended and Restated Charter, our Board, in its sole discretion, may exempt a person from the ownership limits described above and any of the other restrictions described above. However, our Board may not grant an exemption to any person unless our Board obtains such representations, covenants and understandings as our Board may deem appropriate in order to determine that granting the exemption would not result in our losing our qualification as a REIT. As a condition of granting the exemption, our Board may require a ruling from the IRS or an opinion of counsel in either case in form and substance satisfactory to our Board, in its sole discretion in order to determine or ensure our qualification as a REIT.

In addition, under the Amended and Restated Charter, our Board may from time to time increase the ownership limits set forth in the Amended and Restated Charter. However, the ownership limits may not be increased if, after giving effect to such increase, five or fewer individuals could own or constructively own in the aggregate, more than 49.9% in value of the shares then outstanding.

The purpose and effect of this amendment is to assist subsidiary and other REITs in which the Company invests following the Combination in complying with the limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue Code. If one of more of these entities were to fail to comply with the limitations on the concentration of ownership of stock applicable to REITs, it could affect our ability to qualify as a REIT. As a result, our ownership limitations will be lower than those in effect prior to the Combination, which means that, subject to the “grandfather provision” described above, absent an exemption from our Board, an investor will not be permitted to acquire and own as many shares of our common stock as they generally would otherwise be permitted to own absent this amendment. In addition, the purpose and effect of this amendment is to provide a special ownership limit for designated investment entities in order to streamline the process of acquisition and ownership of our common stock by investors that qualify as a designated investment entity, particularly in light of the lower common stock ownership limits resulting from this amendment. Except as amended by the Charter Amendments, the ownership provisions of our Charter will remain unchanged in the Amended and Restated Charter.

 

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OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF PROPOSAL 2(b).

Vote Required and Recommendation

Our Charter requires the affirmative vote of two-thirds of all shares of common stock outstanding and entitled to be cast in order to make certain amendments to the Charter. In addition, we are requiring that the Charter Amendments be approved without the votes of CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates. Therefore, the affirmative vote of (i) two-thirds of the shares outstanding and entitled to be cast, and (ii) two-thirds of the shares outstanding and entitled to be cast, excluding shares held by CC Holdings, Colony Capital, CCH I, CRP and their respective subsidiaries and Affiliates, is required for approval of the Charter Amendments. For the purpose of the vote on the Charter Amendments, abstentions, broker non-votes and other shares not voted will have the same effect as votes against the proposal, although they will be considered present for the purpose of determining the presence of a quorum.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE CHARTER AMENDMENTS.

 

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DESCRIPTION OF THE COMBINATION

Set forth below is a summary of the Combination and the material terms of the Contribution Agreement and the Colony Mark Transfer Agreement to implement the Combination. The summary of the Contribution Agreement and the Colony Mark Transfer Agreement is qualified in its entirety by reference to the Contribution Agreement and the Colony Mark Transfer Agreement, which are attached to this proxy statement respectively as Appendix A and Appendix B, and which are incorporated herein by reference in their entirety.

As a stockholder, you are not a third party beneficiary of the Contribution Agreement or the Colony Mark Transfer Agreement and therefore you may not directly enforce any of their terms or conditions.

This summary may not contain all of the information about the Contribution Agreement and the Colony Mark Transfer Agreement that is important to you. We urge you to carefully read the full text of the Contribution Agreement and the Colony Mark Transfer Agreement because they are the legal documents that govern the Combination. The Contribution Agreement and the Colony Mark Transfer Agreement are not intended to provide you with any factual information about the Company or Colony Capital. In particular, the assertions embodied in the representations and warranties contained in the Contribution Agreement and the Colony Mark Transfer Agreement (and summarized below) were made as of a specified date, are modified or qualified by information in confidential disclosure letters provided by each party to the other in connection with the signing of the Contribution Agreement and the Colony Mark Transfer Agreement, may be subject to a contractual standard of materiality different from what might be viewed as material to stockholders, or may have been used for the purpose of allocating risk between the parties. Accordingly, the representations and warranties in the Contribution Agreement and the Colony Mark Transfer Agreement are not necessarily characterizations of the actual state of facts about the Company or Colony Capital at the time they were made or otherwise. The representations and warranties and other provisions of the Contribution Agreement and the Colony Mark Transfer Agreement and the description of such provisions in this document should not be read alone but instead should be read in conjunction with the other information contained in the reports, statements and filings that the Company files with the SEC and the other information in this proxy statement. See “Where You Can Find More Information” beginning on page 151.

We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, the Company is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this proxy statement not misleading.

Overview of the Combination

Combination with Colony Capital. On December 23, 2014, we entered into the Contribution Agreement, pursuant to which OP will acquire from the Contributors substantially all of Colony Capital’s real estate investment management business and operations, excluding those conducted exclusively in connection with CAH. Also on December 23, 2014, we entered into the Colony Mark Transfer Agreement, pursuant to which OP will acquire from New Colony Holdings LLC the ownership of the Colony Mark, which includes the Colony name.

The assets to be acquired directly or indirectly by OP from CC Holdings, Colony Capital and CCH I pursuant to the Contribution Agreement include the following (collectively, the “CC Contributed Assets”):

 

    all of the equity interests held by CC Holdings, Colony Capital or CCH I, as applicable, in all of the direct subsidiaries of CC Holdings, Colony Capital, and CCH I, other than the CC Retained Entities (as defined in the Contribution Agreement);

 

    all contracts to which CC Holdings, Colony Capital or CCH I is party or under which CC Holdings, Colony Capital or CCH I is bound, or to which any CC Contributed Assets held by Colony Capital, CCH I or CC Holdings are subject (other than any contract exclusively related to Colony Capital’s ownership stake in CAH (the “CC Retained Business”));

 

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    all other assets (other than the CC Retained Assets ) used or held for use in connection with the business conducted by CC Holdings, Colony Capital, CCH I and their respective Subsidiaries, except for the Colony Mark (which will be transferred pursuant to the Colony Mark Transfer Agreement); and

 

    all books and records in the possession or control of CC Holdings, Colony Capital or CCH I to the extent pertaining to the CC Contributed Assets.

To effect the contribution to OP of the CC Contributed Assets, (i) prior to the Closing (as defined in the Contribution Agreement), CC Holdings, Colony Capital, CCH I and their respective subsidiaries will contribute to NewCo (or a wholly owned subsidiary of NewCo) the CC Contributed Assets, and (ii) at the Closing, CC Holdings, Colony Capital and CCH I shall contribute to OP all of the issued and outstanding membership interests in NewCo.

In addition, pursuant to the Contribution Agreement, (i) FHB LLC will contribute to OP membership interests of CRP in the aggregate equal to 50.0% of the outstanding membership interests of CRP (the remaining 50.0% of the outstanding membership interests of CRP being owned by CRM), (ii) Mr. Saltzman will contribute to OP membership interests in CRM in the aggregate equal to 40.0% of the outstanding membership interests of CRM, and (iii) Colony Capital and CRM will enter into an investment management agreement pursuant to which Colony Capital will perform certain management functions required of CRM pursuant to the limited liability agreement of CRP.

Internally Managed REIT. Pursuant to the Contribution Agreement, OP will acquire all of the issued and outstanding equity interests in our manager, Colony Financial Manager, LLC, which is a wholly owned subsidiary of Colony Capital. As described in “Interests of Certain Persons in the Combination—Arrangements with Thomas J. Barrack, Jr.,” beginning on page 73, Mr. Barrack, will continue to serve as our Executive Chairman and the Chairman of our Board and has entered into a five-year employment agreement with the Company to become effective at the Closing. As described in “Interests of Certain Persons in the Combination—Arrangements with Richard B. Saltzman,” beginning on page 76, Mr. Saltzman will continue to serve as our Chief Executive Officer and a member of our Board and has also entered into a five-year employment agreement with the Company to become effective at the Closing. Pursuant to Contribution Agreement, by virtue of the contribution of the CC Contributed Assets to NewCo and the subsequent contribution of NewCo to OP, substantially all of Colony Capital’s employees will become employees of the Company following the Closing and we will be an internally managed REIT.

Company Contribution to OP. OP currently holds, directly and indirectly, a substantial majority of the Company’s assets and liabilities. Pursuant to the Contribution Agreement, prior to the Closing, OP will acquire substantially all of the assets and liabilities of the Company that are not currently held by OP or its subsidiaries. Following the Closing, OP will hold, directly and indirectly, substantially all of our assets and conduct, directly and indirectly, substantially all of our business.

Ownership and Management of OP. Immediately following the Combination, we will directly own approximately 84.1% of the aggregate OP Units in OP and the Contributors will directly own, collectively, approximately 15.9% of the aggregate OP Units in OP. At the Closing, the Company, OP and the Contributors will enter into an amended and restated operating agreement of OP. The Company, as the sole managing member in OP, will have sole responsibility and discretion in the management and control in OP, and the non-managing members of OP, in such capacity, will have no authority to transact business for, or take part in the operations, management or control of, OP. See “Certain Agreements to be entered into pursuant to the Contribution Agreement—OP Operating Agreement” beginning on page 112.

Consideration to be Paid in the Combination

In connection with the Combination, we will issue up to approximately 3.94 million shares of Class A Common Stock and up to 665,593 shares of Class B Common Stock, and OP will issue up to approximately 25.22 million OP Units. Each share of Class B Common Stock will be, at the holder’s option, convertible into one share of Class A

 

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Common Stock. Each OP Unit will be redeemable, subject to the terms and conditions set forth in the operating agreement of OP, at the holder’s option, for cash equal to the average closing price of Class A Common Stock for the ten consecutive trading days immediately preceding the date we receive a notice of redemption; provided, that we may choose, at our sole discretion, to satisfy this redemption right by exchanging such OP Units for shares of Class A Common Stock on a one-for-one basis, in lieu of cash.

The above consideration represented a value of $657.5 million at the time of the announcement of the transaction based on a reference price that equated to $22.05 per share (the “Reference Price”) (which would have a current value of approximately $738.3 million when using the VWAP). Pursuant to the Contribution Agreement and the Colony Mark Transfer Agreement, the Reference Price was used to determine the number of shares and OP Units to be issued to the Contributors and the Mark Transferor in the Combination. The Reference Price was the higher of (x) the volume-weighted average closing price of the Company’s common stock over the 30 trading days prior to the initial announcement of the transaction, and (y) the third quarter 2014 “fair value” Company share price, which the parties agreed would be the fair value of the Company’s net assets on a per share basis as of September 30, 2014, or $22.05 per share. Because the volume-weighted average closing price of the Company’s common stock over the 30 trading days prior to the initial announcement of the transaction was lower than $22.05 per share, the Reference Price was $22.05 per share.

The aggregate potential consideration consists of:

 

    fixed upfront consideration to be paid in a combination of up to approximately 2.83 million shares of Class A Common Stock, 566,635 shares of Class B Common Stock and approximately 21.44 million OP Units, representing a value of $547.5 million at the time of the announcement of the Combination based on the Reference Price (and which would have a current value equal to approximately $614.8 million when using the VWAP), subject to certain adjustments as described below; and

 

    contingent consideration to be paid in a combination of up to approximately 1.11 million shares of Class A Common Stock, 98,958 shares of Class B Common Stock and approximately 3.78 million OP Units, representing a value of up to approximately $110.0 million at the time of announcement based on the Reference Price (and which would have a current value of up to approximately $123.5 million when using the VWAP), subject to multi-year performance targets for achievement of certain FFO per share targets and capital-raising thresholds from the funds management businesses. If the minimum performance target for either of these metrics is not met or exceeded, the contingent consideration paid in respect of the other metric would not be paid out in full.

In connection with the Combination, the upfront consideration is subject to upward and downward adjustments at the Closing in respect of cash, indebtedness and net working capital. If the closing adjustment results in an increase to the upfront consideration, such adjustment will, subject to the applicable cap, be paid in cash and to the extent such adjustment exceeds the applicable cap, will increase the number of OP Units to be issued in the Combination. If the closing adjustment results in a decrease to the upfront consideration, such adjustment will reduce the number of OP Units to be issued in the Combination.

Up to 151,520 shares of Class A Common Stock, 13,494 shares of Class B Common Stock and 515,258 OP Units, representing $15.0 million of the contingent consideration at the time of announcement based on the Reference Price (and which would have a current value of approximately $16.8 million when using the VWAP) may be reallocated to upfront consideration if the volume-weighted average closing price of the Company’s common stock over the 10 trading days prior to the tenth calendar day preceding the date of the Special Meeting were to exceed $24.05, with the full amount reallocated if such volume-weighted average closing price of the Company’s common stock were to equal or exceed $27.05.

The number of shares of Class A Common Stock, shares of Class B Common Stock and OP Units issuable as consideration will be subject to reduction for a portion of any transaction expenses of Colony Capital paid on its behalf by the Company.

 

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Upfront Consideration

Consideration to be paid at the Closing. Pursuant to the Contribution Agreement, the Contributors will be entitled to receive approximately 2.71 million shares of Class A Common Stock and approximately 21.44 million OP Units in aggregate upfront consideration at the Closing valued in the aggregate at $532.5 million based on the Reference Price (and $597.9 million based on the VWAP), subject to reduction, in each case, for a portion of any transaction expenses of Colony Capital paid by the Company at the Closing. Mr. Saltzman will be entitled to receive, pursuant to a share transfer agreement with Colony Capital, all of the shares of Class A Common Stock issued as upfront consideration. The OP Units issued as upfront consideration will be allocated to the Contributors as follows: (i) Colony Capital: approximately 18.5 million, (ii) CCH I: approximately 1.6 million, (iii) FHB LLC: approximately 0.9 million, and (iv) Mr. Saltzman: approximately 0.4 million, subject to reduction, in each case, as described above.

Pursuant to the Colony Mark Transfer Agreement, New Colony Holdings, LLC will be entitled to receive 113,637 shares of Class A Common Stock and 566,635 shares of Class B Common Stock in aggregate upfront consideration at the Closing valued in the aggregate at $15.0 million based on the Reference Price (and approximately $16.8 million based on the VWAP), subject to reduction, in each case, for a portion of any transaction expenses of Colony Capital paid by the Company pursuant to the Contribution Agreement at the Closing.

The amount of upfront consideration payable under the Contribution Agreement is subject to separate adjustments at the Closing in respect of cash, indebtedness and net working capital, which are referred to as the “CC Closing Adjustment” and the “CRP Closing Adjustment.”

For purposes of the Contribution Agreement, the CC Closing Adjustment means (i) CC Closing Date Cash (as defined in the Contribution Agreement) minus (ii) CC Closing Unpaid Indebtedness (as defined in the Contribution Agreement) plus (iii) if the CC Working Capital (as defined in the Contribution Agreement) exceeds the CC Reference Working Capital (as defined in the Contribution Agreement), an amount equal to such excess, minus (iv) if the CC Reference Working Capital exceeds the CC Working Capital, an amount equal to such excess. If the CC Closing Adjustment is a positive amount, OP will pay such amount in cash to Colony Capital up to a cap of $25.0 million; provided, that with respect to any excess above $25.0 million, OP will issue to Colony Capital additional OP Units (valued at the Reference Price) equal to the value of such excess amount. If the CC Closing Adjustment is a negative amount, such amount will result in a decrease in the number of OP Units (valued at the Reference Price) issued by OP to Colony Capital equal to value of the shortfall.

For purposes of the Contribution Agreement, the CRP Closing Adjustment means (i) CRP Closing Date Cash (as defined in the Contribution Agreement) minus (ii) CRP Closing Unpaid Indebtedness (as defined in the Contribution Agreement) plus (iii) if the CRP Working Capital (as defined in the Contribution Agreement) exceeds the CRP Reference Working Capital (as defined in the Contribution Agreement), an amount equal to such excess, minus (iv) if the CRP Reference Working Capital exceeds the CRP Working Capital, an amount equal to such excess. If the CRP Closing Adjustment is a positive amount, such amount up to $5.0 million will result in an increase in upfront consideration payable by OP in cash, with any excess above $5.0 million payable in OP Units (valued at the Reference Price) issued by OP under the Contribution Agreement. If the CRP Closing Adjustment is a negative amount, such amount will result in a decrease in the number of OP Units (valued at the Reference Price) issued by OP under the Contribution Agreement. Any cash payable, or increase or decrease of OP Units issuable, in connection with the CRP Closing Adjustment shall be allocated 50% to FHB LLC, 30% to Colony Capital and 20% to Mr. Saltzman.

Contingent Consideration

Pursuant to the Contribution Agreement, the Contributors will be entitled to receive up to approximately 1.07 million shares of Class A Common Stock and approximately 3.78 million OP Units in aggregate contingent consideration post-Closing valued in the aggregate at approximately $107.0 million based on the Reference Price (and $120.1 million based on the VWAP), in each case, subject to adjustment for any reallocated consideration

 

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and a portion of any transaction expenses of Colony Capital paid by the Company in connection with such contingent consideration. Mr. Saltzman will be entitled to receive, pursuant to a share transfer agreement with Colony Capital, all of the shares of Class A Common Stock issued as contingent consideration. If the full amount of contingent consideration were issued, the OP Units would be allocated to the Contributors as follows (i) Colony Capital: approximately 2.85 million, (ii) CCH I: approximately 0.66 million, (iii) FHB LLC: approximately 0.19 million, and (iv) Mr. Saltzman: approximately 0.08 million, subject to reduction, in each case, as described above.

Pursuant to the Colony Mark Transfer Agreement, New Colony Holdings will be entitled to receive up to 37,718 shares of Class A Common Stock and 98,958 shares of Class B Common Stock in aggregate contingent consideration post-Closing valued in the aggregate at approximately $3.0 million based on the Reference Price (and $3.4 million based on the VWAP), in each case, subject to adjustment for any reallocated consideration and a portion of any transaction expenses of Colony Capital paid by the Company in connection with such contingent consideration.

Distribution of Contingent Consideration

Pursuant to the Contribution Agreement, OP shall, at the Closing, issue up to approximately 4.99 million OP Units of aggregate potential contingent consideration to be held, together with any distributions thereon, in a separate account (the “Contingent Consideration Account”), which account shall be held and managed by OP. Upon a final determination of the amount of contingent consideration payable in connection with the Combination, OP shall transfer to the Contributors and New Colony Holdings (in accordance with their allocable percentages) from the Contingent Consideration Account such number of OP Units (together with an amount in cash equal to any distributions that would have been declared thereon between Closing and the date of the applicable issuance had such OP Units been issued at Closing). If, following any such final determination, the Contingent Consideration Account holds more OP Units than OP could in any event be obligated to transfer to the Contributors and New Colony Holdings pursuant to the Contribution Agreement, OP shall remove such excess OP Units from the Contingent Consideration Account and cancel such excess OP Units. At any time when OP Units are delivered from OP to the Contributors from the Contingent Consideration Account pursuant to the Contribution Agreement, a portion of such OP Units approximately equal to the amount determined by multiplying the number of such OP Units by 22.123% will be exchanged by Colony Capital for shares of Class A Common Stock, which shares shall be transferred to Mr. Saltzman.

Contingent Consideration Relating to Achievement of Benchmark Cumulative FFO Per Share Target.

Contingent consideration with a value of up to an aggregate $31.6 million based on the Reference Price (and $35.4 million based on the VWAP) (subject to reduction for a portion of any reallocated consideration) of the aggregate contingent consideration (the “FFO Contingent Consideration”) is payable based on the achievement of performance targets relating to certain benchmark funds from operations per share target during the three-year period beginning on the first day of the first fiscal quarter beginning on or after the Closing (the “FFO Measurement Period”). The full amount of FFO Contingent Consideration would be payable if the Benchmark Cumulative FFO Per Share (as defined below) equals or exceeds $6.06 per share of Class A Common Stock (the “FFO Target”). A portion of FFO Contingent Consideration is payable if the Benchmark Cumulative FFO Per Share exceeds 87.5% of the FFO Target, or $5.30 per share of Class A Common Stock, with such portion of FFO Contingent Consideration increasing ratably at approximately $1.262 million based on the Reference Price (and $1.417 million based on the VWAP) (subject to reduction for a portion of any reallocated consideration) per half percentage point above 87.5% until the full amount of potential FFO Contingent Consideration is payable if the Benchmark Cumulative FFO Per Share equals or exceeds the FFO Target.

In the event that the Benchmark Cumulative FFO Per Share exceeds the FFO Target, an additional amount of contingent consideration with a value up to an aggregate $16.0 million based on the Reference Price (and $17.9 million based on the VWAP) (subject to reduction for a portion of any reallocated consideration) (the

 

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FFO Additional Contingent Consideration”) is payable as follows: (1) the full amount of FFO Additional Contingent Consideration is payable if the Benchmark Cumulative FFO Per Share equals or exceeds 112.5% of the FFO Target, or approximately $6.82 per share of Class A Common Stock, or (2) a portion of FFO Additional Contingent Consideration is payable if the Benchmark Cumulative FFO Per Share exceeds the FFO Target, with such portion of FFO Additional Contingent Consideration increasing ratably at approximately $638,000 based on the Reference Price (and $716,412 based on the VWAP) (subject to reduction for a portion of any reallocated consideration) per half percentage point above 100% of the FFO Target until the full amount of potential FFO Additional Contingent Consideration is payable if the Benchmark Cumulative FFO Per Share equals or exceeds 112.5% of the FFO Target. In the event that the FFO Additional Contingent Consideration becomes payable but no RE Capital Raise Contingent Consideration (as defined below) is payable as of the end of the RE Capital Raise Measurement Period (as defined below), then the amount of FFO Additional Contingent Consideration that would have otherwise been payable will be reduced by half.

Benchmark FFO Target—Certain Defined Terms

For purposes of determining the FFO Contingent Consideration and FFO Additional Contingent Consideration payable under the Contribution Agreement and the Colony Mark Transfer Agreement, the terms below are generally defined as follows:

Benchmark Cumulative FFO” means the cumulative Benchmark FFO Per Share during the FFO Measurement Period.

Benchmark FFO” means net income allocable to holders of the Company’s common stock and OP Units (computed in accordance with GAAP), excluding (A) realized gains (or losses) from sales of real estate and non-real estate assets, (B) realized and unrealized performance fees related to the real estate and non-real estate private fund business, net of respective performance compensation expenses, (C) purchase accounting adjustments arising from the transaction, (D) real estate depreciation and amortization and (E) adjustments related to changes in GAAP during the FFO Measurement Period, in all cases after adjustments for the Company’s proportionate share of such items from unconsolidated partnerships and joint ventures. Notwithstanding the foregoing, benchmark FFO will (i) include (A) the unrealized fair value gains and losses from CLNY GP Investments, (B) realized investment income, gains and losses from CLNY GP Investments, and (ii) exclude (A) any potential expenses related to contingent consideration, (B) any payment pursuant to the Colony Mark Transfer Agreement, (C) transaction costs, remeasurement gains and losses arising from the transaction, and amortization of intangible assets, liabilities and step-up adjustments recognized as a result of the transaction, (D) realized gains and losses related to sales of the Company’s interest in the Colony American Homes platform and (E) realized gains and losses from the sale of non-real estate assets other than those related to CLNY GP Investments. Benchmark FFO is not intended to represent FFO or adjusted FFO in accordance with the NAREIT definition.

Benchmark FFO Per Share” means, with respect to the FFO Measurement Period, (A) Benchmark FFO for each individual year, independent of prior and forward years, during such FFO Measurement Period, divided by (B) the benchmark weighted average (weighted quarterly in each year of the FFO Measurement Period by the weighted average shares of the Company’s common stock outstanding in each quarter ending shares outstanding balance and the days in the quarter) number of basic shares of Class A Common Stock outstanding during each year of such FFO Measurement Period, which represents (w) the weighted average (as defined above) number of basic shares of Class A Common Stock outstanding that is used to calculate basic earnings per share (in accordance with GAAP) for each year of such FFO Measurement Period, minus (x) the weighted average (as defined above) number of basic shares of Class A Common Stock then outstanding that were issued as Consideration hereunder (or pursuant to any exchange or redemption of Consideration) already included in weighted average basic shares outstanding for each year during such FFO Measurement Period, plus (y) the fixed amount of 27,691,610 shares of Class A Common Stock outstanding as hypothetical potential equity consideration.

 

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CLNY GP Investments” means any investments made by the Company or its subsidiaries as a general partner, a limited partner, or a member in the private fund business, including real estate and non-real estate funds, vehicles and other investment products.

Contingent Consideration Relating to Real Estate and Non-Real Estate Capital Raising Activities

Contingent consideration with a value of up to an aggregate $31.6 million based on the Reference Price (and $35.4 million based on the VWAP) (subject to reduction for a portion of any reallocated consideration) (the “RE Capital Raise Contingent Consideration”) is payable based on the achievement by the Company of certain targets for capital raising generally related to real estate funds and investment vehicles during the two-year period (or if Colony Capital so elects prior to the expiration of such two-year period, a three-year period) beginning on the first day of the first full fiscal quarter beginning on or after the Closing (the “RE Capital Raise Measurement Period”). The full amount of RE Capital Raise Contingent Consideration would be payable if the RE Cumulative Capital Raise (as defined below) equals or exceeds $3.975 billion (if the RE Capital Raise Measurement Period is two years in duration) and $6.650 billion (if the RE Capital Raise Measurement Period is three years in duration) (the “RE Capital Raise Target”). A portion of RE Capital Raise Contingent Consideration is payable if the RE Cumulative Capital Raise exceeds 75% of the RE Capital Raise Target with such portion of RE Capital Raise Contingent Consideration increasing ratably at approximately $1.262 million based on the Reference Price (and $1.417 million based on the VWAP) (subject to reduction for a portion of any reallocated consideration) per percentage point above 75% until the full amount of potential RE Capital Raise Contingent Consideration is payable if the RE Cumulative Capital Raise equals or exceeds the RE Capital Raise Target.

In the event that the RE Cumulative Capital Raise exceeds the RE Capital Raise Target, additional contingent consideration with a value of up to an aggregate $16.0 million based on the Reference Price (or $17.8 million based on the VWAP) (subject to reduction for a portion of any reallocated consideration) (the “RE Capital Raise Additional Contingent Consideration”) is payable as follows (i) the full amount of RE Capital Raise Additional Contingent Consideration is payable if the RE Cumulative Capital Raise equals or exceeds 125% of the RE Capital Raise Target, or (ii) a portion of RE Capital Raise Additional Contingent Consideration is payable if the RE Cumulative Capital Raise exceeds the RE Capital Raise Target, with such portion of RE Capital Raise Additional Contingent Consideration increasing ratably at approximately $638,000 based on the Reference Price (and $716,412 based on the VWAP) (subject to reduction for a portion of any reallocated consideration) per percentage point above 100% of the RE Capital Raise Target until the full amount of RE Capital Raise Additional Contingent Consideration is payable if the RE Cumulative Capital Raise equals or exceeds 125% of the RE Capital Raise Target. In the event that the RE Capital Raise Additional Contingent Consideration becomes payable but no FFO Contingent Consideration is payable as of the end of the FFO Measurement Period, then the amount of the RE Capital Raise Additional Contingent Consideration that would have otherwise been payable shall be reduced by half.

Contingent consideration with a value of $15.0 million based on the Reference Price (or $16.8 million based on the VWAP) in the aggregate (subject to reduction for a portion of any reallocated consideration) (the “Non-RE Capital Raise Contingent Consideration”) is payable based on the achievement of certain targets for capital raising generally related to non-real estate funds and investment vehicles during the two-year period beginning on the first day of the first full fiscal quarter beginning on or after the Closing. The Non-RE Capital Raise Contingent Consideration is payable if the Non-RE Cumulative Capital Raise (as defined below) equals or exceeds $500.0 million during such two-year period.

For purposes of determining RE Capital Raise Contingent Consideration, RE Capital Raise Additional Contingent Consideration and Non-RE Capital Raise Contingent Consideration, the terms below are generally defined as follows:

Non-RE Cumulative Capital Raise” means, without duplication, the cumulative amount of (i) Qualified Third-Party Capital that is raised in non-real estate investment products, (ii) Qualified Third-Party Capital

 

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relating to listed securities hedge fund strategies whether or not real estate-related, and (iii) Qualified Third-Party Capital relating to listed securities non-hedge fund strategies that are not predominantly real estate-related, in each case, during the two-year period beginning on the first day of the first full fiscal quarter beginning on or after the Closing Date. Non-RE Cumulative Capital Raise calculation excludes potential CLNY GP Investment in such non-real estate funds, investment vehicles and other investment products. For clarification purposes, it also excludes any Company stockholder capital raise in the public equity market during the two-year period beginning on the first day of the first full fiscal quarter beginning on or after the Closing, but does not exclude any other form of private or public capital raise for its non-real estate funds, investment vehicles and other investment products.

Qualified Third-Party Capital” for any category of capital means the sum across all funds, investment vehicles and other investment products within such category of capital of an amount equal to, for each such fund, investment vehicle or investment product, (A) the amount of third-party capital committed to such fund, investment vehicle or investment product, multiplied by (B) the sum of: (i) (x) 60% multiplied by (y) the fee to be charged on net funded equity or limited partner capital commitments as an annual management fee expressed in basis points, divided by (z) 125 basis points; plus (ii) (x) 40%, multiplied by (y) the percentage to be charged on investment returns above an IRR hurdle (consistent with market terms for funds, investment vehicles or investment products investing in similar asset classes) as carried interest of such fund, investment vehicle or investment product expressed as a percentage; provided, that such fund is on other terms consistent with market terms for funds investing in similar asset classes, divided by (z) 17%; provided, further, that third-party capital shall exclude capital raised for Colony Distressed Credit and Special Situation Fund III, L.P. and ColCo Strategic Partners III, L.P. For purposes of this definition, the calculation of any management fee or carried interest with respect to any third-party capital raised in a fund, investment vehicle or other investment product shall be determined on a blended basis within such fund, investment vehicle or investment product.

RE Cumulative Capital Raise” means, without duplication, the cumulative amount of (i) Qualified Third-Party Capital that is raised in real estate funds, vehicles and other investment products during the RE Capital Raise Measurement Period, (ii) to the extent the Non-RE Capital Raise Target is achieved, the cumulative amount of any Qualified Third-Party Capital relating to real estate listed securities hedge fund strategies in excess of the Non-RE Capital Raise Target, and (iii) Qualified Third-Party Capital relating to listed securities non-hedge fund strategies that are predominantly real estate-related; provided, that any such capital raised in the fourth quarter of 2014 will be counted for purposes of calculating the RE Cumulative Capital Raise. RE Cumulative Capital Raise calculation excludes potential CLNY GP Investment in such real estate funds, vehicles and other investment products. For clarification purposes, it also excludes any Company stockholder capital raise in the public equity market during the RE Capital Raise Measurement Period, but does not exclude any other form of private or public capital raise for real estate vehicles and other investment products.

 

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THE CONTRIBUTION AGREEMENT

The Contribution

We will acquire from the Contributors substantially all of Colony Capital’s real estate investment management business and operations (other than Colony Capital’s interests in CAH). The Contribution will be made in the following steps:

First, through the contribution of the CC Contributed Assets and CC Assumed Liabilities by CC Holdings, Colony Capital and CCH I to NewCo, a newly-formed wholly owned subsidiary of CC (the “CC Pre-Closing Contribution”). The “CC Assumed Liabilities” generally comprise all liabilities (excluding any CC Retained Liabilities, as defined below), whether arising before or after the Closing of the Combination, from CC Holdings, Colony Capital, CCH I or any of their respective predecessor companies or businesses, or any of its affiliates, subsidiaries or divisions, relating to, resulting from or arising out of the present, past or future operation or conduct of Colony Capital’s business (other than CC Retained Business), or the present, past or future ownership or use of any CC Contributed Assets (including liabilities relating to the Colony Mark).

Secondly, through the contribution by the Contributors to OP, our wholly owned subsidiary, which will be our operating company after the consummation of the Combination, of the following interests (collectively, the “Contribution”):

 

    by CC Holdings, Colony Capital and CCH I: all of their equity interests in NewCo;

 

    by FHB LLC: its interests in CRP in the aggregate equal to 50% of the outstanding membership interests of CRP (the remaining 50% of the outstanding membership interests of CRP being owned by CRM, a 60% owned subsidiary of Colony Capital); and

 

    by Mr. Saltzman: his membership interests in CRM in the aggregate equal to 40% of the outstanding membership interests of CRM (the remaining 60% being owned by Colony CRP Managing Member, LLC, a wholly owned subsidiary of Colony Capital).

As a result of the CC Pre-Closing Contribution and the Contribution, NewCo will become a wholly owned subsidiary of OP at the Closing, and all of NewCo or its subsidiaries’ employees will become our employees.

CC Retained Assets and CC Retained Liabilities. Certain ownership interests and assets (and the liabilities associated with those interests and assets) held by CC Holdings, Colony Capital and CCH I are not being acquired by us. The CC Retained Assets include Colony Capital’s interest in CAH and certain general partnership interests held by Colony Capital, which are:

 

    all of the equity interests held by CC Holdings, Colony Capital or CCH I in each of the following entities: (i) Colony AH Member LLC, (ii) Manager HoldCo LLC, (iii) CAH Holdings II Onshore GP, LLC, (iv) Colony CRP Managing Member, LLC, (v) CRM, (vi) CRP, (vii) Colony CP Member, LLC, (viii) Colony Global Holdings Parent, LLC, (ix) Colony Capital MENA, LLC, (x) Colony Smeralda Co-Investment Genpar, LLC, (xi) Colony Axle Co-Investment Genpar, LLC, (xii) Colony Milestone Co-Investment Genpar, LLC, (xiii) any subsidiaries of any of the foregoing, and (xiv) Colony Capital (collectively the “CC Retained Entities”);

 

    all assets exclusively used or held for use by the CC Retained Entities or in connection with the CC Retained Business;

 

    the corporate documents, qualifications and records of CC Holdings, Colony Capital, CCH I and each CC Retained Entity;

 

    all pre-Closing tax losses and tax loss carry forwards and rights to receive refunds, credits and credit carry forwards with respect to any and all taxes, including interest thereon;

 

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    any deposit or similar advance payment with respect to taxes;

 

    any attorney-client privilege to the extent that such privilege may be asserted by Mr. Barrack in his individual capacity or by CC Holdings, Colony Capital, CCH I or by any CC Retained Entity and their respective affiliates (without prejudice to the ability of any of the foregoing parties and the Company or its affiliates to assert any shared privilege);

 

    all rights of CC Holdings, Colony Capital, CCH I and any CC Retained Entity under the Contribution Agreement and the other agreements entered into as contemplated by the Contribution Agreement; and

 

    if prior to the Closing, Colony Capital is unable to successfully obtain both (i) consent of the Financial Conduct Authority of the United Kingdom for the contribution of Colyzeo Investment Management Limited (UK) (“CIML”) to NewCo, and (ii) consents from the limited partners of CIML or Colyzeo Investment Advisors Limited (UK) (“CIAL”) in connection with the Combination, each of CIML and CIAL will be deemed to be a CC Retained Entity under the Contribution Agreement.

In addition, we will not assume from CC Holdings, Colony Capital or CCH I, any of the following liabilities (the “CC Retained Liabilities”):

 

    any liabilities, whether arising before or after the closing of the transaction, from CC Holdings, Colony Capital, CCH I or any of their respective predecessor companies or businesses, or any of its affiliates, subsidiaries or divisions to the extent relating to, resulting from or arising out of the present, past or future ownership or operation of any CC Retained Assets and any CC Retained Entities, including all liabilities related to the CC Retained Business;

 

    any liabilities with respect to any and all pre-Closing taxes; or

 

    certain other specific liabilities.

Company Pre-Closing Contribution. In order to ensure that following the consummation of the Combination, OP will hold all of the assets and liabilities of the combined business, the Company will contribute substantively all of its entities, assets and liabilities not currently held by OP to OP prior to the Closing (as described under the Contribution Agreement as the “Company Pre-Closing Contribution”).

Conditions to the Closing of the Combination

The obligations of each party to the Contribution Agreement to effect the Closing are subject to the satisfaction or waiver of the following conditions:

 

    the expiration or termination of the waiting period under the HSR Act with respect to the transactions contemplated by the Contribution Agreement;

 

    no law, regulation, authorization, permit, order or judgment shall have been enacted, entered, or promulgated by a governmental, or administrative authority after the date of the Contribution Agreement that prohibits or makes illegal the consummation of the transactions contemplated by the Contribution Agreement, and no order or judgment preventing the consummation of the transactions contemplated by the Contribution Agreement shall be in effect;

 

    receiving the requisite stockholder approvals from the Company’s common stockholders for the Issuances and the Charter Amendments;

 

    a wholly owned subsidiary of NewCo shall have been registered with the SEC as an investment adviser under the Investment Advisers Act of 1940;

 

    receiving consent of the counter parties under certain financing agreements with GE Capital Commercial Inc. related to certain CC Contributed Assets, which is included as a CC Contributed Assets; and

 

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    the transactions contemplated by the Colony Mark Transfer Agreement shall be consummated concurrently at the Closing.

The obligations of the Company and OP to effect the Closing are subject to the satisfaction or waiver of the following additional conditions:

 

    the accuracy of the representations and warranties made by the Contributors, subject to certain qualifications (including a material adverse effect qualification) for certain representations and warranties;

 

    the performance and compliance by the Contributors in all material respects with each agreement, covenant and obligation required under the Contribution Agreement on or before the Closing;

 

    since the date of the Contribution Agreement, no event, circumstance or change shall have occurred that, individually or in the aggregate with one or more other events, circumstances or changes, have had or reasonably would be expected to have, a CC Material Adverse Effect, as defined below;

 

    the completion of the CC Pre-Closing Contribution, except with respect to obtaining consents relating to the CC Contributed Assets or effecting any transfer documents under local laws;

 

    the delivery of each ancillary document required to be delivered to the Company under the Contribution Agreement;

 

    each restrictive covenant agreement, employment agreement and lock-up agreement with Mr. Barrack and Mr. Saltzman remains in full force and effect as of the Closing, and Mr. Barrack and Mr. Saltzman have not repudiated such agreements, conducted themselves in a manner that would constitute “cause” under such agreements, or died or become permanently disabled; and

 

    at least four of the following individuals have entered into employment agreements and restrictive covenant agreements with the Company on specified terms: Messrs. Sanders, Tangen, Traenkle, Freeman, Harmeling and Brauer.

The obligations of the Contributors to effect the Closing are subject to the satisfaction or waiver of the following additional conditions:

 

    the accuracy of the representations and warranties made by the Company and OP, subject to certain qualifications (including a material adverse effect qualification) for certain representations and warranties;

 

    the performance and compliance by the Company and OP in all material respects with each agreement, covenant and obligation required under the Contribution Agreement on or before the Closing;

 

    since the date of the Contribution Agreement, no event, circumstance or change shall have occurred, that individually or in the aggregate with one or more other events, circumstances or changes, have had or reasonably would be expected to have, a CFI Material Adverse Effect;

 

    the completion of the Company Pre-Closing Contribution except with respect to obtaining consents relating to the assets contributed by the Company in the Company Pre-Closing Contribution or effecting any transfer documents under local laws;

 

    obtaining listing approval from the NYSE for the issuance of shares of the Company’s Class A Common Stock under the Contribution Agreement, and upon exchange of OP Units under the OP LLC Agreement; and

 

    the delivery of each of the ancillary documents required to be delivered to the Contributors under the Contribution Agreement.

Representations and Warranties

The Contribution Agreement contains certain reciprocal representations and warranties, many of which are qualified by materiality, CC Material Adverse Effect or CFI Material Adverse Effect.

 

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CC Material Adverse Effect” is defined in the Contribution Agreement generally to mean any change, event, occurrence, circumstance, development or effect that, individually or in the aggregate, (A) has a material adverse effect on the business, results of operations, assets, liabilities or financial condition of the CC Contributed Business, taken as a whole, or (B) materially impairs or delays the ability of any Contributor to consummate the transactions contemplated by the Contribution Agreement, other than, in the case of the foregoing clause (A), any change, event, development or effect that results from or is related to (i) general economic conditions or local, regional, national or international conditions in any of the industries in which the CC Contributed Business is conducted, (ii) changes in law, GAAP or other applicable accounting standards or the interpretations thereof, (iii) acts of God or other calamities, national or international political or social conditions, including the engagement by any country in hostilities, whether commenced before or after the date hereof, and whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack (provided, that with respect to clauses (i)-(iii), any such event, change, development or state of facts shall be taken into account for purposes of determining if a CC Material Adverse Effect has or is reasonably expected to have occurred only if such event, change, development or state of facts, individually or in the aggregate, has a materially disproportionate impact on Colony Capital, its Subsidiaries, or the CC Contributed Business, taken as a whole, relative to other persons in the same industry in which Colony Capital and its subsidiaries conduct their business), (iv) any failure to meet internal projections relating to the CC Contributed Business (it being understood that the underlying causes of, or factors contributing to, the failure to meet such projections may be taken into account in determining whether a CC Material Adverse Effect has occurred except to the extent otherwise excepted pursuant to clauses (i)-(iii) and (v) of this definition), (vi) the announcement or pendency of, or the taking of any action required by, or the failure to take any action where such action is expressly prohibited by, the Contribution Agreement and the ancillary documents contemplated thereby.

CFI Material Adverse Effect” is defined in the Contribution Agreement generally to mean any change, event, occurrence, circumstance, development or effect that, individually or in the aggregate, (A) has a material adverse effect on the business, results of operations, assets or liabilities or financial condition of the business of the Company and its subsidiaries, taken as a whole, or (B) materially impairs or delays the ability of the Company and its subsidiaries to consummate the transactions contemplated by the Contribution Agreement, other than, in the case of the foregoing clause (A), any change, event, development or effect that results from or is related to (i) general economic conditions or local, regional, national or international conditions in any of the industries in which the Company’s business is conducted, (ii) changes in law, GAAP or other applicable accounting standards or the interpretations thereof, (iii) acts of God or other calamities, national or international political or social conditions, including the engagement by any country in hostilities, whether commenced before or after the date hereof, and whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack (provided, that with respect to clauses (i)-(iii), any such event, change, development or state of facts shall be taken into account for purposes of determining if a CFI Material Adverse Effect has or is reasonably expected to have occurred only if such event, change, development or state of facts, individually or in the aggregate, has a materially disproportionate impact on the Company and its subsidiaries, taken as a whole, relative to other persons in the same industry in which the Company and its subsidiaries conduct their business), (iv) any failure to meet internal projections (it being understood that the underlying causes of, or factors contributing to, the failure to meet such projections may be taken into account in determining whether a CFI Material Adverse Effect has occurred except to the extent otherwise excepted pursuant to clauses (i)-(iii) and (v) of this definition), (v) the announcement or pendency of, or the taking of any action required by, or the failure to take any action where such action is expressly prohibited by, the Contribution Agreement and the ancillary documents contemplated thereby.

The reciprocal representations and warranties relate to, among other topics, the following:

 

    the due organization, qualification and good standing of each party;

 

    the power and authority of each party to execute the Contribution Agreement and ancillary agreements required thereby and to consummate the transactions contemplated thereby;

 

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    noncontravention of (i) any applicable law, rule, regulation, order, judgment or decree, (ii) any organizational document, or (iii) solely with respect to Contributors and NewCo, any contract binding on such parties, as a result of the execution and performance by each of the applicable parties of the contribution agreement and ancillary documents thereto;

 

    required consents, approvals, permits, registrations or filings binding on such parties to be filed with a governmental, or administrative authority;

 

    except for certain disclosed parties, no broker, finder or financial advisor will be entitled to any brokerage, finder or other fees or commissions in connection with the transactions contemplated by the Contribution Agreement.

The Contribution Agreement also contains representations and warranties of the Contributors, many of which are qualified by materiality and by the occurrence of a CC Material Adverse Effect. Such representations and warranties relate to, among other topics, the following:

 

    validity and percentage of the ownership interests of the contributed entities and the validity of title of the CC Contributed Assets to be acquired indirectly by OP through the acquisition of NewCo;

 

    validity and percentage of the ownership interests of NewCo, CRP and CRM to be acquired by OP;

 

    absence of a CC Material Adverse Effect since December 31, 2013 to the date of the Contribution Agreement;

 

    absence of certain changes and events from September 30, 2014 to the date of the Contribution Agreement;

 

    compliance with applicable laws and permits;

 

    tax matters;

 

    employees, labor and benefit matters;

 

    financial statements;

 

    absence of undisclosed liabilities;

 

    material contracts;

 

    intellectual property matters;

 

    owned and leased property;

 

    information in this proxy statement;

 

    insurance;

 

    compliance with the Employee Retirement Income Security Act of 1974, as amended and other fund matters;

 

    investment advisor matters;

 

    compliance with anti-corruption laws, including the Foreign Corrupt Practices Act of 1977, as amended;

 

    compliance with privacy policies; and

 

    notice to certain advisory and fund clients.

 

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The Contribution Agreement also contains representations and warranties of the Company and OP, many of which are qualified by materiality and the occurrence of a CFI Material Adverse Effect. Such representations and warranties relate to, among other topics, the following:

 

    capitalization;

 

    receipt by the Special Committee of a fairness opinion; and

 

    REIT-related matters.

Conduct of Business Prior to the Closing

Each of Colony Capital and the Company has agreed to certain covenants in the Contribution Agreement restricting the conduct of its respective business between the date of the Contribution Agreement and the date of the Closing. In general, each of Colony Capital and the Company has agreed to (i) conduct its respective business in all material respects in the ordinary course of business, (ii) preserve intact its business organization, (iii) maintain its relationships with clients, suppliers, vendors, service providers, and other third parties and governmental authorities, and (iv) keep available the services of its officers and employees.

In addition, without limiting the generality of the foregoing, Colony Capital has agreed to various specific restrictions on the conduct of its business between the date of the Contribution Agreement and the date of the Closing, including the following (subject in each case to exceptions specified in the Contribution Agreement or previously disclosed in writing to the Company as provided in the Contribution Agreement):

 

    amending organizational documents;

 

    issuing any equity interest in any Subject Entity (as defined in the Contribution Agreement) or granting any rights with respect thereto;

 

    entering into or consummating acquisitions or business combinations with another entity;

 

    selling, pledging, disposing of, transferring, leasing, licensing or encumbering any material property or assets that would otherwise be CC Contributed Assets;

 

    reclassifying, combining, splitting, subdividing, redeeming, purchasing or otherwise acquiring any equity interest of any Subject Entity;

 

    making loans, advances or capital contributions to, or investments other than in the ordinary course of business (but in no event in excess of $10 million individually or $25 million in the aggregate);

 

    instituting or settling litigation, other than in the ordinary course of business (but in no event in excess of $4 million individually or $15 million in the aggregate);

 

    assigning or licensing material intellectual property to any third party;

 

    increasing compensation and benefits paid to employees, or hiring or terminating employees, in each case, outside of the ordinary course of business, or accelerating the payment or vesting of any compensation or benefits due to employees, or making changes in employee benefit plans;

 

    amending or terminating any material contract or waiving any material right under a material contract that would adversely and materially impact the economic benefits derived by Colony Capital, other than in the ordinary course of business;

 

    modifying fee provisions, or waiving or terminating rights to receive fees prior to liquidation of any fund or fund organizational agreement, other than in the ordinary course of business;

 

    making changes in accounting policies or procedures, except as required by GAAP;

 

    allowing the lapse or termination of insurance policies covering insurable assets and businesses that relate to CC Contributed Assets;

 

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    creating encumbrances on the CC Contributed Assets;

 

    making changes to tax election or tax accounting periods, amending tax returns, entering into certain tax agreements or settling tax claims; or

 

    agreeing or committing to do any of the foregoing.

In addition, without limiting the generality of the foregoing, the Company has agreed to various specific restrictions on the conduct of its business between the date of the Contribution Agreement and the date of the Closing, including the following (subject in each case to exceptions specified in the Contribution Agreement or previously disclosed in writing to the Colony Capital as provided in the Contribution Agreement):

 

    amending the organizational documents of the Company or OP, except amendments to increase the authorized number of shares of the capital stock of the Company;

 

    adopting or publicly proposing a complete or partial liquidation, restructuring, recapitalization or other reorganization;

 

    declaring or paying dividends or other distributions, other than regular quarterly cash dividends not in excess of the greater of $0.42 per share or 115% of the Company’s taxable income plus depreciation for a taxable year, dividends or distributions as is necessary for the Company to maintain its REIT status or to avoid income or excise tax, dividends in respect of the Company’s preferred stock in accordance with their respective terms, dividends and distributions paid on a pro rata basis by its subsidiaries, or by a wholly owned subsidiary of the Company to another wholly owned subsidiary of the Company;

 

    taking any action or omitting to take any action that would adversely affect the Company’s qualification as a REIT; or

 

    agreeing or committing to do any of the foregoing.

Change in Board Recommendation

Except as permitted in the following paragraph, neither the Board nor any committee thereof (including the Special Committee) is permitted under the Contribution Agreement to withhold, withdraw or modify its recommendation that holders of the Company’s common stock vote in favor of the Issuances and the Charter Amendments.

Notwithstanding the foregoing, at any time prior to obtaining the Company stockholder approvals, the Special Committee may withhold, withdraw or modify its recommendation (in which case the Board shall also withdraw or modify its recommendation) if and only if (a) the Board or the Special Committee determines in good faith, after consultation with its financial advisor and outside legal counsel, that failure to do so would be inconsistent with the directors’ fiduciary duties under applicable law, (b) CFI shall have notified Colony Capital, at least three business in advance, that the Board or the Special Committee intends to withhold, withdraw or modify its recommendation, and (c) after providing such notice, CFI shall have negotiated in good faith (to the extent Colony Capital desires to negotiate) during such three business day period to make such adjustments to the terms and conditions of the Contribution Agreement as would permit the Special Committee and Board not to withhold, withdraw or modify its recommendation and (d) the Special Committee shall have considered in good faith any change to the Contribution Agreement that may be offered in writing by Colony Capital during such three business day period, and shall have determined after consultation with its financial advisor and outside legal counsel, that failure to withhold, withdraw or modify its recommendation would be inconsistent with the directors’ fiduciary duties under applicable law, if such changes were to be given effect.

 

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Other Covenants

The Contribution Agreement contains a number of customary and transaction-specific mutual covenants, including, amongst others, topics relating to the following:

 

    issuing press releases or other written public statements;

 

    collaborating on the proxy statement and soliciting from the Company’s stockholders proxies in favor of the Issuances and Charter Amendments;

 

    division of transfer tax liabilities equally between Colony Capital and the Company;

 

    obtaining consents and approvals and making filings, and defending any proceedings challenging the Contribution Agreement or the consummation of the transactions;

 

    terminating affiliated agreements;

 

    registering a wholly owned subsidiary of NewCo as an investment adviser;

 

    causing employment agreements and restrictive covenant agreements to be entered into between the Company and each of Messrs. Sanders, Tangen, Traenkle, Freeman, Harmeling and Brauer;

 

    furnishing necessary information to each other and providing reasonable assistance in preparing for any filing, financial statements, tax returns and the conduct or defense of any litigation or dispute resolution;

 

    purchasing director and officer tail insurance policies and maintaining for six years the same level of indemnification and exculpation for directors and officers as existed at Colony Capital;

 

    assisting with required filings under Section 16 of the Exchange Act;

 

    making a listing application to the NYSE for the issuance of the Company’s Class A Common Stock;

 

    filing a registration statement covering the resale of the Company’s Class A Common Stock issued upon the Closing;

 

    granting to Colony Capital and its subsidiaries a non-exclusive license to use the Colony Mark for the six-month period following the Closing and Colony Capital taking steps to change the name of Colony Capital and cease using the Colony Mark at the end of such six-month period;

 

    the Company and Colony Capital terminating, as of the Closing, the following agreements relating to the Company’s status as an externally managed REIT: (i) the Investment Allocation Agreement among Colony Capital, the Manager and the Company, (ii) the Investment Advisory Agreement between the Manager and the Company, (iii) the Secondment Agreement among Mr. Tangen, Colony Capital and the Company, and (iv) the License Agreement between New Colony Investors, LLC and the Company; and

 

    OP maintaining on a continuous basis during the five-year period beginning on the Closing date an amount of certain third-party liabilities in an amount that is at least equal to $350.0 million.

Termination

Termination events. The Contribution Agreement and the transactions contemplated thereby may be terminated at any time prior to the Closing in certain circumstances, including by:

 

    mutual consent of the Company and Colony Capital; or

 

    either Colony Capital or the Company, if:

 

    any law enacted after the date of the Contribution Agreement that makes the consummation of the transactions illegal or a final nonappealable order is in effect enjoining the parties from consummating the transactions contemplated by the Contribution Agreement (provided that the terminating party uses commercially reasonable efforts to resist such law or order);

 

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    there is any breach of any representations or covenants that would result in the failure to satisfy any conditions to the Closing described above and such breach is incapable of being cured within 30 days;

 

    the Closing has not occurred by September 30, 2015 or such later date as the parties may otherwise agree in writing (provided that the terminating party shall not have been the cause of the Closing not occurring by such date);

 

    prior to the requisite stockholder approvals being received, the Board, following the direction of the Special Committee, withholds, modifies or qualifies its recommendation to the Company’s stockholders with respect to the Issuances and Charter Amendments; or

 

    if the requisite stockholder approvals are not obtained at the Special Meeting.

Effect of termination. If validly terminated pursuant to one of the termination events described above and after giving written notice, the Contribution Agreement shall thereafter become void and there shall be no further obligations or liabilities on the parties except for indemnification obligations and for liability for fraud or any willful breach occurring prior to the termination.

If the Contribution Agreement is terminated due to a change of recommendation by the Board or the Special Committee, within the later of three business days after such termination or two business days following receipt of invoices therefor and other documentation reasonably requested by the Company, the Company shall pay to Colony Capital the lesser of Colony Capital’s transaction expenses or $15.0 million.

Indemnification

Overview of indemnification provisions. The Company has agreed to indemnify in full the Contributors and each of their respective affiliates, together with their respective officers, partners, directors, employees and agents (the “Contributor Indemnified Parties”) and hold them harmless from and against all losses, damages, liabilities, costs and expenses (including reasonable attorneys’ fees) which they may suffer, whether or not involving a claim by a third party, in connection with (i) any breach of a representation or warranty (without regard to any materiality qualifications), (ii) any breach of a covenant, agreement or undertaking by the Company or OP, and (iii) the CC Contributed Assets, the CC Assumed Liabilities and the CC Contributed Business.

Each Contributor has agreed to severally and not jointly indemnify the Company, its affiliates, and their officers, partners, directors, employees and agents (the “CFI Indemnified Parties”) and hold them harmless from and against, in accordance with each Contributor’s pro rata share of the total consideration to be received by all Contributors under the Contribution Agreement, for all losses, damages, liabilities, costs and expenses (including reasonable attorneys’ fees) which we may suffer in connection with (i) any breach of a representation or warranty (with limited exceptions, without regard to any materiality qualifications) by (a) the Contributors under the Contribution Agreement and (b) the Mark Transferor under the Colony Mark Transfer Agreement, each in accordance with the qualifications and exceptions provided under the Contribution Agreement and the Colony Mark Transfer Agreement, respectively, (ii) any breach of a covenant, agreement or undertaking by the Contributors under the Contribution Agreement or by the Mark Transferor under the Colony Mark Transfer Agreement, and (iii) the CC Retained Assets, the CC Retained Liabilities and the CC Retained Business.

Notwithstanding the foregoing, CC Holdings, Colony Capital and CCH I have agreed to be liable for any indemnification obligations not met by the other Contributors.

Survival Periods. All representations and warranties, as well as pre-Closing covenants contained in the Contribution Agreement, shall survive the Closing for eighteen (18) months, except that certain fundamental representations shall survive the Closing indefinitely. All post-Closing covenants shall survive the Closing until the expiration of the applicable statute of limitations or for such shorter period specified in the Contribution

 

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Agreement. All indemnification obligations of the Company with respect to the CC Contributed Assets, the CC Assumed Liabilities and the CC Contributed Business and the Contributors with respect to the CC Retained Assets, the CC Retained Liabilities and the CC Retained Business shall survive the Closing indefinitely.

Limitations on indemnification. Neither party may recover any indemnifiable loss arising under the Contribution Agreement (or series of related losses) until the amount of such loss exceeds $1.0 million, in which case the party may recover the entire such loss. In addition, neither party may recover any indemnifiable losses arising under the Contribution Agreement until the aggregate amount of all indemnifiable losses collectively exceed $5.5 million, in which case such party will be entitled to recover all indemnifiable losses from the first dollar, up to and not exceeding $75.0 million (the “Cap”). Additionally, the Contributor Indemnified Parties may not recover any Loss (or series of related losses) until the amount of such loss exceeds $1.0 million (the “Per Claim Threshold”), in which case the Contributor Indemnified Parties are entitled to recover such losses (including the Per Claim Threshold).

Payment of indemnification obligations by Contributors. Any indemnity payment by a Contributor pursuant to the Contribution Agreement shall be satisfied by OP Units or shares of the Company’s Class A Common Stock, valued at the deemed share price of $22.05, or by cash to the extent that any Contributor does not then own enough OP Units or shares of the Company’s Class A Common Stock.

Amendment; Waiver

The Contribution Agreement may be amended or modified prior to the Closing as set forth in a writing duly executed by the Company and the Contributors. In addition, either party may waive in writing, the compliance by the other party with any obligation, covenant, agreement or condition contained in the Contribution Agreement.

Expenses

Except as otherwise provided for under the Contribution Agreement, each of the parties will bear its own costs and expenses (including legal fees and expenses) incurred in connection with the Combination.

 

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COLONY MARK TRANSFER AGREEMENT

General

Pursuant to the Colony Mark Transfer Agreement, we will acquire, through OP, the Colony Mark from the Mark Transferor, which is wholly owned by Mr. Barrack. The consideration to be paid by us to the Mark Transferor is described in “Consideration to be Paid in the Combination” beginning on page 93.

Conditions to the Closing

The obligations of each party to the Colony Mark Transfer Agreement to effect the closing thereunder are subject to the satisfaction or waiver of the following conditions:

 

    the transactions contemplated by the Contribution Agreement shall have been consummated or shall be consummated substantially concurrently with the consummation of the transactions contemplated in the Colony Mark Transfer Agreement; and

 

    no law, regulation, authorization, permit, order or judgment shall have been enacted, entered, or promulgated by a governmental or administrative authority that prohibits or makes illegal the consummation of the transactions contemplated by the Colony Mark Transfer Agreement; and no order or judgment preventing the consummation of the transactions contemplated by the Colony Mark Transfer Agreement shall be in effect.

In addition, the obligations of the Company, on the one hand, and the Mark Transferor, on the other hand, to effect the closing under the Colony Mark Transfer Agreement are subject to the satisfaction or waiver of the following:

 

    the accuracy of the representations and warranties made by the other party as of the date of the signing of the Colony Mark Transfer Agreement and the closing date; and

 

    the performance and compliance by the other party in all material respects with each agreement, covenant and obligation required under the Colony Mark Transfer Agreement on or before the closing.

Representations and Warranties

The Colony Mark Transfer Agreement contains customary representations and warranties by the Company, OP and the Mark Transferor concerning our respective business and assets. These representations include, but are not limited to:

 

    the due organization and good standing of each party in its respective place of incorporation or formation;

 

    the power and authority of each party to execute the Colony Mark Transfer Agreement and trademark assignment agreement required thereby and consummate the transactions contemplated thereby; and

 

    non-contravention of (i) any applicable law, rule, regulation, order, judgment or decree, (ii) any organizational document or (iii) any contract binding on such parties, as a result of the execution and performance by each of the applicable parties of the Colony Mark Transfer Agreement and the trademark assignment agreement required thereby.

In addition, the Mark Transferor has made additional representations that it has good and valid title to the Colony Mark, free of encumbrances and that at the Closing, we will acquire good and valid title, free of encumbrances, to the Colony Mark, such that we will have all right and title to, and interest in, the Colony Mark, free of encumbrances.

 

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We have made additional representations with respect to the due authorization, validity of issuance and title of our Class A Common Stock and Class B Common Stock to be issued to the Mark Transferor as consideration under the Colony Mark Transfer Agreement.

Covenants and Other Agreements

The Company and OP have agreed to use their reasonable best efforts post-Closing to reserve a sufficient number of authorized but unissued shares of Class A Common Stock and Class B Common Stock as well as to retain enough cash, property or securities that are declared or paid on any then outstanding shares of the Company’s common stock to meet their obligations related to the payment of the contingent consideration under the Colony Mark Transfer Agreement.

Termination

Termination Events. The Colony Mark Transfer Agreement and the transactions contemplated thereby may be terminated at any time prior to the Closing in certain circumstances, including by:

 

    the mutual consent of the Company and the Mark Transferor;

 

    either Colony Capital or the Company, if there is any breach of any representations or covenants that would result in the failure to satisfy any conditions to the Closing described above and such breach is incapable of being cured within 30 days; and

 

    the automatic termination upon the termination of the Contribution Agreement.

Effect of Termination. If validly terminated pursuant to one of the termination events described above, the Colony Mark Transfer Agreement shall thereafter become void and there shall be no further obligations or liabilities on the parties except that such termination shall not relieve any party from liability for fraud or any willful breach occurring prior to the termination.

Indemnification

The Colony Mark Transfer Agreement does not provide any indemnification rights to either party. Instead, the indemnification provisions in the Contribution Agreement (summarized in the “Contribution Agreement” beginning on page 108) shall be the sole and exclusive remedy of the parties in connection with the Colony Mark Transfer Agreement.

Amendment

The Colony Mark Transfer Agreement may be amended or modified prior to the Closing as set forth in a writing duly executed by the Company and the Mark Transferor. All amendments, modifications or waivers under the Colony Mark Transfer Agreement by the Company shall only be made with the prior approval of the Special Committee (or, if the Special Committee has been dissolved, a majority of our independent directors).

 

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CERTAIN AGREEMENTS TO BE ENTERED INTO PURSUANT TO THE CONTRIBUTION AGREEMENT

OP Operating Agreement

General

Colony Capital Operating Company, LLC (formerly known as CFI RE Masterco, LLC) (the “OP”) is currently our wholly-owned subsidiary and a Delaware limited liability company formed on March 25, 2011. Currently, OP holds, directly or indirectly, a substantial majority of the Company’s business and assets. Following the consummation of the Combination, OP will own substantially all of the assets and liabilities of the Company and Colony Capital’s combined business.

In connection with the consummation of the Combination, we, as managing member, will cause OP to issue OP Units to each of Colony Capital, CCH I, FHB LLC and Mr. Saltzman and we will enter into a second amended and restated operating agreement (the “OP Operating Agreement”) with such unitholders as non-managing members. Immediately following the Combination, we expect that we will directly own approximately 84.1% of the aggregate OP Units in OP and the non-managing members will directly own, collectively, approximately 15.9% of the aggregate OP Units in OP.

Management of OP

As the managing member of OP, we exercise exclusive and complete responsibility and discretion in its day-to-day management and control. We can cause OP to enter into major transactions, including acquisitions, dispositions and refinancings, subject to certain limited exceptions. The non-managing members of OP may not transact business for, or participate in the management activities or decisions of OP, except as provided in the OP Operating Agreement or as required by applicable law. We, as the managing member of OP may not be removed as managing member by the other members without our consent. The OP Operating Agreement restricts our ability to engage in certain business combinations as more fully described below.

The non-managing members of OP expressly agree that the managing member of OP is acting for the benefit of OP, the non-managing members of OP and our stockholders collectively. The managing member is under no obligation to give priority to the separate interests of the non-managing members in deciding whether to cause OP to take or decline to take any actions. If there is a conflict between the interests of us or our stockholders, on the one hand, and the non-managing members of OP, on the other, the OP Operating Agreement provides that any action or failure to act by the managing member that gives priority to the separate interests of our stockholders or us does not result in a violation of the contractual rights of the non-managing members of OP under the OP Operating Agreement and does not violate any duty that the managing member owes to OP and its members.

The OP Operating Agreement provides that all of our business activities, including all activities pertaining to the acquisition and operation of properties, must generally be conducted through OP. The OP Operating Agreement does permit us, under certain circumstances, to hold certain assets other than through OP. However, we must take commercially reasonable measures to ensure that the economic benefits and burdens of such assets are vested in OP.

Fiduciary Responsibilities

Our directors and officers have duties under applicable Maryland law to manage us in a manner consistent with the best interests of our stockholders. At the same time, our only duties, fiduciary or otherwise, as managing member of OP, are to perform OP’s contractual obligations as set forth in the OP Operating Agreement consistently with the implied contractual covenant of good faith and fair dealing. As managing member of OP, we shall have no other duty, fiduciary or otherwise. Our duties, as managing member of OP, to OP and its non-managing members of OP, therefore, may come into conflict with the duties of our directors and officers to our stockholders.

 

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In addition, the OP Operating Agreement expressly provides that none of our directors, officers or agents shall have any duties to OP or any of its members and that none of our directors, officers or agents shall be directly liable to OP for money damages by reason of their service as such.

Transferability of Interests

We, as the managing member of OP, may not voluntarily withdraw from OP or transfer or assign all or any portion of our interest in OP (other than a transfer to us or one of our wholly owned subsidiaries or in connection with a permitted Termination Transaction (as defined below)) without the consent of the members (other than us, the managing member and entities controlled by us or the managing member) holding a majority based on the number of OP Units then held by members (other than us, the managing member and entities controlled by us or the managing member) entitled to vote on or consent to such matter. Subject to certain ancillary agreements, a member may not sell, assign, bequest, convey, devise, gift, pledge, encumber, hypothecate, mortgage, exchange or transfer its OP Units in OP without our consent, except (i) to certain family members, certain entities controlled by the member or such persons family, or to any trust, partnership, corporation or limited liability company established and held for the direct or indirect benefit of a certain family members; provided, that any such transfer shall not involve a disposition for value other than equity interests in any such trust, partnership, corporation or limited liability company, (ii) as required by applicable law or order, (iii) to a nominee or custodian of a person or entity to whom a disposition or transfer would be permitted under the OP Operating Agreement, (iv) as expressly authorized by an ancillary agreement (including any lock-up agreement), or (v) in the case of certain transferees that are a past or present officer or employee of (x) OP or the Company (y) Colony Capital, CCH I or CRP or (z) their respective subsidiaries, as may be, or may have been permitted pursuant to the applicable ancillary agreement to which such OP Units were subject at the time of the issuance of such OP Units or to which such transferee was party.

Further, any transfer of membership interests in OP by a non-managing member is subject to satisfaction of the following conditions:

 

    the transferee is an “accredited investor” as defined under Rule 501 of the Securities Act;

 

    the transferor has delivered to us, as managing member, an opinion of counsel reasonably satisfactory to us to the effect that the proposed transfer may be effected without registration under the Securities Act and will not otherwise violate any state securities laws or regulations applicable to OP or the membership interests being transferred. If, in the opinion of such counsel, such transfer would require the filing of a registration statement under the Securities Act or would otherwise violate any federal or state securities laws or regulations applicable to OP or the OP units, we, as managing member, may prohibit such transfer;

 

    the transferor is transferring not less than the lesser of (x) 500 membership units and (y) all of the remaining OP units owned by such transferor; and

 

    the transfer does not violate any ownership limitations contained in our charter.

Generally, we, as managing member of OP, will have the right to consent to the admission of a transferee of the interest of a non-managing member as a substituted member of OP, which consent may be withheld by us in our sole and absolute discretion. If our consent is required for the admission of a transferee as a substituted member of OP and we withhold such consent, such transferee will be considered an assignee for purposes of the OP Operating Agreement and shall be entitled to all the rights of an assignee of a membership interest under applicable Delaware law, including the right to receive distributions and the share of net income, net losses and other items of income, gain, loss, deduction and credit of OP attributable to the membership interest assigned to such transferee, but shall not be deemed to be a holder of OP units and shall not be entitled to effect a consent or vote OP Units on any matter presented to the non-managing members of OP for a vote. Any further assignment of such membership units, shall cause such transferee to be subject to the foregoing conditions.

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bona fide loan or other extension of credit. The transfer of such OP Units pursuant to the lender’s or financial institution’s enforcement of its remedies under the applicable financing documents is permitted by the OP Operating Agreement.

Amendments to the OP Operating Agreement

Amendments to the OP Operating Agreement may be proposed by the managing member or the non-managing members holding a majority of OP units then held by members. All amendments to the OP Operating Agreement must be approved by the managing member.

Generally, the OP Operating Agreement may not be amended, modified or terminated without the approval of both the managing member and if the amendment substantively and adversely affects the rights of the non-managing members disproportionately as compared to the managing member, the members holding a majority of OP units then held by all members (excluding us, the managing member and entities controlled by us or the managing member) entitled to vote on, or consent to such matter. The managing member has the power to unilaterally make certain amendments to the OP Operating Agreement without obtaining the consent of any other members as may be required to:

 

    add to its obligations as managing member or surrender any right or power granted to it as managing member for the benefit of the non-managing members;

 

    reflect the admission, substitution or withdrawal of members or termination of OP in accordance with the terms of the OP Operating Agreement, and to amend the register in connection with such admission, substitution or withdrawal;

 

    reflect a change of an inconsequential nature or that does not adversely affect the non-managing members in any material respect, or cure any ambiguity, correct or supplement any provisions of the OP Operating Agreement not inconsistent with law or with other provisions of the OP Operating Agreement, or make other changes concerning matters under the OP Operating Agreement that will not otherwise be inconsistent with law or the OP Operating Agreement;

 

    satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law;

 

    reflect changes that are reasonably necessary for us to maintain our status as a REIT or to satisfy REIT requirements;

 

    reflect the issuance of additional OP Units;

 

    make certain modifications to the manner in which capital accounts are adjusted, computed or maintained, or net income or net loss are allocated;

 

    set forth or amend the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of any additional class or series of membership interest permitted to be issued under the OP Operating Agreement;

 

    modify, if OP is the surviving company in any Termination Transaction, certain provisions of the OP Operating Agreement to provide the holders of interests in such surviving company rights that are consistent with the OP Operating Agreement; or

 

    reflect any other modification as is reasonably necessary for the business or operations of OP or us, which does not violate the restrictions on the managing member described below.

Subject to certain exceptions, amendments that would, among other things, convert a non-managing member into a managing member (except in connection with a permitted transfer of the managing member’s interest), modify the limited liability of a member, adversely alter a member’s right to receive any distributions or allocations of profits or losses, adversely alter or modify the redemption rights of members and qualifying assignees (except as permitted in connection with a permitted Termination Transaction), or amend these

 

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restrictions must be approved by each member who would be adversely affected by such amendment; provided, however, that the consent of any individual member adversely affected shall not be required for any amendment or action that affects all members holding the same class or series of OP units on a uniform or pro rata basis, if approved by a majority of the members of such class or series.

Restrictions on the Managing Member’s Authority

The managing member may not take any action in contravention of an express prohibition or limitation contained in the OP Operating Agreement, including:

 

    any action that would make it impossible to carry on the ordinary business of OP, except as otherwise provided in the OP Operating Agreement;

 

    admitting any person as a member, except as otherwise provided in the OP Operating Agreement;

 

    perform any act that would subject a member to liability not contemplated in the OP Operating Agreement or under the Delaware Limited Liability Company Act; or

 

    enter into any contract, mortgage loan or other agreement that expressly prohibits or restricts us or OP from performing our or its specific obligations in connection with a redemption of OP Units as described below or expressly prohibits or restricts the ability of a member to exercise its redemption rights in full without the written consent of such member.

In addition, without the consent of members (including us, the managing member and entities controlled by us or the managing member) holding a majority of OP units then held by the members (including us, the managing member and entities controlled by us or the managing member), entitled to vote on or consent to such matter, the managing member may not do any of the following, or enter into any transaction that would have the effect of the following, without the approval of our Board:

 

    terminate the OP Operating Agreement, except as explicitly permitted therein;

 

    transfer any portion of its membership interest or admit into the company any additional or successor managing member (other than to us or one of our wholly owned subsidiaries or in connection with a permitted Termination Transaction);

 

    voluntarily withdraw as managing member except in connection with a permitted transfer of its entire interest to an entity that will become the new managing member or in connection with a permitted Termination Transaction;

 

    make a general assignment for the benefit of creditors, appoint or acquiesce in the appointment of a custodian, receiver or trustee for all or any part of the assets of OP;

 

    institute any proceeding for bankruptcy by OP;

 

    undertake a merger or consolidation of OP with or into another person, or a conversion of OP into another entity, other than in connection with a Termination Transaction effected in accordance with the OP Operating Agreement; or

 

    effect a sale, lease, exchange or other transfer of all or substantially all of the assets of OP in a single transaction or a series of related transactions outside the ordinary course of OP’s business, other than in connection with a Termination Transaction.

Distributions to Holders of OP Units

The OP Operating Agreement requires that we cause OP to distribute quarterly all, or such portions as we may determine, of available cash generated by OP during such quarter to the holders of OP units in accordance with such holders’ respective percentage interests except that all payments received by OP from the management agreement will be distributed to us. We, in our sole and absolute discretion, may cause OP to distribute available cash to the holders of OP units on a more or less frequent basis than quarterly.

 

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We will make reasonable efforts to distribute available cash to us, as managing member, in an amount sufficient to enable us to pay stockholder dividends that will satisfy our requirements for qualifying as a REIT and to avoid any federal income or excise tax liability for us

Upon the liquidation of OP, property shall be liquidated and distributed in the following order: (i) first, to the satisfaction of all of OP’s debts and liabilities other than holders of OP units, (ii) second, to the satisfaction of all of OP’s debts and liabilities to us, (iii) third, to the satisfaction of all of OP’s debts and liabilities to holders of OP units, and (iv) finally, the balance, if any, to the holders of OP units in accordance with their capital account balances, after giving effect to all contributions, distributions and allocations for all periods.

Redemption/Exchange Rights

A member or an assignee has the right, subject to any restrictions pursuant to any other agreement (including any lock-up agreement) between a member or an assignee and OP, to require OP to redeem part or all of its OP Units for cash based upon the fair market value of an equivalent number of shares of our common stock at the time of the redemption, determined in accordance with and subject to adjustment as provided in the OP Operating Agreement. Alternatively, we may elect to acquire those OP Units in exchange for shares of our common stock. Our acquisition will be on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, distributions of warrants or stock rights, specified extraordinary distributions and similar events. Notwithstanding the foregoing, we are not required to redeem such member’s or assignee’s OP Units if our election to acquire such OP Units in exchange for shares of our Class A Common Stock would cause any person to violate the ownership limits or the other restrictions on ownership and transfer of our common stock, after giving effect to any waivers or modifications of such limits granted by our board of directors. With each redemption or exchange, we increase our percentage ownership interest in OP.

In addition, if our election to acquire OP Units tendered for redemption in exchange for shares of our common stock would cause any person to violate the restrictions on ownership and transfer of our stock and we are eligible to file a registration statement on Form S-3 under the Securities Act, then we may also elect, in our sole and absolute discretion, to redeem OP units with the proceeds from a public offering or private placement of our common stock. In the event we elect this option, we may require the other members to also elect whether or not to participate. Participating members will receive on the redemption date for each OP Unit (subject to adjustment) the net proceeds per share received in the public offering but will have a limited opportunity to withdraw their OP Units from the redemption immediately prior to the pricing of the public offering.

Issuance of Units, Stock or Other Securities

We, as the managing member of OP, have the power to cause OP to issue additional units of membership interest in one or more classes or series. These additional units of membership interest may include preferred membership units. Generally, we may issue additional shares of our stock, or rights, options, warrants or convertible or exchangeable securities having the right to subscribe for or purchase shares of our stock, only if we cause OP to issue to us membership interests or rights, options, warrants or convertible or exchangeable securities of OP having economic rights that are substantially similar to the securities that we have issued.

LTIP Units

We, as managing member of OP, may from time to time issue LTIP units, in one or more classes or series to persons or entities who provide services to OP, for such consideration as we, as managing member of OP, may determine to be appropriate. Except to the extent a capital contribution to OP is made with respect to a LTIP unit, each LTIP unit is intended to qualify as a “profits interest” in OP for tax purposes.

Subject to the provisions of the OP Operating Agreement, LTIP units shall be treated as OP units, with all of the rights, privileges and obligations attendant thereto. In particular, subject to the terms of any LTIP award or vesting agreement or by us, as managing member of OP, with respect to any particular class or series of LTIP

 

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units, a holder of LTIP units shall be entitled to transfer its vested LTIP units to the same extent, and subject to the same restrictions as holders of OP units are entitled to transfer their OP units under the OP Operating Agreement. Further, except as otherwise provided in the OP Operating Agreement, LTIP units rank pari passu with OP Units as to the payment of regular and special periodic or other distributions.

In addition, unless otherwise provided in an LTIP award, vesting agreement or by us, as managing member of OP, with respect to any particular class or series of LTIP units, a holder of LTIP units shall have the right, at its option, at any time to convert all or a portion of its vested LTIP units into OP units; provided that a holder may not exercise such right for less than the lesser of (x) 1,000 vested LTIP units and (y) all of the remaining vested LTIP units owned by such holder.

Capital Contributions

The OP Operating Agreement provides that the managing member may authorize the issuance of additional membership interests in exchange for such capital contributions, if any, as the managing member may approve. Under the OP Operating Agreement, we are generally obligated to contribute the net proceeds we receive from any offering of our shares of stock as additional capital to OP in exchange for additional OP Units.

The OP Operating Agreement provides that we may make additional capital contributions, including the contribution of property or assets, to OP in exchange for additional OP Units. If we contribute additional capital and receive additional OP Units in exchange for the capital contribution, our percentage interest in OP will be increased on a proportionate basis based on the amount of the additional capital contributions and the value of OP at the time of the contributions. In addition, if we contribute additional capital and receive additional OP Units for the capital contribution, the capital accounts of the members may be adjusted upward or downward to reflect any unrealized gain or loss attributable to the properties as if there were an actual sale of the properties at the fair market value thereof.

Preemptive Rights

Except to the extent expressly provided in the OP Operating Agreement or in any membership unit designation, no person or entity, including any member or assignee of OP, has any preemptive, preferential, participation or similar right or rights with to subscribe for or acquire any membership interests of OP.

Borrowing by OP

We, as the managing member of OP, may cause OP to borrow money and to issue and guarantee debt , whether or not secured by mortgage, deed of trust, pledge or other lien and, directly or indirectly, to acquire additional properties necessary, useful or desirable in connection with its business.

Tax Matters

We, as the managing member of OP, are the tax matters partner of OP, and we have the authority under the Internal Revenue Code to handle tax audits on behalf of OP. In addition, we have the authority to arrange for the preparation and filing of OP’s tax returns and to make tax elections under the Internal Revenue Code on behalf of OP.

Allocations of Net Income and Net Losses to Members

The net income or net loss of OP is generally allocated to the managing member and the non-managing members of OP in accordance with their respective ownership of OP Units except gross income and the gain of OP associated with the management agreement will be specially allocated to us. However, in some cases, gains or losses may be disproportionately allocated to members who have contributed property to or guaranteed debt of OP. The allocations described above are subject to special allocations relating to depreciation deductions and to compliance with the provisions of Sections 704(b) and 704(c) of the Code and the associated Treasury regulations.

 

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Operations

We intend to cause the managing member of OP to manage OP in a manner that will enable us to maintain our qualification as a REIT and to minimize any U.S. federal income tax liability.

The OP Operating Agreement provides that OP will assume and pay when due, or reimburse us for payment of, all costs and expenses relating to the operations of, or for the benefit of, OP.

Change of Control and Termination Transactions

As managing member, we may not engage in, or cause or permit, a Termination Transaction, other than with the consent of members (other than us, the managing member and entities controlled by us or the managing member) holding a majority of all the outstanding OP Units held by all members (other than us, the managing member and entities controlled by us or the managing member) entitled to vote on or consent to such matter, unless the requirements discussed below are satisfied. A “Termination Transaction” means any direct or indirect transfer of all or any portion of our membership interest in OP or, if we are not the managing member, any direct or indirect transfer of our interest in the managing member in connection with, or any other occurrence of:

 

    a merger, consolidation or other combination transaction involving us or the managing member;

 

    a sale, lease, exchange or other transfer of all or substantially all of our assets not in the ordinary course of our business, whether in a single transaction or a series of related transactions;

 

    a reclassification, recapitalization or similar change of our outstanding shares of our Class A Common Stock or Class B Common Stock (other than a change in par value, or from par value to no par value, or as a result of a stock split, stock dividend or similar subdivision);

 

    the adoption of any plan of liquidation or dissolution of us or the managing member; or

 

    a transfer of all or any portion of our membership interest in OP or, if we are not the managing member, any transfer of our interest in the managing member, other than certain permitted transfers to affiliated entities.

The consent of the non-managing members to a Termination Transaction is not required if:

(1) in connection with the Termination Transaction, each OP Unit is entitled to receive the “transaction consideration,” defined as the fair market value, at the time of the Termination Transaction, of an amount of cash, securities or other property equal to the product of:

 

    the number of shares of our common stock into which each OP Unit is then exchangeable; and

 

    the greatest amount of cash, securities or other property paid to the holder of one share of our common stock in consideration of such share in connection with the Termination Transaction;

 

    provided that, if, in connection with the Termination Transaction, a purchase, tender or exchange offer is made to and accepted by the holders of a majority of the outstanding shares of our common stock, the transaction consideration will refer to the fair market value of the greatest amount of cash, securities or other property which such holder would have received had it exercised its redemption right and received shares of our common stock in exchange for its OP Units immediately prior to the expiration of such purchase, tender or exchange offer and had accepted such purchase, tender or exchange offer; or

(2) all of the following conditions are met: (i) substantially all of the assets directly or indirectly owned by OP prior to the announcement of the Termination Transaction are, immediately after the Termination Transaction, owned directly or indirectly by OP or another limited partnership or limited liability company which is the survivor of a merger, consolidation or combination of assets with OP, which we refer to as the “surviving

 

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company,” (ii) the surviving company is classified as a partnership for U.S. federal income tax purposes; (iii) the rights of such members with respect to the surviving company include:

(a) if we or our successor is a REIT with a single class of publicly traded common equity securities, the right to redeem their interests in the surviving company on terms substantially comparable to those under the OP Operating Agreement for either: (1) a number of such of REIT’s publicly traded common equity securities with a fair market value, as of the date of consummation of such Termination Transaction, equal to the transaction consideration referred to above, subject to anti-dilution adjustments, which we refer to as the “successor shares amount;” or (2) cash in an amount equal to the fair market value of the successor shares amount at the time of such redemption; or

(b) if we or our successor is not a REIT with a single class of publicly traded common equity securities, the right to redeem their interests in the surviving company for cash in an amount equal to the transaction consideration; or

(c) in any Termination Transaction that is a merger, consolidation or other combination with or into another person, immediately following the consummation of such Termination Transaction, the equity holders of the surviving entity are substantially identical to the shareholders of the Company prior to such transaction.

Term

The OP Operating Agreement will continue indefinitely unless OP is dissolved in accordance with the terms of the OP Operating Agreement or as otherwise provided by law.

Indemnification and Limitation of Liability

To the extent permitted by applicable law, the OP Operating Agreement indemnifies us, our directors, officers and employees, the managing member, officers and employees, employees of OP and any other persons whom the managing member may designate from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including attorney’s fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, or that relate to the operations of OP in which any indemnitee may be involved, or is threatened to be involved, as a party or otherwise unless:

 

    it is established by a final judgment of a court of competent jurisdiction that the act or omission of the indemnitee was material and was committed in bad faith, constituted fraud or was a result of active and deliberate dishonesty on the part of the indemnitee;

 

    the claim is brought by the indemnitee (other than to enforce the indemnitee’s rights to indemnification or advance of expenses);

 

    the indemnitee received an improper personal benefit in money, property or services; or

 

    in criminal proceedings, there are reasonable grounds to believe that the indemnitee’s act or omission was unlawful.

Registration Rights Agreement

In conjunction with the execution of the Contribution Agreement, we entered into a Registration Rights Agreement with Colony Capital, CC Holdings, New Colony Holdings, FHB LLC, CCH I, Mr. Saltzman and the other persons party to the Registration Rights Agreement from time to time. Under the Registration Rights Agreement, we are obligated to file a shelf registration statement under the Securities Act, registering the resale of (i) shares of the Company’s Class A Common Stock, and (ii) shares of the Company’s Class A Common Stock issued or issuable upon conversion of Class B Common Stock or upon exchange of OP Units, in each case, issued upon the closing of the transactions pursuant to the Contribution Agreement. We have agreed to use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC not later than the date of the closing under the Contribution Agreement.

 

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To the extent that the initial registration statement does not cover all of the shares registrable pursuant to the Registration Rights Agreement, we also are obligated to file one or more additional shelf registration statements under the Securities Act, registering the resale of all other registrable shares. We have agreed to use commercially reasonable efforts to cause any such additional registration statement to be declared effective by the SEC as soon as reasonably practicable. In the case of any registrable shares subject to an earn-out, we must use commercially reasonable efforts to either include such securities on an existing registration statement by filing a post-effective amendment to such registration statement or file an additional registration statement registering such securities. We have agreed to use commercially reasonable efforts to cause such post-effective amendment or additional registration statement to be declared effective promptly following the date such securities are earned.

We have agreed to keep registration statements covering registrable shares continuously effective until the later of (i) six months following the fifth anniversary of the closing under the Contribution Agreement, and (ii) the holders of registrable shares hold, in the aggregate, registrable shares with an aggregate offering price of less than $75.0 million.

We will bear certain costs of registration, including, among other things, registration and filing fees, printing expenses, attorneys’ fees, accountants’ fees and other reasonable expenses.

We may suspend the use of a registration statement (which suspension shall not exceed more than 60 days at any one time or 90 days in any 365-day period) under certain circumstances, such as disclosing material non-public information at a time we determine not to be in our best interests.

CAH License Agreement

Pursuant to a trademark license agreement between OP, as licensor, and CAH Manager, as licensee, OP will grant to CAH a non-exclusive, non-transferable, perpetual (subject to termination as described below), revocable, royalty-free, and worldwide license to use the Colony Mark only in connection with engaging in debt and equity investments in North American residential properties and related operational activities. OP may terminate the agreement in the event of (i) CAH’s material and incurable breach (or, if the breach is curable, if such breach is uncured within a specified period), (ii) CAH’s bankruptcy or insolvency (or certain related proceedings), (iii) certain changes in control of CAH, or (iv) CAH’s discontinuing use of the Colony Mark for 12 consecutive months. Each party indemnifies the other for third party claims arising out of such party’s material breach of the agreement. CAH may not assign the agreement without the prior written consent of OP (which shall not be unreasonably withheld).

 

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PROPOSAL 3: THE ADJOURNMENT PROPOSAL

Proposal 3 is to consider and vote upon the proposal to approve adjourning the Special Meeting, if necessary or appropriate in the discretion of the Chairman of the Special Meeting, to solicit additional proxies in the event that there are not sufficient votes at the time of the Special Meeting to approve either the Issuances or the Charter Amendments.

General

The Special Meeting may be adjourned to another time or place, if necessary or appropriate in the discretion of the Chairman of the Special Meeting, to permit further solicitation of proxies to obtain additional votes in favor of either the Issuances or the Charter Amendments.

If, at the Special Meeting, the number of shares of common stock present or represented and voting in favor of the proposal to approve either the Issuances or the Charter Amendment is insufficient to approve such proposal, the Company intends to move to adjourn the Special Meeting in order to enable the Board to solicit additional proxies for approval of such proposal. In addition, as permitted by the Maryland General Corporation Law, prior to the Special Meeting being convened, the meeting may be postponed by the Board to a date not more than 120 days after the record date for the Special Meeting. Moreover, pursuant to the Company’s bylaws, the chairman of the Special Meeting may adjourn the meeting without any action by the stockholders and without regard to whether a quorum is present. We are asking our stockholders to approve this adjournment if necessary or appropriate in the discretion of the Chairman of the Special Meeting.

Vote Required and Recommendation

The affirmative vote of a majority of the votes cast is required for approval of the Adjournment Proposal. For the purpose of the vote on this proposal, abstentions, broker non-votes and other shares not voted will not be counted as votes cast and will have no effect on the result of the vote, although they will be considered present for the purpose of determining the presence of a quorum.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE ADJOURNMENT PROPOSAL.

 

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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION

The following is a summary of certain U.S. federal income tax consequences of the Combination to us and to U.S. persons (as defined below) who hold shares of our common stock. The discussion is based upon the Internal Revenue Code, treasury regulations, court decisions, published positions of the Internal Revenue Service (the “IRS”) and other applicable authorities, all as in effect on the date hereof and all of which are subject to change or differing interpretations (possibly with retroactive effect). This summary does not address all of the U.S. federal income tax consequences that may be relevant to the Company or to particular stockholders. No ruling has been or will be obtained from the IRS regarding any matter relating to the Combination. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects described below. This summary of U.S. federal income tax consequences is for general information only.

For purposes of this discussion, a U.S. person is a beneficial owner of our common stock who for U.S. federal income tax purposes is:

 

    a citizen or resident of the United States;

 

    a corporation, or an entity treated as a corporation, created or organized in or under the laws of the United States or any state or political subdivision thereof;

 

    a trust that (1) is subject to (A) the primary supervision of a court within the United States and (B) the authority of one or more United States persons to control all substantial decisions of the trust or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person; or

 

    an estate that is subject to U.S. federal income tax on its income regardless of its source.

Stockholders are urged to consult their tax advisers regarding the U.S. federal income tax consequences of the Combination, as well as the effects of state, local and non-U.S. tax laws, including possible changes in tax law.

In General

The formation of OP as part of the Combination is intended to constitute, for U.S. federal income tax purposes, a tax-deferred contribution by us to a partnership. As a result, neither we nor holders of our common stock, in respect of those common stock holdings, are expected to recognize significant gain or loss for U.S. federal income tax purposes as a result of the Combination. In addition, the Combination is not expected to adversely affect our ability to continue to qualify as a REIT. Notwithstanding the foregoing, under the “investment company” rules under Section 721 of the Internal Revenue Code, the Combination generally would not qualify for tax-deferred treatment to the extent that it is treated under such rules as a contribution by us to an “investment company.” The investment company rules are complex, and there also is uncertainty regarding other aspects of the U.S. federal tax treatment of the Combination. If the Combination failed to qualify for tax-deferred treatment under the investment company rules or otherwise, we generally would recognize taxable gain for U.S. federal income tax purposes, possibly up to the extent that the fair market value of our assets immediately prior to the Combination exceeded their adjusted tax basis. If and to the extent that we were unable to make distributions for the year in which the Combination occurred at least equal to our taxable income (including our net long term capital gain and also any taxable income or gain recognized in connection with the Combination), we would be subject to U.S. federal income tax (and potentially excise tax) on any undistributed amounts and may also be unable to satisfy the distribution requirements applicable to REITs.

In addition, as a general matter, as a REIT, we generally will be unable to conduct directly a portion of the third-party management business of Colony Capital that we are acquiring in connection with the Combination. We therefore intend to conduct those operations through one or more taxable REIT subsidiaries (each, a “TRS”). A TRS is subject to regular corporate income tax on its net income. As a result, the net income generated by those operations generally will be subject to regular corporate income tax. Moreover, as a REIT, stock and other securities of a TRS constitute nonqualifying assets for purposes of the 75% asset test applicable to REITs, and,

 

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thus, no more than 25% of our total gross assets may be comprised of the stock or other securities of one or more taxable REIT subsidiaries and other nonqualifying assets (including goodwill and similar assets we are acquiring as a result of the Combination). In addition, dividends payable by taxable REIT subsidiaries constitute qualifying income for purposes of the 95% gross income test applicable to REITs, but nonqualifying income for purposes of the 75% gross income test applicable to REITs. Accordingly, if the value of the business we are acquiring in connection with the Combination and the income generated thereby increases relative to the value of our other, REIT-compliant assets and the income produced thereby, we may fail to satisfy one or more of the requirements applicable to REITs.

Certain Tax Aspects of OP and any Subsidiary Partnerships

Substantially all of our investments are expected to be held indirectly through OP. In general, partnerships are “pass-through” entities that are not subject to U.S. federal income tax. Rather, partners are allocated their shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax on these items, without regard to whether the partners receive a distribution from the partnership. Accordingly, we will include in our income our share of the foregoing partnership items in the computation of our REIT taxable income. Moreover, for purposes of the REIT asset and gross income tests, we will include our proportionate share of assets held by, and the gross income of, OP and subsidiaries of OP that are partnerships (“Subsidiary Partnerships”).

Our direct and indirect investment in partnerships involves special tax considerations, including the possibility of a challenge by the IRS of the tax status of any of the Subsidiary Partnerships as a partnership for U.S. federal income tax purposes. If any of these entities were treated as an association for U.S. federal income tax purposes, it would be taxable as a corporation and therefore could be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of gross income would change and could preclude us from satisfying the REIT asset tests and gross income tests, and in turn could prevent us from qualifying as a REIT unless we are eligible for relief from the violation pursuant to relief provisions described above. In addition, any change in the status of any of the Subsidiary Partnerships for tax purposes might be treated as a taxable event, in which case we might incur a tax liability without any related cash distributions.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of February 17, 2015, regarding the beneficial ownership of (i) our common stock, (ii) our Series A Cumulative Redeemable Preferred Stock, and (iii) our Series B Cumulative Redeemable Preferred Stock by:

 

    each of our directors;

 

    each of our executive officers; and

 

    all of our directors, director nominees and executive officers as a group.

The SEC has defined “beneficial ownership” of a security to mean the possession, directly or indirectly, of voting power and/or dispositive power with respect to such security. In accordance with SEC rules, each listed person’s beneficial ownership includes:

 

    all shares the investor actually owns beneficially or of record;

 

    all shares over which the investor has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund); and

 

    all shares the investor has the right to acquire within 60 days (such as shares of restricted common stock that are currently vested or which are scheduled to vest within 60 days, the exercise of any option, warrant or right, or the power to revoke a trust, discretionary account or similar arrangement).

Unless otherwise indicated, the address of each named person is c/o Colony Financial, Inc., 2450 Broadway, 6th Floor, Santa Monica, California 90404. The percentages below are based on 110,251,922 shares outstanding as of February 17, 2015. No shares beneficially owned by any executive officer, director or director nominee have been pledged as security.

Additionally, to our knowledge and based upon information available to us in securities filings made by our stockholders with the SEC, the following table sets forth certain information regarding the beneficial owners of more than 5% of our shares of common stock as of February 17, 2015:

 

     Common Stock     Preferred Stock  
Beneficial Owner    Shares
Owned
    Percentage
of Class
    Shares
Owned
     Percentage
of Class
 

Executive Officers and Directors

         

Thomas J. Barrack, Jr.

     526,091 (1)(2)      *       —          —    

Richard B. Saltzman

     333,833 (2)      *       —          —    

Ronald M. Sanders

     90,249 (2)      *       —          —    

Darren J. Tangen

     146,389 (2)      *       —          —    

Kevin P. Traenkle

     193,727 (2)      *       —          —    

Nancy A. Curtin

     3,984 (2)      *       —          —    

George G. C. Parker

     12,787 (2)      *       —          —    

John A. Somers

     15,287 (2)      *       500         *  

John L. Steffens

     20,787 (2)      *       —          —    
  

 

 

   

 

 

   

 

 

    

 

 

 

All directors and executive officers as a group (9 persons)

  1,343,634      1.22   500      *  

Greater than Five Percent Beneficial Owners

EJF Capital LLC(3)

  10,794,916      9.8   —        —     

BlackRock, Inc. (4)

  9,024,566      8.2   —        —     

The Vanguard Group, Inc.(5)

  6,732,909      6.1   —        —     

SAB Capital Advisors, L.L.C.(6)

  6,060,980      5.5   —        —     

 

* Represents less than 1.0% of the common stock outstanding as of February 17, 2015.

 

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(1) Represents shares held in a family trust of which Mr. Barrack is trustee, and shares directly owned by our Manager. Colony Capital is the managing member of our Manager, and Mr. Barrack is the sole managing member of Colony Capital. Accordingly, Mr. Barrack may be deemed to beneficially own all of the reported securities. This filing shall not be deemed an admission that Mr. Barrack is the beneficial owner of any securities beneficially owned by our Manager except to the extent of his pecuniary interest therein.
(2) Includes shares of restricted common stock subject to time vesting.
(3) Based on information provided in a Schedule 13G/A filed on February 17, 2015 jointly by EJF Capital LLC, Emanuel J. Friedman, EJF Debt Opportunities Master Fund, L.P., EJF Debt Opportunities GP, LLC and other investment funds and their general partners of which EJF Capital LLC is sole member and manager, EJF Capital LLC and Emanuel J. Friedman have shared voting and dispositive power with respect to 10,794,916 shares of our common stock. According to the Schedule 13G/A, EJF Capital LLC is the sole member and manager of the general partner of various investment funds that hold shares of our common stock and principal amounts of our 3.875% Convertible Senior Notes (“Notes”), including EJF Debt Opportunities Master Fund, L.P., together with its general partner, EJF Debt Opportunities GP, LLC, which have shared voting and dispositive power with respect to 6,499,755 of these shares. EJF Capital LLC therefore may be deemed to share beneficial ownership with those entities as well as with respect to shares in a managed account for which EJF Capital LLC serves as investment manager. In addition, according to the Schedule 13G/A, Emanuel J. Friedman is the controlling member of EJF Capital LLC and therefore may be deemed to share beneficial ownership of the shares of common stock and Notes with respect to which EJF Capital LLC may share beneficial ownership. The Schedule 13G/A indicates that due to the operation of the share ownership limits contained in our charter, certain of the Notes with respect to which EJF Capital LLC shares beneficial ownership are not currently convertible into shares of our common stock and are therefore not included in the total number of shares reported. The address of EJF Capital LLC, Emanuel J. Friedman and these various investment funds and their general partners, as reported by it in the Schedule 13G/A, is 2107 Wilson Boulevard, Suite 410, Arlington, VA 22201.
(4) Based on information provided in a Schedule 13G/A filed on January 23, 2015, BlackRock, Inc. has sole voting power with respect to 8,776,321 of these shares and sole dispositive power with respect to 9,024,566 of these shares. The address of BlackRock, Inc., as reported by it in the Schedule 13G/A, is 55 East 52nd Street, New York, NY 10022.
(5) Based on information provided in a Schedule 13G/A filed on February 11, 2015, The Vanguard Group, Inc. has sole voting power with respect to 153,095 of these shares, sole dispositive power with respect to 6,589,514 of these shares and shared dispositive power with respect to 143,395 of these shares. The address of The Vanguard Group, Inc., as reported by it in the Schedule 13G/A, is 100 Vanguard Blvd., Malvern, PA 19355.
(6) Based on information provided in a Schedule 13G/A filed on February 17, 2015 jointly by SAB Capital Advisors, L.L.C., SAB Capital Management, L.P., SAB Capital Management, L.L.C. and Scott A. Bommer, each of SAB Capital Advisors, L.L.C., SAB Capital Management, L.P., SAB Capital Management, L.L.C. and Scott A. Bommer has sole voting power and sole dispositive power with respect to 0 shares of our common stock and shared voting power and shared dispositive power with respect to 6,060,980 shares of our common stock. The address of each of SAB Capital Advisors, L.L.C., SAB Capital Management, L.P., SAB Capital Management, L.L.C. and Scott A. Bommer is 767 Fifth Avenue, 44th Floor, New York, New York 10153.

 

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SELECTED HISTORICAL PER SHARE MARKET PRICE AND DIVIDEND INFORMATION

Our common stock is traded on the NYSE under the symbol “CLNY.” The following table illustrates the high, low and closing prices as reported on the NYSE and cash dividends declared by quarter during 2014 and 2013.

 

Quarter Ended

   High      Low      Close      Cash Dividends
Declared Per
Share of
Common Stock
 

March 31, 2013

     23.48         19.75         22.20         0.35   

June 30, 2013

     23.73         19.13         19.89         0.35   

September 30, 2013

     21.39         19.03         19.98         0.35   

December 31, 2013

     21.12         19.55         20.29         0.35   

March 31, 2014

     23.35         20.09         21.95         0.35   

June 30, 2014

     23.42         20.87         23.22         0.36   

September 30, 2014

     23.51         21.59         22.38         0.36   

December 31, 2014

     24.92         20.86         23.82         0.37   

On February 13, 2015, the last reported sale price of our common stock on the NYSE was $24.43 and there were 54 holders of record of our common stock.

Holders of our common stock are entitled to receive distributions if and when the Board authorizes and declares distributions. The Board has not established any minimum distribution level. In order to maintain our qualification as a REIT, we intend to pay dividends to our stockholders that, on an annual basis, will represent at least 90% of our taxable income, which may not necessarily equal net income as calculated in accordance with GAAP, determined without regard to the deduction for dividends paid and excluding any net capital gains.

 

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SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY

The following selected historical financial information of the Company as of and for each of the four years in the period ended December 31, 2013 and for the period from June 23, 2009 (date of inception) to December 31, 2009, have been derived from our audited consolidated financial statements, which are incorporated by reference into this proxy statement. The selected historical financial information as of and for the nine months ended September 30, 2014 and 2013 have been derived from our unaudited consolidated financial statements contained in the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 and the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013. Certain amounts for the years ended December 31, 2013 and 2012 have been reclassified to conform to the Company’s current presentation of including accelerated amortization of discounts on loans on early repayment as part of interest income rather than other gain (loss). The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014 or any future periods.

We commenced operations upon completion of our initial public offering on September 29, 2009 and have been actively investing in our target assets. Due to our ongoing capital raising and investment activities, the selected financial data presented below do not reflect comparable year over year results, nor are they indicative of future financial condition or results of operations.

 

   

 

 

Nine Months Ended
September 30,

    Year Ended December 31,     Period from
June 23,
2009 (Date of
Inception) to
December 31,

2009
 

(In thousands, except per share data)

  2014     2013     2013     2012     2011     2010    

Statements of Operations Data:

             

Total income

  $ 215,052      $ 125,379      $ 183,799      $ 107,963      $ 65,469      $ 27,425      $ 1,091   

Net income (loss)

    128,799        86,719        125,923        68,205        43,364        17,754        (398

Net income (loss) attributable to Colony Financial, Inc.

    98,333        71,507        101,765        62,011        42,260        17,731        (400

Net income (loss) attributable to common stockholders

    80,435        55,442        80,345        48,096        42,260        17,731        (400

Share Data:

             

Net income (loss) per share attributable to common stockholders—basic

  $ 0.86      $ 0.86      $ 1.20      $ 1.33      $ 1.47      $ 1.20      $ (0.06

Net income (loss) per share attributable to common stockholders—diluted

  $ 0.85      $ 0.86      $ 1.20      $ 1.32      $ 1.46      $ 1.18      $ (0.06

Dividends per common share

  $ 1.07      $ 1.05      $ 1.40      $ 1.44      $ 1.31      $ 0.97      $ 0.07   

 

     As of
September 30,
2014
     As of December 31,  

(In thousands)

      2013      2012      2011      2010      2009  

Balance Sheet Data:

                 

Total assets

   $ 3,953,650       $ 2,628,552       $ 1,435,567       $ 727,519       $ 390,457       $ 287,529   

Total debt

     1,091,830         616,107         108,167         82,845         34,000         —     

Total liabilities

     1,231,427         674,325         152,537         114,029         57,178         14,112   

Total stockholders’ equity

     2,451,165         1,684,310         1,223,331         602,976         333,039         273,377   

Total equity

     2,722,223         1,954,227         1,283,030         613,490         333,279         273,417   

 

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SELECTED HISTORICAL FINANCIAL DATA OF COLONY CAPITAL

The following selected historical financial information as of and for each of the three years in the period ended December 31, 2013 have been derived from Colony Capital’s audited combined financial statements included in this proxy statement. Selected historical financial information as of and for each of the two years in the period ended December 31, 2010 have been derived from Colony Capital’s unaudited financial statements that are not included in this proxy statement. The selected historical financial information as of and for the nine months ended September 30, 2014 and 2013 have been derived from Colony Capital’s unaudited consolidated financial statements included in this proxy statement.

The following selected historical financial information should be read with Colony Capital’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Colony Capital’s combined financial statements and the notes thereto included in this proxy statement. Colony Capital’s historical results are not necessarily indicative of results for any future periods.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  

(In thousands)

  2014     2013     2013     2012     2011     2010      2009  

Statements of Operations Data

              

Total revenues

  $ 117,596      $ 113,380      $ 151,813      $ 146,420      $ 139,734      $ 151,154       $ 150,725   

Total expenses

    98,163        85,565        132,406        115,738        113,519        113,285         114,230   

Net income

    19,433        27,815        19,407        30,682        26,215        37,869         36,495   

Net income allocable to members

    19,433        27,815        19,446        30,727        26,215        37,869         36,495   

 

     September 30,      December 31,  

(In thousands)

   2014      2013      2012      2011      2010      2009  

Balance Sheet Data

                 

Cash and cash equivalents

   $ 29,119       $ 42,474       $ 21,715       $ 43,771       $ 53,667       $ 59,998   

Due from affiliates

     41,458         31,915         48,267         28,687         35,445         29,622   

Fixed assets, net

     48,030         51,554         81,639         33,619         36,994         39,897   

Total assets

     133,929         142,514         154,005         110,573         132,523         135,011   

Total debt

     53,617         65,167         75,008         29,914         36,413         36,967   

Total liabilities

     97,797         102,518         114,947         87,273         101,856         111,629   

Total members’ equity

     35,951         39,815         38,838         23,300         30,667         23,382   

Total equity

     36,132         39,996         39,058         23,300         30,667         23,382   

 

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PRO FORMA SELECTED FINANCIAL DATA

The following pro forma selected financial information as of and for the nine months ended September 30, 2014 and for the year ended December 31, 2013 are presented to show the pro forma effect of the Combination. See “Unaudited Pro Forma Consolidated Financial Information” beginning on page 139 for additional details. The pro forma selected financial information is not necessarily indicative of the consolidated results of operations or financial position that might have been achieved by the consolidated company for the dates or periods indicated, nor is it necessarily indicative of the results of operations or financial position of the consolidated company that may occur in the future.

 

     Nine Months
Ended
September 30,
2014
     Year Ended
December 31,
2013
 

(In thousands, except per share data)

     

Pro Forma Statements of Operations Data:

     

Total income

   $ 305,235       $ 305,987   

Net income

     137,274         129,246   

Net income attributable to Colony Financial, Inc.

     90,766         85,624   

Net income attributable to common stockholders

     72,868         64,204   

Net income per share attributable to common stockholders—basic

   $ 0.75       $ 0.91   

Net income per share attributable to common stockholders—diluted

   $ 0.75       $ 0.91   

 

(In thousands)

   As of
September 30,
2014
 

Pro Forma Balance Sheet Data:

  

Total assets

     4,764,273   

Total debt

     1,145,447   

Total liabilities

     1,422,589   

Total stockholders’ equity

     2,547,977   

Total equity

     3,341,684   

 

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HISTORICAL AND PRO FORMA PER SHARE DATA

The following table presents selected historical and pro forma per share data. The selected pro forma per share data have been derived from our unaudited pro forma consolidated financial information, beginning on page 139. The selected pro forma per share data are not necessarily indicative of the consolidated results of operations or financial position that might have been achieved by the consolidated company for the dates or periods indicated, nor is it necessarily indicative of the results of operations or financial position of the consolidated company that may occur in the future. The information set forth below should be read in conjunction with our consolidated financial statements and notes thereto, and our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” incorporated by reference in this proxy statement, and our unaudited pro forma financial statements, beginning on page 139.

 

     Nine Months Ended
September 30, 2014
     Year Ended
December 31, 2013
 
     Pro Forma(1)      Historical      Pro Forma(1)      Historical  

Cash distributions declared per common share

   $ 1.07       $ 1.07       $ 1.40       $ 1.40   

Net income per share attributable to common stockholders—basic

   $ 0.75       $ 0.86       $ 0.91       $ 1.20   

 

     At September 30, 2014  
     Pro Forma(2)      Historical  

Book value per outstanding share

   $ 19.57       $ 19.27   

 

(1) Pro forma to give effect to the Combination as if it had occurred on January 1, 2013.
(2) Pro forma to give effect to the Combination as if it had occurred on September 30, 2014. Based on pro forma stockholders’ equity as of September 30, 2014, presented elsewhere in this proxy statement, and approximately 112.9 million aggregate shares of pro forma outstanding Class A Common Stock and Class B Common Stock which include approximately 3.3 million aggregate shares to be issued as part of upfront consideration.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COLONY CAPITAL

The historical combined financial data discussed below reflects the historical combined results and financial position of the real estate investment management businesses and operations of Colony Capital that will be contributed to the Company in the Combination. The following discussion and analysis should be read in conjunction with the audited combined financial statements and the related notes included elsewhere in this proxy statement. The historical combined financial statements do not give effect to the Combination and therefore may not necessarily be representative of Colony Capital’s financial condition and results of operations upon consummation of, and subsequent to, the Combination. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those discussed in any forward-looking statements.

Overview

Colony Capital is a leading global real estate private equity investment management firm with approximately 300 employees in 13 offices located in 10 countries with approximately $19.0 billion of assets under management (“AUM”) and over $2.0 billion of uncalled equity capital available for investment at September 30, 2014. Over its history, Colony Capital has managed the acquisition of over 37,000 assets and loans representing over $60 billion in value.

Colony Capital’s primary activities include the (i) sponsorship and capital-raising activities on behalf of certain limited partnerships (the “Partnerships”), which are engaged in the acquisition, management and disposition of real estate and real estate-related assets, including mortgage loans, and (ii) identification, structuring, consummation, management and disposition of investments on behalf of the Partnerships. The Partnerships invest in a diversified portfolio of investments consisting of direct or indirect exposure to debt or preferred equity instruments secured by real estate assets and equity investments in core-plus, value-added and opportunistic real estate portfolios. While Colony Capital has made advances to certain of its affiliates, including the general partners of the Partnerships (“GPs”), it has not historically invested in or held direct interests in the Partnerships or the GPs.

In addition to managing the Partnerships, Colony Capital has asset management companies (“AMC”), which provide portfolio management services to affiliated entities that hold over 3,500 loans with combined unpaid principal balance of over $3.0 billion at September 30, 2014.

 

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Results of Operations

The following tables set forth information regarding Colony Capital’s combined results of operations and certain key operating metrics for the nine months ended September 30, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011, respectively.

 

<
    Nine months ended
September 30,
    Year ended December 31,  

(In thousands)

  2014     2013     2013     2012      2011  

Revenue:

          

Management and real estate management fees

  $ 97,671      $ 98,201      $ 129,103      $ 127,573       $ 129,409   

Cost reimbursements

    16,504        12,622        19,846        16,548         8,762   

Other

    3,421        2,557        2,864        2,299         1,563   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

  117,596      113,380      151,813      146,420      139,734   

Expenses: