A critical matter to consider and address is the composition of the board itself. All exchanges require that, except under limited circumstances, a majority of the directors be “independent,” as defined by both the federal securities laws and the applicable stock exchange listing rules. In addition, boards should include individuals with: appropriate financial expertise and relevant real estate industry experience; an understanding of risk management; ESG, cybersecurity, and privacy issues; and public company experience. A company should begin its search for suitable directors early in the IPO process. The company can turn to its large investors, as well as its legal counsel and underwriters, for references regarding potential director candidates. In recent years, REITs, management teams, investors, and proxy advisory and governance firms have placed a higher priority on ensuring that REIT boards of directors and management teams are diverse in terms of experience and personal background, among other considerations. In 2021, the SEC approved two new Nasdaq listing rules that require most Nasdaq-listed companies, including REITs, to have or explain why they do not have at least two directors that identify as diverse (including at least one female) and to publicly disclose certain diversity statistics about their boards on an annual basis. These new Nasdaq listing rules began phasing in during 2022 and are indicative of a trend toward focusing on diversity in board composition. Certain states also have enacted, or are considering enacting, requirements related to board diversity. In addition, in recognition of the value of diversity, the National Association of Real Estate Investment Trusts (“Nareit”) established the Dividends through Diversity, Equity and Inclusion (“DDEI”) Initiative in 2021 to promote the recruitment, inclusion, and advancement of women and members of other diverse groups in REITs and the broader commercial real estate industry. Several studies have demonstrated a positive link between board diversity and financial performance. The benefits of diversity of experience and background should be considered to ensure that decision-making reflects diverse perspectives. REITs incorporated in Maryland or operating as Maryland REITs have had the ability to make various elections regarding opting out of (and the ability to opt-in later without stockholder consent) corporate governance matters before going public, including, but not limited to, considering whether to: opt out of the Maryland Unsolicited Takeovers Act (“MUTA”), a provision of the MGCL that provides for classified boards without stockholder approval; require super-majority votes to remove directors; require that the number of directors be fixed only by a vote of directors; require current directors to fill vacancies on a board; require no less than a majority of stockholders to call a special meeting of stockholders including to amend the REIT’s Bylaws; and include Bylaw provisions regarding “proxy access” (which enables stockholders to use the REIT’s annual proxy statement to nominate directors). However, certain of these provisions have been criticized as being too company-friendly, and therefore, companies should weigh—with input from legal counsel and the underwriters—the pros and cons of adopting any of these governance provisions. Additionally, the size of the board and the number of “insider directors” and relationships or compensation to “independent” directors (the Chairman role in particular) needs to be carefully considered. Companies should carefully evaluate which corporate governance provisions are most advantageous, including by assessing the potential views of investors and proxy advisory firms (such as ISS, Glass Lewis, and Green Street) that will analyze the company once it becomes public (and probably before the IPO). Executive Compensation Well before its IPO, an issuer should begin to approach executive compensation in a manner that is similar to a public company’s approach. The IPO registration statement requires the same enhanced executive compensation disclosures that public companies provide in their annual proxy statements, including a discussion of compensation philosophy, an analysis of how compensation programs implement that philosophy, and a discussion of the effects of risk when taking on compensation decisions. In mortgage REITs and REITs that are not self-managed or self-administered, the REIT will also be required to provide extensive disclosure of both the compensation paid to the managers and the process to manage conflicts of interest. 7 | 2024 Guide to REIT IPOs and Listing Transactions
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