Amid continuing reports of corporations reincorporating from Delaware, including Simon Property Group reincorporating from Delaware to Indiana, the location of its headquarters, and Texas and Nevada recently amending their corporate statutes to actively chase new incorporations and reincorporations, Maryland remains the most common jurisdiction for formation of public REITs. As of the end of 2024, approximately 90% of listed REITs were formed in Maryland. Maryland remains the favored jurisdiction for REITs due to Maryland’s decades-long history with REITs, statutory provisions designed to assist REITs and other general protections for Maryland-formed corporations.
Maryland, for good reason, has been the favored jurisdiction for REIT formations for over 60 years. The REIT provisions of the Internal Revenue Code were implemented in 1960 and, by 1963, Maryland created a form of trust entity, a Maryland real estate investment trust, which was the first of its kind and designed to align with the REIT tax provisions. In the early 1990s, the popularity of REITs increased significantly and, due to a 1976 change to the REIT tax provisions, a REIT could be formed as a corporation in addition to a trust. Most of those 1990s REITs were formed in Maryland and, as noted above, approximately 90% of all listed REITs (and many private REITs) were formed in Maryland. The Maryland General Corporation Law (“MGCL”) and the Maryland REIT Law (“MRL”) contain many provisions that create substantive advantages for REITs formed in Maryland as opposed to other jurisdictions, including:
- Validation of Ownership and Transfer Restrictions. Specific statutory validation of share ownership and transfer limitations for any purpose, including those designed to protect REIT tax status.
- Applicability of Charter Amendments to All Stockholders. Applicability of all charter amendments to all stockholders, including stockholders that voted against an amendment. By contrast, the Delaware General Corporation Law provides that charter amendments related to share ownership and transfer provisions (including those designed to protect REIT tax status) are effective against an existing stockholder only with the express approval of such holder.
- Increase/Decrease Authorized Stock. Authorization for the charter of a Maryland corporation to permit the board to amend the charter to increase or decrease authorized stock without a stockholder vote, which can be helpful in facilitating time-sensitive equity offerings. As REITs are required under federal tax laws to distribute annually at least 90% of their taxable income as dividends to stockholders, and, therefore, are significantly restricted in financing growth through retained earnings, this provision has become market-standard among Maryland corporations in the past 25-plus years since enactment of this statute. Maryland is the first and, so far as we know, the only state with this provision. This charter provision has also been useful to many early-stage companies which tend to have extensive capital requirements and need to go through multiple rounds of equity financing.
- No Mandatory Class Voting Rights. The charter of a Maryland corporation may completely deny voting rights to a class or series of stock (i.e., there are no mandatory class voting rights in connection with an amendment to the charter that would change the aggregate number of authorized shares or the par value of the class or would adversely affect the powers, preferences or special rights of the class or series).Again, due to the need for REITs to frequently access capital through equity raises, having flexibility in preferred stock voting rights (rather than statutorily imposed rights) is essential.
- Distributions. Modern, flexible and unitary statute on dividends and other distributions (based on the Model Business Corporation Act).This naturally facilitates a REIT’s compliance with the tax law distribution requirement mentioned above.
In addition to the foregoing, which have special applicability to REITs, numerous other provisions of the MGCL and MRL make Maryland an advantageous place for other businesses to incorporate. A large number of registered investment companies and business development companies, as well as bank holding companies, are formed in Maryland. These provisions include:
- Director/Trustee Duties. A clear three-part statutory standard of conduct for directors of a Maryland corporation and trustees of a Maryland REIT (good faith, reasonable belief, ordinary prudence) vs. a constantly shifting, case-based standard in Delaware and some other jurisdictions. Maryland’s statutory standard has remained stable since it was first adopted over 40 years ago. In addition, the MGCL and MRL contain a statutory presumption that any act of a director/trustee satisfies the standard of conduct for directors/trustees (vs. no such statute in Delaware).
- Case Law. In 2003, the Maryland legislature demonstrated its commitment to Maryland-formed entities by forming the Maryland Business and Technology Case Management Program (the “B&T Program”).Judges assigned to the B&T Program receive training in business and technology issues. Maryland has a simple process for either litigant to request to have a case assigned to the B&T Program. In its nearly 25 years, the B&T Program has addressed numerous business law matters effectively and efficiently, has gained significant familiarity with corporate law matters, including REIT-specific issues, and has decided many cases involving business issues. Other states are only now seeking to create a business-focused court system, such as Texas in September 2024.
- Exculpation from Personal Liability. Broader statutory exculpation for directors/trustees and officers from personal liability for money damages than in many other states, including Delaware and Texas, which have more and broader exceptions (including “acts not in good faith,” which was litigated for over ten years in the Disney case in Delaware).
- Director/Trustee and Officer Indemnification. Broader indemnification rights for directors/trustees and officers (vs. Delaware, which prohibits indemnification of derivative suit settlements).
- Reverse Stock Split Approval. Board power, without stockholder approval, to effect a reverse stock split of a corporation with a class of equity securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”) so long as the split does not combine more than ten shares into one in any twelve-month period. This statute provides much greater flexibility for listed companies to address market price issues, such as a minimum per share price for investment by certain major investors.
- Franchise Taxes. No franchise taxes in Maryland (vs. Delaware, where the franchise tax for a publicly-traded corporation can be as high as $250,000 per year).
- Stockholder Inspection Rights. Stockholders’ right to inspect books of account and stock ledgers only if stockholders are, and for at least six months have been, holders of record of at least five percent of the outstanding stock of any class of the corporation.
- Appraisal Rights. Authorization for the charter of a Maryland corporation to eliminate appraisal rights (not permitted in Delaware).In addition, the MGCL’s “market out” exception for appraisal rights applies to all stock listed on a national securities exchange (except for the infrequent case of cash mergers in which directors/trustees and officers own five percent or more of the outstanding shares and any of their stock is converted in the merger into stock of the acquirer) (vs. Delaware, where the market out does not apply to any cash merger).
- Takeover Defense Protections. Broader takeover defense statutes than most other states, designed to provide a board with the time and leverage to negotiate with an unsolicited bidder for control, whether through a tender offer or proxy contest (or both), and protect the best interests of the corporation and get the best deal for the stockholders. These broader defenses, which have been successfully used by many Maryland corporations, are entirely optional. Among these is Subtitle 8 of Title 3 of the MGCL, which was adopted in 1999 and, among other items, permits a board of directors of a company with a class of equity securities registered under the Exchange Act and three independent directors to classify itself without regard to any other provision of the charter or bylaws of the corporation. Boards that do not want any of these defenses may either not adopt them or opt out of them and still have the other benefits of Maryland law.
The lists above are not intended to be exhaustive. In addition to the foregoing benefits, there are other advantages of Maryland as the jurisdiction for forming corporations (whether REITs or corporations generally).
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As always, we are glad to discuss any questions you may have about Maryland law. Our Maryland Corporate Practice represents approximately 75% of the aforementioned 90% of public REITs formed in Maryland.
This memorandum is provided for informational purposes only and is not intended to provide legal advice. Such advice may be provided only after engagement for advice and analysis of specific facts and circumstances and consideration of issues that may not be addressed in this document.