NorthStar Merger Back On Track After Structure Changes

NorthStar Asset Management Group Inc. (NYSE: NSAM), Colony Capital Inc. (NYSE: CLNY) and NorthStar Realty Finance Corp. (NYSE: NRF), amended its corporate governance structure relating to the proposed merger agreement that was announced in June. The proposed merger, which would create a $58 billion equity REIT called Colony NorthStar Inc. is expected to close in January 2017, if their respective shareholders approve.

NSAM, which spun off from NorthStar Realty in July 2014, is the sponsor of NorthStar’s non-traded REITs and other direct investment offerings.

The previously proposed governance structure faced opposition from NSAM’s largest shareholders, including Michael Dell – founder, CEO and chairman of computer giant Dell Inc. His private investment firm, MSD Capital, and its affiliates have a 10.2 percent stake in NSAM with 19 million shares owned. MSD and its affiliates have now agreed to vote in favor of the transaction.

MSD Capital and MSD Partners stated, “NorthStar and Colony have made some very important improvements to the terms and proposed structure of the merged company. The governance changes assure greater alignment with shareholders and we believe they will better position the new Colony NorthStar for future growth. We are pleased to support the new proposals and look forward to the closing of the merger and to the company’s future success.”

The management of NSAM, CLNY and NRF said that they believe having a shareholder-focused corporate governance structure will enhance Colony NorthStar’s business and value to stockholders. The amended Colony NorthStar corporate governance structure includes the following:

• Colony NorthStar’s board will include two new independent directors – former Oak Hill CEO Jon Fosheim and managing partner of DC Partners, Douglas Crocker II.

• The board will be comprised of 10 directors (a reduction from previously contemplated board size of 13 directors), with five members jointly selected by NSAM and NRF, including Fosheim and Crocker, and five members selected by Colony.

• All directors will stand for election annually.

• Colony NorthStar will opt out of the Maryland Unsolicited Takeover Act that would have permitted the board to elect, without stockholder approval, to adopt a classified board structure and other anti-takeover provisions.

• In uncontested elections, members of the board will be elected by majority vote, with incumbent directors who are not re-elected being required to submit a resignation.

• Stockholders holding 25 percent of the Colony NorthStar voting power will be entitled to call a special meeting of stockholders.

• Stockholders will have the right to remove directors at a special meeting of stockholders, with or without cause, by majority vote. Colony NorthStar stockholders will also have the right to fill vacancies resulting from the removal of directors.

• Stockholders will be entitled to amend bylaws by majority vote. In addition, the board will not be permitted to unilaterally amend any bylaw provisions adopted by stockholders.

• Stockholder approval will be required to increase the number of shares available for issuance.

• Directors will be required to maintain stock ownership equal to four times their annual cash retainer.

• NSAM will pay its pre-closing stockholders a special cash dividend of $228 million (approximately $1.16 per share), an increase of $100 million above the $128 million special cash dividend NSAM was permitted to pay under the original merger agreement. This special dividend will be in addition to NSAM’s regularly scheduled dividend of $0.10 per share payable in November.

• Colony NorthStar intends to implement a plan for executive compensation substantially similar to Colony’s existing compensation program.

• NSAM’s executives agreed that the number of Colony NorthStar shares that they will be entitled to receive for their previously reduced, contractually owed severance payments, which was to be determined based solely on the volume weighted average trading price of the Colony NorthStar shares over the five trading days following the closing of the merger, will be determined based on the greater of (i) a $15.00 per share price and (ii) the five trading day volume weighted average price of Colony NorthStar following the closing of the merger.

• Executive chairman David Hamamoto has agreed to submit his resignation as a director of Colony NorthStar in the event that his equity interest in Colony NorthStar falls below 50 percent of his equity interest as of the closing of the transaction.

• NSAM, CLNY and NRF plan to hold their respective shareholder meetings before the end of the year.

• At the close of the merger, Colony NorthStar intends to commence payment of an annualized dividend of $1.08 per share, payable quarterly.

The merger has been unanimously approved by the special committees of NSAM and NRF, and the board of directors of Colony. If approved, NSAM shareholders will own approximately 32.85 percent, Colony shareholders will own approximately 33.25 percent and NRF shareholders will own approximately 33.90 percent of the combined company on a fully diluted basis. NSAM shareholders will also receive, in addition to its regular quarterly dividend, a special cash dividend equal to $228 million, which represents a one-time distribution of excess NSAM taxable earnings and profits.

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