AGREEMENT AND PLAN OF MERGER

EXECUTION COPY

 

Exhibit 2.1

 

AGREEMENT AND PLAN OF MERGER

 

among

 

COLONIAL PROPERTIES TRUST,

 

CLNL ACQUISITION SUB LLC, and

 

CORNERSTONE REALTY INCOME TRUST, INC.

 

Dated as of October 25, 2004

TABLE OF CONTENTS

 

 

 

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EXHIBITS

 

 

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Index of Defined Terms

 

 

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AGREEMENT AND PLAN OF MERGER

 

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of October 25, 2004, by and among COLONIAL PROPERTIES TRUST, an Alabama real estate investment trust (“Colonial”), CLNL ACQUISITION SUB LLC, a Delaware limited liability company (“Colonial Merger Sub”), and CORNERSTONE REALTY INCOME TRUST, INC., a Virginia corporation (“Cornerstone”).

 

R E C I T A L S:

 

A. The Board of Trustees of Colonial and the Board of Directors of Cornerstone deem it advisable and in the best interests of their respective shareholders, upon the terms and subject to the conditions contained herein, that Cornerstone shall merge with and into Colonial Merger Sub, a wholly owned subsidiary of Colonial that is disregarded as an entity separate from Colonial for federal income tax purposes (the “Merger”).

 

B. Upon the terms and subject to the conditions set forth herein, Colonial Merger Sub and Cornerstone shall execute a Certificate of Merger (the “Delaware Certificate of Merger”) in substantially the form attached hereto as Exhibit A and shall file such Delaware Certificate of Merger in accordance with Delaware law to effectuate the Merger.

 

C. Upon the terms and subject to the conditions set forth herein, Colonial Merger Sub and Cornerstone shall also execute Articles of Merger (the “Virginia Articles of Merger”) in substantially the form attached hereto as Exhibit B and, concurrently with the filing of the Delaware Certificate of Merger, shall file such Virginia Articles of Merger in accordance with Virginia law to effectuate the Merger.

 

D. Immediately following consummation of the Merger, Colonial shall contribute to Colonial Realty Limited Partnership, a Delaware limited partnership (“Colonial Partnership”), in exchange for additional interests therein, all of the outstanding limited liability company membership interests in Colonial Merger Sub, with the result that Colonial Merger Sub will become a wholly owned subsidiary of Colonial Partnership that is disregarded as an entity separate from Colonial Partnership for federal income tax purposes.

 

E. For federal income tax purposes, it is intended that the Merger shall qualify as a reorganization under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), with Cornerstone being treated as having merged into Colonial for federal income tax purposes, and that this Agreement shall constitute a plan of reorganization under Section 368(a) of the Code.

 

F. Colonial and Cornerstone have each received a fairness opinion relating to the transactions contemplated hereby as more fully described herein.

 

G. Colonial, Colonial Merger Sub and Cornerstone desire to make certain representations, warranties, covenants and agreements in connection with the Merger.

 

H. As an inducement to Colonial and Colonial Merger Sub to enter into this Agreement, Glade M. Knight and certain entities controlled by Glade M. Knight have entered into a voting agreement (the “Cornerstone Voting Agreement”), pursuant to which such person or entity has agreed, among other things, to vote his or its Cornerstone Common Shares (as defined herein) to approve this Agreement, the Merger and any other matter which requires his or its vote in connection with the transactions contemplated by this Agreement.

 

I. As an inducement to Cornerstone to enter into this Agreement, Thomas H. Lowder and certain entities controlled by Thomas H. Lowder have entered into a voting agreement (the “Colonial Voting Agreement,” and together with the Cornerstone Voting Agreement, the “Voting Agreements”), pursuant to which such person or entity has agreed, among other things, to vote his or its shares of beneficial interest of Colonial to approve this Agreement, the Merger and any other matter which requires his or its vote in connection with the transactions contemplated by this Agreement.

 

NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows:

 

ARTICLE I

 

THE MERGER

 

1.1 The Merger . Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Title 6, Chapter 18 of the Delaware Code Annotated, as amended (the “DE LLC Act”) and Title 13.1, Chapter 9 of the Code of Virginia, as amended (the “Virginia Corporation Act”), Cornerstone shall be merged with and into Colonial Merger Sub, with Colonial Merger Sub surviving as a limited liability company.

 

1.2 Closing . The closing of the Merger (the “Closing”) will take place commencing at 9:00 a.m., local time, on the date to be specified by the parties, which shall be no later than the third business day after satisfaction or waiver of the conditions set forth in Article 6 (the “Closing Date”), at the offices of Hogan & Hartson L.L.P., Columbia Square, 555 Thirteenth Street, NW Washington D.C. 20004, unless another date or place is agreed to in writing by the parties; provided that, in the event that Cornerstone has delivered a notice of termination pursuant to Section 7.1(j) , the “Closing Date” shall be the third business day after delivery of the Top-Up Notice (as defined herein), if any, pursuant to Section 7.1(j) .

 

1.3 Effective Time . On the Closing Date, Colonial Merger Sub and Cornerstone shall execute and file the Delaware Certificate of Merger, executed in accordance with the DE LLC Act, with the Office of the Secretary of State of the State of Delaware (the “Delaware Secretary”), and the Virginia Articles of Merger, executed in accordance with the Virginia Corporation Act, with the State Corporation Commission of the Commonwealth of

 

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Virginia (the “Virginia Commission”) and shall make all other filings and recordings required under the DE LLC Act and the Virginia Corporation Act. The Merger shall become effective (the “Effective Time”) at such time as Colonial and Cornerstone shall agree should be specified in the Delaware Certificate of Merger and the Virginia Articles of Merger (not to exceed thirty (30) days after the Delaware Certificate of Merger is accepted for record by the Delaware Secretary). Unless otherwise agreed, the parties shall cause the Effective Time to occur on the Closing Date.

 

1.4 Effect of Merger on Certificate of Formation and Operating Agreement of Colonial Merger Sub . The Articles of Organization, as amended, of Colonial Merger Sub and the Limited Liability Company Operating Agreement, as amended, of Colonial Merger Sub, as in effect immediately prior to the Effective Time of the Merger, shall continue in full force and effect after the Merger until further amended in accordance with applicable Delaware law.

 

1.5 Officers and Managers of Colonial Merger Sub; Additional Trustee of Colonial . The officers and members of the Board of Managers of Colonial Merger Sub following the Merger shall consist of the officers and members of the Board of Managers of Colonial Merger Sub immediately prior to the Effective Time of the Merger, who shall continue to serve for the balance of their unexpired terms or their earlier death, resignation or removal. Colonial shall cause Glade M. Knight to be appointed as an additional member of the Board of Trustees of Colonial, effective as of midnight on the Closing Date. Colonial then shall include and recommend Glade M. Knight in the management slate of nominees for election to the Board of Trustees of Colonial at each annual meeting or special meeting of Colonial until at least the third anniversary of the Effective Time.

 

1.6 Effect on Capital Stock and Membership Interest; Colonial Articles Supplementary . The effect of the Merger on the shares of capital stock of Cornerstone shall be as provided in the Delaware Certificate of Merger, the Virginia Articles of Merger and in Section 1.8 . The Merger shall not change the shares of beneficial interest of Colonial outstanding immediately prior to the Effective Time of the Merger. At the Effective Time of the Merger, the 100% limited liability company membership interest of Colonial Merger Sub outstanding immediately prior to the Effective Time of the Merger (all of which shall be owned by Colonial at such time) shall be converted into a number of units of limited liability company membership interest of Colonial Merger Sub (“Colonial Merger Sub LLC Units”) equal to the number of Cornerstone Common Shares outstanding immediately prior to the Effective Time of the Merger. Prior to or as of the Effective Time, the Declaration of Trust, as amended, of Colonial (the “Colonial Declaration of Trust”) shall be amended, in accordance with Title 10, Chapter 3 of the Alabama Code, as amended (the “Alabama REIT Law”), and the terms of the Colonial Declaration of Trust, by the adoption of articles supplementary substantially in the form set forth on Exhibit C (the “Colonial Articles Supplementary”) to provide for the creation of the Colonial Series E Preferred Shares (as defined herein).

 

1.7 Colonial Partnership Amendment . Prior to or as of the Effective Time, the Third Amended and Restated Agreement of Limited Partnership, as amended, of Colonial Partnership (the “Colonial Partnership Agreement”) shall be amended, in accordance with Title 6, Chapter 17 of the Delaware Code Annotated, as amended, and the terms of the Colonial

 

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Partnership Agreement, by the adoption of an amendment in accordance with Section 4.2.B thereof (the “Colonial Partnership Amendment”) to provide for the creation of 7.62% Series E Preferred Units of Colonial Partnership to be owned by Colonial and having terms substantially similar to the Colonial Series E Preferred Shares (as defined herein)) (the “Colonial Series E Preferred OP Units”).

 

1.8 Merger Consideration .

 

(a) Merger Consideration . (i) Each common share, no par value, of Cornerstone (“Cornerstone Common Share”) issued and outstanding immediately prior to the Effective Time of the Merger, which under the terms of Section 1.10 is to be converted solely into Depositary Shares of Colonial (each having a liquidation preference of $25.00 per Depositary Share) (each a “Colonial Series E Preferred Depositary Share”) representing 1/100 ^th of a 7.62% Series E Cumulative Redeemable Preferred Share of Beneficial Interest, $.01 par value per share, of Colonial (each having a liquidation preference of $2,500.00 per share) (each a “Colonial Series E Preferred Share”), shall be converted into the right to receive a number of validly issued, fully paid and nonassessable Colonial Series E Preferred Depositary Shares (evidenced by Depositary Receipts of Colonial (“Depositary Receipts”)) equal to the Preferred Depositary Share Conversion Rate (as defined herein). As used herein, “Preferred Depositary Share Conversion Rate” shall mean (I) 0.4200 multiplied by (II) an amount equal to the difference obtained by subtracting (x) one (1) minus (y) the Closing Adjustment Factor (as defined herein).

 

(ii) Each Cornerstone Common Share issued and outstanding immediately prior to the Effective Time of the Merger (other than Cornerstone Common Shares to be converted into the right to receive Colonial Series E Preferred Depositary Shares pursuant to Section 1.8(a)(i) and Section 1.10 ) shall be converted into the right to receive (A) a number of validly issued, fully paid and nonassessable common shares of beneficial interest, $.01 par value per share, of Colonial (each a “Colonial Common Share”) equal to the Common Share Conversion Rate (as defined herein) (with each such Colonial Common Share being issued with the related Colonial Right (as defined herein)) and (B) if (and only if) a Top-Up Notice shall have been delivered pursuant to Section 7.1(j) , (y) if the Top-Up Amount is payable all or in part with Colonial Common Shares, an additional number of validly issued, fully paid and nonassessable Colonial Common Shares equal to the product of the Common Share Conversion Rate times a fraction, the numerator of which is the portion of the Top-Up Amount (expressed in dollars) payable in Colonial Common Shares (as specified in the Top-Up Notice) and the denominator of which is the Average Closing Price (as defined herein) (with each such Colonial Common Share being issued with the related Colonial Right), or (z) if the Top-Up Amount is payable all or in part in cash, an amount of cash equal to the product of the Common Share Conversion Rate times the portion of the Top-Up Amount (expressed in dollars) payable in cash. As used herein, “Common Share Conversion Rate” shall mean (I) 0.2584 multiplied by (II) an amount equal to the difference obtained by subtracting (x) one (1) minus (y) the Closing Adjustment Factor. “Closing Adjustment Factor” shall mean a fraction obtained by dividing (I) the Closing Adjustment Amount by (II) the product of (x) the sum of the total number of Cornerstone Common Shares outstanding immediately prior to the Effective Time plus the total number of Net Cornerstone Option Shares (as defined herein) determined based on the Cornerstone Stock Options (as defined herein) outstanding immediately

 

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prior to the Effective Time and (y) $10.80. “Closing Adjustment Amount” shall mean the sum of (I) the Closing Dividend Deficiency Amount (as defined herein), (II) the Section 5.16 Expenses Amount (as defined herein) (but not to exceed $2,000,000), and (III) the Section 5.16 Interest/Penalties Amount (as defined herein). “Average Closing Price” shall mean the average of the closing prices as reported in The Wall Street Journal for each of the 20 consecutive Trading Days (as defined herein) in the period ending ten Trading Days prior to the Closing Date. “Trading Day” shall mean a day on which the New York Stock Exchange (“NYSE”) is open for trading. “Colonial Right” shall mean a “Right” issued pursuant to Colonial’s Rights Agreement, dated November 2, 1998 (the “Colonial Rights Agreement”), between Colonial and BankBoston, N.A., as Rights Agent. “Net Cornerstone Option Shares” shall be equal to (x) the number of Cornerstone Common Shares issuable under Cornerstone Stock Options outstanding immediately prior to the Effective Time with exercise prices of less than $10.80 minus (y) the number of Cornerstone Common Shares that could be purchased at a price of $10.80 per share using the aggregate proceeds that would be received by Cornerstone if all of the in-the-money Cornerstone Stock Options described in clause (x) were exercised in full.

 

(b) Cancelled Status of Cornerstone Common Shares . Each Cornerstone Common Share, when so converted as provided in Section 1.8(a)(i) or (ii) or Section 1.10(b) , shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate (a “Certificate”) theretofore representing such Cornerstone Common Share shall cease to have any rights with respect thereto, except the right to receive, upon the surrender of such Certificate in accordance with Section 1.13(c) , as applicable, (A) any dividends and other distributions in accordance with Section 1.13(d) , (B) certificates representing the Colonial Common Shares into which such Cornerstone Common Shares are converted pursuant to Section 1.8(a)(ii) or Section 1.10(b) (if any), (C) Depositary Receipts representing the Colonial Series E Preferred Depositary Shares into which such Cornerstone Common Shares are converted pursuant to Section 1.8(a)(i) or Section 1.10(b) , and (D) any cash, without interest, in lieu of fractional Colonial Common Shares or Colonial Series E Preferred Depositary Shares to be issued or paid in consideration for Cornerstone Common Shares upon the surrender of such Certificate in accordance with Sections 1.13(c) and 1.13(g) or payable as part of any Top-Up Amount pursuant to Section 1.8(a)(ii) .

 

1.9 Election by Holders of Cornerstone Common Shares to Receive Colonial Common Shares or Colonial Series E Preferred Depositary Shares . Each holder of Cornerstone Common Shares shall have the right to submit a Form of Election (as defined herein) specifying the number of Cornerstone Common Shares which such holder desires to have converted into the right to receive Colonial Common Shares in the Merger pursuant to Section 1.8(a)(ii) and the number which such holder desires to have converted into the right to receive Colonial Series E Preferred Depositary Shares in the Merger pursuant to Section 1.8(a)(i) in accordance with the following procedures:

 

(a) Each holder of Cornerstone Common Shares may specify in a request made in accordance with the provisions of this Section 1.9 (an “Election”) (i) the number of such Cornerstone Common Shares which such holder desires to have converted into the right to receive Colonial Series E Preferred Depositary Shares in the Merger pursuant to Section 1.8(a)(i) (a “Preferred Election”) and (ii) the number of such Cornerstone Common

 

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Shares which such holder desires to have converted into the right to receive Colonial Common Shares in the Merger pursuant to Section 1.8(a)(ii) (a “Common Election”).

 

(b) Colonial and Cornerstone shall prepare, for use by holders of Cornerstone Common Shares in surrendering Certificates representing Cornerstone Common Shares, a form of election (the “Form of Election”) pursuant to which each holder of Cornerstone Common Shares may make Elections. The Form of Election shall be mailed to holders of record of Cornerstone Common Shares as of the record date for the Cornerstone Shareholders Meeting (as defined herein) and shall accompany the Joint Proxy Statement (as defined herein).

 

(c) Cornerstone shall use commercially reasonable efforts to make the Form of Election available to all Persons (as defined herein) who become holders of record of Cornerstone Common Shares during the period between such record date and the Election Date (as defined herein).

 

(d) An Election shall have been properly made only if the Exchange Agent (as defined herein) shall have received, by 5:00 p.m., Eastern Time, on the second business day (such time on such day being referred to herein as the “Election Date”) preceding the date of the Cornerstone Shareholders Meeting, a Form of Election properly completed and signed (and not revoked) and accompanied by the Certificate or Certificates representing Cornerstone Common Shares to which such Form of Election relates, duly endorsed in blank or otherwise in form acceptable for transfer on the books of Cornerstone (or by an appropriate guarantee of delivery of such Certificate or Certificates as set forth in such Form of Election from a member of any registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, provided such Certificate or Certificates are in fact delivered by the time set forth in such guarantee of delivery).

 

(e) Any holder of record of Cornerstone Common Shares may at any time prior to the Election Date change such holder’s Election by written notice received by the Exchange Agent at or prior to the Election Date accompanied by a properly completed Form of Election. Colonial and Cornerstone shall have the right in their sole discretion and by mutual agreement to permit changes in Elections after the Election Date.

 

(f) Any holder of record of Cornerstone Common Shares may at any time prior to the Election Date revoke such holder’s Election by written notice received by the Exchange Agent at or prior to the Election Date or by withdrawal prior to the Election Date of such holder’s Certificates previously deposited with the Exchange Agent. Any revocation of an Election may be withdrawn by notice of such withdrawal delivered at or prior to the Election Date. Any such holder who shall have deposited Certificates with the Exchange Agent shall have the right to withdraw such Certificates by written notice received by the Exchange Agent and thereby revoke such holder’s Election as of the Election Date at any time after the expiration of the period of 60 days following the Election Date if the Merger shall not have been consummated prior thereto. Colonial shall obtain from the Exchange Agent an agreement to return each Form of Election and accompanying Certificates to the holders of Cornerstone Common Shares submitting the same in the event this Agreement shall be terminated in accordance with its terms.

 

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(g) Colonial and Cornerstone by mutual agreement shall have the right to make rules, not inconsistent with the terms of this Agreement, governing the validity of the Form of Election, the manner and extent to which Elections are to be taken into account in making the determinations prescribed by Section 1.10 , the issuance and delivery of certificates for Colonial Common Shares and Colonial Series E Preferred Depositary Shares into which Cornerstone Common Shares are converted in the Merger and the treatment of Colonial Common Shares and Cornerstone Common Shares held through brokers or other market participants ( i.e., in street name).

 

1.10 Proration . The determination of whether Cornerstone Common Shares shall be converted in the Merger into Colonial Common Shares in accordance with Section 1.8(a)(ii) or Colonial Series E Preferred Depositary Shares in accordance with Section 1.8(a)(i) , or the right to receive a combination of Colonial Series E Preferred Depositary Shares and Colonial Common Shares shall be made as set forth in this Section 1.10 .

 

(a) Each Cornerstone Common Share for which a Common Election is received and each Non-Electing Share (as defined herein) shall be converted into Colonial Common Shares in accordance with Section 1.8(a)(ii) . For purposes of this Section 1.10 , outstanding Cornerstone Common Shares as to which an election is not in effect at the Election Date and shares as to which an Election has been withdrawn after the 60-day period following the Election Date and prior to the Effective Time of the Merger shall be called “Non-Electing Shares.” If Colonial and Cornerstone shall determine for any reason that any Election was not properly made with respect to Cornerstone Common Shares, such Election shall be deemed ineffective and Cornerstone Common Shares covered by such Election shall, for purposes hereof, be deemed to be Non-Electing Shares.

 

(b) Except as provided in the immediately following sentence, each Cornerstone Common Share for which a Preferred Election is received shall be converted into Colonial Series E Preferred Depositary Shares in accordance with Section 1.8(a)(i) . If Preferred Elections are received for a number of Cornerstone Common Shares which is greater than the Maximum Preferred Depositary Share Amount (as defined herein), each Cornerstone Common Share for which a Preferred Election has been received shall be converted in the Merger into the right to receive (i) a number of Colonial Series E Preferred Depositary Shares equal to the product of (w) the Preferred Depositary Share Conversion Rate and (x) a fraction (the “Preferred Fraction”) the numerator of which shall be the Maximum Preferred Depositary Share Amount and the denominator of which shall be the aggregate number of Cornerstone Common Shares covered by all Preferred Elections, and (ii) a number of Colonial Common Shares equal to the product of (y) the Common Share Conversion Rate and (z) a fraction (the “Common Fraction”) equal to one minus the Preferred Fraction and (iii) if (and only if) a Top-Up Notice shall have been delivered pursuant to Section 7.1(j) , additional consideration in an amount and form equal to the Common Fraction times the amount of Colonial Common Shares and cash payable with respect to a Cornerstone Common Share for which a Common Election is received pursuant to clause (B) of Section 1.8(a)(ii) . As used herein, “Maximum Preferred Depositary Share Amount” shall mean 14,080,954 minus the Maximum Preferred Depositary Share Adjustment Amount. “Maximum Preferred Depositary Share Adjustment Amount” shall be an amount

 

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(rounded to the nearest whole number) equal to the quotient obtained by dividing (I) the Closing Adjustment Amount by (II) $10.50.

 

1.11 Partner Approval . Through its approval of the Colonial Partnership Amendment as general partner of Colonial Partnership, Colonial has obtained the requisite approval of the partners of Colonial Partnership of the Colonial Partnership Amendment (the “Colonial Partner Approval”).

 

1.12 Appraisal or Dissenters Rights . The holders of Cornerstone Common Shares and Colonial Common Shares are not entitled under applicable law to appraisal, dissenters or similar rights as a result of the Merger.

 

1.13 Exchange of Certificates; Pre-Closing Dividends; Fractional Shares .

 

(a) Exchange Agent; Depositary . Prior to the Effective Time, Colonial shall appoint EquiServe Trust Company as the exchange agent, or another bank or trust company reasonably acceptable to Cornerstone, to act as exchange agent (the “Exchange Agent”) for the exchange of the consideration to be paid in the Merger pursuant to Section 1.8 and Section 1.10 (the “Merger Consideration”) upon surrender of certificates representing issued and outstanding Cornerstone Common Shares. In addition, prior to the Effective Time, Colonial shall appoint Equiserve Trust Company as the depositary for the Colonial Series E Preferred Depositary Shares, or another bank or trust company reasonably acceptable to Cornerstone, pursuant to a Depositary Agreement in form and substance reasonably acceptable to Cornerstone.

 

(b) Colonial to Provide Merger Consideration; Cornerstone to Provide Funds for Final Cornerstone Dividend . Colonial shall provide to the Exchange Agent at or before the Effective Time of the Merger, for the benefit of the holders of Cornerstone Common Shares, the Merger Consideration issuable in exchange for the issued and outstanding Cornerstone Common Shares pursuant to Section 1.8 and Section 1.10 , together with any cash required to make payments in lieu of any fractional shares pursuant to Section 1.13(g) (the “Exchange Fund”). The Exchange Agent (or other depository acting for the benefit of the Exchange Agent) shall invest any cash included in the Exchange Fund as directed by Colonial, on a daily basis. Any interest or other income resulting from such investments shall be paid to Colonial. Cornerstone shall provide to the Exchange Agent not later than three business days prior to the Effective Time of the Merger, for the benefit of the holders of Cornerstone Common Shares, cash payable in respect of any dividends required pursuant to Section 1.13(d)(i) . Such cash shall be invested in accordance with written directions delivered by Cornerstone to the Exchange Agent (or other depository) not later than three business days prior to the Effective Time of the Merger, with any interest or other income earned on such investments to be paid to Colonial as the successor to Cornerstone in the Merger.

 

(c) Exchange Procedure . As soon as reasonably practicable after the Effective Time, Colonial shall use commercially reasonable efforts to cause the Exchange Agent to mail to each holder of record of a Certificate or Certificates which immediately prior to the Effective Time represented outstanding Cornerstone Common Shares (other than to holders of Cornerstone Common Shares who previously surrendered with their Form of Election their

 

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Certificates for Cornerstone Common Shares) whose shares were converted into the right to receive the Merger Consideration pursuant to Section 1.8(a) and Section 1.10 , (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in a form and have such other provisions as Colonial may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. To the extent not previously surrendered with a Form of Election, upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Colonial, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration into which the Cornerstone Common Shares theretofore represented by such Certificate shall have been converted pursuant to Section 1.8(a) and Section 1.10 , together with cash, if any, payable in lieu of fractional shares pursuant to Section 1.13(g) , to be mailed (or made available for collection by hand if so elected by the surrendering holder) within five business days of receipt thereof, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Cornerstone Common Shares which is not registered in the transfer records of Cornerstone, payment may be made to a Person other than the Person in whose name the Certificate so surrendered is registered if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the Person requesting such payment either shall pay any transfer or other Taxes required by reason of such payment being made to a Person other than the registered holder of such Certificate or establish to the satisfaction of Colonial that such Tax or Taxes have been paid or are not applicable. Until surrendered as contemplated by this Section 1.13 , each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration, without interest, into which the Cornerstone Common Shares theretofore represented by such Certificate shall have been converted pursuant to Section 1.8 and Section 1.10 , and any cash payable in lieu of fractional shares pursuant to Section 1.13(g) . No interest will be paid or will accrue on the Merger Consideration upon the surrender of any Certificate or on any cash payable pursuant to Section 1.13(d) or Section 1.13(g) . Colonial or the Exchange Agent, as applicable, shall be entitled, in its sole and absolute discretion, to deduct and withhold from the cash, Colonial Common Shares or Colonial Series E Preferred Depositary Shares, or any combination thereof, that otherwise is payable pursuant to this Agreement to any holder of Cornerstone Common Shares such amounts as Colonial or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code or under any provision of federal, state, local or foreign Tax law. For this purpose, (x) any Colonial Common Shares deducted and withheld by Colonial shall be valued at the last trading price of the Colonial Common Shares on the NYSE on the Effective Date of the Merger and (y) any Colonial Series E Preferred Depositary Shares deducted and withheld by Colonial shall be valued at $25.00 ( i.e., 1/100 ^th of the liquidation preference of a Colonial Series E Preferred Share). To the extent that amounts are so withheld by Colonial or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of Cornerstone Common Shares in respect of which such deduction and withholding was made by Colonial or the Exchange Agent.

 

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(d) Record Dates for Final Dividends; Distributions with Respect to Unexchanged Shares .

 

(i) If and to the extent necessary for Cornerstone to satisfy the requirements of Section 857(a)(1) of the Code for the taxable year of Cornerstone ending at the Effective Time of the Merger (and to avoid the payment of any Tax with respect to undistributed income or gain), Cornerstone shall declare a dividend (the “Final Cornerstone Dividend”) to holders of Cornerstone Common Shares, the record date for which shall be the close of business no later than the sixth business day prior to the Effective Time of the Merger, in an amount equal to the minimum dividend sufficient to permit Cornerstone to satisfy such requirements. Any dividends payable hereunder to holders of Cornerstone Common Shares shall be paid on the third business day immediately preceding the Closing Date. The Final Cornerstone Dividend shall not include any dividend or distribution in satisfaction of the Dividend Deficiency Amount (as defined herein). In the event that any prior or contemporaneous dividends or distributions of Cornerstone are or have been treated as being in satisfaction of the Dividend Deficiency Amount and Cornerstone would be required to pay a Final Cornerstone Dividend, then an amount equal to the lesser of such Final Cornerstone Dividend or the amount of prior or contemporaneous distributions of Cornerstone that are or have been treated as being in satisfaction of the Dividend Deficiency Amount shall be treated as a Closing Deficiency Dividend Amount and not a Final Cornerstone Dividend. In the event that Cornerstone is required to declare a Final Cornerstone Dividend with respect to the Cornerstone Common Shares, Cornerstone shall cause Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (“Cornerstone Partnership”), to simultaneously declare any related distribution (the “Final Cornerstone Partnership Distribution”) required under the Agreement of Limited Partnership of Cornerstone Partnership, as amended (the “Cornerstone Partnership Agreement”), the record date for which shall correspond to the record date for the Final Cornerstone Dividend. Such distribution shall be payable on the third business day immediately preceding the Closing Date.

 

(ii) If Cornerstone determines that it is necessary to declare the Final Cornerstone Dividend, Cornerstone shall notify Colonial at least 20 days prior to the date for the Cornerstone Shareholders Meeting, and Colonial shall be entitled to declare a dividend per share payable to holders of shares of Colonial Common Shares (in which event Colonial shall cause Colonial Partnership to declare a distribution per unit payable to holders of Colonial OP Units (as defined herein) if a distribution has been declared on the Colonial Common Shares), the record dates for which shall correspond to the record date for the Final Cornerstone Dividend, in an amount per Colonial Common Share (and Colonial OP Unit) equal to the quotient obtained by dividing (A) the Final Cornerstone Dividend paid by Cornerstone with respect to each Cornerstone Common Share by (B) the Common Share Conversion Rate (the “Corresponding Colonial Dividends and Distributions”). If, and to the extent, the terms of any series of Colonial Preferred Shares (as defined herein) or Colonial Preferred OP Units (as defined herein) require the payment of a dividend or distribution by reason of the payment of the Corresponding Colonial Dividends and Distributions, Colonial shall (and shall cause Colonial Partnership to) declare and pay any such required dividends and distributions. Any dividends payable hereunder to holders of Colonial Common Shares (and Colonial OP Units) shall be paid on the third business day immediately preceding the Closing Date.

 

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(e) No Further Ownership Rights in Cornerstone Common Shares . All Merger Consideration paid upon the surrender of Certificates in accordance with the terms of this Section 1.13 (including any cash paid pursuant to Section 1.13(g) ) shall be deemed to have been paid in full satisfaction of all rights pertaining to the Cornerstone Common Shares theretofore represented by such Certificates; provided , however , that Cornerstone shall transfer to the Exchange Agent cash sufficient to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by Cornerstone on such Cornerstone Common Shares in accordance with the terms of this Agreement or prior to the date of this Agreement and which remain unpaid at the Effective Time and have not been paid prior to such surrender, and there shall be no further registration of transfers on the stock transfer books of Cornerstone of the Cornerstone Common Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to Colonial for any reason, they shall be canceled and exchanged as provided in this Section 1.13 .

 

(f) No Liability . None of Cornerstone, Colonial, Colonial Merger Sub or the Exchange Agent shall be liable to any Person in respect of any Merger Consideration or dividends delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any portion of the Exchange Fund delivered to the Exchange Agent pursuant to this Agreement that remains unclaimed for 12 months after the Effective Time shall be redelivered by the Exchange Agent to Colonial, upon demand, and any holders of Certificates who have not theretofore complied with Section 1.13(c) shall thereafter look only to Colonial for delivery of the Merger Consideration, any cash payable in lieu of fractional shares pursuant to Section 1.13(g) and any unpaid dividends, subject to applicable escheat and other similar laws.

 

(g) No Fractional Shares .

 

(i) No certificates, scrip or Depositary Receipts representing fractional Colonial Common Shares or Colonial Series E Preferred Depositary Shares shall be issued upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote, to receive dividends or to any other rights of a shareholder of Colonial.

 

(ii) No fractional Colonial Common Shares or Colonial Series E Preferred Depositary Shares shall be issued pursuant to this Agreement. In lieu of the issuance of any fractional Colonial Common Shares pursuant to this Agreement, each holder of Cornerstone Common Shares shall be paid an amount in cash (without interest), rounded to the nearest cent (with .5 of a cent rounded up), determined by multiplying (A) the average closing price of one Colonial Common Share on the NYSE on the five trading days immediately preceding the Closing Date by (B) the fraction of a Colonial Common Share which such holder would otherwise be entitled to receive under this Section 1.13 . In lieu of the issuance of any fractional Colonial Series E Preferred Depositary Shares pursuant to this Agreement, each holder of Cornerstone Common Shares shall be paid an amount in cash (without interest), rounded to the nearest cent (with .5 of a cent rounded up), determined by multiplying (A) $25.00 ( i.e., 1/100 ^th of the liquidation preference of a Colonial Series E Preferred Share) by (B) the fraction of a Colonial Series E Preferred Depositary Share which such holder would otherwise be entitled to receive under this Section 1.13 .

 

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(h) Lost Certificates . If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by Colonial or the Exchange Agent, the posting by such Person of a bond in such reasonable amount as Colonial or the Exchange Agent may direct (but consistent with the practices Colonial applies to its own shareholders) as indemnity against any claim that may be made against them with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the cash, Colonial Common Shares and/or Colonial Series E Preferred Depositary Shares to which the holders thereof are entitled pursuant to Section 1.8 , any cash payable pursuant to Section 1.13(g) to which the holders thereof are entitled and any dividends or other distributions to which the holders thereof are entitled pursuant to Section 1.13(d) .

 

1.14 Post-Merger Reorganization . No later than one day following the Closing Date, Colonial shall contribute to Colonial Partnership all of the outstanding Colonial Merger Sub LLC Units in exchange for additional Colonial OP Units (such transaction, the “Post-Merger Reorganization”). As a result of the Post-Merger Reorganization, Colonial Merger Sub shall become a wholly owned subsidiary of Colonial Partnership.

 

1.15 Cornerstone LP Acquisition Transaction . Notwithstanding anything to the contrary contained herein (but subject to the last sentence of this Section 1.15 ), Colonial shall be permitted to enter into and consummate, or cause any Colonial Subsidiary (as defined herein) to enter into and consummate, any transaction or series of related transactions for the purpose of acquiring the Cornerstone LP OP Units (as defined herein) from the holders thereof (any such transaction, a “Cornerstone LP Acquisition Transaction”). If a Cornerstone LP Acquisition Transaction is to be consummated concurrently with or following the Closing Date, the terms and conditions (including consideration payable and structure) of such Cornerstone LP Acquisition Transaction shall be determined by Colonial in its sole discretion. If a Cornerstone LP Acquisition Transaction is to be consummated prior to the Closing Date, the terms and conditions (including consideration payable and structure) of any Cornerstone LP Acquisition Transaction shall be determined by Colonial, subject to the reasonable approval of Cornerstone. Cornerstone shall (a) use all reasonable efforts to take, or cause to be taken, all reasonable actions and do, or cause to be done, all things reasonably necessary to consummate and make effective any Cornerstone LP Acquisition Transaction and (b) execute such consents, approvals and other documents and instruments as shall be necessary under the Cornerstone Partnership Agreement or otherwise to consummate and make effective any Cornerstone LP Acquisition Transaction. The entering into or consummation of any Cornerstone LP Acquisition Transaction, or any related action taken by Colonial, shall not constitute a circumstance, event, occurrence, change or effect that would constitute a Cornerstone Material Adverse Effect. Colonial shall not, and shall not permit any Colonial Subsidiary (as defined herein) to, enter into or consummate any Cornerstone LP Acquisition Transaction that could cause the Merger not to qualify, for federal income tax purposes, as a reorganization under Section 368(a)(1)(A) of the Code.

 

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ARTICLE 2

 

REPRESENTATIONS AND WARRANTIES OF CORNERSTONE

 

Except as specifically set forth in the disclosure letter to this Agreement delivered to Colonial prior to the execution hereof (the “Cornerstone Disclosure Letter”) (each section of which qualifies the correspondingly numbered representation and warranty or covenant to the extent specified therein, provided that any disclosure set forth with respect to any particular section shall be deemed to be disclosed in reference to all other applicable sections of this Agreement if the disclosure in respect of the particular section is sufficient on its face without further inquiry reasonably to inform the other parties to this Agreement of the information required to be disclosed in respect of the other sections to avoid a breach under the representation and warranty or covenant corresponding to such other sections), Cornerstone represents and warrants to Colonial and Colonial Merger Sub as follows:

 

2.1 Organization, Standing and Power . Cornerstone is a corporation duly incorporated, validly existing and in good standing under the laws of Virginia. Cornerstone has all requisite corporate power and authority to own, operate, lease and encumber its properties and carry on its business as now being conducted. The Amended and Restated Articles of Incorporation, as amended and supplemented, of Cornerstone (the “Cornerstone Articles”) are in effect, and no dissolution, revocation or forfeiture proceedings regarding Cornerstone have been commenced. Cornerstone is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not reasonably be expected to have a Cornerstone Material Adverse Effect (as defined herein). As used in this Agreement, a “Cornerstone Material Adverse Effect” means any circumstance, event, occurrence, change or effect that is materially adverse to the business, properties, assets (tangible or intangible), financial condition or results of operations of Cornerstone, Cornerstone Partnership and the Cornerstone Subsidiaries (as defined herein), taken as a whole, other than effects, events or changes arising out of or resulting from (a) changes in conditions in the United States or global economy or capital or financial markets generally, including changes in interest or exchange rates, (b) changes in general legal, regulatory, political, economic or business conditions or changes in GAAP (as defined herein) that, in each case, generally affect the real estate industry and that do not affect Cornerstone, Cornerstone Partnership or the Cornerstone Subsidiaries materially disproportionately relative to other participants in the real estate industry or (c) the negotiation, execution, announcement or performance of this Agreement or the consummation of the transactions contemplated by this Agreement. Cornerstone has delivered to Colonial complete and correct copies of the Cornerstone Articles and the Bylaws of Cornerstone (the “Cornerstone Bylaws”), in each case, as amended or supplemented to the date of this Agreement.

 

2.2 Cornerstone Subsidiaries .

 

(a) Schedule 2.2(a) to the Cornerstone Disclosure Letter sets forth (i) each Subsidiary (as defined herein) of Cornerstone (the “Cornerstone Subsidiaries”) and each

 

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other Person in which Cornerstone owns, directly or indirectly through a Cornerstone Subsidiary, 10% or more of the capital stock, voting securities or other equity interests, (ii) the ownership interest therein of Cornerstone, (iii) if not directly or indirectly wholly owned by Cornerstone, the identity and ownership interest of each of the other owners of each Cornerstone Subsidiary, (iv) each property owned by such Cornerstone Subsidiary and such other Person and each other asset material to such Cornerstone Subsidiary or such other Person, and (v) if not wholly owned by such Cornerstone Subsidiary or such other Person, the identity and ownership interest of each of the other owners of such property. As used in this Agreement, “Subsidiary” of any Person (as defined herein) means any corporation, partnership, limited liability company, joint venture, trust or other legal entity of which such Person owns (either directly or through or together with another Subsidiary of such Person) either (i) a general partner, managing member or other similar interest, or (ii) 50% (or in the case of Section 2.14(b) and Section 3.12(b) , 10%) or more of the capital stock or other equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity. As used herein, “Person” means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity. Schedule 2.2(a) of the Cornerstone Disclosure Letter sets forth a true and complete list of the equity securities owned by Cornerstone or any Cornerstone Subsidiary, in any corporation, partnership, limited liability company, joint venture, trust or other legal entity that is not a Cornerstone Subsidiary.

 

(b) Except as set forth in Schedule 2.2(b) to the Cornerstone Disclosure Letter, (i) all of the outstanding shares of capital stock of each Cornerstone Subsidiary that is a corporation have been duly authorized, validly issued and are (A) fully paid and nonassessable and not subject to preemptive or similar rights, and (B) in the case of capital stock owned by Cornerstone or a Cornerstone Subsidiary, owned free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, “Liens”) and (ii) all equity interests in each Cornerstone Subsidiary that is a partnership, joint venture, limited liability company or trust which are owned by Cornerstone or a Cornerstone Subsidiary are owned free and clear of all Liens other than pledges, if any, contained in organizational documents of such Cornerstone Subsidiary and given to secure performance thereunder. Each Cornerstone Subsidiary that is a corporation is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to own, operate, lease and encumber its properties and carry on its business as now being conducted, and each Cornerstone Subsidiary that is a partnership, limited liability company or trust is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the requisite power and authority to own, operate, lease and encumber its properties and carry on its business as now being conducted. Each Cornerstone Subsidiary is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not reasonably be expected to have a Cornerstone Material Adverse Effect. Complete and correct copies of the articles of incorporation, bylaws, organization documents and partnership, joint venture and operating agreements of each Cornerstone Subsidiary, as amended to the date

 

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of this Agreement, have been previously delivered or made available to Colonial. No amendment has been made to the Cornerstone Partnership Agreement since March 11, 2004.

 

2.3 Capital Structure .

 

(a) The authorized shares of capital stock of Cornerstone on the date hereof consist of 125,000,000 shares of capital stock, of which 100,000,000 are classified as Common Shares (previously defined herein as “Cornerstone Common Shares”), and 25,000,000 are classified as preferred shares, without par value (the “Cornerstone Preferred Shares”). 12,700,000 of the Cornerstone Preferred Shares have been designated as Series A Convertible Preferred Shares (“Cornerstone Series A Preferred Shares”) and 607,000 of the Cornerstone Preferred Shares have been designated as Series B Convertible Preferred Shares (“Cornerstone Series B Preferred Shares”). 56,323,817.1326 Cornerstone Common Shares are issued and outstanding on the date of this Agreement. 127,380 Cornerstone Series A Preferred Shares are issued and outstanding on the date of this Agreement. No Cornerstone Series B Preferred Shares or other Cornerstone Preferred Shares are issued and outstanding on the date of this Agreement.

 

(b) Set forth in Schedule 2.3(b) to the Cornerstone Disclosure Letter is a true and complete list of the following: (i) each qualified or nonqualified option to purchase Cornerstone Common Shares or Cornerstone OP Units granted under either Cornerstone’s 1992 Non-Employee Directors Stock Option Plan, as amended, Cornerstone’s 1992 Incentive Plan, as amended, or any other formal or informal arrangement (collectively, the “Cornerstone Stock Options”); and (ii) except for the Cornerstone Series A Preferred Shares and the Cornerstone Preferred Units, all other warrants or other rights to acquire Cornerstone’s shares of capital stock, all stock appreciation rights, restricted stock, dividend equivalents, deferred compensation accounts, performance awards, restricted stock unit awards and other awards which are outstanding on the date of this Agreement (“Cornerstone Share Rights”). Schedule 2.3(b) to the Cornerstone Disclosure Letter sets forth for each Cornerstone Stock Option and Cornerstone Share Right (other than Cornerstone Preferred Units and Cornerstone Series A Preferred Shares) the name of the grantee, the date of the grant, the type of grant, the status of the option grants as qualified or nonqualified under Section 422 of the Code, the number of Cornerstone Common Shares or other shares subject to each option or other award, the number and type of shares subject to options or awards that are currently exercisable, the exercise price per share, and the number and type of such shares subject to stock appreciation rights. On the date of this Agreement, except as set forth in this Section 2.3 or as set forth in Schedule 2.3(b) to the Cornerstone Disclosure Letter, no shares of Cornerstone were outstanding or reserved for issuance (except for the Cornerstone Common Shares reserved for issuance upon redemption of Cornerstone Preferred Units or conversion of Cornerstone Series A Preferred Shares).

 

(c) All outstanding Cornerstone Common Shares are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive or similar rights under applicable law or the Cornerstone Articles or Cornerstone Bylaws, or any contract or instrument to which Cornerstone is a party or by which it is bound. There are no bonds, debentures, notes or other indebtedness of Cornerstone having the right to vote (or convertible into, or exchangeable or exercisable for, securities having the right to vote) on any matters on which shareholders of Cornerstone may vote.

 

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(d) Except (i) as set forth in this Section 2.3 or in Schedule 2.3(b) to the Cornerstone Disclosure Letter, (ii) Cornerstone Preferred Units, which may be converted into Cornerstone Common Shares at a rate of one Cornerstone Common Share for each Cornerstone Preferred Unit or, under the circumstances described in the Cornerstone Partnership Agreement, into cash or a combination of cash and Cornerstone Common Shares, (iii) Cornerstone Non-Preferred Units, which may be exchanged for Cornerstone Preferred Units at a rate of one Cornerstone Preferred Unit for each Cornerstone Non-Preferred Unit under the circumstances described in the Cornerstone Partnership Agreement, and (iv) Cornerstone Common Shares issuable, and reserved for issuance, upon the conversion of the Cornerstone Series A Preferred Shares, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Cornerstone or any Cornerstone Subsidiary is a party or by which such entity is bound, obligating Cornerstone or any Cornerstone Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock, voting securities or other ownership interests of Cornerstone or any Cornerstone Subsidiary or obligating Cornerstone or any Cornerstone Subsidiary to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking (other than to Cornerstone or a Cornerstone Subsidiary).

 

(e) As of the date of this Agreement, 11,189,492 Partnership Units (as defined in the Cornerstone Partnership Agreement) (“Cornerstone OP Units”), consisting of 9,362,347 Cornerstone OP Units constituting General Partner Interests (as defined in the Cornerstone Partnership Agreement) (“Cornerstone GP OP Units”), 1,807,145 Preferred Partnership Units (as defined in the Cornerstone Partnership Agreement) (the “Cornerstone Preferred Units”), and 20,000 Non-Preferred Partnership Units (as defined in the Cornerstone Partnership Agreement) (the “Cornerstone Non-Preferred Units” and, together with the Cornerstone Preferred Units, the “Cornerstone LP OP Units”), are validly issued and outstanding, fully paid and nonassessable and not subject to preemptive or similar rights under law or the Cornerstone Partnership Agreement, or any contract or instrument to which Cornerstone or Cornerstone Partnership is a party or by which either is bound. !Schedule 2.3(e) to the Cornerstone Disclosure Letter sets forth the name of each holder of Cornerstone OP Units and the number and classification of Cornerstone OP Units owned by each such holder as of the date of this Agreement. Except as provided in the Cornerstone Partnership Agreement, the Cornerstone OP Units are not subject to any restrictions. Except as set forth in Schedule 2.3(e) to the Cornerstone Disclosure Letter, Cornerstone Partnership has not issued or granted and is not a party to any outstanding commitments of any kind relating to, or any agreements or understandings with respect to, the issuance or sale of interests in Cornerstone Partnership, whether issued or unissued, or securities convertible into or exchangeable or exercisable for interests in Cornerstone Partnership.

 

(f) All dividends on Cornerstone Common Shares and Cornerstone Preferred Shares and all distributions on Cornerstone OP Units, which have been declared prior to the date of this Agreement, have been paid in full.

 

(g) Set forth on Schedule 2.3(g) to the Cornerstone Disclosure Letter is a list of each registration rights agreement or other agreement between Cornerstone and/or Cornerstone Partnership, on the one hand, and one or more other parties, on the other hand,

 

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which sets forth the rights of any such other party or parties to cause the registration of any securities of Cornerstone and/or Cornerstone Partnership pursuant to the Securities Act of 1933, as amended (the “Securities Act”).

 

2.4 Other Interests . Except for interests in the Cornerstone Subsidiaries and the other entities as set forth in Schedule 2.2(a) or Schedule 2.4 to the Cornerstone Disclosure Letter (the “Cornerstone Other Interests”), neither Cornerstone nor any Cornerstone Subsidiary owns directly or indirectly any interest or investment (whether equity or debt) in any corporation, partnership, joint venture, business, trust, limited liability company or other entity (other than investments in short-term investment securities). With respect to the Cornerstone Other Interests, Cornerstone or the applicable Cornerstone Subsidiary is a partner, member or shareholder in good standing, and owns such interests free and clear of all Liens. Neither Cornerstone nor any Cornerstone Subsidiary is in material breach of any agreement, document or contract which is of a material nature governing its rights in or to the Cornerstone Other Interests, all of which agreements, documents and contracts are (a) listed in Schedule 2.4 to the Cornerstone Disclosure Letter, (b) unmodified except as described therein and (c) in full force and effect. To the Knowledge of Cornerstone (as defined herein), the other parties to any such agreement, document or contract which is of a material nature are not in material breach of any of their respective obligations under such agreements, documents or contracts.

 

2.5 Authority; Noncontravention; Consents .

 

(a) Cornerstone has the requisite corporate power and authority to enter into this Agreement and, subject to the requisite Cornerstone shareholder approval of this Agreement and the Merger (the “Cornerstone Shareholder Approval”), to consummate the transactions contemplated by this Agreement to which Cornerstone is a party. The execution and delivery of this Agreement by Cornerstone and the consummation by Cornerstone of the transactions contemplated by this Agreement to which Cornerstone is a party have been duly authorized by all necessary action on the part of Cornerstone, except for and subject to the Cornerstone Shareholder Approval. This Agreement has been duly executed and delivered by Cornerstone and constitutes a valid and binding obligation of Cornerstone, enforceable against Cornerstone in accordance with and subject to its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors’ rights and general principles of equity.

 

(b) Except as set forth in Schedule 2.5(b)(1) to the Cornerstone Disclosure Letter, the execution and delivery of this Agreement by Cornerstone do not, and, subject to receipt of the Cornerstone Shareholder Approval, the consummation of the transactions contemplated by this Agreement to which Cornerstone is a party and compliance by Cornerstone with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Cornerstone or any Cornerstone Subsidiary under, (i) the Cornerstone Articles or Cornerstone Bylaws or the comparable charter or organizational documents or partnership, operating, or similar agreement (as the case may be) of any Cornerstone Subsidiary, each as amended or

 

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supplemented to the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, merger or other acquisition agreement, shareholder rights plan, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, franchise or license applicable to Cornerstone or any Cornerstone Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation (collectively, “Laws”) applicable to Cornerstone or any Cornerstone Subsidiary, or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or Liens that individually or in the aggregate would not reasonably be expected to (x) have a Cornerstone Material Adverse Effect or (y) prevent or materially impair the ability of Cornerstone or Cornerstone Partnership to perform any of its obligations hereunder or prevent or materially threaten or impede the consummation of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any federal, state or local government or any court, administrative or regulatory agency or commission or other governmental authority or agency, domestic or foreign (a “Governmental Entity”), is required by or with respect to Cornerstone or any Cornerstone Subsidiary in connection with the execution and delivery of this Agreement by Cornerstone and Cornerstone Partnership or the consummation by Cornerstone or any Cornerstone Subsidiary of the transactions contemplated by this Agreement, except for (i) the filing with the Securities and Exchange Commission (the “SEC”) of (x) the Joint Proxy Statement, and (y) such reports and filings under the Securities Act and the Exchange Act (as defined herein) as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (ii) the filing of the Delaware Certificate of Merger with the Delaware Secretary, (iii) the filing of the Virginia Articles of Merger with the Virginia Commission and (iv) such other consents, approvals, orders, authorizations, registrations, declarations and filings (A) as are set forth in Schedule 2.5(b)(2) to the Cornerstone Disclosure Letter, (B) as may be required under (w) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (x) laws requiring transfer, recordation or gains tax filings, (y) federal, state or local environmental laws or (z) the “blue sky” laws of various states, to the extent applicable, or (C) which, if not obtained or made, would not prevent or delay in any material respect the consummation of any of the transactions contemplated by this Agreement or otherwise prevent Cornerstone from performing its obligations under this Agreement in any material respect or reasonably be expected to have, individually or in the aggregate, a Cornerstone Material Adverse Effect.

 

2.6 SEC Documents; Financial Statements; Undisclosed Liabilities . Cornerstone has furnished or filed all reports, schedules, forms, statements and other documents required to be furnished or filed with the SEC since December 31, 1997 through the date of this Agreement (the “Cornerstone SEC Documents”). All of the Cornerstone SEC Documents (other than preliminary material), as of their respective filing dates, complied in all material respects with all applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, in each case, the rules and regulations promulgated thereunder applicable to such Cornerstone SEC Documents. None of the Cornerstone SEC Documents at the time of filing contained, nor will any report, schedule, form, statement or other document filed by Cornerstone after the date hereof and prior to the Effective Time contain, any untrue statement of a material fact or omitted to state any material fact required to be stated

 

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therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of Cornerstone included in the Cornerstone SEC Documents complied, as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (“GAAP”) (except, in the case of unaudited statements, as permitted by the applicable rules and regulations of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented, in all material respects in accordance with the applicable requirements of GAAP and the applicable rules and regulations of the SEC, the consolidated financial position of Cornerstone and its Subsidiaries, as the case may be, in each case, taken as a whole, as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (except, in the case of unaudited statements, as permitted by Form 10-Q under the Exchange Act). Except as set forth in Schedule 2.6 to the Cornerstone Disclosure Letter, Cornerstone has no Subsidiaries which are not consolidated for accounting purposes. Except for liabilities and obligations set forth in the Cornerstone SEC Documents or in Schedule 2.6 to the Cornerstone Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of Cornerstone or in the notes thereto and which, individually or in the aggregate, would reasonably be expected to have a Cornerstone Material Adverse Effect.

 

2.7 Absence of Certain Changes or Events . Except as disclosed in the Cornerstone SEC Documents or in Schedule 2.7 to the Cornerstone Disclosure Letter, since December 31, 2003 (the “Cornerstone Financial Statement Date”), Cornerstone and its Subsidiaries have conducted their business only in the ordinary course (taking into account prior practices, including the acquisition and disposition of properties and issuance of securities) and there has not been (a) any circumstance, event, occurrence, change or effect that has had a Cornerstone Material Adverse Effect, nor has there been any circumstance, event, occurrence, change or effect that with the passage of time would reasonably be expected to result in a Cornerstone Material Adverse Effect, (b) except for regular quarterly distributions not in excess of $0.20 per Cornerstone Common Share or Cornerstone OP Unit (subject to changes pursuant to Section 5.10 and to any Final Cornerstone Dividend payable pursuant to Section 1.13(d)(i) ) and $0.5938 per Cornerstone Series A Preferred Share (or, in each case, with respect to the period commencing on the date hereof and ending on the Closing Date, distributions as necessary to maintain REIT (as defined herein) status), in each case with customary record and payment dates, any authorization, declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the Cornerstone Common Shares, the Cornerstone OP Units or the Cornerstone Series A Preferred Shares, (c) any split, combination or reclassification of, or any issuance or the authorization of, or any issuance of any other securities in respect of, in lieu of or in substitution for, or giving the right to acquire by exchange or exercise, shares of stock of Cornerstone or partnership interests in Cornerstone Partnership or any issuance of an ownership interest in, any Cornerstone Subsidiary, (d) any damage, destruction or loss, whether or not covered by insurance, that has had or would reasonably be expected to have a Cornerstone Material Adverse Effect, (e) any change made prior to the date of this Agreement in accounting methods, principles or practices by Cornerstone or any of its

 

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Subsidiaries or Cornerstone Partnership or any of its Subsidiaries materially affecting its assets, liabilities or business, except insofar as may have been disclosed in Cornerstone SEC Documents or required by a change in GAAP, or (f) any amendment of any employment, consulting, severance, retention or any other agreement between Cornerstone or any Cornerstone Subsidiary and any officer or director of Cornerstone or any Cornerstone Subsidiary.

 

2.8 Litigation . Except as disclosed in Schedule 2.8 to the Cornerstone Disclosure Letter, and other than personal injury and other routine tort litigation arising from the ordinary course of operations of Cornerstone and the Cornerstone Subsidiaries (a) which are covered by adequate insurance or (b) for which all material costs and liabilities arising therefrom are reimbursable pursuant to common area maintenance or similar agreements, there is no suit, action or proceeding pending (in which service of process has been received by an employee of Cornerstone or a Cornerstone Subsidiary) or, to the Knowledge of Cornerstone (as defined herein), threatened in writing against or affecting Cornerstone or any Cornerstone Subsidiary that, individually or in the aggregate, would reasonably be expected to (i) have a Cornerstone Material Adverse Effect or (ii) prevent or materially impair the ability of Cornerstone to perform any of its obligations hereunder or prevent or materially threaten or impair the consummation of any of the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any court or Governmental Entity or arbitrator outstanding against Cornerstone or any Cornerstone Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. Notwithstanding the foregoing, (y) Schedule 2.8 to the Cornerstone Disclosure Letter sets forth each and every material uninsured claim, equal employment opportunity claim and claim relating to sexual harassment and/or discrimination pending or, to the Knowledge of Cornerstone, threatened as of the date hereof, in each case with a brief summary of such claim or threatened claim, and (z) no claim has been made under any directors’ and officers’ liability insurance policy maintained at any time by Cornerstone or any of the Cornerstone Subsidiaries.

 

2.9 Properties .

 

(a) Except as provided in Schedule 2.2 or Schedule 2.9(a) to the Cornerstone Disclosure Letter, Cornerstone or the Cornerstone Subsidiary set forth on Schedule 2.2 to the Cornerstone Disclosure Letter owns fee simple title to each of the real properties identified in Schedule 2.2 to the Cornerstone Disclosure Letter (the “Cornerstone Properties”), which are all of the real estate properties owned or leased by them, in each case (except for the Permitted Title Exceptions (as defined herein)) free and clear of liens, mortgages or deeds of trust, claims against title, charges which are liens, security interests or other encumbrances on title (“Encumbrances”). Except as set forth in Schedule 2.2 to the Cornerstone Disclosure Letter, no other Person has any ownership interest in any of the Cornerstone Properties and any such ownership interest so scheduled does not materially detract from the value of Cornerstone’s or the Cornerstone Subsidiary’s (as the case may be) interest in, or materially interfere with the present use of, any of the Cornerstone Properties subject thereto or affected thereby. Except as set forth in Schedule 2.9(a) to the Cornerstone Disclosure Letter, no Cornerstone Property is subject to any restriction on the sale or other disposition thereof or on the financing or release of financing thereon. No Cornerstone Property is subject to any rights of way, agreements, laws, ordinances and regulations affecting building use or occupancy, or

 

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reservations of an interest in title (collectively, “Property Restrictions”) or Encumbrances, except for the following (collectively, the “Permitted Title Exceptions”) (i) Property Restrictions and Encumbrances set forth in Schedule 2.9(a) of the Cornerstone Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations, which do not materially adversely affect the current use of such Cornerstone Property, (iii) Property Restrictions and Encumbrances disclosed on existing title reports or policies or existing surveys, in each case as previously made available to Colonial, or subsequently granted by Cornerstone or the applicable Cornerstone Subsidiary (which subsequently granted Property Restrictions and Encumbrances, in any event, do not materially detract from the value of, or materially interfere with the present use of, such Cornerstone Property) and (iv) liens for real estate taxes not yet due and payable, mechanics’, carriers’, workmen’s, repairmen’s liens and other Encumbrances and Property Restrictions, if any, which, individually or in the aggregate, do not materially detract from the value of or materially interfere with the present use of such Cornerstone Property. With respect to the existing title reports or policies or existing surveys previously provided to Colonial, there has been no material change with respect to any Cornerstone Property that would affect title or survey matters from the date of the information provided to the date hereof. Schedule 2.9(a) to the Cornerstone Disclosure Letter lists each of the Cornerstone Properties which are under development as of the date of this Agreement and describes the status of such development as of the date hereof.

 

(b) Except as provided in Schedule 2.2 or Schedule 2.9(b) to the Cornerstone Disclosure Letter, valid policies of title insurance have been issued insuring Cornerstone’s or the applicable Cornerstone Subsidiary’s fee simple title or leasehold estate, as the case may be, to the Cornerstone Properties owned by it in amounts which are at least equal to the purchase price therefor paid by Cornerstone or such Cornerstone Subsidiary, subject only to the Permitted Title Exceptions. Such policies are, at the date hereof, in full force and effect and no material claim has been made against any such policy.

 

(c) Except as provided in Schedule 2.9(c) to the Cornerstone Disclosure Letter, Cornerstone has no Knowledge (i) that, any certificate, permit or license from any governmental authority having jurisdiction over any of the Cornerstone Properties or any agreement, easement or other right which is necessary to permit the lawful use and operation of the buildings and improvements on any of the Cornerstone Properties or which is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the Cornerstone Properties has not been obtained and is not in full force and effect, or of any pending threat of modification or cancellation of any of the same, which would have a material adverse effect on such Cornerstone Property, (ii) of any written notice of any violation of any federal, state or municipal law, ordinance, order, regulation or requirement affecting any of the Cornerstone Properties issued by any governmental authority which would have a material adverse effect on such Cornerstone Property, (iii) of any existing structural defects relating to any Cornerstone Property which would have a material adverse effect on such Cornerstone Property, (iv) of any Cornerstone Property whose building systems are not in working order so as to have a material adverse effect on such Cornerstone Property, or (v) of any physical damage to any Cornerstone Property which would have a material adverse effect on

 

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such Cornerstone Property for which there is not insurance in effect covering the cost of the restoration and the loss of rent.

 

(d) To the Knowledge of Cornerstone, there is no (and neither Cornerstone nor any of the Cornerstone Subsidiaries has received any written or published notice of) (i) any condemnation or rezoning proceedings pending or threatened with respect to any of the Cornerstone Properties or (ii) any zoning, building or similar law, code, ordinance, order or regulation that is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the Cornerstone Properties or by the continued maintenance, operation or use of the parking areas which would have a material adverse effect on such Cornerstone Property. Except as set forth in Schedule 2.9(d) to the Cornerstone Disclosure Letter, (i) to the Knowledge of Cornerstone, all work required to be performed, payments required to be made and actions required to be taken prior to the date hereof pursuant to any agreement entered into with a governmental body or authority in connection with a site approval, zoning reclassification or other similar action relating to any Cornerstone Properties ( e.g. , Local Improvement District, Road Improvement District, Environmental Mitigation (as defined herein)) has been performed, paid or taken, as the case may be, and (ii) Cornerstone has no Knowledge of any planned or proposed work, payments or actions that may be required after the date hereof pursuant to such agreements, in each case except as set forth in development or operating budgets for such Cornerstone Properties delivered to Colonial and Colonial Partnership prior to the date hereof and other than any work, payments or actions which would not reasonably be expected to have a Cornerstone Material Adverse Effect. As used in this Agreement, “Environmental Mitigation” means investigation, clean-up, removal action, remedial action, restoration, repair, response action, corrective action, monitoring, sampling and analysis, installation, reclamation, closure or post-closure in response to any Release or actual or suspected environmental condition or Hazardous Materials.

 

(e) The rent rolls previously provided by Cornerstone to Colonial (the “Cornerstone Rent Roll”) set forth a list of each Cornerstone Space Lease (as defined herein) in effect as of the dates set forth therein. All information set forth in the Cornerstone Rent Roll is true, correct and complete with respect to each Cornerstone Property in all material respects as of the date thereof. “Cornerstone Space Lease” means each lease or other right of occupancy affecting or relating to a property in which Cornerstone or any Cornerstone Subsidiary is the landlord, either pursuant to the terms of the lease agreement or as successor to any prior landlord, but excluding any ground lease. Except as set forth in a delinquency report made available to Colonial, neither Cornerstone nor any Cornerstone Subsidiary, on the one hand, nor, to the knowledge of Cornerstone or Cornerstone Partnership, any other party, on the other hand, is in monetary default under any Cornerstone Space Lease as of the date of delinquency report, except for such defaults that would not reasonably be expected to materially adversely affect the applicable Cornerstone Property.

 

(f) Schedule 2.9(f) contains a true and complete list, by type of insurance, carrier, coverages (including limits) and term, of all material policies of casualty, liability and other types of insurance (except title insurance) carried by Cornerstone or any Cornerstone Subsidiary. All such policies are in full force and effect and neither Cornerstone nor any Cornerstone Subsidiary has received from any insurance company notice of any material

 

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defects or deficiencies affecting the insurability of Cornerstone or any Cornerstone Subsidiary or any of their respective assets thereunder.

 

2.10 Environmental Matters .

 

(a) “Environmental Law” shall mean all applicable Laws relating to the environment, and including, without limitation, Laws relating to the use, manufacturing, production, generation, installation, recycling, reuse, sale, storage, handling, transport, treatment, release, threatened release or disposal of any Hazardous Materials (including the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, 42 U.S.C. §§ 9601 et seq. (“CERCLA”)). “Hazardous Materials” shall mean substances, wastes, radiation or materials (whether solids, liquids or gases) (i) which are hazardous, toxic, infectious, explosive, radioactive, carcinogenic, or mutagenic, (ii) which are listed, regulated or defined under any Environmental Law, and shall include “hazardous wastes,” “hazardous substances,” “hazardous materials,” “pollutants,” “contaminants,” “chemical substances,” “radioactive materials” or “solid wastes,” (iii) the presence of which on the property cause or threaten to cause a nuisance pursuant to applicable statutory or common law upon the property or to adjacent properties, (iv) which contain without limitation polychlorinated biphenyls (PCBs), toxic mold, asbestos or asbestos-containing materials, lead-based paints, urea-formaldehyde foam insulation, or petroleum or petroleum products (including, without limitation, crude oil or any fraction thereof) or (v) which pose a hazard to human health, safety, natural resources, industrial hygiene, or the environment, or an impediment to working conditions. “Release” shall mean any emission, spill, seepage, leak, escape, leaching, discharge, injection, pumping, pouring, emptying, dumping, disposal, migration, or release of Hazardous Materials into or upon the environment, including the air, soil, improvements, surface water, groundwater, the sewer, septic system, storm drain, publicly owned treatment works, or waste treatment, storage, or disposal systems.

 

(b) (i) Except as set forth on Schedule 2.10(b) to the Cornerstone Disclosure Letter, there have been no Releases of Hazardous Materials (and, to the Knowledge of Cornerstone, there has been no presence of Hazardous Materials) at, on, under or from (A) any real property owned, operated or leased by Cornerstone or any Cornerstone Subsidiary or (B) any real property formerly owned, operated or leased by Cornerstone or any Cornerstone Subsidiary (the “Former Cornerstone Properties”) during the period of such ownership, operation or tenancy which would, individually or in the aggregate, reasonably be expected to have a Cornerstone Material Adverse Effect.

 

(ii) Cornerstone and the Cornerstone Subsidiaries have not failed to comply with any Environmental Law, and neither Cornerstone nor any of the Cornerstone Subsidiaries has any liability under the Environmental Laws, except to the extent that any such failure to comply or any such liability, individually or in the aggregate, would not reasonably be expected to have a Cornerstone Material Adverse Effect.

 

(iii) Cornerstone and the Cornerstone Subsidiaries have been duly issued and maintain all permits, licenses, certificates and approvals required under any Environmental Law (collectively, the “Environmental Permits”) necessary to operate their businesses as currently operated except where the failure to obtain and maintain such

 

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Environmental Permits would not, individually or in the aggregate, reasonably be expected to have a Cornerstone Material Adverse Effect. Cornerstone and the Cornerstone Subsidiaries have timely filed applications for all Environmental Permits except where the failure to so timely file such applications would not, individually or in the aggregate, reasonably be expected to have a Cornerstone Material Adverse Effect. All of the Environmental Permits maintained by Cornerstone and the Cornerstone Subsidiaries are listed on Schedule 2.10 .

 

(iv) Cornerstone and the Cornerstone Subsidiaries have not arranged, by contract, agreement, or otherwise, for the transportation, disposal or treatment of Hazardous Materials at any location such that they are or could be liable for Environmental Mitigation of such location pursuant to Environmental Laws, except as would not, individually or in the aggregate, reasonably be expected to have a Cornerstone Material Adverse Effect.

 

(v) There are no facts, circumstances or conditions existing, initiated or occurring prior to the Effective Time, which will result in liability under Environmental Laws to Cornerstone or the Cornerstone Subsidiaries, except as would not, individually or in the aggregate, reasonably be expected to have a Cornerstone Material Adverse Effect.

 

(vi) Except as set forth on Schedule 2.10 to the Cornerstone Disclosure Letter, neither Cornerstone, nor any Cornerstone Subsidiary has installed any underground storage tanks or associated piping used currently or in the past for the management of Hazardous Materials on any real property owned, operated or leased by Cornerstone or any Cornerstone Subsidiaries, and to the Knowledge of Cornerstone, no such underground storage tanks are located on any real property owned, operated or leased by Cornerstone or any Cornerstone Subsidiary. Except as set forth on Schedule 2.10 to the Cornerstone Disclosure Letter, to the Knowledge of Cornerstone, neither Cornerstone, nor any Cornerstone Subsidiary is using or has used any real property owned, operated or leased by Cornerstone or any Cornerstone Subsidiary as a dump or landfill nor does any real property owned, operated or leased by Cornerstone or any Cornerstone Subsidiary consist of or contain filled in land, wetlands, asbestos-containing materials, PCBs or toxic mold.

 

(c) Cornerstone has previously delivered or made available to Colonial complete copies of all material information, documents and reports, including, without limitation, environmental investigations and testing or analysis, which relate to compliance with Environmental Laws by Cornerstone and the Cornerstone Subsidiaries or to the past or current environmental condition of any of the real property owned, operated or leased by Cornerstone or any Cornerstone Subsidiary or Former Cornerstone Properties that are in the possession or control of any of Cornerstone and the Cornerstone Subsidiaries.

 

2.11 Related Party Transactions . Set forth in Schedule 2.11 to the Cornerstone Disclosure Letter or in the Cornerstone SEC Documents is a list of all arrangements, agreements and contracts entered into by Cornerstone or any Cornerstone Subsidiary which are in effect and which are with (a) any investment banker or financial advisor or (b) any Person who is an officer, director or Affiliate (as defined herein) of Cornerstone or any Cornerstone Subsidiary, any relative of any of the foregoing or any entity of which any of the foregoing is an Affiliate and, in

 

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the case of arrangements, agreement and contracts referred to in this clause (b), are required to be described in Item 404 of Regulation S-K under the Securities Act. Such documents, copies of all of which have previously been delivered or made available to Colonial, are listed in Schedule 2.11 to the Cornerstone Disclosure Letter. As used in this Agreement, the term “Affiliate” shall have the same meaning as such term is defined in Rule 405 promulgated under the Securities Act.

 

2.12 Employee Benefits . As used herein, the term “Employee Plan” includes any pension, retirement, savings, disability, medical, dental, health, fringe benefit, life, death benefit, group insurance, profit sharing, deferred compensation, stock option, bonus, incentive, vacation pay, tuition reimbursement, severance pay, or other employee benefit plan, trust, agreement, contract, agreement, policy or commitment (including, without limitation, any pension plan, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder (“ERISA”) (“Pension Plan”), and any welfare plan as defined in Section 3(1) of ERISA (“Welfare Plan”)), whether any of the foregoing is funded, insured or self-funded, written or oral, (i) sponsored or maintained by Cornerstone or any entity that, together with Cornerstone, is required to be treated as a single employer under Section 414(b), (c), (m) or (o) of the Code (each, a “Controlled Group Member”) and covering any Controlled Group Member’s active or former employees (or their beneficiaries), (ii) to which any Controlled Group Member is a party or by which any Controlled Group Member (or any of the rights, properties or assets thereof) is bound or (iii) with respect to which any current Controlled Group Member may otherwise have any material liability (whether or not such Controlled Group Member still maintains such Employee Plan). Each Employee Plan is listed on Schedule 2.12 to the Cornerstone Disclosure Letter. Except as disclosed in Schedule 2.12 to the Cornerstone Disclosure Letter, with respect to the Employee Plans:

 

(a) No Controlled Group Member has any continuing liability under any Welfare Plan which provides for continuing benefits or coverage for any participant or any beneficiary of a participant after such participant’s termination of employment, except as may be required by Section 4980B of the Code or Section 601 (et seq.) of ERISA, or under any applicable state law, and at the expense of the participant or the beneficiary of the participant.

 

(b) Each Employee Plan complies in all material respects with the applicable requirements of ERISA, the Code and any other applicable law governing such Employee Plan, and, to the Knowledge of Cornerstone, each Employee Plan has at all times been properly administered in all material respects in accordance with all such requirements of law, and in accordance with its terms and the terms of any applicable collective bargaining agreement to the extent consistent with all such requirements of law. Each Pension Plan which is intended to be qualified is qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS stating that such plan meets the requirements of Section 401(a) of the Code and, to the Knowledge of Cornerstone, no event has occurred which would jeopardize the qualified status of any such plan or the tax exempt status of any such trust under Section 401(a) and Section 501(a) of the Code, respectively. No lawsuits, claims (other than routine claims for benefits) or complaints to, or by, any Person or Governmental Entity have been filed, are pending or, to the Knowledge of Cornerstone, threatened with respect to any Employee Plan and, to the Knowledge of Cornerstone, there is no fact or contemplated event which would

 

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be expected to give rise to any such lawsuit, claim (other than routine claims for benefits) or complaint with respect to any Employee Plan. Without limiting the foregoing, the following are true with respect to each Employee Plan:

 

(i) all Controlled Group Members have complied in all material respects with the applicable reporting and disclosure requirements of ERISA, the Code, or both, with respect to each Employee Plan and no Controlled Group Member has incurred any material liability in connection with such reporting or disclosure;

 

(ii) all contributions and payments with respect to Employee Plans that are required to be made by a Controlled Group Member with respect to periods ending on or before the Closing Date (including periods from the first day of the current plan or policy year to the Closing Date) have been, or will be, made or accrued before the Closing Date in accordance with the appropriate plan document, actuarial report, collective bargaining agreements or insurance contracts or arrangements or as otherwise required by ERISA or the Code; and

 

(iii) with respect to each such Employee Plan, to the extent applicable, Cornerstone has delivered to or has made available to Colonial true and complete copies of (A) current plan documents and any amendments thereto, or any and all other documents that establish the existence of the plan, trust, arrangement, contract, policy or commitment and all amendments thereto, (B) the most recent summary plan description and the subsequent summaries of material modifications, (C) all rulings, opinions or advice issued by the U.S. Department of Labor, the IRS or the Pension Benefit Guaranty Corporation, (D) the most recent determination letter, if any, received from the IRS, (E) the three most recent Form 5500 Annual Reports (and all schedules and reports relating thereto) and actuarial reports and (F) all related trust agreements, insurance contracts or other funding agreements that implement each such Employee Plan.

 

(c) With respect to each Employee Plan, to the Knowledge of Cornerstone, there has not occurred, and no Person is contractually bound to enter into, (i) any “prohibited transaction” within the meaning of Section 4975(c) of the Code or Section 406 of ERISA, which transaction is not exempt under Section 4975(d) of the Code or Section 408 of ERISA or (ii) any breach of responsibilities or obligations imposed upon fiduciaries under Title I of ERISA and which in the case of either (i) or (ii) could subject Cornerstone or any Controlled Group Member to material liability.

 

(d) No Controlled Group Member has ever maintained or participated in been otherwise obligated to contribute to (i) any Employee Plan subject to Code Section 412 or Title IV of ERISA or (ii) any “multiemployer plan”, as such term is defined in ERISA Section 3(37). No Employee Plan subject to Code Section 412 or Title IV of ERISA has been terminated.

 

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(e) With respect to each Pension Plan maintained by any Controlled Group Member, such plan provides the plan sponsor the authority to amend or terminate the Plan at any time, subject to applicable requirements of ERISA and the Code.

 

(f) No Employee Plan is (i) an “employee stock ownership plan”, as defined by Code Section 4975(e)(7), or otherwise invests in employer securities, as defined by Code Section 409(l) or (ii) a “voluntary employees’ beneficiary association”, as defined by Code Section 501(c)(9).

 

(g) Except as set forth on Schedule 2.12(g) to the Cornerstone Disclosure Letter, the consummation of the transaction contemplated by this Agreement will not (i) result in any material payment becoming due pursuant to an Employee Plan to any current or former employee or other service provider of any Controlled Group Member or (ii) accelerate the vesting or timing of the payment of material benefits or compensation payable pursuant to any Employee Plan to any current or former employee or other service provider of any Controlled Group Member.

 

(h) Except as set forth on Schedule 2.12(h) to the Cornerstone Disclosure Letter, no amount required to be paid or payable to or with respect to any employee or other service provider of any Controlled Group Member in connection with the transaction contemplated by this Agreement will be an “excess parachute payment” as defined by Code Section 280G.

 

2.13 Employee Policies . The employee handbooks of Cornerstone and the Cornerstone Subsidiaries currently in effect have been delivered to Colonial and fairly and accurately summarize in all material respects the employee policies, vacation policies and payroll policies.

 

2.14 Taxes .

 

(a) Each of Cornerstone and the Cornerstone Subsidiaries (i) has filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Entity having authority to do so) and all such returns and reports are accurate and complete in all material respects, (ii) has paid (or Cornerstone has paid on its behalf) all Taxes (as defined herein) shown on such returns and reports as required to be paid by it, and (iii) has complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of Taxes (including, without limitation, withholding of Taxes pursuant to Sections 1441, 1442, 1445, 1446, 3121, 3402 and 3406 of the Code) and has, within the time period prescribed by law, withheld and paid over to the proper governmental entities all amounts required to be so withheld and paid over under applicable laws and regulations, except, with respect to all of the foregoing, where the failure to file such tax returns and reports or failure to pay such Taxes or failure to comply with such withholding requirements would not reasonably be expected to have a Cornerstone Material Adverse Effect. The most recent audited financial statements contained in the Cornerstone SEC Documents reflect an adequate reserve for all material Taxes payable by Cornerstone and the Cornerstone Subsidiaries for all taxable periods and portions thereof through the date of such financial

 

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statements. Since the Cornerstone Financial Statement Date, Cornerstone has incurred no liability for Taxes under Sections 857(b), 860(c) or 4981 of the Code, including without limitation any Tax arising from a prohibited transaction described in Section 857(b)(6) of the Code, and neither Cornerstone nor any Cornerstone Subsidiary has incurred any material liability for Taxes other than in the ordinary course of business. No event has occurred, and no condition or circumstance exists, which presents a material risk that any material Tax described in the preceding sentences will be imposed upon Cornerstone or any Cornerstone Subsidiary. Neither Cornerstone nor any Cornerstone Subsidiary is the subject of any audit, examination, or other proceeding in respect of federal income Taxes, and to Cornerstone’s Knowledge, no audit, examination or other proceeding in respect of federal income Taxes involving Cornerstone or any Cornerstone Subsidiary is being considered by any Tax authority. To the Knowledge of Cornerstone, no deficiencies for any Taxes have been proposed, asserted or assessed against Cornerstone or any Cornerstone Subsidiary, and no requests for waivers of the time to assess any such Taxes are pending. As used in this Agreement, “Taxes” shall include all taxes, charges, fees, levies and other assessments, including, without limitation, income, gross receipts, excise, property, sales, withholding (including, without limitation, dividend withholding and withholding required pursuant to Sections 1445 and 1446 of the Code), social security, occupation, use, service, license, payroll, franchise, transfer and recording taxes, fees and charges, including estimated taxes, imposed by the United States or any taxing authority (domestic or foreign), whether computed on a separate, consolidated, unitary, combined or any other basis, and any interest, fines, penalties or additional amounts attributable to, or imposed upon, or with respect to any such taxes, charges, fees, levies or other assessments.

 

(b) Cornerstone (i) for all taxable years for which the Internal Revenue Service could assert a tax liability, has been subject to taxation as a real estate investment trust (a “REIT”) within the meaning of Section 856 of the Code and has satisfied all requirements to qualify as a REIT for all such years, (ii) has operated since December 31, 2003 to the date of this representation, and intends to continue to operate, in such a manner as to qualify as a REIT for the taxable year ending on the earlier of December 31, 2004 or the Closing Date and, if later, for the taxable year of Cornerstone ending on the Closing Date, and (iii) has not taken or omitted to take any action which would reasonably be expected to result in a challenge to its status as a REIT and, to Cornerstone’s Knowledge, no such challenge is pending or threatened. Except as set forth on Schedule 2.14(b) , each Cornerstone Subsidiary which is a partnership, joint venture or limited liability company has been since the later of its formation or the acquisition by Cornerstone of a direct or indirect interest therein, and continues to be treated for federal income tax purposes as a partnership or as an entity that is disregarded for federal income tax purposes and not as a corporation or an association taxable as a corporation. In addition, each Cornerstone Subsidiary which is a partnership, joint venture or limited liability company has not since the later of its formation or the acquisition by Cornerstone of a direct or indirect interest therein, owned any assets (including, without limitation, securities) that would cause Cornerstone to violate Section 856(c)(4) of the Code. Cornerstone Partnership is not a publicly traded partnership within the meaning of Section 7704(b) of the Code that is taxable as a corporation pursuant to Section 7704(a) of the Code. For all taxable years for which the Internal Revenue Service either could assert a Tax liability or could assert that Cornerstone failed to qualify as a REIT, each Cornerstone Subsidiary which is a corporation (for federal income tax purposes) has

 

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been either, at all times during which Cornerstone has owned an interest in such corporation representing more than 10% of the value of the outstanding securities of such corporation or more than 10% of the outstanding voting securities of such corporation, a qualified REIT subsidiary under Section 856(i) of the Code, a taxable REIT subsidiary of Cornerstone under Section 856(l) of the Code, or a corporation which qualifies under the transitional rules set forth in Section 546(b) of the Tax Relief Extension Act of 1999. Each Cornerstone Subsidiary that is a “qualified REIT subsidiary” under Section 856(i) of the Code is set forth on Schedule 5.13 to the Cornerstone Disclosure Letter. Neither Cornerstone nor any Cornerstone Subsidiary holds any asset the disposition of which would be subject to rules similar to Section 1374 of the Code as a result of an election under IRS Notice 88-19, Temporary Treas. Reg. §1.337(d)-5T, Treas. Reg. §1.337(d)-5, Treas. Reg. §1.337(d)-6 or the application of Treas. Reg. §1.337(d)-7 except as set forth on Schedule 2.14(b) .

 

(c) To Cornerstone’s knowledge, as of the date hereof, Cornerstone is a “domestically-controlled REIT” within the meaning of Section 897(h)(4)(B) of the Code.

 

2.15 No Payments to Employees, Officers or Directors . Schedule 2.15 to the Cornerstone Disclosure Letter contains a true and complete list of all arrangements, agreements or plans pursuant to which cash and non-cash payments which will become payable (and the maximum aggregate amount which may be payable thereunder) to each employee, officer or director of Cornerstone or any Cornerstone Subsidiary as a result of the Merger or a termination of service subsequent to the consummation of the Merger. Except as described in Schedule 2.15 to the Cornerstone Disclosure Letter, or as otherwise provided for in this Agreement, there is no employment or severance contract, or other agreement requiring payments, cancellation of indebtedness or other obligations or lapse of vesting requirements or other restrictions to be made on a change of control or otherwise as a result of the consummation of any of the transactions contemplated by this Agreement or as a result of a termination of service subsequent to the consummation of any of the transactions contemplated by this Agreement, with respect to any employee, officer or director of Cornerstone or any Cornerstone Subsidiary. Except as set forth on Schedule 2.15 to the Cornerstone Disclosure Letter, there is no agreement or arrangement with any employee, officer or other service provider under which Cornerstone or any Cornerstone Subsidiary has agreed to pay any tax that might be owed under Section 4999 of the Code with respect to payments to such individuals.

 

2.16 Broker; Schedule of Fees and Expenses . No broker, investment banker, financial advisor or other Person, other than Wachovia Securities, the fees and expenses of which are described in the engagement letter dated June 16, 2004, between Wachovia Securities and Cornerstone, a true, correct and complete copy of which has previously been given to Colonial, is entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Cornerstone or any Cornerstone Subsidiary.

 

2.17 Compliance with Laws . Neither Cornerstone nor any Cornerstone Subsidiary has violated or failed to comply with any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity applicable to its business, properties or

 

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operations, except to the extent that such violation or failure would not reasonably be expected to have a Cornerstone Material Adverse Effect.

 

2.18 Contracts; Debt Instruments .

 

(a) Neither Cornerstone nor any Cornerstone Subsidiary has received a written notice that it is in violation of or in default under (nor to the Knowledge of Cornerstone does there exist any condition which upon the passage of time or the giving of notice or both would cause such a violation of or default under) any material loan or credit agreement, note, bond, mortgage, indenture, lease, permit, concession, franchise, license or any other material contract, agreement, arrangement or understanding, to which it is a party or by which it or any of its properties or assets is bound, nor to the Knowledge of Cornerstone does such a violation or default exist, except to the extent that such violation or default, individually or in the aggregate, would not reasonably be expected to have a Cornerstone Material Adverse Effect.

 

(b) Schedule 2.18(b) to the Cornerstone Disclosure Letter sets forth a list of each material loan or credit agreement, note, bond, mortgage, indenture and any other agreement or instrument pursuant to which any Indebtedness (as defined herein) in excess of $1,000,000 of Cornerstone or any Cornerstone Subsidiary, other than Indebtedness payable to Cornerstone or a Cornerstone Subsidiary, is outstanding or may be incurred. For purposes of this Section 2.18 , “Indebtedness” shall mean (i) indebtedness for borrowed money, whether secured or unsecured, (ii) obligations under conditional sale or other title retention agreements relating to property purchased by such Person, (iii) capitalized lease obligations, (iv) obligations under interest rate cap, swap, collar or similar transaction or currency hedging transactions (valued at the termination value thereof) and (v) guarantees of any such indebtedness of any other Person.

 

(c) To the extent not set forth in response to the requirements of Section 2.18(b) , Schedule 2.18(c) to the Cornerstone Disclosure Letter sets forth each interest rate cap, interest rate collar, interest rate swap, currency hedging transaction, and any other agreement relating to a similar transaction to which Cornerstone or any Cornerstone Subsidiary is a party or an obligor with respect thereto and which has a notional amount in excess of $1,000,000.

 

(d) [ Intentionally omitted .]

 

(e) Except as set forth on Schedule 2.18(e) of the Cornerstone Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary is a party to any agreement relating to the management of any Cornerstone Property by any Person other than Cornerstone or a Cornerstone Subsidiary.

 

(f) Except as set forth on Schedule 2.18(f) to the Cornerstone Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary is a party to any agreement pursuant to which Cornerstone or any Cornerstone Subsidiary manages or provides services with respect to any real properties other than Cornerstone Properties.

 

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(g) Cornerstone has delivered to Colonial prior to the date of this Agreement a true and complete capital budget for the year 2004 relating to budgeted capital improvements and development. Schedule 2.18(g) to the Cornerstone Disclosure Letter lists all material agreements entered into by Cornerstone or any of the Cornerstone Subsidiaries relating to the development or construction of, or additions or expansions to, any Cornerstone Properties (or any properties with respect to which Cornerstone or any Cornerstone Subsidiary has executed as of the date of this Agreement a purchase agreement or other similar agreement) which are currently in effect and under which Cornerstone or any of the Cornerstone Subsidiaries currently has, or expects to incur, an obligation in excess of $250,000 per agreement. True, correct and complete copies of such agreements have previously been delivered or made available to Colonial.

 

(h) Schedule 2.18(h) to the Cornerstone Disclosure Letter lists all agreements entered into by Cornerstone or any Cornerstone Subsidiary providing for the sale of, or option to sell, any Cornerstone Properties or the purchase of, or option to purchase, by Cornerstone or any Cornerstone Subsidiary, on the one hand, or the other party thereto, on the other hand, any real estate not yet consummated as of the date hereof.

 

(i) Except as set forth in Schedule 2.18(i) to the Cornerstone Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary has any material continuing contractual liability (A) for indemnification or otherwise under any agreement relating to the sale of real estate previously owned, whether directly or indirectly by Cornerstone, or any Cornerstone Subsidiary or (B) to pay any additional purchase price for any of the Cornerstone Properties.

 

(j) Except as set forth in Schedule 2.18(j) to the Cornerstone Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary has entered into or is subject, directly or indirectly, to any Tax Protection Agreements. As used herein, a “Tax Protection Agreement” is an agreement, oral or written, entered into between (x) either Cornerstone or a Cornerstone Subsidiary and (y) a Person other than Cornerstone or a Cornerstone Subsidiary and (A) that has as one of its purposes to permit a Person to take the position that such Person could defer federal taxable income that otherwise might have been recognized upon a transfer of property to the Cornerstone Partnership or any other Cornerstone Subsidiary that is treated as a partnership for federal income tax purposes, and that (i) prohibits or restricts in any manner the disposition of any assets of Cornerstone or any Cornerstone Subsidiary, (ii) requires that Cornerstone or any Cornerstone Subsidiary maintain, put in place, or replace, indebtedness, whether or not secured by one or more of the Cornerstone Properties, or (iii) requires that Cornerstone or any Cornerstone Subsidiary offer to any Person at any time the opportunity to guarantee or otherwise assume, directly or indirectly (including, without limitation, through a “deficit restoration obligation,” guarantee (including, without limitation, a “bottom” guarantee), indemnification agreement or other similar arrangement), the risk of loss for federal income tax purposes for indebtedness or other liabilities of Cornerstone or any Cornerstone Subsidiary, (B) that specifies or relates to a method of taking into account book-tax disparities under Section 704(c) of the Code with respect to one or more assets of Cornerstone or a Cornerstone Subsidiary, or (C) that requires a particular method for allocating one or more liabilities of Cornerstone or any Cornerstone Subsidiary under Section 752 of the Code. Neither

 

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Cornerstone nor any Cornerstone Subsidiary is in violation of or in default under any Tax Protection Agreement (or similar agreement concerning action that would affect the tax liability of any person) that it is or has been a party to, and neither Cornerstone nor any Cornerstone Subsidiary has any outstanding tax liability to any person under any such agreement.

 

(k) Except as set forth in Schedule 2.18(k) to the Cornerstone Disclosure Letter and for the Confidentiality Agreement, dated July 15, 2004 between Cornerstone and Colonial (the “Confidentiality Agreement”), neither Cornerstone nor any Cornerstone Subsidiary is a party to any (A) standstill, lock-up, financial advisory or voting agreement or (B) confidentiality agreement related to any of the types of transactions described in clauses (A), (B) or (C) of Section 4.3(a)(i) (but substituting 50% for each instance where 10% appears).

 

(l) Cornerstone does not have any shareholder rights plan or similar arrangement in effect.

 

2.19 Opinion of Financial Advisor . Cornerstone has received the opinion of Wachovia Securities, Cornerstone’s financial advisor, to the effect that, as of the date thereof, the aggregate Merger Consideration to be received by the holders of Cornerstone Common Shares pursuant to the Merger is fair to such holders from a financial point of view. Within 15 days after the date hereof, Cornerstone will have received the written opinion of Wachovia Securities to such effect.

 

2.20 State Takeover Statutes . Cornerstone has taken all action necessary to exempt the transactions contemplated by this Agreement between Colonial and Cornerstone and its Affiliates from the operation of any “fair price,” “moratorium,” “control share acquisition” or any other anti-takeover statute or similar statute enacted under the laws of the state or federal laws of the United States or similar statute or regulation (a “Takeover Statute”).

 

2.21 Investment Company Act of 1940 . Neither Cornerstone nor any Cornerstone Subsidiary is required to be registered under the Investment Company Act of 1940, as amended (the “1940 Act”).

 

2.22 Definition of “Knowledge of Cornerstone” . As used in this Agreement, the phrase “Knowledge of Cornerstone” (or words of similar import) means the actual knowledge of those individuals identified in Schedule 2.22 to the Cornerstone Disclosure Letter.

 

2.23 Required Shareholder Approval . Assuming the redemption of the Cornerstone Series A Preferred Shares as provided for in Section 5.15 , the affirmative vote of the holders of at least two-thirds of the outstanding Cornerstone Common Shares is the only vote or approval of the holders of any class or series of Cornerstone capital shares necessary or required under applicable law to approve the Merger and this Agreement.

 

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ARTICLE 3

 

REPRESENTATIONS AND WARRANTIES OF COLONIAL

AND COLONIAL MERGER SUB

 

Except as specifically set forth in the disclosure letter to this Agreement delivered to Cornerstone prior to the execution hereof (the “Colonial Disclosure Letter”) (each section of which qualifies the correspondingly numbered representation and warranty or covenant to the extent specified therein, provided that any disclosure set forth with respect to any particular section shall be deemed to be disclosed in reference to all other applicable sections of this Agreement if the disclosure in respect of the particular section is sufficient on its face without further inquiry reasonably to inform the other parties to this Agreement of the information required to be disclosed in respect of the other sections to avoid a breach under the representation and warranty or covenant corresponding to such other sections), Colonial and Colonial Merger Sub represent and warrant to Cornerstone as follows:

 

3.1 Organization, Standing and Power of Colonial . Colonial is a real estate investment trust duly organized, validly existing and in good standing under the laws of Alabama. Colonial has all requisite power and authority to own, operate, lease and encumber its properties and carry on its business as now being conducted. The Colonial Declaration of Trust is in effect, and no dissolution, revocation or forfeiture proceedings regarding Colonial have been commenced. Colonial is duly qualified or licensed to do business as a foreign trust and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not reasonably be expected to have a Colonial Material Adverse Effect (as defined herein). As used in this Agreement, a “Colonial Material Adverse Effect” means any circumstance, event, occurrence, change or effect that is materially adverse to the business, properties, assets (tangible or intangible), financial condition or results of operations of Colonial, Colonial Partnership and the Subsidiaries of Colonial (collectively, “Colonial Subsidiaries”), taken as a whole, other than effects, events or changes arising out of or resulting from (a) changes in conditions in the United States or global economy or capital or financial markets generally, including changes in interest or exchange rates, (b) changes in general legal, regulatory, political, economic or business conditions or changes in GAAP (as defined herein) that, in each case, generally affect the real estate industry and that do not affect Colonial, Colonial Partnership or the Colonial Subsidiaries materially disproportionately relative to other participants in the real estate industry or (c) the negotiation, execution, announcement or performance of this Agreement or the consummation of the transactions contemplated by this Agreement. Colonial has delivered to Cornerstone complete and correct copies of the Colonial Declaration of Trust and the Bylaws of Colonial (the “Colonial Bylaws”), as amended or supplemented to the date of this Agreement.

 

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3.2 Colonial Subsidiaries .

 

(a) Schedule 3.2(a) to the Colonial Disclosure Letter sets forth (i) each Colonial Subsidiary and each other Person in which Colonial owns, directly or indirectly through a Colonial Subsidiary, 10% or more of the capital stock, voting securities or other equity interests, (ii) the ownership interest therein of Colonial, (iii) if not directly or indirectly wholly owned by Colonial, the identity and ownership interest of each of the other owners of each Colonial Subsidiary, (iv) each property owned by such Colonial Subsidiary or such other Person and each other asset material to such Colonial Subsidiary or such other Person, and (v) if not wholly owned by such Colonial Subsidiary or such other Person, the identity and ownership interest of each of the other owners of such property.

 

(b) Except as set forth in Schedule 3.2(b) to the Colonial Disclosure Letter, (i) all the outstanding shares of capital stock of each Colonial Subsidiary that is a corporation have been duly authorized, validly issued and are (A) fully paid and nonassessable and not subject to preemptive or similar rights and (B) in the case of capital stock owned by Colonial or a Colonial Subsidiary, owned free and clear of all Liens and (ii) all equity interests in each Colonial Subsidiary that is a partnership, joint venture, limited liability company or trust which are owned by Colonial or a Colonial Subsidiary are owned free and clear of all Liens. Each Colonial Subsidiary that is a corporation is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to own, operate, lease and encumber its properties and carry on its business as now being conducted, and each Colonial Subsidiary that is a partnership, limited liability company or trust is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the requisite power and authority to own, operate, lease and encumber its properties and carry on its business as now being conducted. Each Colonial Subsidiary is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not reasonably be expected to have a Colonial Material Adverse Effect. Complete and correct copies of the Articles of Incorporation, Bylaws, organization documents and partnership, joint venture and operating agreements of each Colonial Subsidiary, as amended to the date of this Agreement, have been previously delivered or made available to Cornerstone. No effective amendment has been made to the Colonial Partnership Agreement since February 18, 2004 (except to provide for redemptions of Colonial OP Units in the ordinary course of business).

 

3.3 Capital Structure .

 

(a) The authorized shares of beneficial interest of Colonial on the date hereof consist of 75,000,000 shares of beneficial interest, of which 65,000,000 are classified as common shares of beneficial interest, par value $0.01 per share (previously defined herein as “Colonial Common Shares”), and 10,000,000 are classified as preferred shares of beneficial interest, par value $0.01 per share (the “Colonial Preferred Shares”). 2,000,000 of the Colonial Preferred Shares have been designated as 7.25% Series B Cumulative Redeemable Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share

 

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(“Colonial Series B Preferred Shares”), 2,000,000 of the Colonial Preferred Shares have been designated as 9.25% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (“Colonial Series C Preferred Shares”), 500,000 of the Colonial Preferred Shares have been designated as 8 1/8% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (“Colonial Series D Preferred Shares”), 70,000 of the Colonial Preferred Shares have been designated as 7.62% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (previously defined herein as “Colonial Series E Preferred Shares”) and 6,500 of the Colonial Preferred Shares have been designated as Series 1998 Junior Participating Preferred Shares of Beneficial Interest (the “Colonial Series 1998 Preferred Shares”). 27,388,192 Colonial Common Shares are issued and outstanding on the date of this Agreement (such amount does not include 5,623,150 Colonial Common Shares held as treasury shares). No Colonial Series B Preferred Shares are issued and outstanding on the date of this Agreement. 2,000,000 Colonial Series C Preferred Shares and 500,000 Colonial Series D Preferred Shares are issued and outstanding on the date of this Agreement. No Colonial Series E Preferred Shares are issued and outstanding on the date of this Agreement. No Colonial Series 1998 Preferred Shares are issued and outstanding on the date of this Agreement. No other Colonial Preferred Shares are issued and outstanding on the date of this Agreement.

 

(b) Set forth in Schedule 3.3(b) to the Colonial Disclosure Letter is a true and complete list of the following: (i) each qualified or nonqualified option to purchase Colonial’s shares of beneficial interest granted under either Colonial’s Second Amended and Restated Employee Share Option and Restricted Share Plan, as amended, Colonial’s Non-Employee Trustee Share Option Plan, as amended, or any other formal or informal arrangement (collectively, the “Colonial Options”); and (ii) except for the Colonial OP Units, the Colonial Series B OP Units (as defined herein) and the Colonial Series 1998 Preferred Shares, all other warrants or other rights to acquire Colonial’s shares of beneficial interest, all share appreciation rights, all restricted shares, phantom shares, dividend equivalents, performance units and performance shares which are outstanding on the date of this Agreement. Schedule 3.3(b) to the Colonial Disclosure Letter sets forth the Colonial Options granted to Colonial’s Chief Executive Officer and four other most highly compensated officers, the date of each grant, the status of each Colonial Option as qualified or nonqualified under Section 422 of the Code, the number of Colonial Common Shares subject to each Colonial Option, the number and type of Colonial Common Shares or other shares subject to Colonial Options that are currently exercisable, the exercise price per share, and the number and type of such shares subject to share appreciation rights. On the date of this Agreement, except as set forth in this Section 3.3 or in Schedule 3.3(b) or 3.3(d) to the Colonial Disclosure Letter, no shares of beneficial interest of Colonial were outstanding or reserved for issuance (except for (x) Colonial Common Shares reserved for issuance upon redemption of Colonial OP Units and exercise of Colonial Options, (y) Colonial Series B Preferred Shares reserved for issuance upon redemption of Colonial Series B Preferred OP Units and (z) Colonial Series 1998 Preferred Shares issuable upon the exercise of Colonial Rights).

 

(c) All outstanding shares of beneficial interest of Colonial are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive or similar rights under law or the Colonial Declaration of Trust or Colonial Bylaws, or any contract or instrument to which Colonial is a party or by which it is bound. There are no bonds, debentures, notes or other indebtedness of Colonial having the right to vote (or convertible into, or

 

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exchangeable or exercisable for, securities having the right to vote) on any matters on which shareholders of Colonial may vote.

 

(d) Except (i) as set forth in this Section 3.3 or in Schedule 3.3(b) or 3.3(d) to the Colonial Disclosure Letter, (ii) Colonial OP Units and Colonial Series B Preferred OP Units, which may be redeemed for Colonial Common Shares and Colonial Series B Preferred Shares, respectively, and (iii) Colonial Rights which may be exercised for Series 1998 Preferred Shares or Colonial Common Shares pursuant to the Rights Agreement, as of the date of this Agreement, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Colonial or any Colonial Subsidiary is a party or by which such entity is bound, obligating Colonial or any Colonial Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of beneficial interest, voting securities or other ownership interests of Colonial or any Colonial Subsidiary or obligating Colonial or any Colonial Subsidiary to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking (other than to Colonial or a Colonial Subsidiary).

 

(e) As of the date of this Agreement, 37,714,052 Class A Units (as defined in the Colonial Partnership Agreement) (“Colonial OP Units”), 2,000,000 7.25% Series B Cumulative Redeemable Preferred Units (“Colonial Series B Preferred OP Units”), 2,000,000 9.25% Series C Cumulative Redeemable Preferred Units (“Colonial Series C Preferred OP Units”), 500,000 8 1/8% Series D Cumulative Redeemable Preferred Units (“Colonial Series D Preferred OP Units” and, together with the Colonial Series B Preferred OP Units, the Colonial Series C Preferred OP Units, the Colonial Series E Preferred OP Units and the Colonial Series F Preferred OP Units, the “Colonial Preferred OP Units”), no Colonial Series E Preferred OP Units and no Colonial Series F Preferred Units are validly issued and outstanding, fully paid and nonassessable and not subject to preemptive or similar rights under law or the Colonial Partnership Agreement, or any contract or instrument to which Colonial or Colonial Partnership is a party or by which either is bound. Except as provided in the Colonial Partnership Agreement, the Colonial OP Units are not subject to any restrictions. Except as set forth in Schedule 3.3(e) to the Colonial Disclosure Letter, Colonial Partnership has not issued or granted and is not a party to any outstanding commitments of any kind relating to, or any agreements or understandings with respect to, interests in Colonial Partnership, whether issued or unissued, or securities convertible into or exchangeable or exercisable for interests in Colonial Partnership.

 

(f) All dividends on Colonial Common Shares and Colonial Preferred Shares and all distributions on Colonial OP Units and Colonial Preferred OP Units, which have been declared prior to the date of this Agreement, have been paid in full, except as set forth in Schedule 3.3(f) .

 

(g) The Colonial Common Shares to be issued by Colonial, and the Colonial OP Units to be issued by the Colonial Partnership, pursuant to this Agreement have been duly authorized for issuance, and upon issuance will be duly and validly issued, fully paid and nonassessable.

 

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3.4 Other Interests . Except for interests in the Colonial Subsidiaries and the other entities as set forth in Schedule 3.2(a) or Schedule 3.4 to the Colonial Disclosure Letter (the “Colonial Other Interests”), neither Colonial nor any Colonial Subsidiary owns directly or indirectly any interest or investment (whether equity or debt) in any corporation, limited liability company, partnership, joint venture, business, trust or other entity (other than investments in short-term investment securities). With respect to the Colonial Other Interests, Colonial or the applicable Colonial Subsidiary is a partner, member or shareholder in good standing, and owns such interests free and clear of all Liens. None of Colonial nor any Colonial Subsidiary is in material breach of any agreement, document or contract which is of a material nature governing its rights in or to the Colonial Other Interests, all of which agreements, documents and contracts are (a) listed in Schedule 3.4 to the Colonial Disclosure Letter, (b) unmodified except as described therein and (c) in full force and effect. To the Knowledge of Colonial (as defined herein), the other parties to any such agreement, document or contract which is of a material nature are not in breach of any of their respective obligations under such agreements, documents or contracts.

 

3.5 Authority; Noncontravention; Consents .

 

(a) Colonial has the requisite power and authority to enter into this Agreement and, subject to the requisite Colonial shareholder approval of the issuance of Colonial Common Shares contemplated by the Merger under the listing standards of the NYSE (the “Colonial Shareholder Approval” and, together with the Cornerstone Shareholder Approval, the “Shareholder Approvals”), to consummate the transactions contemplated by this Agreement to which Colonial is a party. The execution and delivery of this Agreement by Colonial and the consummation by Colonial of the transactions contemplated by this Agreement to which Colonial is a party have been duly authorized by all necessary action on the part of Colonial, except for and subject to the Colonial Shareholder Approval. This Agreement has been duly executed and delivered by Colonial and constitutes a valid and binding obligation of Colonial, enforceable against Colonial in accordance with and subject to its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors’ rights and general principles of equity.

 

(b) Colonial Merger Sub has the requisite corporate or limited liability company power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement to which Colonial Merger Sub is a party. The execution and delivery of this Agreement by Colonial Merger Sub and the consummation by Colonial Merger Sub of the transactions contemplated by this Agreement have been duly authorized by all necessary action on the part of Colonial Merger Sub. This Agreement has been duly executed and delivered by Colonial Merger Sub and constitutes a valid and binding obligation of Colonial Merger Sub, enforceable against Colonial Merger Sub in accordance with and subject to its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors’ rights and general principles of equity.

 

(c) Except as set forth in Schedule 3.5(c)(1) to the Colonial Disclosure Letter, the execution and delivery of this Agreement by Colonial and Colonial Merger Sub do not, and, subject to receipt of the Colonial Shareholder Approval, the consummation of the

 

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transactions contemplated by this Agreement to which Colonial or Colonial Merger Sub is a party and compliance by Colonial or Colonial Merger Sub with the provisions of this Agreement will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Colonial or any Colonial Subsidiary under, (i) the Colonial Declaration of Trust or the Colonial Bylaws or the comparable charter or organizational documents or partnership, operating or similar agreement (as the case may be) of any Colonial Subsidiary, each as amended or supplemented to the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, merger or other acquisition agreement, shareholder rights plan, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, franchise or license applicable to Colonial or any Colonial Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any Laws applicable to Colonial or any Colonial Subsidiary or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or Liens that individually or in the aggregate would not reasonably be expected to (x) have a Colonial Material Adverse Effect or (y) prevent or materially impair the ability of Colonial or Colonial Merger Sub to perform any of its obligations hereunder or prevent or materially threaten or impede the consummation of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Colonial or any Colonial Subsidiary in connection with the execution and delivery of this Agreement by Colonial and Colonial Merger Sub or the consummation by Colonial and Colonial Merger Sub of any of the transactions contemplated by this Agreement, except for (i) the filing with the SEC of (x) the Form S-4 (as defined herein) and (y) such reports and filings under the Securities Act and the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (ii) the filing of the Delaware Certificate of Merger with the Delaware