J-REITs - noandt.com · Atsumi & Partners Greenwich Legal Jones Day Macquarie Goodman Group Mori...

asialaw

J-REITs Japan Real Estate Investment Trusts

Out look & Oppor tun i t y

Published by Asia Law & Practice, in association with:

Atsumi & Partners

Greenwich Legal

Jones Day

Macquarie Goodman Group

Mori Hamada & Matsumoto

Nagashima Ohno & Tsunematsu

O’Melveny & Myers

J-REITs Japan Real Estate Investment Trusts

Out look & Oppor tun i t y

Published byAsia Law & Practice

A Euromoney Institutional Investor PLC company5/F Printing House

6 Duddell Street, CentralHong Kong

Tel: +852 2523 3399 Fax: +852 2521 8900Email: [email protected]

www.asialawandpractice.com

Managing EditorManju Manglani

Head of ProductionAndy Alcock

Head of MarketingRegina Leung

Office ManagerConnie Lo

Associate PublisherStephen Lai

PublisherDarren Barton

ISBN: 978-962-936-177-8

© Euromoney Publications (Jersey) Limited, June 2007Printed in Hong Kong

Directors, Euromoney Publications (Jersey) Limited:Richard Ensor, Tony Shale, Anita Rye

CONDITIONS OF SALEAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written

permission from the publisher.

DISCLAIMERThe information contained in this publication is not offered as advice on any particular matter and should not be taken as such. It should not be relied upon as professional advice and should not be regarded as a substitute for obtaining professional advice on the facts and circumstances at issue in any particular case. The editors, authors

and publisher disclaim any liability to any person or entity in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any part of this book.

XJ-REITs: Outlook & Opportunity

About the Authors

NAGASHIMA OHNO & TSUNEMATSU

Ryohei Kataoka

Ryohei Kataoka is an associate of Nagashima Ohno & Tsunematsu. He is

a graduate of Waseda University (LL.B., 2002) and the Legal Training and

Research Institute of the Supreme Court of Japan (2004). He practices in

the areas of real estate finance and securitization, structured finance and

regulations governing J-REITs.

Kioicho Building, 3-12, Kioicho, Chiyoda-ku, Tokyo 102-0094, JapanTel: +81 3 3288 7000 Fax: +81 3 5213 7800 Web: www.noandt.com Email: [email protected]

A Leading Law Firm in Japan

Administrative Law and RegulationAntitrustArbitration and Dispute ResolutionAsset AcquisitionBankingBankruptcy and DissolutionCapital Market TransactionsCivilCommercialCommunications and MediaCorporateCorporate ReorganizationDebt Issues

Employment and PensionEntertainmentFinanceFranchises and DistributorshipsInformation TechnologyInsuranceIntellectual PropertyInternational FinanceInternational LawInvestment TrustsJoint VenturesLeasingLending

LicensingMergers and AcquisitionsPharmaceuticalsProduct LiabilityQuasi-Judicial ProceedingsReal Estate and DevelopmentSecurities and DerivativesSecurities TransactionsSecuritizationsTaxTelecommunicationsTrade Regulation

Areas of Practice:

Year Established: 2000

Number of Lawyers: 269 (as of June 1, 2007)

Languages Sopken: Japanese, English, Chinese, French and German

Contact Persons: Hisashi Hara, (Ms) Yuko Tamai (Dai-ichi Tokyo Bar Association)

21J-REITs: Outlook & Opportunity

Mergers & Acquisitions of REITs in Japan

Mergers and Acquisitions of J-REITsBy Ryohei Kataoka – Nagashima Ohno & Tsunematsu

There are two types of legal structures for Japanese real estate investment trust (J-REIT)

vehicles: investment corporations and contract investment trusts. As of June 8 2007,

all J-REITs listed on the Japanese stock exchanges were structured as investment

corporations.

There are primarily two situations in which acquisitions of J-REITs occur: an acquirer seeks to

obtain control of a J-REIT, or an acquirer desires to procure all of the assets held by a J-REIT.

In order to establish control over a J-REIT, an acquirer must first change the directors of the

J-REIT. The acquirer must subsequently either obtain control over the asset management

company (AMC) which manages the assets in the J-REIT, or replace the AMC. In order to

procure control over the assets of a J-REIT, an acquirer can either purchase all of the assets

held by the J-REIT by agreement with it or merge with the J-REIT.

PROCEDURES FOR OBTAINING CONTROL OVER A J-REIT

Governance and Asset Management Functions

The governance structure of a J-REIT consists of unitholders, a board of directors formed by

its executive director(s) and supervisory directors, and an independent auditor. The board of

directors supervises the executive director(s) and retains the right to dismiss executive directors

and terminate the asset management agreement (AMA) between the AMC and the J-REIT

without the approval of unitholders in certain cases.

Executive directors must obtain the approval of the board of directors to issue new units in

a J-REIT, convene unitholders’ meetings, enter into merger agreements, enter into or amend

the AMA, issue corporate bonds or perform other significant business. In addition, certain

other significant matters (including the appointment and dismissal of directors, conclusion or

termination of the AMA, and amendments to the articles of incorporation) require the approval

of unitholders. Therefore, to secure the power to make decisions regarding any of the foregoing

issues, the acquirer must obtain a sufficient number of units to control decisions at the

unitholders’ meeting, including a decision to replace the current directors.

Under the Law Concerning Investment Trust and Investment Corporations of Japan (Investment

Trust Law), a J-REIT is only a vehicle for holding assets and the entity performing a J-REIT’s

asset management functions is the AMC, licensed by the Financial Services Agency (FSA) as



an investment trust manager.

The AMC performs virtually all of the functions of the J-REIT. As a result, simply acquiring units

of a J-REIT and changing the directors is not necessarily sufficient to secure the level of control

sought by a potential acquirer over a J-REIT. In order to obtain control of the asset management

functions of a J-REIT, an acquirer must obtain the shares of the AMC or replace it with a new

AMC favourable to the acquirer.

Acquiring Units of J-REITs

Takeover Bid Procedures

An acquirer may freely purchase units of J-REITs that are listed on certain Japanese securities

exchanges. The acquisition of J-REIT units is now regulated by the rule governing takeover bids

following the 2004 amendment to the Securities and Exchange Law (SEL). For example, if an

acquirer desires to gain control over one-third of the units of a J-REIT without trading on the

securities exchanges, the acquirer must utilize the procedures for a takeover bid prescribed in

the SEL.

Squeeze-out

In Japan, there is no SEL provision that could be used to compel existing unitholders to sell

their units of a J-REIT to a person or company seeking to purchase them. Moreover, under the

Investment Trust Law, there is no provision covering unit exchange and transfer.

Under the Investment Trust Law, if fractional units are generated as a result of the merger or

consolidation of units, J-REITs must sell whole units corresponding to the total number of

fractional units created, pursuant to prescribed procedures, and then distribute the purchase

price to unitholders on a pro rata basis.

Therefore, in theory, if an acquirer intentionally generates fractional units by a merger or

consolidation of units and distributes cash to unitholders in exchange for such fractional units,

the acquirer will squeeze out such unitholders. However, it is possible that a court will nullify or

revoke the approval of the merger or consolidation of units at a unitholders’ meeting if it finds an

abuse of voting rights by the majority unitholders.

Bulk Holding Report

The SEL requires any person owning more than 5% of the equity in a corporation listed on a

securities exchange in Japan to file a report (the bulk holding report) with the commissioner

of the FSA. The bulk holding report sets forth the amount of equity owned, the purpose for

holding the equity and certain other designated matters. This must generally be done within five

business days of any transaction causing a person’s equity ownership to exceed 5%.



Requirements for Enjoying Tax Benefits

Generally, dividend distributions made by Japanese corporations are not deductible in the

calculation of corporate taxable income. However, a dividend distribution made by a J-REIT to

its unitholders will be deductible from the taxable income of the J-REIT, so long as it satisfies

the conditions of the Special Taxation Measures Law (STML).

One important condition to obtain this deduction is that the J-REIT is not a family corporation

(do-zoku kaisha) under the Japanese Corporation Tax Law at the end of the relevant taxable

year. A family corporation refers to a corporation where more than 50% of the total outstanding

equity is held by three or fewer equity holders. For the purpose of calculating the percentage

held by the three equity holders, equity owned both by these three equity holders and any

parties with a special relationship (as defined in the enforcement regulations of the STML) to

these three equity holders (the special parties) is counted.

Therefore, if an acquirer and the other two equity holders obtain and hold over half the total

number of issued and outstanding units of a J-REIT (including the number of units held by their

special parties) at the end of the relevant taxable year, the J-REIT does not enjoy the tax benefits

described above.

Change in Directors

Any changes in directors must be approved at a unitholders’ meeting by a majority vote. A

majority vote means an affirmative vote by half or more of the units held by the unitholders

present at the meeting on the condition that the unitholders holding more than half of the total

issued and outstanding units are present at the meeting.

Under the Investment Trust Law, financial statements are approved by the board of directors

and do not require approval at a unitholders’ meeting. Therefore, unitholders’ meetings are not

required to be held each fiscal year.

Because the STML and the Japanese securities exchange listing rules require that the fiscal

year for a J-REIT must be not less than six months but not more than one year, the fiscal year

for almost all of the listed J-REITs is six months.2 Unitholders’ meetings are held every two years

because the term of the executive director(s) is limited to two years under the Investment Trust

Law and J-REITs must appoint new executive director(s) every two years.

Under the Investment Trust Law, a unitholder who has continually held units comprising at

least 3% of the total number of units issued and outstanding of a J-REIT for six months can

request that the executive director(s) convene a unitholders’ meeting. Such a unitholder can also

convene the unitholders’ meeting to consider an agenda item he/she proposes if the meeting is

not convened within the period prescribed by the Investment Trust Law. If an acquirer is not able

to wait for the ordinary biennial unitholders’ meeting, the acquirer who meets the unitholding

requirements described above may convene a unitholders’ meeting directly.



Acquiring the Shares of an AMC

If an acquirer wishes to obtain control of an existing AMC, acquiring its shares is the simplest

way. However, the AMCs of listed J-REITs are not listed on the securities exchange. In addition,

an AMC’s articles of incorporation ordinarily contain a provision requiring the approval of the

transfer of any of its shares by the board of directors. Therefore, an acquirer cannot acquire the

shares of an AMC without the agreement of the AMC’s current shareholders and the approval

of its board of directors.

Replacing the AMC

Under the Investment Trust Law, terminating the AMA and entering into a new one with a

different AMC requires the approval of unitholders by majority vote at the unitholders’ meeting.

Under the Investment Trust Law, a unitholder who has continually held units comprising at least

1% of the total number of units issued and outstanding of a J-REIT for six months can propose

an agenda item to replace the AMC to be resolved at the unitholders’ meeting no later than eight

weeks prior to the date of that meeting.

If the executive director(s) of a J-REIT disagree with a proposed acquisition, an acquirer who

meets the unitholding requirements described above can propose the agenda item regarding

the replacement of the AMC to the unitholders’ meeting directly (as opposed to through the

directors).

In order to replace an AMC, an acquirer must form a new AMC, which must obtain the necessary

licenses. Under the Investment Trust Law, a new AMC must also submit documents to the FSA

demonstrating its competency to act as an AMC in order to obtain an investment trust manager

license. The new AMC must provide business and service documents, establish its ability

to comply with corporate governance requirements, prove its expertise in the field and have

experienced senior management and officers. It generally takes six months or more to obtain

an investment trust manager license.

The Investment Trust Law and SEL are scheduled to be amended in September 2007. After the

proposed amendment, the AMC will only be required to register with the FSA as an investment

manager (as opposed to obtaining a license) in order to manage the assets a J-REIT. The

registration procedures will take up to six months.

PROCEDURES FOR ACQUIRING ASSETS HELD BY A J-REIT

Sale of All or a Substantial Part of Assets

General

Under the Investment Trust Law, an AMC has the authority to manage a J-REIT’s assets.

Therefore, if an acquirer desires to acquire the assets held by a J-REIT, the acquirer must



negotiate with the AMC over the sale of the assets. The acquirer can enter into a purchase

agreement with the J-REIT only after the acquirer and the AMC agree on the terms and

conditions of the purchase and sale of the J-REIT’s assets.

Articles of Incorporation

Usually, investment policies provided in the articles of incorporation (AOI) of a J-REIT require it

to invest and manage its assets in order to foster stable benefits and steady growth of its assets

from a medium-term perspective.

If a J-REIT sells all or a substantial part of its assets and then distributes the entirety of the

proceeds obtained to unitholders without further investment, the sale may be substantially

equivalent to liquidation, as these actions may be inconsistent with the J-REIT’s investment

policies under its AOI.

Additionally, the AOI of most J-REITs require that at least 75% of the total assets of the J-REIT

are invested in real estate and real estate equivalent assets, namely real estate, leasehold rights,

surface rights over land (chijo-ken) and beneficial interest in a trust (the 75% rule). This provision

is required by the STML so that J-REITs enjoy the tax benefits from an alleviation of registration

license taxes regarding assignment of real estate. If a J-REIT sells all or a substantial part of its

assets, such sale may trigger the violation of the 75% rule because all or a substantial part of its

assets would then be cash or receivables.

Therefore, if a J-REIT does not amend its investment policies under the AOI and the provision in

its AOI regarding the 75% rule prior to the sale of all or a substantial part of its assets to a third

party, the sale could be revoked or nullified as a violation of the AOI.

Scope of Authority of the AMC

The sale of all or a substantial part of the assets of a J-REIT and the distribution of the proceeds

to the unitholders is substantially equivalent to liquidation. However, in principle, liquidation

procedures can commence only upon the approval of the unitholders at a unitholders’ meeting.

In addition, because there is a provision in the AOI of all listed J-REITs which forbids the

redemption of units to unitholders by the J-REIT,1 it would violate the AOI if a J-REIT distributed

proceeds to unitholders without proper liquidation procedures. Therefore, it may be construed

that the Investment Trust Law does not authorize an AMC to sell all or a substantial part of a

J-REIT’s assets to a third party on behalf of the J-REIT.

If an AMC does not have authorization to sell all or a substantial part of a J-REIT’s assets to

a third party, such a sale could be revoked or nullified. Furthermore, under the Investment

Trust Law, if a J-REIT intends to sell all or a substantial part of its assets, it should sell those

assets through liquidation procedures after obtaining approval for dissolution of the J-REIT at

a unitholders’ meeting. However, a significant problem is posed by the fact that a distribution

made by a dissolving J-REIT through liquidation procedures to its unitholders may not be



deductible from the J-REIT’s taxable income under the STML.

Because there are a number of restrictions and complications, J-REITs must proceed cautiously

when attempting to sell all or a substantial part of their assets, subject to the approval of the FSA,

the supervisory agency for J-REITs and AMCs.

Merger of J-REITs

Types of Merger

There are two types of merger for J-REITs:

(i) a merger (kyushu gappei) in which all rights and liabilities of the dissolving J-REIT will

transfer to the surviving J-REIT after the merger, and

(ii) a consolidation (shinsetsu gappei) under which all the rights and liabilities of two or more

J-REITs will be transferred to an entirely new J-REIT which will be established upon

consolidation.

The shinsetsu gappei method is rarely utilized in Japan for mergers involving joint stock

companies. This is for various reasons, including the complicated procedures involved.

Although there have been no previous mergers among listed J-REITs, practically speaking, the

kyushu gappei method will be generally utilized in Japan.3

A J-REIT can only merge with another J-REIT; a J-REIT cannot merge with a joint stock company

or any other corporation or entity other than a J-REIT. If an acquirer that is not a J-REIT seeks

to obtain the assets of a J-REIT through a merger, the acquirer must create a J-REIT over which

the acquirer has control. However, only investment trust managers that are licensed by the FSA

and persons or corporations satisfying the qualifications prescribed by the Investment Law can

incorporate a J-REIT. Therefore, the acquirer must satisfy such qualifications itself or establish

an entity that would qualify to incorporate a J-REIT.

Merger Procedures

Approval of the Merger Agreement

Under the Investment Trust Law, parties must enter into a written merger agreement on the

fundamental terms and conditions of a contemplated merger. Among other conditions that

must be satisfied, except for special cases prescribed in the Investment Trust Law, the merger

agreement must be approved by a unitholders’ meeting of both J-REITs by super-majority vote.

A super-majority vote means an affirmative vote by two-thirds or more of the units held by the

unitholders present at a unitholders’ meeting, on the condition that the unitholders holding more

than half of the total issued and outstanding units are present at the meeting.

Prior Disclosure

Prior to the unitholders’ meetings at which the merger agreement is to be approved, each J-REIT



must make available at its head office certain documents. This includes the merger agreement

and both J-REITs’ financial documents as of certain prescribed dates, so that unitholders and

creditors may investigate the appropriateness of the merger.

Opposition by Unitholders

A unitholder of either J-REIT may demand that the applicable J-REIT purchase his/her units at

fair value if the unitholder has notified the respective J-REIT in writing prior to the unitholders’

meeting of his/her intention to oppose the contemplated merger, and opposed the merger

agreement at the unitholders’ meeting.

Creditor Protection Procedures

Both the dissolving J-REIT and the surviving J-REIT must make a public notice in the official

gazette (kampo) so that any creditor who opposes the contemplated merger may present

objections to the relevant J-REIT within a certain specified period of time as determined by the J-

REIT (but not shorter than one month) and separately notify each creditor known to the J-REITs

of such opposition rights within the same timeframe. A J-REIT may omit this individual notice to

the creditor if the J-REIT’s AOI provides that the method of public notice is via a daily newspaper

handling current events and the J-REIT has actually given public notice in such newspaper in

addition to the official gazette.

If a creditor has not presented any objections to the J-REIT within the prescribed period, the

creditor is deemed to have constructively approved the contemplated merger. If a creditor

presents objections about the proposed merger to the J-REIT, the J-REIT must then pay the

debt owed to the creditor, provide adequate security or entrust adequate property to a trust

company for the purpose of paying the debt, except in cases where the merger does not

threaten to adversely affect the creditor.

Post-merger Disclosure

The surviving J-REIT must prepare documents describing the status of several issues related to

the merger. This includes details on the progress of the creditors’ concerns regarding both the

surviving J-REIT and the dissolving J-REIT, and details on the rights transferred to and liabilities

assumed by the surviving J-REIT from the dissolving J-REIT.

This documents must then be made available at the head office of the surviving J-REIT for six

months from the effective date of the merger. During that period, any unitholder or creditor

may investigate any of the documents and demand that the surviving J-REIT provide them with

copies of such documents at any time during normal office hours.

PROSPECTS FOR J-REITS

As of June 8 2007, 40 J-REITs were listed on the Tokyo Stock Exchange and one J-REIT was

listed on the Jasdaq Securities Exchange.



There is a widening gap in the unit price and total assets of J-REITs. Although J-REITs must

acquire high-quality assets to survive in a competitive market, they are finding it increasingly

difficult to acquire such assets due to heavy competition in the real estate market.

Under the circumstances, it has recently become popular for some J-REITs to enter into business

support agreements with real estate funds or real estate companies. In such relationships, the

real estate funds or companies contribute by selling high-quality assets to the J-REITs and, in

turn, new units are privately placed with the funds or companies in order to build solid business

partnerships.

However, because J-REITs have portfolios full of real estate, the best way to expand these

portfolios is for J-REITs to merge with each other or acquire the assets of other J-REITs. It is also

possible that real estate funds, real estate companies or foreign REITs will seek to gain control

of J-REITs or to procure their assets.

Therefore, although there are no pending mergers between or acquisitions of listed J-REITs as

of June 8, 2007, these are likely to occur with greater frequency in the near future.

Endnotes1. The Tokyo Securities Exchange listing rules, on which most J-REITS list, require that the AOI provide a provision

forbidding redemption by J-REITs of issued units.2. The fiscal year of one listed J-REIT is one year as of June 8 2007.3. For these reasons, this chapter shall only cover matters realted to the kyushu gappei.

J-REITs - noandt.com · Atsumi & Partners Greenwich Legal Jones Day Macquarie Goodman Group Mori...

Documents

Transcript of J-REITs - noandt.com · Atsumi & Partners Greenwich Legal Jones Day Macquarie Goodman Group Mori...