JAPAN Trends and Developments Contributed by: Hiroshi Niinomi, Koki Hara, Naoto Yamamoto and Serina Nakano, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
are not permitted under the Act on Investment Trusts and Investment Corporations, which regulates REITs. The types of REIT M&A transactions are generally as follows: • mergers between two REITs (via a consolidation- type merger or an absorption-type merger); • the acquisition of J-REIT shares and the replace - ment of an asset management company; and • the acquisition of all portfolio assets held by a REIT by the acquiring REIT. These types of transactions are subject to approval by the shareholders of the REIT to be acquired, so there are hurdles to implementing REIT M&A transactions without the target REIT’s co-operation. Even so, REIT asset management companies cannot overlook the possibility of these transactions, considering that a shareholder holding 3% or more of the issued shares for the preceding six-month period can request that a shareholders’ meeting is held to approve these trans - actions. Given these circumstances, it is becoming increas - ingly important for REIT asset management compa - nies to regularly provide sufficient reports to share - holders, ensuring they understand the advantages of having the companies manage REIT assets, as well as reports on their investment policies and investment records. Furthermore, under the Act on Investment Trusts and Investment Corporations, a J-REIT may provide that shareholders who do not attend a shareholders’ meet - ing or exercise their voting rights will be deemed to agree to the proposal(s) submitted at that meeting in its certificate of incorporation (this is known as a “deemed votes in favour provision”). Shareholders of J-REITs include many individual and corporate inves - tors who are mainly focused on returns and are there - fore less likely to attend shareholders’ meetings or exercise their voting rights. Most J-REIT asset man - agement companies therefore provide deemed votes in favour provisions in their REIT certificates of incor - poration in order to constitute a quorum and pass the necessary resolutions at shareholders’ meetings.
However, as a general rule, a deemed votes in favour provision can also apply to important proposals such as those for the replacement of management compa - nies or the takeover, thereby making these transac - tions easier. In response, several REITs have amended their certificates of incorporation so that deemed votes in favour provisions do not apply to certain important agenda items (such as the dismissal of officers, termi - nation of a management agreement and dissolution). Current restructuring There have recently been some REIT mergers, includ - ing those in which the merged REITs shift from sector- specific to diversified REITs, making it easier to replace or rebalance asset portfolios and to increase AUM to grow faster. In addition to REIT mergers, the delisting of an infrastructure REIT (a REIT focused on invest - ments in solar power facilities) initiated by its sponsor has been conducted in recent years. Although there have been concerns about whether, and how, the squeeze-out of REIT minority shareholders was car - ried out, it has been recognised in several transactions that delisting a REIT is legally feasible by consolidat - ing shares until minority shareholders hold less than one share. There may be further restructuring activity (including M&A and delistings) in the REIT market. Security Token Offerings A security token offering (STO) is an attempt to issue a security that is managed and transferred using dis - tributed ledger technology (ie, blockchain). STOs are expected to reduce management costs for real estate funds and provide investors (including individual investors) with new small-lot real estate investments with middle-risk, middle returns in Japan. Amendments to the Financial Instruments and Exchange Act (the “FIEA”) and the Payment Service Act, effective on 1 May 2020, established regulations for STOs. Following this, several real estate funds suc - cessfully raised funds through STOs. There have been large STO transactions in which more than JPY10 bil - lion in security tokens have been issued. One of the leading methods for structuring real estate- backed STOs is to use a trust with certificates of beneficial interest. Unlike other types of equity instru - ments (eg, equity investments via anonymous partner -
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