JAPAN Trends and Developments Contributed by: Hiroshi Niinomi, Koki Hara, Naoto Yamamoto and Mitsuhiko Murata, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
The first hostile REIT M&A transaction was com - pleted in 2020. A minor shareholder called a shareholders’ meeting of a target REIT with the financial bureau’s permission. At the sharehold - er’s meeting, the existing management agree - ment was terminated, a new officer nominated by the minor shareholder was selected, and a management agreement with a new sponsor was executed. After the meeting, a merger was conducted between the REIT managed by the new sponsor and the target REIT. Another contemplated hostile transaction was a hostile bid to take over a listed office J-REIT’s shares, which resulted in the delisting of the REIT through a counter-bid and squeeze-out of minority shareholders by its sponsor. A REIT has relatively limited defensive measures against a hostile takeover bid compared with a company incorporated under the Companies Act. For example, “poison pills” and specially designed shares are not permitted under the Act on Invest - ment Trusts and Investment Corporations, which regulates REITs. The types of REIT M&A transactions are gener - ally as follows: • mergers between two REITs (via a consol - idation-type merger or an absorption-type merger); • the acquisition of J-REIT shares and the replacement of an asset management com - pany; and • the acquisition of all portfolio assets held by a REIT by the acquiring REIT. These types of transactions are subject to approval from the shareholders of the REIT to be acquired, so there are hurdles to implementing hostile REIT M&A transactions. Even so, REIT asset management companies cannot overlook
the possibility of such transactions, considering that a shareholder holding 3% or more of the issued shares for the preceding six-month peri - od can request that a shareholders’ meeting is held to consider such transactions. Under these circumstances, it is becoming more important for REIT asset management companies to regu - larly provide sufficient reports to shareholders and ensure that they understand the advantag - es of having such companies managing REIT assets in addition to reports on their investment policies and investment records. Furthermore, under the Act on Investment Trusts and Investment Corporations, a J-REIT may provide in its certificate of incorporation that shareholders who do not attend a shareholders’ meeting or exercise their voting rights will be deemed to agree to the proposal(s) submitted at that meeting (this is known as a “Deemed Votes in Favour Provision”). Shareholders of J-REITs include many individual or corporate inves - tors who are mainly focusing on returns and, therefore, are less concerned about attending shareholders’ meetings or exercising their vot - ing rights. As a result, most J-REIT asset man - agement companies provide Deemed Votes in Favour Provisions in their REIT certificates of incorporation in order to constitute a quorum and pass necessary resolutions at sharehold - ers’ meetings. As a general rule, however, a Deemed Votes in Favour Provision can also apply to important proposals such as those for the replacement of management companies or the above-mentioned hostile takeover – thereby making such transactions easier. In response to this, several REITs have amended their certifi - cate of incorporation in such a way that Deemed Votes in Favour Provisions do not apply to cer - tain important agenda items (such as dismissal of officers, termination of a management agree - ment, and dissolution).
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