SOMMARIO:

Introduction - 1. Operational Governance and Investment Targets. – 1.1. Operational Governance - 2. Legal Structures in M&A Context - Conclusion - NOTE

Introduction

A “Real Estate Investment Trust,” often abbreviated as “REIT,” is a special purpose investment vehicle in the form of a trust or corporation that invests in real estate or ancillary rights in real estate. It has special tax status whereby investors of real estate investment trusts can avoid taxation by way of a so-called pay-through or pass-through treatment. The concept was introduced in the US in the 1960s (“US Real Estate Investment Trust”). Now, many countries all over the world including the Netherlands, France, Singapore and Japan have introduced Real Estate Investment Trusts. On September 10, 2001, the first Japanese Real Estate Investment Trusts (“Japan Real Estate Investment Trusts,” also often abbreviated as “J-REITs”) were listed on the Tokyo Stock Exchange (“TSE”). Since then, the market of Japan Real Estate Investment Trusts has rapidly grown. Starting from two issuers with a market capitalization of approximately JPY 260 billion (USD 3.1 billion), it had grown to 41 issuers with a market capitalization of approximately JPY 6.8 trillion (USD 80 billion) by the end of May, 2007. However, in the aftermath of the 2008 global financial crisis, the market of Japan Real Estate Investment Trusts declined sharply: the TSE REIT Index had dropped nearly 70% by November 2008 from its peak in May 2007. New City Residence Investment Corporation, the then-second largest residential Japan Real Estate Investment Trust, filed for civil rehabilitation proceedings (similar to Chapter 11 proceedings in the US) in October, 2008 and was the first Japan Real Estate Investment Trust to do so. At the moment, most Japan Real Estate Investment Trusts are being traded at far less than net asset value, rendering them potentially attractive investments. In order to save the Japan Real Estate Investment Trusts industry, the Japanese government also began taking steps to promote the merger and acquisition of Japan Real Estate Investment Trusts by amending or clarifying certain tax codes as well as the Investment Trust and Investment Company Act [continua ..]

1. Operational Governance and Investment Targets. – 1.1. Operational Governance

 – 1.1. Operational Governance. – 1.1.1. The ITA. – The greatest difference between Japan Real Estate Investment Trusts and US Real Estate Investment Trusts is their governing law. “Real estate investment trust” [2] means any corporation, trust, or association that meets certain requirements under the Internal Revenue Code in the US. In other words, being a Real Estate Investment Trust is simply a tax status. Therefore, the investment vehicle determines the applicable governing law. For example, if a US Real Estate Investment Trust is a corporation incorporated in Maryland, it will be governed by Maryland Corporate Law. In Japan however, a Japan Real Estate Investment Trust must be incorporated according to the ITA [3]. Therefore, unlike in the US, a joint stock corporation (kabushiki kaisha) incorporated according to the Company Act (kaisha ho, Law No. 86 of 2005) cannot become a Japan Real Estate Investment Trust. And as I discuss in detail below, the operational governance of a Japan Real Estate Investment Trust is generally less flexible than a Japanese joint stock corporation or a US corporation. For instance, Japan Real Estate Investment Trusts must delegate the management of their assets to a licensed investment management corporation (in most cases, the sponsor’s affiliate) [4]. 1.1.2. Board of Officers. – A Japan Real Estate Investment Trust is governed by a board of officers (yakuinkai), which is comprised of an executive officer (shikko yakuin), who has the authority to conduct any of the Japan Real Estate Investment Trust’s business and perform in or outside of court any act regarding any of its business as its representative, and supervisory officers (kantoku yakuin) whose duties are to supervise the executive officer and to vote, as members of the board, on certain material transactions entered into by the Japan Real Estate Investment Trust such as the execution of merger agreements [5]. Resolutions of the board of officers are adopted by a simple majority of the officers entitled to vote when a majority of all the officers is present [6]. The board must have at least [continua ..]

2. Legal Structures in M&A Context

In this chapter, I first discuss transaction considerations and what options are available for consensual M&As. Then, I discuss the available defensive measures to hostile takeover attempts while comparing them to those available in the US. Briefly though, due to the recent revisions of the ITA and certain tax codes, consensual mergers among the listed Japan Real Estate Investment Trusts have become a viable survival option in the currently severe market. On the other hand, only few defensive measures to hostile takeover attempts are available in Japan Real Estate Investment Trusts. 2.1. Consensual Transactions. – Because it is still difficult to find sources for debt and equity finance under current market conditions, it is hard for Japan Real Estate Investment Trusts to grow their portfolios by acquiring new assets. To this end, mergers of Japan Real Estate Investment Trusts have been garnering much attention. New amendments to the ITA and certain tax codes support these mergers among the listed Japan Real Estate Investment Trusts, and as of September 30, 2010, seven had been announced or completed. However, there are some caveats to bear in mind. 2.1.1. Limited M&A Schemes.– In addition to mergers, various M&A schemes are available to Japanese joint stock corporations. Corporation splits (kaisha bunkatsu) [33], share exchanges (kabushiki kokan) [34], share transfers (kabushiki iten) [35] and cash-out mergers are some examples [36]. In the context of M&As of Japan Real Estate Investment Trusts however, only mergers are possible, and only stock for stock mergers (i.e., where consideration for an absorbed corporation’s share must be those of an existing corporations) were permissible until last year. Thus, cash payments were not permissible even in consideration for adjustment of fractions. It is also prohibited for a Japan Real Estate Investment Trust to own a majority of voting rights in other corporations including Japan Real Estate Investment Trusts under the ITA [37]. Therefore, the merger of a Japan Real Estate Investment Trust by the [continua ..]

Conclusion

Though Japan Real Estate Investment Trusts and US Real Estate Investment Trusts share certain similarities in terms of operational governance and investment targets, Japan Real Estate Investment Trusts are more rigid since 1) they must be passive entities and business activities must be outsourced, 2) they cannot issue any class units or rights, and 3) J-UPREITs are not yet permitted under the ITA. With respect to consensual mergers, the acquirer of a Japan Real Estate Investment Trust or US Real Estate Investment Trust must take into account not only the ITA and the applicable corporate laws, but also the relevant tax codes and other regulations. On the other hand, Japan Real Estate Investment Trusts are more vulnerable to hostile takeover attempts since 1) the anti-takeover measures available to US Real Estate Investment Trusts are not available to Japan Real Estate Investment Trusts, and 2) there are essentially no anti-takeover measures available to Japan Real Estate Investment Trusts if the bidder already owns his own investment management company. Nonetheless, it is difficult for a hostile bidder to “squeeze out” the minority of unitholders since Japan Real Estate Investment Trusts do not permit cash-out mergers and cash payments upon merging are only allowed for certain purposes, such as the adjustment of fractions.

NOTE