There are two ways to look at the first ever hostile takeover attempt in Japan’s $130bn real estate investment trust (Reit) sector. It is either going to cause huge disruption, which is great, or cause huge disruption, which is terrible.
The conundrum has surfaced over the past few weeks after Star Asia, which has a Tokyo-listed Reit, began a pincer movement on a smaller rival, Sakura Sogo.
The slightly smoother half of the claw is the submission on May 10 of a merger proposal that Sakura immediately said was not (in caps and underlined) in the interests of its unit-holders. The more jagged part was a formal demand for an extraordinary meeting of Sakura unit-holders by Lion Partners, a Star Asia affiliate that had built the minimum 3 per cent stake in Sakura required to do that.
At that still-hypothetical meeting — the authorities are due to decide whether it should go ahead by the weekend — Lion will propose installing its own head as Sakura’s executive director and replacing Sakura’s asset manager with Star Asia. The consternation in the Sakura camp is acute because the whole ploy may well succeed by taking advantage of a rule that has existed since Japan’s Reit sector was established in 2001 but has never been tested in this way.
Under a “deemed approval” system that seemed an expedient idea at the time, non-voting unit-holders are counted as having voted in support of any given proposal. That leaves Sakura hoping against hope that its large contingent of elderly individual unit-holders will bother to vote against Lion’s proposal — but knowing from experience that they almost certainly will not.
This is where the debate over market disruption begins. The two big questions here are, first, whether hostile action of any kind can have a legitimate role in Japanese capital markets and second, whether authorities should tolerate the use of a rule intended for one purpose when it is used to achieve another. The Sakura view is that the precedent is outright dangerous for the J-Reit sector, creating an unpredictable environment where there is currently stability.
Sakura is fortunate that stability looks particularly attractive right now. The TSE Reit index, which tracks Japan’s 63-listed J-Reits, has been climbing steadily for the past 18 months, while the broader market has fallen.
But more broadly, Japan could always use a little disruption and a lesson that rules in capital markets are there to be tested. Equity investors have been muttering for some time that, for all the progress on corporate governance, stewardship and so on, what the market really needs is the jolt of a successful hostile takeover of a company that, for example, is trading with a market capitalisation lower than its net cash.
Nobody makes a move, though, because the history of resistance and failure is formidable. It may now be for the sleepy J-Reit sector to decide how far attitudes have changed.