J-REIT Reform Finance and Insider Trading Regulations

Transcription

1 April 2, 2013 J-REIT Refrm Finance and Insider Trading Regulatins By Mitsutshi Uchida and Shusaku Iwasaki On December 7, 2012, the wrking grup f the finance cmmittee f the Financial Services Agency f Japan (the Wrking Grup ) issued its final reprt (the Final Reprt ) with respect t the refrm f the legal regime f Japanese real estate investment trusts [1] ( J-REITs ). The Japanese gvernment plans t submit a bill t effect the refrm f J-REITs in the current Diet sessin. A. PURPOSE OF J-REIT REFORM The main purpse f the Wrking Grup was t review the current J-REIT system, which started in 2001, and t prpse refrms fr imprvements. In rder t increase the attractiveness f J-REITs t investrs arund the glbe and lead t greater assets and better management efficiency, an urgent pririty was t make the J-REIT system cmparable t the glbal standard. The Wrking Grup was particularly fcused n (i) imprvements t financial stability and (ii) the implementatin f mechanisms t attain mre trust frm investrs. In this client alert, amng the varius refrms prpsed, we wuld like t intrduce the fllwing aspects: (i) increased means fr fund raising and capital management and (ii) applicatin f the insider trading regulatins. B. INCREASED MEANS FOR FUND RAISING AND CAPITAL MANAGEMENT FOR J-REITS 1. New Measures t be Implemented While the J-REIT market has shwn trends f recvery in recent mnths, the glbal financial crisis fllwing the turmil in the subprime market has revealed vulnerability and the lack f adequate means f financing J-REITs during financially challenging times. [2] The Wrking Grup intends t respnd t this issue by implementing the fllwing three measures: (a) Rights Issues In the Final Reprt, the Wrking Grup cncluded that it recmmends the intrductin f a system that wuld allw J-REITs t cnduct rights issues (the Rights Issues ), as this wuld cntribute t the peratinal stability f J-REITs. In essence, the Rights Issues enable J-REITs t raise funds in financially challenging envirnments, while prtecting the existing investrs frm dilutin. Expansin f financing alternatives by J-REITs wuld cntribute t raising the credibility f the J-REIT system by prviding a cntingency plan t respnd t ther pssible financial crises. [1] In Japan, in practice, REITs take the legal frm f an investment crpratin (tshi hjin), as ppsed t the frm f investment trusts. In this newsletter, a J-REIT refers t an investment crpratin that is listed n a Japanese stck exchange and invests primarily in real estate assets. [2] The serius impact even led t ne J-REIT, New City Residence Investment Crp., filing fr bankruptcy in Octber Mrrisn & Ferster LLP mf.cm Attrney Advertising

2 Specifically, it is likely that the Investment Trust and Investment Crpratin Law (the ITICL ) will be amended t permit J-REITs t issue warrant-type securities [3] t unithlders fr the purpses f cnducting Rights Issues. These warrant-type securities wuld allw the unithlders t acquire investment units [4] in J-REITs (the Rights ). Befre the Japanese gvernment submits a prpsed amendment t the ITICL, certain issues must be cnsidered, fr example, when the Rights can be issued and hw the listing f the Rights may be established n a stck exchange. Additinally, despite a series f refrms t Japanese law and rules f stck exchanges and clearing institutins remving many bstacles fr Japanese issuers t cnduct Rights Issues, there have been nly a few cases where rdinary business crpratins (i.e. Kabushiki Kaisha) have cnducted Rights Issues in Japan. [5] Further legal refrms and effrts by Japanese market participants may be necessary in rder t make Rights Issues a mre ppular and established financing methd in Japan. (b) Acquisitin f Treasury Investment Units In the current J-REIT system, except in certain limited circumstances, [6] a J-REIT is prhibited frm acquiring its wn investment units. The Final Reprt states that the acquisitin f its wn investment units (the Treasury Investment Units ) shuld be allwed, as it cntributes t the peratinal stability f the J-REITs. Thrugh the permitted acquisitin f Treasury Investment Units, J-REITs will have brader tls t structure and effect their capital strategies. Hwever, it is still unclear t what extent the acquisitin f Treasury Investment Units will be permitted. Fr a Kabushiki Kaisha, the acquisitin f its wn shares is nly allwed, as with the declaratin f dividends, t the extent there are retained earnings and ther distributable amunts within the cmpany as defined in the Cmpany Law. On the ther hand, under the current prvisins f the ITICL, J-REITs can make distributins withut being subject t the requirement f having a distributable amunt, [7] and therefre by analgy, acquisitin f Treasury Investment Units may als be permissible withut any such restrictin, unless the ITICL prvides therwise. The maximum amunts available fr acquisitin, acquisitin prcedures and the gverning bdy that wuld authrize the acquisitin, tax treatment and the after-treatment f acquired Treasury Investment Units are all utstanding issues that need t be cnsidered. [3] The rdinary business cmpanies (i.e. Kabushiki Kaisha) under the Cmpanies Law f Japan (the Cmpany Law ) can issue stck acquisitin rights (shinkabu yyaku ken) that represent rights t acquire shares at pre-determined purchase price and are transferrable t ther investrs. In Japanese Rights Issues, the issuer allts stck acquisitin rights t all existing sharehlders n a pr rata basis, free f cnsideratin, and such stck acquisitin rights are listed n a stck exchange. [4] These are the equity shares f J-REITs (i.e. equivalent t shares in Kabushiki Kaisha). [5] Issuers f these Rights Issues were Japanese small r mid-sized listed cmpanies, all f which were nn-cmmitment type Rights Issues where n securities cmpany was invlved as underwriter in the ffering (i.e. these rights have adpted a mechanism where all unexercised rights lapse). [6] Fr instance, in the cntext f mergers f J-REITs, the assumptin f the Treasury Investment Units (as defined herein) frm the disslving J-REIT and the purchase f the Treasury Investment Units frm bjecting investrs are permitted (e.g. Articles 80, and f the ITICL). [7] Hwever, in additin t the minimum net asset requirement under the ITICL, the rules f the Investment Trust Assciatin f Japan prvide fr certain restrictins n distributins by a J-REIT in excess f its retained earnings (i.e. return f capital). Specifically, such distributins must be made with (i) 60% f the depreciatin expenses fr the relevant fiscal perid r (ii) if the amunt f the incme prescribed under the same rules is less than the taxable incme, the amunt f such taxable incme Mrrisn & Ferster LLP mf.cm Attrney Advertising

3 (c) Capital Reductin The Final Reprt als prpsed t allw J-REITs t cnduct capital reductin withut returning capital t unithlders ( Capital Reductin withut Cnsideratin ). Capital Reductin withut Cnsideratin has been advcated by the J-REIT industry fr sme time. The issue arises, fr example, when the market value f managed real estate substantially drps and requires the J-REIT t bk an impairment lss. Due t the difference in the lss recgnitin rules under Japanese GAAP and tax laws, impairment lsses may cause high crprate taxes t be impsed n J-REITs. Capital Reductin withut Cnsideratin is said t prvide a straightfrward methd fr a J- REIT t avid this crprate tax cnsequence. 2. Other Measures Discussed The Wrking Grup als explred the feasibility f cnvertible investment crpratin bnds [8] and different classes f investment units (e.g. nn-vting preferred units). Hwever, with the simple gvernance structure used in J-REITs, it is difficult t balance the interests f different investrs. The implementatin f these measures was cncluded t be premature and will nt be permitted fr J-REITs at this time. C. APPLICATION OF INSIDER TRADING REGULATIONS TO INVESTMENT UNITS OF J-REITS The investment units f J-REITs are currently nt subject t the insider trading regulatins (the Insider Trading Regulatins ) under the Financial Instruments and Exchange Law f Japan (the FIEL ). This is mainly due t the fact that investment units f J-REITs were believed t have little risk f insider trading because the prices were thught t be determined based n the net asset value f managed real estate. Hwever, it has becme clear that the prices f the investment units are vlatile and greatly affected by the market frces. Therefre, in rder t preserve the trust f the investrs and the integrity f the market, the applicatin f the Insider Trading Regulatins is nw seen as necessary with respect t the J-REIT investment units. 1. Final Reprt In the Final Reprt, it has been cncluded that the investment units f J-REITs shuld be subject t the Insider Trading Regulatins. In additin, the Final Reprt especially pinted ut that (i) in light f the fact that the asset managers (the Asset Managers ) f J-REITs acquire, hld and manage the material infrmatin f the acquiring assets, the fficers, emplyees and ther related persns f the Asset Managers shall be treated in the same way as thse f the J-REITs themselves and (ii) given that the parent cmpany f the Asset Manager (the Spnsr ) plays an imprtant rle in the prvisin f persnnel, knw-hw and ptential investment assets, the Spnsr shuld be subject t the Insider Trading Regulatins as well. [9] [8] Cnvertible investment crpratin bnds are bnds that culd be cnverted int investment units with a predetermined cnversin price. [9] Under the Insider Trading Regulatins, certain crprate insiders (e.g. directrs, emplyees, parties wh cnduct transactins with the listed cmpany) as specifically enumerated in the FIEL, and any persn wh directly receives nn-public material infrmatin frm such crprate insiders, are prhibited frm trading securities f a listed cmpany befre such material infrmatin is made public Mrrisn & Ferster LLP mf.cm Attrney Advertising

4 The Final Reprt als indicated that due t the distinct nature f J-REITs, the events that influence market prices f investment units differ frm thse f shares f Kabushiki Kaisha and als tend t nt be clearly evident. Based n histrical data f the events that have led t investment unit price changes, the Final Reprt prvided examples f thse changes as fllws: Changes in the cntent and cnditins f the investment units (e.g. annuncements f public fferings); Changes in the J-REIT assets (e.g. annuncements f majr tenant departures; annuncements f changes in financial frecasts); Changes in the peratins r business f the J-REITs (e.g. annuncements f bankruptcy); and Changes in the peratins r business f the Asset Manager r Spnsr changes (e.g. annuncements f changes f Spnsrs). Cntact: In the prpsed amendment t the ITICL, the details f material infrmatin subject t insider trading restrictins will likely be structured arund these events. [10] 2. Other Develpments in Insider Trading Regulatins In respnse t recent vilatins f the Insider Trading Regulatins in equity fferings by Japanese issuers, the Financial Services Agency has annunced a separate plan f further general amendments t the Insider Trading Regulatins. Under the prpsed amendments, transmitting nn-public material infrmatin fr the purpse f insider trading r encuraging trading while withhlding such infrmatin will be included in the categries f illegal actins. Als, the penalties t be impsed n investment managers r financial intermediaries (such as securities cmpanies) fr vilatin f the Insider Trading Regulatins will be revamped t achieve effective enfrcement. These amendments, nce intrduced, wuld equally apply t J-REIT issuers, Asset Managers, Spnsrs and investrs. Mitsutshi Uchida Tky muchida@mf.cm Shusaku Iwasaki San Francisc +1 (415) shusakuiwasaki@mf.cm Abut Mrrisn & Ferster: We are Mrrisn & Ferster a glbal firm f exceptinal credentials. Our clients include sme f the largest financial institutins, investment banks, Frtune 100, technlgy and life science cmpanies. We ve been included n The American Lawyer s A-List fr nine straight years, and Frtune named us ne f the 100 Best Cmpanies t Wrk Fr. Our lawyers are cmmitted t achieving innvative and business-minded results fr ur clients, while preserving the differences that make us strnger. This is MF. Visit us at [10] It is als likely that there will be a basket prvisin that picks up unremunerated items f infrmatin t be included in the categries f material infrmatin in the same way the current Insider Trading Regulatins d with respect t shares f Kabushiki Kaisha Mrrisn & Ferster LLP mf.cm Attrney Advertising

5 Because f the generality f this update, the infrmatin prvided herein may nt be applicable in all situatins and shuld nt be acted upn withut specific legal advice based n particular situatins. Prir results d nt guarantee a similar utcme Mrrisn & Ferster LLP mf.cm Attrney Advertising