WHAT exactly does it mean when a Reit is taken over? In the case of other corporate entities, it’s fairly clear that when a general offer is made after the 30 per cent trigger point is reached, control of the company and the subsequent economic decision-making will pass into the hands of the successful takeover party. With Reits though, the situation is not as clear – mainly because economic decision-making does not lie with shareholders but rests with the Reit manager instead.
It was in June 2007 that the Securities Industry Council announced that the Singapore Code on Takeovers and Mergers will be extended to Reits – about five years after the first Reit was floated on the SGX. This means a party whose stake in a Reit hits the 30 per cent threshold would have to make a general offer for remaining units in the Reit. This is the same as for any listed company on the Singapore Exchange.
But Reits are unlike other listed entities because they are externally managed by a manager appointed by the trust.
In the case of other companies, anyone owning the controlling block of shares can control the company’s management, assets and cashflow.
But when you buy units in a Reit, you own its assets but not the manager. So even if a party owns a controlling stake in the trust, it has no control over distribution of its cashflow as this rests with the Reit manager, as spelled out in the trust deed as well as the Reit guidelines.
One could thus argue that gaining a controlling block of units in a Reit does not necessarily give you control of the trust’s underlying economics, which is vested with the manager.
Another example of the influence that a Reit manager has over the trust’s business is that the manager gets to recommend what assets the trust should buy and on what terms – including pricing and timing of the acquisition. This includes purchases from the Reit’s sponsor, which may also own the manager.
What this means it that if a new entity takes control of a Reit manager, one could argue that control of the Reit’s economics has actually passed to this new investor, even if this party did not buy any units in the Reit or bought less than the 30 per cent threshold that will trigger a takeover offer. The new investor could be prepared to pay a premium for the stake in the Reit manager but not for units in the Reit. In this instance, the new investor would have managed to take control of the Reit’s manager – and the trust’s economics – without making an offer to other unitholders.
In another scenario, even if the incoming investor in the Reit does reach the 30 per cent mark and makes a general offer to other unitholders, it could structure a deal such that the price at which it buys the Reit units reflect no or low premium; in exchange, it pays a handsome premium for a stake in the Reit manager. Hence, current guidelines allow an incoming investor to shift value between units in the Reit and the price of the management company.
The long and short of it is that Reit unitholders are deprived of an offer – or a good offer. What’s more, bad Reit managers are rewarded when an incoming investor pays a premium for the Reit manager as a cheap way to gain control (and where the premium paid for management control is not made available to minority unitholders) instead of making a general offer for the Reit and having to pay a premium for units in the Reit.
There is thus a need for the authorities to study whether transfer of ownership in the Reit manager is tantamount to a passing in control of the Reit itself.
Current interpretation of takeover guidelines for a Reit – defined as gaining control of at least 30 per cent ownership of the trust but without any reference to the Reit manager – is open to being exploited by incoming investors looking for a cheap way to control a Reit as well as bad Reit managers who’ll be handsomely rewarded in the process for their stake in the Reit management company.
The takeover guidelines for Reits require a closer look. Sure it will not be easy. How does one define passing of control of a Reit manager? Should it be when an incoming investor buys a 20 per cent stake in the management company? Or should the limit be set higher – at say, 50 per cent? And requiring the investor to make a general offer for the Reit itself could also have other implications. What happens if this party then turns out to be a bad manager for the Reit? If other unitholders subsequently want to get rid of it, they may not be able to muster enough support to pass a resolution at an EOGM to oust the manager.
Then there will be cries from other quarters that such rules would stifle the property fund management industry in Singapore. There must be room for pure Reit managers, who do not take any stake in the Reit, goes the argument. But such a breed of managers may not have their interests fully aligned with unitholders’, and may engage in activities that boost their fee income but which may be detrimental to unitholders – such as buying assets that could be earnings dilutive but which would enable them to cream off a nice acquisition fee and boost their management fees as the value of the Reit’s deposited property increases.
Still, the issue of when the control of a Reit passes on warrants a re-look by the authorities. This will protect the interests of minority investors as well as the reputation of Singapore as a Reits hub in Asia.
Source: Business Times, 24 Dec 2009