Proposed merger of Sabana Reit and ESR-Reit

Safeguards in place against conflict of interest, says MAS

It responds to queries on proposed merger of 2 Reits whose managers share same sponsor

The Monetary Authority of Singapore has noted that a shareholder group can own substantial stakes in two Reit managers that manage trusts invested in the same property class, after minority unit holders voiced concerns over conflicts of interest aris
The Monetary Authority of Singapore has noted that a shareholder group can own substantial stakes in two Reit managers that manage trusts invested in the same property class, after minority unit holders voiced concerns over conflicts of interest arising from the proposed merger between Sabana Reit and ESR-Reit.ST FILE PHOTO

A shareholder group can own substantial stakes in two real estate investment trust (Reit) managers that manage trusts invested in the same property class, the Monetary Authority of Singapore (MAS) noted yesterday.

Its clarification came in response to queries about the proposed merger of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) and ESR-Reit, whose managers share the same sponsor, ESR Cayman.

Minority unit holders claim there might be potential "severe" conflicts of interest arising from ESR Cayman's controlling ownership of both managers, among other concerns about the merger. The unit holders "urgently" sought guidance from MAS and Singapore Exchange Regulation last week on how to resolve the alleged conflict.

MAS noted yesterday that there are safeguards under the Securities and Futures Act to mitigate potential conflicts of interest.

For instance, independent directors must comprise at least half of the boards of Reit managers where unit holders do not have the right to appoint directors.

The Sabana manager's board is composed entirely of independent directors, with none from either ESR Cayman or the ESR-Reit manager, the manager said in a bourse filing yesterday. There is also no overlap of management teams between the Sabana manager and the ESR-Reit manager.

MAS noted that Reit managers and their directors must act in the best interests of unit holders and prioritise their interests over those of the manager and its investors.

The Sabana manager's filing said its board is proposing the merger by way of a trust scheme of arrangement "in accordance with its fiduciary duties". A trust scheme of arrangement is a "fair and equitable" way of effecting the merger, as it will provide a binary outcome - "all or nothing" - for the proposal, it added.

MAS can require financial institutions to put in place additional measures to address specific risks, including conflicts of interest.

"We have done so in the case of ESR-Reit and Sabana Reit," it said.

MAS also noted that only the Sabana unit holders who are independent have a say in whether to approve or reject the proposed merger based on the financial terms put forth by the Reit managers.

The scheme requires approval by a majority in number of independent unit holders representing at least 75 per cent in value of the units held by those present and voting.

ESR-Reit's manager, its concert parties and the common substantial unit holders of both Reits - including ESR Cayman, which holds 20.88 per cent of Sabana; Chinese billionaire Tong Jinquan, who holds 3.3 per cent; Wealthy Fountain Holdings and e-Shang Infinity Cayman - will abstain from voting.

The Sabana manager must also abstain from voting on the scheme, which will require court sanction before it can become effective.

This serves as "additional protection" for independent Sabana unit holders, the manager said.

It added that its board went through a "thorough" process to evaluate the merger, involving its management team as well as financial advisers engaged to evaluate the commercial terms.

The board of the Sabana manager also noted that the proposed merger was the only formal offer it received.

Sabana units closed unchanged at at 37.5 cents yesterday. ESR-Reit was unchanged at 38.5 cents.

THE BUSINESS TIMES

A version of this article appeared in the print edition of The Straits Times on August 29, 2020, with the headline 'Safeguards in place against conflict of interest, says MAS'. Print Edition | Subscribe