Sabana-ESR merger: MAS says safeguards in place against conflicts of interest

Singapore

THE Monetary Authority of Singapore (MAS) on Friday clarified that its regulatory framework does not prohibit a shareholder group from owning substantial stakes in two real estate investment trust (Reit) managers managing Reits invested in the same property class.

This was 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 have the same sponsor, ESR Cayman.

Minority unitholders including Quarz Capital Management and Black Crane Capital had voiced potential "severe" conflicts of interest arising from ESR Cayman's controlling ownership of both managers, among their other concerns about the merger.

The unitholders last week wrote to regulators, "urgently" seeking guidance on how to resolve the alleged conflict. They also called on the sponsor to divest its stake in Sabana's manager so the latter could be acquired by the Reit at tangible book value or by third parties without overlapping investment mandates.

On Friday, MAS pointed out there are regulatory safeguards under the Securities and Futures Act to mitigate potential conflicts of interest.

For instance, independent directors must make up at least half of boards of Reit managers where unitholders do not have the right to appoint directors.

For Sabana, its manager's board is composed entirely of independent directors, with no representation of directors from either the sponsor or ESR-Reit's manager, the Sabana manager clarified in a filing on Friday. There is also no overlap of management teams between the Sabana manager and the ESR-Reit manager.

Another regulatory safeguard is that Reit managers and their directors have a legal obligation to act in unitholders' best interests, and prioritise unitholders' interests over those of the manager and its shareholders.

In its filing, the Sabana manager said its board is proposing the merger by way of a trust scheme of arrangement for the consideration of independent unitholders, "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, the manager added.

MAS said it may require financial institutions to put in place additional measures to address specific risks where needed, including that of conflicts of interest. "We have done so in the case of ESR-Reit and Sabana Reit," the financial regulator said.

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

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

Those abstaining from voting on the scheme are ESR-Reit's manager, its concert parties and the common substantial unitholders 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. The Sabana manager will also abstain from voting on the scheme.

Moreover, the scheme will require court sanction before it can become effective, which serves as "additional protection" for independent Sabana unitholders, the manager said.

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

The board also said the ESR-Reit merger was the only formal offer it had ever received.

Deloitte & Touche Corporate Finance is the appointed independent financial adviser (IFA) for the independent directors of the Sabana manager and its trustee on the scheme.

MAS emphasised that Singapore's regulatory framework governing mergers and takeovers is well-established and ensures that shareholders or unitholders are given sufficient information, independent advice and time to consider and decide on the offer.

Both MAS and the Sabana manager encouraged unitholders to carefully study the scheme document, including the IFA's assessment and advice, in deciding how they would vote.

Separately, ESR Cayman on Friday said it is "aware of the perceived conflicts of interest" resulting from its interests in ESR-Reit and Sabana and their managers.

But it added that while there is common ownership of the Reits, there is no common sponsorship. ESR Cayman's stake in Sabana is held through a trust, with an independent party acting as trustee. ESR Cayman also said information related to Sabana Reit's operations, acquisitions, divestments and strategic directions stay within the Reit's manager.

"The strategic directions, businesses and affairs of ESR-Reit and Sabana Reit are managed and operated entirely independently of each other," ESR Cayman added.

Sabana units finished flat at S$0.37 on Friday while ESR-Reit units were unchanged at 38.5 cents.