Investor advisory group ISS has waded into an unprecedented hostile takeover battle in Japan’s $130bn real estate investment trust sector with a call for shareholders to reject both offers.

The blunt advice, which was sent to investors on Tuesday, could be pivotal in deciding the fate of Sakura Sogo Reit Investment — a $300m minnow that has become the first test of the Japanese reit market’s appetite for either friendly or hostile mergers.

Advisers to Sakura calculate that, at a time when there is much more scrutiny of Japanese corporate stewardship, the ISS recommendation is likely to influence the decisions of institutional and retail shareholders with a combined 50 per cent of the votes likely to be cast at two extraordinary general meetings next week. 

The two meetings — one in the morning to vote on the hostile deal, and an afternoon meeting to vote on the friendly one — are shaping-up as one of the more bizarre events in recent Japanese investor history, and the culmination of a battle that may hinge on an untested rule.

In June, Sakura was confronted with a two-step hostile merger attempt by its rival, Star Asia Investment, to dismiss Sakura’s executive director and asset manager then install itself as the successor to both before fusing the two reits.

Star Asia made the move after using an affiliate to buy a large enough stake in Sakura to call an extraordinary general meeting of shareholders. In July, Sakura counterpunched by agreeing a friendly merger with the much larger Mirai Reit, which is managed by the giant trading house Mitsui. 

ISS analyst Takeyuki Ishida argued that both proposals raised valuation concerns and that Sakura’s performance did not indicate that an urgent change of its executive director and asset manager was necessary. 

As well as testing the Japanese market’s taste for a fight, the tug of war over Sakura may also become a test of an obscure loophole in the rules on how shareholder votes are counted. 

Star Asia’s hopes of success appear to rest partly on the application of “deemed approval” — an untested rule that counts investors who do not vote as having voted in favour of any given proposal. Given that many individual holders of Japanese Reits are elderly and scattered around Japan, Sakura believes there is a clear danger that many of them will end up inadvertently voting for Star Asia’s proposal. 

The problem raised by this is that Star Asia has managed to ensure that the EGM to vote on its proposal is being held some hours before the meeting to vote on Mirai’s friendly approach. Efforts by Sakura to convince Star Asia to combine meetings and allow shareholders a straight vote on both proposals have not succeeded. In theory, deemed approval voting could hand Star Asia a victory that would call the afternoon meeting into question.

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