The Japanese authorities first took steps to help encourage liquidity in the Japanese real estate market through the introduction of a conduit entity that could be used in real estate transactions prior to 2000, when the ‘Law Concerning the Liquidation of Specified through a Special Purposes Company’ (in Japanese the ‘特定目的会社による特定資産の流動化に関する法律’ or ‘or tokutei mokuteki kaisha ni yoru tokutei no shisan non ryudouka ni kansuru houritsu’ and referred to be low as the ‘SPC Law’) was initially introduced. However, this original law, often referred to as the ‘Old SPC Law’, was not immediately widely used.
Although the Old SPC Law included significant tax benefits, the prior approval of an asset liquidation Plan (below the ‘TMK Asset Liquidation Plan’) was required before an entity subject to the law could qualify for tax benefits. The approval of these plans was often a very bureaucratic process that could not be accommodated in the time required to close a transaction. However, the Old SPC Law was substantially revised in the year 2000 to allow it to be more easily used, and structures based on the new law are now widely used in real estate transactions.
Structures based on this law are often referred to as ‘TMK structures’, where TMK refers to ‘tokutei mokuteki kaisha’, which is the Japanese term for ‘special purpose company’.
This article reviews some aspects of the initial set up of a TMK, the contents of the required TMK Asset Liquidation Plan and limitations on the activities of the TMK. Later articles will consider the criteria that must be met in order to apply the TMK tax benefits.
Note that the proper qualified legal advice should always be taken prior to setting up a TMK.
Notification of commencement of a TMK business
A TMK is essentially a Japanese company that has been set up following specified procedure in the SPC Law. One of the key aspects of these procedures is the submission of a report notifying the local finance bureau of the commencement of a TMK business. This notification requirement replaced the pre-approval requirement under the Old SPC Law.
The submission of this notification can be registered electronically through this web page (link in Japanese), which includes an extensive list of the documents that are required along with the submission. There is a link to the formal submission document itself on the web page here (link in Japanese).
Finance offices around the region maintain on the internet a list of TMKs that have registered, for example please refer to the Kanto list (including Tokyo and surrounding areas link in Japanese) for November 2008 and the Kanto list (Osaka and surrounding areas – link in Japanese) for the same period.
Contents of the TMK plan
Below is a brief summary of the items that are include on the report on the commencement of a TMK business
- The period of the asset liquidation plan
- Information concerning borrowings or the issue of securities to purchase the underlying asset, for different classes of securities as noted below:
Preferred investment securities
- The upper limit for the number of securities
- The terms of the preferred investments including preferential treatment in relation to distributions (of profit or of residual assets)
- Other terms relating to the issue or disposition of the securities
- The total amount
- The terms of the specified bonds
- Other matters concerning the issue or repayment of the specified bonds
Specified convertible securities
- The total amount
- The terms of conversion
- The terms of preferred investments upon conversion
- The period under which the conversion can be required
- Other terms concerning issue or repayment of the specified convertible securities
Specified bonds with attached rights to invest in newly issued preferred securities.
- Total amount
- The nature of the rights to subscribe in newly issued preferred securities
- The period through which such right can be exercised and whether or not such rights in themselves can be transferred.
- Whether or not any payment is required for the issue of new preferred securities at the time that rights are exercised
- In relation to distributions of profits whether or not, in the event of exercise of the rights in this or the previous year, the new preferred securities will have been deemed to have been issued.
Specified short term bonds.
- The limit to the amount issued
- Other items concerning the issue or repayment of specified short term bonds
Specified promissory notes
- The limit to the amount issued.
- Other terms related to the issue or repayment of the specified short term bonds
Special purpose borrowings
- The limit to the amount issued.
- Other terms related to such borrowings or their repayment
- The nature of the specified assets subject to securitization (see below for limitations on the asset type): The time of their acquisition and other information concerning the specified assets or the seller of those assets.
- The method of managing and dealing with specified assets, whether or not a trustee has been appointed to deal with the business of managing or dealing with the assets; any other matters concerning the management or disposition of the assets.
- Any conditions relating to other borrowings other than those specified above.
- Other items
Permitted activities of the TMK
A TMK is established under the asset liquidation law, so in principle is not permitted to carry on any other business other than that required to securitize the assets concerned. Furthermore, there are also limitations placed on other actions of the TMK from the point of view of investor protection. Below are brief notes on these additional limitations.
Entrustment of specified assets to a trust company
In principles the activities related to the management and disposition of the assets of the TMK should be entrusted to a trust company or similar company (SPC Law article 200 I).
Limitation on assets that can be acquired by a TMK
The TMK is not permitted to purchase certain categories of assets that maybe an obstacle to the proper carrying out the asset liquidation business of the TMK (SPC Law article 212 I). These are as follows;
- Investments interests in certain specified partnerships.
- Investments interests in specified Japanese silent partnerships.
- Beneficiary interests in money trusts (note that beneficiary interests in certain trusts used for lending are not included in this exception)
- Other investments whether is a concern it may interfere with the carrying out of the liquidation business of the TMK.
TMK’s are also not permitted to purchase shares above a certain specified ownership limits (SPC Law article 212 II). The shareholder obligations to supervise the business of a company arising from shareholdings are not seen as compatible with the concept that the TMK should solely be carrying on an asset liquidation business.
Prohibition on the lending or disposal of specified assets.
Other than when permitted under the asset liquidation plan, the TMK is not permitted to lend, sell, exchange or provide as collateral the specified assets.
Limitation on borrowing
The TMK is in principle not permitted to borrow other than within the scope of the asset liquidation plan. This prohibition is intended to prevent the risk of loss to existing investors or creditors of the TMK and hence requires that a limit to borrowings be established in the plan. Note however that when agreed further to a director’s resolution and for the purposes of purchasing specified assets then, provided such borrowing is from a bank or similar, it can be allowed (SPC Law article 210).
Limitation on the investments of surplus monies
A TMK is only allowed to invest any surplus monies arising in assets with very limited risk such as Japanese government bonds or similar (SPC Law article 214)