In the wake of Livedoor's hostile takeover of Nippon Broadcasting System, listed companies began mounting a variety of defensive measures against unsolicited takeovers – takeovers that occur without the approval of, or an agreement with, the target's board of directors. Recently, with the increase in unsolicited takeovers and bear-hug proposals, more and more listed companies have adopted anti-takeover defences. It was estimated that around 10% of all listed companies had adopted such defensive measures in Japan as of July 2007.

Advance warning

The most commonly adopted measure among Japanese listed companies in recent times has been the so-called advance-warning defensive scheme (jizen-keikoku-gata). A company makes public its proposed procedures and management's possible countermeasures to be employed in the event of a potential unsolicited takeover. Most commonly, the company states that any person intending to make a large purchase of shares is required to provide the management with enough information and time to enable it to adequately inform its shareholders about the potential purchase. If the potential purchaser fails to comply, the management may use defensive countermeasures, such as issuing stock acquisition rights to existing shareholders on a pro-rata basis and on condition that only prospective purchaser and its affiliates are not allowed to exercise any right to receive stock.

The details of the advance-warning defensive scheme vary from company to company. Schemes mainly differ in whether the role of the board of directors is limited to collecting necessary information. Alternatively, the board, with a help of an independent committee or shareholders' approval, will decide if the proposed takeover is desirable or detrimental to the company and the shareholders. Schemes will also differ in who is chosen to approve adoption of the defensive measure, the shareholders or the board of directors.

Limiting power

With respect to limiting the role of the board of directors, there are two types of schemes. The first relies on the concept that shareholders should determine whether to accept an unsolicited takeover. The role of the board of directors is to collect information on the proposed transaction from the acquirer and to communicate it to the shareholders. The board then evaluates the takeover and expresses its opinion on it, or in some cases, proposes another option to the shareholders. This type of scheme is designed to implement a defensive countermeasure only when an unsolicited tender offerer fails to comply with proposed procedures. The second type differs from the first in that the board of directors may also determine whether to implement the countermeasure taking into account certain factors, such as whether such a proposal would benefit the company and increase its value as well as its shareholders' collective benefits. In this type of scheme, the company may implement a defensive countermeasure with or without an independent committee's recommendation or the shareholders' approval. The anti-takeover defence plan has a stronger effect on an unsolicited takeover than in the first scheme mentioned.

With respect to the question of who approves adopting defensive measures, the procedures can vary. Approvals are classified into four types: approval by a board of directors resolution only; indirect approval at a general meeting of shareholders by a resolution of re-election of the directors who, before the re-election, express support of the defence plan the board has adopted; approval by an ordinary resolution at a general meeting of shareholders (that is, approval by a simple majority of the voting rights of shareholders present at the meeting); and approval by a special resolution at a general meeting of shareholders (that is, approval by two-thirds or more of the voting rights of shareholders present at the meeting). Under the Company Law, a general meeting of shareholders can only approve matters provided for in the Company Law or articles of incorporation. If a matter that is not provided for in either is approved, then from a legal point of view its approval has no meaning. Therefore, with respect to the third option – approval by an ordinary resolution – an argument can be made that the resolution to approve defensive measures not provided for in the Company Law or articles of incorporation at a general meeting of shareholders is not legally binding, and is nothing more than a survey of shareholders' opinions. Because of this and other legal objections, the fourth option – approval by special resolution at a shareholders' meeting – is adopted. Typically, a company takes the step of obtaining a special resolution by amending its articles of incorporation to make it possible for the company to initiate defensive measures. Under the Company Law, an amendment to the articles of incorporation must be adopted by a special resolution at a general meeting of shareholders.

The Bull-Dog Sauce case

Until now, there have been several judicial precedents concerning anti-takeover defensive measures, such as the Nippon Broadcasting System and Nireco Corporation cases. But in these cases, board resolutions approved the adoption of defensive measures, and the Japanese courts had not reviewed defensive measures adopted by a resolution at a shareholders' meeting. Bull-Dog Sauce (Bull-Dog), a company listed on the second section of the Tokyo Stock Exchange, adopted a defensive measure by a special resolution at a general meeting of shareholders to thwart an unsolicited takeover by Steel Partners Japan Strategic Fund (Steel Partners). The Tokyo District Court, Tokyo High Court, and Supreme Court, took up this action.

Before the challenge, Steel Partners and its affiliate company (SPG), had collectively acquired 10.52% of the voting rights of Bull-Dog. On May 16 2007 Steel Partners gave notice to Bull-Dog that it intended to implement a tender offer to acquire all of Bull-Dog's outstanding shares. On May 18 2007, Steel Partners Japan Strategic Fund SPV II LLC, a wholly owned company of Steel Partners, launched the tender offer. On June 7 2007, Bull-Dog submitted a report, which stated that it opposed the tender offer. As a countermeasure it decided to propose approving a defensive measure at its annual general meeting of shareholders on June 24 2007. Specifically, the company proposed an amendment to its articles of incorporation to allow a gratis issuance of stock acquisition rights, on the condition that some holders of the rights would be treated differently from others; it also proposed a gratis issuance of stock acquisition rights to all existing shareholders on the condition that Bull-Dog acquire such issued stock acquisition rights from shareholders other than SPG in exchange for issuing shares of Bull-Dog to shareholders other than SPG, and that it acquire such issued stock acquisition rights from SPG in exchange for paying a certain amount of cash to SPG. The proposals were approved at Bull-Dog's annual general meeting of shareholders on June 24 2007. If Bull-Dog acquired the issued stock acquisition rights from SPG, Bull-Dog would pay SPG just over ¥2.3 billion ($20.7 million). The operating profits of Bull-Dog on a consolidated basis for the business year ending March 2007 were less than one-third of this amount. Steel Partners sought a preliminary injunction from the Tokyo District Court to prevent Bull-Dog from issuing the stock acquisition rights. The Tokyo District Court dismissed the preliminary injunction. On appeal by Steel Partners, the Tokyo High Court confirmed this decision, and so did the Supreme Court.

The main points of this case are as follows. In contrast with the defensive measures adopted by many listed companies during a period in which no particular unsolicited buyer has yet to emerge, this defensive measure was adopted after the commencement of an unsolicited tender offer. This was the first ruling by a Japanese court on a defensive measure adopted by a resolution at a general meeting of shareholders. The defensive measure was designed not to cause the unsolicited offerers any economic damage, because the company would purchase the stock acquisition rights issued to the offerer and its affiliates at a price calculated from the initial tender offer price that the unsolicited offerer originally determined.

Supreme Court ruling

The Supreme Court's ruling can be summarised as follows. Because the realisation of profits to a company's individual shareholders would not come about without the existence and growth of the company, if either the value of the company deteriorates or the company's or shareholders' collective benefits are undermined because of a certain shareholder's acquisition of control, a company may treat that shareholder differently, as long as such treatment is appropriate. The shareholders – the owners of the company – must decide whether the value of the company will deteriorate and whether the company's or shareholders collective benefits will be undermined because of acquisition of control by certain shareholders. Unless it is found that a material flaw exists in the decision-making of the shareholders, that decision should be respected. In the Bull-Dog case, because 83.4% of the shareholders approved the defensive measure at a general meeting, most shareholders, other than SPG, determined that acquisition of control by SPG would undermine the value of Bull-Dog, as well as their collective benefits. SPG would receive cash for transferring back to the company the stock acquisition rights it would be issued. This cash amount could reflect the value of the stock acquisition rights because the amount would be based on the tender offer price determined by Steel Partners. So the court could not conclude that the issuance of the stock acquisition rights was inappropriate.

It is thought that the Supreme Court did not mean that for a defensive measure to be upheld, a special resolution at a general meeting of shareholders must adopt it, and that the issuance of stock acquisition rights under conditions that differentiate unsolicited tender offerers can only be upheld in cases in which no economic loss would be inflicted on the unsolicited tender offerer.

Respect for shareholders

This is not the first time courts have made clear that in defensive measures, emphasis should be placed on the shareholders' wishes. Since the decision in Nippon Broadcasting System, Japanese courts have consistently maintained that to adopt a defensive measure, determining what the shareholders want is paramount. In the Nippon Broadcasting System case, the Tokyo High Court stated that the board of directors is not allowed to issue shares or stock acquisition rights for the primary purpose of changing the shareholding ratio of the shareholders, because the board members are appointed and dismissed at the sole discretion of the shareholders. Japanese courts' attitudes seem to rest on the concept that under the Company Law (as well as the previous Commercial Code), shareholders should determine who manages the company, and the court upholds such decision-making by the shareholders.

Controversy

The decision of the Supreme Court is controversial among practitioners in a number of respects. First, in the Bull-Dog case, some of those who attended and voted at the meeting to approve the defence may no longer have held shares in the company at that time. This is because shareholders entitled to exercise voting rights at an annual general meeting are those who were shareholders at the end of the previous fiscal year (so in this case, shareholders as of the end of March 2007), and not shareholders at the time of the meeting. This time difference under the recorded date system (kijun-bi), which is allowed under the Company Law, is unavoidable in a company with a diverse shareholder base. So the emphasis that the court put on obtaining approval at a general meeting of shareholders, which included potential non-shareholders that may have had no particular interest in the success or failure of the tender offer, is controversial. Second, because the tender offer had already commenced, its success or failure could be determined solely on the basis of each shareholder's response to it. There was no need to have a general meeting of shareholders determine whether to adopt a defensive measure. Third, the defence was approved by a large majority of more than 80% of the shareholders, and the Supreme Court seemed to stress this fact. But if such support from shareholders is required for a defensive measure to be upheld, listed companies may try to have more long-term shareholders. Long-term shareholders may not always vote from the standpoint of whether the value of the company will deteriorate or whether the company's or shareholders' collective benefits will be undermined. Rather it may be more important to such shareholders that they continue to have good business relations with the company's management. Increasing the number of long-term shareholders would not necessarily lead to more appropriate decision-making on whether a proposed acquisition would positively or negatively affect the company's value.

In these circumstances, there are fears that the Court's attitude might have undermined ordinary shareholders' or institutional investors' interests. From the viewpoint of economic rationality, when an offerer commences an unsolicited tender offer, and wishes to purchase all tendered shares and, under such offer, all tendered shares will be purchased by the tender offeror, ordinary shareholders or institutional investors would be expected to determine whether or not to respond to the offer based on the tender offer price. But long-term shareholders might agree to implement an unsolicited tender offer defensive measure, not based on the tender offer price but on their business relations with the company. In subsequent cases, if the Japanese courts allow listed companies to adopt defensive measures based only on a majority decision by the shareholders, ordinary shareholders' and institutional investors' interests could be undermined.

The Supreme Court has emphasised the fact that the company would pay a hefty price to the tender offerer. This decision might allow tender offerers to be rewarded if they implement a tender offer at a price above the market price after buying a certain number of shares, and then have the target company adopt an anti-takeover defence and purchase the offerers' shares legitimately, as in this case. It could be said that the Supreme Court has indirectly approved of greenmailing. The future impact of the Bull-Dog Sauce decision should be carefully monitored.

Author biography

Masahisa Miwa Nagashima Ohno & Tsunematsu Masahisa Miwa is an associate of Nagashima Ohno & Tsunematsu. His practice focuses on M&A and corporate law, including tender offers, international and domestic M&A and corporate restructurings. He graduated from Keio University in 2001 with an LLB, and was admitted to the Bar in Japan in 2003.