Until recently it was extremely rare for Japanese listed companies to be exposed to threats of hostile takeover partly because of the longstanding practice (from the sixties to the eighties) of cross-shareholding between a Japanese industrial company and its main bank and also between Japanese industrial companies. After the collapse of the bubble economy in Japan during late eighties, however, the practice of cross-shareholding declined dramatically (it decreased by half from the nineties to the early 21st century), partly because faltering companies and banks rushed to sell off shares held by them, which resulted in increasing stock liquidity. This led to an environment where hostile acquirers could easily buy up shares of Japanese listed companies.
Dawn of the hostile takeover
The tender offer for Shoei Co, Ltd by MAC (the Murakami Fund) in 2000 indicated the start of a new trend of hostile takeovers in Japan. Later, the attempted hostile takeover of Nippon Broadcasting System, Inc by Livedoor Co, Ltd in 2005, which involved one of the main broadcasting companies in Japan, Fuji Television Network, Inc, brought national attention to hostile takeovers. Furthermore, the tender offer for rival Hokuetsu Paper Mills, Ltd by Oji Paper Co, Ltd in 2006 demonstrated that even a well-established Japanese company can become a hostile acquirer, as that transaction involved a takeover battle between two traditional Japanese companies. Even though none of these hostile takeover attempts have succeeded, as a result of this trend defending against a hostile takeover has become one of the top concerns for executives in Japanese listed companies and the adoption of defensive measures has progressively increased each year – the most common being so-called advance warning-type defence plans (jizen-keikoku-gata). Though it was estimated that around 14% of all Japanese listed companies adopted takeover-defensive measures as at July 2008, there have been some that have recently voluntarily abolished or discontinued such measures.
Notwithstanding these developments, neither the new Company Law (Kaisha-hou) nor the amended Securities Exchange Law (the Financial Instruments and Exchange Law) address the legality or permissibility of advance warning-type defence plans. As a result of concerns from some executives regarding the effectiveness of takeover-defensive measures and a growing perception (based on the court precedent discussed below) that the stable practice of cross-shareholding is a more effective defence against hostile takeovers, the practice of cross-shareholding has begun to show signs of revival.
The Bull-Dog precedent
On May 18 2007, Steel Partners Japan Strategic Fund SPV II LLC (Steel Partners) launched a tender offer for all of the outstanding shares of Bull-Dog Sauce Co, Ltd (Bull-Dog), a company listed on the second section of the Tokyo Stock Exchange. As a countermeasure, Bull-Dog proposed the adoption of a defensive measure at its annual general meeting of shareholders on June 24 2007 and the proposal was approved with the support of shareholders representing more than 83% of that company's total voting rights. The defensive measure taken by Bull-Dog had the following three characteristics: (i) it was adopted and invoked after the commencement of an unsolicited tender offer (this defensive measure was different from advance warning-type defence plans); (ii) it was adopted and invoked by a special resolution at a general meeting of shareholders after an amendment to its articles of incorporation; and (iii) the unsolicited acquirer would receive just over ¥2.3 billion ($24.1 million) in consideration of issued stock acquisition rights, calculated based on the tender offer price determined by Steel Partners and determined to be an amount that would not cause the unsolicited acquirer any economic damage. 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, however, denied the preliminary injunction request. On appeal by Steel Partners, the Tokyo High Court confirmed this decision, as did the Supreme Court. The two main reasons that the Supreme Court emphasised in upholding the decision were the characteristics set forth in (ii) and (iii) above.
Based on a series of judicial rulings by Japanese lower courts, the Supreme Court has made clear that in determining the appropriateness of hostile takeover-defensive measures emphasis should be placed on the shareholders' wishes. Under the influence of this Supreme Court ruling, as at July 2008 it was estimated that around 28.5% of all takeover-defensive measures, and 45.9% of defensive measures newly adopted in the previous year (after the Bull-Dog ruling) have a mechanism to confirm shareholders' wishes before being exercised. However, this Supreme Court ruling may have sent out the wrong message to some business executives who have an aversion to hostile takeovers: that they can invoke hostile defensive measures and fight off unsolicited acquirers simply by obtaining approval of the measure at a general meeting of shareholders. As a result, this Supreme Court ruling appears to have accelerated the trend of returning to the practice of cross-shareholding between industrial companies.
The Supreme Court also emphasised the fact that Bull-Dog payed a substantial amount to the unsolicited acquirer. This ruling caused another problem. Advance warning-type defensive measures require any person intending to make a large purchase of shares to provide the management of the target company with enough information and time to enable it to adequately inform its shareholders about the potential purchase. If the potential purchaser fails to comply with this requirement, the management may use defensive countermeasures that may cause the potential purchaser extensive economic damage. The threat of such damage acts as a deterrent and the potential purchaser is therefore compelled to comply with the management's request. If, however, the potential purchaser who failed to comply with the request of the target company's management will be financially compensated, the end result will be that the potential purchaser can realise substantial gains from such investment opportunities. It could be said that the Supreme Court, by its ruling in the Bull-Dog case, indirectly approved the practice of greenmailing. Furthermore, the ruling may have sent the wrong message to some business executives: that they can fight off unsolicited acquirers by paying them off. After the Bull-Dog precedent, takeover-defensive measures that stipulate the option of providing for a monetary payoff to unsolicited acquirers have increased. It was estimated that, as at July 2008, around 21.4% of all takeover-defensive measures (39.5% of defensive measures newly adopted in the previous year) stipulated the option of making a payment of money to unsolicited acquirers.
Corporate value report
Though the legal admissibility of takeover-defensive measures has been a topic of much discussion and debate in Japan, the actual structure of such measures has became somewhat removed from what is considered by some to be a reasonable structure for such measures. In response to the recent surge in the adoption of takeover-defensive measures, the Corporate Value Study Group sponsored by the Ministry of Economy, Trade and Industry (METI) issued the Corporate Value Report on June 30 2008. The Corporate Value Study Group is composed of a diverse group of members such as investors, management personnel, law scholars, finance researchers, attorneys at law and financial advisers, among others. The Corporate Value Report proposes its view of what a reasonable defence plan should be in its first half and why such a plan is legally permissible in the light of a series of court decisions in its second half. The main points of the Corporate Value Report can be summarised as follows: (i) companies should not pay money to unsolicited acquirers; and (ii) directors, who must exercise the due care of a prudent manager, have a responsibility to make an initial decision regarding whether or not the hostile takeover bid would benefit the shareholders' common interests. If the directors choose to avoid such responsibility by leaving the decision for consideration and determination at a shareholders' meeting, such indecision can be viewed as an abandonment of responsibility.
The Corporate Value Report is not legally binding in nature but seems to have a material influence on the structure of takeover-defensive measures that have since been adopted, as well as the takeover-defensive measures that will be adopted in the future. Because the Corporate Value Report was issued on June 30 2008 (though its draft was made public on June 11 2008) and the shareholders' meetings of the majority of Japanese listed companies were held in June 2008, many of the defensive measures adopted this year do not reflect the findings of the Corporate Value Report. For this reason, it is expected that most Japanese listed companies that have already adopted takeover-defensive measures will be required to review their takeover-defensive measures when such measures expire or are up for renewal, if not earlier. Because the Corporate Value Report clearly states that companies should not pay money to unsolicited acquirers as a defensive measure, it is expected that measures that provide for payment to unsolicited acquirers will decrease after annual shareholders' meetings in June 2009. This trend has also been supported by the fact that before the issuance of the Corporate Value Report some institutional investors announced their own policy of opposing any defensive measures that stipulate the possibility of making a monetary payoff to unsolicited acquirers.
Future issues
The Corporate Value Report should be respected for its proposal of a reasonable form of advance warning-type defence plan. However, as the Corporate Value Report is not legally binding in nature and the courts of Japan may therefore have a different view than that propounded by it, and considering the weight of the Supreme Court ruling in the Bull-Dog case, we cannot deny the possibility that cases similar to Bull-Dog will occur in the future. That is, cases in which the target company offers a monetary payoff to the unsolicited acquirer to end a hostile takeover attempt. Moreover, if the target company can defend against unsolicited acquirers only by first obtaining the approval of a general meeting of shareholders, apprehensive executives would likely be more inclined to pursue cross-shareholding as a takeover-defensive measure. There is little wonder that some executives consider increased cross-shareholding to be preferable to a takeover-defence plan for which legal admissibility is still unclear.
Some practitioners argue that the courts, through their judicial rulings, should establish the efficacy of the advance warning-type defence plans. However, we believe that this approach is not appropriate because it will take a substantial amount of time to develop such a line of legal precedents: in the meantime, the trend of Japanese listed companies pursuing cross-shareholding practices will continue to increase. Furthermore, the current judicial system may not be the best body to develop rules concerning hostile takeover-defensive measures because it focuses on resolving specific cases and does not necessarily consider factors such as incentives to executives and market affiliates regarding predictability.
It could be said that the existence of the threat of hostile takeovers serves the purpose of motivating Japanese executives to increase business efficiency and corporate value, so that Japanese companies can compete in the global market. The question remains, however, as to what rules should be established to provide these executives with such incentives. The approach so far in Japan has been to adopt a US-style shareholders' rights plan. However, perhaps because of the differences in the social and judicial structure of the two countries, as well as the different ways of thinking between executives in Japan and in the US, the defensive measures adopted in Japan have not developed in a way similar to the US rights plan so far. In order to make the US rights plan work in Japan, the Japanese social and judicial structures and the way Japanese executives think need to become more similar to those of the U.S. However, the adoption of such US-type structures and thinking will require a considerable amount of time and such changes may result in the loss of many of the strengths and unique qualities of Japanese companies. It is not easy to find an appropriate solution to this issue, but discussions addressing it must commence in order for Japanese companies to develop with the globalisation of the capital market. In this way, discussions concerning hostile takeovers in Japan, which started in earnest when Japanese-type rights plans were adopted, have recently entered a new phase. As a part of these discussions, some practitioners have proposed a system that is similar to the takeover panel adopted in the UK, as well as the further amendment of the tender offer rules.
On the other hand, the activities of hostile acquirers have taken on a new aspect, which is evidenced by an increase (since 2007) in proxy fights between management and hostile shareholders (especially some activist funds). Proxy fights have been considered to be a common practice associated with hostile takeovers and tender offers in the US and are expected to increase in Japan in the near future. However, as proxy fights have not been prevalent in Japan so far, there still remains uncertainty and inconsistency regarding regulations and practice. We hope that the rules and practice regarding proxy fights improve in the near future.
Hostile takeovers have become a hotly-debated issue over the last four or five years in Japan, but the rules addressing them are still in their early stages. Because there is no persuasive reason to adhere to the US model of hostile takeover defence plans, it would be prudent to continue to search for rules that would best suit Japanese business culture. The improvement of Japanese rules addressing hostile takeovers is urgently needed in the near future. Until such a change is effected, the prevailing takeover-defensive measures should be appropriately managed and continue to develop.
| Author biographies |
Shintaro Takai
Nagashima Ohno & Tsunematsu
Shintaro Takai is a partner at Nagashima Ohno & Tsunematsu. His practice focuses on corporate transactions, especially international and domestic M&A transactions. He regularly represents domestic and international clients, ranging from private equity funds to industrial companies.
Shintaro graduated with an LLB from the University of Tokyo in 1997 and with an LLM from the University of Chicago in 2004. He was admitted to practice law in Japan in 1999 and worked at Schulte Roth & Zabel in New York as a visiting attorney from 2004 to 2005.
Keiji Tonomura
Nagashima Ohno & Tsunematsu
Keiji Tonomura is an associate at Nagashima Ohno & Tsunematsu. His practice focuses on M&A, including hostile takeover defences and other corporate transactions. He graduated in 2004 with an LLB from Kyoto University and in 2006 with a JD from Kyoto University Law School. Keiji was admitted to practice law in Japan in 2007. |