From ancient times, Japan has been considered one of the most mysterious countries in the world. The same has been said even in the M&A world. The country, however, has a simple and straightforward legal system, especially in relation to stake-building in listed companies. The guidance below explains the stake-building system for both on-market and off-market stakes.
As with many countries in Europe, there are several legal hurdles for off-market stake-building: the biggest one being a compulsory tender offer bid (TOB). TOB regulation is strictly controlled by the Financial Services Agency under the Financial Instrument Exchange Act (FIEA). The legal landscape is not particularly complicated. In fact, it is much more straightforward than that of many EU countries. There are just a few important points to remember for off-market stake-building.
If the total shareholding ratio resulting from the contemplated transaction is of a certain size, it will trigger the obligation to make a TOB, under which a bidder must make an offer by means of a public notice to purchase a certain number of target shares.
A total shareholding ratio of more than one-third but less than two-thirds of all the target voting shares will trigger an obligation to make a simple TOB; a total shareholding ratio of two-thirds or more will trigger an obligation to make a TOB with a mandatory purchase obligation.
A bidder's total shareholding ratio will be calculated jointly with those of its special-affiliated persons/entities, such as its affiliated companies and those who agree to jointly purchase the target shares or jointly exercise the voting rights of the target shares with the bidder.
A TOB does not necessarily include a mandatory purchase obligation under which a bidder must purchase all tendered shares. In other words, during a simple TOB a bidder can still set an upper limit for the number of target shares it will purchase unless the second trigger described above (the two-thirds ratio) is pulled. A bidder can also set a lower limit for the number of target shares it will purchase at its sole discretion. The target shareholders can either accept the TOB offer or remain as shareholders in the target. If the shareholders elect to remain as shareholders in the target, the bidder cannot compulsorily cash-out the target shareholders through a TOB.
Regardless of the bidder's total shareholding ratio after the TOB, the bidder is not necessarily required to purchase the target shares of the remaining minority shareholders who did not accept the offer by the bidder, but may choose to do so basically at its option by a squeeze-out. A squeeze-out (or freeze-out) is the only way to remove conflicting interests between the major and minor shareholders in the target. Thus, a major shareholder whose total shareholding ratio reaches around 90% usually takes the further step of making a squeeze-out.
In recent times, the so-called fully-callable shares scheme has been used most frequently for this purpose. Under this scheme, the target shares are converted into fully-callable shares, all of which can be further converted into another class of shares usually called class A shares at the target's option. The exchange ratio for such further conversion will be set at a level that will result in only the bidder receiving more than one class A share and all the other target shareholders being entitled to only a fractional portion of a class A share. The target shareholders who receive a fractional portion of a class A share are ultimately offered the same amount of money as the TOB price in lieu of the fractional portion.
Cash only, no shares
Unlike in much of the EU, the consideration for a TOB must be cash in practice. Although no regulations prohibit a TOB using shares as consideration (rather, recent amendments have vigorously tried to stimulate such TOBs), the fact that target shareholders, who obtain shares only, cannot defer capital gains on their target shares under Japanese tax laws makes such consideration impractical. There is only one Japanese example of a TOB using shares instead of cash as consideration.
Also unlike the European practice, a bidder can set any price for a TOB as long as it offers the same price to all target shareholders. In fact, Japan has seen many TOBs with a highly discounted price offered to target shareholders. Once a bidder sets a price, it cannot reduce that price unless a share (or warrant) issue or split happens during the TOB period. A bidder can, however, raise the price at its sole discretion at any time during the TOB period, but it must purchase target shares at the increased price from target shareholders who have already accepted the previous price.
No way back
A bidder cannot freely withdraw a commenced TOB. Fundamental changes to the investment situation beyond the control of the bidder must occur before a bidder may withdraw. For example, the unavailability of finance in itself is insufficient to permit a TOB withdrawal. The most common example of when a bidder may withdraw a commenced TOB is bankruptcy of the target. Of course, frustrating actions taken by the target, such as an issue of shares or warrants, can also be sufficient. Given that a bidder is basically locked into a TOB, it is important that it sets an appropriate upper and lower limit for the number of target shares it will purchase at the commencement of the TOB.
Unlike in many EU countries, there are no particular obstacles for on-market stake-building. Without doubt, the Japanese legal landscape is among the simplest in the world in this regard.
On-market stake-building itself will never trigger a TOB obligation. The same is true even where a bidder plans to acquire a substantial stake (a majority stake, for example) in the target. This is the biggest difference between Japan and the EU countries in which on-market stake-building may trigger a TOB obligation by itself.
An attempt to circumvent the regulations regarding off-market stake-building will be prevented. A TOB obligation will be triggered where a bidder rapidly buys a substantial stake in the target through a combination of on- and off-market acquisitions. More specifically, a TOB obligation will be triggered if (a) a bidder acquires a stake, whether on- or off-market, within a three-month period that exceeds 10% of all the voting shares in the target; (b) the acquisition results in the bidder's total shareholding ratio becoming more than one-third; and (c) the acquisition includes an off-market acquisition exceeding 5%.
For example, if a bidder acquires an off-market stake of 32% and on-market stake of a further 2% within a three-month period, the obligation to make a TOB, under what is usually called the rapid buy-ups rule, will arise. This is an example of a situation where a bidder must conduct a TOB for a stake which was predominantly built off-market. As can be seen, triggering the rapid buy-ups rule requires off-market stake-building but not on-market stake-building.
Filing obligations – 5%, 10%, 20% and 50%
A stake of a certain size will trigger filing obligations, most of which require only an after-the-fact report. The size of a bidder's stake will be calculated jointly with certain-affiliated persons/entities of the bidder.
When a bidder's total shareholding ratio exceeds 5% of all the target voting shares, a large shareholding report is required under the FIEA. The report must be filed with the competent local finance bureau, the local arm of the Ministry of Finance of Japan, within five business days from the shareholding ratio exceeding 5%. An updated report is required, for example, each time a bidder's total shareholding ratio changes by 1% or more, whether upward or downward.
When a bidder's total shareholding ratio reaches 10% or more of all the target shares, a direct inward investment report under the Foreign Exchange Act is required. This report must be filed with the Bank of Japan usually by the 15th day of the month immediately following the closing month.
A share acquisition report must be filed under the Antimonopoly Act where (a) the aggregate sales amount in Japan of a bidder's business group exceeds ¥20 billion ($262.8 million); (b) the same amount of the target's business group exceeds ¥5 billion; and (c) the bidder's total shareholding ratio passes 20% or 50% of all the target voting shares by virtue of the stake-building. The report must be filed with the Japan Fair Trade Commission 30 days before these three requirements are fulfilled. Recently the Commission abolished its prior consultation practice regarding business mergers, which was notorious for being time-consuming and opaque. Thus, a bidder need not (and cannot) consult with the Commission before stake-building, although the Commission may investigate stake-building, if necessary, upon and after receipt of a share acquisition report.
Only a few hostile takeovers have ever succeeded in Japan. This is due partly to the legal system and partly due to its unique labour-management culture. Unlike in the EU, neither a board neutrality rule nor a breakthrough rule exists under the TOB regulations. Moreover, a board usually fosters a sense of unity amongst its directors, officers and employees. Some employees will be promoted to the board in the future.
This kind of unity usually tends to be intolerant of foreign threats, the classic example being a hostile takeover. A target might deploy defensive strategies against hostile takeovers under the TOB regulations, as well as large-scale negative campaigns through the mass media. Being friendly is the best way to get the deal through in Japan.
||Atsutoshi Maeda is a partner at Anderson Mori & Tomotsune. He has worked on an extensive range of legal matters, including providing general corporate advice on issues regarding commercial laws and compliance problems, as well as negotiating contracts in a broad range of industries. He has handled disputes for domestic and overseas clients. Maeda also specialises in finance law, where he has extensive experience in banking and securitisation deals and regulatory advisory work for domestic and foreign financial institutions, including various types of funds. For foreign clients, he aims to demystify Japanese law and local market practice. |
Maeda was educated at the University of Tokyo where he earned an LLB in 1998, and University College London where he was awarded an LLM in 2005.
Anderson Mori & Tomotsune
Izumi Garden Tower
6-1, Roppongi 1-chome
Minato-ku, Tokyo 106-6036
||Yuhki Tanaka is a partner at Anderson Mori & Tomotsune. His principal practice areas are M&A, and labour and employment. In M&A, he specialises in advising and representing clients on national and cross-border transactions and has a substantial track record including TOBs, squeeze outs (freeze-outs), joint ventures, MBOs and various statutory organisational restructurings (for example merger, corporate split and share swap). |
Tanaka was educated at the University of Tokyo, where he earned an LLB in 2000.
Anderson Mori & Tomotsune
Izumi Garden Tower
6-1, Roppongi 1-chome
Minato-ku, Tokyo 106-6036