This content is from: Local Insights

Special measures concerning exchange tender offers

Mizuki Kasai

The act on the partial amendment of the Law on Special Measures for Industrial Revitalization and Innovation which aims, among other things, to promote prompt and flexible reorganisation by companies pursuing enhancement of international competitiveness, was promulgated on May 25 2011 and became effective on July 1. The amendment includes new special measures concerning exchange tender offers in which shares of tender offerors are paid in exchange for offered shares of target companies.

In other countries, significant acquisitions that lead to industrial reorganisation are sometimes conducted by exchange tender offers. In Japan, however, exchange tender offers have not been utilised to date, in spite of the fact that they were legal even before the amendment.

It has been noted that one of the reasons is that there are practical problems arising from the regulations under the Companies Act of Japan concerning contributions in-kind and offerings at a favourable price. Delivery of the tender offeror's shares by the tender offeror in an exchange tender offer has been deemed an issuance of new shares or disposition of treasury shares in exchange for the target company's shares by the tender offeror.

Therefore, the following issues are obstacles to conducting exchange tender offers in Japan: (i) in the case where the exchange tender offer is conducted at a stock exchange ratio that includes a premium, as is the case with typical tender offers, the tender offeror could be required to adopt a special resolution at a general meeting of shareholders to approve the offering at such favourable exchange ratio; (ii) the tender offeror, in principle, must file a petition with the court for an order appointing an inspector to investigate and report on the value of the target company's shares, as in the case of contributions in-kind; and (iii) if the market value of the shares of the target company drops rapidly during the term of the tender offer and the value at the time of issuance of new shares by the tender offeror falls substantially below the amount to be paid for the new shares under the terms of the offering, directors of the tender offeror or shareholders who tender their shares could be liable to cover the shortfall of contributed properties.

As a result of the amendment, in the case where a company whose business plan is certified pursuant to the Law (certified company) conducts an exchange tender offer intending to make the target company its related company (a company which is virtually controlled by another company, as defined under the Law); or a wholly-owned subsidiary of a certified company conducts an exchange tender offer, in which the certified company's shares are delivered, intending to make the target company its related company: (i) such tender offeror will no longer need to adopt a resolution at a general meeting of shareholders regardless of the stock exchange ratio; (ii) investigation by an inspector on the value of the target company's shares which is paid in exchange for the offered shares will not be required; and (iii) directors of the tender offeror or accepting shareholders of the target company will not be liable to cover any shortfall of contributed properties. This will enhance the attractiveness of exchange tender offers.

Practical impact

Exchange tender offers enable a party to conduct partial acquisition of a target company, such as an acquisition for the purpose of making the target a consolidated subsidiary of the tender offeror while the target remains listed, and to conduct acquisition of foreign companies flexibly.

The amendment also has significance in expanding the use of treasury shares by Japanese companies in corporate acquisition situations; many Japanese companies hold treasury shares for capital management purposes.

In response to the amendment, some related disclosure regulations have begun to be amended or enacted. However, since there still remain some practical issues to be resolved regarding exchange tender offers, many await the development of arguments in relation to practical operations of exchange tender offers.

Mizuki Kasai

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