On February 15 2010, the Financial Services Agency of Japan (FSA) announced its unofficial view on the issue of tender offer rules for indirect acquisitions of reporting companies and sought public comments on it.
In January 2010, KDDI Corporation, a Japanese telecommunications company, announced that it had entered into a definitive agreement with LGI International to acquire for ¥361.7 billion ($4 billion) in equity interests in three Delaware LLCs wholly owned by LGI. These three LLCs held approximately 37.8% of the aggregate voting rights of Jupiter Telecommunications (J-Com), a company whose shares are listed on Jasdaq Securities Exchange and the intended target of KDDI. If consummated, this transaction would substantially give KDDI control of 37.8% of the aggregate voting rights of J-Com.
Under the mandatory tender offer rule of the Financial Instruments and Exchange Act of Japan (FIEA), roughly speaking if, upon the acquisition at issue, the acquirer's equity securities could result in the holding ratio of the acquirer, together with parties with whom it has a special relationship (such as, for example, certain affiliates or parties acting in concert), more than one-third of the aggregate voting shares of a company that is subject to a continuous reporting requirement under FIEA, the acquisition must be made through a public tender offer and cannot be made in a private transaction outside stock markets. Violations of this rule may subject the acquirer to up to five years imprisonment and criminal fines up to ¥5 million. Violations may also trigger administrative civil penalties of 25% of the total acquisition price.
However, this mandatory offer rule does not specifically state that it will apply to the acquisition of a holding company of the target, unless that holding company is itself a reporting firm. Thus, one may argue that it is theoretically possible to avoid the mandatory tender rule by acquiring shares of a holding company (or multiple firms holding shares) of the desired target company, instead of the target itself. Please note that if an acquirer establishes a special-purpose company (SPC) and such SPC acquires more than one-third of the voting shares of a listed firm, then the SPC may be subjected to the mandatory offer rules. The transaction involving J-Com caused public debate because, by having the SPC in the middle in the situation otherwise the mandatory offer rule applies, it appears an acquirer may dispense with the costly tender offer process while achieving the substantially similar goal of acquiring control of the desired company.
In February, the FSA issued its interpretative guidance regarding tender offer rules called Additional Q&As Regarding Tender Offers of Shares, etc. It discusses, among other things, whether the acquisition of an asset management company that holds more than one third of the shares of a reporting firm should be deemed an indirect acquisition that should trigger the mandatory offer rule. The FSA states that if the acquisition of such asset management company is in substance an acquisition of the shares of the target which gives the acquirer control of that target, considering the value of assets held by the asset management company other than the target shares, the substance as an operating firm and other factors regarding the status of the management company, the acquisition should be subject to the mandatory offer rule. The FSA explains, because such acquisition may be made without affording an opportunity to the other shareholders to sell their shares as would otherwise be available if a tender offer were conducted, it may conflict with the legislative purpose of Japanese tender offer regulations.
The issue here is whether a more explicit rule in the statutes is necessary to regulate such indirect acquisitions, such as in the UK, as the above FSA guidance is merely an unofficial view of the administration and does not have the authority to constrain future court decisions. As noted previously, violations of the mandatory tender offer rule trigger criminal penalties under FIEA. Therefore, a general rule the definitions of prohibited transactions should be clearly articulated in the statutes.
Another interesting aspect of the J-Com case was, prior to the closing, a certain part (6.7%) of shares of J-Com were transferred to a trust, thereby freezing out some voting rights and reducing the shareholding of LGI group below the one-third threshold, as non-voting shares are not subject to the mandatory offer rule and not included in calculating the shareholding ratio to determine the applicability of the rule. This scheme may pose further questions whether it is generally possible to avoid the mandatory offer rule, by using trust (or possibly equity derivatives or share lending), segregating voting rights from shares or other equity securities for a certain period of time. (Though in J-Com, the 4.5% shares in trust were to be sold by the trustee to a third party and the ultimate shareholding ratio of KDDI would remain just below the one-third threshold.)
While it would be appropriate for the FSA to move quickly and take initiative in regulating indirect acquisitions like J-Com, in response to developing market practices to provide more transparency of Japanese market regulations, clearer written rules in legislation are desirable that encompass a wider range of transactions beyond direct acquisitions of equity securities of the target.