JAPAN: An Introduction to Corporate/M&A: Domestic
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JAPAN: An Introduction to Corporate/M&A: Domestic
Yuichi Urata and Jason Jose R. Jiao
Oh-Ebashi LPC & Partners
Recent trends in the Japanese M&A market:
Until the early 2010s, hostile bids had been uncommon in Japan. From the early to mid-2000s, a few activists tried to make hostile bids and even went to court over those bids. However, almost all of those bids did not succeed. This was mainly because Japan had a cultural environment in which shareholders in general refused to accept hostile bids, rather than decide based on economic rationality. The turnaround in hostile bids in Japan came about after the establishment of the second Shinzo Abe administration in December 2012, which introduced the Japanese Stewardship Code (the “JSSC”) and Corporate Governance Code (the “JCGC”). The JSSC, which almost all of the major institutional investors active in Japan observe, is largely similar to the UK Stewardship Code, and requires institutional investors to disclose the reasons for their exercise of the voting rights in their portfolio. The JCGC, on the other hand, requires certain listed companies to engage in “constructive dialogues” with their shareholders. These two codes created an environment where shareholders in Japanese listed companies were compelled to accept preferable offers even though they were hostile bids.
In March 2019, Itochu Corporation, one of the major trading companies, made a successful hostile bid against Descente Ltd., a major sportswear manufacturer, which attracted much public attention. Since then, the number of hostile takeovers has continued to increase in Japan, although almost all the M&A transactions in Japan are still friendly transactions. Before Itochu’s bid, almost all hostile takeovers in Japan had failed. But the hostile takeovers in the 2020s to date have been generally successful.
Another trend in the Japanese M&A market is the increasing number of going-private transactions of listed subsidiaries. There were about 15 cases in 2020. Recent major examples of delisting of listed subsidiaries cover tender offers for:
• Sony Financial Holdings Inc. by Sony Group Corporation, announced in May 2020;
• FamilyMart Co., Ltd. by Itochu Corporation, announced in July 2020; and
• NTT Docomo, Inc. by Nippon Telegraph and Telephone Corporation (NTT), announced in September 2020.
There had previously been a unique phenomenon in Japan where major listed companies had a tendency to keep the listing status of some of their subsidiaries to maintain their reputation. However, the Tokyo Stock Exchange announced its plan to review the listing classifications of companies in February 2020, which will take effect in April 2022. Also, in June 2019, the Ministry of Economy, Trade and Industry issued the Fair M&A Guidelines, updated the prior guidelines for management buyouts issued in 2007, to ensure fairness not only in management buyouts but also in acquisitions of a controlled company by a controlling shareholder. The expected review of the listing classifications caused major Japanese listed companies to initiate the delisting of their listed subsidiaries, while the Fair M&A Guidelines provided safe harbour rules for going-private transactions.
Recent developments in M&A laws and regulations:
As the amendment to the Companies Act, which was approved by the Japanese Diet in December 2019, came into effect on 1 March 2021, a new acquisition scheme called “Share Delivery” (or Kabushiki Kofu in Japanese) was introduced. Share Delivery allows a Japanese stock company to acquire the shares of another Japanese stock company using its own shares as consideration, making the target company its subsidiary. The tax law was also amended so that the shareholders of the target company are able to defer payment of any capital gains tax upon receipt of the acquiring company’s shares. The combined consideration of cash and shares is also available as long as the value of the cash consideration does not exceed 20% of the total consideration value. Historically, there have been few share exchange offers in Japan compared to other countries, but these are expected to increase because of the introduction of Share Delivery, even though Share Delivery is practically available only between Japanese stock companies.
Another key development affecting M&A transactions is that, early in 2021, Japanese courts issued notable decisions on anti-hostile takeover defence measures. Under conventional M&A practice in Japan, the issuance of share options, without contribution, to all shareholders excluding the hostile tender offeror has generally been used as a poison pill. Pursuant to this, a considerable number of companies adopted an anti-hostile takeover plan, a so-called rights plan, in which such companies may issue share options by approval of the board when certain conditions are met.
In March 2021, Nippo Ltd. issued share options against a hostile takeover by Freesia Macross Co., Ltd. At first, the issuance of the share options was invalidated by the Nagoya District Court in late March 2021, but the appeals court later on held the issuance of the share options to be valid in an April 2021 decision, which then became the final judgment. Similarly, in March 2021, Japan Asia Group Limited also tried to issue share options against a hostile takeover by City Index Eleventh Co., Ltd (“CI11”). In April, CI11’s request for an injunction to suspend the issuance of the share options was approved by the Tokyo District Court and the Tokyo High Court, and consequently, Japan Asia Group finally cancelled the issuance of the share options. In the case of Nippo, the Nagoya appeals court held Nippo’s issuance of the share options to be valid because the share options were issued not only with Nippo’s board approval, but the rights plan had also been consistently approved at Nippo’s annual shareholders' meetings since 2019. In contrast, the decisions in the Japan Asia Group case denied the issuance of the share options because they were issued only through board approval, and was not approved at the shareholders' meeting. These new court precedents thus suggest that a rights plan should be adopted with shareholders’ approval obtained in advance, or, at least, the issuance of share options by board approval in emergency situations should be designed so that it can be cancelled or approved by shareholders’ resolution.