JAPAN: An Introduction to Corporate/M&A: Domestic
Japan: Corporate/M&A: Domestic
Contributors:
Norihiro Sekiguchi,
Takuro Yamaguchi,
Yuichi Urata and Jason Jose R. Jiao;
Oh-Ebashi LPC & Partners
Recent trends in the Japanese M&A market
The number of M&A transactions involving Japanese entities has been continuously increasing year by year since 2012, except in 2020 due to the COVID-19 pandemic. In 2021, the number of such transactions reached the highest ever recorded at 4,280. In terms of market segments, the number of domestic transactions also marked the highest at 3,337, approximately 40% of which were related to the venture business. There were eight transactions that utilised Share Delivery (or Kabushiki Kofu, in Japanese), which was introduced in March 2020, all of which involved venture companies. In Japan, the issue of finding successors to good businesses has been one of the major drivers for divestitures, and in 2021 about 20% of domestic deals were acquisitions from the founders’ families. The number of inbound transactions was also the highest recorded at 318. Most of the major inbound transactions were carve-out deals targeting Japanese listed companies, including the acquisition of Hitachi Metal by a consortium led by Bain Capital. In addition, CVC Capital Partners and Carlyle, respectively, made acquisitions from the founders’ families. With respect to outbound deals, the number of cases was not the highest on record, but it increased by approximately 12% from 2020. The largest by deal size was Hitachi’s acquisition of the holding company of GlobalLogic, an IoT system vendor based in California, which seemed to have been initiated by Hitachi’s restructuring of its business portfolio. In terms of outbound deals, it is also worth noting that Japanese firms are increasingly strengthening their operations in the Asia-Pacific region, such as Sumitomo Mitsui Financial Group's acquisition of non-banks in India and Vietnam. Another feature of Japanese M&A in 2021 was an increase in tender offers. Against the backdrop of the TSE market reorganisation scheduled in April 2022 and other factors, listed companies' business restructurings progressed. There were 71 tender offers (an increase of 14 cases compared to 2020), 19 de-listings through MBOs (an increase of eight cases compared to 2020), and 11 parent-subsidiary de-listing deals. Hostile tender offers reached a record high of eight and, among them, the successful acquisition of Shinsei Bank by SBI Holdings was prominent.
As for M&A trends in the first half of 2022 (January-June), the overall number of mergers and acquisitions involving Japanese entities was 2,203, an increase of 67 over the same period last year, which was previously the highest number for the said period. In particular, there was a marked increase in the number of inbound deals. In the first half of 2022 alone, there were 172 inbound deals, up 11.7% YoY, the most ever during the same period, with large inbound private equity deals continuing from the previous year, such as KKR's acquisition of Hitachi Transport System. On the other hand, outbound deals decreased by 7.7% YoY. These trends were likely to have been influenced by the sharp depreciation of the yen triggered by, among others, the Russian invasion of Ukraine. The depreciation of the yen is expected to further increase inbound deals in the future.
Recent developments in M&A laws and regulations
As mentioned above, in recent years the number of hostile takeovers in Japan has increased, and companies targeted by hostile buyers have been trying to respond to such takeovers by introducing poison pills. 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.
In 2021, several important court decisions on poison pills were issued. Among them, the most prominent case was that of Tokyo Kikai Seisakusho (“TKS”) v Asia Development Capital (“ADC”), in which the Supreme Court held TKS’s poison pill to be legal. These days, poison pills are generally introduced whenever a hostile buyer appears and are designed to target such specific acquirer and its related parties, who are then required to comply with certain procedures under the poison pill. TKS introduced such type of poison pill when it realised that ADC had bought a large number of TKS shares on the market. Under this poison pill, if the invocation of a countermeasure is approved by a majority of the votes of the attending shareholders with voting rights, excluding ADC and its related parties and the TKS’s directors and their related parties (ie, majority of the minority), at a shareholders’ meeting (“MOM Resolution”), and the large-scale hostile purchase is not withdrawn, then the gratis allotment of share options will not be suspended. The MOM Resolution was obtained at the shareholders’ meeting of TKS, and this point was considered to be one of the major factors in the court’s ruling that held that the poison pill was valid. The court decisions in 2021, including the TKS case, appear to suggest that it is important to obtain the shareholders’ approval to the invocation of a poison pill.
However, in July 2022, in Mitsuboshi v Adage Capital, the courts denied the validity of the poison pill used, which had a scheme similar to that of TKS, even though the invocation of the poison pill had also been approved at a shareholders' meeting. The difference of this case with the TKS case is that there were several hostile investors in Mitsuboshi and the capital relationship among those hostile investors was unknown, while there were only two in TKS (ie, ADC and its wholly owned subsidiary). In the Mitsuboshi case, one of the hostile investors, Adage Capital, demanded that Mitsuboshi hold an extraordinary shareholders’ meeting and proposed the dismissal of three directors and the appointment of directors nominated by Adage. In response to the request, Mitsuboshi hastily set up a poison pill. The shareholders' proposal was rejected at the extraordinary shareholders' meeting, and Mitsuboshi's board of directors decided to invoke the poison pill and seek approval for such invocation at the annual shareholders' meeting in June 2022. Adage then filed a court injunction against the allotment of the share options. Mitsuboshi thereafter announced that, in addition to Adage and its related parties, it would certify the shareholders who submitted proxies in favour of Adage's proposal at the extraordinary meeting of shareholders as ineligible shareholders who would not be entitled to the allotment of share options. Adage then withdrew all actions that Mitsuboshi claimed to be large-scale purchases, which were prohibited under the poison pill. At the annual shareholders' meeting, the proposal for the allotment of share options was approved by 54% of the shareholders (not by the MOM Resolution).
The courts rejected the allotment of share options as "grossly unfair" at all levels from the district court to the Supreme Court. The main reason for the decision was that the poison pill lacked reasonableness as a means of maintaining the common interests of shareholders because (i) Mitsuboshi did not specify in advance how to withdraw the large-scale purchase in order for Adage and others to be released from the application of the poison pill (TKS had a prior announcement on the method of withdrawal); and (ii) the court could not rule out the possibility that the certification of the ineligible shareholders had been done arbitrarily by the then-current management.
In the Mitsuboshi case, it was found that even if the invocation of the poison pill was approved at a shareholders' meeting, legal risks could still remain if the implementation of the poison pill is not appropriately conducted. In the case of a hostile takeover using the "wolfpack tactic", where several investors simultaneously acquire shares in the market, it is difficult for a company to recognise the co-ordinated actions among such investors and identify the ineligible shareholders when multiple investors with no capital relationship or concurrent directorships engage in co-ordinated action. In light of this precedent, there seems to be room for improvement of the TKS type of poison pill, especially as a countermeasure to the wolfpack tactic.