JAPAN: An Introduction to Corporate/M&A: Domestic

Overview of Japan’s M&A Market 

Japan’s M&A market in 2023 remained strong despite a global decline in M&A activities. The total value of deals involving Japanese companies increased by 52.2% from JPY11.8 trillion in 2022 to JPY17.9 trillion in 2023, while the number of deals dropped by 6.7% from a record high of 4,304 deals in 2022 to 4,015 deals in 2023.

A notable feature of Japan’s M&A market in 2023 was the sudden rise of unsolicited takeover bids. For example, in July, Nidec announced that it would launch a takeover bid for Takisawa, a machine tool maker, if Takisawa did not agree to Nidec’s buyout proposal. In December, Dai-ichi Life Holdings announced an unsolicited counteroffer to acquire Benefit One, a corporate welfare benefit provider, while another company already launched a takeover bid for Benefit One. The issuance of “Guidelines for Corporate Takeovers” by the Ministry of Economy, Trade and Industry in August, as more fully described below, may inspire more potential acquirors to conduct such unsolicited bid activities, breaking a long-standing taboo in Japan. In parallel, the Financial Services Agency of Japan has consulted with an expert panel, with the aim of making major revisions to the tender offer rule for the first time since 2006, including lowering the threshold for a mandatory tender offer and expanding the scope of transactions requiring a tender offer, and to have such revisions made in the National Diet in 2024.

M&A activities between Japanese companies expanded in 2023, and the value of domestic deals rose by 85.1% from JPY4.1 trillion in 2022 to JPY7.7 trillion in 2023. Buyouts in Japan by corporate management surged in 2023, which included the management buyout of Taisho Pharmaceutical Holdings for over JPY700 billion that was announced in November, the largest ever in Japan. The total value of management buyouts in Japan in 2023 exceeded JPY1 trillion for the first time. This momentum in buyouts is driven by governance pressures, including the Tokyo Stock Exchange’s call for improving price-to-book ratios and increasing levels of shareholder activism, and the continuing availability of relatively cheap financing for buyers.

The largest domestic deal in 2023 was a private equity buyout of Toshiba led by Japan Industrial Partners for JPY2 trillion. Other major deals include the acquisition of JSR, a leading producer of semiconductor materials, by the government-backed fund Japan Investment Corporation, for over JPY900 billion. This acquisition was aimed at strengthening the global competitiveness of Japan’s semiconductor industry. It is notable that the take-private transactions with Toshiba and JSR were led by domestic funds, as foreign direct investment regulations have been tightened by the Japanese authorities because of concerns regarding national security and the maintenance of stable supply chains, including the recent amendment to the Foreign Exchange and Foreign Trade Act, as further explained below.

Guidelines for Corporate Takeovers 

The Ministry of Economy, Trade and Industry of Japan formulated “Guidelines for Corporate Takeovers” (the “Guidelines”) on 31 August 2023. The Guidelines were formulated on the premise that fair rules for M&A transactions would encourage and promote desirable public company acquisitions (ie, acquisitions that both increase corporate value and secure the interests of shareholders) in Japan.

The Guidelines cover a wide range of topics and issues related to corporate takeovers, including the following: (i) basic principles that should be respected in acquisitions of corporate control of listed companies in general; (ii) a code of conduct for boards of listed companies that receive acquisition proposals; (iii) measures to increase transparency regarding public company acquisitions; and (iv) takeover defences.

Regarding such basic principles, the Guidelines outline the following three basic principles: 

For boards of listed companies that receive acquisition proposals, the Guidelines provide the following framework to give guidance to public company boards:

On measures to increase transparency, the Guidelines notably provide guidance on appropriate information disclosure by acquirors, in addition to information disclosure by target companies.

The Guidelines also discuss critical legal issues surrounding takeover defences such as the legal framework to determine the legality of a takeover defence, the significance of a shareholder resolution to approve a takeover defence, and measures to counter coercive tender offers.

While the Guidelines are a compilation of “principles and best practices” that should be followed and are not legally binding, it is expected that the Guidelines will have a significant impact on M&A practices in Japan. By complying with the Guidelines, public company boards will likely be able to reduce the risk of breach of their duty of care and duty of loyalty, and transaction terms agreed between the transaction parties will more likely be respected by courts in appraisal proceedings. There have already been instances where acquirors in public company acquisitions have explained in press releases that they adhered to the Guidelines, and requested the targets’ boards to also adhere to the Guidelines.

Public companies and M&A practitioners should, therefore, be mindful of the Guidelines when engaging in public company acquisitions, and pay close attention to further developments in public company acquisitions in Japan.

Amendment to the Foreign Exchange and Foreign Trade Act

The Ministry of Finance in Japan and relevant competent ministries issued amendments to the Foreign Exchange and Foreign Trade Act (FEFTA) on 24 April 2023 that broadened the scope of the “core business sectors” and apply to certain investments and other activities to be made by foreign investors on or after 24 May 2023.

While the basic principle of the FEFTA is free-market investment, from the perspective of national security, foreign investors are required to submit a prior notification when they intend to make investments or take relevant actions (including acquiring 1% or more of shares of a listed company or acquiring one or more shares of an unlisted company) with respect to Japanese companies operating in certain types of businesses, which can be categorised into “non-core business sectors” and “core business sectors”.

Foreign investors may sometimes be exempted from such prior notification if they meet certain requirements; however, the scope of such exceptions will be limited for investments into “core business sectors”.

This amendment to the FEFTA added the following businesses to the existing “core business sectors”:

Foreign investors should analyse the necessity of prior notification under the FEFTA taking into account this amendment.