Recent Developments in Japanese Tender Offer Regulations

Recently, the Japanese Ministry of Economy, Trade and Industry (METI) decided to revise the current regulation regarding the tender offer system and large shareholding reporting system, in order to:

The latter point, in particular, includes:

A working group meeting discussing the tender offer system and large shareholding system (hereinafter, the “Working Group”) was established, and after six meetings held throughout 2023 it concluded its report, issued on 25 December 2023. More than ten issues were discussed, and the particularly noteworthy topics are detailed as follows. This article mainly addresses the issues related to the tender offer system.

Under the existing tender offer system in Japan, generally, certain regulations have been established for cases where the purchase of shares of a public company is conducted outside the market, and transactions conducted in-market were subject to these regulations only in exceptional cases.

However, in recent years, there have been cases in which more voting rights than would substantially affect the management of the company (please refer below for details of the threshold) have been acquired in a short period of time through in-market transactions; and in recent court cases regarding anti-takeover measures, the pressure-to-tender issues discussed below were pointed out.

In its report, the Working Group recommended that when transactions involving the acquisition of more voting rights than would substantially affect the management of the company are made through in-market transactions, such transactions should be subject to the tender offer regulations.

Under the existing tender offer system in Japan, if the ownership ratio of shares after a tender offer exceeds one third, and even if the number of counterparties to the purchase is ten or less, the purchase is subject to tender offer regulations (the “1/3 Rule”). The 1/3 Rule requires a tender offer to be made if a shareholder holds one third or more of the voting rights. The Japanese Companies Act requires a two-thirds or more vote in favour of a resolution at a general meeting of shareholders concerning certain important matters governing the management of a company (a “Special Resolution”); and if a given shareholder holds one third or more of the voting rights, they will be able to prevent a Special Resolution.

However, statistics on how previous proportions of voting rights have been exercised by public companies (for example, the average percentage of voting rights exercised by public companies from FY2018 to FY2022 was around 60%) reveal that it is possible to prevent a Special Resolution with around 30% of the voting rights; and in many other countries the threshold for tender offers is set at 30% or less. The question of whether or not to lower the threshold for the 1/3 Rule was considered by the Working Group.

The Working Group reported that it would be preferable to set a new threshold of 30%, which is the threshold used in countries such as the United Kingdom, France and Germany. Attention should be paid to future discussions on this topic.

In recent years in the Japanese capital market, it has been pointed out that when a person intends to acquire ownership in a company through a tender offer, and when the corporate value of the company is expected to decrease after the acquisition of ownership, there is pressure for ordinary shareholders of the company to accept the tender offer and promote the acceptance even of tender offers which cause a decrease in the value of the company, in order for the shareholders to avoid being disadvantaged by the anticipated decrease of corporate value (that is, the decrease of the share value held) after the tender offer.

In the legal precedents articulated in the case of Tokyo Machinery Co, Ltd, it was pointed out that “[g]iven that a takeover by the acquirer could damage the value of the company, it is easy to take actions to avoid that risk and... to eliminate the incentive or pressure to sell”, and that “sufficient information and time necessary for making investment decisions are not given”. The Working Group had discussed measures to be taken to eliminate this pressure-to-tender issue.

In this regard, the Working Group considered measures such as:

After the discussion, the Working Group reported that establishing an optional additional tender period system would be acceptable.

The Working Group has recommended amending certain tender offer rules during 2024 and 2025, and attention should be paid to future amendments.