On 28 June 2019, as part of the continuing push to reform corporate governance under the Abe administration, Japan’s Ministry of Economy, Trade and Industry (METI) introduced the new “Guidelines for Fair M&A – Enhancing Corporate Value and Securing Shareholders’ Interests” (the Guidelines). The Guidelines are intended to address past abuses in management buyouts and controlling shareholder acquisitions of listed companies.
Since the introduction of the Guidelines, Japan has seen a number of high profile deals involving management or controlling shareholders, including the recent takeover efforts relating to Unizo, the merger of Yahoo Japan and Line, and most recently Maeda Corp’s tender offer for Maeda Road Construction, making the Guidelines more relevant than ever for participants in the Japan public M&A market.
What do the Guidelines do?
The Guidelines set forth certain exemplary procedures (the Fairness Ensuring Measures) that are aimed at ensuring the legitimate interests of public shareholders.
The Guidelines are only “soft” law in that they do not have any legal enforceability. However, the directors of a Japanese corporation owe a duty of care of a prudent manager and a duty of loyalty to the corporation, and the Guidelines indicate that where the Fairness Ensuring Measures are effectively implemented, there is a high probability that a court would respect the agreed terms and conditions as achieving a “fair price” for purposes of the Companies Act and that the directors should not be in breach of their duty of care and duty of loyalty.
What are the Fairness Ensuring Measures?
The Guidelines set forth the following as examples of Fairness Ensuring Measures:
- establishing an independent special committee;
- retaining independent expert advisors (including third party valuation advisors for the provision of a fairness opinion);
- a market check;
- a majority-of-minority-condition;
- information disclosure and enhanced transparency; and
- a general catch-all regarding the elimination of coercion.
The Guidelines envision that various combinations of the Fairness Ensuring Measures could be adopted in various situations, and that the focus should be the effective functioning of the Fairness Ensuring Measures rather than the number of formal procedures put in place. As such, parties should seek to tailor the Fairness Ensuring Measures to the individual circumstances of a transaction.
However, it should be noted that the Guidelines place a particular emphasis on the formation of an independent special committee.