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Types of shareholders’ claims
Identify the main claims shareholders in your jurisdiction may assert against corporations, officers and directors in connection with M&A transactions.
There has been an increased number of appraisal cases in which shareholders who were not satisfied with the consideration offered in a transaction have requested the court to determine the fair value of the shares. In some cases, shareholders also claimed a breach of fiduciary duty of directors of the seller (for selling shares at a discounted price), the buyer (for buying shares at a price higher than the fair value) or the target company (for accepting, and recommending its shareholders to accept, a tender offer despite the tender offer price being lower than the fair value of its shares). However, as proving a breach of fiduciary duty is challenging for shareholders without comprehensive discovery, appraisal claims are currently the most common claims. When shareholders claim a breach of directors’ fiduciary duty, they tend to claim against directors in tort at the same time.
While, in theory, the Companies Act of Japan (Companies Act) permits claims for injunctive relief to suspend a transaction, shareholders generally do not attempt this because the grounds for injunctive relief are limited. Shareholders may also bring a claim to nullify a transaction, but as doing so would affect a large number of interested parties and the courts tend not to nullify transactions in the absence of extraordinary circumstances, such successful claims are quite rare.
Requirements for successful claims
For each of the most common claims, what must shareholders in your jurisdiction show to bring a successful suit?
Appraisal cases are treated as non-contentious cases in which the court has reasonable discretion to determine the fair value of shares without regard to the burden of proof of the parties. However, in recent cases the court has presumed the consideration offered in a transaction is fair if it was determined through fair procedures and without any coercion. Therefore, as in many cases the company can show the fairness of the procedures to a certain extent, shareholders are normally required to rebut this presumption, for example by showing there were factors preventing the shareholders from approving the transaction fairly (eg, the company’s false disclosure of material facts, or shareholders being threatened with a squeeze-out at a lower price in the future) or that the independence of the target’s board was jeopardised.
For a derivative claim in which shareholders pursue damages sustained by the company for breach of fiduciary duty, shareholders must prove the existence of the fiduciary relationship, the contents of the directors’ duties, their breach and the quantum of damages arising. Directors could then refute the claimed negligence, as it is not a strict liability. On the other hand, to pursue directors for damage directly sustained by shareholders, the Companies Act requires shareholders to prove, in addition to the foregoing, malicious intent or gross negligence on the part of the directors.
In both cases, as mentioned in question 15, except in the case of directors of the target company breaching their fiduciary duty in management buyouts (or transactions involving conflicts of interests), the business judgment rule would apply to the decision of directors with respect to M&A transactions. Therefore, shareholders would be required to show that the directors were prevented from making an informed decision, or that their decision or decision-making process was extremely unreasonable (see question 15 for further explanation).
Publicly traded or privately held corporations
Do the types of claims that shareholders can bring differ depending on whether the corporations involved in the M&A transaction are publicly traded or privately held?
The actual claims that shareholders tend to bring differ depending on whether the companies involved in the M&A transactions are publicly traded or privately held, but under the Companies Act, there is no major difference in the types of claims they can bring.
Form of transaction
Do the types of claims that shareholders can bring differ depending on the form of the transaction?
Shareholders can bring a derivative suit or direct claim in all types of M&A transactions if losses are sustained by the company or the shareholders (see question 6).
A claim for injunction under the Companies Act is only available (and in a limited manner) for mergers and other statutory reorganisations, and not in the case of tender offers, share purchases or asset sales, although the Companies Act generally allows injunctions by shareholders if directors conducted or are likely to conduct actions that are outside the scope of the company’s purpose or that otherwise are in violation of the law or the company’s articles of incorporation, and the company will likely sustain substantial damages.
In addition, appraisal rights are available in mergers and other statutory reorganisations and business transfers, except for simplified mergers or other reorganisations or for shareholders of the acquiring company in short-form mergers or other reorganisations. Shareholders do not have appraisal rights in the case of tender offer, share purchase and asset purchase transactions.
Negotiated or hostile transaction
Do the types of claims differ depending on whether the transaction involves a negotiated transaction versus a hostile or unsolicited offer?
Party suffering loss
Do the types of claims differ depending on whether the loss is suffered by the corporation or by the shareholder?
Yes, shareholders can bring a derivative suit if the company itself sustains losses. Subject to directors’ malicious intent or gross negligence, if shareholders themselves directly sustain damages arising out of a breach of directors’ fiduciary duty, they may bring a direct claim against directors. The question arises as to whether shareholders can claim diminution of value of their shares due to directors’ failure to exercise their fiduciary duty with respect to M&A transactions, which resulted in losses to the company as damages in a direct claim. The majority view is that diminution of value of their shares is an indirect damage, and that the remedy should be through bringing a derivative action if the loss is sustained by the company and is recoverable through the derivative action. For instance, in a cash-out merger, the surviving company would sustain losses if the merger ratio was improper and the surviving company paid excessive consideration to the shareholders of the absorbed company, in which case shareholders of the surviving company should bring a derivative action.
If the consideration in the merger was shares of the surviving company, all the assets and liabilities of the absorbed company are succeeded to the surviving entity without any cash-out and, therefore, the surviving company arguably does not sustain any losses. In this case, while a derivative action would likely be dismissed due to the lack of losses sustained by the surviving company, shareholders of the surviving company may bring a direct claim as their shares were diluted in a manner disproportionate to a fair merger ratio. In this case, one would argue that issuing new shares based on an improper merger ratio itself should be considered damage to the issuer (ie, the surviving company), but whether the courts will accept such argument or not remains to be seen.
Collective and derivation litigation
Class or collective actions
Where a loss is suffered directly by individual shareholders in connection with M&A transactions, may they pursue claims on behalf of other similarly situated shareholders?
Japanese law does not permit class or collective actions (except for collective actions that may be brought by certified consumer protection agencies under special laws for protection of consumers’ interests, which are not relevant here). This said, there have been cases in which a lead shareholder made a campaign through a website or other means to solicit other shareholders or similarly situated parties to be co-plaintiffs in a claim.
Where a loss is suffered by the corporation in connection with an M&A transaction, can shareholders bring derivative litigation on behalf or in the name of the corporation?
Yes, shareholders can bring derivative litigation on behalf of or in the name of the company.
Any shareholder holding one or more shares in a company (for at least six months or such shorter period as prescribed in the articles of incorporation in the case of a public company) may demand that the company bring a claim against its directors and other officers. After receipt of the demand, the company will have 60 days to determine whether it will bring a claim against the named directors and other officers. If the company does not file such claim within the 60-day period, the demanding shareholder may bring derivative litigation on behalf of the company. When the company decides not to bring the claim, upon request of the demanding shareholder it must notify the demanding shareholder, and provide a description of any investigation it conducted, the conclusion and justifying reasons for such decision.
The 60-day period does not apply, and shareholders can immediately bring derivative litigation if the waiting period would result in the company sustaining irrecoverable damages.
Interim relief and early dismissal
Injunctive or other interim relief
What are the bases for a court to award injunctive or other interim relief to prevent the closing of an M&A transaction? May courts in your jurisdiction enjoin M&A transactions or modify deal terms?
Under the Companies Act, for mergers or other M&A transactions involving corporate reorganisations such as spin-off, the court may enjoin the transaction if there is a violation of the law or the articles of incorporation, and the shareholders are likely to be prejudiced by the transaction. In the case of short-form mergers or other short-form reorganisations that do not require approval of the shareholders, if the consideration of the transaction is extremely unfair that would also form the basis of an injunction. A breach of fiduciary duty or the insufficiency of consideration in the transaction (except for short-form mergers or other short reorganisation) is not generally considered a violation of law. As mentioned in question 1, injunctive or other interim relief to prevent the closing of an M&A transaction is extremely rare in Japan.
The court does not have any authority to modify deal terms.
Early dismissal of shareholder complaint
May defendants seek early dismissal of a shareholder complaint prior to disclosure or discovery?
This is not relevant in Japan as there is no comprehensive discovery.
Advisers and counterparties
Claims against third-party advisers
Can shareholders bring claims against third-party advisers that assist in M&A transactions?
In theory, shareholders can bring such claims if, for example, advisers had been involved in some wrongdoing or there were other extraordinary circumstances that would constitute a tort, but in practice such claims are extremely rare.
Claims against counterparties
Can shareholders in one of the parties bring claims against the counterparties to M&A transactions?
In theory, shareholders of a party can bring claims against the counterparty to the M&A transactions for aiding and abetting a breach of fiduciary duty based on the joint-tort theory, but we are not aware of any such cases. As the directors and officers of the counterparty do not owe any fiduciary duty to the shareholders of the first party, bringing a successful claim would be extremely difficult. Note that a controlling shareholder is not construed as owing fiduciary duties to other minority shareholders, so the foregoing is also true for M&A transactions between a company and its controlling shareholder.
Limitations on claims
Limitations of liability in corporation’s constitution documents
What impact do the corporation’s constituting documents have on the extent board members or executives can be held liable in connection with M&A transactions?
A company may include provisions in its articles of incorporation that allow the board to discharge directors’ or officers’ liabilities or permit non-executive directors or officers to enter into contracts limiting their liabilities, in both cases in excess of certain statutory minimum liabilities. For details, see question 21.
Statutory or regulatory limitations on claims
Are there any statutory or regulatory provisions in your jurisdiction that limit shareholders’ ability to bring claims against directors and officers in connection with M&A transactions?
To deter abusive derivative litigation, shareholders are not entitled to demand the company to bring a claim against its directors, or to bring a derivative claim if the claim is for the personal benefit of the shareholders or other third parties or causes damage to the company. Otherwise, there are no statutory or regulatory provisions that limit shareholders’ ability to bring claims against directors and officers in connection with M&A transactions.
Common law limitations on claims
Are there common law rules that impair shareholders’ ability to bring claims against board members or executives in connection with M&A transactions?
Japan is not a common law jurisdiction. However, the Japanese courts generally apply a ‘business judgment rule’ when questions arise with respect to a managerial decision. While there is no concrete specification of the business judgment rule and the effect thereof, where the business judgment rule applies, the court normally respects the decision of the director unless the director made a mistake in gathering or analysing the information necessary to recognise the underlying facts that formed the basis of his or her decision; or the director’s decision or the decision-making process was extremely unreasonable.
How and to what extent the business judgment rule applies to a decision of board members in connection with M&A transactions is not entirely clear. However, except for a decision of board members of a publicly traded target company with respect to management buy-outs or other transactions that involve conflicts of interests (see refer question 17), the business judgment rule would be widely applied.
Standard of liability
What is the standard for determining whether a board member or executive may be held liable to shareholders in connection with an M&A transaction?
As mentioned above, the court would normally apply the business judgment rule in some form in determining the liability of directors with respect to M&A transactions; therefore, unless exceptional circumstances are found, it is not easy for shareholders to prove a breach of a board member’s or executive’s fiduciary duty. For instance, with respect to an integration of two publicly traded non-life insurance companies by way of a joint share swap, a shareholder filed a claim for breach of fiduciary duty and asserted that the representative director of the company failed to exercise the duty to determine a fair consideration (ie, the stock swap ratio). However, the Tokyo District Court applied the business judgment rule and dismissed the claim.
In doing so, the Tokyo District Court reasoned that:
- the company engaged an independent third party to conduct financial due diligence;
- the parties agreed on the stock swap ratio in reference to the result of multiple third-party valuation reports;
- the agreed stock swap ratio was within a range of the valuation reports; and
- the multiple independent third parties expressed a fairness opinion.
Type of transaction
Does the standard vary depending on the type of transaction at issue?
It is not entirely clear whether the court applies a different standard of review depending on the type of transaction, consideration being paid, potential conflict or involvement of a controlling shareholder.
In 2013, the Tokyo High Court held in a breach of fiduciary duty claim with respect to a management buyout of Rex Holdings that the decision to conduct the management buyout itself should be respected under the business judgment rule unless there were circumstances that rendered such decision or the decision-making process extremely unreasonable. Nonetheless, the court stated that, even if the decision for conducting the management buy-out itself is respected under the business judgment rule, the directors must perform their fiduciary duties to ensure that the fair value is transferred among shareholders; and to disclose the information necessary for the shareholders to determine whether to tender their shares in a tender offer.
There are divided views as to whether this decision imposes a stricter standard of review or merely clarifies duties of directors in management buy-outs. It is also not clear whether this decision applies only to management buy-outs, or whether it could extend to transactions involving conflicts of interests or further to transactions in which a transfer of value among shareholders would be disputed.
Type of consideration
Does the standard vary depending on the type of consideration being paid to the seller’s shareholders?
See question 17.
Potential conflicts of interest
Does the standard vary if one or more directors or officers have potential conflicts of interest in connection with an M&A transaction?
See question 17.
Does the standard vary if a controlling shareholder is a party to the transaction or is receiving consideration in connection with the transaction that is not shared ratably with all shareholders?
See question 17.
Legal restrictions on indemnities
Does your jurisdiction impose legal restrictions on a company’s ability to indemnify, or advance the legal fees of, its officers and directors named as defendants?
With respect to indemnification of directors’ or officers’ liabilities against the company itself, the Companies Act provides specific rules for the company to discharge such liabilities. As a general rule, discharging directors’ or officers’ liabilities against the company requires unanimous approval of the shareholders. However, if the director or officer acted in good faith and without gross negligence, the liability in excess of the statutory minimum (ie, six years’ salary for representative directors and four years’ salary for other directors) could be discharged by approval of the shareholders or, if the articles of incorporation of the company have a provision expressly allowing it, by the board. Non-executive directors or officers, if there is a provision in the articles of incorporation expressly allowing it, may enter into contracts with the company limiting their liabilities to the statutory minimum or any amount determined by the company within the range stipulated in the articles of incorporation, whichever is the higher.
Apart from those statutory provisions, officers and directors are generally considered as fiduciaries of the company and, in accordance with the Civil Code of Japan, may request that the company reimburse or advance expenses required to perform their duties as fiduciaries. In addition, they may request that the company indemnify them for any liability incurred in performing their duties as fiduciaries not attributable to their fault. While the Civil Code of Japan requires officers and directors not to be at fault, in practice, companies from time to time voluntarily indemnify officers and directors in the absence of gross negligence. Therefore, it is generally understood that companies may indemnify, or advance the legal fees of, its officers and directors named as defendants in M&A-related litigation so long as such indemnification or advancement is necessary for them to perform their duties as officers or directors.
The Companies Act does not clearly set out rules concerning companies’ ability to indemnify, or advance the legal fees of, their officers and directors named as defendants. Depending on the circumstances, it is possible that the indemnification or advancement of legal fees could be considered compensation, in which case other requirements would apply (eg, obtaining shareholder approval). Hence, there was ambiguity about whether companies could take such actions.
In recognition of this, a study group organised by the Ministry of Economy, Trade and Industry published a report in July 2015 on the practice of corporate governance, and clarified the requirements and procedures for indemnification, or advancement of legal fees or other damages, to enable directors to take necessary risks when managing companies without fear of personal liability. According to the report, if an indemnity agreement is entered into with an officer or director with the approval of the board as well as the unanimous consent of outside directors or the approval of a committee, the majority of which consist of outside directors, companies may indemnify directors and officers for their liabilities against third parties that arose in discharging their duties without malicious intent or gross negligence, and reimburse or advance the resulting legal fees. In February 2018, the Legislative Council Companies Act Subcommittee published an Interim Proposal for the Companies Act Revision, which addresses these issues, and relevant amendments are expected to come into force soon.
M&A clauses and terms
Challenges to particular terms
Can shareholders challenge particular clauses or terms in M&A transaction documents?
It is not clear whether shareholders can challenge particular clauses or terms in M&A transaction documents such as termination fees, standstills, ‘no shop’ or ‘no talk’ clauses, or other terms that tend to preclude third-party bidders. Agreeing on deal protection clauses without proper fiduciary-out exceptions might deprive shareholders of opportunities to receive more favourable offers from other bidders and would constitute a breach of directors’ fiduciary duty. If this is the case and shareholders sustain losses as a result, shareholders can bring a claim for breach of fiduciary duty. However, proving damage arising out of such breach would normally be difficult, unless a favourable competing offer was actually made but prevented due to the deal protection clauses. Injunctions based on improper deal protection clauses are even more difficult, as the grounds for injunctions are limited (see question 9).
As such, it is not practicable for shareholders to challenge particular deal protection clauses.
Having said this, in subsequent appraisal proceedings shareholders may use the improper deal protection clauses in support of the claim that the entire transaction process was unfair (and thus, the court should not presume the agreed consideration to be fair).
Pre-litigation tools and procedure in M&A litigation
What impact does a shareholder vote have on M&A litigation in your jurisdiction?
While the shareholder vote itself is not the decisive factor, the court normally respects the informed decision of shareholders. In an appraisal proceeding concerning an M&A transaction between independent listed companies, the Supreme Court judged that, if the transaction was implemented through procedures generally considered fair (such as the approval of the shareholders based on proper disclosure of relevant information) then, unless there were special circumstances that prevented shareholders from making a reasonable decision, the consideration of the transaction will be considered fair.
What role does directors’ and officers’ insurance play in shareholder litigation arising from M&A transactions?
Directors’ and officers’ (D&O) insurance plays a substantial role in shareholder litigation.
Standard D&O insurance in Japan would normally cover a wide range of liabilities that directors or officers could incur in performing their duties, except for matters arising from receipt of unlawful private benefits, criminal acts or wilful breaches of the law. Whether a company can pay the insurance premium corresponding to special coverage for cases where a director loses in a shareholders’ derivative suit had long been subject to discussion, as it would have been construed as payment of compensation without obtaining shareholder approval or a discharge of directors’ liabilities without taking proper procedures. In practice, to be conservative, directors themselves have paid the insurance premium corresponding to such special coverage. However, as this differed from other developed countries, in a recent report of the study group organised by the Ministry of Economy, Trade and Industry, it was clarified that the company can pay such insurance premiums for directors by taking the same procedures required for the execution of the indemnity agreement (see question 21), and the Interim Proposal for the Companies Act also contains relevant proposals.
Burden of proof
Who has the burden of proof in an M&A litigation - the shareholders or the board members and officers? Does the burden ever shift?
For appraisal cases there is no precise burden of proof, while for a breach of a fiduciary duty claim shareholders have the burden of proof. For further details, see question 2.
There are no clear rules as to when and to what extent the burden shifts.
Are there pre-litigation tools that enable shareholders to investigate potential claims against board members or executives?
Any shareholder may, during the normal business hours of the company, review or obtain copies of minutes of shareholders’ meetings.
Similarly, if it is necessary to exercise this right as a shareholder, a shareholder may request the company to make available for review, or provide copies of, minutes of board meetings. However, for the board minutes, if the company is a company with statutory auditors or a company with an audit or nominating committee, the request requires court approval.
Class actions are not possible under Japanese law; however, shareholders are entitled to review or copy the shareholders’ register, and sometimes a plaintiff shareholder exercises this right to solicit other shareholders who would be potential plaintiffs. The company may refuse such a request only if it was made:
(i) for purposes other than securing or exercising rights as a shareholder;
(ii) for disturbing the business of the company or otherwise impairing the common interests of shareholders;
(iii) for providing to third parties the facts ascertainable from the shareholders’ register for consideration; or
(iv) by an applicant who has provided to third parties the facts ascertainable from the shareholders’ register for consideration in the past two years.
Shareholders holding at least 3 per cent of the total voting rights of a company (or such lower threshold as prescribed in the articles of incorporation) may request the company to make available for review, or provide copies of, the accounting books and records at any time during normal business hours. However, the company may refuse to do so based on the grounds equivalent to items (i) to (iv) above and also if the requesting shareholder engages in a competing business.
In addition, when a shareholder anticipates a dispute with respect to an M&A transaction that requires shareholders’ approval, any shareholder holding at least 1 per cent of the total voting rights (or such lower threshold as prescribed in the articles of incorporation) (in the case of a public company, for a consecutive period of six months) may request the court to appoint an inspector to investigate the convocation procedures and the manner of the resolution of the shareholders’ meeting.
Are there jurisdictional or other rules limiting where shareholders can bring M&A litigation?
Under the Companies Act, with some minor exceptions, the court located in the area of the headquarters of the defendant company or the company for which the defendant directors or officers serve has exclusive jurisdiction over any litigation concerning the validity of an M&A transaction or a breach of fiduciary duty claim. Forum selection clauses in corporate by-laws are not permitted.
Expedited proceedings and discovery
Does your jurisdiction permit expedited proceedings and discovery in M&A litigation? What are the most common discovery issues that arise?
There are no expedited proceedings or comprehensive discovery under Japanese law. However, under the Code of Civil Procedure, a party may request the court to order the other party or any third party to produce a document to the court. The party requesting such order must specify a description, the purpose and the holder of the document, the facts to be proven by the document and why it is necessary. Documents typically requested by plaintiff shareholders would include negotiation materials, internal evaluation documents, third-party valuation reports and minutes of material internal meetings, including those in draft form.
The statute imposes a general obligation on relevant parties for submission of documents with some exceptions. In M&A litigation, defendants could contest a plaintiff shareholders’ request in reliance on:
- the lack of necessity of producing a document;
- the specification of the documents requested to be disclosed; or
- the exceptions for document production related to professional secrecy or to documents prepared solely for the use of the party holding the documents.
The court once ordered a company to produce various documents with respect to an attempted management buy-out that was not successful due to improper involvement of the management who participated in the buyer; it was an extraordinary case that came about mainly because of a series of reports from whistleblowers. The lack of comprehensive discovery in M&A litigation is probably a major factor in M&A litigation being less common in Japan than in some other jurisdictions such as the US.
Damages and settlements
How are damages calculated in M&A litigation in your jurisdiction?
There are no clear guidelines as to how damages should be calculated in M&A litigation in Japan.
As a general rule, Japanese courts do not award punitive damages. While the position of the courts is far from settled, shareholders tend to assert that the difference between the actual price paid in the transaction and the fair value of the shares is the damage they sustained from the transaction. Calculation of damages based on a multiple would not likely be accepted by the court.
What are the special issues in your jurisdiction with respect to settling shareholder M&A litigation?
In a derivative M&A litigation brought by a shareholder, if the company is not a party to the litigation, the settlement does not have an immediate final and binding effect on the company unless the company affirms the settlement. In such cases, the court must notify the company of the description of the settlement and request the company to make any objection within two weeks. If the company does not object to the settlement in writing within two weeks, the company is deemed to have affirmed the settlement, and the settlement will be final and binding on the company.
Third parties preventing transactions
Can third parties bring litigation to break up or stop agreed M&A transactions prior to closing?
Under the Companies Act, only shareholders of the company are entitled to bring claims for injunctions in M&A transactions. Therefore, in the absence of contractual or other specific grounds that would form the basis of an injunction under the Civil Preservation Act, third parties cannot bring litigation to break up or stop agreed M&A transactions prior to closing.
One such exceptional case was the merger between the Mitsubishi Tokyo Financial Group (MTFG) and the UFJ Holdings Group (UFJHD) together with some of their affiliates. In this case, UFJHD had entered into a memorandum of understanding (MOU) with Sumitomo Trust Bank (STB) regarding the disposal of its shares in UFJ Trust Bank that included exclusivity provisions, but UFJHD had later decided to unilaterally terminate the MOU to enter into discussions with MTFG regarding the integration of the entire UFJHD group with the MTFG group. STB brought an injunction based on the exclusivity provision. While the Tokyo District Court granted injunctive relief to prohibit negotiations between UFJHD and MTFG, the Tokyo High Court and the Supreme Court denied the injunction. In doing so, the Supreme Court stated that, as the MOU itself did not oblige either party to enter into definitive agreements for a transaction, the damage the claimant would sustain from the breach of the MOU should not include the profit they would have received if the transaction was completed. If that were the case, such damage could be recovered by a subsequent damages claim, and thus there is no significant damage or imminent danger that forms the basis of injunctive relief.
Third parties supporting transactions
Can third parties in your jurisdiction use litigation to force or pressure corporations to enter into M&A transactions?
It is not common in Japan for third parties to use litigation to force or pressure companies to enter into M&A transactions. As mentioned in question 31, in the absence of contractual or other specific grounds that would form the basis of an injunction under the Civil Preservation Act, third parties cannot bring claims for injunction.
It is of course possible for third parties to acquire substantial shares in companies and pressure them to enter into M&A transactions, but here again, initiating litigation to force or pressure companies to enter into M&A transactions is not practicable.
Unsolicited or unwanted proposals
What are the duties and responsibilities of directors in your jurisdiction when the corporation receives an unsolicited or unwanted proposal to enter into an M&A transaction?
Unsolicited or unwanted offers are quite rare in Japan, and there is no judicial precedent in which directors’ duties in the face of an unsolicited or unwanted offer were directly at issue.
When the validity of defensive measures has been disputed, courts have normally upheld the defensive measures adopted by boards if the purpose is to obtain information and the time required to ensure the informed decision of shareholders. On the other hand, if the board takes a more aggressive measure such as the issuance of stock options to a friendly third party with the aim to diluting the shareholding of the hostile offeror, as determined in the Tokyo High Court’s decision in the Livedoor v Nippon Broadcasting case, unless exceptional circumstances justify the taking of such a measure to protect the common interest of shareholders (eg, there is a greenmailer or other abusive offeror), taking such measures is presumed to be for the purpose of maintaining the control of the incumbent management and would not be permissible.
With regard to defensive measures approved by the shareholders, however, the Supreme Court held in the Steel Partners Japan Strategic Fund v Bull-Dog Sauce case in 2007 that it was permissible under the principle of equal treatment of shareholders for a company to allot stock options to all shareholders that are only exercisable by shareholders other than the hostile offeror as long as such allotment is necessary and appropriate to protect the common interests of shareholders from the probable damage to be caused by the hostile offeror.
Common types of claim
Shareholders aside, what are the most common types of claims asserted by and against counterparties to an M&A transaction?
In private M&A transactions, we have seen an increased number of disputes regarding breach of representations and warranties. From time to time, parties to M&A transactions dispute purchase price adjustments or earn-out payments, but these are less common. This said, while there have been some cases in which the court determined whether a breach of representations and warranties occurred and, if so, the amount of damage arising, owing to the limited number of such precedents there remains a number of issues with respect to which the court’s position is unclear.
Differences from litigation brought by shareholders
How does litigation between the parties to an M&A transaction differ from litigation brought by shareholders?
In litigation brought by shareholders, shareholders would have difficulties obtaining the evidence necessary to prove their case. In litigation between the parties to an M&A transaction, asymmetry of information would not normally be a critical issue.
Update and trends
Current trends and developments
What are the most current trends and developments in M&A litigation in your jurisdiction?
Since the enactment of the Companies Act in 2005, there has been a significant increase in the number of appraisal cases in which minority shareholders have demanded that the courts determine the fair value of their shares in M&A transactions, mainly because the Companies Act entitles dissenting shareholders to the fair value of the shares taking into consideration the synergies arising out of the transaction or the value the shares would have had in the absence of the M&A transaction. In some of these appraisal cases, the courts looked in detail at the appropriate value of the shares and determined the fair value on its own without specifically relying on any third-party expert’s opinion. Such cases encouraged arbitrary actions by shareholders to a certain extent, creating uncertainty in M&A transactions involving publicly listed companies, and have been criticised by practitioners. The Supreme Court removed such uncertainty in its decision involving the appraisal of shares of Jupiter Telecommunication, the largest Japanese cable TV operator, in its going-private transaction by its major shareholders, KDDI and Sumitomo Corporation, who collectively held more than 70 per cent of the shares in Jupiter Telecommunication prior to the transaction. The Supreme Court stated that, even in the case of a two-step going-private transaction consisting of a tender offer and a subsequent squeeze-out procedure that involves conflicts of interest, the court should respect the price determined by the parties to the transaction if:
- measures to ensure the decision-making process was not arbitrary due to conflicts of interests such as obtaining an opinion from an independent committee or third-party experts were taken; and
- the tender offer was conducted through procedures generally considered fair, such as disclosing the offeror’s intent to acquire the remaining shares in the subsequent squeeze-out process at the same price as the tender offer price (to reduce coerciveness).
To put it simply, the Supreme Court stressed that courts should focus on procedural fairness before looking deeply into the substance (ie, valuation of the shares) because judges are not valuation experts. How and to what extent the courts should review procedural fairness are remaining issues about which further clarification is awaited.
In any event, we expect to see fewer arbitral appraisal cases going forward, but at the same time the courts will review procedural fairness more carefully, so practitioners should continue to pay attention to how they ensure procedural fairness.
Apart from the appraisal proceedings, we have seen an increased number of disputes regarding breach of representations and warranties between private sellers and buyers. As mentioned earlier, the courts’ position on a number of issues relating to M&A litigation are far from settled, but judicial precedent that can guide M&A practitioners has gradually accumulated through a series of court decisions, including Supreme Court decisions, in recent years.