Only in recent years have hostile takeovers become more common in Japan. The dissolution of cross-shareholdings among Japanese companies, a significant increase in the percentage of foreign shareholders and the growing importance of the concept of shareholder value have helped lead to an increasing number of attempted hostile bids being made in Japan by both Japanese and international companies. Set out below are some key issues that an offeror should be aware of before contemplating a hostile offer in Japan.
Under Japanese law, without the support of the target, control cannot be obtained by way of a merger or a share-for-share exchange. Without such support, control would need to be acquired by way of stock purchases from major stakeholders or a public tender offer bid, ie, a bidder offers to acquire a proportion or all of the issued share capital of the target off market and communicates this offer to the entire shareholder base of the target.
Listed companies in Japan are subject to increased regulation in order to protect the interests of investors on the stock market. Offers to acquire a stake of 5% or more in a listed company off market, are governed by the rules of the Japanese Securities and Exchange Law (“SEL”) and its subordinate regulations on public take-over bids (“TOB”).
The pre-bid process
A bidder will need to consider certain factors before making an offer for a listed Japanese company, including the following:
- Structural considerations – a bidder will need to consider what proportion of a target company’s share capital it intends to offer to acquire. Other than in certain cases, a bidder must purchase all the shares from shareholders who agree to the bidder’s offer up to the number of shares that the bidder offered to acquire. Where the bidder offers to acquire less than two thirds of the shares in issue in the target company and the number of shareholders who accept the offer exceeds the target number, then the bidder can purchase shares from accepting shareholders on a pro-rata basis up to the number of shares that the bidder offered to acquire. However, if the number of shares that the bidder offers to acquire is two-thirds or more of the issued share capital of the target company, then the bidder is obliged to acquire shares from all shareholders who accept the offer.
- Stakebuilding – hostile takeover bids may be more likely to be successful if the bidder already holds shares in the target company. However, under Japanese law, any shareholder holding 5% or more of the shares in a listed company is required to file a public report within five days of exceeding the 5% threshold. This requirement is likely to impact on any stakebuilding strategy.
- Stock acquisitions from key shareholders – the majority of listed companies in Japan have one or more major shareholders that often belong to the same group or have strong economic ties. Often it is difficult to secure control of a company if these shareholders are not willing to sell their shares. Whilst it is not uncommon to enter into a memorandum of understanding with such shareholders pre-offer, under Japanese law, shareholders are entitled to disregard their obligations under such memoranda and, therefore, such agreements are equivalent to (non-binding) letters of intent. Alternative mechanisms are however available, such as option agreements. The bid process and documentation required
- Documentation – in order to start a public offer in Japan, a bidder must serve a tender offer registration statement stating certain information. Once this tender offer registration statement has been served starting the offer period the bidder is unable to withdraw or cancel the offer (other than in certain specified cases). However, shareholders that have accepted the offer can cancel their acceptance at any time during the offer period. A bidder must also serve a registration statement of a public offer with the relevant authority. Finally, a bidder must also prepare a TOB prospectus which will be published and sent to shareholders upon their request.
- Documents from the target board – the target company is required to publicise and file whether it is for or against the proposed bid. The target company must also state the reasons for its opinion, its intention to engage in any defensive measures and the process by which the target company formed its view. The target company may in such a report make enquiries of the bidder and the bidder is generally obliged to submit a response to any such enquiries within five business days of receiving the questions.
- Public offer period – the public offer period can be between 20 and 60 business days from the date that the public offer notice is served and such period is determined by the bidder. If the offer period is less than 30 business days, the offer period can be extended to 30 business days by the target company if it so requests.
The timetable may be extended if a competing bidder emerges. The terms of the TOB should be the same for all shareholders during the offer period. If the bidder raises the TOB purchase price during the offer period, the bidder must buy all shares at the raised price even from shareholders who have accepted the bidder’s offer before such raise. Shareholders who have tendered their shares may, at any time and at their discretion, withdraw their tender during the offer period.
- Conditions attaching to the takeover offer and terms of the offer – an offer will usually contain certain standard conditions. The terms and conditions attaching to the offer must be the same for all shareholders. The bidder may change the terms of the TOB offer (subject to certain procedural requirements) as long as such changes are in favour of the target company shareholders. In principle, the bidder can not cancel or withdraw the offer. However, if the bidder states in the TOB registration statement that it may cancel the TOB if certain events occur, the bidder may withdraw from the offer only in those circumstances.
- Effect of share acquisitions on offer consideration and offer price – purchases by the bidder of shares in the target either on or off market before the TOB, have no impact on the offer price nor do they lead to any restrictions on other offer conditions under Japanese law. However, recent share transactions in which the bidder was involved have to be disclosed.
Defensive measures by the target company In light of the increased risk in recent years of hostile takeovers in Japan, a number of Japanese companies have been considering and implementing defensive measures that aim to protect such companies from being taken over.
- Guidelines and stock exchange rules – in May 2005 the Ministry of Economy, Trade and Industry and the Ministry of Justice jointly issued the “Guidelines on Defensive Measures” against takeovers in Japan. According to the guidelines defensive measures are permissible when they protect and enhance corporate value and the interests of the shareholders as a whole. The admissibility of individual defensive measures depends on the listing rules of the stock exchange on which the target company is listed.
- Preventive defensive measures – the following are examples of measures that a target company may take prior to becoming aware of a hostile offer:
(a) The target company can issue shares with a right to veto the approval of a merger or the election/removal of directors (golden shares). Under the new Japanese Corporation Law, a company is allowed to make the transfer of (only) golden shares subject to approval by the company. Under most stock exchange rules, this defensive measure is not permitted.
(b) Rights plans are defensive schemes which serve to dilute the shareholding of a hostile buyer by the target company issuing share purchase warrants. The new Japanese Corporation Act permits the target company to issue warrants allowing the issuing company to compulsorily exchange the warrants for shares under certain circumstances.
(c) The target company can amend its articles of incorporation to restrict the requirement to have a shareholder meeting to approve a merger making it easier for the target company to take reactive defensive measures.
- Reactive defensive measures – the following are examples of defensive measures that a target company may take once it has become aware of a possible hostile offer or after a hostile offer has been made:
(a) The target company can significantly increase the payment of dividends, thereby decreasing the incentive for a bidder to obtain control of the target company by removing liquid assets. In addition, the target company can reduce its capital to increase distributable reserves and further increase the payment of dividends with the same effect.
(b) The target company can issue shares to an amicable third party (known as a white knight), thereby increasing the number of shares in issue.
(c) The target company can merge with another company, thereby increasing the funds required to obtain control of the target. The target company can also form a joint holding company with an amicable company by stock-transfers, or acquire such a company by stock-for-stock exchanges with the same effect.
- Reaction of the bidder – depending on the kind of defensive measure, the bidder may under certain circumstances be forced to reduce the offer price or even withdraw its takeover bid. If the defensive action is unlawful, the bidder can obtain an injunction against its implementation or a declaratory judgement of its invalidity. However, even preliminary injunction proceedings take much longer in Japan than in other jurisdictions.
Compulsory acquisition (or “squeeze-out power”)
It is not possible to compulsorily squeeze out minority shareholders through a public offer in Japan. Minority shareholders can either accept the public offer and sell their shares or remain as shareholders of the target company.
There are solutions to this difficulty under Japanese law, however, in May 2007, the squeeze-out provisions of the new Corporation Act came into effect, allowing a majority shareholder holding two thirds or more of the outstanding shares to squeeze out minority shareholders for cash. However, such squeeze-out mergers require a reasonable business purpose. In the absence of such business purpose a compulsory acquisition can successfully be challenged by minority shareholders.