Company response strategies

Fiduciary duties

What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?

In general, a director’s duty with respect to an activist proposal is similar to other board decisions; namely, the business judgement rule. Unless there is a conflict of interest between the company and the directors, and unless there is a violation of laws or the articles of incorporation of the company, the courts generally respect the wide discretion of the board, assuming that the board made a reasonable decision that duly recognised the applicable facts and circumstances. However, even under this Japanese business judgement rule, Japanese courts may sometimes carefully scrutinise the context and situation surrounding the board’s decision. In Japan, it has thus far been understood that no controlling shareholder owes any fiduciary duty to minority shareholders.


What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?

As activist shareholders have enhanced their presence in Japanese businesses, we generally advise our clients to periodically check the shareholders’ composition and improve their governance structures, business plans or financial structures, and recommend that they engage in proactive communication with their shareholders.


What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?

Against a corporate raider, the Japanese rights plan or ‘large-scale share purchasing policies’ may be a structural defence, even though the ratio of companies adopting such plans has been gradually decreasing (in comparison, the ratio is higher among larger market capitalisation companies); and, as at the end of June 2021, less than 10 per cent of the companies listed on the Tokyo Stock Exchange have adopted such plans. Under this plan, a company implements procedures in advance that a potential raider must follow, although the company does not issue rights or warrants (unlike poison pills in the United States). If a potential raider crosses the shareholding threshold (typically, 20 per cent) without complying with the procedures, or a potential raider is recognised as an ‘abusive raider’, new shares will be issued and allocated to all shareholders except the violating raider. Thus, the raider’s shareholding ratio will be diluted. If an activist does not intend to cross the threshold, such a plan is not a defence against the shareholders. However, companies that have been targeted by activists rarely have such a plan in place.

Other than the above-mentioned plan, structural defences such as dual capitalisation are rarely possible. In addition, as the term of office of a director at a Japanese listed company is one or two years (depending on the company’s governance), a staggered board is not an effective measure, in practice.

In 2020, there was an instance where a company (Shibaura Machine (FKA Toshiba Machine)) successfully activated the ‘shelf’ Japanese rights plan and the activist’s tender offer was unsuccessful, even though there was no court ruling on this plan because the activist had withdrawn its campaign after the plan was supported by shareholders at the shareholders’ meeting. Therefore, the Supreme Court judgment in the Bull-Dog Sauce case in 2006 is still important as a precedent. In the Bull-Dog Sauce case, the company (Bull-Dog Sauce) had not adopted the rights plan and the anti-takeover defence measures in the case were adopted after the raider announced its intent to launch a tender offer. The Supreme Court stated, obiter, that the rights plan had a net positive effect, as it increased the predictability of the outcome of a takeover. The Supreme Court also followed this logic in the guidelines for defence measures against hostile takeovers issued by the Japanese Ministry of Economy, Trade and Industry, and recognised the validity of an anti-takeover defence (similar to a poison pill in the United States) implemented by a target.

In 2021, there were also some remarkable cases. In Fuji Kosan v Aslead Strategic Value Fund, Fuji Kosan, an oil distributing company, successfully defended itself against Aslead by implementing a rights plan via a resolution at a board of directors meeting and subsequent ratification by a simple majority vote (in favour of implementation) of the shareholders at a general shareholders’ meeting. Although this was a Tokyo High Court case, it paved the way for listed companies to implement a rights plan in a timely manner during a hostile acquisition. In Tokyo Kikai Seisakusho v Asia Development Capital et al., Tokyo Kikai Seisakusho (TKS), a manufacturing company, successfully defended itself against Asia Development Capital (ADC), an investment company, and Asia Development Fund (ADF), ADC’s subsidiary, by implementing a rights plan via a resolution at a general shareholders’ meeting, which was approved by majority vote (in favour of implementation) of shareholders other than the relevant parties, including ADC, ADF and the directors of TKS. This was an important Supreme Court case, which justified the implementation of rights plan against a shareholder building a stake through market trading.   

In 2021, there were no changes to laws and regulations or court rulings to limit the anti-takeover defences available to a company.


Proxy votes

Do companies receive daily or periodic reports of proxy votes during the voting period?

Trust banks that act as standing agents receive voting forms from shareholders. Consequently, in practice, a company may receive an early voting ratio and other information during the period for sending back voting forms (ie, after the convocation notice but before the due date of the voting forms). The company is not obliged to disclose any information it receives from the voting forms prior to the date of the general shareholders’ meeting. During a proxy fight, however, a company does not have any way of determining how many proxies an opposing shareholder will receive.


Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?

‘Soft’ activists would prefer to have a dialogue with management to improve the governance structure, management plan or financial structure of the targeted company. Although soft activists sometimes launch a formal shareholder proposal at a general shareholders’ meeting, the company may agree on the proposals without the proxy campaign.

Law stated date

Correct on

Give the date on which the information above is accurate.

1 March 2022.